UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-K
 
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 20092012
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, Kentucky 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, Kentucky 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, Kentucky 40507-1462
(502) 627-2000
61-0247570




Securities registered pursuant to Section 12(b) of the Act:
 
Title of each className of each exchange on which registered
 
Common Stock of PPL CorporationNew York Stock Exchange
 
Senior NotesCorporate Units issued 2011 of PPL Energy Supply, LLC
7.0% due 2046CorporationNew York Stock Exchange
Preferred StockCorporate Units issued 2010 of PPL Electric Utilities Corporation
4-1/2%
4.40% Series
New York Stock Exchange
New York Stock Exchange
 
Junior Subordinated Notes of PPL Capital Funding, Inc.
 2007 Series A due 2067New York Stock Exchange
 
Senior Notes of PPL Capital Funding, Inc.
6.85% due 2047New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:  None
Common Stock of PPL Electric Utilities Corporation

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

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

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

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

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

 PPL Corporation[ 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 Registrantsregistrants are large accelerated filers, accelerated filers, non-accelerated filers, or a smaller reporting company.  See definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.  (Check one):

  
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 Registrantsregistrants are shell companies (as defined in Rule 12b-2 of the Act).

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

As of June 30, 2009,29, 2012, PPL Corporation had 376,144,172580,212,689 shares of its $.01 par value Common Stock outstanding.  The aggregate market value of these common shares (based upon the closing price of these shares on the New York Stock Exchange on that date) held by non-affiliates was $12,397,711,909.$16,135,714,881.  As of January 29, 2010,31, 2013, PPL Corporation had 377,900,179582,846,910 shares of its $.01 par value Common Stock outstanding.

As of January 29, 2010,31, 2013, PPL Corporation held all 66,368,056 outstanding common shares, no par value, of PPL Electric Utilities Corporation.

PPL Corporation indirectly holds all of the membership interests in PPL Energy Supply, LLC.

PPL Corporation directly holds all of the membership interests in LG&E and KU Energy LLC.

As of January 31, 2013, LG&E and KU Energy LLC held all 21,294,223 outstanding common shares, no par value, of Louisville Gas and Electric Company.

As of January 31, 2013, LG&E and KU Energy LLC held all 37,817,878 outstanding common shares, no par value, of Kentucky Utilities Company.

PPL Energy Supply, LLC, meetsPPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company meet the conditions set forth in General Instructions (I)(1)(a) and (b) of Form 10-K and isare therefore filing this form with the reduced disclosure format.

Documents incorporated by reference:

PPL Corporation and PPL Electric Utilities Corporation havehas incorporated herein by reference certain sections of PPL Corporation's 20102013 Notice of Annual Meeting and Proxy Statement, and PPL Electric Utilities Corporation's 2010 Notice of Annual Meeting and Information Statement, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2009.2012.  Such Statements will provide the information required by Part III of this Report.


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-K ANNUAL REPORT TO
THE SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 20092012

TABLE OF CONTENTS

This combined Form 10-K is separately filed by the following individual registrants:  PPL Corporation, PPL Energy Supply, LLC, and PPL Electric Utilities Corporation.Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company.  Information contained herein relating to PPL Energy Supply, LLC, and PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company is filed by PPL Corporation and separately by PPL Energy Supply, LLC, and PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company on their own behalf.  No registrant makes any representation as to information relating to any other registrant, except that information relating to the twofive PPL Corporation subsidiaries is also attributed to PPL Corporation.Corporation and the information relating to Louisville Gas and Electric Company and Kentucky Utilities Company is also attributed to LG&E and KU Energy LLC.

Item  Page
PART I 
  i 
  v 
1. 1 
1A. 9 
1B. 16 
2. 17 
3. 18 
4. 18 
  19 
     
PART II 
5. 21 
6. 21 
7. Management's Discussion and Analysis of Financial Condition and Results of Operations  
  24 
  51 
  75 
7A. 87 
  89 
8. 93 
9. 195 
9A. 195 
9A(T). 195 
9B. 196 
     
PART III 
10. 196 
11. 197 
12. 197 
13. 198 
14. 198 
     
PART IV 
15. 199 
  200 
  202 
  205 
  215 
  218 
  224 
  230 
Unless otherwise specified, references in this Form 10-K, individually, to PPL Corporation, PPL Energy Supply, LLC, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company or 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 are consolidated into such Registrants 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.


Item  Page
  PART I 
  
  
 
 
 
 
 
 
    
  PART II 
 
 
7. Management's Discussion and Analysis of Financial Condition and Results of Operations 
  
  
  
  
  
  
 
  




8.Financial Statements and Supplementary Data
FINANCIAL STATEMENTS
PPL Corporation and Subsidiaries
PPL Energy Supply, LLC and Subsidiaries
PPL Electric Utilities Corporation and Subsidiaries
LG&E and KU Energy LLC and Subsidiaries
Louisville Gas and Electric Company
Kentucky Utilities Company
COMBINED NOTES TO FINANCIAL STATEMENTS




  
  
  
  
  
  
    
  SUPPLEMENTARY DATA 
  Schedule I - Condensed Unconsolidated Financial Statements 
  
  
  
 
 
 
    
  PART III 
 
 
 
 
 
    
  PART IV 
 
  
  
  
  
  
  



GLOSSARY OF TERMS AND ABBREVIATIONS

PPL Corporation and its current and former subsidiaries

EmelCentral Networks - - Empresas Emel S.A.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), a Chilean electricwholly 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 holding company in which PPL Global had a majority ownership interest until its sale in November 2007.utility companies.

HyderKU - Kentucky Utilities Company, a public utility subsidiary of LKE engaged in the regulated generation, transmission, distribution and sale of electricity, primarily in Kentucky.  The subsidiary was acquired by PPL through the acquisition of LKE in November 2010.

LG&E- Hyder Limited,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.  The subsidiary was acquired by PPL through the acquisition of LKE in November 2010.

LKE - LG&E and KU Energy LLC (formerly E.ON U.S. LLC), a subsidiary of WPDLPPL and the parent of LG&E, KU and other subsidiaries.  PPL acquired E.ON U.S. LLC in November 2010 and changed the name to LG&E and KU Energy LLC.

LKS - LG&E and KU Services Company (formerly E.ON U.S. Services Inc.), a subsidiary of LKE that was the previous owner of South Wales Electricity plc.  In March 2001, South Wales Electricity plcprovides services for LKE and its subsidiaries.  The subsidiary was acquired by WPDH Limited and renamed WPD (South Wales).PPL through the acquisition of LKE in November 2010.

PPL - PPL Corporation, the parent holding company of PPL Electric, PPL Energy 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 wholly owned financing subsidiary of PPL that provides financing for the operations of PPL and certain subsidiaries.  Debt issued by PPL Capital Funding is guaranteed as to payment by PPL.

PPL Electric - PPL Electric Utilities Corporation, a regulatedpublic utility subsidiary of PPL that transmits and distributes electricity in its Pennsylvania service territoryarea and provides electric supply to retail customers in this territoryarea as a PLR.

PPL Energy Funding - PPL Energy Funding Corporation, a subsidiary of PPL and the parent holding company of PPL Energy Supply.Supply, PPL Global (effective January 2011) 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 deregulatedcompetitive markets.

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

  In January 2011, PPL Gas Utilities -Energy Supply distributed its membership interest in PPL Gas Utilities Corporation, a regulated utility that provided natural gas distribution, transmission and storage services, andGlobal, representing 100% of the competitive sale of propane, which was a subsidiaryoutstanding membership interests of PPL until its sale in October 2008.Global, to PPL Energy Supply's parent, PPL Energy Funding.

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 SupplyFunding that primarily owns and operates WPD a business in the U.K., WPD, that is focused on the regulated distribution of electricity.  In January 2011, PPL Energy Supply, PPL Global's former parent, distributed its membership interest in PPL Global, representing 100% of the outstanding membership interest of PPL Global, to its parent, PPL Energy Funding.

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

PPL Investment Corp.Ironwood - PPL Investment Corporation, a subsidiary of PPL Energy Supply.

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

i


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

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

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

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

PPL Susquehanna - PPL Susquehanna, LLC, the nuclear generating subsidiary of PPL Generation.

PPL Transition Bond CompanyWEM - PPL Transition Bond Company, LLC, aWEM Holdings plc (formerly WPD Investment Holdings Limited), an indirect U.K. subsidiary of PPL Electric that was formed to issue transition bonds under the Customer Choice Act.  This subsidiary was dissolved in June 2009.Global.  PPL WEM indirectly owns both WPD (East Midlands) and WPD (West Midlands).

SIUK Capital Trust IPPL WW - a business trust created to issue preferred securities, the common equityPPL WW Holdings Limited (formerly Western Power Distribution Holdings Limited), an indirect U.K. subsidiary of which was held byPPL Global.  PPL WW Holdings indirectly owns WPD LLP.  The preferred securities were redeemed in February 2007.(South Wales) and WPD (South West).

WPD - - refers collectively to WPDH LimitedPPL WW and WPDL.PPL WEM and their subsidiaries.

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

WPD Midlands- refers to Central Networks, which owns WPD (South West) and WPD (South Wales).was renamed after the acquisition.

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

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

WPDH LimitedWPD (West Midlands) - Western Power Distribution Holdings Limited, an indirect, wholly owned subsidiary of PPL Global.  WPDH Limited owns WPD LLP.(West Midlands) plc, a British regional electricity distribution utility company.  The company (formerly Central Networks West plc) was acquired and renamed in April 2011.

WPDLWKE - - WPD Investment Holdings Limited, an indirect wholly ownedWestern Kentucky Energy Corp., a subsidiary of LKE that leased certain non-utility generating plants in western Kentucky until July 2009.  The subsidiary was acquired by PPL Global.  WPDL owns 100%through the acquisition of the common shares of Hyder.LKE in November 2010.

Other terms and abbreviations

401(h) account - A sub-account established within a qualified pension trust to provide for the payment of retiree medical costs.

£ - British poundspound sterling.

1945 First Mortgage Bond Indenture- PPL Electric's Mortgage and Deed of Trust, dated as of October 1, 1945, to Deutsche Bank Trust Company Americas, as trustee, as supplemented.

2001 Senior Secured BondMortgage Indenture - PPL Electric's Indenture, dated as of August 1, 2001, to The Bank of New York Mellon (as successor to JPMorgan Chase Bank), as trustee, as supplemented.

2010 Bridge Facility - an up to $6.5 billion Senior Bridge Term Loan Credit Agreement between PPL Capital Funding, as borrower, and PPL, as guarantor, and a group of banks syndicated in June 2010, to serve as a funding backstop in the event alternative financing was not available prior to the closing of PPL's acquisition of E.ON U.S. LLC.

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 that requires holders to purchase shares of PPL common stock on or prior to July 1, 2013.
ii


2011 Bridge Facility - the £3.6 billion Senior Bridge Term Loan Credit Agreement between PPL Capital Funding and PPL WEM, as borrowers, and PPL, as guarantor, and lenders party thereto, used to fund the April 1, 2011 acquisition of Central Networks, as amended by Amendment No. 1 thereto dated April 15, 2011.

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 that requires holders to purchase shares of PPL common stock on or prior to May 1, 2014.

401(h) account - A sub-account established within a qualified pension trust to provide for the payment of retiree medical costs.

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 makes changes to the AEPS.

AEPS - Alternative Energy Portfolio Standard.

AFUDC (Allowance- Allowance for Funds Used During Construction) -Construction, the cost of equity and debt funds used to finance construction projects of regulated businesses, which is capitalized as part of construction cost.

A.M. Best - A.M. Best Company, a company that reports on the condition of insurance companies.

AMT - alternative minimum tax.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.

Bcf - - billion cubic feet.

Black Lung Trust - a trust account maintained under federal and state Black Lung legislation for the payment of claims related to disability or death due to pneumoconiosis.

Bluegrass CTs - three natural gas combustion turbines owned by Bluegrass Generation.  In 2011, LG&E and KU entered into an asset purchase agreement with Bluegrass Generation for the purchase of these combustion turbines, subject to certain conditions including receipt of applicable regulatory approvals and clearances.  In June 2012, LG&E and KU terminated the asset purchase agreement.

Bluegrass Generation - Bluegrass Generation Company, L.L.C., an exempt wholesale electricity generator in LaGrange, Kentucky.

BREC - Big Rivers Electric Corporation, a power-generating rural electric cooperative in western Kentucky.

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.

CAIR - thethe EPA's Clean Air Interstate Rule.

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

iii


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

CTCCPCN- Certificate of Public Convenience and Necessity.  Authority granted by the KPSC pursuant to Kentucky Revised Statute 278.020 to provide utility service to or for the public or the construction of certain plant, equipment, property or facility for furnishing of utility service to the public.

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

DDCP - - Directors Deferred Compensation Plan.

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

DNO- Department of EnvironmentalDistribution Network Operator.

Dodd-Frank Act - the Dodd-Frank Wall Street Reform and Consumer Protection a state government agency.Act that was signed into law in July 2010.

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

DRIPDPCR4 - Distribution Price Control Review 4, the U.K. 5-year rate review period applicable to WPD that commenced April 1, 2005.

DPCR5 - Distribution Price Control Review 5, the U.K. 5-year rate review period applicable to WPD that commenced April 1, 2010.

DRIP - Dividend Reinvestment and Direct Stock Purchase Plan.

DSIC - a 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.

DUoS - Distribution Use of System.  This forms the majority of WPD's revenues and is the charge to electricity suppliers who are WPD's customers and use WPD's network to distribute electricity.

EBPB - Employee Benefit Plan Board. The administrator of PPL's U.S. qualified retirement plans, which is charged with the fiduciary responsibility to oversee and manage those plans and the investments associated with those plans.

Economic Stimulus Package - The American Recovery and Reinvestment Act of 2009, generally referred to as the federal economic stimulus package, which was signed into law in February 2009.

EMFECR - Environmental Cost Recovery.  Pursuant to Kentucky Revised Statute 278.183, effective January 1993, 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- electricElectric Energy, Inc., owns and magnetic fields.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.

E.ON AG - a German corporation and the parent of E.ON UK plc, the former parent of Central Networks, and the indirect parent of E.ON US Investments Corp., the former parent of LKE.

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


iv

EPS - - earnings per share.

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

ESOP - Employee Stock Ownership Plan.

EWGEuro - the basic monetary unit among participating members of the European Union.

EWG - exempt wholesale generator.

FASBE.W. Brown - Financial Accounting Standards Board, a rulemaking organization that establishes financial accounting and reporting standards.generating station in Kentucky with capacity of 1,594 MW.

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.

FTRFTR(s) - financial transmission rights,right, which areis a financial instrumentsinstrument established to manage price risk related to electricity transmission congestion.  They entitlecongestion that entitles the holder to receive compensation or requirerequires the holder to remit payment for certain congestion-related transmission charges that arise whenbased on the level of congestion in the transmission grid is congested.grid.

Fundamental Change - as it relates to the terms of the 2011 and 2010 Equity Units, will be deemed to have occurred if any of the following occurs with respect to PPL, subject to certain exceptions:  (i) a change of control; (ii) a consolidation with or merger into any other entity; (iii) common stock ceases to be listed or quoted; or (iv) a liquidation, dissolution or termination.

GAAP - - generally accepted accounting principlesGenerally Accepted Accounting Principles in the U.S.

GWhGBP - British pound sterling.

GHG - greenhouse gas(es).

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

HMRCHealth Care Reform - The Patient Protection and Affordable Care Act (HR 3590) and the Health Care and Education Reconciliation Act of 2010 (HR 4872), signed into law in March 2010.

HMRC - HMHer Majesty's Revenue & Customs.  The tax authority in the U.K., formerly known as Inland Revenue.

IBEW - - International Brotherhood of Electrical Workers.

ICP - - Incentive Compensation Plan.

ICPKE - - Incentive Compensation Plan for Key Employees.

Intermediate and peaking generation - includes the output provided by PPL Energy Supply'sPPL's 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 own and operate, respectively, the Ironwood Facility.

Ironwood Facility - a natural gas-fired power plant in Lebanon, Pennsylvania with a wintersummer rating of 759665 MW.

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

IRC Sec. 481 - the Internal Revenue Code Section that prescribes the tax year in which adjustments to taxable income resulting from a change in a tax accounting method must be recognized.

ISO - - Independent System Operator.

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

v


KU 2010 Mortgage Indenture- intangible transition charge on customer billsKU's Indenture dated as of October 1, 2010, to recover intangible transition costs associated with securitizing stranded costs under the Customer Choice Act.The Bank of New York Mellon, as trustee, as supplemented.

kVA - kilovolt-ampere.kilovolt ampere.

kWh - - kilowatt-hour, basic unit of electrical energy.

LCIDA - Lehigh County Industrial Development Authority.

LG&E 2010 Mortgage Indenture - LG&E's Indenture, dated as of October 1, 2010, to The Bank of New York Mellon, as trustee, as supplemented.

LIBOR - London Interbank Offered Rate.

Long Island generation business- includes a 79.9 MW gas-fired plant in the Edgewood section of Brentwood, New York and a 79.9 MW oil-fired plant in Shoreham, New York.York and related tolling agreements.  This business was sold in February 2010.

MACTLTIIP - Long Term Infrastructure Improvement Plan.

MATS - Mercury and Air Toxics Standards.

MDEQ- maximum achievable control technology.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.

NPDES - - National Pollutant Discharge Elimination System.

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 federal agency that regulates nuclear power facilities.

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

NYMEX - New York Mercantile Exchange.

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.
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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 in 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.

PEDFA - Pennsylvania Economic Development Financing Authority.

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

PP&E - property, plant and equipment.

Predecessor - refers to the LKE, LG&E and KU pre-acquisition activity covering the time period prior to November 1, 2010.

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

PUC Final Order - final order issued by the PUC on August 27, 1998, approving the settlement of PPL Electric's restructuring proceeding.

PUHCA - - Public Utility Holding Company Act of 1935, legislation passed by the U.S. Congress.  Repealedrepealed effective February 2006 by the Energy Policy Act of 2005 and replaced with the Public Utility Holding Company Act of 2005.

Purchase Contract(s) - refers collectively to the 2010 and 2011 Purchase Contracts.

PURPA - Public Utility Regulatory Policies Act of 1978, legislation passed by the U.S. Congress to encourage energy conservation, efficient use of resources and equitable rates.

PURTA - The Pennsylvania Public Utility Realty Tax Act.

RABRAV - - regulatory asset base.value.  This term is also commonly known as RAV.RAB or regulatory asset base.

RECs - - renewable energy credits.

Regional Transmission 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 that are needed to maintain reliability standards and that are reviewed and approved by the PJM Board.

Registrants - PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and KU, collectively.

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

RFC - ReliabilityFirstReliability First Corporation, (theone of eight regional entities with delegated authority from NERC that work to safeguard the reliability entity that replacedof the Mid-Atlantic Area Coordination Council).bulk power systems throughout North America.

RFP - Request for Proposal.

RMC - - Risk Management Committee.


RMR - - reliability must run.  Describes a generation facility that is operated at the request of an ISO to ensure system reliability, generally in a transmission constrained area of the electricity system.
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RTO - - Regional Transmission Organization.

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.  It also 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 (such as(primarily sulfur dioxide) from exhaust gases.

SEC - -the U.S. Securities and Exchange Commission, a U.S. government agency whose primary mission is to protect investors and maintain the integrity of the securities markets.

S&PSecurities Act of 1933 - the Securities Act of 1933, 15 U.S. Code, Sections 77a-77aa, as amended.

SERC- Standard & Poor's Ratings Services.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.

SIP - PPL Corporation's 2012 Stock Incentive Plan.

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' merchant 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.

Successor - refers to the LKE, LG&E and KU post-acquisition activity covering the time period after October 31, 2010.

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

Synfuel projectsTC2 - production facilities that manufactured synthetic fuel from coalTrimble 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 coal byproducts.  Favorable federal tax credits, which expired effective December 31, 2007, were available on qualified synthetic fuel products.549 MW of the capacity.

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

Total shareowner return - increasechange in market value of a share of the Company's common stock plus the value of all dividends paid on a share of the common stock during the applicable performance period, divided by the price of the common stock as of the beginning of the performance period.

VaRTRA - Tennessee Regulatory Authority, the state agency that has jurisdiction over the regulation of rates and service of utilities in Tennessee.

Utilization Factor - a measure reflecting the percentage of electricity actually generated by a plant compared with the electricity such plant could produce at full capacity when available.

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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.

VEBA - - Voluntary Employee Benefit Association Trust, trust accounts for health and welfare plans for future benefit payments for employees, retirees or their beneficiaries.

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.

VWAP - as it relates to the 2011 and 2010 Equity Units issued by PPL, the per share volume-weighted-average price as displayed under the heading Bloomberg VWAP on Bloomberg page "PPL <EQUITY> AQR" (or its equivalent successor if such page is not available) in respect of the period from the scheduled open of trading on the relevant trading day until the scheduled close of trading on the relevant trading day (or if such volume-weighted-average price is unavailable, the market price of one share of PPL common stock on such trading day determined, using a volume-weighted-average method, by a nationally recognized independent investment banking firm retained for this purpose by PPL).

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FORWARD-LOOKING INFORMATION

Statements contained in this Form 10-KAnnual Report 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 PPL, PPL Energy Supply and PPL Electricthe 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 "Item 1A. Risk Factors" and in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Form 10-K report,Annual Report, 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;
·potential expansion of alternative sources of electricity generation;
·potential laws or regulations to reduce emissions of "greenhouse" gases;gases or the physical effects of climate change;
·collective labor bargaining negotiations;
·the outcome of litigation against PPLthe Registrants and itstheir subsidiaries;
·potential effects of threatened or actual terrorism, war or other hostilities, cyber-based intrusions or natural disasters;
·the commitments and liabilities of PPLthe Registrants and itstheir subsidiaries;
·volatility in market demand and prices for energy, capacity, transmission services, emission allowances and delivered fuel;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 theits impact on the value of assets in the NDT funds and in defined benefit costsplans, and resultantthe potential cash funding requirements for defined benefit plans;if fair value declines;
·interest rates and their effect on pension, retiree medical and nuclear decommissioning liabilities;liabilities, and interest payable on certain debt securities;
·volatility in or the impact of the currentother changes in financial or commodity markets and economic downturn;conditions;
·the effect of electricity price deregulation beginning in 2010 in PPL Electric's service territory;
·the profitability and liquidity, including access to capital markets and credit facilities, of PPL and its subsidiaries;
·new accounting requirements or new interpretations or applications of existing requirements;
·changes in securities and credit ratings;
·changes in foreign currency exchange rates;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 PPLthe Registrants or itstheir subsidiaries conduct business;
·receipt of necessary governmental permits, approvals and rate relief;
·new state, federal or foreign legislation including new tax legislation;
·state, federal and foreignor regulatory developments;
·the outcome of any rate cases or other cost recovery filings by PPL Electric at the PUC;PUC or the FERC, by LG&E at the KPSC or the FERC; by KU at the KPSC, VSCC, TRA or the FERC, or by WPD at Ofgem in the U.K.;
·the impact of any state, federal or foreign investigations applicable to PPLthe Registrants and itstheir 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 asset acquisitions and dispositions.our ability to successfully operate acquired businesses and realize expected benefits from business acquisitions, including PPL's 2011 acquisition of WPD Midlands and 2010 acquisition of LKE.

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Any such forward-looking statements should be considered in light of such important factors and in conjunction with other documents of PPL, PPL Energy Supply and PPL Electricthe 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 PPL, PPL Energy Supply or PPL Electricthe 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 PPL, PPL Energy Supply and PPL Electricthe Registrants undertake no obligation to update the information contained in such statement to reflect subsequent developments or information.

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PART I

ITEM 1. BUSINESS

BACKGROUND

PPL Corporation, headquartered in Allentown, PA,Pennsylvania, is an energy and utility holding company that was incorporated in 1994.  Through its subsidiaries, PPL generates electricity from power plants in the northeastern, northwestern and westernsoutheastern U.S.,; markets wholesale or retail energy primarily in the northeastern and westernnorthwestern portions of the U.S. and; delivers electricity to approximately 4 million customers in Pennsylvania, Kentucky, Virginia, Tennessee and the U.K.; and delivers natural gas to customers in Kentucky.

PPL's overall strategy is to achieve stable, long-term growth in its regulated electricity delivery businesses through efficient operations and strong customer and regulatory relations, and disciplined optimization of energy supply margins in its energy supply business while mitigating volatility in both cash flows and earnings.

In pursuing this strategy, in 2011 and 2010, PPL completed two significant acquisitions that have reduced PPL's overall business risk profile and reapportioned the mix of PPL's regulated and competitive businesses by increasing the regulated portion of its business:

·On April 1, 2011, PPL, through an indirect, wholly owned subsidiary, PPL WEM, completed its acquisition of all the outstanding ordinary share capital of Central Networks East plc and Central Networks Limited, the sole owner of Central Networks West plc, together with certain other related assets and liabilities (collectively referred to as Central Networks and subsequently renamed WPD Midlands), from subsidiaries of E.ON AG.  WPD Midlands operates two regulated distribution networks that serve five million end-users in the Midlands area of England.

·On November 1, 2010, PPL acquired all of the limited liability company interests of E.ON U.S. LLC from a wholly owned subsidiary of E.ON AG.  Upon completion of the acquisition, E.ON U.S. LLC was renamed LG&E and KU Energy LLC (LKE).  LKE is engaged in regulated utility operations through its subsidiaries, LG&E and KU.

See Note 10 to the Financial Statements for additional information on both acquisitions.

Each rate-regulated business plans to make material capital investments over the next several years to improve infrastructure and customer reliability.  See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - Liquidity and Capital Resources" for information on each Registrant's capital expenditure projections.

A key objective of PPL's business strategy is to maintain a strong credit profile.  PPL's recent growth in rate-regulated businesses has provided the organization with an enhanced corporate level financing alternative, through PPL Capital Funding, that further enables PPL to support targeted credit profiles cost effectively 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, as appropriate.

At December 31, 2012, PPL had:

·$12.3 billion in operating revenues for the year (56% from regulated businesses),
·10.5 million end-users of its utility services,
·approximately 19,000 MW of generation (44% within regulated businesses), and
·approximately 18,000 full-time employees.

PPL's principal subsidiaries at December 31, 2012 are shown below:below (* denotes an SEC registrant).
3

 
PPL Corporation*
PPL Capital Funding
LKE*
PPL Global
Engages in the regulated distribution of electricity in the U.K.
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
Kentucky Regulated
Segment
U.K. Regulated
Segment
Pennsylvania Regulated Segment
Supply
Segment

In addition to PPL Corporation, the other SEC registrants included in this filing are:

PPLLG&E and KU Energy Supply, LLC,, an indirect wholly owned headquartered in Louisville, Kentucky, is a holding company with regulated utility operations through subsidiaries, LG&E and KU, and is a subsidiary of PPLPPL.  LKE, formed in 2000,2003, is an energy companythe successor to a Kentucky entity incorporated in 1989.

Louisville Gas and Electric Company, headquartered in Louisville, Kentucky, is a regulated utility engaged through its subsidiaries in the generation, transmission, distribution and marketing of power, primarily in the northeastern and western power markets of the U.S. and in the deliverysale of electricity and the distribution and sale of natural gas in the U.K.  PPL Energy Supply's major operating subsidiaries are PPL Generation, PPL EnergyPlus and PPL Global.Kentucky.  LG&E was incorporated in Kentucky in 1913.  At December 31, 2009, PPL Energy Supply2012, LG&E owned or controlled 11,7193,354 MW of electric power generation capacity and has plans to implementis implementing capital projects at certain of itsan existing generation facilities in Pennsylvania and Montanafacility to provide 239141 MW of additional generating capacity by 2014.the end of 2015.  LG&E also anticipates retiring 563 MW of coal-fired generating capacity by the end of 2015 to meet certain environmental regulations.  LG&E and KU jointly dispatch their generation units with the lowest cost generation used to serve their retail native load.

Kentucky Utilities Company, headquartered in Lexington, Kentucky, is a regulated utility engaged in the generation, transmission, distribution and sale of electricity in Kentucky, Virginia and Tennessee.  KU was incorporated in Kentucky in 1912 and Virginia in 1991.  KU serves its Virginia customers under the Old Dominion Power name while its Kentucky and Tennessee customers are served under the KU name.  At December 31, 2012, KU owned 4,833 MW of electric power generation capacity and is implementing capital projects at an existing generation facility owned by LG&E to provide 499 MW of additional generating capacity by the end of 2015.  KU retired the remaining 71 MW unit at the Tyrone plant in February 2013.  KU also anticipates retiring 163 MW of coal-fired generating capacity by the end of 2015 to meet certain environmental regulations.  KU and LG&E jointly dispatch their generation units with the lowest cost generation used to serve their retail native load.

PPL Electric Utilities Corporation, incorporatedheadquartered in 1920,Allentown, Pennsylvania, is a direct subsidiary of PPL incorporated in Pennsylvania in 1920 and a regulated public utility.  PPL Electric providesdelivers electricity delivery service in its Pennsylvania service territory in Pennsylvania and provides electricity supply to retail customers in that territory as a PLR under the Customer Choice Act.
 
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PPL Energy Supply, LLC, headquartered in Allentown, Pennsylvania, is an indirect subsidiary of PPL formed in 2000 and is an energy company engaged through its subsidiaries in the generation and marketing of electricity, primarily in the northeastern and northwestern power markets of the U.S.  PPL Energy Supply's major operating subsidiaries are PPL EnergyPlus and PPL Generation.  In January 2011, PPL Energy Supply distributed its entire membership interest in PPL Global to its parent, PPL Energy Funding (the parent holding company of PPL Energy Supply and PPL Global with no other material operations), to better align PPL's organizational structure with the manner in which it manages these businesses and reports segment information in its consolidated financial statements.  The distribution separated the U.S.-based competitive energy marketing and supply business from the U.K.-based regulated electricity distribution business.  See Note 9 to the Financial Statements for additional information.  The 2010 operating results of PPL Global, which represented the U.K. Regulated segment (formerly International Regulated), are classified as discontinued operations.  At December 31, 2012, PPL Energy Supply owned or controlled 10,591 MW of electric power generation capacity and is implementing capital projects at certain of its existing generation facilities in Pennsylvania and Montana to provide 153 MW of additional generating capacity by the end of 2013.

PPL's utility subsidiaries, and to a lesser extent, certain competitive supply subsidiaries, are subject to extensive regulation by the FERC related to wholesale power sales and related transactions, electricity transmission service, accounting practices, issuances and sales of securities, acquisitions and sales of utility properties and payments of dividends.  PPL and LKE are subject to certain FERC regulations as holding companies under PUHCA and the Federal Power Act, including with respect to accounting and record-keeping, inter-system sales of non-power goods and services and acquisitions of securities in, or mergers with, certain types of electric utility companies.

Successor and Predecessor Financial Presentation(LKE, LG&E and KU)

LKE's, LG&E's and KU's Financial Statements and related financial and operating data include the periods before and after PPL's acquisition of LKE on November 1, 2010 and have been segregated to present pre-acquisition activity as the Predecessor and post-acquisition activity as the Successor.  Certain accounting and presentation methods were changed to acceptable alternatives to conform to PPL's accounting policies, and the cost bases of certain assets and liabilities were changed as of November 1, 2010 as a result of the application of push-down accounting.  Consequently, the financial position, results of operations and cash flows for the Successor periods are not comparable to the Predecessor periods; however, the core operations of LKE, LG&E and KU have not changed as a result of the acquisition.

Segment Information

(PPL)

PPL is organized into threefour reportable segments:  Kentucky Regulated, U.K. Regulated (name changed in 2012 from International Regulated), Pennsylvania Regulated and Supply.  There were no changes to reportable segments in 2012 other than the name change noted above.

A comparison of PPL's three regulated segments is shown below:
           
   KY Regulated (a) U.K. Regulated (b) PA Regulated (c)
           
For the year ended December 31, 2012:         
 Operating Revenues (in billions) $2.8 $2.3 $1.8
 Net Income Attributable to PPL Shareowners (in millions) $177 $803 $132
 Electric energy delivered (GWh) 30,908  77,467  36,023 
At December 31, 2012:        
 Regulatory Asset Base (in billions) (d) $6.7 $8.6 $3.5
 Service area (in square miles) 9,400  21,400  10,000 
 End-users (in millions) 1.3  7.8  1.4 

(a)Business activities include the generation, transmission, distribution and sale of electricity and the distribution and sale of natural gas.
(b)Business activities include the distribution of electricity.
(c)Business activities include the transmission and distribution of electricity.
(d)Represents RAV for U.K. Regulated, capitalization for KY Regulated and rate base for PA Regulated.
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(PPL Energy Supply)

PPL Energy Supply Pennsylvania Delivery and International Delivery.has operated in a single reportable segment since 2011.  Prior to 2011, PPL Energy Supply's segments consistconsisted of Supply and U.K. Regulated (formerly International Delivery.  Regulated).  In January 2011, PPL Energy Supply distributed its 100% membership interest in PPL Global to its parent, PPL Energy Funding, to better align PPL's organizational structure with the manner in which it manages its businesses and reports segment information in its consolidated financial statements.  The distribution separated the U.S.-based competitive energy marketing and supply business from the U.K.-based regulated electricity distribution business.  The 2010 operating results of PPL Global, which represented the U.K. Regulated segment, are classified as discontinued operations for PPL Energy Supply.

(PPL Electric, operates inLKE, LG&E and KU)

PPL Electric, LKE, LG&E and KU each operate within a single businessreportable segment.

(PPL)

See Note 2 to the Financial Statements for financial information about the segmentssegments.

·
Kentucky Regulated Segment (PPL)
Consists of the operations of LKE, which owns and operates regulated public utilities engaged in the generation, transmission, distribution and sale of electricity and the distribution and sale of natural gas, representing primarily the activities of LG&E and KU.  The Kentucky Regulated segment also includes interest expense related to the 2010 Equity Units that were issued to partially finance the acquisition of LKE.

(PPL, LKE, LG&E and geographicKU)

LKE became a wholly owned subsidiary of PPL on November 1, 2010.  LG&E and KU are engaged in the regulated generation, transmission, distribution and sale of electricity in Kentucky and, in KU's case, Virginia and Tennessee.  LG&E also engages in the distribution and sale of natural gas in Kentucky.  LG&E provides electric service to approximately 393,000 customers in Louisville and adjacent areas in Kentucky, covering approximately 700 square miles in 9 counties.  LG&E provides natural gas service to approximately 318,000 customers in its electric service area and 7 additional counties in Kentucky.  KU provides electric service to approximately 510,000 customers in 77 counties in central, southeastern and western Kentucky; approximately 29,000 customers in 5 counties in southwestern Virginia; and fewer than 10 customers in Tennessee, covering approximately 4,800 non-contiguous square miles.  KU also sells wholesale electricity to 12 municipalities in Kentucky under load following contracts.  In Virginia, KU operates under the name Old Dominion Power Company.

Acquisition by PPL

In September 2010, the KPSC approved a settlement agreement among PPL and all of the intervening parties to PPL's joint application to the KPSC for approval of its acquisition of ownership and control of LKE.  In the settlement agreement, the parties agreed that LG&E and KU would commit that no base rate increases would take effect before January 1, 2013.  Under the terms of the settlement, LG&E and KU retained the right to seek approval for the deferral of "extraordinary and uncontrollable costs."  Interim rate adjustments continued to be permissible during that period through existing fuel, environmental and demand side management recovery mechanisms.  In October 2010, both the VSCC and the TRA approved the transfer of control of LKE to PPL.  The orders and the settlement agreement approved by the KPSC contained certain other commitments by LG&E and KU with regard to operations, workforce, community involvement and other matters.

Also in October 2010, the FERC approved the application for the transfer of control of the utilities.  The approval included various conditional commitments, such as a continuation of certain existing undertakings with intervenors in prior cases, an agreement not to terminate certain KU municipal customer contracts prior to January 2017, an exclusion of any transaction-related costs from wholesale energy and tariff customer rates to the extent that LG&E and KU have agreed not to seek recovery of the same transaction-related costs from retail customers and agreements to coordinate with intervenors in certain pending matters.

See Note 10 to the Financial Statements for additional information on regulatory matters related to the acquisition.

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Franchises and Licenses

LG&E and KU provide electricity delivery service, and LG&E provides natural gas distribution service, in their respective service territories pursuant to certain franchises, licenses, statutory service areas, easements and other rights or permissions granted by state legislatures, cities or municipalities or other entities. 

Competition

There are currently no other electric public utilities operating within the electric service areas of LKE.  From time to time, bills are introduced into the Kentucky General Assembly which seek to authorize, promote or mandate increased distributed generation, customer choice or other developments.  Neither the Kentucky General Assembly nor the KPSC has adopted or approved a plan or timetable for retail electric industry competition in Kentucky.  The nature or timing of any legislative or regulatory actions regarding industry restructuring and their impact on LKE, which may be significant, cannot currently be predicted.  Virginia, formerly a deregulated jurisdiction, has enacted legislation that implemented a hybrid model of cost-based regulation.  KU's operations in Virginia have been and remain regulated.

Alternative energy sources such as electricity, oil, propane and other fuels provide indirect competition for natural gas revenues of LKE.  Marketers may also compete to sell natural gas to certain large end-users.  LG&E's natural gas tariffs include gas price pass-through mechanisms relating to its sale of natural gas as a commodity; therefore, customer natural gas purchases from alternative suppliers do not generally impact profitability.  However, some large industrial and commercial customers may physically bypass LG&E's facilities and seek delivery service directly from interstate pipelines or other natural gas distribution systems.

Operating Revenues

Details of operating revenues by customer class are shown below.
                          
  Successor  Predecessor
  Year Ended Year Ended Two Months Ended  Ten Months Ended
  December 31, 2012 December 31, 2011 December 31, 2010  October 31, 2010
     % of    % of    % of     % of
  Revenue Revenue Revenue Revenue Revenue Revenue  Revenue Revenue
LKE (a)                         
Commercial $ 723    26  $ 719    26  $ 123    25   $ 573    26 
Industrial   551    20    533    19    86    17     424    19 
Residential   1,071    39    1,087    39    219    44     886    40 
Retail - other   270    10    269    9    43    9     212    10 
Wholesale - municipal   102    4    104    4    15    3     88    4 
Wholesale - other (b)   42    1    81    3    8    2     31    1 
Total $ 2,759    100  $ 2,793    100  $ 494    100   $ 2,214    100 
                          
LG&E                         
Commercial $ 374    28  $ 372    27  $ 66    26   $ 287    27 
Industrial   170    13    152    11    26    10     122    12 
Residential   548    41    561    41    113    44     446    42 
Retail - other   131    10    130    10    22    9     98    9 
Wholesale - other (b) (c)   101    8    149    11    27    11     104    10 
Total $ 1,324    100  $ 1,364    100  $ 254    100   $ 1,057    100 
                          
KU                         
Commercial $ 349    23  $ 347    22  $ 57    22   $ 286    23 
Industrial   381    25    381    25    60    23     302    24 
Residential   523    34    526    34    106    40     440    35 
Retail - other   139    9    139    9    21    8     114    9 
Wholesale - municipal   102    7    104    7    15    6     88    7 
Wholesale - other (b) (c)   30    2    51    3    4    1     18    2 
Total $ 1,524    100  $ 1,548    100  $ 263    100   $ 1,248    100 

(a)The LKE Successor information also represents PPL's Kentucky Regulated segment.
(b)Includes wholesale and transmission revenues.
(c)Includes intercompany power sales and transmission revenues, which are eliminated upon consolidation at LKE.

7

Power Supply

At December 31, 2012, LKE owned, controlled or had an ownership interest in generating capacity (summer rating) of 8,187 MW, of which 3,354 MW related to LG&E and 4,833 MW related to KU, in Kentucky, Indiana, and Ohio.  See "Item 2. Properties - Kentucky Regulated Segment" for a complete list of LKE's generating facilities.

The system capacity of LKE's owned or controlled generation is based upon a number of factors, including the operating experience and physical condition of the units, and may be revised periodically to reflect changes in circumstances.

During 2012, LKE's Kentucky power plants generated the following amounts of electricity.

 Thousands of MWh
Fuel SourceLKE LG&E KU
Coal (a) 32,820   15,051   17,769 
Oil / Gas 1,340   463   877 
Hydro 250   212   38 
Total (b) 34,410   15,726   18,684 

(a)Includes 990 MWh of power generated by and purchased from OVEC for LKE, 685 MWh for LG&E and 305 MWh for KU.
(b)This generation represents a 4% decrease for LKE, a 4% decrease for LG&E and a 3% decrease for KU from 2011 output.

A significant portion of LG&E's and KU's generated electricity was used to supply its retail and municipal customer base.

LG&E and KU jointly dispatch their generation units with the lowest cost generation used to serve their retail native load.  When LG&E has excess generation capacity after serving its own retail native load and its generation cost is lower than that of KU, KU purchases electricity from LG&E.  When KU has excess generation capacity after serving its own retail native load and its generation cost is lower than that of LG&E, LG&E purchases electricity from KU.

See "Item 2. Properties - Kentucky Regulated Segment" for additional information regarding LG&E's and KU's plans for development of Cane Run Unit 7.  KU retired the remaining 71 MW unit at the Tyrone plant in February 2013.  LG&E and KU also anticipate retiring 563 MW and 163 MW of coal-fired generating capacity by the end of 2015 to meet certain environmental regulations.

Fuel Supply

Coal is expected to be the predominant fuel used by LG&E and KU for baseload generation for the foreseeable future.  However, natural gas will play a more significant role starting in 2015 when Cane Run Unit 7 is expected to be placed into operation.  This unit is expected to be used for baseload generation.  Natural gas and oil will continue to be used for intermediate and peaking capacity and flame stabilization in coal-fired boilers.

Fuel inventory is maintained at levels estimated to be necessary to avoid operational disruptions at coal-fired generating units.  Reliability of coal deliveries can be affected from time to time by a number of factors including fluctuations in demand, coal mine production issues and other supplier or transporter operating difficulties.  To enhance the reliability of natural gas supply, LG&E and KU have secured long-term pipeline capacity on the interstate pipeline serving the new combined cycle unit and six simple cycle combustion turbine units.

LG&E and KU have entered into coal supply agreements with various suppliers for coal deliveries through 2017 and normally augment their coal supply agreements with spot market purchases, as needed.

For their existing units, LG&E and KU expect for the foreseeable future to purchase most of their coal from western Kentucky, southern Indiana, southern Illinois and Ohio.  The use of high sulfur coal increased during 2012 due to the installation of scrubbers and the sulfuric acid mist mitigation system at KU's E.W. Brown plant.  In 2013 and beyond, LG&E and KU may purchase certain quantities of ultra-low sulfur content coal from Wyoming for blending at TC2.  Coal is delivered to the generating plants by barge, truck and rail.

8

(PPL, LKE and LG&E)

Natural Gas Supply

Five underground natural gas storage fields, with a current working natural gas capacity of approximately 15 Bcf, are used in providing natural gas service to LG&E's firm sales customers.  By using natural gas storage facilities, LG&E avoids the costs typically associated with more expensive pipeline transportation capacity to serve peak winter heating loads.  Natural gas is stored during the summer season for withdrawal during the following winter heating season.  Without this storage capacity, LG&E would be required to purchase additional natural gas and pipeline transportation services during winter months when customer demand increases and the prices for natural gas supply and transportation services are typically at their highest.  Several suppliers under contracts of varying duration provide competitively priced natural gas.  At December 31, 2012, LG&E had a 12 Bcf inventory balance of natural gas stored underground with a carrying value of $42 million.

LG&E has a portfolio of supply arrangements of varying terms with a number of suppliers designed to meet its firm sales obligations.  These natural gas supply arrangements include pricing provisions that are market-responsive.  In tandem with pipeline transportation services, these natural gas supplies provide the reliability and flexibility necessary to serve LG&E's natural gas customers.

LG&E purchases natural gas supply transportation services from two pipelines.  LG&E has contracts with one pipeline that are subject to termination by LG&E between 2015 and 2018.  Total winter capacity under these contracts is 194,900 MMBtu/day and summer capacity is 88,000 MMBtu/day.  LG&E has a contract with another pipeline that expires in October 2014.  Total winter and summer capacity under this contract is 20,000 MMBtu/day during both seasons.

(PPL, LKE, LG&E and KU)

Rates and Regulation

LG&E is subject to the jurisdiction of the KPSC and the FERC, and KU is subject to the jurisdiction of the KPSC, the FERC, the VSCC and the TRA.  LG&E and KU operate under a FERC-approved open access transmission tariff.  LG&E and KU contract with the Tennessee Valley Authority to act as their transmission reliability coordinator.  LG&E and KU contracted with Southwest Power Pool, Inc. (SPP), to function as their independent transmission operator, pursuant to FERC requirements under a contract that expired on August 31, 2012.  After receiving FERC approval, LG&E and KU transferred from SPP to TranServ International, Inc. as their independent transmission operator beginning September 1, 2012.

In February 2013, LG&E and KU submitted a compliance filing to the FERC reflecting their participation with other utilities in the Southeastern Regional Transmission Planning relating to certain FERC Order 1000 requirements.  FERC Order 1000, issued in July 2011, establishes certain procedural and substantive requirements relating to participation, cost allocation and non-incumbent developer aspects of regional and inter-regional electric transmission planning activities. 

LG&E's and KU's Kentucky base rates are calculated based on a return on capitalization (common equity, long-term debt and short-term debt) including certain adjustments to exclude non-regulated investments and costs recovered separately through other rate mechanisms.  As such, LG&E and KU earn a return on the net cash invested in regulatory assets and regulatory liabilities.

KU's Virginia base rates are calculated based on a return on rate base (net utility plant plus working capital less deferred taxes and miscellaneous deductions).  All regulatory assets and liabilities, except the levelized fuel factor, are excluded from the return on rate base utilized in the calculation of Virginia base rates; therefore, no return is earned on the related assets.

KU's rates to municipal customers for wholesale requirements are calculated based on annual updates to a rate formula that utilizes a return on rate base (net utility plant plus working capital less deferred taxes and miscellaneous deductions).  All regulatory assets and liabilities are excluded from the return on rate base utilized in the development of municipal rates; therefore, no return is earned on the related assets.

See Note 6 to the Financial Statements for additional information on cost recovery mechanisms.
9

2012 Kentucky Rate Case

In June 2012, LG&E and KU filed requests with the KPSC for increases in annual base electric rates of approximately $62 million at LG&E and approximately $82 million at KU and an increase in annual base gas rates of approximately $17 million at LG&E.  In November 2012, LG&E and KU along with all of the parties filed a unanimous settlement agreement.  Among other things, the settlement provided for increases in annual base electric rates of $34 million at LG&E and $51 million at KU and an increase in annual base gas rates of $15 million at LG&E.  The settlement agreement also included revised depreciation rates that result in reduced annual electric depreciation expense of approximately $9 million for LG&E and approximately $10 million for KU.  The settlement agreement included an authorized return on equity at LG&E and KU of 10.25%.  On December 20, 2012, the KPSC issued orders approving the provisions in the settlement agreement.  The new rates became effective on January 1, 2013.  In addition to the increased base rates, the KPSC approved a gas line tracker mechanism for LG&E to provide for recovery of costs associated with LG&E's gas main replacement program, gas service lines and risers.

FERC Wholesale Rates

In May 2012, KU submitted to the FERC the annual adjustments to the formula rate which incorporated certain proposed increases.  These rates became effective as of July 1, 2012.

·
U.K. Regulated Segment (PPL)
Includes WPD, a regulated electricity distribution business in the U.K.

WPD, through indirect wholly owned subsidiaries, operates four of the 15 regulated distribution networks providing electricity service in the U.K.  With the April 2011 acquisition of WPD Midlands, the number of end-users served has more than doubled totaling 7.8 million across 21,400 square miles in Wales, southwest and central England.  See Note 10 to the Financial Statements for additional information on the acquisition.

Details of revenue by category for the years ended December 31 are shown below.

  2012  2011  2010 
  Revenue % of Revenue Revenue % of Revenue Revenue % of Revenue
Utility revenues (a) $2,289   98  $1,618   98  $727   96 
Energy-related businesses  47     35     34   
Total $ 2,336    100  $ 1,653   100  $ 761    100 

(a)The above years are not comparable as WPD Midlands was acquired in April 2011.  2011 includes eight months of activity as WPD Midlands' results are recorded on a one-month lag.

WPD's energy-related businesses revenues include ancillary activities that support the distribution business, including telecommunications and real estate.  WPD's telecommunication revenues are from the rental of fiber optic cables primarily attached to WPD's overhead electricity distribution network.  WPD also provides meter services to businesses across the U.K.

Franchise and Licenses

WPD is authorized by Ofgem to provide electric distribution services within its concession areas and service territories, subject to certain conditions and obligations.  For instance, WPD is subject to Ofgem regulation of the regulated revenue it can earn and the quality of service it must provide, and WPD can be fined or have its licenses revoked if it does not meet the mandated standard of service.

Competition

Although WPD operates in non-exclusive concession areas in the U.K., it currently faces little competition with respect to end-users connected to its network.  WPD's four distribution businesses, WPD (South West), WPD (South Wales), WPD (West Midlands) and WPD (East Midlands), are thus regulated monopolies which operate under regulatory price controls.

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Revenue and Regulation

The operations of WPD (South West), WPD (South Wales), WPD (East Midlands) and WPD (West Midlands) are regulated by Ofgem under the direction of the Gas and Electricity Markets Authority.  The Electricity Act 1989 provides the fundamental legal framework of electricity companies and established licenses that required each of the DNOs to develop, maintain and operate efficient distribution networks.  Ofgem has established a price control mechanism that restricts the amount of revenue that can be earned by regulated business and provides for an increase or reduction in revenues based on incentives or penalties for exceeding or underperforming against pre-established targets.

This regulatory structure is an incentive-based regulatory structure in comparison to the U.S. utility businesses which operate under a cost-based regulatory framework.  Under the UK regulatory structure, electricity distribution revenues are currently set every five years, but extending to eight years in the next price control period beginning in April 2015.  The revenue that DNOs can earn in each of the five years is the sum of:  i) the regulator's view of efficient operating costs, ii) a return on the capital from the RAV plus an annual adjustment for the inflation determined by Retail Price Index (RPI) for the prior calendar year, iii) a return of capital from the RAV (i.e. depreciation), and iv) certain pass-through costs over which the DNO has no control.  Additionally, incentives are provided for a range of activities including exceeding certain reliability and customer service targets.

WPD is currently operating under DPCR5 which was completed in December 2009 and is effective for the period from April 1, 2010 through March 31, 2015.  Ofgem allowed WPD (South West) and WPD (South Wales) an average increase in total revenues, before inflationary adjustments, of 6.9% in each of the five years and WPD Midlands an average increase in total revenues, before inflationary adjustments, of 4.5% in each of the five years.  The revenue increase includes reimbursement for higher operating and capital costs to be incurred driven by additional requirements.  In DPCR5, Ofgem decoupled WPD's allowed revenue from volume delivered over the five-year price control period.  However, in any fiscal period WPD's revenue could be negatively affected if its tariffs and the volume delivered do not fully recover the allowed revenue for a given period.  Under recoveries are recovered in the next regulatory year, however, PPL does not record a receivable for under recoveries in the current period.  Over recoveries are reflected in the current period as a liability and are not included in revenue.

In addition to providing a base regulated revenue allowance, Ofgem has established incentive mechanisms to provide significant opportunities to enhance overall returns by improving network efficiency, reliability and customer service.  Some of the more significant incentive mechanisms under DPCR5 include:

·Interruptions Incentive Scheme (IIS) - This incentive has two major components: 1)  Customer interruptions and 2) Customer minutes lost and is designed to incentivize the DNOs to invest and operate their networks to manage and reduce both the frequency and duration of power outages experienced by customers.  The target for each DNO is based on a benchmark of data from the last four years of the prior price control period.

Effective April 1, 2012, an additional customer satisfaction incentive mechanism was implemented that includes a customer satisfaction survey, a complaints metric and a measure of stakeholder engagement.  This incentive replaced the customer response telephone performance incentive that was effective April 1, 2010.

·Line Loss Incentive - This incentive existed in the prior price control review, DPCR4, and was designed to incentivize DNOs to invest in lower loss equipment, to change the way they operate their systems to reduce losses, and to detect theft and unregistered meters.  In November 2012, Ofgem issued a decision not to activate the DPCR5 line loss incentive.  See Note 6 to the Financial Statements for information on Ofgem's review of line loss calculations.

·Information Quality Incentive (IQI) - The IQI is designed to incentivize the DNOs to provide good quality information when they submit their business plans to Ofgem during the price control process and to execute the plan they submitted.  The IQI eliminates the distinction between capital expenditure and operating expense and instead looks at total expenditure.  Total expenditure is allocated 85% to "slow pot" which is added to RAV and recovered over 20 years through the regulatory depreciation of the RAV and 15% to "fast pot" which is recovered during the current price control review period.  The IQI then provides for incentives or penalties at the end of DPCR5 based on the ratio of actual expenditures to the expenditures submitted to Ofgem that were the basis for the revenues allowed during the five-year price control review period.
11

At the beginning of DPCR5, WPD was awarded $301 million in incentive revenue of which $222 million will be included in revenue throughout the current price control period with the balance recovered over subsequent price control periods.  Since the beginning of DPCR5, WPD earned additional incentive revenue, primarily from IIS of $83 million and $30 million for the regulatory years ended March 31, 2012 and 2011, which will be included in revenue for the 2013-14 and 2012-13 regulatory years.

In October 2010, Ofgem announced a new pricing model that will be effective for the U.K. electricity distribution sector, including WPD, beginning April 2015.  The model, 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.  In September 2012, Ofgem published a strategy consultation document providing an overview of its approach for RIIO-ED1 and is expected to publish a policy decision document in February 2013.  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, expansion of the current Low Carbon Network Fund to stimulate 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.  Management is in the process of creating the "well-justified business plans" required by Ofgem for WPD's four DNOs.  These plans are expected to be submitted to Ofgem in July 2013 as part of the RIIO-ED1 review process.  Once the business plans are complete, management will be in a better position to determine the effect of RIIO-ED1 on future financial data.results.  See "Item 1A. Risk Factors - Risks Related to U.K. Regulated Segment."

Customers

The majority of WPD's revenue is known as DUoS and is derived from charging energy suppliers for the delivery of electricity to end-users and thus its customers are the suppliers to those end-users.  Ofgem requires that all licensed electricity distributors and suppliers become parties to the Distribution Connection and Use of System Agreement.  This agreement sets out how creditworthiness will be determined and, as a result, whether the supplier needs to provide collateral.

·
Pennsylvania Regulated Segment (PPL)
Includes the regulated electric delivery operations of PPL Electric.

(PPL and PPL Electric)

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 the FERC under the Federal Power Act.  PPL Electric delivers electricity to approximately 1.4 million customers in a 10,000-square mile territory in 29 counties of eastern and central Pennsylvania.  PPL Electric also provides electricity supply in this territory as a PLR.

Details of electric revenues by customer class for the years ended December 31, are shown below.

  2012  2011  2010 
  Revenue % of Revenue Revenue % of Revenue Revenue % of Revenue
                   
Residential $ 1,108    63  $ 1,266    67  $ 1,469    60 
Industrial   53    3    62    3    123    5 
Commercial   366    21    431    23    588    24 
Other (a) (b)   236    13    133      275   11 
Total $ 1,763    100  $ 1,892    100  $ 2,455    100 

(a)Includes regulatory over- or under-recovery reconciliation mechanisms, pole attachment revenues, street lighting and net transmission revenues.
(b)Included in these amounts for 2012, 2011 and 2010 are $3 million, $11 million and $7 million of retail and wholesale electric to affiliate revenue which is eliminated in consolidation for PPL.

Franchise, Licenses and Other Regulations

PPL Electric is authorized to provide electric public utility service throughout its service area as a result of grants by the Commonwealth of Pennsylvania in corporate charters to PPL Electric and companies to which it has succeeded and as a result of certification by the PUC.  PPL Electric is granted the right to enter the streets and highways by the Commonwealth subject to certain conditions.  In general, such conditions have been met by ordinance, resolution, permit, acquiescence or other action by an appropriate local political subdivision or agency of the Commonwealth.

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Competition

Pursuant to authorizations from the Commonwealth of Pennsylvania and the PUC, PPL Electric operates a regulated distribution monopoly in its service area.  Accordingly, PPL Electric does not face competition in its electric distribution business.

The PPL Electric transmission business, operating under the purview of the FERC-approved PJM Open Access Transmission Tariff, is subject to competition from entities that are not incumbent PJM transmission owners with respect to building and ownership of transmission facilities within PJM.  No authority has yet been promulgated that sets forth the parameters of non-incumbent competition.

Rates and Regulation

Transmission and Distribution

PPL Electric's transmission facilities are within PJM, which operates the electric transmission network and electric energy market in the Mid-Atlantic and Midwest regions of the U.S.

PJM serves as a FERC-approved RTO to promote greater participation and competition in the region it serves.  In addition to operating the electric transmission network, PJM also administers regional markets for energy, capacity and ancillary services.  A primary objective of any RTO is to separate the operation of, and access to, the transmission grid from market participants that buy or sell electricity in the same markets.  Electric utilities continue to own the transmission assets and to receive their share of transmission revenues, but the RTO directs the control and operation of the transmission facilities.

As a transmission owner, PPL Electric's transmission revenues are billed to PJM in accordance with a FERC tariff that allows recovery of transmission costs incurred, a return on transmission-related plant and an automatic annual update.  As a PLR, PPL Electric also purchases transmission services from PJM.  See "PLR" below.

In April 2010, the FERC issued an order concluding that under the PJM Open Access Transmission Tariff, PJM may, but is not required to, designate an entity other than the incumbent PJM transmission owner to own and construct economic expansion projects and receive cost-of-service based compensation for the use of its facilities.  Additionally, the FERC directed PJM to file tariff changes necessary for non-incumbent transmission owners to be provided opportunity to propose and construct transmission projects in accordance with exclusions specified in the April 2010 order and consistent with state and local laws and regulations.  PJM tariff changes are currently under review by the FERC.

PPL Electric's distribution base rates are calculated based on a return on rate base (net utility plant plus a cash working capital allowance less plant-related deferred taxes and other miscellaneous additions and deductions such as materials and supplies inventories and customer deposits and advances) plus certain operating expenses.  Operating expenses included in PPL Electric's distribution base rates include wages and benefits, other operation and maintenance expenses, depreciation, and taxes.

In November 2004, Pennsylvania enacted the AEPS, which requires electricity distribution companies and electricity generation suppliers to obtain a portion of the electricity sold to retail customers in Pennsylvania from alternative energy sources.  Under the default service procurement plans approved by the PUC, PPL Electric purchases all of the alternative energy generation supply it needs to comply with the AEPS.

Act 129 creates an energy efficiency and conservation program, a demand side management program, smart metering technology requirements, new PLR generation supply procurement rules, remedies for market misconduct, and changes to the existing AEPS.

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, a DSIC.  In August 2012, the PUC issued a final implementation order adopting procedures, guidelines and a model tariff for 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.  PPL Electric filed its LTIIP in September 2012 and the PUC subsequently approved the LTIIP on January 10, 2013.  PPL Electric filed a petition requesting permission to establish a DSIC on January 15, 2013 with rates proposed to be effective beginning May 1, 2013.

See "Regulatory Matters - Pennsylvania Activities" in Note 6 to the Financial Statements for additional information regarding Act 129, Act 11 and other legislative and regulatory impacts.

13


PLR

The Customer Choice Act requires Electric Distribution Companies (EDCs), including PPL Electric, to act as a PLR of electricity supply for customers who do not choose to shop for supply with a competitive supplier and provides that electricity supply costs will be recovered by the PLR pursuant to regulations established by the PUC.  As of December 31, 2012, the following percentages of PPL Electric's customer load were provided by competitive suppliers:  46% of residential, 84% of small commercial and industrial and 99% of large commercial and industrial customers.  The PUC continues to be interested in expanding the competitive market for electricity.  See "Regulatory Matters - Pennsylvania Activities" in Note 6 to the Financial Statements for additional information.

PPL Electric's cost of electricity generation is based on a competitive solicitation process.  The PUC approved PPL Electric's default service plan for the period January 2011 through May 2013, which includes 14 solicitations for electricity supply beginning January 1, 2011 with a portion extending beyond May 2013.  Pursuant to this plan, PPL Electric contracts for all of the electricity supply for residential, small commercial and small industrial customers, large commercial and large industrial customers who elect to take that service from PPL Electric.  These solicitations include a mix of spot market purchases and long-term and short-term purchases ranging from five months to ten years to fulfill PPL Electric's obligation to provide customer electricity supply as a PLR.  To date, PPL Electric has concluded all of its planned competitive solicitations under the 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 supply from the competitive retail market.  In its January 24, 2013 final order, the PUC approved PPL Electric's plan with modifications and directed PPL Electric to establish collaborative processes to address several retail competition issues.

Numerous alternative suppliers have offered to provide generation supply in PPL Electric's service territory.  Whether its customers purchase electricity supply from these alternative suppliers or from PPL Electric as a PLR, the purchase of such supply has no impact on the financial results of PPL Electric.  The costs to purchase PLR supply, including charges paid to PJM for related transmission services, are passed directly by PPL Electric to its PLR customers without markup.  See "Energy Purchase Commitments" in Note 15 to the Financial Statements for additional information regarding PPL Electric's solicitations.

Rate Cases

2012 Rate Case

In March 2012, PPL Electric filed a request with the PUC to increase distribution rates by approximately $105 million, effective January 1, 2013.  On December 28, 2012, in its final order, the PUC approved a 10.4% return on equity and a total distribution revenue increase of about $71 million.  The approved rates became effective January 1, 2013.

Also in its December 28, 2012 final order, the PUC directed PPL Electric to file a proposed Storm Damage Expense Rider within 90 days following the order.  PPL Electric plans to file a proposed Storm Damage Expense Rider with the PUC and, as part of that filing, request recovery of the $28 million of qualifying storm costs incurred as a result of the October 2012 landfall of Hurricane Sandy.

See "Regulatory Matters - Pennsylvania Activities - Storm Costs" in Note 6 to the Financial Statements for additional information on Hurricane Sandy.

FERC Formula Rates

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.
PPL Electric has initiated its formula rate 2012, 2011 and 2010 Annual Updates.  Each update has been subsequently challenged by a group of municipal customers.  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
14

challenge with the 2010 and 2011 challenges.  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.

In March 2012, PPL Electric filed a request with the FERC seeking recovery of its regulatory asset related to the deferred state tax liability that existed at the time of the transition from the flow-through treatment of state income taxes to full normalization.  This change in tax treatment occurred in 2008 as a result of prior FERC initiatives that transferred regulatory jurisdiction of certain transmission assets from the PUC to FERC.  At December 31, 2012 and December 31, 2011, $52 million and $53 million are classified as taxes recoverable through future rates and included on the Balance Sheets in "Other Noncurrent Assets - Regulatory assets." In May 2012, the FERC issued an order approving PPL Electric's request to recover the deferred tax regulatory asset over a 34-year period beginning June 1, 2012.

See Note 6 to the Financial Statements for additional information on rate mechanisms.

(PPL and PPL Energy Supply)

·Supply Segment -
  
 Owns and operates competitive domestic power plants to generate electricity; markets and trades this electricity, purchased power, and other purchased powerenergy-related products to deregulatedcompetitive wholesale and retail markets; and acquires and develops competitive domestic generation projects.  Consists primarily of the activities of PPL Generation and PPL EnergyPlus.

PPL Energy Supply has generation assets that are located in the easternnortheastern and westernnorthwestern U.S. markets.  The eastern generation assets arenortheastern generating capacity is located primarily in the Northeast/Mid-Atlantic energy markets - includingPennsylvania within PJM the New York ISO and ISO New England.  PPL Energy Supply's westernnorthwestern generating capacity is located in markets withinMontana.  PPL Energy Supply enters into energy and energy-related contracts to hedge the Western Electricity Coordinating Council.variability of expected cash flows associated with its generating units and marketing activities, as well as for trading purposes.  PPL EnergyPlus sells the electricity produced by PPL Energy Supply's generation plants based on prevailing market rates.  PPL Energy Supply's total expected generation in 2013 is anticipated to be used to meet its committed contractual sales.  PPL Energy Supply has entered into commitments of varying quantities and terms for 2014 and beyond.

Details of revenue by category for the years ended December 31, are shown below.

   2012  2011  2010 
   Revenue % of Revenue Revenue % of Revenue Revenue % of Revenue
Energy                  
 Wholesale (a) $ 4,200    76  $ 5,240    82  $ 4,347    85 
 Retail   848    16    727    11    415    8 
 Trading   4       (2)      2    
 Total energy   5,052    92    5,965    93    4,764    93 
Energy-related businesses (b)   448    8    464    7    364    7 
Total $ 5,500    100  $ 6,429    100  $ 5,128    100 

(a)Included in these amounts for 2012, 2011, and 2010 are $78 million, $26 million and $320 million of wholesale electricity sales to an affiliate, PPL Electric, which are eliminated in consolidation for PPL.
(b)
Energy-related businesses primarily support the generation, marketing and trading businesses of PPL Energy Supply.  Their activities include developing renewable energy projects and providing energy-related products and services to commercial and industrial customers through their mechanical contracting and services subsidiaries.  Energy-related businesses for PPL's Supply segment had additional revenues not related to PPL Energy Supply of $13 million, $8 million and $11 million for 2012, 2011 and 2010, which are not included in this table.

 PPL EnergyPower Supply Owned or Controlled Generation Capacity

PPL Energy Supply owned or controlled generating capacity (summer rating) of 11,71910,591 MW at December 31, 2009.  Through subsidiaries,2012.  The system capacity of PPL Generation owns and operates power plants primarily in Pennsylvania, Montana, Illinois, Connecticut, New York and Maine.  The totalEnergy Supply's owned or controlled generatinggeneration is based upon a number of factors, including the operating experience and physical condition of the units, and may be revised periodically to reflect changes in circumstances.  Generating capacity controlled by PPL Generation and other PPL Energy Supply subsidiaries includes power obtained through PPL EnergyPlus' tolling or power purchase agreements (including Ironwood and other facilities that consist of NUGs, wind farms and landfill gas facilities).agreements.  See "Item 2. Properties - Supply Segment" for a complete listing of PPL Energy Supply's generating capacity.

During 2012, PPL Energy Supply owned or controlled power plants that generated the following amounts of electricity.

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   Thousands of MWhs
Fuel Source Northeastern Northwestern Total
        
Nuclear  15,224     15,224 
Oil / Gas  9,383     9,383 
Coal  16,857   3,232   20,089 
Hydro  552   3,443   3,995 
Renewables (a)  342     342 
Total  42,358   6,675   49,033 

(a)PPL Energy Supply subsidiaries own or control renewable energy projects located in Pennsylvania, New Jersey, Vermont, Connecticut and New Hampshire with a generating capacity (summer rating) of 70 MW.  PPL EnergyPlus sells the energy, capacity and RECs produced by these plants into the wholesale market as well as to commercial, industrial and institutional customers.

PPL Energy Supply's U.S. generation subsidiaries are EWGs whichthat sell electricity into the wholesale market.  PPL Energy Supply'smarkets.  EWGs are subject to regulation by the FERC, which has authorized these EWGs to sell generation from their facilitiesthe electricity generated at market-based prices.  TheThis electricity from these plants is sold to PPL EnergyPlus under FERC-jurisdictional power purchase agreements.

PPL Generation operates its Pennsylvania and Illinois power plants in conjunction with PJM.  PPL Generation's Pennsylvania and Illinois power plants and PPL EnergyPlus are members of the RFC.  Refer to "Pennsylvania Delivery Segment" for information regarding PJM's operations and functions and the RFC.

Pennsylvania generation had a total capacity of 9,583 MW at December 31, 2009.  These plants are fueled by uranium, coal, natural gas, oil, water and other fuels.

PPL Susquehanna, a subsidiary of PPL Generation, owns a 90% undivided interest in each of the two nuclear-fueled generating units at its Susquehanna station in Pennsylvania.  Allegheny Electric Cooperative, Inc. owns the remaining 10% undivided interest.  PPL's 90% share of Susquehanna's generating capacity was 2,206 MW at December 31, 2009.  The Illinois natural gas-fired station has a total capacity of 585 MW.

The Montana coal-fired and hydroelectric-powered stations have a capacity of 1,286 MW.  PPL Montana's power plants are operated in conjunction with the Western Electricity Coordinating Council.

The Connecticut natural gas-fired station has a total capacity of 244 MW, is operated in conjunction with ISO New England and the Northeast Power Coordinating Council.

The New York oil/gas-fired stations have a capacity of 159 MW.  These generating assets are operated in conjunction with the New York ISO and the Northeast Power Coordinating Council.  Tolling agreements are in place for 100% of the capacity and output of this business.  See Note 9 to the Financial Statements for additional information on the anticipated sale of the Long Island generation business.

The Maine hydroelectric-powered stations have a total capacity of 12 MW.  The Maine generating assets are operated in conjunction with ISO New England and the Northeast Power Coordinating Council.  See Note 9 to the Financial Statements for information on the November 2009 sale of the majority of the Maine hydroelectric business, the sale of PPL's interest in an oil-fired unit in Maine and the conditional agreement of sale for the remaining three hydroelectric facilities.

PPL Generation has current plans for capital projects at certain of its generation facilities in Pennsylvania and Montana to provide 239 MW of additional generation capacity for its use by 2014.  See "Item 2. Properties - Supply Segment" for additional information regarding these capital projects.

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

A subsidiary of PPL Energy Supply develops renewable energy plants on various sites using technologies such as turbines, reciprocating engines and photovoltaic solar panels.  Included in PPL Energy Supply's owned or controlled generating capacity reported in "Item 2. Properties - Supply Segment" is approximately 28 MW of installed capacity from these projects that serve commercial and industrial customers.

Certain PPL Energy Supply subsidiaries are subject to the jurisdiction of certain federal, regional, state and local regulatory agencies with respect to air and water quality, land use and other environmental matters.  PPL Susquehanna is subject to the jurisdiction of the NRC in connection with the operation of the Susquehanna nuclear units.  Certain of PPL Energy Supply's other subsidiaries are subject to the jurisdiction of the NRC in connection with the operation of their fossil plants with respect to certain level and density monitoring devices.

Certain operations of PPL Generation's subsidiaries are also subject to the Occupational Safety and Health Act of 1970OSHA and comparable state statutes.

Energy Marketing

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

PPL EnergyPlus purchases and sells electric capacity and energy at the wholesale level at competitive prices under FERC market-based prices.  PPL EnergyPlus enters into these agreements to market available energy and capacity from PPL Generation's assets and to profit from market price fluctuations.  Within the constraints of its hedging policy, PPL EnergyPlus actively manages its portfolios to optimize the value of PPL's generating assets and to limit exposure to price fluctuations.  PPL EnergyPlus also enters into over-the-counter and futures contracts to purchase and sell energy and other commodity-based financial instruments in accordance with PPL's risk management policies, objectives and strategies.

PPL EnergyPlus had contracted to provide electricity to PPL Electric sufficient for it to meet its PLR obligation through 2009 at the predetermined capped rates PPL Electric was entitled to charge its customers.  These contracts accounted for 29% of PPL Energy Supply's operating revenues in 2009 and expired December 31, 2009.  See Note 159 to the Financial Statements for more information concerning these contracts.on the 2011 sale of certain non-core generation facilities, the 2010 sale of the Long Island generation business and the 2010 completion of the sale of the Maine hydroelectric generation business.

PPL EnergyPlus is licensed to provide retail electric supply to customers in Delaware, Maine, Massachusetts, Maryland, Montana, New Jersey and Pennsylvania and provides electricity to industrial and commercial customers in Montana and Pennsylvania.  PPL EnergyPlus provides natural gas to customers in Pennsylvania, New Jersey, Delaware and Maryland.

Competition

The unregulated businesses and markets in which PPL and its subsidiaries participate are highly competitive.  Since the early 1990s, there has been increased competition in U.S. energy markets because of federal and state deregulation initiatives.  For example, in 1992 the Energy Act amended the Federal Power Act to provide open access to electric transmission systems for wholesale transactions.  In 1996, the Customer Choice Act was enacted in Pennsylvania to restructure the state's electric utility industry to create a competitive market for electricity generation.  Certain other states in which PPL's subsidiaries operate have also adopted "customer choice" plans to allow customers to choose their electricity supplier.  PPL and its subsidiaries believe that competition in deregulated energy markets will continue to be intense.

The Supply segment faces competition in wholesale markets for available energy, capacity and ancillary services.  Competition is impacted by electricity and fuel prices, new market entrants, construction by others of generating assets, technological advances in power generation, the actions of environmental and other regulatory authorities and other factors.  The Supply segment primarily competes with other electricity suppliers based on its ability to aggregate generation supply at competitive prices from different sources and to efficiently utilize transportation from third-party pipelines and transmission from electric utilities and ISOs.  Competitors in wholesale power markets include regulated utilities, industrial companies, non-utility generators, unregulated subsidiaries of regulated utilities and other energy marketers.  See "Item 1A. Risk Factors - Risks Related to Supply Segment" and PPL's and PPL Energy Supply's "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview" for more information concerning the risks faced with respect to competition in deregulated energy markets.

Power Supply

PPL Energy Supply's owned or controlled system capacity (winter rating) at December 31, 2009 was 11,719 MW.  The capacity of generating units is based upon a number of factors, including the operating experience and physical condition of the units, and may be revised periodically to reflect changes in circumstances.  See "Item 2. Properties - Supply Segment" for a description ofadditional information regarding PPL Energy Supply's plants at December 31, 2009.

During 2009, PPL Energy Supply's plants, excluding renewable facilitiesGeneration's plans for capital projects in Pennsylvania and Montana that are discussed separately below, generatedexpected to provide 153 MW of additional electric generating capacity by the following amountsend of electricity.

StateMillions of kWh
Pennsylvania46,019
Montana8,120
Maine261
Connecticut108
New York (a)
Illinois64
Total54,572

(a)72 million kWhs were excluded as tolling agreements were in place for 100% of the output.

Of this generation, 49% of the energy was from coal-fired stations, 32% from nuclear operations at the Susquehanna station, 11% from oil/gas-fired stations and 8% from hydroelectric stations.

PPL Energy Supply estimates that, on average, approximately 94% of its total expected annual generation output for 2010 will be used to meet EnergyPlus' committed contractual sales.  PPL Energy Supply has also entered into commitments of varying quantities and terms for the years 2011 and beyond.  These commitments are consistent with, and integral to, PPL Energy Supply's business strategy to capture profits while managing exposure to adverse movements in energy and fuel prices.  See "Commodity Volumetric Activity" in Note 18 to the Financial Statements for the strategies PPL Energy Supply employs to optimize the value of its wholesale and retail energy portfolio.

Subsidiaries of PPL Energy Supply controlled existing renewable energy projects located in Pennsylvania, New Jersey, Vermont and New Hampshire with capacity of 28 MW.  PPL EnergyPlus sells the energy and RECs produced by these plants to commercial, industrial and institutional customers.  During 2009, these projects generated 145 million kWhs.  In addition, a PPL Energy Supply subsidiary owns renewable energy facilities with capacity of 6 MW that have power purchase agreements in place.  During 2009, these projects generated 23 million kWhs.

PPL EnergyPlus also purchases the full output from two wind farms in Pennsylvania with a combined capacity of 50 MW.2013.

 Fuel Supply

PPL EnergyPlus acts as agent for PPL Generation to procure and optimize its various fuels.

Coal

Pennsylvania

PPL Generation, by and through its agent PPL EnergyPlus actively manages PPL'sPPL Energy Supply's coal requirements by purchasing coal principally from mines located in central and northern Appalachia.

During 2009,2012, PPL Generation by and throughpurchased 5.6 million tons of coal required for its agent PPL EnergyPlus, purchased 100% of the coal delivered to PPL Generation's wholly owned Pennsylvania stationsplants under short-term and long-term contracts.  These contracts provided PPL Generation 7.3 million tons of coal.  Contracts currently in place are expected to provide 7.8 million tons in 2010.  The amount of coal in inventory varies from time to time depending on market conditions and plant operations.

PPL Generation, by and through its agent PPL EnergyPlus, entered into a long-term coal purchase agreement with CONSOL Energy Inc.  The contracthas agreements in place that will provide more than one-third23 million tons of PPL Generation's projected annual coal needs for the Pennsylvania power plants from 20102013 through 2018.  PPL Generation has other contracts that, in total, will provide additional coal supply for PPL's projected annual needs from 2010 through 2013.

A PPL Generation subsidiary owns a 12.34% interest in the Keystone stationplant and a 16.25% interest in the Conemaugh station.plant.  PPL Generation owns a 12.34% interest in Keystone Fuels, LLC and a 16.25% interest in Conemaugh Fuels, LLC.  The Keystone stationplant contracts with Keystone Fuels, LLC for its coal requirements.  In 2009, Keystone Fuels, LLCrequirements, which provided 4.84.3 million tons of coal to the Keystone station.plant in 2012.  The Conemaugh stationplant requirements are purchased under contract from Conemaugh Fuels, LLC.  In 2009, Conemaugh Fuels, LLC, which provided 4.84.1 million tons of coal to the Conemaugh station.  Aplant in 2012.

All PPL Generation subsidiary also owns a 12.34% equity interestcoal plants within Pennsylvania are equipped with scrubbers, which use limestone in Keystone Fuels, LLC and a 16.25% equity interest in Conemaugh Fuels, LLC.

Scrubbers were placed in service at Montour in 2008 and at Brunner Island in 2009.  At December 31, 2009, scrubbers were in place at all oftheir operations.  Acting as agent for PPL Generation's Pennsylvania coal stations.  Contracts are in placeGeneration, PPL EnergyPlus has entered into contracts with limestone suppliers that will provide for all thethose plants' limestone requirements for all the scrubbers at PPL Generation's wholly owned Pennsylvania coal stations through 2010.  It is projected that annual limestone requirements will be approximately 600,000 tons.2014.  During 2009, approximately 325,0002012, 382,000 tons of limestone were delivered to PPL Generation's wholly owned Pennsylvania stationsBrunner Island and Montour under long-termthese contracts.  Annual limestone requirements approximate 400,000-500,000 tons.
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Montana

PPL Montana has a 50% leasehold interest in Colstrip Units 1 and 2, and a 30% leasehold interest in Colstrip Unit 3.  NorthWestern owns a 30% leasehold interest in Colstrip Unit 4.  PPL Montana and NorthWestern have a sharing agreement to governthat governs each party's responsibilities regardingand rights relating to the operation of Colstrip Units 3 and 4, and4.  Under the terms of that agreement, each party is responsible for 15% of the respectivetotal non-coal operating and construction costs of Colstrip Units 3 and 4, regardless of whether a particular cost is specifiedspecific to Colstrip Unit 3 or 4 and is entitled to take up to 15% of the available generation from Units 3 and 4.  However, eachEach party is responsible for its own fuel-relatedcoal costs.  PPL Montana, along with the other Colstrip owners, is party to contracts to purchase 100% of its coal requirements with defined coal quality characteristics and specifications.  In 2007, PPL Montana, entered intoalong with the other Colstrip Units 1 and 2 owner, has a long-term purchase and supply agreement with the current supplier for Units 1 and 2, beginning January 1, 2010.  The contract is to providewhich provides these units 100% of their coal requirements through December 2014, and at least 85% of such requirements from January 2015 through December 2019.  ThePPL Montana, along with the other Colstrip Units 3 and 4 owners, has a long-term coal supply contract for Unit 3'sUnits 3 and 4, which provides these units 100% of their coal requirements is in effect through December 2019.Scrubbers are in place at all of

These units were originally built with scrubbers and PPL Montana has entered into a long-term contract to purchase the limestone requirements for these units.  The contract extends through December 2030.

Coal supply contracts are in place to purchase low-sulfur coal with defined quality characteristics and specifications for PPL Montana's Corette station.plant.  The contracts covered 100% of the station'splant's coal requirements in 2009,2012 and similar contracts are currently in place to supply 100% of the expected coal requirements through 2012.2014.

Oil and Natural Gas

Pennsylvania

PPL Generation's Martins Creek Units 3 and 4 burn both oil and natural gas.  PPL EnergyPlus is responsible for procuring the oil and natural gas supply for all PPL Generation operations.  During 2009,2012, 100% of the physical gas and oil requirements for the Martins Creek units were purchased on the spot market.market while oil requirements were supplied from inventory.  At December 31, 2009, PPL EnergyPlus had2012, there were no long-term agreements for oil or gas.natural gas for these units.

PPL EnergyPlus has a short-termShort-term and long-term gas transportation contractcontracts are in place for approximately 30%38% of the maximum daily requirements of the Lower Mt. Bethel facility.  During 2012, 100% of the physical gas requirements were purchased on the spot market.

In 2008, PPL EnergyPlus acquired the rights to an existing long-term tolling agreement associated with the capacity and energy of the Ironwood facility.Facility.  In April 2012, an indirect, wholly owned subsidiary of PPL Energy Supply completed the acquisition of the equity interests in the owner and operator of the Ironwood Facility.  See Note 10 to the Financial Statements for additional information.  Beginning in 2010, PPL EnergyPlus has long-term transportation contracts that can deliver up to serve approximately 25% of Ironwood's maximum daily gas requirements.  Daily gas requirements which begins in the fourth quarter of 2010.  For the first three quarters of 2010, Ironwood willcan also be servedmet through a combination of short-term transportation capacity release transactions and delivered supply to the plant.coupled with upstream supply.  PPL EnergyPlus currently has no long-term physical supply agreements to purchase natural gas for Ironwood.

Illinois

At December 31, 2009, there were no long-term delivery or supply agreements to purchase natural gas for the University Park facility.

Connecticut

PPL EnergyPlus has a long-term contract for approximately 40%contracts.  During 2012, 100% of the expected pipeline transportationphysical gas requirements ofwere purchased on the Wallingford facility, but has no long-term physical supply agreement to purchase natural gas.spot market.

Nuclear

The nuclear fuel cycle consists of several material and service components:  the mining and milling of uranium ore to produce uranium concentrates; the conversion of these concentrates into uranium hexafluoride, a gas component; the enrichment of the hexafluoride gas; the fabrication of fuel assemblies for insertion and use in the reactor core; and the temporary storage and final disposal of spent nuclear fuel.

PPL Susquehanna has a portfolio of supply contracts, with varying expiration dates, for nuclear fuel materials and services.  These contracts are expected to provide sufficient fuel to permit Unit 1 to operate into the first quarter of 2016 and Unit 2 to operate into the first quarter of 2015.2017.  PPL Susquehanna anticipates entering into additional contracts to ensure continued operation of the nuclear units.
17


Federal law requires the federalU.S. government to provide for the permanent disposal of commercial spent nuclear fuel.  Under the Federal Nuclear Waste Policy Act, the DOE carried out an analysis of a site in Nevada for a permanent nuclear waste repository.  Therefuel, but there is no definitive date by which a repository will be operational.  As a result, it was necessary to expand Susquehanna's on-site spent fuel storage capacity.  To support this expansion, PPL Susquehanna contracted for the design and construction of a spent fuel storage facility employing dry cask fuel storage technology.  The facility is modular, so that additional storage capacity can be added as needed.  The facility began receiving spent nuclear fuel in 1999.  PPL Susquehanna estimates, under current operating conditions, that there is sufficient storage capacity in the spent nuclear fuel pools and the on-site spent fuel storage facility at Susquehanna to accommodate spent fuel discharged through approximately 2017 under current operating conditions.2017.  If necessary, the on-site spent fuel storage facility can be expanded, assuming appropriate regulatory approvals are obtained.  If additional on-siteobtained, such that, together, the spent fuel pools and the expanded dry fuel storage facility will accommodate all of the spent fuel expected to be discharged through the current licensed life of the plant.

In 1996, the U.S. Court of Appeals for the District of Columbia Circuit ruled that the Nuclear Waste Policy Act imposed on the DOE an unconditional obligation to begin accepting spent nuclear fuel on or before January 31, 1998.  In January 2004, PPL Susquehanna filed suit in the U.S. Court of Federal Claims for unspecified damages suffered as a result of the DOE's breach of its contract to accept and dispose of spent nuclear fuel.  In May 2011, the parties entered into a settlement agreement which resolved all claims of PPL Susquehanna through December 2013.  PPL Susquehanna has received payments for claims through 2011.  PPL Susquehanna is eligible to receive payment of annual claims for allowed costs, as set forth in the settlement agreement, that are incurred through December 31, 2013.  In exchange, PPL Susquehanna has waived any claims against the United States government for costs paid or injuries sustained related to storing spent nuclear fuel at the Susquehanna plant through December 31, 2013.

Energy Marketing

PPL EnergyPlus sells the capacity and electricity produced by PPL Generation subsidiaries, along with purchased power, FTRs, natural gas, oil, uranium, emission allowances and RECs in competitive wholesale and competitive retail markets.

Purchases and sales at the wholesale level are made at competitive prices under FERC market-based prices.  PPL EnergyPlus is required, supplementary storagelicensed to provide retail electric supply to customers in Delaware, the District of Columbia, Maryland, New Jersey, Montana and Pennsylvania and licensed to provide retail natural gas supply to customers in Delaware, Maryland, New Jersey, New York and Pennsylvania.  Within the constraints of its hedging policy, PPL EnergyPlus actively manages its portfolios of energy and energy-related products to optimize their value and to limit exposure to price fluctuations.  See "Commodity Volumetric Activity" in Note 19 to the Financial Statements for the strategies PPL Energy Supply employs to optimize the value of its wholesale and retail energy portfolio.

Competition

Since the early 1990s, there has been increased competition in U.S. energy markets because of federal and state competitive market initiatives.  While some states, such as Pennsylvania and Montana, have created a competitive market for electricity generation, other states continue to consider different types of regulatory initiatives concerning competition in the power and gas industry.  Some states that were considering creating competitive markets have slowed their plans or postponed further consideration.  In addition, states that have created competitive markets have, from time to time, considered new market rules and re-regulation measures that could result in more limited opportunities for competitive energy suppliers.  Interest in re-regulation, however, has slowed due to the current environment of declining power prices.  As such, the markets in which PPL Energy Supply participates are highly competitive.

PPL Energy Supply faces competition in wholesale markets for available energy, capacity will be pursued.and ancillary services.  Competition is impacted by electricity and fuel prices, congestion along the power grid, new market entrants, construction by others of generating assets, technological advances in power generation, the actions of environmental and other regulatory authorities and other factors.  PPL Energy Supply primarily competes with other electricity suppliers based on its ability to aggregate generation supply at competitive prices from different sources and to efficiently utilize transportation from third-party pipelines and transmission from electric utilities and ISOs.  Competitors in wholesale power markets include regulated utilities, industrial companies, NUGs, competitive subsidiaries of regulated utilities and other energy marketers.  See "Item 1A. Risk Factors - Risks Related to Supply Segment" and PPL's and PPL Energy Supply's "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview" and Note 15 to the Financial Statements for more information concerning the risks faced with respect to competitive energy markets.

18


 Franchise and Licenses

See "Background - Segment Information - Supply Segment - Energy"Energy Marketing" above for a discussion of PPL EnergyPlus' licenses in various states.  PPL EnergyPlus also has an export license from the DOE to sell capacity and/or energy to electric utilities in Canada.

PPL Susquehanna operates Units 1 and 2 pursuant to NRC operating licenses.  In November 2009, the NRC approved PPL Susquehanna's application for 20-year license renewals for each of the Susquehanna units, extending the license expiration dates tolicenses that expire in 2042 for Unit 1 and toin 2044 for Unit 2.  See Note 8 to the Financial Statements for additional information.

In 2008, PPL Susquehanna received NRC approval for its request to increase the generation capacity of the Susquehanna nuclear plant.  The total expected capacity increase is 159 MW, of which PPL Susquehanna's 90% ownership share would be 143 MW.  The first uprate for Unit 1 totaling 50 MW was completed in 2008 and the second uprate is scheduled to be completed in 2010.  The first uprate for Unit 2 totaling 50 MW was completed in 2009, and the second uprate is scheduled to be completed in 2011.  The remaining total capacity increase is 59 MW, of which PPL Susquehanna's share is 53 MW.  PPL Susquehanna's share of the expected capital cost for the total uprate of 143 MW is $345 million.

In October 2008, a PPL Energy Supply subsidiary, PPL Bell Bend, LLC, submitted a COLA to the NRC for a new nuclear generating unit (Bell Bend) to be built adjacent to the Susquehanna plant.  TheAlso in 2008, the COLA was formally docketed and accepted for review by the NRC in December 2008.  In May 2009,NRC.  PPL Bell Bend, LLC does not expect to complete the COLA review process with the NRC published its official review schedule that culminates with the issuance of Bell Bend's final safety evaluation report in 2012.prior to 2015.  See Note 8 to Financial Statements for additional information.

PPL Holtwood operates the Holtwood hydroelectric generating stationplant pursuant to a FERC-granted license that was recently extended by the FERC to expireexpires in 2030.  PPL Holtwood operates the Wallenpaupack hydroelectric generating station pursuant to a license renewed by the FERC in 2005 and expiring in 2044.  PPL Holtwood also owns one-third of the capital stock of Safe Harbor Water Power Corporation (Safe Harbor), which holds a project license that extends the operation of its hydroelectric generating station until 2030.  The total capacity of the Safe Harbor generating station is 421 MW, and PPL Holtwood is entitled by contract to one-third of the total capacity.

In 2007, PPL requested FERC approval to expand its Holtwood plant by 125 MW.  In 2008, PPL withdrew the application in light of prevailing economic conditions, including the high cost of capital and projections of future energy prices.  PPL reconsidered its Holtwood expansion project in view of the tax incentives and potential loan guarantees for renewable energy projects contained in the Economic Stimulus Package.  In April 2009, PPL resubmitted the expansion application to FERC and in October 2009, the FERC approved the request to expand the plant and extended the operating license through August 2030.Holtwood plant.  See Note 8 to the Financial Statements for additional information.  PPL Holtwood operates the Wallenpaupack hydroelectric generating plant pursuant to a FERC-granted license that expires in 2044.

ThePPL's 11 hydroelectric facilities and one storage reservoir in Montana are licensed by the FERC.  These licenses expire periodically and the generating facilities must be relicensed at such times.  The FERC license for the Mystic facility expired in 2009 but has been extended, effective January 1, 2010, for an additional 40-year term.  The Thompson Falls and Kerr licenses expire in 2025 and 2035, respectively; and the licenses for the nine Missouri-Madison facilities expire in 2040.2040, and the license for the Mystic facility expires in 2050.

In connection with the relicensing of these generationgenerating facilities, applicable law permits the FERC may, under applicable law,to relicense the original licensee or license a new licensee or allow the U.S. government mayto take over the facility.  If the original licensee is not relicensed, it is compensated for its net investment in the facility, not to exceed the fair value of the property taken, plus reasonable damages to other property affected by the lack of relicensing.

·Pennsylvania Delivery Segment -
Includes the regulated electric delivery operations of PPL Electric.

PPL Electric

PPL Electric delivers electricity to approximately 1.4 million customers in a 10,000-square mile territory in 29 counties of eastern and central Pennsylvania.  The largest cities in this territory are Allentown, Bethlehem, Harrisburg, Hazleton, Lancaster, Scranton, Wilkes-Barre and Williamsport.

PPL Electric is the sole electricity distribution provider in its service territory, and also provides electricity supply in that territory as a PLR.  As part of the PUC Final Order, PPL Electric agreed to supply this electricity at predetermined capped rates through 2009.  PPL Electric entered into two contracts to purchase electricity from PPL EnergyPlus sufficient for PPL Electric to meet its PLR obligation through 2009 at the capped rates.  As discussed below, PPL Electric's PLR obligation after 2009 is governed by the PUC pursuant to the Public Utility Code as amended by Act 129, PLR regulations and a policy statement regarding interpretation and implementation of those regulations.  Both the regulations and the policy statement became effective in September 2007.  The PUC has approved PPL Electric's procurement plans for 2010 and for the period from January 2011 through May 2013.  Refer to Notes 14 and  See Note 15 to the Financial Statements for additional information.

During 2009, about 98% of PPL Electric's operating revenues were derived from regulated electricity delivery and supply as a PLR.  The remaining 2009 operating revenues were from wholesale revenues, primarily the sale to PPL EnergyPlus of power purchased from NUGs.  During 2009, about 46% of electricity delivery and PLR revenues were from residential customers, 37% from commercial customers, 16% from industrial customers and 1% from other customer classes.

PPL Electric's transmission facilities are operated as part of PJM, which operates the electric transmission network and electric energy market in the mid-Atlantic and Midwest regions of the U.S.  Bulk electricity is transmitted to wholesale users throughout a geographic area including all or part of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia.  As of January 1, 2006, PPL Electric became a member of the RFC.  The purpose of the RFC is to preserve and enhance electric service reliability and security for the interconnected electric systems within its territory and to be a regional entity under the framework of the NERC.  The RFC's key functions are the development of regional standards for reliable planning and operation of the bulk electric system and non-discriminatory compliance monitoring and enforcement of both NERC and regional standards.

PJM serves as a FERC-approved RTO in order to promote greater participation and competition in the region.  An RTO, like an ISO, is a designation provided by the FERC to a FERC-approved independent entity that operates the transmission system and typically administers a competitive power market.  PJM also administers regional markets for energy, capacity and ancillary services.  A primary purpose of the RTO/ISO is to separate the operation of, and access to, the transmission grid from market participants that buy or sell electricity in the same markets.  Electric utilities continue to own the transmission assets, but the RTO/ISO directs the control and operation of the transmission facilities.  PPL Electric is entitled to fully recover from retail customers the charges that it pays to PJM for transmission-related services.  PJM imposes these charges pursuant to its FERC-approved Open Access Transmission Tariff.

PPL Electric is subject to regulation as a public utility by the PUC, and certain of its activities are subject to the jurisdiction of the FERC under the Federal Power Act.

PPL Electric also is subject to the jurisdiction of certain federal, regional, state and local regulatory agencies with respect to land use and other environmental matters.  Certain operations of PPL Electric are subject to the Occupational Safety and Health Act of 1970 and comparable state statutes.

In November 2004, Pennsylvania enacted the Alternative Energy Portfolio Standard (the AEPS), which requires electric distribution companies, such as PPL Electric, and retail electric suppliers serving retail load to ultimately provide 18% of the electricity sold to retail customers in Pennsylvania from alternative energy sources by 2020.  Under this state law, alternative energy sources include hydro, wind, solar, waste coal, landfill methane and fuel cells.  An electric distribution company will pay an alternative compliance payment of $45 (or, in the case of solar, 200% of the average market value of solar credits) for each MWh that it is short of its required alternative energy supply percentage.  PPL Electric became subject to the requirements of this legislation beginning in 2010.  In 2010, PPL Electric is required to supply about 9% of the total amount of electricity it delivers to its PLR customers from alternative energy sources.  PPL Electric has purchased all of the supply required to meet its 2010 default service obligations pursuant to a PUC-approved Competitive Bridge Plan (the Plan).  Under the Plan, PPL Electric obtained full requirements service which includes the generation or credits that PPL Electric will need to comply with the AEPS in 2010.

Act 129 became effective in October 2008.  The law 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 makes changes to the existing AEPS.

See "Regulatory Issues - Pennsylvania Activities" in Note 14 to the Financial Statements for additional information regarding Act 129, other legislative and regulatory impacts and PPL Electric's actions to provide default electricity supply for periods after 2009.

Competition

Pursuant to authorizations from the Commonwealth of Pennsylvania and the PUC, PPL Electric operates a regulated distribution monopoly in its service area.  Accordingly, PPL Electric does not face competition in its electricity distribution business.

Effective January 1, 2010, PPL Electric's rates for generation supply as a PLR are no longer capped and the cost of electric generation is based on a competitive solicitation process.  Prior to the expiration of the generation rate caps, PPL Electric's customers' interest in purchasing generation supply from other providers was limited because, in recent years, the long-term supply agreement between PPL Electric and PPL EnergyPlus provided a below-market cost of generation supply for these customers.  As a result, a limited amount of "shopping" occurred.  In 2010, several alternative suppliers have offered to provide generation supply in PPL Electric's service territory.  When its customers purchase supply from these alternative suppliers or from PPL Electric as PLR, the purchase of such supply has no significant impact on the operating results of PPL Electric.  The cost to purchase PLR supply is passed directly by PPL Electric to its customers without markup. PPL Electric remains the distribution provider for all the customers in its service territory and charges a regulated rate for the service of delivering that electricity.

Provider of Last Resort Supply

The Customer Choice Act requires electric distribution companies, like PPL Electric, to act as a PLR of electricity supply and provides that electricity supply costs will be recovered by such companies pursuant to regulations established by the PUC.  In May 2007, the PUC approved PPL Electric's plan to procure default electricity supply for 2010 - after its current supply agreements with PPL EnergyPlus expire - for retail customers who do not choose an alternative competitive supplier.  Pursuant to this plan, PPL Electric completed six competitive supply solicitations and has contracted for all of the 2010 electricity supply it expects to need for residential, small commercial and small industrial customers.  In October 2009, PPL Electric purchased supply for fixed-price default service to large commercial and large industrial customers who elect to take that service in 2010.  In November 2009, PPL Electric purchased supply to provide hourly default service to large commercial and industrial customers in 2010.  See "Energy Purchase Commitments" in Note 14 to the Financial Statements for additional information regarding PPL Electric's solicitations for 2010 and its actions to provide default electricity supply for periods after 2010.

Franchise and Licenses

PPL Electric is authorized to provide electric public utility service throughout its service area as a result of grants by the Commonwealth of Pennsylvania in corporate charters to PPL Electric and companies to which it has succeeded and as a result of certification by the PUC.  PPL Electric is granted the right to enter the streets and highways by the Commonwealth subject to certain conditions.  In general, such conditions have been met by ordinance, resolution, permit, acquiescence or other action by an appropriate local political subdivision or agency of the Commonwealth.Kerr Dam license.

·International Delivery Segment -
Includes WPD, a regulated electricity distribution company in the U.K.
Other Corporate Functions (PPL)

WPD, through indirect wholly ownedPPL Services provides corporate functions such as financial, legal, human resources and information technology services.  Most of PPL Services' costs are charged directly to the respective PPL subsidiaries operates twofor the services provided or are indirectly charged to applicable subsidiaries based on an average of the 15 distribution networks providing electricity servicesubsidiaries' relative invested capital, operation and maintenance expenses and number of employees.

PPL Capital Funding, PPL's financing subsidiary, provides financing for the operations of PPL and certain subsidiaries, but PPL Capital Funding's costs are not charged to any Registrant other than PPL.  PPL Capital Funding participated significantly in the U.K.financing for the acquisitions of LKE and WPD Midlands.  The WPD subsidiaries together serve approximately 2.6 million end-usersassociated financing costs, as well as the financing costs associated with prior issuances of certain other PPL Capital Funding securities, have been and will continue to be assigned to the appropriate segments for purposes of PPL management's assessment of segment performance.  PPL's recent growth in rate-regulated businesses provides the U.K.  WPD (South West) serves 1.5 million customersorganization with an enhanced corporate level financing alternative, through PPL Capital Funding, that further enables PPL to support targeted credit profiles cost effectively across all of PPL's rated companies.  As a result, PPL plans to further utilize PPL Capital Funding in a 5,560 square mile area of southwest England.  WPD (South Wales) serves an area of Wales oppositeaddition to continued direct financing by the Bristol Channel from WPD (South West)'s territory.  Its 1.1 million customers occupy 4,550 square miles within Wales.  WPD is headquarteredoperating companies, as appropriate.  Beginning in Bristol, England.  See "Franchise2013, the proceeds and Licenses" for additional information about WPD's regulator, Ofgem, which sets price controls and grants distribution licenses.the financing costs associated primarily with PPL Capital Funding's future securities issuances are not expected to be directly assignable or allocable to any segment.

Competition
Also, the costs of certain other miscellaneous corporate level activities are not charged to any subsidiaries or allocated or assigned to any segment for purposes of assessing performance by PPL management.

Although WPD operates in non-exclusive concession areas in the U.K., it currently faces little competition with respect to residential customers.  See "Franchises(PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and Licenses" for more information.KU)

Franchise and Licenses

WPD is authorized by the U.K. government to provide electric distribution services within its concession areas and service territories, subject to certain conditions and obligations.  For instance, WPD is subject to governmental regulation of the prices it can charge and the quality of service it must provide, and WPD can be fined or have its licenses revoked if it does not meet the mandated standard of service.

WPD operates under distribution licenses granted, and price controls set, by Ofgem.  The price control formula that governs WPD's allowed revenue is normally determined every five years. Ofgem completed a rate review in December 2009 for the five-year period from April 1, 2010 through March 31, 2015.  See PPL's and PPL Energy Supply's "Results of Operations - Segment Results - International Delivery Segment" in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional information.

SEASONALITY

DemandThe demand for and market prices of electricity and natural gas are affected by weather.  As a result, PPL's overallthe Registrants' operating results in the future may fluctuate substantially on a seasonal basis, especially when more severe weather conditions such as heat waves or extreme winter stormsweather make such fluctuations more pronounced.  The pattern of this fluctuation may change depending on the type and location of the facilities PPL ownsowned and the terms of its contracts to purchase or sell electricity.  See "Financial Condition - Liquidity and Capital Resources - Environmental Matters" in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional information regarding climate change.

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FINANCIAL CONDITION

See PPL's, PPL Energy Supply's and PPL Electric'sthe Registrants' "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for this information.

CAPITAL EXPENDITURE REQUIREMENTS

See "Financial Condition - Liquidity and Capital Resources - Forecasted Uses of Cash - - Capital Expenditures" in PPL's, PPL Energy Supply's and PPL Electric'sthe Registrants' "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for information concerning projected capital expenditure requirements for the years 2010-2012.2013 through 2017.  See Note 1415 to the Financial Statements for additional information concerning the potential impact on capital expenditures from environmental matters.

ENVIRONMENTAL MATTERS

PPL and certain PPL subsidiaries, including PPL Electric and PPL Generation subsidiaries,The Registrants are subject to certain existing and developing federal, regional, state and local laws and regulations with respect to air and water quality, land use and other environmental matters.  See PPL'sThe EPA is in the process of proposing and PPL Energy Supply'sfinalizing an unprecedented number of environmental regulations that will directly affect the electricity industry.  These initiatives cover air, water and waste.  See "Financial Condition - Liquidity and Capital Resources"Resources - Forecasted Uses of Cash - Capital Expenditures" in the Registrants' "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Forecasted Uses of Cash - Capital Expenditures"Operations" for information concerning environmental capital expenditures during 20092012 and projected environmental capital expenditures for the years 2010-2012.  See2013-2017.  Also, see "Environmental Matters" in Note 1415 to the Financial Statements for information regarding these lawsadditional information.  To comply with primarily air-related environmental requirements, PPL's forecast for capital expenditures reflects a best estimate projection of expenditures that may be required within the next five years.  Such projections are $1.1 billion for LG&E, $1.2 billion for KU and regulations$246 million for PPL Energy Supply.  Actual costs (including capital, allowance purchases and operational modifications) may be significantly lower or higher depending on the status of PPL'sfinal requirements and its subsidiaries'market conditions.  Environmental compliance costs incurred by LG&E and remediation activities, as well as legal and regulatory proceedings involving PPL and its subsidiaries.KU are subject to recovery through a rate recovery mechanism.  See Note 6 to the Financial Statements for additional information.

PPL and its subsidiariesThe Registrants are unable to predict the ultimate effect of evolving environmental laws and regulations upon their existing and proposed facilities and operations and competitive positions.  In complying with statutes, regulations and actions by regulatory bodies involving environmental matters, including, among other things, air and water quality, greenhouse gasGHG emissions, hazardous and solid waste management and disposal, and regulation of toxic substances, PPL's and LKE's subsidiaries may be required to modify, replace or cease operating certain of their facilities.  PPL's and LKE's subsidiaries may also incur significant capital expenditures and operating expenses in amounts which are not now determinable but could be significant.

EMPLOYEE RELATIONS

As ofAt December 31, 2009,2012, PPL and its subsidiaries had the following full-time employees.

PPL Energy Supply (a) 4,733 
PPL Electric 2,311 
LKE  
PPL Generation2,665KU  931 
PPL EnergyPlus2,020LG&E (a) 991 
LKS 1,380 
Total LKE 3,302 
PPL Global (primarily WPD)2,369
Total PPL Energy Supply7,054
PPL Electric2,1666,116 
PPL Services and other1,2691,267 
Total PPL10,489 17,729 

(a)Includes labor union employees of mechanical contracting subsidiaries, whose numbers tend to fluctuate due to the nature of this business.

Approximately 4,980,5,600 employees, or 61%48%, of PPL's domestic workforce are members of labor unions, with threefour IBEW localslabor unions representing approximately 3,5404,300 employees.  Other unions primarily represent employees of the mechanical contractors.  The bargaining agreement with the largest IBEW local was negotiated in May 2006 andlabor union, which expires in May 2010.  This agreement2014, covers approximately 3,2001,500 PPL Electric, 1,600 PPL Energy Supply and 400 other employees.  Approximately 700 employees of LG&E and 70 employees of KU are represented by an IBEW labor union.  Both LG&E and KU have three-year labor agreements with the IBEW, which expire in November 2014 and August 2015.  The KU IBEW representingagreement includes a wage reopener in 2014.  Approximately 70 employees of KU are represented by a United Steelworkers of America (USWA) labor union, under an agreement that expires in August 2014.  PPL Montana's largest bargaining unit, an IBEW labor union, represents approximately 260 employees at the Montana Colstrip power plants, is covered under aplant.  The four-year labor agreement expiring in April 2012.  In January 2008, a four-year contract that expires in April 2012 was renegotiated with the2016.  PPL Montana's second largest bargaining unit, also an IBEW local of Montana thatlabor union, represents approximately 80 employees at the hydroelectric facilities and at the Corette plant.plant, under an agreement that expires in April 2013.

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Approximately 1,860,3,900, or 79%64%, of PPL's U.K. workforce are members of labor unions.  WPD recognizes fivefour unions, the largest of which represents 37%41% of its union workforce.  WPD's Electricity Business Agreement, which covers approximately 1,8103,850 union employees; itemployees, may be amended by agreement between WPD and the unions and is terminable with 12 monthsmonths' notice by either side.

See "Separation Benefits" in Note 12 to the Financial Statements for information on a 2009 cost reduction initiative, which resulted in the elimination of approximately 200 domestic management and staff positions at PPL.

AVAILABLE INFORMATION

PPL's Internet Web sitewebsite is www.pplweb.com.  On the Investor Center page of that Web site,website, PPL provides access to all SEC filings of PPL, PPL Energy Supplythe Registrants (including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and PPL Electricamendments to these reports filed or furnished pursuant to Section 13(d) or 15(d)) free of charge, as soon as reasonably practicable after filing with the SEC.  Additionally, PPL registrants'the Registrants' filings are available at the SEC's Web sitewebsite (www.sec.gov) and at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549, or by calling 1-800-SEC-0330.

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ITEM 1A. RISK FACTORS

PPL, PPL Energy Supply and PPL ElectricThe Registrants face various risks associated with their businesses.  While we have identified below the risks we currently consider material, these risks are not the only risks that we face.  Additional risks not presently known to us or that we currently deem immaterial may also impair our business operations.  Our businesses, financial condition, cash flows or results of operations could be materially adversely affected by any of these risks.  In addition, this report also contains forward-looking and other statements about our businesses that are subject to numerous risks and uncertainties.  See "Forward-Looking Information," "Item 1. Business," "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 1415 to the Financial Statements for more information concerning the risks described below and for other risks, uncertainties and factors that could impact our businesses and financial results.

As used in this Item 1A., the terms "we," "our" and "us" generally refer to PPL and its consolidated subsidiaries taken as a whole, or to PPL Energy Supply and its consolidated subsidiaries taken as a whole within the Supply and International Delivery segment discussions, or PPL Electric and its consolidated subsidiaries taken as a whole within the Pennsylvania DeliveryRegulated segment discussion, or LKE and its consolidated subsidiaries taken as a whole within the Kentucky Regulated segment discussion.

Risks Related to All Segments

(PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and KU)

We plan to selectively pursue growth of generation, transmission and distribution capacity, which involves a number of uncertainties and may not achieve the desired financial results.

We plan to pursue expansion of our generation, transmission and distribution capacity over the next several years through power uprates at certain of our existing power plants, the potential construction of new power plants, the potential acquisition of existing plants, the potential construction or acquisition of transmission and distribution projects and capital investments to upgrade transmission and distribution infrastructure.  We will rigorously scrutinize opportunities to expand our generating capability and may determine not to proceed with any expansion.  These types of projects involve numerous risks.  Any planned power uprates could result in cost overruns, reduced plant efficiency and higher operating and other costs.  With respect to the construction of new plants, the acquisition of existing plants, or the construction or acquisition of transmission and distribution projects, we may be required to expend significant sums for preliminary engineering, permitting, resource exploration, legal and other expenses before it can be established whether a project is feasible, economically attractive or capable of being financed.  Expansion in our regulated businesses is dependent on future load or service requirements and subject to applicable regulatory processes.  The success of both a new or acquired project would likely be contingent, among other things, upon the negotiation of satisfactory operating contracts, obtaining acceptable financing and maintaining acceptable credit ratings, as well as receipt of required and appropriate governmental approvals.  If we were unable to complete construction or expansion of a project, we may not be able to recover our investment in the project.  Furthermore, we might be unable to operate any new or acquired plants as efficiently as projected, which could result in higher than projected operating and other costs and reduced earnings.

Adverse conditions in the economic and financial markets in which we operate could adversely affect our financial condition and results of operations.

Adverse conditions in the financial markets during 2008 and the associated contraction of liquidity in the wholesale energy markets contributed significantly to declines in wholesale energy prices, and has significantly impacted our earnings since the second half of 2008.  The breadth and depth of these negative economic conditions had a wide-ranging impact on the U.S. and U.K. business environment, including our businesses.  As a result of the economic downturn, demand for energy commodities declined significantly.  This reduced demand continues to impact the key domestic wholesale energy markets we serve (such as PJM) and our Pennsylvania and Kentucky utility businesses.  The combination of lower demand for power and increased supply of natural gas has put downward price pressure on wholesale energy markets in general, further impacting our energy marketing results.  In general, current economic and commodity market conditions will continue to challenge predictability regarding our unhedged future energy margins, liquidity and overall financial condition.

Our businesses are heavily dependent on credit and capital, among other things, for capital expenditures and providing collateral to support hedging in our energy marketing business.  Global bank credit capacity declined and the cost of renewing or establishing new credit facilities increased significantly in 2008, primarily as a result of general credit concerns nationwide, introducing uncertainties as to our businesses' ability to enter into long-term energy commitments or reliably estimate the longer-term cost and availability of credit.  Although bank credit conditions have improved since mid-2009, and we currently expect to have adequate access to needed credit and capital based on current conditions, deterioration in the financial markets could adversely affect our financial condition and liquidity.  Additionally, regulations to be adopted to implement the Dodd-Frank Act and Basel III in Europe may impose requirements on our businesses and the businesses of others with whom we contract such as banks or other counterparties, or simply result in increased costs to conduct our business or access sources of capital and liquidity upon which the conduct of our businesses is dependent.

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

Our businesses are subject to seasonal demand cycles.  For example, in some markets demand for, and market prices of, electricity peak during hot summer months, while in other markets such peaks occur in cold winter months.  As a result, our overall operating results in the future may fluctuate substantially on a seasonal basis if weather conditions such as heat waves, extreme cold, unseasonably mild weather or severe storms occur.  The patterns of these fluctuations may change depending on the type and location of our facilities and the terms of our contracts to sell electricity.

Operating expenses could be affected by weather conditions, including storms, as well as by significant man-made or accidental disturbances, including terrorism or natural disasters.

Weather and these other factors can significantly affect our profitability or operations by causing outages, damaging infrastructure and requiring significant repair costs.  Storm outages and damage often either or both directly decrease revenues and increase expenses, due to reduced usage and higher restoration charges.  In addition, weather and other disturbances may affect capital markets and general economic conditions and impact future growth.

Our businesses are subject to physical, market and economic risks relating to potential effects of climate change.

Climate change may produce changes in weather or other environmental conditions, including temperature or precipitation levels, and thus may impact consumer demand for electric power.  Temperature increases could result in increased summer or decreased winter overall electricity consumption and precipitation changes could result in altered availability of water for hydro generation or plant cooling operations.  These or other meteorological changes could lead to increased operating costs, capital expenses or power purchase costs.  Greenhouse gas regulation could increase the cost of electric power, particularly power generated by fossil fuels, and such increases could have a depressive effect on regional economies.  Reduced economic and consumer activity in our service areas -- both generally and specific to certain industries and consumers accustomed to previously lower cost power -- could reduce demand for the power we generate, market and deliver.  Also, demand for our energy-related services could be similarly lowered should consumers' preferences or market factors move toward favoring energy efficiency, low-carbon power sources or reduced electric usage.

We cannot predict the outcome of the legal proceedings and investigations currently being conducted with respect to our current and past business activities.  An adverse determination could have a material adverse effect on our financial condition, results of operations or cash flows.

We are involved in legal proceedings, claims and litigation and subject to ongoing state and federal investigations arising out of our business operations, the most significant of which are summarized in "Legal Matters," "Regulatory Issues" and "Environmental Matters - Domestic" in Note 15 to the Financial Statements.  We cannot predict the ultimate outcome of these matters, nor can we reasonably estimate the costs or liabilities that could potentially result from a negative outcome in each case.

We could be negatively affected by rising interest rates, downgrades to our bond credit ratings or other negative developments in our ability to access capital markets.

In the ordinary course of business, we are reliant upon adequate long-term and short-term financing to fund our significant capital expenditures, debt service and operating needs.  As a capital-intensive business, we are sensitive to developments in interest rate levels; credit rating considerations; insurance, security or collateral requirements; market liquidity and credit availability and refinancing opportunities necessary or advisable to respond to credit market changes.  Changes in these conditions could result in increased costs and decreased liquidity to our regulated utility businesses.

A downgrade in our credit ratings could negatively affect our ability to access capital and increase the cost of maintaining our credit facilities and any new debt.

Credit ratings assigned by Moody's, Fitch and S&P to our businesses and their financial obligations have a significant impact on the cost of capital incurred by our businesses.  Although we do not expect these ratings to limit our ability to fund short-term liquidity needs or access new long-term debt, any ratings downgrade could increase our short-term borrowing costs and negatively affect our ability to fund short-term liquidity needs and access new long-term debt.  See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - Liquidity and Capital Resources - Ratings Triggers" for additional information on the impact of a downgrade in our credit rating.

Significant increases in our operation and maintenance expenses, including health care and pension costs, could adversely affect our future earnings and liquidity.

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We continually focus on limiting and reducing where possible our operation and maintenance expenses.  However, we expect to continue to face increased cost pressures in our operations.  Increased costs of materials and labor may result from general inflation, increased regulatory requirements (especially in respect of environmental regulations), the need for higher-cost expertise in the workforce or other factors.  In addition, pursuant to collective bargaining agreements, we are contractually committed to provide specified levels of health care and pension benefits to certain current employees and retirees.  We provide a similar level of benefits to our management employees.  These benefits give rise to significant expenses.  Due to general inflation with respect to such costs, the aging demographics of our workforce and other factors, we have experienced significant health care cost inflation in recent years, and we expect our health care costs, including prescription drug coverage, to continue to increase despite measures that we have taken and expect to take to require employees and retirees to bear a higher portion of the costs of their health care benefits.  In addition, we expect to continue to incur significant costs with respect to the defined benefit pension plans for our employees and retirees.  The measurement of our expected future health care and pension obligations, costs and liabilities is highly dependent on a variety of assumptions, most of which relate to factors beyond our control.  These assumptions include investment returns, interest rates, health care cost trends, inflation rates, benefit improvements, salary increases and the demographics of plan participants.  If our assumptions prove to be inaccurate, our future costs and cash contribution requirements to fund these benefits could increase significantly.

We may be required to record impairment charges in the future for certain of our investments, which could adversely affect our earnings.

Under GAAP, we are required to test our recorded goodwill for impairment on an annual basis, or more frequently if events or circumstances indicate that these assets may be impaired.  Although no goodwill impairments were recorded based on our annual review in the fourth quarter of 2012, we are unable to predict whether future impairment charges may be necessary.

We also review our long-lived assets, including equity investments, for impairment when events or circumstances indicate that the carrying value of these assets may not be recoverable.  See Notes 1, 9 and 18 to the Financial Statements for additional information on impairment charges taken during the reporting periods.  We are unable to predict whether impairment charges, or other losses on sales of other assets or businesses, may occur in future years.

We may incur liabilities in connection with discontinued operations.

In connection with various divestitures, we have indemnified or guaranteed parties against certain liabilities and with respect to certain transactions.  These indemnities and guarantees relate, among other things, to liabilities which may arise with respect to the period during which we or our subsidiaries operated the divested business, and to certain ongoing contractual relationships and entitlements with respect to which we or our subsidiaries made commitments in connection with the divestiture.

We are subject to liability risks relating to our generation, transmission and distribution businesses.

The conduct of our physical and commercial operations subjects us to many risks, including risks of potential physical injury, property damage or other financial liability, caused to or by employees, customers, contractors, vendors, contractual or financial counterparties and other third parties.

Our facilities may not operate as planned, which may increase our expenses and decrease our revenues and have an adverse effect on our financial performance.

Operation of power plants, transmission and distribution facilities, information technology systems and other assets and activities subjects us to a variety of risks, including the breakdown or failure of equipment, accidents, security breaches, viruses or outages affecting information technology systems, labor disputes, obsolescence, delivery/transportation problems and disruptions of fuel supply and performance below expected levels.  These events may impact our ability to conduct our businesses efficiently and lead to increased costs, expenses or losses.  Operation of our delivery systems below our expectations may result in lost revenue and increased expense, including higher maintenance costs which may not be recoverable from customers.  Planned and unplanned outages at our power plants may require us to purchase power at then-current market prices to satisfy our commitments or, in the alternative, pay penalties and damages for failure to satisfy them.

Although we maintain customary insurance coverage for certain of these risks, no assurance can be given that such insurance coverage will be sufficient to compensate us fully in the event losses occur.
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The operation of our businesses is subject to cyber-based security and integrity risk.

Numerous functions affecting the efficient operation of our businesses are dependent on the secure and reliable storage, processing and communication of electronic data and the use of sophisticated computer hardware and software systems.  The operation of our generation plants, including the Susquehanna nuclear plant, and of our energy and fuel trading businesses, as well as our transmission and distribution operations are all reliant on cyber-based technologies and, therefore, subject to the risk that such systems could be the target of disruptive actions, principally by terrorists or vandals, or otherwise be compromised by unintentional events.  As a result, operations could be interrupted, property could be damaged and customer information lost or stolen, causing us to incur significant losses of revenues, other substantial liabilities and damages and costs to replace or repair damaged equipment.

We are subject to risks associated with federal and state tax laws and regulations.

Changes in tax law as well as the inherent difficulty in quantifying potential tax effects of business decisions could negatively impact our results of operations.  We are required to make judgments in order to estimate our obligations to taxing authorities.  These tax obligations include income, property, sales and use, employment-related and other taxes.  We also estimate our ability to utilize tax benefits and tax credits.  Due to the revenue needs of the jurisdictions in which our businesses operate, various tax and fee increases may be proposed or considered.  We cannot predict whether such tax legislation or regulation will be introduced or enacted or the effect of any such changes on our businesses.  If enacted, any changes could increase tax expense and could have a significant negative impact on our results of operations and cash flows.

We are subject to the risk that our workforce and its knowledge base may become depleted in coming years.

PPL is experiencing an increase in attrition due primarily to the number of retiring employees.  Over the period from 2014 through 2018, 23.5% of PPL's total workforce is projected to leave the company, with the risk that critical knowledge will be lost and that it may be difficult to replace departed personnel due to a declining trend in the number of available skilled workers and an increase in competition for such workers.

(PPL, PPL Energy Supply and LKE)

Risk Related to Registrant Holding Companies

PPL's, PPL Energy Supply's and LKE's cash flows and ability to meet their obligations with respect to indebtedness and under guarantees, and PPL's ability to pay dividends, largely depends on the financial performance of their subsidiaries and, as a result, is effectively subordinated to all existing and future liabilities of those subsidiaries.
PPL, PPL Energy Supply and LKE are holding companies and conduct their operations primarily through subsidiaries.  Substantially all of the consolidated assets of these Registrants are held by such subsidiaries.  Accordingly, their cash flows and ability to meet their debt and guaranty obligations, as well as PPL's ability to pay dividends, are largely dependent upon the earnings of those subsidiaries and the distribution or other payment of such earnings in the form of dividends, distributions, loans or advances or repayment of loans and advances.  The subsidiaries are separate and distinct legal entities and have no obligation to pay any amounts due from their parents or to make any funds available for such a payment.  The ability of the subsidiaries of the Registrants to pay dividends or distributions to such Registrants in the future will depend on the subsidiaries' future earnings and cash flows and the needs of their businesses, and may be restricted by their obligations to holders of their outstanding debt and other creditors, as well as any contractual or legal restrictions in effect at such time, including the requirements of state corporate law applicable to payment of dividends and distributions, and regulatory requirements, including restrictions on the ability of PPL Electric, LG&E and KU to pay dividends under Section 305(a) of the Federal Power Act.
Because PPL, PPL Energy Supply and LKE are holding companies, their debt and guaranty obligations are effectively subordinated to all existing and future liabilities of their subsidiaries.  Therefore, PPL's, PPL Energy Supply's and LKE's rights and the rights of their creditors, including rights of any debt holders, to participate in the assets of any of their subsidiaries, in the event that such a subsidiary is liquidated or reorganized, will be subject to the prior claims of such subsidiary's creditors.  Although certain agreements to which certain subsidiaries are parties limit their ability to incur additional indebtedness, PPL, PPL Energy Supply and LKE and their subsidiaries retain the ability to incur substantial additional indebtedness and other liabilities. In addition, if PPL elects to receive distributions of earnings from its foreign operations, PPL may incur U.S. income taxes, net of any available foreign tax credits, on such amounts.
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(PPL, PPL Electric, LKE, LG&E and KU)

Risks Related to Domestic Regulated Utility Operations

Our domestic regulated utility businesses face many of the same risks, in addition to those risks that are unique to the Kentucky Regulated segment and the Pennsylvania Regulated segment.  Set forth below are risk factors common to both domestic regulated segments, followed by sections identifying separately the risks specific to each of these segments.

Our profitability is highly dependent on our ability to recover the costs of providing energy and utility services to our customers and earn an adequate return on our capital investments.  Regulators may not approve the rates we request.

We currently provide services to our utility customers at rates approved by one or more federal or state regulatory commissions, including those commissions referred to below.  While such regulation is generally premised on the recovery of prudently incurred costs and a reasonable rate of return on invested capital, the rates that we may charge our regulated generation, transmission and distribution customers are subject to authorization of the applicable regulatory authorities.  There can be no assurance that such regulatory authorities will consider all of our costs to have been prudently incurred or that the regulatory process by which rates are determined will always result in rates that achieve full recovery of our costs or an adequate return on our capital investments.  While our rates are generally regulated based on an analysis of our costs incurred in a base year or based on future projected costs, the rates we are allowed to charge may or may not match our costs at any given time.  Our regulated utility businesses are subject to substantial capital expenditure requirements over the next several years, which will likely require rate increase requests to the regulators.  If our costs are not adequately recovered through rates, it could have an adverse effect on our business, results of operations, cash flows and financial condition.

Our domestic utility businesses are subject to significant and complex governmental regulation.

Various federal and state entities, including but not limited to the FERC, KPSC, VSCC, TRA and PUC regulate many aspects of the domestic utility operations of PPL, including:

·the rates that we may charge and the terms and conditions of our service and operations;
·financial and capital structure matters;
·siting, construction and operation of facilities;
·mandatory reliability and safety standards and other standards of conduct;
·accounting, depreciation and cost allocation methodologies;
·tax matters;
·affiliate restrictions;
·acquisition and disposal of utility assets and securities; and
·various other matters.

Such regulations or changes thereto may subject us to higher operating costs or increased capital expenditures and failure to comply could result in sanctions or possible penalties.  In any rate-setting proceedings, federal or state agencies, intervenors and other permitted parties may challenge our rate requests, and ultimately reduce, alter or limit the rates we seek.

We could be subject to higher costs and/or penalties related to mandatory reliability standards.

Under the Energy Policy Act of 2005, owners and operators of the bulk power electricity system are now subject to mandatory reliability standards promulgated by the NERC and enforced by the FERC.  Compliance with reliability standards may subject us to higher operating costs and/or increased capital expenditures, and violations of these standards could result in substantial penalties which may not be recoverable from customers.

Changes in transmission and wholesale power market structures could increase costs or reduce revenues.

Wholesale revenues fluctuate with regional demand, fuel prices and contracted capacity.  Changes to transmission and wholesale power market structures and prices may occur in the future, are not predictable and may result in unforeseen effects on energy purchases and sales, transmission and related costs or revenues.  These can include commercial or regulatory changes affecting power pools, exchanges or markets in which PPL participates.

Our domestic regulated businesses undertake significant capital projects and these activities are subject to unforeseen costs, delays or failures, as well as risk of inadequate recovery of resulting costs.

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The domestic regulated utility businesses are capital intensive and require significant investments in energy generation (in the case of LG&E and KU) and transmission, distribution and other infrastructure projects, such as projects for environmental compliance and system reliability.  The completion of these projects without delays or cost overruns is subject to risks in many areas, including:

·approval, licensing and permitting;
·land acquisition and the availability of suitable land;
·skilled labor or equipment shortages;
·construction problems or delays, including disputes with third party intervenors;
·increases in commodity prices or labor rates;
·contractor performance;
·environmental considerations and regulations;
·weather and geological issues; and
·political, labor and regulatory developments.

Failure to complete our capital projects on schedule or on budget, or at all, could adversely affect our financial performance, operations and future growth if such expenditures are not granted rate recovery by our regulators.

Risks Specific to Kentucky Regulated Segment

(PPL, LKE, LG&E and KU)

The costs of compliance with, and liabilities under, environmental laws are significant and are subject to continuing changes.

Extensive federal, state and local environmental laws and regulations are applicable to LG&E's and KU's generation business, including its air emissions, water discharges and the management of hazardous and solid waste, among other business-related activities; and the costs of compliance or alleged non-compliance cannot be predicted but could be material.  In addition, our costs may increase significantly if the requirements or scope of environmental laws, regulations or similar rules are expanded or changed.  Costs may take the form of increased capital expenditures or operating and maintenance expenses, monetary fines, penalties or forfeitures or other restrictions.  Many of these environmental law considerations are also applicable to the operations of our key suppliers, or customers, such as coal producers and industrial power users, and may impact the costs of their products and demand for our services.

Ongoing changes in environmental regulations or their implementation requirements and our compliance strategies relating thereto entail a number of uncertainties.

The environmental standards governing LG&E's and KU's businesses, particularly as applicable to coal-fired generation and related activities, continue to be subject to uncertainties due to ongoing rulemakings and other regulatory developments, legislative activities and litigation.  The uncertainties associated with these developments introduce risks to our management of operations and regulatory compliance.  Environmental developments, including revisions to applicable standards, changes in compliance deadlines and invalidation of rules on appeal may require major changes in compliance strategies, operations or assets and adjustments to prior plans.  Depending on the extent, frequency and timing of such changes, the companies may be subject to inconsistent requirements under multiple regulatory programs, compressed windows for decision-making and short compliance deadlines that may require aggressive schedules for construction, permitting, and other regulatory approvals.  Under such circumstances, the companies may face higher risks of unsuccessful implementation of environmental-related business plans, noncompliance with applicable environmental rules, or increased costs of implementation.

Risks Specific to Pennsylvania Regulated Segment

(PPL and PPL Electric)

We may be subject to higher transmission costs and other risks as a result of PJM's regional transmission expansion plan (RTEP) process.
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PJM and the FERC have the authority to require upgrades or expansion of the regional transmission grid, which can result in substantial expenditures for transmission owners.  As discussed in Note 8 to the Financial Statements, we expect to make substantial expenditures to construct the Susquehanna-Roseland transmission line that PJM has determined is necessary for the reliability of the regional transmission grid.  Although the FERC has granted our request for incentive rate treatment of such facilities, we cannot be certain that all costs that we may incur will be recoverable.  In addition, the date when these facilities will be in service, which can be significantly impacted by delays related to public opposition or other factors, is subject to the outcome of future events that are not all within our control.  As a result, we cannot predict the ultimate financial or operational impact of this project or other RTEP projects on PPL Electric.

We could be subject to higher costs and/or penalties related to Pennsylvania Conservation and Energy Efficiency Programs.

PPL Electric is subject to Act 129 which contains requirements for energy efficiency and conservation programs and for the use of smart metering technology, imposes new PLR electricity supply procurement rules, provides remedies for market misconduct, and made changes to the existing AEPS.  The law also requires electric utilities to meet specified goals for reduction in customer electricity usage and peak demand by specified dates (2011 and 2013 for Phase 1 and by 2016 for Phase 2).  Utilities not meeting these requirements of Act 129 are subject to significant penalties that cannot be recovered in rates.  Numerous factors outside of our control could prevent compliance with these requirements and result in penalties to us.

(PPL)

Risks Related to U.K. Regulated Segment

Our U.K. delivery business is subject to risks with respect to rate regulation and operational performance.

Our U.K. delivery business is rate-regulated and operates under an incentive-based regulatory framework.  In addition, its ability to manage operational risk is critical to its financial performance.  Disruption to the distribution network could reduce profitability both directly through the higher costs for network restoration and also through the system of penalties and rewards that Ofgem has in place relating to customer service levels.

In December 2009, Ofgem completed its rate review for the five-year period from April 1, 2010 through March 31, 2015, reducing regulatory rate uncertainty in the U.K. Regulated segment until the next rate review which will be effective April 1, 2015.  The regulated income of the U.K. Regulated segment and also the RAV are to some extent linked to movements in the Retail Price Index (RPI), a measure of inflation.  Reductions in the RPI would adversely impact revenues and the debt-to-RAV ratio.

Our U.K. distribution business exposes us to risks related to U.K. laws and regulations, taxes, economic conditions, foreign currency exchange rate fluctuations, and political conditions and policies of the U.K. government.  These risks may reduce the results of operations from our U.K. distribution business:

·changes in laws or regulations relating to U.K. operations, including tax laws and regulations;
·changes in government policies, personnel or approval requirements;
·changes in general economic conditions affecting the U.K.;
·regulatory reviews of tariffs for distribution companies;
·severe weather and natural disaster impacts on the electric sector and our assets;
·changes in labor relations;
·limitations on foreign investment or ownership of projects and returns or distributions to foreign investors;
·limitations on the ability of foreign companies to borrow money from foreign lenders and lack of local capital or loans;
·fluctuations in foreign currency exchange rates and in converting U.K. revenues to U.S. dollars, which can increase our expenses and/or impair our ability to meet such expenses, and difficulty moving funds out of the country in which the funds were earned; and
·compliance with U.S. foreign corrupt practices laws.
The WPD Midlands acquisition may not achieve its intended results, including anticipated cost savings, efficiencies and other benefits.
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Although we completed the WPD Midlands acquisition with the expectation that it will result in various benefits, including a significant amount of cost savings and other financial and operational benefits, there can be no assurance regarding the extent to which we will be able to realize these cost-savings or other benefits.  Achieving the anticipated benefits, including cost savings, is subject to a number of uncertainties, including whether the businesses acquired can be operated in the manner we intend.  Events outside of our control, including but not limited to regulatory changes or developments in the U.K., could also adversely affect our ability to realize the anticipated benefits from the WPD Midlands acquisition.
The WPD Midlands acquisition exposes us to additional risks and uncertainties with respect to the acquired businesses and their operations.
Although the WPD Midlands acquisition increased our relative investment in regulated operations, which we believe should help mitigate our exposure to downturns in the wholesale power markets, it will increase our dependence on rate-of-return regulation.  

The WPD businesses generally are subject to risks similar to those to which we were subject in our pre-acquisition U.K. businesses.  These include:
·There are various changes being contemplated by Ofgem to the current electricity distribution, gas transmission and gas distribution regulatory frameworks in the U.K. and there can be no assurance as to the effects such changes will have on our U.K. regulated businesses in the future, including the acquired businesses.  In particular, in October 2010, Ofgem announced a new regulatory framework that is expected to become effective in April 2015 for the electricity distribution sector in the U.K.  The framework, known as RIIO (Revenues = Incentives + Innovation + Outputs), focuses on sustainability, environmental-focused output measures, promotion of low carbon energy networks and financing of new investments.  The new regulatory framework is expected to have a wide-ranging effect on electricity distribution companies operating in the U.K., including changes to price controls and price review periods.  Our U.K. regulated businesses' compliance with this new regulatory framework may result in significant additional capital expenditures, increases in operating and compliance costs and adjustments to our pricing models.
·Ofgem has formal powers to propose modifications to each distribution license.  We are not currently aware of any planned modification to any of our U.K. regulated businesses distribution licenses that would result in a material adverse change to the U.K. regulated businesses and PPL.  There can, however, be no assurance that a restrictive modification will not be introduced in the future, which could have an adverse effect on the operations and financial condition of the U.K. regulated businesses and PPL.
·A failure to operate our U.K. networks properly could lead to compensation payments or penalties, or a failure to make capital expenditures in line with agreed investment programs could lead to deterioration of the network.  While our U.K. regulated businesses' investment programs are targeted to maintain asset conditions over a five-year period and reduce customer interruptions and customer minutes lost over that period, no assurance can be provided that these regulatory requirements will be met.
·A failure by any of our U.K. regulated businesses to comply with the terms of a distribution license may lead to the issuance of an enforcement order by Ofgem that could have an adverse impact on PPL.  Ofgem has powers to levy fines of up to 10 percent of revenue for any breach of a distribution license or, in certain circumstances, such as insolvency, the distribution license itself may be revoked.  Unless terminated in the circumstances mentioned above, a distribution license continues indefinitely until revoked by Ofgem following no less than 25 years' written notice.
·We will be subject to increased foreign currency exchange rate risks because a greater portion of our cash flows and reported earnings will be generated by our U.K. business operations.  These risks relate primarily to changes in the relative value of the British pound sterling and the U.S. dollar between the time we initially invest U.S. dollars in our U.K. businesses and the time that cash is repatriated to the U.S. from the U.K., including cash flows from our U.K. businesses that may be distributed as future dividends to our shareholders or repayments of intercompany loans.  In addition, our consolidated reported earnings on a U.S. GAAP basis may be subject to increased earnings translation risk, which is the result of the conversion of earnings as reported in our U.K. businesses on a British pound sterling basis to a U.S. dollar basis in accordance with U.S. GAAP requirements.
·Environmental costs and liabilities associated with aspects of the acquired businesses may differ from those of our existing business.
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Risks Related to Supply Segment

(PPL and PPL Energy Supply)

We face intense competition in our energy supply business, which may adversely affect our ability to operate profitably.

Unlike our regulated utility businesses, our energy supply business is dependent on our ability to operate in a competitive environment and is not assured of any rate of return on capital investments through a predetermined rate structure.  Competition is impacted by electricity and fuel prices, new market entrants, construction by others of generating assets and transmission capacity, technological advances in power generation, the actions of environmental and other regulatory authorities and other factors.  These competitive factors may negatively impact our ability to sell electricity and related products and services, as well as the prices that we may charge for such products and services, which could adversely affect our results of operations and our ability to grow our business.

We sell our available energy and capacity into the competitive wholesale markets through contracts of varying duration.  Competition in the wholesale power markets occurs principally on the basis of the price of products and, to a lesser extent, on the basis of reliability and availability.  We believe that the commencement of commercial operation of new electricity generating facilities in the regional markets where we own or control generation capacity and the evolution of demand side management resources will continue to increase competition in the wholesale electricity market in those regions, which could have an adverse effect on capacity prices and the prices we receive for electricity.

We also face competition in the wholesale markets for electricity capacity and ancillary services.  We primarily compete with other electricity suppliers based on our ability to aggregate supplies at competitive prices from different sources and to efficiently utilize transportation from third-party pipelines and transmission from electric utilities and ISOs.  We also compete against other energy marketers on the basis of relative financial condition and access to credit sources, and our competitors may have greater financial resources than we have.

Competitors in the wholesale power markets in which PPL Generation subsidiaries and PPL EnergyPlus operate include regulated utilities, industrial companies, non-utility generators, competitive subsidiaries of regulated utilities and financial institutions.

Adverse changes in commodity prices and related costs may decrease our future energy margins, which could adversely affect our earnings and cash flows.

Our energy margins, or the amount by which our revenues from the sale of power exceed our costs to supply power, are impacted by changes in market prices for electricity, fuel, fuel transportation, emission allowances, RECs, electricity transmission and related congestion charges and other costs.  Unlike most commodities, the limited ability to store electric power requires that it must be consumed at the time of production.  As a result, wholesale market prices for electricity may fluctuate substantially over relatively short periods of time and can be unpredictable.  Among the factors that influence such prices are:
·demand for electricity;
·supply and demand for electricity available from current or new generation resources;
·variable production costs, primarily fuel (and the associated fuel transportation costs) and emission allowance expense for the generation resources used to meet the demand for electricity;
·transmission capacity and service into, or out of, markets served;
·changes in the regulatory framework for wholesale power markets;
·liquidity in the wholesale electricity market, as well as general creditworthiness of key participants in the market; and
·weather and economic conditions impacting demand for or the price of electricity or the facilities necessary to deliver electricity.
We do not always hedge against risks associated with electricity and fuel price volatility.

We attempt to mitigate risks associated with satisfying our contractual electricity sales obligations by either reserving generation capacity to deliver electricity or purchasing the necessary financial or physical products and services through competitive markets to satisfy our net firm sales contracts.  We also routinely enter into contracts, such as fuel and electricity purchase and sale commitments, to hedge our exposure to fuel requirements and other electricity-related commodities.  However, based on economic and other considerations, we may decide not to hedge the entire exposure of our operations from commodity price risk.  To the extent we do not hedge against commodity price risk, our results of operations and financial position may be adversely affected.

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We are exposed to operational, price and credit risks associated with selling and marketing products in the wholesale and retail electricity markets.

We purchase and sell electricity in wholesale markets under market-based tariffs authorized by the FERC throughout the U.S. and also enter into short-term agreements to market available electricity and capacity from our generation assets with the expectation of profiting from market price fluctuations.  If we are unable to deliver firm capacity and electricity under these agreements, we could be required to pay damages.  These damages would generally be based on the difference between the market price to acquire replacement capacity or electricity and the contract price of any undelivered capacity or electricity.  Depending on price volatility in the wholesale electricity markets, such damages could be significant.  Extreme weather conditions, unplanned generation facility outages, environmental compliance costs, transmission disruptions, and other factors could affect our ability to meet our obligations, or cause significant increases in the market price of replacement capacity and electricity.

Our wholesale power agreements typically include provisions requiring us to post collateral for the benefit of our counterparties if the market price of energy varies from the contract prices in excess of certain pre-determined amounts.  At December 31, 2009, we had posted $242 million of collateral, in the form of letters of credit, under these contracts.  At December 31, 2009, we maintained $4.1 billion of liquidity facilities to provide for potential additional collateral obligations.  We currently believe that we have sufficient credit to fulfill our potential collateral obligations under these power contracts.  OurHowever, our obligation to post collateral could exceed the amount of our facilities or our ability to increase our facilities could be limited by financial marketmarkets or other factors.  See Note 7 to the Financial Statements for a discussion of PPL's credit facilities.

We also face credit risk that parties with whom we contract in both the wholesale and retail markets will default in their performance, in which case we may have to sell our electricity into a lower-priced market or make purchases in a higher-priced market than existed at the time of contract.  Whenever feasible, we attempt to mitigate these risks byusing various means, including agreements that require our counterparties to post collateral for our benefit if the market price of energy varies from the contract price in excess of certain pre-determined amounts.  However, there can be no assurance that we will avoid counterparty nonperformance risk, including bankruptcy, which could adversely impact our ability to performmeet our obligations to other parties, which could in turn subject us to claims for damages.

Adverse changesThe load following contracts that PPL EnergyPlus is awarded do not provide for specific levels of load and actual load significantly below or above our forecasts could adversely affect our energy margins.

We generally hedge our load following obligations with energy purchases from third parties, and to a lesser extent with our own generation.  If the actual load is significantly lower than the expected load, we may be required to resell power at a lower price than was contracted for to supply the load obligation, resulting in commodity pricesa financial loss.  Alternatively, a significant increase in load could adversely affect our energy margins because we are required under the terms of the load following contracts to provide the energy necessary to fulfill increased demand at the contract price, which could be lower than the cost to procure additional energy on the open market.  Therefore, any significant decrease or increase in load compared with our forecasts could have a material adverse effect on our results of operations and related costsfinancial position.

We may decreaseexperience disruptions in our future energy margins,fuel supply, which could adversely affect our earnings and cash flows.ability to operate our generation facilities.

Our energy margins,We purchase fuel from a number of suppliers.  Disruption in the delivery of fuel and other products consumed during the production of electricity (such as coal, natural gas, oil, water, uranium, lime, limestone and other chemicals), including disruptions as a result of weather, transportation difficulties, global demand and supply dynamics, labor relations, environmental regulations or the financial viability of our fuel suppliers, could adversely affect our ability to operate our facilities, which could result in lower sales and/or higher costs and thereby adversely affect our results of operations.

Unforeseen changes in the price of coal and natural gas could cause us to incur excess coal inventories and contract termination costs.

Extraordinarily low natural gas prices during 2012 caused natural gas to be the more cost competitive fuel compared to coal for generating electricity.  Because we enter into guaranteed supply contracts to provide for the amount by whichof coal needed to operate our revenues from the salebase load coal-fired generating facilities, we may experience periods where we hold excess amounts of power exceedcoal if fuel pricing results in our reducing or idling coal-fired generating facilities in favor of operating available alternative natural gas-fired generating facilities.  In addition, we may incur costs to terminate supply power, are impacted by changescontracts for coal in market prices for electricity, fuel, fuel transportation, emission allowances, RECs, electricity transmission and related congestion charges and other costs.  Unlike most commodities, the limited ability to store electric power requires that it must be consumed at the timeexcess of production.  As a result, wholesale market prices for electricity may fluctuate substantially over relatively short periods of time and can be unpredictable.  Among the factors that influence such prices are:

·demand for electricity and supplies of electricity available from current or new generation resources;
·variable production costs, primarily fuel (and the associated fuel transportation costs) and emission allowance expense for the generation resources used to meet the demand for electricity;
·transmission capacity and service into, or out of, markets served;
·changes in the regulatory framework for wholesale power markets;
·liquidity in the wholesale electricity market, as well as general credit worthiness of key participants in the market; and
·weather and economic conditions impacting demand for electricity or the facilities necessary to deliver electricity.

See Exhibit 99(a) for more information concerning the market fluctuations in wholesale energy, fuel and emission allowance prices over the past five years.  The volatility of these business factors has increased significantly with the current economic downturn.our generating requirements.

Our risk management policy and programs relating to electricity and fuel prices, interest rates foreign currency and counterpartiescounterparty credit and non-performance risks may not work as planned, and we may suffer economic losses despite such programs.


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We actively manage the market risk inherent in our generation and energy marketing activities, as well as our debt foreign currency and counterparty credit positions.  We have implemented procedures to monitor compliance with our risk management policy and programs, including independent validation of transaction and market prices, verification of risk and transaction limits, portfolio stress test,tests, sensitivity analyses and daily portfolio reporting of various risk management metrics.  Nonetheless, our risk management programs may not work as planned.  For example, actual electricity and fuel prices may be significantly different or more volatile than the historical trends and assumptions upon which we based our risk management calculations.  Additionally, unforeseen market disruptions could decrease market depth and liquidity, negatively impacting our ability to enter into new transactions.  We enter into financial contracts to hedge commodity basis risk, and as a result are exposed to the risk that the correlation between delivery points could change with actual physical delivery.  Similarly, interest rates or foreign currency exchange rates could change in significant ways that our risk management procedures were not designed to address.  As a result, we cannot always predict the impact that our risk management decisions may have on us if actual events result in greater losses or costs than our risk models predict or greater volatility in our earnings and financial position.

In addition, our trading, marketing and hedging activities are exposed to counterparty credit risk and market liquidity risk.  We have adopted a credit risk management policy and program to evaluate counterparty credit risk.  However, if counterparties fail to perform, the risk of which has increased due to the economic downturn, we may be forced to enter into alternative arrangements at then-current market prices.  In that event, our financial results are likely to be adversely affected.

We doOur costs to comply with existing and new environmental laws are expected to continue to be significant, and we plan to incur significant capital expenditures for pollution control improvements that, if delayed, would adversely affect our profitability and liquidity.

Our business is subject to extensive federal, state and local statutes, rules and regulations relating to environmental protection.  To comply with existing and future environmental requirements and as a result of voluntary pollution control measures we may take, we have spent and expect to spend substantial amounts in the future on environmental control and compliance.

In order to comply with existing and previously proposed federal and state environmental laws and regulations primarily governing air emissions from coal-fired plants, since 2005 PPL has spent more than $1.6 billion to install scrubbers and other pollution control equipment (primarily aimed at sulfur dioxide, particulate matter and nitrogen oxides with co-benefits for mercury emissions reduction) in its competitive generation fleet.  Many states and environmental groups have challenged certain federal laws and regulations relating to air emissions as not always hedge against risks associated with electricitybeing sufficiently strict.  As a result, state and fuel price volatility.federal regulations have been adopted that would impose more stringent restrictions than are currently in effect, which could require us significantly to increase capital expenditures for additional pollution control equipment.

We attempt to mitigate risks associated with satisfying our contractual electricity sales obligations by either reserving generation capacity to deliver electricity or purchasing the necessary financial or physical products and services through competitive markets to satisfy our net firm sales contracts.  We also routinely enter into contracts, such as fuel and electricity purchase and sale commitments, to hedge our exposure to fuel requirements and other electricity-related commodities.  However, based on economic and other considerations, we may not hedge the entire exposurebe able to obtain or maintain all environmental regulatory approvals necessary for our planned capital projects which are necessary to our business.  If there is a delay in obtaining any required environmental regulatory approval or if we fail to obtain, maintain or comply with any such approval, operations at our affected facilities could be halted, reduced or subjected to additional costs.  Furthermore, at some of our operations from commodity price volatility.  Toolder generating facilities it may be uneconomic for us to install necessary pollution control equipment, which could cause us to retire those units.

For more information regarding environmental matters, including existing and proposed federal, state and local statutes, rules and regulations to which we are subject, see "Environmental Matters - Domestic" in Note 15 to the extentFinancial Statements.

We rely on transmission and distribution assets that we do not hedge against commodity price volatility,own or control to deliver our results of operations and financial position may be adversely affected.

We face intense competition in our energy supply business, which may adversely affect our ability to operate profitably.

Unlike our regulated delivery businesses, our energy supply businesswholesale electricity.  If transmission is dependent on our ability to operate in a competitive environment anddisrupted, or not operated efficiently, or if capacity is not assured of any rate of return on capital investments through a predetermined rate structure.  Competition is impacted by electricity and fuel prices, new market entrants, construction by others of generating assets and transmission capacity, technological advances in power generation, the actions of environmental and other regulatory authorities and other factors.  These competitive factors may negatively impactinadequate, our ability to sell and deliver power may be hindered.

We depend on transmission and distribution facilities owned and operated by utilities and other energy companies to deliver the electricity and related products and services,natural gas we sell in the wholesale market, as well as the prices thatnatural gas we may chargepurchase for such productsuse in our electricity generation facilities.  If transmission is disrupted (as a result of weather, natural disasters or other reasons) or not operated efficiently by ISOs and services, which could adversely affect our results of operations andRTOs, in applicable markets, or if capacity is inadequate, our ability to growsell and deliver products and satisfy our business.contractual obligations may be hindered, or we may be unable to sell products at the most favorable terms.

We sell ourThe FERC has issued regulations that require wholesale electric transmission services to be offered on an open-access, non-discriminatory basis.  Although these regulations are designed to encourage competition in wholesale market transactions for electricity, there is the potential that fair and equal access to transmission systems will not be available energy andor that transmission capacity into the competitive wholesale markets through contracts with various durations.  Competitionwill not be available in the wholesale power markets occurs principally onamounts we require.  We cannot predict the basistiming of the price of products and, to a lesser extent, on the basis of reliability and availability.  We believe that the commencement of commercial operation of new electric facilities in the regional markets where we own or control generation capacity and the evolution of demand side management resources will continue to increase the competitiveness of the wholesale electricity market in those regions, which could have a material adverse effect on the prices we receive for electricity.

We also face competition in the wholesale markets for electricity capacity and ancillary services.  We primarily compete with other electricity suppliers based on our ability to aggregate supplies at competitive prices from different sources and to efficiently utilize transportation from third-party pipelines and transmission from electric utilities and ISOs.  We also compete against other energy marketers on the basis of relative financial condition and access to credit sources, and our competitors may have greater financial resources than we have.

Competitors in the wholesale power markets in which PPL Generation subsidiaries and PPL EnergyPlus operate include regulated utilities, industrial companies, non-utility generators and unregulated subsidiaries of regulated utilities.  In the past, PUHCA significantly restricted mergers and acquisitions and other investments in the electric utility sector.  Entirely new competitors, including financial institutions, have entered the energy marketsindustry changes as a result of the repeal of PUHCA.  The repeal of PUHCA also may lead to consolidation in our industry, resulting in competitors with significantly greater financial resources than we have.

Disruptions in our fuel supplies could occur, which could adversely affect our ability to operate our generation facilities.

We purchase fuel from a number of suppliers.  Disruption in the delivery of fuel and other products consumed during the production of electricity (such as lime, limestone and other chemicals), including disruptions as a result of weather, transportation difficulties, global demand and supply dynamics, labor relations, environmental regulationsthese initiatives or the financial viabilityadequacy of our fuel suppliers, could adversely affect our ability totransmission facilities in specific markets or whether ISOs and RTOs in applicable markets will efficiently operate our facilities, which could result in lower sales and/or higher coststransmission networks and thereby adversely affect our results of operations.provide related services.

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Despite federal and state deregulation initiatives, our supply business is still subject to extensive regulation, which may increase our costs, reduce our revenues, or prevent or delay operation of our facilities.

Our generation subsidiaries sell electricity into the wholesale market.  Generally, our generation subsidiaries and our marketing subsidiaries are subject to regulation by the FERC.  The FERC has authorized us to sell generation from our facilities and power from our marketing subsidiaries at market-based prices.  The FERC retains the authority to modify or withdraw our market-based rate authority and to impose "cost of service" rates if it determines that the market is not competitive, that we possess market power or that we are not charging just and reasonable rates.  Any reduction by the FERC in the rates we may receive or any unfavorable regulation of our business by state regulators could materially adversely affect our results of operations.  See "FERC Market-Based Rate Authority" in Note 1415 to the Financial Statements for information regarding recent court decisions that could impact the FERC's market-based rate authority program, and "PJM RPM Litigation" in Note 14 to the Financial Statements for information regarding the FERC's proceedings that could impact PJM's capacity pricing model.program.

In addition, the acquisition, construction, ownership and operation of electricity generation facilities require numerous permits, approvals, licenses and certificates from federal, state and local governmental agencies.  We may not be able to obtain or maintain all required regulatory approvals.  If there is a delay in obtaining any required regulatory approvals or if we fail to obtain or maintain any required approval or fail to comply with any applicable law or regulation, the operation of our assets and our sales of electricity could be prevented or delayed or become subject to additional costs.

Our generation facilities may not operate as planned, which may increaseIf market deregulation is reversed or discontinued, our expenses or decrease our revenuesbusiness prospects and thus, have an adverse effect on our financial performance.
Our ability to manage operational risk with respect to our generation plants is critical to our financial performance.  Operation of our power plants at expected capacity levels involves many risks, including the breakdown or failure of equipment or processes, accidents, labor disputes and fuel interruption.  In addition, weather and natural disasters can disrupt our generation plants.  Weather conditions also have a direct impact on the river flows required to operate our hydroelectric plants at expected capacity levels.  Depending on the timing and duration of both planned and unplanned, complete or partial outages at our power plants (in particular, if such outages are during peak periods or during periods of, or caused by, severe weather), or if our planned uprates at power plants are not completed as scheduled, our revenues from expected energy sales could significantly decrease and our expenses significantly increase, and wecondition could be requiredmaterially adversely affected.

In some markets, state legislators, government agencies and other interested parties have made proposals to purchase power at then-current marketchange the use of market-based pricing, re-regulate areas of these markets that have previously been competitive or permit electricity delivery companies to construct, contract for, or acquire generating facilities.  The ISOs that oversee the transmission systems in certain wholesale electricity markets have from time to time been authorized to impose price limitations and other mechanisms to address extremely high prices to satisfy our energy sales commitments or, in the alternative, pay penaltiespower markets.  These types of price limitations and damages for failureother mechanisms may reduce profits that our wholesale power marketing and trading business would have realized under competitive market conditions absent such limitations and mechanisms.  Although we generally expect electricity markets to satisfy them.  Many ofcontinue to be competitive, other proposals to re-regulate our generating units are reaching mid-life,industry may be made, and legislative or other actions affecting the electric power restructuring process may cause the process to be delayed, discontinued or reversed in states in which we facecurrently, or may in the potential for more frequent unplanned outagesfuture, operate.  See "New Jersey Capacity Legislation" and "Maryland Capacity Order" in Note 15 to the possibility of planned outages of longer duration to accommodate significant investments in major component replacements at these facilities.Financial Statements.

Changes in technology may negatively impact the value of our power plants.

A basic premise of our generation business is that generating electricity at central power plants achieves economies of scale and produces electricity at relatively low prices.  There are alternate technologies to produce electricity, most notably fuel cells, microturbines,micro turbines, windmills and photovoltaic (solar) cells, the development of which has been expanded due to global climate change concerns.  Research and development activities are ongoing to seek improvements in alternate technologies.  It is possible that advances will reduce the cost of alternate methods of electricity production to a level that is equal to or below that of certain central station production.  Also, as new technologies are developed and become available, the quantity and pattern of electricity usage (the "demand") by customers could decline, with a corresponding decline in revenues derived by generators.  These alternative energy sources could result in a decline to the dispatch and capacity factors of our plants.  As a result of all of these factors, the value of our generation facilities could be significantly reduced.

The load following contracts that PPL EnergyPlus is awarded do not provide for specific levels of load, and actual load significantly below or above our forecasts could adversely affect our energy margins.

We generally hedge our load following obligations with energy purchases from third parties, and to a lesser extent with its owned generation.  If the actual load is significantly lower than the expected load, we may be required to resell power at a lower price than was purchased to supply the load obligation, resulting in a financial loss.  Alternatively, a significant increase in load could adversely affect our energy margins because we are required under the terms of the load following contracts to provide the energy necessary to fulfill increased demand at the contract price, which could be lower than the cost to procure additional energy on the open market.  Therefore, any significant decrease or increase in load compared to our forecasts, could have a material adverse effect on our results of operations or financial position.

Our earnings may be affected by whether we decide to, or are able to, continue to enter into or renew long-term power sale, fuel purchase and fuel transportation agreements to mitigate market price and supply risk.

As a result of the PLR contracts and certain other agreements, a substantial portion of our generation production and capacity value was committed through 2009 under power sales agreements of various terms that included fixed prices for electric power.  With the expiration of these agreements we have been actively selling our generation at fixed prices in the wholesale energy market and participating in load-following or full requirements auctions with utility companies in the PJM, New England Power Pool and Midwest ISO regions.  In connection with these activities, we have entered into longer-term fuel purchase and fuel transportation agreements that include fixed prices for a significant portion of our forecasted needs.  Whether we decide to, or are able to, continue to enter into such agreements or renew existing agreements in the future, prevailing market conditions will affect our financial performance.  For example, in the absence of long-term power sales agreements, we would sell the energy, capacity and other products from our facilities in the competitive wholesale power markets under contracts of shorter duration at then-current market prices.  Current forward prices for electricity are lower than the prices under some of our existing power sales agreements.  In addition, if we do not secure or maintain favorable fuel purchase and transportation agreements for our power generation facilities, our fuel costs (and associated fuel transportation costs) could exceed the revenues we derive from our energy sales.  Given the volatility and potential for material differences between actual electricity prices and fuel and other costs, if we do not secure or maintain long-term electricity sales and fuel purchase and fuel transportation agreements, our margins will be subject to increased volatility and, depending on future electricity and fuel costs (and associated fuel transportation costs), our financial results may be materially adversely affected.

If market deregulation is reversed or discontinued, our business prospects and financial condition could be materially adversely affected.

In some markets, state legislators, government agencies and other interested parties have made proposals to change the use of market-based pricing, re-regulate areas of these markets that have previously been deregulated or permit electricity delivery companies to construct or acquire generating facilities.  The ISOs that oversee the transmission systems in certain wholesale electricity markets have from time to time been authorized to impose price limitations and other mechanisms to address volatility in the power markets.  These types of price limitations and other mechanisms may reduce profits that our wholesale power marketing and trading business would have realized under competitive market conditions absent such limitations and mechanisms.  Although we generally expect electricity markets to continue to be competitive, other proposals to re-regulate our industry may be made, and legislative or other action affecting the electric power restructuring process may cause the process to be delayed, discontinued or reversed in states in which we currently, or may in the future, operate.

We rely on transmission and distribution assets that we do not own or control to deliver our wholesale electricity.  If transmission is disrupted, or not operated efficiently, or if capacity is inadequate, our ability to sell and deliver power may be hindered.

We depend on transmission and distribution facilities owned and operated by utilities and other energy companies to deliver the electricity and natural gas we sell to the wholesale market, as well as the natural gas we purchase for use in our electric generation facilities.  If transmission is disrupted (as a result of weather, natural disasters or other reasons) or not operated efficiently by ISOs, in applicable markets, or if capacity is inadequate, our ability to sell and deliver products and satisfy our contractual obligations may be hindered, or we may be unable to sell products on the most favorable terms.

The FERC has issued regulations that require wholesale electric transmission services to be offered on an open-access, non-discriminatory basis.  Although these regulations are designed to encourage competition in wholesale market transactions for electricity, there is the potential that fair and equal access to transmission systems will not be available or that transmission capacity will not be available in the amounts we desire.  We cannot predict the timing of industry changes as a result of these initiatives or the adequacy of transmission facilities in specific markets or whether ISOs in applicable markets will efficiently operate transmission networks and provide related services.

Our costs to comply with existing and new environmental laws are expected to continue to be significant, and we plan to incur significant capital expenditures for pollution control improvements that, if delayed, would adversely affect our profitability and liquidity.

Our business is subject to extensive federal, state and local statutes, rules and regulations relating to environmental protection.  To comply with existing and future environmental requirements and as a result of voluntary pollution control measures we may take, we have spent and expect to spend substantial amounts in the future on environmental control and compliance.

In order to comply with existing and recently enacted federal and state environmental laws and regulations primarily governing air emissions from coal-fired plants, in 2005 PPL began a program to install scrubbers and other pollution control equipment (primarily aimed at sulfur dioxide, particulate and nitrogen oxides with co-benefits for mercury emissions reduction).  The cost to install this equipment was approximately $1.6 billion, of which $19 million remains to be spent.  The remaining unspent balance is included in the 2010 through 2012 capital budget.  The scrubbers at our Montour and Brunner Island plants are now in service.  Many states and environmental groups have challenged certain federal laws and regulations relating to air emissions as not being sufficiently strict.  As a result, it is possible that state and federal regulations will be adopted that impose more stringent restrictions than are currently in effect, which could require us to significantly increase capital expenditures for pollution control equipment.

We may not be able to obtain or maintain all environmental regulatory approvals necessary for our planned capital projects or which are otherwise necessary to our business.  If there is a delay in obtaining any required environmental regulatory approval or if we fail to obtain, maintain or comply with any such approval, operations at our affected facilities could be halted or subjected to additional costs.  Furthermore, at some of our older generating facilities it may be uneconomic for us to install necessary equipment, which could cause us to close those units.

Additionally, the expanding national and international focus on climate change and the related desire to reduce carbon dioxide and other greenhouse gas emissions has lead to numerous federal legislative and regulatory proposals, and several states already have passed legislation capping carbon dioxide emissions.  The continuation of this trend may heighten or make more likely the risks identified above.

For more information regarding environmental matters, including existing and proposed federal, state and local statutes, rules and regulations to which we are subject, see "Environmental Matters - Domestic" in Note 14 to the Financial Statements.

We are subject to thecertain risks ofassociated with nuclear generation, including the risk that our Susquehanna nuclear plant could become subject to revisedincreased security or safety requirements that would increase our capital and operating expenditures, uncertainties regarding spent nuclear fuel, and uncertainties associated with decommissioning our plant at the end of its licensed life.

Nuclear generation accounted for about 32%31% of our 20092012 generation output.  The risks of nuclear generation generally include:

·the potential harmful effects on the environment and human health from the operation of nuclear facilities and the storage, handling and disposal of radioactive materials;
·limitations on the amounts and types of insurance commercially available to cover losses and liabilities that might arise in connection with nuclear operations; and
·uncertainties with respect to the technological and financial aspects of decommissioning nuclear plants at the end of their licensed lives.  The licenses for our two nuclear units expire in 2042 and 2044.  See Note 2021 to the Financial Statements for additional information on the ARO related to the decommissioning.

33

The NRC has broad authority under federal law to impose licensing requirements, including security, safety and employee-related requirements for the operation of nuclear generation facilities.  In the event of noncompliance, the NRC has authority to impose fines or shut down a unit, or both, depending upon its assessment of the severity of the situation, until compliance is achieved.  In addition, revised security or safety requirements promulgated by the NRC could necessitate substantial capital or operating expenditures at our Susquehanna nuclear plant.  There also remains substantial uncertainty regarding the temporary storage and permanent disposal of spent nuclear fuel, which could result in substantial additional costs to PPL that cannot be predicted.  In addition, although we have no reason to anticipate a serious nuclear incident at our Susquehanna plant, if an incident did occur, any resulting operational loss, damages and injuries could have a material adverse effect on our results of operations, cash flows orand financial condition.

Risks Related to International Delivery Segment

(PPL and PPL Energy Supply)

Our U.K. delivery business is subject to risks with respect to rate regulation and operational performance.

Our U.K. delivery business is rate regulated and operates under an incentive-based regulatory framework.  In addition, its ability to manage operational risk is critical to its financial performance.  Disruption to the distribution network could reduce profitability both directly through the higher costs for network restoration and also through the system of penalties and rewards that Ofgem has in place relating to customer service levels.

In December 2009, Ofgem completed its rate review for the five-year period from April 1, 2010 through March 31, 2015, thus reducing regulatory rate risk in the International Delivery Segment until the next rate review which will be effective April 1, 2015.  The results of the rate review are further discussed in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations."  The regulated income of the International Delivery Segment and also the RAB are to some extent linked to movements in the Retail Price Index (RPI).  Reductions in the RPI would adversely impact revenues and the debt/RAB ratio.

Our U.K. delivery business exposes us to risks related to U.K. laws and regulations, taxes, economic conditions, foreign currency exchange rate fluctuations, and political conditions and policies of the U.K. government.  These risks may reduce the results of operations from our U.K. delivery business.

The acquisition, financing, development and operation of projects in the U.K. entail significant financial risks including:

·changes in laws or regulations relating to U.K. operations, including tax laws and regulations;
·changes in government policies, personnel or approval requirements;
·changes in general economic conditions affecting the U.K.;
·regulatory reviews of tariffs for distribution companies;
·severe weather and natural disaster impacts on the electric sector and our assets;
·changes in labor relations;
·limitations on foreign investment or ownership of projects and returns or distributions to foreign investors;
·limitations on the ability of foreign companies to borrow money from foreign lenders and lack of local capital or loans;
·fluctuations in currency exchange rates and in converting U.K. revenues to U.S. dollars, which can increase our expenses and/or impair our ability to meet such expenses, and difficulty moving funds out of the country in which the funds were earned; and
·compliance with U.S. foreign corrupt practices laws.

Risks Related to Pennsylvania Delivery Segment

(PPL and PPL Electric)

Regulators may not approve the rates we request.

Our Pennsylvania delivery business is rate-regulated.  While such regulation is generally premised on the recovery of prudently incurred costs, including energy supply costs for customers, and a reasonable rate of return on invested capital, the rates that we may charge our delivery customers are subject to authorization of the applicable regulatory authorities.  Our Pennsylvania delivery business is subject to substantial capital expenditure requirements over the next several years, which will require rate increase requests to the regulators.  There is no guarantee that the rates authorized by regulators will match our actual costs or provide a particular return on invested capital at any given time.

Our transmission and distribution facilities may not operate as planned, which may increase our expenses or decrease our revenues and, thus, have an adverse effect on our financial performance.

Our ability to manage operational risk with respect to our transmission and distribution systems is critical to the financial performance of our delivery business.  Our delivery business also faces several risks, including the breakdown or failure of or damage to equipment or processes (especially due to severe weather or natural disasters), accidents and labor disputes and other factors.  Operation of our delivery systems below our expectations may result in lost revenues or increased expenses, including higher maintenance costs.

We may be subject to higher transmission costs and other risks as a result of PJM's regional transmission expansion plan (RTEP) process.

PJM and the FERC have the authority to require upgrades or expansion of the regional transmission grid, which can result in substantial expenditures for transmission owners.  As discussed in  See Note 8 to the Financial Statements, we expect to make substantial expenditures to construct the Susquehanna-Roseland transmission line that PJM has determined is necessary for the reliability of the regional transmission grid.  Although the FERC has granted our request for incentive rate treatment of such facilities, we cannot predict the date when these facilities will be in service or whether delays may occur due to public opposition or other factors.  Delays could result in significant cost increases for these facilities and decreased reliability of the regional transmission grid.  As a result, we cannot predict the ultimate financial or operational impact of this project or other RTEP projects on PPL Electric.

We could be subject to higher costs and/or penalties related to mandatory reliability standards.

Under the Energy Policy Act, owners and operators of the bulk power transmission system are now subject to mandatory reliability standards promulgated by the NERC and enforced by the FERC.  Compliance with reliability standards may subject us to higher operating costs and/or increased capital expenditures, and violations of these standards could result in substantial penalties.

We could be subject to higher costs and/or penalties related to Pennsylvania Conservation and Energy Efficiency Programs.

Act 129 became effective in October 2008.  This law created requirements for energy efficiency and conservation programs and for the use of smart metering technology, imposed new PLR electricity supply procurement rules, provided remedies for market misconduct, and made changes to the existing Alternative Energy Portfolio Standard.  Utilities not meeting the requirements of Act 129 are subject to significant penalties that cannot be recovered in rates.  The law also requires electric utilities to meet specified goals for reduction in customer electricity usage and peak demand by specified dates (2011 and 2013).  Although we expect to meet these requirements, numerous factors outside of our control could prevent compliance with these requirements and result in penalties to us.  See "Regulatory Issues - Energy Policy Act of 2005 - Reliability Standards" in Note 1415 to the Financial Statements for additional information.a discussion of nuclear insurance.

Rate deregulation remains subject to political risks.

Although prior initiatives have not resulted in the enactment of legislation, the possibility remains that certain Pennsylvania legislators could introduce legislation to extend generation rate caps or otherwise limit cost recovery through rates for Pennsylvania utilities after the end of applicable transition periods, which in PPL Electric's case was December 31, 2009.  If such legislation were introduced and ultimately enacted, PPL Electric could face severe financial consequences including operating losses and significant cash flow shortfalls.  In addition, continuing uncertainty regarding PPL Electric's ability to recover its market supply and other costs of operating its business could adversely affect its credit quality, financing costs and availability of credit facilities necessary to operate its business.

Other Risks Related to All Segments

(PPL, PPL Energy Supply and PPL Electric)

We will selectively pursue growth of generation and transmission and distribution capacity, which involves a number of uncertainties and may not achieve the desired financial results.

We will pursue expansion of our generation and transmission and distribution capacity over the next several years through power uprates at certain of our existing power plants, the potential construction of new power plants, the potential acquisition of existing plants, the potential construction or acquisition of transmission and distribution projects and capital investments to upgrade transmission and distribution infrastructure.  We will rigorously scrutinize opportunities to expand our generating capability and may determine not to proceed with any expansion.  These types of projects involve numerous risks.  Any planned power uprates could result in cost overruns, reduced plant efficiency and higher operating and other costs.  With respect to the construction of new plants, the acquisition of existing plants, or the construction or acquisition of transmission and distribution projects, we may be required to expend significant sums for preliminary engineering, permitting, resource exploration, legal and other expenses before it can be established whether a project is feasible, economically attractive or capable of being financed.  The success of both a new or acquired project would likely be contingent, among other things, upon the negotiation of satisfactory operating contracts, obtaining acceptable financing, maintaining acceptable credit ratings, as well as receipt of required and appropriate governmental approvals.  If we were unable to complete construction or expansion of a facility, we would generally be unable to recover our investment in the project.  Furthermore, we might be unable to run any new or acquired plants as efficiently as projected, which could result in higher than projected operating and other costs and reduced earnings.

The economic and financial markets in which we operate could adversely affect our financial condition and results of operations.

In 2008, conditions in the financial markets became disruptive to the processes of managing credit risk, responding to liquidity needs, measuring at fair value derivatives and other financial instruments and managing market risk.  The contraction of liquidity in the wholesale energy markets and accompanying significant decline in wholesale energy prices significantly impacted our earnings during the second half of 2008 and the first half of 2009.  The breadth and depth of these negative economic conditions had a wide-ranging impact on the U.S. and international business environment, including our businesses, and may continue to do so.  As a result of the economic downturn, demand for energy commodities has declined significantly.  This reduced demand will continue to impact the key domestic wholesale energy markets we serve (such as PJM) and our Pennsylvania delivery business, especially industrial customer demand.  The combination of lower demand for power and natural gas and other fuels has put downward price pressure on the wholesale energy market in general, further impacting our energy marketing results.  In general, current economic and commodity market conditions will continue to challenge the predictability regarding our unhedged future energy margins, liquidity and overall financial condition.

Our businesses are heavily dependent on credit and capital, among other things, for providing collateral to support hedging in our energy marketing business.  Global bank credit capacity was reduced and the cost of renewing or establishing new credit facilities increased significantly in 2008, primarily as a result of general credit concerns nationwide, thereby introducing uncertainties as to our businesses' ability to enter into long-term energy commitments or reliably estimate the longer-term cost and availability of credit.  Although bank credit conditions have improved since mid-2009, and we currently expect to have adequate access to needed credit and capital based on current conditions, deterioration in the financial markets could adversely affect our financial condition and liquidity.

The current condition of the economic and financial markets in which we operate is expected to continue to impact numerous other aspects of our business operations discussed elsewhere in this Risk Factor section.

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

Our businesses are subject to seasonal demand cycles.  For example, in some markets demand for, and market prices of, electricity peak during hot summer months, while in other markets such peaks occur in cold winter months.  As a result, our overall operating results in the future may fluctuate substantially on a seasonal basis if weather conditions such as heat waves, extreme cold weather or severe storms occur.  The patterns of these fluctuations may change depending on the type and location of our facilities and the terms of our contracts to sell electricity.

We cannot predict the outcome of the legal proceedings and investigations currently being conducted with respect to our current and past business activities.  An adverse determination could have a material adverse effect on our financial condition, results of operations or cash flows.

We are involved in legal proceedings, claims and litigation and subject to ongoing state and federal investigations arising out of our business operations, the most significant of which are summarized in "Legal Matters," "Regulatory Issues" and in "Environmental Matters - Domestic" in Note 14 to the Financial Statements.  We cannot predict the ultimate outcome of these matters, nor can we reasonably estimate the costs or liability that could potentially result from a negative outcome in each case.

We may need significant additional financing to pursue growth opportunities.

We continually review potential acquisitions and development projects and may enter into significant acquisition agreements or development commitments in the future.  An acquisition agreement or development commitment may require access to substantial capital from outside sources on acceptable terms.  We also may need external financing to fund capital expenditures, including capital expenditures necessary to comply with environmental or other regulatory requirements.  Our ability to arrange financing and our cost of capital are dependent on numerous factors, including general economic conditions, credit availability and our financial performance.  The inability to obtain sufficient financing on terms that are acceptable to us could adversely affect our ability to pursue acquisition and development opportunities and fund capital expenditures.

A downgrade in our credit ratings could negatively affect our ability to access capital and increase the cost of maintaining our credit facilities and any new debt.

Our current credit ratings by Moody's, Fitch and S&P, including a January 2009 review by S&P that resulted in a negative outlook for us, are listed in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - Liquidity and Capital Resources - Credit Ratings."  While we do not expect these ratings to limit our ability to fund short-term liquidity needs or access new long-term debt, any ratings downgrade could increase our short-term borrowing costs and negatively affect our ability to fund short-term liquidity needs and access new long-term debt.  See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - Liquidity and Capital Resources - Ratings Triggers" for additional information on the impact of a downgrade in our credit rating.

Significant increases in our operation and maintenance expenses, including health care and pension costs, could adversely affect our future earnings and liquidity.

We continually focus on limiting and reducing where possible our operation and maintenance expenses.  However, we expect to continue to face increased cost pressures in our operations. Increased costs of materials and labor may result from general inflation, increased regulatory requirements, especially in respect of environmental protection, the need for higher cost expertise in the workforce or other factors.  In addition, pursuant to collective bargaining agreements, we are contractually committed to provide specified levels of health care and pension benefits to certain current employees and retirees.  We provide a similar level of benefits to our management employees.  These benefits give rise to significant expenses.  Due to general inflation with respect to such costs, the aging demographics of our workforce and other factors, we have experienced significant health care cost inflation in recent years, and we expect our health care costs, including prescription drug coverage, to continue to increase despite measures that we have taken and expect to take to require employees and retirees to bear a higher portion of the costs of their health care benefits.  In addition, we expect to continue to incur significant costs with respect to the defined benefit pension plans for our employees and retirees.  The measurement of our expected future health care and pension obligations, costs and liabilities is highly dependent on a variety of assumptions, most of which relate to factors beyond our control.  These assumptions include investment returns, interest rates, health care cost trends, benefit improvements, salary increases and the demographics of plan participants.  If our assumptions prove to be inaccurate, our future costs and cash contribution requirements to fund these benefits could increase significantly.

There is a risk that we may be required to record impairment charges in the future for certain of our investments, which could adversely affect our earnings.

Under GAAP, we are required to test our recorded goodwill for impairment on an annual basis, or more frequently if events or circumstances indicate that these assets may be impaired.  Although no goodwill impairments were recorded based on our annual review in the fourth quarter of 2009, we are unable to predict whether future impairment charges may be necessary.

We also review our long-lived assets for impairment when events or circumstances indicate that the carrying value of these assets may not be recoverable.  During 2009, PPL recorded impairment charges related to certain sulfur dioxide emission allowances and the Long Island generation business that is being sold.  During 2008, PPL recorded impairment charges related to a cancelled hydroelectric expansion project, certain emission allowances and its natural gas distribution and propane businesses that were sold in 2008.  During 2007, PPL impaired certain transmission rights, certain domestic telecommunications assets, certain assets of the natural gas distribution and propane businesses, and the net assets of our Bolivian businesses prior to their sale in 2007.  See Notes 8, 9 and 17 to the Financial Statements for additional information on these charges.  We are unable to predict whether impairment charges, or other losses on sales of other assets or businesses, may occur in future years.

ITEM 1B. UNRESOLVED STAFF COMMENTS

PPL Corporation, PPL Energy Supply, LLC, and PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company

None.

34


ITEM 2. PROPERTIES

Supply(PPL, LKE, LG&E and KU)

Kentucky Regulated Segment

PPL Energy Supply's systemLG&E's and KU's properties consist primarily of regulated generation facilities, electric transmission and distribution assets and natural gas transmission and distribution assets in Kentucky.  The electric generating capacity (winter rating) at December 31, 2009,2012 was:

Plant 
Total MW
Capacity (a)
 % Ownership 
PPL Energy Supply's Ownership
or Lease Interest
in MW
 Primary Fuel
         
Pennsylvania        
Susquehanna 2,451 90.00 2,206 Nuclear
Montour 1,530 100.00 1,530 Coal
Brunner Island 1,476 100.00 1,476(b)Coal
Martins Creek 1,672 100.00 1,672 Natural Gas/Oil
Keystone 1,718 12.34 212 Coal
Conemaugh 1,718 16.25 279 Coal
Ironwood (c) 759 100.00 759 Natural Gas
Lower Mt. Bethel 624 100.00 624 Natural Gas
Combustion turbines 465 100.00 465 Natural Gas/Oil
Safe Harbor Water Power Corp. 421 33.33 140 Hydro
Hydroelectric 172 100.00 172 Hydro
Other (c) (d) 48 100.00 48 Various
  13,054   9,583  
Montana        
Colstrip Units 1 & 2 614 50.00 307 Coal
Colstrip Unit 3 740 30.00 222 Coal
Corette 153 100.00 153 Coal
Hydroelectric 604 100.00 604 Hydro
  2,111   1,286  
         
Illinois        
University Park 585 100.00 585 Natural Gas
         
Connecticut        
Wallingford 244 100.00 244 Natural Gas
         
New York        
Shoreham and Edgewood 159 100.00  (e)Natural Gas/Oil
         
Maine        
Hydroelectric 12 100.00 12 Hydro
         
New Jersey        
Other 11 100.00 5(f)Landfill Gas/Solar
         
Vermont        
Moretown 3 100.00 3 Landfill Gas
         
New Hampshire        
Colebrook 1 100.00 1 Landfill Gas
         
Total System Capacity 16,180   11,719  
     LKE LG&E KU
              
   Total MW Ownership or   Ownership or   Ownership or
   Capacity (b) Lease Interest   Lease Interest   Lease Interest
Primary Fuel/Plant (a) Summer in MW % Ownership in MW % Ownership in MW
              
Coal            
 
Ghent
  1,932   1,932       100.00   1,932 
 
Mill Creek
  1,472   1,472   100.00   1,472     
 
E.W. Brown - Units 1-3
  684   684       100.00   684 
 
Cane Run - Units 4-6
  563   563   100.00   563     
 
Trimble County - Unit 1 (c)
  511   383   75.00   383     
 
Trimble County - Unit 2 (c)
  732   549   14.25   104  60.75   445 
 
Green River
  163   163       100.00   163 
 
OVEC - Clifty Creek (d)
  1,304   106   5.63   73   2.50   33 
 
OVEC - Kyger Creek (d)
  1,086   88   5.63   61   2.50   27 
 
Tyrone (e)
  71   71       100.00   71 
    8,518   6,011     2,656     3,355 
Natural Gas/Oil            
 
E.W. Brown Unit 5 (f)(g)
  132   132   53.00   69   47.00   63 
 
E.W. Brown Units 6-7 (f)
  292   292   38.00   111   62.00   181 
 
E.W. Brown Units 8-11 (g)
  486   486       100.00   486 
 
Trimble County Units 5-6
  314   314   29.00   91   71.00   223 
 
Trimble County Units 7-10
  628   628   37.00   232   63.00   396 
 
Paddy's Run Units 11-12
  35   35   100.00   35     
 
Paddy's Run Unit 13
  147   147   53.00   78   47.00   69 
 
Haefling
  36   36       100.00   36 
 
Zorn
  14   14   100.00   14     
 
Cane Run Unit 11
  14   14   100.00   14     
    2,098   2,098     644     1,454 
Hydro            
 
Ohio Falls
  54   54   100.00   54     
 
Dix Dam
  24   24       100.00   24 
    78   78     54     24 
              
Total
  10,694   8,187     3,354     4,833 

(a)LG&E and KU's properties are primarily located in Kentucky, with the exception of the units owned by OVEC.  Clifty Creek is located in Indiana and Kyger Creek is located in Ohio.
(b)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.
(b)PPL Energy Supply expects a reduction of up to 30 MW in net generation capability due to the estimated increase in station service usage during the scrubber operation.
(c)Facilities notTC1 and TC2 are jointly owned by PPL Energy Supply, but therewith Illinois Municipal Electric Agency and Indiana Municipal Power Agency.  Each owner is a tolling agreement or power purchase agreement in place.
(d)Includes renewable energy facilities owned by a PPL Energy Supply subsidiary.
(e)Facilities owned by PPL Energy Supply, but there are tolling agreements in place for 100%entitled to its proportionate share of the output.  In May 2009, PPL Generation signed a definitive agreement to sell the Long Island generation business.  The tolling agreements related to these plants will be transferred to the new owner upon completionunits' total output and funds its proportionate share of the sale.capital, fuel and other operating costs.  See Note 914 to the Financial Statements for additional informationinformation.
(d)This unit is owned by OVEC.  LKE has a power purchase agreement that entitles LKE to its proportionate share of the unit's total output and LKE funds its proportionate share of fuel and other operating costs.  See Note 15 to the Financial Statements for additional information.
(e)This unit was retired in February 2013.  See Note 8 to the Financial Statements for additional information.
(f)Includes a leasehold interest.  See Note 11 to the Financial Statements for additional information.
(g)There is an inlet air cooling system attributable to these units.  This inlet air cooling system is not jointly owned; however, it is used to increase production on the anticipated sale.units to which it relates, resulting in an additional 10 MW of capacity for LG&E and an additional 88 MW of capacity for KU.

For a description of LG&E's and KU's service areas, see "Item 1. Business - Background."  At December 31, 2012, LG&E's transmission system included in the aggregate, 45 substations (32 of which are shared with the distribution system) with a total capacity of 7 million kVA and 917 circuit miles of lines.  LG&E's distribution system included 97 substations (32 of which are shared with the transmission system) with a total capacity of 5 million kVA, 3,908 miles of overhead lines and 2,390 miles of underground wires.  KU's transmission system included 134 substations (55 of which are shared with the distribution system) with a total capacity of 13 million kVA and 4,079 circuit miles of lines.  KU's distribution system included 480 substations (55 of which are shared with the transmission system) with transformer capacity of 7 million kVA, 14,134 miles of overhead lines and 2,299 miles of underground conduit.

35

LG&E's natural gas transmission system includes 4,272 miles of gas distribution mains and 388 miles of gas transmission mains, consisting of 255 miles of gas transmission pipeline, 124 miles of gas transmission storage lines, 6 miles of gas combustion turbine lines and 3 miles of gas transmission pipeline in regulator facilities.  Five underground natural gas storage fields, with a total working natural gas capacity of approximately 15 Bcf, are used in providing natural gas service to ultimate consumers.  KU's service area includes an additional 11 miles of gas transmission pipeline providing gas supply to natural gas combustion turbine electrical generating units.

Substantially all of LG&E's and KU's respective real and tangible personal property located in Kentucky and used or to be used in connection with the generation, transmission and distribution of electricity and, in the case of LG&E, the storage and distribution of natural gas, is subject to the lien of either the LG&E 2010 Mortgage Indenture or the KU 2010 Mortgage Indenture.  See Note 7 to the Financial Statements for additional information.

LG&E and KU continuously reexamine development projects based on market conditions and other factors to determine whether to proceed with the projects, sell, cancel or expand them or pursue other options.  At December 31, 2012, LG&E and KU planned to implement the following incremental capacity increases and decreases at the following plants located in Kentucky.

            
     LG&E KU  
   Total Net         Date of
   Summer MW         Incremental
   Capacity (a)   Ownership or   Ownership or Capacity
   Increase /   Lease Interest   Lease Interest Increase /
Primary Fuel/Plant (Decrease) % Ownership in MW % Ownership in MW Decrease
              
Coal            
 
Cane Run - Units 4-6 - (b)
 (563) 100.00  (563)     2015 
 
Green River - (b)
 (163)     100.00  (163) 2015 
 
Tyrone - (c)
 (71)     100.00  (71) 2013 
 
Total Capacity Decreases
 (797)   (563)   (234)  
             
Natural Gas            
 
Cane Run - Unit 7 (d)
 640  22.00  141  78.00  499  2015 

(f)(a)The capacity of generating units is based on a number of factors, including the operating experience and physical condition of the units, and may be revised periodically to reflect changed circumstances.
(b)LG&E and KU anticipate retiring these units by the end of 2015.  See Notes 8 and 15 to the Financial Statements for additional information.
(c)KU retired this unit in February 2013.  See Note 8 to the Financial Statements for additional information.
(d)In May 2012, LG&E and KU received approval to build this unit at the existing Cane Run site.  See Note 8 to the Financial Statements for additional information.

(PPL)

U.K. Regulated Segment

For a description of WPD's service territory, see "Item 1. Business - Background."  At December 31, 2012, WPD had electric distribution lines in public streets and highways pursuant to legislation and rights-of-way secured from property owners.  WPD's distribution system in the U.K. includes 1,592 substations with a total capacity of 68 million kVA, 57,472 circuit miles of overhead lines and 79,755 cable miles of underground conductors.

(PPL and PPL Electric)

Pennsylvania Regulated Segment

For a description of PPL Electric's service territory, see "Item 1. Business - Background."  At December 31, 2012, PPL Electric had electric transmission and distribution lines in public streets and highways pursuant to franchises and rights-of-way secured from property owners.  PPL Electric's transmission system includes 61 substations with a total capacity of 18 million kVA and 3,973 pole miles in service.  PPL Electric's distribution system includes 339 substations with a total capacity of 12 million kVA, 37,031 circuit miles of overhead lines and 8,098 cable miles of underground conductors in service.  All of PPL Electric's facilities are located in Pennsylvania.  Substantially all of PPL Electric's distribution properties and certain transmission properties are subject to the lien of the PPL Electric 2001 Mortgage Indenture.

See Note 8 to the Financial Statements for information on the Regional Transmission Line Expansion Plan.

36

(PPL and PPL Energy Supply)

Supply Segment

PPL Energy Supply's electric generating capacity (summer rating) at December 31, 2012 was:

           
        PPL Energy Supply's  
         Ownership or  
Primary Fuel/Plant Total MW Capacity (a) % Ownership Lease Interest in MW (a) Location
           
Natural Gas/Oil        
 
Martins Creek
  1,745   100.00   1,745  Pennsylvania
 
Ironwood
  665   100.00   665  Pennsylvania
 
Lower Mt. Bethel
  543   100.00   543  Pennsylvania
 
Combustion turbines
  363   100.00   363  Pennsylvania
     3,316     3,316   
           
Coal        
 
Montour
  1,518   100.00   1,518  Pennsylvania
 
Brunner Island
  1,455   100.00   1,455  Pennsylvania
 
Colstrip Units 1 & 2 (b)
  614   50.00   307  Montana
 
Conemaugh (c)
  1,749   16.25   284  Pennsylvania
 
Colstrip Unit 3 (b)
  740   30.00   222  Montana
 
Keystone (c)
  1,714   12.34   212  Pennsylvania
 
Corette
  153   100.00   153  Montana
     7,943     4,151   
           
Nuclear        
 
Susquehanna (c)
  2,528   90.00   2,275  Pennsylvania
           
Hydro        
 
Various
  604   100.00   604  Montana
 
Various
  175   100.00   175  Pennsylvania
     779     779   
           
Qualifying Facilities        
 
Renewables (d)
  61   100.00   61  Pennsylvania
 
Renewables
  9   100.00   9  Various
     70     70   
           
Total
  14,636     10,591   

(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.
(b)Represents the leasehold interest held by PPL Montana.  See Note 11 to the Financial Statements for additional information.
(c)This unit is jointly owned.  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 Note 14 to the Financial Statements for additional information.
(d)Includes renewable energy facilities owned, by acontrolled or for which PPL Energy Supply subsidiary for which there are power purchase agreements in place.has the rights to the output.

Amounts guaranteed by PPL Montour and PPL Brunner Island in connection with an $800 million secured energy marketing and trading facility are secured by liens on the generating facilities owned by PPL Montour and PPL Brunner Island.  See Note 7 to the Financial Statements for additional information.

PPL Energy Supply continuouslyfrom time to time reexamines development projects 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 15 to the Financial Statements for information on PPL Energy Supply's intention, beginning in April 2015, to place its Corette plant in long-term reserve status.  At December 31, 2009,2012, PPL GenerationEnergy Supply subsidiaries planned to implement the following incremental capacity increases.

37


Project Primary Fuel 
Total MW
Capacity (a)
 
PPL Energy Supply
Ownership or Lease
Interest in MW
 
Expected
In-Service Date (b)
 
          
Pennsylvania           
Holtwood (c) Hydro 125 125 (100%) 2013 
Susquehanna (d) Nuclear 59 53 (90%) 2010 - 2011 
Martins Creek (e) Natural Gas/Oil 30 30 (100%) 2011 
Chrin Landfill Landfill Gas 3 3 (100%) 2011 
Montana           
Great Falls (f) Hydro 28 28 (100%) 2012 
Total   245 239     
       PPL Energy Supply Expected
     Total MW Ownership or Lease In-Service
 Primary Fuel/Plant Location Capacity (a) Interest in MW Date (b)
           
Hydro         
 
Holtwood (c)
 Pennsylvania 125  125 (100%) 2013 
 
Great Falls (d)
 Montana 28  28 (100%) 2013 
           
Total
   153  153    

(a)The capacity of generationgenerating units is based on a number of factors, including the operating experience and physical condition of the units, and may be revised periodically to reflect changed circumstances.
(b)The expected in-service dates are subject to receipt of required approvals, permits and other contingencies.
(c)This project includes installation of two additional large turbine-generators.turbine-generators and the replacement of four existing runners.
(d)This project involves the extended upgrade of Units 1 and 2 and is being implemented in two uprates per unit, the first increase being an average of 50 MW per unit.  The first uprate for Unit 1 occurred in 2008.  The second uprate is planned to occur in 2010.  The first uprate for Unit 2 occurred in 2009.  The second uprate is planned to occur in 2011.
(e)This project involves the replacement of LP rotors and stationary blading for Unit 4.
(f)This project involves reconstructionconstruction of a new powerhouse and retirement of the exiting powerhouse.

Pennsylvania Delivery Segment

For a description of PPL Electric's service territory, see "Item 1. Business - Background."  At December 31, 2009, PPL Electric had electric transmission and distribution lines in public streets and highways pursuant to franchises and rights-of-way secured from property owners.  PPL Electric's system included 371 substations with a total capacity of 30 million kVA, 33,053 circuit miles of overhead lines and 7,310 cable miles of underground conductors.  All of PPL Electric's facilities are located in Pennsylvania.  Substantially all of PPL Electric's distribution properties and certain transmission properties are subject to the lien of PPL Electric's 2001 Senior Secured Bond Indenture.

See Note 8 to the Financial Statements for information on the construction of a new 500-kilovolt transmission line.

International Delivery Segment

For a description of WPD's service territory, see "Item 1. Business - Background."  At December 31, 2009, WPD had electric distribution lines in public streets and highways pursuant to legislation and rights-of-way secured from property owners.  In 2009, electricity distributed totaled 26,358 GWh based on operating revenues recorded by WPD.  WPD's distribution system in the U.K. includes 651 substations with a total capacity of 25 million kVA, 28,877 miles of overhead lines and 23,896 cable miles of underground conductors.


ITEM 3. LEGAL PROCEEDINGS

See Note 14Notes 5, 6 and 15 to the Financial Statements for information regarding legal, tax litigation, regulatory and environmental proceedings and matters.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSMINE SAFETY DISCLOSURES

There were no matters submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of 2009.Not applicable.

38

EXECUTIVE OFFICERS OF THE REGISTRANTS

Officers of PPL, PPL Energy Supply and PPL Electric are elected annually by their Boards of Directors (or Board of Managers for PPL Energy Supply) to serve at the pleasure of the respective Boards.  There are no family relationships among any of the executive officers, nor is there any arrangement or understanding between any executive officer and any other person pursuant to which the officer was selected.

There have been no events under any bankruptcy act, no criminal proceedings and no judgments or injunctions material to the evaluation of the ability and integrity of any executive officer during the past five years.

Listed below are the executive officers at December 31, 2009.

PPL Corporation
NameAgePositions Held During the Past Five YearsDates
James H. Miller61Chairman, President and Chief Executive OfficerOctober 2006 - present
PresidentJune 2006 - September 2006
President and Chief Operating OfficerAugust 2005 - June 2006
Executive Vice President and Chief Operating OfficerSeptember 2004 - July 2005
William H. Spence52Executive Vice President and Chief Operating OfficerJune 2006 - present
President-PPL GenerationJune 2008 - present
Senior Vice President-Pepco Holdings, Inc.August 2002 - June 2006
Senior Vice President-Conectiv HoldingsSeptember 2000 - June 2006
Paul A. Farr42Executive Vice President and Chief Financial OfficerApril 2007 - present
Senior Vice President-FinancialJanuary 2006 - March 2007
Senior Vice President-Financial and ControllerAugust 2005 - January 2006
Vice President and ControllerAugust 2004 - July 2005
Robert J. Grey59Senior Vice President, General Counsel and SecretaryMarch 1996 - present
Robert D. Gabbard (a)50President-PPL EnergyPlusJune 2008 - present
Senior Vice President-Trading-PPL EnergyPlusJune 2008 - June 2008
Senior Vice President Merchant Trading Operations-Conectiv Energy
June 2005 - May 2008
 
Vice President and General Manager Power Trading-Conectiv Energy
April 1998 - June 2005
Rick L. Klingensmith (a)49President-PPL GlobalAugust 2004 - present
David G. DeCampli (a)52President-PPL ElectricApril 2007 - present
Senior Vice President-Transmission and Distribution Engineering and Operations-PPL ElectricDecember 2006 - April 2007
Vice President-Asset Investment Strategy and Development-Exelon Energy Delivery-Exelon CorporationApril 2004 - December 2006
James E. Abel58Vice President-Finance and TreasurerJune 1999 - present
J. Matt Simmons, Jr.44Vice President and ControllerJanuary 2006 - present
Vice President-Finance and Controller-Duke Energy AmericasOctober 2003 - January 2006

(a)Designated an executive officer of PPL by virtue of their respective positions at a PPL subsidiary.


PPL Electric Utilities Corporation
NameAgePositions Held During the Past Five YearsDates
David G. DeCampli52PresidentApril 2007 - present
Senior Vice President-Transmission and Distribution Engineering and OperationsDecember 2006 - April 2007
Vice President-Asset Investment Strategy and Development-Exelon Energy Delivery-Exelon CorporationApril 2004 - December 2006
Gregory N. Dudkin (a)52Senior Vice President-OperationsJune 2009 - present
Independent ConsultantFebruary 2009 - June 2009
Senior Vice President of Technical Operations and Fulfillment-Comcast CorporationJuly 2006 - January 2009
Regional Senior Vice President-Comcast CorporationJanuary 2005 - June 2006
James E. Abel58TreasurerJuly 2000 - present
J. Matt Simmons, Jr.44Vice President and ControllerJanuary 2006 - present
Vice President-Finance and Controller-Duke Energy AmericasOctober 2003 - January 2006

(a)On June 29, 2009, Gregory N. Dudkin was elected Senior Vice President-Operations of PPL Electric.

PPL Energy Supply, LLC

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


PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES

See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition - Liquidity and Capital Resources - Forecasted Uses of Cash" for information regarding certain restrictions on the ability to pay dividends for PPL, LKE, LG&E and KU.

PPL Corporation

Additional information for this item is set forth in the sections entitled "Quarterly Financial, Common Stock Price and Dividend Data," "Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters" and "Shareowner and Investor Information" of this report.  At January 29, 2010,31, 2013, there were 72,01366,130 common stock shareowners of record.


Issuer Purchases of Equity Securities during the Fourth Quarter of 2009:

 (a)(b)(c)(d)
Period
Total Number of
Shares (or Units)
Purchased (1)
Average Price Paid
per Share
(or Unit)
Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs (2)
Maximum Number (or
Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (2)
October 1 to October 31, 2009   $57,495
November 1 to November 30, 200914,124$29.44 $57,495
December 1 to December 31, 2009   $57,495
Total14,124$29.44 $57,495
 Issuer Purchase of Equity Securities during the Fourth Quarter of 2012:   
              
    (a)(b)(c)(d)
              
             Maximum Number (or
             Approximate Dollar
          Total Number ofValue) of Shares
          Shares (or Units)(or Units) that May
    Total Number ofAverage PricePurchased as Part ofYet Be Purchased
    Shares (or Units)Paid per SharePublicly AnnouncedUnder the Plans
Period  Purchased (1)(or Unit)Plans of Programsor Programs (1)
October 1 to October 31, 2012      
November 1 to November 30, 2012   4,665 $29.35  
December 1 to December 31, 2012      
Total   4,665 $29.35  

(1) Represents shares of common stock withheld by PPL at the request of its executive officers to pay income taxes upon the vesting of the officers' restricted stock awards, as permitted under the terms of PPL's ICP and ICPKE.
(2)In June 2007, PPL announced a program to repurchase from time to time up to $750 million of its common stock in open market purchases, pre-arranged trading plans or privately negotiated transactions.

PPL Energy Supply, LLC

There is no established public trading market for PPL Energy Supply's membership interests.  PPL Energy Funding, a direct wholly owned subsidiary of PPL, owns all of PPL Energy Supply's outstanding membership interests.  Distributions on the membership interests will be paid as determined by PPL Energy Supply's Board of Managers.

PPL Energy Supply made cash distributions to PPL Energy Funding of $943$787 million in 20092012 and $750$316 million in 2008.2011.  See Note 9 to the Financial Statements regarding the distribution, including $325 million of cash, of PPL Energy Supply's membership interests in PPL Global to PPL Energy Funding in January 2011.

PPL Electric Utilities Corporation

There is no established public trading market for PPL Electric's common stock, as PPL owns 100% of the outstanding common shares.  Dividends paid to PPL on those common shares are determined by PPL Electric's Board of Directors.  PPL Electric paid common stock dividends to PPL of $274$95 million in 20092012 and $98$92 million in 2008.2011.

ITEM 6. SELECTED FINANCIAL AND OPERATING DATA

PPLLG&E and KU Energy Supply, LLC

Item 6There is omittedno established public trading market for LKE's membership interests.  PPL owns all of LKE's outstanding membership interests.  Distributions on the membership interests will be paid as determined by LKE's Board of Directors.  LKE made cash distributions to PPL Energy Supply meetsof $155 million in 2012 and $533 million in 2011 (including $248 million from the conditions set forthproceeds of a note issuance).

Louisville Gas and Electric Company

There is no established public trading market for LG&E's common stock, as LKE owns 100% of the outstanding common shares.  Dividends paid to LKE on those common shares are determined by LG&E's Board of Directors.  LG&E paid common stock dividends to LKE of $75 million in General Instructions (I)(1)(a)2012 and (b) of Form 10-K.$83 million in 2011.

39

ITEM 6.  SELECTED FINANCIAL AND OPERATING DATA
 
PPL Corporation (a)(b)  2009   2008   2007   2006   2005 
Income Items - millions
                    
Operating revenues $7,556  $8,007  $6,462  $6,096  $5,498 
Operating income  961   1,793   1,659   1,485   1,242 
Income from continuing operations after income taxes attributable to PPL  447   907   1,001   825   666 
Net income attributable to PPL  407   930   1,288   865   669 
Balance Sheet Items - millions (c)
                    
Total assets  22,165   21,405   19,972   19,747   17,926 
Short-term debt  639   679   92   42   214 
Long-term debt (d)  7,143   7,838   7,568   7,746   7,081 
Long-term debt with affiliate trusts              89   89 
Noncontrolling interests  319   319   320   361   107 
Common equity  5,496   5,077   5,556   5,122   4,418 
Total capitalization (d)  13,597   13,913   13,536   13,360   11,909 
Capital lease obligations              10   11 
Financial Ratios                    
Return on average common equity - %  7.48   16.88   24.47   17.81   15.44 
Ratio of earnings to fixed charges - total enterprise basis (e)  2.0   3.2   2.9   2.8   2.3 
Common Stock Data                    
Number of shares outstanding - Basic - thousands                    
Year-end  377,183   374,581   373,271   385,039   380,145 
Average  376,082   373,626   380,563   380,754   379,132 
Income from continuing operations after income taxes available to PPL common shareowners - Basic EPS $1.18  $2.42  $2.62  $2.16  $1.75 
Income from continuing operations after income taxes available to PPL common shareowners - Diluted EPS $1.18  $2.41  $2.60  $2.13  $1.74 
Net income available to PPL common shareowners - Basic EPS $1.08  $2.48  $3.37  $2.26  $1.76 
Net income available to PPL common shareowners - Diluted EPS $1.08  $2.47  $3.34  $2.24  $1.74 
Dividends declared per share of common stock $1.38  $1.34  $1.22  $1.10  $0.96 
Book value per share (c) $14.57  $13.55  $14.88  $13.30  $11.62 
Market price per share (c) $32.31  $30.69  $52.09  $35.84  $29.40 
Dividend payout ratio - % (f)  128   54   37   49   55 
Dividend yield - % (g)  4.27   4.37   2.34   3.07   3.27 
Price earnings ratio (f) (g)  29.92   12.43   15.60   16.00   16.90 
Sales Data - millions of kWh
                    
Domestic - Electric energy supplied - retail  38,912   40,374   40,074   38,810   39,413 
Domestic - Electric energy supplied - wholesale (h)  38,988   42,712   33,515   30,427   31,530 
Domestic - Electric energy delivered  36,717   38,058   37,950   36,683   37,358 
International - Electric energy delivered (i)  26,358   27,724   31,652   33,352   33,146 
Kentucky Utilities Company

There is no established public trading market for KU's common stock, as LKE owns 100% of the outstanding common shares.  Dividends paid to LKE on those common shares are determined by KU's Board of Directors.  KU paid common stock dividends to LKE of $100 million in 2012 and $124 million in 2011.

40


ITEM 6.  SELECTED FINANCIAL AND OPERATING DATA
                   
PPL Corporation (a) (b)  2012 (c)  2011 (c)  2010 (c)  2009   2008 
                   
Income Items (in millions)
               
 
Operating revenues
 $ 12,286  $ 12,737  $ 8,521  $ 7,449  $ 7,857 
 
Operating income
   3,109    3,101    1,866    896    1,703 
 Income from continuing operations after income taxes               
  
attributable to PPL shareowners
   1,532    1,493    955    414    857 
 
Net income attributable to PPL shareowners
   1,526    1,495    938    407    930 
Balance Sheet Items (in millions) (d)
               
 
Total assets
   43,634    42,648    32,837    22,165    21,405 
 
Short-term debt
   652    578    694    639    679 
 
Long-term debt
   19,476    17,993    12,663    7,143    7,838 
 
Noncontrolling interests
   18    268    268    319    319 
 
Common equity
   10,480    10,828    8,210    5,496    5,077 
 
Total capitalization
   30,626    29,667    21,835    13,597    13,913 
Financial Ratios               
 
Return on average common equity - %
   13.76    14.93    13.26    7.48    16.88 
 
Ratio of earnings to fixed charges (e)
   2.9    3.1    2.7    1.9    3.1 
Common Stock Data               
 Number of shares outstanding - Basic (in thousands)               
   
Year-end
   581,944    578,405    483,391    377,183    374,581 
   
Weighted-average
   580,276    550,395    431,345    376,082    373,626 
 Income from continuing operations after income taxes               
  
available to PPL common shareowners - Basic EPS
 $ 2.62  $ 2.70  $ 2.21  $ 1.10  $ 2.28 
 Income from continuing operations after income taxes               
  
available to PPL common shareowners - Diluted EPS
 $ 2.61  $ 2.70  $ 2.20  $ 1.10  $ 2.28 
 Net income available to PPL common shareowners -               
  
Basic EPS
 $ 2.61  $ 2.71  $ 2.17  $ 1.08  $ 2.48 
 Net income available to PPL common shareowners -               
  
Diluted EPS
 $ 2.60  $ 2.70  $ 2.17  $ 1.08  $ 2.47 
 
Dividends declared per share of common stock
 $ 1.44  $ 1.40  $ 1.40  $ 1.38  $ 1.34 
 
Book value per share (d)
 $ 18.01  $ 18.72  $ 16.98  $ 14.57  $ 13.55 
 
Market price per share (d)
 $ 28.63  $ 29.42  $ 26.32  $ 32.31  $ 30.69 
 
Dividend payout ratio - % (f)
   55    52    65    128    54 
 
Dividend yield - % (g)
   5.03    4.76    5.32    4.27    4.37 
 
Price earnings ratio (f) (g)
   11.01    10.89    12.13    29.92    12.43 
Sales Data - GWh               
 
Domestic - Electric energy supplied - retail (h)
   42,379    40,147    14,595    38,912    40,374 
 
Domestic - Electric energy supplied - wholesale (h) (i)
   56,302    65,681    75,489    38,988    42,712 
 
Domestic - Electric energy delivered - retail (j)
   66,931    67,806    42,463    36,689    38,013 
 
U.K. - Electric energy delivered (k)
   77,467    58,245    26,820    26,358    27,724 

(a) The earnings each year were affected by several items that management considers special.  See "Results of Operations - Segment Results" in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for a description of special items in 2009, 20082012, 2011 and 2007.2010.  The earnings were also affected by the sales of various businesses.  See Note 9 to the Financial Statements for a discussion of discontinued operations in 2012, 2011 and 2010.
(b) See "Item 1A. Risk Factors" and Note 14Notes 6 and 15 to the Financial Statements for a discussion of uncertainties that could affect PPL's future financial condition.
(c) As of each respective year-end.Includes WPD Midlands activity since its April 1, 2011 acquisition date.  Includes LKE activity since its November 1, 2010 acquisition date.
(d) The year 2007 excludes amounts related to PPL's natural gas distribution and propane businesses that had been classified as held for sale at December 31, 2007.As of each respective year-end.
(e) Computed using earnings and fixed charges of PPL and its subsidiaries.  Fixed charges consist of interest on short- and long-term debt, amortization of debt discount, expense and premium - net, other interest charges, the estimated interest component of operating rentals and preferred securities distributions of subsidiaries.  See Exhibit 12(a) for additional information.
(f) Based on diluted EPS.
(g) Based on year-end market prices.
(h) All years include kWh associated withThe electric energy supplied changes in 2010 reflect the Long Island generation businessexpiration of the PLR contract between PPL EnergyPlus and the majorityPPL Electric as of PPL Maine's hydroelectric generation business that have been classified as Discontinued Operations.December 31, 2009.
(i) Years 2007 and earlierGWh are included until the transaction closing for facilities that were sold.
(j)
(k)
Prior period volumes were restated to include theunbilled volumes.
Year 2011 includes eight months of deliveries associated with the Latin American businesses, until the datesacquisition of their sales in 2007.WPD Midlands as volumes are reported on a one-month lag.
41

ITEM 6.  SELECTED FINANCIAL AND OPERATING DATA
 
PPL Electric Utilities Corporation (a)(b)  2009   2008   2007   2006   2005 
Income Items - millions
                    
Operating revenues $3,292  $3,401  $3,410  $3,259  $3,163 
Operating income  329   375   350   418   377 
Net income  142   176   163   194   147 
Income available to PPL  124   158   145   180   145 
Balance Sheet Items - millions (c)
                    
Total assets  5,092   5,416   4,986   5,315   5,537 
Short-term debt      95   41   42   42 
Long-term debt  1,472   1,769   1,674   1,978   2,411 
Shareowners' equity  1,896   1,646   1,586   1,559   1,375 
Total capital provided by investors  3,368   3,510   3,301   3,579   3,828 
Financial Ratios                    
Return on average common equity - %  9.08   12.00   11.35   14.33   11.20 
Ratio of earnings to fixed charges (d)  2.8   3.4   2.7   2.9   2.1 
Ratio of earnings to combined fixed charges and preferred stock dividends (e)  2.3   2.7   2.3   2.5   2.1 
Sales Data                    
Customers (thousands) (c)  1,398   1,394   1,387   1,377   1,365 
Electric energy delivered - millions of kWh                    
Residential  14,256   14,419   14,411   13,714   14,218 
Commercial  13,837   13,942   13,801   13,174   13,196 
Industrial  8,435   9,508   9,547   9,638   9,777 
Other  189   189   191   157   167 
                     
Total electric energy delivered  36,717   38,058   37,950   36,683   37,358 
                     
Electric energy supplied as a PLR - millions of kWh  36,695   38,043   37,919   36,577   36,917 

(a)Earnings for the years 2009, 2007, 2006 and 2005 were affected by several items that management considers special.  See "Results of Operations - Earnings" in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for a description of special items in 2009 and 2007.
(b)See "Item 1A. Risk Factors" and Note 14 to the Financial Statements for a discussion of uncertainties that could affect PPL Electric's future financial condition.
(c)As of each respective year-end.
(d)Computed using earnings and fixed charges of PPL Electric and its subsidiaries.  Fixed charges consist of interest on short- and long-term debt, other interest charges, amortization of debt discount, expense and premium - net, and the estimated interest component of operating rentals.  See Exhibit 12(c) for additional information.
(e)Computed using earnings, fixed charges and preferred stock dividend requirements of PPL Electric and its subsidiaries.  Fixed charges consist of interest on short- and long-term debt, other interest charges, amortization of debt discount, expense and premium - net, and the estimated interest component of operating rentals.  See Exhibit 12(c) for additional information.
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA

PPL Energy Supply, LLC, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company

Item 6 is omitted as PPL Energy Supply, PPL Electric, LKE, LG&E and KU meet the conditions set forth in General Instructions (I)(1)(a) and (b) of Form 10-K.

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PPL CORPORATION AND SUBSIDIARIES

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

PPL is an energy and utility holding company with headquarters in Allentown, Pennsylvania.  Refer to "Item 1. Business - Background" for descriptions of its reportable segments, which are Supply, International Delivery and Pennsylvania Delivery.  Through its subsidiaries, PPL is primarily engaged in the generation and marketing of electricity in two key markets - the northeastern and western U.S. - and in the delivery of electricity in Pennsylvania and the U.K.  PPL's overall strategy is to achieve disciplined growth in energy supply margins while limiting volatility in both cash flows and earnings and to achieve stable, long-term growth in its regulated electricity delivery businesses through efficient operations and strong customer and regulatory relations.  More specifically, PPL's strategy for its electricity generation and marketing business is to match energy supply with load, or customer demand, under contracts of varying lengths with creditworthy counterparties to capture profits while effectively managing exposure to energy and fuel price volatility, counterparty credit risk and operational risk.  PPL's strategy for its electricity delivery businesses is to own and operate these businesses at the most efficient cost while maintaining high quality customer service and reliability.

PPL faces several risks in its supply business, principally electricity and capacity wholesale price risk, fuel supply and price risk, electricity and fuel basis risk, power plant performance, evolving regulatory frameworks and counterparty credit risk.  PPL attempts to manage these risks through various means.  For instance, PPL operates a portfolio of generation assets that is diversified as to geography, fuel source, cost structure and operating characteristics.  PPL expects to expand its generation capacity over the next several years through power uprates at certain of its existing power plants, and is continually evaluating the potential construction of new plants and the potential acquisition of existing plants or businesses.  PPL is and will continue to remain focused on the operating efficiency and availability of its existing and any newly constructed or acquired power plants.

In addition, PPL has executed and continues to pursue contracts of varying lengths for energy sales and fuel supply, while using other means to mitigate risks associated with adverse changes in the difference, or margin, between the cost to produce electricity and the price at which PPL sells it.  PPL's future profitability will be affected by prevailing market conditions and whether PPL decides to, or is able to, continue to enter into long-term or intermediate-term power sales and fuel purchase agreements or renew its existing agreements.  Currently, PPL's commitments for energy sales are satisfied through its own generation assets and supply purchased from third parties.  PPL markets and trades around its physical portfolio of generating assets through integrated generation, marketing and trading functions.

PPL has adopted financial and operational risk management programs that, among other things, are designed to monitor and manage its exposure to earnings and cash flow volatility related to changes in energy and fuel prices, interest rates, foreign currency exchange rates, counterparty credit quality and the operating performance of its generating units.

The principal challenge that PPL facesinformation provided in its electricity delivery businesses is to maintain high quality customer servicethis Item 7 should be read in conjunction with PPL's Consolidated Financial Statements and reliabilitythe accompanying Notes.  Capitalized terms and abbreviations are defined in a cost-effective manner.  PPL's electricity delivery businessesthe glossary.  Dollars are rate-regulated.  Accordingly, these businesses are subject to regulatory risk with respect to costs that may not be recovered and investment returns that may not be collected through customer rates.  See "Customer Choice - End of Transition Period" below for information on additional risks PPL's domestic electricity business may face.in millions, except per share data, unless otherwise noted.

PPL faces additional financial risks in conducting U.K. operations, such as fluctuations in foreign currency exchange rates and the effect these rates have on the conversion of U.K. earnings and cash flows to U.S. dollars.  PPL attempts to manage these financial risks through its risk management programs.

In order to manage financing costs and access to credit markets, a key objective for PPL's business as a whole is to maintain a strong credit profile.  PPL continually focuses on maintaining an appropriate capital structure and liquidity position.

See "Item 1A. Risk Factors" for more information concerning these and other material risks PPL faces in its businesses.

In May 2009, PPL Generation signed a definitive agreement to sell its Long Island generation business and related tolling agreements, and expects the sale to close on or about February 26, 2010.  In November 2009, PPL Maine completed the sale of the majority of its hydroelectric generation business.  These businesses are included in the Supply segment.  In 2008, PPL sold its natural gas distribution and propane businesses, which were included in the Pennsylvania Delivery segment.  In 2007, PPL sold its regulated electricity delivery businesses in Latin America, which were included in the International Delivery segment.  See Note 9 to the Financial Statements for additional information.

The purpose of "Management's"Management's Discussion and Analysis of Financial Condition and Results of Operations" is to provide information concerning PPL's performance in implementingincludes the strategies and managing the risks and challenges mentioned above.  Specifically:following information:

·"Overview" provides a description of PPL and its business strategy, a summary of Net Income Attributable to PPL Shareowners and a discussion of certain events related to PPL's results of operations and financial condition.

·  "Results of Operations" provides an overviewa summary of PPL's operating results in 2009, 2008 and 2007, includingearnings, a review of earnings, with details of results by reportable segment.  It also providessegment and a brief outlook fordescription of key factors by segment expected to impact future earnings.  This section ends with explanations of significant changes in principal items on PPL's Statements of Income, comparing 2012 with 2011 and 2011 with 2010.

·"Financial Condition - Liquidity and Capital Resources" provides an analysis of PPL's liquidity position and credit profile, including itsprofile.  This section also includes a discussion of forecasted sources of cash (including bank credit facilities and sources of operating cash flow) and uses of cash (including contractual obligations and capital expenditure requirements) and the key risks and uncertainties that impact PPL's past and future liquidity position and financial condition.  This subsection also includes a listing and discussion of PPL's current credit ratings.rating agency actions.

·"Financial Condition - Risk Management - Energy Marketing & Trading and Other" provides an explanation of PPL's risk management programs relating to market risk and credit risk.

·"Application of Critical Accounting Policies" provides an overview of the accounting policies that are particularly important to the results of operations and financial condition of PPL and that require its management to make significant estimates, assumptions and other judgments.judgments of matters inherently uncertain.

The information providedOverview

Introduction

PPL is an energy and utility holding company with headquarters in this Item 7 should be readAllentown, Pennsylvania.  Through subsidiaries, PPL generates electricity from power plants in conjunction with PPL's Consolidated Financial Statementsthe 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 Pennsylvania, Kentucky, Virginia, Tennessee and the accompanying Notes.U.K. and delivers natural gas to customers in Kentucky.

Terms and abbreviationsPPL's principal subsidiaries are explained in the glossary.  Dollars are in millions unless otherwise noted.shown below (* denotes an SEC registrant):

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Customer Choice – End of Transition Period

In 1996, the Customer Choice Act was enacted to restructure Pennsylvania's electric utility industry in order to create retail access to a competitive market for generation of electricity.  The Customer Choice Act required each Pennsylvania electric utility, including PPL Electric, to file a restructuring plan to "unbundle" its rates into separate generation, transmission and distribution components and to permit its customers to directly access alternate suppliers of electricity.  Under the Customer Choice Act, PPL Electric was required to act as a PLR.  As part of a settlement approved by the PUC and in connection with the restructuring plan PPL Electric filed under the Customer Choice Act, PPL Electric agreed to provide electricity as a PLR at predetermined "capped" rates through 2009.  In addition, the PUC authorized recovery of approximately $2.97 billion of competitive transition or "stranded" costs (generation-related costs that might not otherwise be recovered in a competitive market) from customers during an 11-year transition period.  For PPL Electric, this transition period ended on December 31, 2009.

As a result of the PUC settlement order and the PLR obligation, PPL Electric, through 2009, generally bore the risk that it would not be able to obtain adequate energy supply at the "capped" rates it could charge to its customers who did not select an alternate electricity supplier.  To mitigate this risk, PPL Electric entered into full requirements energy supply agreements with PPL EnergyPlus.  Under these agreements, through 2009, PPL EnergyPlus supplied PPL Electric's entire PLR load at predetermined prices equal to the capped generation rates that PPL Electric was authorized to charge its customers.

Related to PPL Electric's transition period, the following has occurred or will occur:

·In August 1999, CTC of $2.4 billion were converted to intangible transition costs when they were securitized by the issuance of transition bonds.  The intangible transition costs were amortized over the life of the transition bonds, through December 2008, in accordance with an amortization schedule filed with the PUC.  These transition bonds matured in tranches, with the final tranche being repaid in December 2008.PPL Corporation*
  
·During the transition period, PPL Electric was authorized by the PUC to bill its customers $130 million for a portion of the costs associated with decommissioning of the Susquehanna nuclear plant.  Under the power supply agreements between PPL Electric and PPL EnergyPlus, these revenues were passed on to PPL EnergyPlus.  Similarly, these revenues were passed on to PPL Susquehanna under a power supply agreement between PPL EnergyPlus and PPL Susquehanna and invested in the NDT funds.  Effective January 1, 2010, these ratepayer billings have ceased.
  
·In December 2009, PPL Electric filed with the PUC a final reconciliation of CTC and ITC recoveries during the transition period.  At December 31, 2009, PPL Electric has recorded a net regulatory liability of $33 million related to these recoveries.  The net overcollection will be reflected in customer rates in 2010.Capital Funding
  
·At December 31, 2009, PPL Electric's long-term power purchase agreements with PPL EnergyPlus (effective since 2000 and 2002) expired.
  
·To mitigate 2010 rate increases, PPL Electric implemented two programs in 2008 and 2009 that allowed customers to make prepayments toward their 2010 and 2011 electric bills or to defer any 2010 electric bill increases exceeding 25%.  Any deferred amounts are to be repaid by 2012.  At December 31, 2009, PPL Electric has recorded a liability of $36 million for these programs.
  
·Effective January 1, 2010, PPL Electric's rates for generation supply as a PLR are no longer capped and the cost of electric generation is based on a competitive solicitation process.  During 2007 through 2009, PPL Electric procured through PUC-approved solicitation procedures, the electric generation supply it will need in 2010 for customers who do not choose an alternative supplier.  The prices in these contracts will result in an average residential customer paying approximately 30% higher rates, as compared to the previously-capped rates on delivered electricity.  PPL Electric is currently procuring the PLR supply it will need for the January 2011 through May 2013 period.  The results of all procurements continue to require the approval of the PUC.
  
LKE*
PPL Global
Engages in the regulated distribution of electricity in the U.K.
PPL Electric*
Engages in the regulated transmission and distribution of electricity in Pennsylvania
PPL Energy Supply*
·For those customers who choose to procure
LG&E*
Engages in the regulated generation, supply from other providers, 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 Electric will provide services for these alternativeEnergyPlus
Performs energy marketing and trading activities
Purchases fuel
PPL Generation
Engages in the competitive generation suppliers to bill usage charges, among other duties.  As required by a PUC-approved plan, PPL Electric will be purchasing certain receivables from alternative suppliers at a discount.of electricity, primarily in Pennsylvania and Montana
Kentucky Regulated
Segment
U.K. Regulated
Segment
Pennsylvania Regulated Segment
Supply
Segment

In October 2008, Act 129 became effective.  This law created requirements for energy efficiency and conservation programs and for the use of smart metering technology, imposed new PLR electricity supply procurement rules, provided remedies for market misconduct, and made changes to the existing Alternative Energy Portfolio Standard.Business Strategy

PriorPPL's overall strategy is to achieve stable, long-term growth in its regulated electricity delivery businesses through efficient operations and strong customer and regulatory relations, and disciplined optimization of energy supply margins in its energy supply business while mitigating volatility in both cash flows and earnings.  In pursuing this strategy, PPL acquired LKE in November 2010 and WPD Midlands in April 2011.  These acquisitions have reduced PPL's overall business risk profile and reapportioned the expirationmix of PPL's regulated and competitive businesses by increasing the regulated portion of its business.  Each of the generation rate caps, customers' interest in purchasing generation supply from other providers was limited because in recentrate-regulated businesses plans to make material capital investments over the next several years the long-term supply agreement between PPL Electricto improve infrastructure and PPL EnergyPlus provided a below-market cost of generation supply for these customers.customer reliability.  As a result a limited amount of "shopping" occurred.  In 2010, several alternative suppliers have offeredthese acquisitions, approximately 71% of PPL's assets were in its regulated businesses at December 31, 2012 and approximately 73% of "Net Income Attributable to PPL Shareowners" was from regulated businesses for the year ended December 31, 2012.

The increase in regulated assets is expected to provide generationearnings stability through regulated returns on equity and the ability to recover costs of capital investments, in contrast to the competitive energy supply in PPL Electric's service territory.  When its customers purchase supply from these alternative suppliers or from PPL Electric as PLR, the purchase of such supply has no significant impact on the operating results of PPL Electric.  The cost to purchase PLR supply is passed directly by PPL Electric to its customers without markup.  For those customers who receive their supply from an alternative supplier, PPL Electric may act as billing agent or the alternative supplier may bill for their supply directly,business where earnings and in either case, PPL Electric does not record revenues or expenses related to this supply.  PPL Electric remains the distribution provider for all the customers in its service territory and charges a regulated rate for the service of delivering that electricity.

Lower demand for electric power due to increased prices, the economic downturn or the conservation provisions of Act 129 that require PPL Electric to reduce its customers' electricity usage in future periods, could impact future revenues.  The reduction in volume could be offset by changes in customer rates for this service,cash flows are subject to PUC approval, depending on PPL Electric's cost structure.  Act 129 includes one-time penaltiescommodity market volatility.

Results for periods prior to the acquisitions of upLKE and WPD Midlands are not comparable with, or indicative of, results for periods subsequent to $20 million for not attaining the required reductions by 2011 and 2013.  At this time, PPL Electric expects to meet these targeted reductions.  The costs of complying with the other provisions of Act 129 would, subject to PUC approval, be recoverable through an automatic adjustment clause.  None of the above changes are expected to have a significant impact on PPL Electric's 2010 financial condition, operating results or cash flows.acquisitions.

With the expirationacquisition of WPD Midlands, PPL has a higher proportion of overall earnings subject to foreign currency translation risk.  The U.K. subsidiaries also have currency exposure to the U.S. dollar to the extent they have U.S. dollar denominated debt.  To manage these risks, PPL generally uses contracts such as forwards, options and cross currency swaps that contain characteristics of both interest rate and foreign currency exchange contracts.

PPL's strategy for its energy supply business is to optimize the value from its competitive generation and marketing portfolio.  PPL 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.

To manage financing costs and access to credit markets, a key objective of PPL's business strategy is to maintain a strong credit profile and strong liquidity position.  In addition, PPL has financial and operational risk management programs that, among other things, are designed to monitor and manage its exposure to earnings and cash flow volatility related to changes in energy and fuel prices, interest rates, counterparty credit quality and the operating performance of its generating units.
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Financial and Operational Developments

Net Income Attributable to PPL Shareowners

Net Income Attributable to PPL Shareowners for the years ended December 31 by segment and in total was:

   2012  2011  2010  
            
Kentucky Regulated (a) $ 177  $ 221  $ 26  
U.K. Regulated (b)   803    325    261  
Pennsylvania Regulated   132    173    115  
Supply   414    776    612  
Corporate and Other (c)         (76) 
Net Income Attributable to PPL Shareowners $ 1,526  $ 1,495  $ 938  
            
EPS - basic $ 2.61  $ 2.71  $ 2.17  
EPS - diluted $ 2.60  $ 2.70  $ 2.17  

(a)LKE was acquired on November 1, 2010.  Therefore, 2012 and 2011 include a full year of LKE results, while 2010 includes two months of LKE results.
(b)WPD Midlands was acquired on April 1, 2011 and its results are recorded on a one-month lag.  Therefore, 2012 includes a full year of WPD Midlands' results, while 2011 includes eight months of WPD Midlands' results.  2011 was also impacted by certain acquisition related costs.  These costs are considered special items by management and are discussed in further detail in "Results of Operations - Earnings - U.K. Regulated Segment."  See Notes 7 and 10 to the Financial Statements for additional information on the acquisition and related financing.
(c)Includes $22 million, after tax ($31 million, pre-tax), of certain third-party acquisition-related costs, including advisory, accounting, and legal fees associated with the acquisition of LKE that are recorded in "Other Income (Expense) - net" on the Statement of Income.  Also includes $52 million, after tax ($80 million, pre-tax), of 2010 Bridge Facility costs that are recorded in "Interest Expense" on the Statement of Income.  These costs are considered special items by management.  See Notes 7 and 10 to the Financial Statements for additional information on the acquisition and related financing.

Earnings in 2012 increased 2% over 2011 and earnings in 2011 increased 59% over 2010.  The changes in Net Income Attributable to PPL Shareowners from year to year were, in part, attributable to the acquisition of LKE and WPD Midlands and certain items that management considers special.  See "Results of Operations" for further discussion of PPL's business segments, details of special items and analysis of the long-term power purchase agreements between PPL Electricconsolidated results of operations.

Economic and PPL EnergyPlus, PPL EnergyPlus now has multiple options as to how, and to whom, it sells the electricity produced byMarket Conditions

Unregulated Gross Energy Margins associated with PPL Energy Supply's competitive generation plants.  These salesand marketing business are based on prevailingimpacted by changes in market rates, as compared to pre-determined capped rates underprices and demand for electricity and natural gas, power plant availability, competition in the expired supply agreements with PPL Electric.  PPL EnergyPlus has entered into variousmarkets for retail customers, fuel costs and availability, fuel transportation costs and other costs.  Current depressed wholesale market prices for electricity and retail contracts to sell this powernatural gas have resulted from general weak economic conditions and at this time has hedged almost 100%other factors, including the impact of expected 2010 baseload generation output.  The expirationexpanded domestic shale gas development and production.  As a result of the long-term supply agreements with PPL Electric also providesthese factors, PPL Energy Supply has experienced a shift in the abilitydispatching of its competitive generation from coal-fired to adjust its exposure to fluctuationscombined-cycle gas-fired generation as illustrated in demand that existed with supplyingthe following table:

   Average Utilization Factors (a)
   2012   2009 - 2011
Pennsylvania coal plants  69%  87%
Montana coal plants  67%  89%
Combined-cycle gas plants  98%  72%

(a)All periods reflect the year ended December 31.

This reduction in coal-fired generation output had resulted in a surplus of coal inventory at certain of PPL Electric's PLR load.  EntryEnergy Supply's Pennsylvania coal plants.  To mitigate the risk of new generation suppliers into the Pennsylvania marketplace providesexceeding available coal storage, PPL Energy Supply the abilityincurred pre-tax charges of $29 million in 2012 to provide generation supply to additional wholesale customers.  Overall, these changesreduce its 2012 and the resulting level of hedged electricity prices are expected to have a positive impact on the financial condition, operating results and cash flows of2013 contracted coal deliveries.  PPL Energy Supply.

PPL Electric's customers are no longer funding contributions to Susquehanna's NDT funds.  PPLSupply will continue to manage the NDT funds until the PPL Susquehanna plant is decommissioned.  If the balance of the NDT funds is not adequateits coal inventory to cover decommissioning costs, PPL Susquehanna will be responsible to fund 90% of the shortfall.  The Susquehanna nuclear units currently are licensed to operate until 2042 and 2044.

The final expiration of generation rate caps in Pennsylvania, applicable to three other large regulated utilities, is scheduled to occur at the end of 2010.  Discussions concerning generation rate caps and rate increase mitigation are continuing.  The final result of those discussions and the future impact onmitigate the financial conditionimpact and future cash flowsphysical implications of PPL cannot be predictedan oversupply; however, no additional coal contract modifications are expected at this time.

In addition, current economic and commodity market conditions indicate a lower value of unhedged future energy margins (primarily in 2014 and forward years) compared to the energy margins in 2012.  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, as well as its hedging strategies, to help counter the financial effects of low commodity prices.

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PPL's businesses are subject to extensive federal, state and local environmental laws, rules and regulations.  Although PPL Energy Supply's competitive generation assets are well positioned to meet these requirements, certain regulated generation assets at LG&E and KU will require substantial capital investment.  LG&E and KU project $2.3 billion of capital investment over the next five years to satisfy certain of these requirements.  See Note 1415 to the Financial Statements for additional information on Pennsylvania legislative and other regulatory activities.

Market Events

In 2008, conditionsthese requirements.  These requirements have resulted in LKE's anticipated retirement of five coal-fired units with a combined summer capacity rating of 726 MW by 2015.  KU retired the financial markets became disruptive to71 MW unit at the processes of managing credit risk, responding to liquidity needs, measuring derivatives and other financial instruments at fair value, and managing market risk.  Bank credit capacity was reduced and the cost of renewing or establishing new credit facilities increased, thereby introducing uncertainties as to PPL's ability to enter into long-term energy commitments or reliably estimate the longer-term cost and availability of credit.  In general, bank credit capacity has increased from the significantly constrained levels of 2008 and early 2009.  In addition, the cost of renewing or establishing new credit facilities has improved when compared with the 2008 and early 2009 periods.

Commodity Price Risk

The contractionTyrone plant in wholesale energy market liquidity and accompanying decline in wholesale energy prices due to conditions in the financial and commodity markets significantly impacted PPL's earnings during the second half of 2008 and the first half of 2009.February 2013.  See "Statement of Income Analysis - Domestic Gross Energy Margins - Domestic Gross Energy Margins By Region" for further discussion.

Credit Risk

Credit risk is the risk that PPL would incur a loss as a result of nonperformance by counterparties of their contractual obligations.  PPL maintains credit policies and procedures to limit counterparty credit risk.  Conditions in the financial and commodity markets have generally increased PPL's exposure to credit risk.  See Notes 17 and 18 to the Financial Statements, and "Risk Management - Energy Marketing & Trading and Other - Credit Risk" for more information on credit risk.

Liquidity Risk

PPL expects to continue to have access to adequate sources of liquidity through operating cash flows, cash and cash equivalents, credit facilities and, from time to time, the issuance of capital market securities.  PPL's ability to access capital markets may be impacted by conditions in the overall financial and capital markets, as well as conditions specific to the utility sector.  See "Financial Condition - Liquidity and Capital Resources" for an expanded discussion of PPL's liquidity position and a discussion of its forecasted sources of cash.

Valuations in Inactive Markets

Conditions in the financial markets have generally made it difficult to determine the fair value of certain assets and liabilities in inactive markets.  Management has reviewed the activity in the energy and financial markets in which PPL transacts, concluding that all of these markets were active at December 31, 2009, with the exception of the market for auction rate securities.  See Notes 17 and 21 to the Financial Statements and "Financial Condition - Liquidity and Capital Resources - Auction Rate Securities" for a discussion of these investments.

Securities Price Risk

Declines in the market price of debt and equity securities result in unrealized losses that reduce the asset values of PPL's investments in its defined benefit plans and NDT funds.  Both the defined benefit plans and the NDT funds earned positive returns in the second half of 2009, thereby recovering a portion of the negative returns incurred in 2008 and the first quarter of 2009.  PPL actively monitors the performance of the investments held in its defined benefit plans and NDT funds and periodically reviews the funds' investment allocations.  See "Financial Condition - Risk Management - Energy Marketing & Trading and Other - NDT Funds - Securities Price Risk" for additional information on securities price risk.

Determination of the funded status of defined benefit plans, contribution requirements and net periodic defined benefit costs for future years are subject to changes in various assumptions, in addition to the actual performance of the assets in the plans.  See "Application of Critical Accounting Policies - Defined Benefits" for a discussion of the assumptions and sensitivities regarding those assumptions.

The Economic Stimulus Package

The Economic Stimulus Package was intended to stimulate the U.S. economy through federal tax relief, expansion of unemployment benefits and other social stimulus provisions, domestic spending for education, health care and infrastructure, including the energy sector.  A portion of the benefits included in the Economic Stimulus Package are offered in the form of loan fee reductions, expanded loan guarantees and secondary market incentives, including delayed recognition for tax purposes of income related to the cancellation of certain types of debt.  See "Financial Condition - Liquidity and Capital Resources" for a discussion of the applicability to the purchase of notes by PPL.

Funds from the Economic Stimulus Package have been allocated to various federal agencies, such as the DOE, and provided to state agencies through block grants.  The DOE has made awards of the funds for smart grid, efficiency-related and renewable energy programs.  The Commonwealth of Pennsylvania has also made awards for funding certain energy projects, including solar projects.  As discussed in Note 8 to the Financial Statements for additional information regarding the anticipated retirement of these units as well as plans to build a combined-cycle natural gas facility in Kentucky.  Also, in 2012 KU recorded a $25 million pre-tax impairment of its EEI investment as a result of environmental regulations and low energy prices.  Finally, in September 2012 PPL has reconsideredannounced 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 decidedthe costs to pursuecomply with MATS.  The Corette plant asset group's carrying amount at December 31, 2012 was approximately $68 million.  Although the Corette plant asset group was not determined to be impaired at December 31, 2012, it is reasonably possible that an impairment could occur in future periods, as higher priced sales contracts settle, adversely impacting projected cash flows.

In light of these economic and market conditions, as well as current and projected environmental regulatory requirements, PPL considered whether certain of its Holtwood expansion projectother generating assets were impaired, and determined that no impairment charges were required at December 31, 2012.  PPL is unable to predict whether future environmental requirements or market conditions will result in view ofimpairment charges for other generating assets or other retirements.

PPL and its subsidiaries may also be impacted in future periods by the tax incentives and potential loan guarantees for renewable energy projects containeduncertainty in the Economic Stimulus Package.  worldwide financial and credit markets.  In addition, PPL may be impacted by reductions in the credit ratings of financial institutions and evolving regulations in the financial sector.  Collectively, these factors could reduce availability or restrict PPL and its subsidiaries' ability to maintain sufficient levels of liquidity, reduce capital market activities, change collateral posting requirements and increase the associated costs to PPL and its subsidiaries.

PPL cannot predict the future impact that these economic and market conditions and regulatory requirements may have on its financial condition or results of operations.

Susquehanna Turbine Blade Inspection

During 2012, PPL Energy Supply performed inspections of the Unit 1 and Unit 2 turbine blades at the PPL Susquehanna nuclear power plant in order to further address the issue of turbine blade cracking that was first identified in 2011.  The after-tax earnings impact of these 2012 inspections, including reduced energy-sales margins and repair expenses, was approximately $53 million.  The after-tax earnings impact of turbine blade related outages in 2011 was approximately $63 million.

Ironwood Acquisition

In April 2012, an indirect, wholly owned subsidiary of PPL Energy Supply completed the acquisition of the equity interests in the owner and operator of the Ironwood Facility.  The Ironwood Facility began operation in 2001 and, since 2008, PPL EnergyPlus has applied for DOE loan guaranteessupplied natural gas for the Holtwood expansion projectfacility and received the facility's full electricity output and capacity value pursuant to a tolling agreement that expires in 2021.  The acquisition provides PPL Energy Supply, through its subsidiarysubsidiaries, operational control of additional combined-cycle gas generation in PJM.  See Note 10 to the Financial Statements for additional information.

Bankruptcy of SMGT

In October 2011, SMGT, a Montana cooperative and purchaser of electricity under a long-term supply contract with PPL Montana,EnergyPlus expiring in June 2019 (SMGT Contract), filed for protection under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Rainbow redevelopment project.  District of Montana.  At the time of the bankruptcy filing, SMGT was PPL EnergyPlus' largest unsecured credit exposure.  This contract was accounted for as NPNS by PPL EnergyPlus.
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The SMGT Contract provided for fixed volume purchases on a monthly basis at established prices.  Pursuant to a court order and subsequent stipulations entered into between the SMGT bankruptcy trustee and PPL EnergyPlus, since the date of its Chapter 11 filing through January 2012, SMGT continued to purchase electricity from PPL EnergyPlus at the price specified in the SMGT Contract, and made timely payments for such purchases, but at lower volumes than as prescribed in the SMGT Contract.  In January 2012, the trustee notified PPL EnergyPlus that SMGT would not purchase electricity under the SMGT Contract for the month of February.  In March 2012, the U.S. Bankruptcy Court for the District of Montana issued an order approving the request of the SMGT bankruptcy trustee and PPL EnergyPlus to terminate the SMGT Contract.  As a result, the SMGT Contract was terminated effective April 1, 2012, allowing PPL EnergyPlus to resell to other customers the electricity previously contracted to SMGT under the SMGT Contract.

PPL EnergyPlus' receivable under the SMGT Contract totaled approximately $21 million at December 31, 2012, which has been fully reserved.

In July 2012, PPL EnergyPlus filed its proof of claim in the SMGT bankruptcy proceeding.  The total claim is approximately $375 million, including the above receivable, predominantly an unsecured claim representing the value for energy sales that will not occur as a result of the termination of the SMGT Contract.  No assurance can be given as to the collectability of the claim, thus no amounts have been recorded in the 2012 financial statements.

PPL Energy Supply cannot predict any amounts that it may recover in connection with the SMGT bankruptcy or the prices and other terms on which it will be able to market to third parties the power that SMGT will not purchase from PPL EnergyPlus due to the termination of the SMGT Contract.

Tax Litigation

In 1997, the U.K. imposed a Windfall Profits Tax (WPT) on privatized utilities, including WPD.  PPL filed its federal 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.  As a result, and with finalization of other issues, PPL recorded a $42 million tax benefit in 2010.  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 2011.  In February 2012, PPL filed its petition for rehearing of the Third Circuit's opinion.  In March 2012, the Third Circuit denied PPL's petition.  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 on October 29, 2012, and oral argument was held on February 20, 2013.  PPL expects the case to be decided before the end of the Supreme Court's current term in June 2013 and cannot predict the outcome of this matter.

Terminated Bluegrass CTs Acquisition

In September 2011, LG&E and KU entered into an asset purchase agreement with Bluegrass Generation for the purchase of the Bluegrass CTs, aggregating approximately 495 MW, plus limited associated contractual arrangements required for operation of the units, for a purchase price of $110 million, pending receipt of applicable regulatory approvals.  In May 2012, the KPSC issued an order approving the request to purchase the Bluegrass CTs.  In November 2011, LG&E and KU filed an application with the FERC under the Federal Power Act requesting approval to purchase the Bluegrass CTs.  In May 2012, the FERC issued an order conditionally authorizing the acquisition of the Bluegrass CTs, subject to approval by the FERC of satisfactory mitigation measures to address market-power concerns.  After a review of potentially available mitigation options, LG&E and KU determined that the options were not commercially justifiable.  In June 2012, LG&E and KU terminated the asset purchase agreement for the Bluegrass CTs in accordance with its terms and made applicable filings with the KPSC and FERC.

Cane Run Unit 7 Construction

In September 2011, LG&E and KU filed a CPCN with the KPSC requesting approval to build Cane Run Unit 7.  In May 2012, the KPSC issued an order approving the request.  A formal request for recovery of the costs associated with the construction was not included in the CPCN filing with the KPSC but is expected to be included in future rate case proceedings.  LG&E and KU commenced preliminary construction activities in the third quarter of 2012 and project construction is expected to be completed by May 2015.  The project, which includes building a natural gas supply pipeline and related transmission projects, has an estimated cost of approximately $600 million.
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Future Capacity Needs

In addition to the construction of a combined cycle gas unit at the Cane Run station, LG&E and KU continue to assess future capacity needs.  As a part of the assessment, LG&E and KU issued an RFP in July 2009,September 2012 for up to 700 MW of capacity beginning as early as 2015.

Storm Costs

During 2012, PPL Electric proposedexperienced several PUC-reportable storms, including Hurricane Sandy, resulting in total restoration costs of $81 million, of which $61 million were initially recorded in "Other operation and maintenance" on the Statement of Income.  In particular, in late October 2012, PPL Electric experienced widespread significant damage to its distribution network from Hurricane Sandy resulting in total restoration costs of $66 million, of which $50 million were initially recorded in "Other operation and maintenance" on the DOE thatStatement of Income.  However, a PPL subsidiary has a $10 million reinsurance policy with a third party insurer, for which a receivable was recorded with an offsetting credit to "Other operation and maintenance" on the agency provide funding for one-halfStatement of Income.  PPL Electric recorded a $38regulatory asset of $28 million smart grid project.  The project would use smart grid technologyin December 2012 (offset to strengthen reliability, save energy"Other operation and improve electric service for 60,000 Harrisburg, Pennsylvania area customers.  It would also provide benefits beyondmaintenance" on the Harrisburg region, helping to speed power restoration across PPL Electric's 29-county service territory.Statement of Income).  In October 2009,February 2013, PPL Electric received notificationan order from the PUC granting permission to defer qualifying storm costs in excess of insurance recoveries associated with Hurricane Sandy.

See "Regulatory Matters - Pennsylvania Activities - Storm Costs" in Note 6 to the Financial Statements for information on $84 million of storm costs incurred in 2011.

Rate Case Proceedings

Pennsylvania

In March 2012, PPL Electric filed a request with the PUC to increase distribution rates by approximately $105 million, effective January 1, 2013.  In its December 28, 2012 final order, the PUC approved a 10.4% return on equity and a total distribution revenue increase of about $71 million.  The approved rates became effective January 1, 2013.

Also, in its December 28, 2012 final order, the PUC ordered PPL Electric to file a proposed Storm Damage Expense Rider within 90 days following the order.  PPL Electric plans to file a proposed Storm Damage Expense Rider with the PUC and, as part of that filing, request recovery of the $28 million of qualifying storm costs incurred as a result of the October 2012 landfall of Hurricane Sandy.

Kentucky

In June 2012, LG&E and KU filed requests with the KPSC for increases in annual base electric rates of approximately $62 million at LG&E and approximately $82 million at KU and an increase in annual base gas rates of approximately $17 million at LG&E.  In November 2012, LG&E and KU along with all of the parties filed a unanimous settlement agreement.  Among other things, the settlement provided for increases in annual base electric rates of $34 million at LG&E and $51 million at KU and an increase in annual base gas rates of $15 million at LG&E.  The settlement agreement also included revised depreciation rates that result in reduced annual electric depreciation expense of approximately $9 million for LG&E and approximately $10 million for KU.  The settlement agreement included an authorized return on equity at LG&E and KU of 10.25%.  On December 20, 2012, the KPSC issued orders approving the provisions in the settlement agreement.  The new rates became effective on January 1, 2013.  In addition to the increased base rates, the KPSC approved a gas line tracker mechanism for LG&E to provide for recovery of costs associated with LG&E's gas main replacement program, gas service lines and risers.

Regional Transmission Line Expansion Plan

Susquehanna-Roseland

In 2007, PJM directed the construction of a new 150-mile, 500-kilovolt transmission line between the Susquehanna substation in Pennsylvania and the Roseland substation in New Jersey that it identified as essential to long-term reliability of the Mid-Atlantic electricity grid.  PJM determined that the line was needed to prevent potential overloads that could occur on several existing transmission lines in the interconnected PJM system.  PJM directed PPL Electric to construct the portion of the Susquehanna-Roseland line in Pennsylvania and Public Service Electric & Gas Company to construct the portion of the line in New Jersey.
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On October 1, 2012, the National Park Service (NPS) issued its grant proposalRecord of Decision (ROD) on the proposed Susquehanna-Roseland transmission line affirming the route chosen by PPL Electric and Public Service Electric & Gas Company as the preferred alternative under the NPS's National Environmental Policy Act review.  On October 15, 2012, a complaint was filed in the United States District Court for the District of Columbia by various environmental groups, including the Sierra Club, challenging the ROD and seeking to prohibit its implementation; and on December 6, 2012, the groups filed a petition for injunctive relief seeking to prohibit all construction activities until the court issues a final decision on the complaint.  PPL Electric has intervened in the lawsuit.  The chosen route had previously been selectedapproved by the DOE for award negotiations.PUC and New Jersey Board of Public Utilities.

On December 13, 2012, PPL Electric received federal construction and right of way permits to build on National Park Service lands.

Construction activities have begun on portions of the 101-mile route in Pennsylvania.  The line is expected to be completed before the peak summer demand period of 2015.  At December 31, 2012, PPL Electric's estimated share of the project cost was $560 million.

PPL and PPL Electric cannot predict the ultimate outcome or timing of any legal challenges to the project or what additional actions, if any, PJM might take in the event of a further delay to its 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, three new substations and upgrades to adjacent facilities).  The incentives were specifically tailored to address the risks and challenges PPL Electric will face in building the project.  The FERC granted the incentive for inclusion of all prudently incurred construction work in progress (CWIP) costs in rate base and denied the request for a 100 basis point adder to the return on equity incentive.  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 will submit to the FERC in March 2013.  PPL Electric expects the project to be completed in 2017.  At December 31, 2012, PPL Electric estimates the total project costs to be approximately $200 million with approximately $190 million qualifying for the CWIP incentive.

Legislation - Regulatory Procedures and Mechanisms

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 PPL Electric filed a petition requesting permission to establish a DSIC on January 15, 2013, with rates proposed to be effective beginning May 1, 2013.

FERC Formula Rates

In March 2012, PPL Electric filed a request with the FERC seeking recovery of its regulatory asset related to the deferred state tax liability that existed at the time of the transition from the flow-through treatment of state income taxes to full normalization.  This change in tax treatment occurred in 2008 as a result of prior FERC initiatives that transferred regulatory jurisdiction of certain transmission assets from the PUC to FERC.  At December 31, 2012 and December 31, 2011, $52 million and $53 million respectively, are classified as taxes recoverable through future rates and included on the Balance Sheets in "Other Noncurrent Assets - Regulatory assets."  In May 2012, the FERC issued an order approving PPL Electric's request to recover the deferred tax regulatory asset over a 34 year period beginning June 1, 2012.

U.K. Tax Rate Change

In July 2012, the U.K.'s Finance Act of 2012 (the Act) became effective.  The Act 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 of these award negotiations.changes, PPL recognized a deferred tax benefit of $75 million in 2012.
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Ofgem Review of Line Loss Calculation

WPD had a $94 million liability recorded at December 31, 2012, compared with $170 million at December 31, 2011, related to the close-out of line losses for the prior price control period, DPCR4.  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.  In October 2011, Ofgem issued a consultation paper citing two potential changes to the methodology, both of which would result in a reduction of the liability.  In March 2012, Ofgem issued a decision regarding the preferred methodology.  In July 2012, Ofgem issued a consultation paper regarding certain aspects of the preferred methodology as it relates to the DPCR4 line loss incentive/penalty and a proposal to delay the target date for making a final decision until April 2013.  In October 2012, a license modification was issued to allow Ofgem to publish the final decisions on these matters by April 2013.  In November 2012, Ofgem issued an additional consultation on the final DPCR4 line loss close-out that published values for each DNO and further indicated the preferred methodology that would replace the methodology under WPD's licenses.  Based on applying the preferred methodology for DPCR4, the liability was reduced by $79 million, with a credit recorded in "Utility" on the Statement of Income, to reflect what WPD expects to be the final close-out settlement under Ofgem's preferred methodology.  This consultation also confirmed the final decisions will be published by April 2013.  In February 2013, Ofgem issued additional consultation proposing to delay the April 2013 decision date.  PPL cannot predict when this matter will be resolved.

Ofgem also stated in the November 2012 consultation that the line loss incentive implemented at the last rate review will be withdrawn and no incentive will apply for the DPCR5 period.  That decision resulted in the elimination of the DPCR5 liability of $11 million, with a credit recorded in "Utility" on the Statement of Income.

Equity Forward Contract

In April 2012, PPL made a registered underwritten public offering of 9.9 million shares of its common stock.  In conjunction with that offering, the underwriters exercised an option to purchase 591 thousand additional shares of PPL common stock solely to cover over-allotments.

In connection with the registered public offering, PPL entered into forward sale agreements with two counterparties covering the 9.9 million shares of PPL's common stock.  Settlement of these initial forward sale agreements will occur no later than April 2013.  As a result of the underwriters' exercise of the overallotment option, PPL entered into additional forward sale agreements covering the additional 591 thousand shares of PPL common stock.  Settlement of the subsequent forward sale agreements will occur no later than July 2013.

PPL will not receive any proceeds or issue any shares of common stock until settlement of the forward sale agreements.  PPL intends to use any net proceeds that it receives upon settlement to repay short-term debt obligations and for other general corporate purposes.

The forward sale agreements are classified as equity transactions.  As a result, no amounts will be recorded in the consolidated financial statements until the settlement of the forward sale agreements.  Prior to those settlements, the only impact to the financial statements will be the inclusion of incremental shares within the calculation of diluted EPS using the treasury stock method.  See Note 7 to the Financial Statements for additional information.

2010 Equity Units

During 2013, two events will occur related to the components of the 2010 Equity Units.  PPL will receive proceeds of $1.150 billion through the issuance of PPL common stock to settle the 2010 Purchase Contracts and PPL Capital Funding expects to remarket the 4.625% Junior Subordinated Notes due 2018.  See Note 7 to the Financial Statements for additional information.

Redemption of PPL Electric Preference Stock

In June 2012, PPL Electric redeemed all 2.5 million shares of its 6.25% Series Preference Stock, par value $100 per share.  The price paid for the redemption was the par value, without premium ($250 million in the aggregate).  At December 31, 2011, the preference stock was reflected in "Noncontrolling Interests" on PPL's Balance Sheet.
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Results of Operations

The "Statement of Income Analysis" explains the year-to-year changes in significant earnings components, including certain income statement line items, Kentucky Gross Margins, Pennsylvania Gross Delivery Margins and Unregulated Gross Energy Margins.

On April 1, 2011, PPL presents tablescompleted its acquisition of WPD Midlands.  As PPL is consolidating WPD Midlands on a one-month lag, consistent with its accounting policy on consolidation of foreign subsidiaries, a full year of WPD Midlands' results of operations are included in PPL's results for 2012, and eight months of WPD Midlands' results of operations are included in PPL's results for 2011, with no comparable amounts for 2010.  When discussing PPL's results of operations for 2012 compared with 2011 and 2011 compared with 2010, the results of WPD Midlands are isolated for purposes of comparability.  WPD Midlands' results are included within "Segment Results - U.K. Regulated Segment (formerly the International Regulated Segment, renamed in 2012)."  See Note 10 to the Financial Statements for additional information regarding the acquisition.

On November 1, 2010, PPL completed its acquisition of LKE.  LKE's results of operations are included in PPL's results for the full year of 2012 and 2011, while 2010 includes LKE's operating results for the two months ended December 31, 2010.  When discussing PPL's results of operations for 2011 compared with 2010, the results of LKE are isolated for purposes of comparability.  LKE's results are shown separately within "Segment Results - Kentucky Regulated Segment."  See Note 10 to the Financial Statements for additional information regarding the acquisition.

Tables analyzing changes in amounts between periods within "Segment Results" 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.

Earnings
Earnings         
           
   2012  2011  2010 
           
Net Income Attributable to PPL Shareowners $ 1,526  $ 1,495  $ 938 
EPS - basic $ 2.61  $ 2.71  $ 2.17 
EPS - diluted $ 2.60  $ 2.70  $ 2.17 

Kentucky Regulated Segment

The Kentucky Regulated segment consists primarily of LKE's results from the operation of regulated electricity generation, transmission and distribution assets, primarily in Kentucky, as well as in Virginia and Tennessee.  This segment also includes LKE's results from the regulated distribution and sale of natural gas in Kentucky.

Net income attributableIncome Attributable to PPL andShareowners includes the related EPS were:following results:

  2009  2008  2007 
          
Net income attributable to PPL $407  $930  $1,288 
EPS - basic $1.08  $2.48  $3.37 
EPS - diluted $1.08  $2.47  $3.34 
   2012  2011  % Change 2010 (a)
            
Utility revenues $ 2,759  $ 2,793   (1) $ 493 
Fuel   872    866   1    139 
Energy purchases   195    238   (18)   68 
Other operation and maintenance   778    751   4    139 
Depreciation   346    334   4    49 
Taxes, other than income   46    37   24    2 
 Total operating expenses   2,237    2,226      397 
Other Income (Expense) - net   (15)   (1)  1,400    (1)
Other-Than-Temporary Impairments   25     n/a   
Interest Expense (b)   219    217   1    55 
Income Taxes   80    127   (37)   16 
Income (Loss) from Discontinued Operations (net of income taxes)   (6)   (1)  500    2 
Net Income Attributable to PPL Shareowners $ 177  $ 221   (20) $ 26 

(a)Represents the results of operations for the two-month period from November 1, 2010 through December 31, 2010.
(b)Includes allocated interest expense of $68 million in 2012, $70 million in 2011 and $31 million in 2010 related to the 2010 Equity Units and interest rate swaps.
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The changes in net income attributable to PPL from year to yearthe components of the Kentucky Regulated segment's results between 2012 and 2011 were in part, due to several specialthe following factors, which reflect reclassifications for items included in Kentucky Gross Margins and certain items that management considers significant.  Detailsspecial.  See additional detail of these special items in the table below.  The 2011 and 2010 comparison has not been included as the periods are provided within the reviewnot comparable (2010 includes two months of each segment's earnings.activity as LKE was acquired on November 1, 2010).

2012 vs. 2011
Kentucky Gross Margins$ (8)
Other operation and maintenance (16)
Depreciation (10)
Taxes, other than income (9)
Other Income (Expense) - net (14)
Interest Expense (2)
Income Taxes 31 
Special items, after-tax (16)
Total$ (44)

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

·
Higher other operation and maintenance in 2012 compared with 2011 primarily due to $11 million of expenses related to an increased scope of scheduled outages and a $6 million credit to establish a regulatory asset recorded when approved in 2011 related to 2009 storm costs.

·Higher depreciation in 2012 compared with 2011 due to PP&E additions.

·Lower other income (expense) - net in 2012 compared with 2011 primarily due to losses from the EEI investment.

·Lower income taxes in 2012 compared with 2011 primarily due to lower pre-tax income.

The year-to-year changes in significant earnings components, including domestic gross energy margins by region and significant income statement linefollowing after-tax gains (losses), which management considers special items, are explained inalso impacted the "Statement of Income Analysis."Kentucky Regulated segment's results.

PPL's
   Income Statement           
   Line Item 2012  2011   2010 
             
Adjusted energy-related economic activity, net, net of tax of $0, ($1), $1Utility Revenues     $ 1   $ (1)
Impairments:            
 Other asset impairments, net of tax of $10, $0, $0 (a)Other-Than-Temporary-Impairments $ (15)        
LKE acquisition-related adjustments:            
 Net operating loss carryforward and other tax-related adjustmentsIncome Taxes and Other O&M   4         
Other:            
 LKE discontinued operations, net of tax of $4, $1, ($2) (b)Disc. Operations   (5)    (1)    2 
Total  $ (16)  $   $

(a)KU recorded an impairment of its equity method investment in EEI.  See Note 18 to the Financial Statements for additional information.
(b)2012 includes an adjustment to an indemnification liability.

2013 Outlook

Excluding special items, PPL projects higher segment earnings beyond 2009in 2013 compared with 2012, primarily driven by electric and gas base rate increases effective January 1, 2013, returns on additional environmental capital investments and retail load growth, partially offset by higher operation and maintenance.

Earnings in future periods are subject to various risks and uncertainties.  See "Forward-Looking Information," "Item 1. Business," "Item 1A. Risk Factors," the rest of this Item 7 and Note 14Notes 6 and 15 to the Financial Statements for a discussion of the risks, uncertainties and factors that may impact PPL's future earnings.

U.K. Regulated Segment Results

Net income attributableThe U.K. Regulated segment consists primarily of the regulated electric distribution operations in the U.K.  As a result of the WPD Midlands acquisition on April 1, 2011, the U.K. Regulated segment includes eight months of WPD Midlands' results in 2011.  Similar to PPL by segment was:
WW, WPD Midlands' results are recorded on a one-month lag.
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Net Income Attributable to PPL Shareowners includes the following results (includes PPL WW and WPD Midlands on a consolidated basis, except for 2012 and 2011 acquisition-related adjustments, which are shown separately):

  2009 2008 2007
             
Supply $40  $479  $568 
International Delivery  243   290   610 
Pennsylvania Delivery  124   161   110 
Total $407  $930  $1,288 
   2012  2011  2010 
           
Utility revenues (a) $ 2,289  $ 1,618  $ 727 
Energy-related businesses   47    35    34 
 Total operating revenues   2,336    1,653    761 
Other operation and maintenance   439    374    182 
Depreciation   279    211    117 
Taxes, other than income   147    113    52 
Energy-related businesses   34    17    17 
 Total operating expenses   899    715    368 
Other Income (Expense) - net   (51)   13    3 
Interest Expense (b)   421    336    135 
Income Taxes   153    98    
WPD Midlands acquisition-related adjustments, net of tax   (9)   (192)   
Net Income Attributable to PPL (c) $ 803  $ 325  $ 261 

(a)Includes $1,423 million in 2012 and $790 million in 2011 for WPD Midlands.
(b)Includes allocated interest expense of $47 million and $38 million for 2012 and 2011 related primarily to the 2011 Equity Units.
(c)Includes $570 million in 2012 and $137 million in 2011 for WPD Midlands, net of acquisition-related adjustments.

The changes in the components of the U.K. Regulated segment's results between these periods were due to the following factors, which reflect reclassifications for certain items that management considers special and with WPD Midlands isolated for comparability purposes.  See additional detail of special items in the table below.  The amounts for PPL WW and WPD Midlands are presented on a constant U.K. foreign currency exchange rate basis in order to isolate the impact of the change in the exchange rate.

   2012 vs. 2011 2011 vs. 2010
PPL WW      
 Utility revenues $ 49  $ 77 
 Other operation and maintenance   (26)   (10)
 Interest expense   16    (14)
 Depreciation   (8)   (2)
 Other   (4)   5 
 Income taxes   17    (55)
WPD Midlands, after-tax   224    240 
U.S.      
 Interest expense and other   (15)   (41)
 Income taxes   (25)   37 
Foreign currency exchange rates, after-tax   (14)   15 
Special items, after-tax   264    (188)
Total $ 478  $ 64 
PPL WW
·The increase in utility revenues in 2012 compared with 2011 was due to the impact of the April 2012 and 2011 price increases which resulted in $78 million of higher utility revenues, partially offset by $13 million of lower volumes due primarily to a downturn in the economy and weather.

The increase in utility revenues in 2011 compared with 2010 was due to the impact of the April 2011 and 2010 price increases that resulted in $76 million of additional revenue.

·The increases in other operation and maintenance in 2012 compared with 2011 and 2011 compared with 2010 were due to higher pension expense resulting from an increase in amortization of actuarial losses.

·The decrease in interest expense in 2012 compared with 2011 was due to lower interest expense on index-linked notes.

The increase in interest expense in 2011 compared with 2010 was due to $11 million of higher interest expense arising from a March 2010 debt issuance.

·The increase in depreciation expense in 2012 compared with 2011 was due to $10 million of depreciation related to PP&E additions.
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·  The decrease in income taxes in 2012 compared with 2011 was due to the tax deductibility of interest on acquisition financing of $12 million and $9 million from a benefit relating to customer contributions for capital expenditures.

The increase in income taxes in 2011 compared with 2010 was due to a $46 million benefit recorded in 2010 for realized capital losses that offset a gain relating to a business activity sold in 1999 and $15 million due to higher 2011 pre-tax income.
WPD Midlands
·  Earnings in 2012 compared with 2011 were affected by an additional four months of results in 2012 totaling $171 million, after-tax.

·  The comparable eight month period was affected by higher utility revenue of $125 million resulting from the April 1, 2012 price increase and $26 million of lower pension expense, partially offset by $26 million of higher taxes due to higher pre-tax income, $25 million of additional interest expense on debt issuances in 2011 and 2012 and $25 million of higher taxes due to a U.K./U.S. intercompany tax transaction.
U.S.
·The increase in interest expense and other in 2012 compared with 2011 was due to $9 million of higher interest expense primarily associated with the 2011 Equity Units issued to finance the WPD Midlands acquisition.

The increase in interest expense and other in 2011 compared with 2010 was due to $38 million of higher interest expense primarily associated with the 2011 Equity Units issued to finance the WPD Midlands acquisition.

·The increase in income taxes in 2012 compared with 2011 was due to $28 million of tax benefits recorded in 2011 as a result of U.K. pension plan contributions and a $20 million adjustment primarily related to the recalculation of 2010 U.K. earnings and profits, partially offset by $25 million from the U.K./U.S. intercompany tax transaction.

The decrease in income taxes in 2011 compared with 2010 was due to a $41 million tax benefit resulting from changes in the taxable amount of planned U.K. cash repatriations, a tax benefit of $28 million from U.K. pension plan contributions and lower income taxes due to lower 2011 pre-tax income.  These tax benefits were partially offset by $24 million of favorable 2010 adjustments to uncertain tax benefits primarily related to Windfall Profits Tax and $11 million of higher income taxes on interest income related to acquisition financing.

Foreign Currency Exchange Rates
·Changes in foreign currency exchange rates negatively affected the segment's earnings for 2012 compared with 2011 and positively affected 2011 compared with 2010.  The weighted-average exchange rates for the British pound sterling, including the effects of currency hedges, were approximately $1.58 in 2012, $1.61 in 2011, and $1.57 in 2010.

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

   Income Statement         
   Line Item 2012  2011  2010 
Foreign currency-related economic hedges, net of tax of $18, ($2), $0 (a)Other Income-net $(33) $ $
WPD Midlands acquisition-related adjustments:          
 2011 Bridge Facility costs, net of tax of $0, $14, $0 (b)Interest Expense     (30)   
 Foreign currency loss on 2011 Bridge Facility, net of tax of $0, $19, $0 (c)Other Income-net     (38)   
 Net hedge gains, net of tax of $0, ($17), $0 (c)Other Income-net     38    
 Hedge ineffectiveness, net of tax of $0, $3, $0 (d)Interest Expense     (9)   
 U.K. stamp duty tax, net of tax of $0, $0, $0 (e)Other Income-net     (21)   
 Separation benefits, net of tax of $4, $26, $0 (f)Other O&M  (11)  (75)   
 Other acquisition-related adjustments, net of tax of ($1), $20, $0(g)    (57)   
Other:          
 Change in U.K. tax rate (h)Income Taxes  75    69    18 
 Windfall profits tax litigation (i)Income Taxes      (39)   12 
 Line loss adjustment, net of tax of ($23), $0, $0 (j)Utility Revenues  74       
Total  $ 107  $ (157) $ 31 
54

(a)Represents unrealized gains (losses) on contracts that economically hedge anticipated earnings denominated in GBP.
(b)Represents fees incurred in connection with establishing the 2011 Bridge Facility.
(c)Represents the foreign currency loss on the repayment of the 2011 Bridge Facility, including a pre-tax foreign currency loss of $15 million associated with proceeds received on the U.S. dollar-denominated senior notes issued by PPL WEM in April 2011 that were used to repay a portion of PPL WEM's borrowing under the 2011 Bridge Facility.  The foreign currency risk was economically hedged with forward contracts to purchase GBP, which resulted in pre-tax gains of $55 million.
(d)Represents a combination of ineffectiveness associated with closed out interest rate swaps and a charge recorded as a result of certain interest rate swaps failing hedge effectiveness testing.
(e)Tax on the transfer of ownership of property in the U.K., which is not tax deductible for income tax purposes.
(f)2012 represents severance compensation and early retirement deficiency costs.  2011 primarily represents severance compensation, early retirement deficiency costs and outplacement services for employees separating from the WPD Midlands companies as a result of a reorganization to transition the WPD Midlands companies to the same operating structure as WPD (South West) and WPD (South Wales).  2011 also includes severance compensation and early retirement deficiency costs associated with certain employees who separated from the WPD Midlands companies, but were not part of the reorganization.
(g)2011 primarily includes $34 million, pre-tax, of advisory, accounting and legal fees which are recorded in "Other Income (Expense) - net" on the Statement of Income; $37 million, pre-tax, of costs, primarily related to the termination of certain contracts, rebranding costs and relocation costs that were recorded to "Other operation and maintenance" expense on the Statement of Income; and $6 million, pre-tax, of costs associated with the integration of certain information technology assets, that were recorded in "Depreciation" on the Statement of Income.
(h)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.  The U.K. Finance Act of 2011, enacted in July 2011, reduced the U.K. statutory income tax rate from 27% to 26% retroactive to April 1, 2011 and reduced the rate from 26% to 25% effective April 1, 2012.  The U.K. Finance Act of 2010, enacted in July 2010, reduced the U.K. statutory income tax rate from 28% to 27% effective April 1, 2011.  As a result, WPD reduced its net deferred tax liabilities and recognized deferred tax benefits in 2012, 2011 and 2010.  WPD Midlands' portion of the deferred tax benefit was $43 million and $35 million for 2012 and 2011.
(i)In 2010, the U.S. Tax Court ruled in PPL's favor in a pending dispute with the IRS concluding that the 1997 U.K. Windfall Profits Tax (WPT) imposed on all U.K. privatized utilities, including PPL's U.K. subsidiary, is a creditable tax for U.S. Federal income tax purposes.  As a result, PPL recorded an income tax benefit in 2010.  In January 2011, the IRS appealed the U.S. 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 and holding that the WPT is not a creditable tax.  As a result of the Third Circuit's adverse determination, PPL recorded a $39 million expense in 2011.  See Note 5 to the Financial Statements for information on 2012 activities related to this case, including the U.S. Supreme Court's decision to grant PPL's petition for a writ of certiorari to review the Third Circuit's opinion.
(j)In November 2012, Ofgem issued additional consultation on the final DPCR4 line loss close-out that published values for each DNO and further indicated the preferred methodology that would replace the methodology under WPD's licenses.  Based on applying the preferred methodology for DPCR4, WPD Midlands reduced its line loss liability by $86 million, pre-tax.  Ofgem also indicated that the line loss incentive implemented at the last rate review will be withdrawn and no incentive will apply for the DPCR5 period.  As a result, WPD Midlands reduced their line loss accrual by $11 million, pre-tax.  This represents WPD Midlands' portion of the adjustment as the original liability was primarily established through purchase accounting.

2013 Outlook

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

Earnings in future periods are subject to various risks and uncertainties.  See "Forward-Looking Information," "Item 1. Business," "Item 1A. Risk Factors," the rest of this Item 7 and Notes 6 and 15 to the Financial Statements for a discussion of the risks, uncertainties and factors that may impact future earnings.

Pennsylvania Regulated Segment

The Pennsylvania Regulated segment includes the regulated electric delivery operations of PPL Electric.

Net Income Attributable to PPL Shareowners includes the following results:
55

   2012  2011  % Change 2011  2010  % Change
Operating revenues                
 External $ 1,760  $ 1,881  (6) $ 1,881  $ 2,448  (23)
 Intersegment   3    11  (73)   11    7  57 
 Total operating revenues   1,763    1,892  (7)   1,892    2,455  (23)
Energy purchases                
 External   550    738  (25)   738    1,075  (31)
 Intersegment   78    26  200    26    320  (92)
Other operation and maintenance   576    530     530    502  
Amortization of recoverable transition costs       n/a       n/a
Depreciation   160    146  10    146    136  
Taxes, other than income   105    104     104    138  (25)
 Total operating expenses   1,469    1,544  (5)   1,544    2,171  (29)
Other Income (Expense) - net   9    7  29    7    7  
Interest Expense   99    98     98    99  (1)
Income Taxes   68    68     68    57  19 
Net Income   136    189  (28)   189    135  40 
Net Income Attributable to Noncontrolling Interests (Note 3)   4    16  (75)   16    20  (20)
Net Income Attributable to PPL Shareowners $ 132  $ 173  (24) $ 173  $ 115  50 

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

  2012 vs. 2011 2011 vs. 2010
       
Pennsylvania Gross Delivery Margins $ 19  $ 66 
Other operation and maintenance   (50)   4 
Depreciation   (14)   (10)
Taxes, other than income   (9)   4 
Other   1    1 
Income Taxes      (11)
Noncontrolling Interests   12    4 
Total $ (41) $ 58 

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

·  Higher other operation and maintenance for 2012 compared with 2011, primarily due to $17 million in higher payroll-related costs due to less project costs being capitalized in 2012, higher support group costs of $11 million and $10 million for increased vegetation management.

·  Higher depreciation for 2012 compared with 2011 and 2011 compared with 2010 primarily due to PP&E additions.

·  Higher taxes, other than income for 2012 primarily due to a $10 million tax provision related to gross receipts tax.

·Income taxes were flat in 2012 compared with 2011 primarily due to the $22 million impact of lower 2012 pre-tax income primarily offset by $9 million of depreciation not normalized and $9 million of income tax return adjustments, largely related to changes in flow-through regulated tax depreciation.

Income taxes were higher in 2011 compared with 2010, due to the $26 million impact of higher 2011 pre-tax income, partially offset by a $14 million tax benefit related to changes in flow-through regulated tax depreciation.

·  Lower noncontrolling interests in 2012 compared with 2011 due to PPL Electric's redemption of preference securities in June 2012.

2013 Outlook

PPL projects higher segment earnings in 2013 compared with 2012, due to higher distribution revenues from a distribution base rate increase effective January 1, 2013, and higher transmission margins, partially offset by higher depreciation.

Earnings in future periods are subject to various risks and uncertainties.  See "Forward-Looking Information," "Item 1. Business," "Item 1A. Risk Factors," the rest of this Item 7 and Notes 6 and 15 to the Financial Statements for a discussion of the risks, uncertainties and factors that may impact future earnings.
56

Supply Segment

The Supply segment primarily consists of the domestic energy marketing and trading activities, as well as the competitive generation and development operations of PPL Energy Supply.  In December 2009,2011 and 2010, PPL Maine sold its 8.33% ownership interest in Wyman Unit 4.  In November 2009, PPL MaineEnergy Supply subsidiaries completed the sale of the majority of its hydroelectric generation business.  In May 2009, PPL Generation signed a definitive agreement to sell its Long Island generation business and expects the sale to close on or about February 26, 2010.  In August 2007, PPL completed the sale of its domestic telecommunication operations.  See Notes 8 and 9 to the Financial Statements for additional information.

The Supply segment results reflect the classification of the Long Island generation business, the majority of the Maine hydroelectric generation business, and the 8.33% ownership interest in Wyman Unit 4,several businesses, which have been classified as Discontinued Operations.  See Note 9 to the Financial Statements for additional information.

Supply segment net income attributableNet Income Attributable to PPL was:Shareowners includes the following results:

 2009 2008 2007  2012  2011  % Change 2011  2010  % Change
Energy revenues       Energy revenues            
External (a) $3,227 $3,371 $1,576 
Intersegment 1,806 1,826 1,810 
External (a) $ 4,970  $ 5,938   (16) $ 5,938  $ 4,444   34 
Intersegment  79   26   204   26   320   (92)
Energy-related businesses  391   486   732 Energy-related businesses   461    472   (2)   472    375   26 
Total operating revenues  5,424   5,683   4,118 
       Total operating revenues   5,510    6,436   (14)   6,436    5,139   25 
Fuel and energy purchases       
External (a) 3,608 3,108 1,419 
Intersegment 70 108 156 
Fuel (a)Fuel (a)  965   1,080     1,080   1,096   
Energy PurchasesEnergy Purchases            
External (a)  1,810   2,277   (21)  2,277   1,344   69 
Intersegment  2   4   (50)  4   3   33 
Other operation and maintenance 867 827 707 Other operation and maintenance  1,032   882   17   882   934   (6)
Depreciation 226 193 163 Depreciation  315   262   20   262   254   3 
Taxes, other than income 29 19 31 Taxes, other than income  68   72   (6)  72   46   57 
Energy-related businesses  380   467   745 Energy-related businesses   450    467   (4)   467    366   28 
Total operating expenses  5,180   4,722   3,221 
       Total operating expenses   4,642    5,044   (8)   5,044    4,043   25 
Other Income - net 50 24 40 
Other Income (Expense) - netOther Income (Expense) - net  18   43   (58)  43   (9)  (578)
Other-Than-Temporary Impairments 18 36 3 Other-Than-Temporary Impairments  2   6   (67)  6   3   100 
Interest Expense 191 200 154 Interest Expense  222   192   16   192   224   (14)
Income Taxes 31 283 221 Income Taxes  247   463   (47)  463   228   103 
Income (Loss) from Discontinued Operations  (13)  15   12 Income (Loss) from Discontinued Operations      3   (100)   3    (19)  (116)
Net Income 41 481 571 Net Income  415   777   (47)  777   613   27 
Net Income Attributable to Noncontrolling Interests  1   2   3 Net Income Attributable to Noncontrolling Interests   1    1      1    1   
Net Income Attributable to PPL $40  $479  $568 
Net Income Attributable to PPL ShareownersNet Income Attributable to PPL Shareowners $ 414  $ 776   (47) $ 776  $ 612   27 

(a)Includes the impact from energy-related economic activity.  See "Commodity Price Risk (Non-trading) - Economic Activity" in Note 1819 to the Financial Statements for additional information.

The after-tax changes in net income attributable to PPLthe components of the Supply segment's results between these periods were due to the following factors.factors, which reflect reclassifications for items included in Unregulated Gross Energy Margins and certain items that management considers special.  See additional detail of these special items in the table below.


  2009 vs. 2008 2008 vs. 2007
       
Eastern U.S. non-trading margins $(3) $(62)
Western U.S. non-trading margins  20   5 
Net energy trading margins  81   (95)
Energy-related businesses  (3)  (4)
Other operation and maintenance  (30)  18 
Depreciation  (19)  (18)
Taxes, other than income  (6)  7 
Other income - net  9   (8)
Interest expense  5   (28)
Income taxes  (16)  (61)
Discontinued operations (Note 9)  (9)  3 
Other  1   2 
Special items  (469)  152 
  $(439) $(89)
  2012 vs. 2011 2011 vs. 2010
       
Unregulated Gross Energy Margins $ (197) $ (405)
Other operation and maintenance   (91)   (63)
Depreciation   (53)   (8)
Taxes, other than income   8    (10)
Other Income (Expense) - net   (26)   22 
Interest Expense   (20)   (12)
Other   5    (4)
Income Taxes   136    107 
Discontinued operations, after-tax - excluding certain revenues and expenses included in margins      17 
Special items, after-tax   (124)   520 
Total $ (362) $ 164 

·See "Domestic Gross Energy Margins""Statement of Income Analysis - Margins - Changes in Non-GAAP Financial Measures" for an explanation of non-trading margins and net energy trading margins.Unregulated Gross Energy Margins.

·
OtherHigher other operation and maintenance expenses increased in 20092012 compared with 2008,2011 due to higher costs at PPL Susquehanna of $27 million including refueling outage costs, payroll-related costs and project costs, $18 million due to the Ironwood Acquisition, $13 million due to eastern fossil and hydroelectric unit outages, $11 million of higher pension expense and $10 million of higher charges from support groups.

Higher other operation and maintenance in 2011 compared with 2010 primarily due to higher costs at PPL Susquehanna of $27 million largely due to unplanned outages, the refueling outage and payroll-related costs, $23 million higher costs at eastern fossil and hydroelectric units largely due to outages, and $12 million higher net costs at western fossil and hydroelectric units, largely resulting from insurance recoveries received in 2010.
57

·Higher depreciation in 2012 compared with 2011 primarily due to increased payroll-related costs, higher contractor-related costsa $24 million impact from PP&E additions and $17 million due to the Ironwood Acquisition.

·Lower taxes other costs at PPL's generation plants.
Other operation and maintenance expenses decreasedthan income in 20082012 compared with 2007,2011 primarily due to lower costs at PPL's nuclear power plants and lower defined benefit costs.
capital stock tax.

 
·
Depreciation expense increasedHigher taxes other than income in 20092011 compared with 2008,2010 primarily due to the scrubbers at Brunner Island and Montour and the portions of the Susquehanna uprate projects that were placedhigher capital stock tax.

·Lower other income (expense) - net in service in 2008 and 2009.
Depreciation expense increased in 20082012 compared with 2007, primarily due to the Montour scrubbers2011 and the Susquehanna uprate project that were placedhigher other income (expense) - net in service in 2008.
·Interest expense increased in 20082011 compared with 2007, primarily due to increased interest on long-term debt resulting from new issuances, partially offset by hedging activities.
·
Income taxes increased in 2009 compared with 2008, in part due to lower domestic manufacturing deductions in 2009.
Income taxes increased in 2008 compared with 2007, primarily due to the loss of synfuel tax credits as the projects ceased operation at the end of 2007.
·Special items decreased in 2009 compared with 2008,2010 primarily due to a $476$22 million after-tax changegain on the July 2011 redemption of Senior Secured Bonds.

·Higher interest expense in energy-related economic activity.  The change is2012 compared with 2011 primarily the result of certain powerdue to hedging activity, which increased interest expense by $30 million and gas cash flow hedges failing hedge effectiveness testing in the third and fourth quarters of 2008, as well as the first quarter of 2009.  Hedge accounting is not permitted for the quarter in which this occurs and, accordingly, the entire change in fair value for the periods that failed was recorded$12 million related to the income statement.  However, these transactions were not dedesignated as hedges, as prospective regression analysis demonstrated that these hedges are expected to be highly effective over their term.  For 2008, an after-tax gain of $298 million was recognized in earningsdebt assumed as a result of these hedge failures.  During the second, thirdIronwood Acquisition, partially offset by $11 million of lower interest on short-term borrowings and fourth quarters$4 million of 2009, fewer power and gas cash flow hedges failed hedge effectiveness testing; therefore, a portion of the previously recognized unrealized gains recorded in the second half of 2008 and the first quarter of 2009 associated with these hedges were reversed.  For 2009, after-tax losses of $215 million were recognized in earnings.higher capitalized interest.

Higher interest expense in 2011 compared with 2010 of $13 million primarily due to hedging activity and $8 million due to short-term borrowings, partially offset by $15 million of higher capitalized interest.

·Lower income taxes in 2012 compared with 2011 due to lower 2012 pre-tax income, which reduced income taxes by $151 million and $23 million related to lower adjustments to valuation allowances on Pennsylvania net operating losses, partially offset by $21 million related to the impact of prior period tax return adjustments.

Lower income taxes in 2011 compared with 2010 due to lower 2011 pre-tax income, which reduced taxes by $204 million and a $26 million reduction in deferred tax liabilities related to an updated blended state tax rate resulting from a change in state tax apportionment.  These decreases were partially offset by $101 million related to adjustments to valuation allowances on Pennsylvania net operating losses, $16 million in favorable adjustments to uncertain tax benefits recorded in 2010 and an $11 million decrease in the domestic manufacturing deduction resulting from revised bonus depreciation estimates.

The following after-tax amounts,gains (losses), which management considers special items, also impacted the Supply segment's earnings.results.

  2009 2008 2007
             
Energy-related economic activity (Note 18) $(225) $251  $32 
Sales of assets            
Long Island generation business (a)  (33)        
Interest in Wyman Unit 4 (Note 9)  (4)        
Majority of Maine hydroelectric generation business (Note 9)  22         
Domestic telecommunication operations (Note 8)          (23)
Impairments            
Impacts from emission allowances (b)  (19)  (25)    
Other asset impairments (c)  (4)  (15)    
Adjustments - NDT investments (d)      (17)    
Transmission rights (e)          (13)
Workforce reduction (Note 12)  (6)  (1)  (4)
Other            
Change in tax accounting method related to repairs (Note 5)  (21)        
Montana hydroelectric litigation (Note 14)  (3)        
Synthetic fuel tax adjustment (Note 14)      (13)    
Montana basin seepage litigation (Note 14)      (5)    
Off-site remediation of ash basin leak (Note 14)      1     
Settlement of Wallingford cost-based rates (f)          33 
PJM billing dispute          (1)
Total $(293) $176  $24 
   Income Statement         
   Line Item 2012  2011  2010 
           
Adjusted energy-related economic activity, net, net of tax of ($26), ($52), $85(a) $ 38  $ 72  $ (121)
Sales of assets:          
 Maine hydroelectric generation business, net of tax of $0, $0, ($9) (b)Disc. Operations         15 
 Sundance indemnification, net of tax of $0, $0, $0Other Income-net         1 
Impairments:          
 Emission allowances, net of tax of $0, $1, $6 (c)Other O&M      (1)   (10)
 Renewable energy credits, net of tax of $0, $2, $0Other O&M      (3)   
 Adjustments - nuclear decommissioning trust investments, net of tax of ($2), $0, $0Other Income-net   2       
 Other asset impairments, net of tax of $0, $0, $0Other O&M   (1)      
LKE acquisition-related adjustments:          
 Monetization of certain full-requirement sales contracts, net of tax of $0, $0, $89(d)         (125)
 Sale of certain non-core generation facilities, net of tax of $0, $0, $37 (e)Disc. Operations      (2)   (64)
 Discontinued cash flow hedges and ineffectiveness, net of tax of $0, $0, $15 (f)Other Income-net         (28)
 Reduction of credit facility, net of tax of $0, $0, $4 (g)Interest Expense         (6)
Other:          
 Montana hydroelectric litigation, net of tax of $0, ($30), $22(h)      45    (34)
 Litigation settlement - spent nuclear fuel storage, net of tax of $0, ($24), $0 (i)Fuel      33    
 Health care reform - tax impact (j)Income Taxes         (8)
 Montana basin seepage litigation, net of tax of $0, $0, ($1)Other O&M         2 
 Counterparty bankruptcy, net of tax of $5, $5, $0 (k)Other O&M   (6)   (6)   
 Wholesale supply cost reimbursement, net of tax of $0, ($3), $0(l)   1    4    
 Ash basin leak remediation adjustment, net of tax of ($1), $0, $0Other O&M   1       
 Coal contract modification payments, net of tax of $12, $0, $0 (m)Fuel   (17)      
Total  $ 18  $ 142  $ (378)

(a)See "Reconciliation of Economic Activity" below.
(b)Gains recorded on the completion of the sale of the Maine hydroelectric generation business.  See Note 9 to the Financial Statements for additional information.
(c)Primarily represents impairment charges of sulfur dioxide emission allowances.
(d)In July 2010, in order to raise additional cash for the LKE acquisition, certain full-requirement sales contracts were monetized that resulted in cash proceeds of $249 million.  See "Monetization of Certain Full-Requirement Sales Contracts" in Note 19 to the Financial Statements for additional information.  $343 million of pre-tax gains were recorded to "Wholesale energy marketing" and $557 million of pre-tax losses were recorded to "Energy purchases" on the Statement of Income.
58

(e)Consists primarily of the initial impairment charge recorded in June 2009 when thisthe business was classified as held for sale.  See Note 9 to the Financial Statements for additional information oninformation.
(f)As a result of the expected net proceeds from the anticipated sale.sale of certain non-core generation facilities, coupled with the monetization of certain full-requirement sales contracts, debt that had been planned to be issued by PPL Energy Supply in 2010 was no longer needed.  As a result, hedge accounting associated with interest rate swaps entered into by PPL in anticipation of a debt issuance by PPL Energy Supply was discontinued.
(b)(g)In October 2010, PPL Energy Supply made borrowings under its Syndicated Credit Facility in order to enable a subsidiary to make loans to certain affiliates to provide interim financing of amounts required by PPL to partially fund PPL's acquisition of LKE.  Subsequent to the repayment of such borrowing, the capacity was reduced, and as a result, PPL Energy Supply wrote off deferred fees in 2010.
(h)
2009 primarily consistsIn March 2010, the Montana Supreme Court substantially affirmed a June 2008 Montana District Court decision regarding lease payments for the use of certain Montana streambeds.  In 2010, PPL Montana recorded a pre-tax charge of $37$56 million, relatedrepresenting estimated rental compensation for years prior to sulfur dioxide emission allowances.2010, including interest.  Of this total charge $47 million, pre-tax, was recorded to "Other operation and maintenance" and $9 million, pre-tax, was recorded to "Interest Expense" on the Statement of Income.  In August 2010, PPL Montana filed a petition for a writ of certiorari with the U.S. Supreme Court requesting the Court's review of this matter.  In June 2011, the U.S. Supreme Court granted PPL Montana's petition.  In February 2012, the U.S. Supreme Court overturned the Montana Supreme Court decision and remanded the case to the Montana Supreme Court for further proceedings consistent with the U.S. Supreme Court's opinion.  Prior to the U.S. Supreme Court decision, $4 million, pre-tax, of interest expense on the rental compensation covered by the court decision was accrued in 2011.  As a result of the U.S. Supreme Court decision, PPL Montana reversed its total pre-tax loss accrual of $89 million, which had been recorded prior to the U.S. Supreme Court decision, of which $79 million pre-tax is considered a special item because it represented $65 million of rent for periods prior to 2011 and $14 million of interest accrued on the portion covered by the prior court decision.  These amounts were credited to "Other operation and maintenance" and "Interest Expense" on the Statement of Income.  See Note 17 to the Financial Statements for additional information.
2008 consists of charges related to annual nitrogen oxide allowances and put options.  See Note 14 to the Financial Statements for additional information.
(c)2008 primarily consists of a pre-tax charge of $22 million related to the cancellation of the Holtwood hydroelectric expansion project.  See Note 815 to the Financial Statements for additional information.
(d)(i)In May 2011, PPL Susquehanna entered into a settlement agreement with the U.S. Government relating to PPL Susquehanna's lawsuit, seeking damages for the Department of Energy's failure to accept spent nuclear fuel from the PPL Susquehanna plant.  PPL Susquehanna recorded credits to fuel expense to recognize recovery, under the settlement agreement, of certain costs to store spent nuclear fuel at the Susquehanna plant.  This special item represents amounts recorded in 2011 to cover the costs incurred from 1998 through December 2010.
(j)Represents other-than-temporary impairment charges on securities, including reversals of previous impairments when previously impaired securities were sold.
(e)See "Other Operation and Maintenance" for more information on the $23 million pre-tax impairmentincome tax expense recorded in 2007.
(f)In 2003, PPL Wallingford and PPL EnergyPlus sought from the FERC cost-based payments based upon the RMR status of four units at the Wallingford, Connecticut generating facility.  In 2007, as a result of the provisions within Health Care Reform which eliminated the tax deductibility of retiree health care costs to the extent of federal subsidies received by plan sponsors that provide retiree prescription drug benefits equivalent to Medicare Part D Coverage.
(k)In October 2011, a settlement agreement,wholesale customer, SMGT, filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy code.  In 2012, PPL recognized $55EnergyPlus 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.
(l)In January 2012, PPL received $7 million pre-tax, related to electricity delivered to a wholesale customer in 2008 and 2009, recorded in "Wholesale energy marketing-Realized."  The additional revenue results from several transmission projects approved at PJM for recovery that were not initially anticipated at the time of the electricity auctions and therefore were not included in the auction pricing.  A FERC order was issued in 2011 approving the disbursement of these supply costs by the wholesale customer to the suppliers, therefore, PPL accrued its share of this additional revenue in 2011.
(m)As a result of lower electricity and $4 millionnatural 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) from the table within "Commodity Price Risk (Non-trading) - Economic Activity" in Note 19 to the Financial Statements to the special item identified as "Adjusted energy-related economic activity, net."

    2012  2011  2010 
Operating Revenues         
  Unregulated retail electric and gas $ (17) $ 31  $ 1 
  Wholesale energy marketing   (311)   1,407    (805)
Operating Expenses         
  Fuel   (14)   6    29 
  Energy Purchases   442    (1,123)   286 
Energy-related economic activity (a)   100    321    (489)
Option premiums (b)   (1)   19    32 
Adjusted energy-related economic activity   99    340    (457)
Less:  Unrealized economic activity associated with the monetization of certain         
 full-requirement sales contracts in 2010 (c)         (251)
Less:  Economic activity realized, associated with the monetization of certain         
 full-requirement sales contracts in 2010   35    216    
Adjusted energy-related economic activity, net, pre-tax $ 64  $ 124  $ (206)
            
Adjusted energy-related economic activity, net, after-tax $ 38  $ 72  $ (121)

(a)See Note 19 to the Financial Statements for additional information.
(b)Adjustment for the net deferral and amortization of interest income.option premiums over the delivery period of the item that was hedged or upon realization.  Option premiums are recorded in "Wholesale energy marketing - Realized" and "Energy purchases - Realized" on the Statements of Income.
(c)See "Components of Monetization of Certain Full-Requirement Sales Contracts" below.

2010 Outlook

Excluding special items, PPL projects higher earnings from its Supply segment in 2010 compared with 2009, due to growth in energy margins.  The forecast for growth in energy margins is based on hedged power and fuel prices as well as established capacity prices in PJM.  These positive factors are expected to be partially offset by higher depreciation, financing costs and operation and maintenance expenses.

International Delivery SegmentComponents of Monetization of Certain Full-Requirement Sales Contracts

The International Delivery segment consists primarilyfollowing table provides the components of the electricity distribution operations in the U.K.  In 2007, PPL completed the sale"Monetization of its Latin American businesses.  In 2008, the International Delivery segment recognized income tax benefits and miscellaneous expenses in Discontinued Operations in connection with the dissolution of certain Latin American holding companies.  In 2009, the International Delivery segment recognized $24 million of income tax expense in Discontinued Operations related to a correction of the calculation of tax bases of the Latin American businesses sold in 2007.  See Note 9 to the Financial Statements for additional information.Certain Full-Requirement Sales Contracts" special item.

The International Delivery segment results reflect the classification of its Latin American businesses as Discontinued Operations.
59


International Delivery segment net income attributable to PPL was:

  2009 2008 2007
             
Utility revenues $684  $824  $863 
Energy-related businesses  32   33   37 
Total operating revenues  716   857   900 
Other operation and maintenance  140   186   252 
Depreciation  115   134   147 
Taxes, other than income  57   66   67 
Energy-related businesses  16   14   17 
Total operating expenses  328   400   483 
Other Income - net  (11)  17   26 
Interest Expense  87   144   183 
Income Taxes  20   45   (43)
Income (Loss) from Discontinued Operations  (27)  5   313 
Net Income  243   290   616 
Net Income Attributable to Noncontrolling Interests          6 
Net Income Attributable to PPL $243  $290  $610 

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

  2009 vs. 2008 2008 vs. 2007
U.K.        
Delivery margins $17  $12 
Other operating expenses  7   22 
Other income - net  (4)  (7)
Depreciation  (4)  4 
Interest expense  28   5 
Income taxes  24   24 
Foreign currency exchange rates  (69)  (14)
Gain on transfer of equity investment      (5)
Other  (4)  (3)
Discontinued Operations (Note 9)  (5)  (49)
U.S. interest expense      17 
U.S. income taxes  1   (32)
Gain (loss) on economic hedges (Note 15)  (12)  10 
Other  2   6 
Special items  (28)  (310)
  $(47) $(320)

·Lower U.K. other operating expenses in 2008 compared with 2007, were primarily due to lower compensation and lower pension costs.2010 
  
·Full-requirement sales contracts monetized (a)Lower U.K. interest expense in 2009 compared with 2008, was primarily due$ (68)
Economic activity related to lower inflation rates on U.K. Index-linked Senior Unsecured Notes and lower debt balances.the full-requirement sales contracts monetized (146)
Monetization of certain full-requirement sales contracts, pre-tax (b)$ (214)
  
·
Lower U.K. income taxes in 2009 compared with 2008, were primarily due to HMRC's determination related to the valuation of a business activity sold in 1999 and to the deductibility of foreign currency exchange losses, partially offset by the items in 2008 mentioned below.
Lower U.K. income taxes in 2008 compared with 2007, were primarily due to HMRC's determination related to deductibility of imputed interest on a loan from Hyder and a change in tax law that included the phase-out of tax depreciation on industrial buildings over a four-year period.
  
·Monetization of certain full-requirement sales contracts, after-taxChanges in foreign currency exchange rates negatively impacted U.K. earnings for both periods.  The weighted-average exchange rates for the British pound sterling were approximately $1.53 in 2009, $1.91 in 2008 and $2.00 in 2007.
 
·$Higher U.S. income taxes in 2008 compared with 2007, was primarily due to the change in a U.S. income tax reserve resulting from the lapse in 2007 of an applicable statute of limitations. (125)

The following after-tax amounts, which management considers special items, also impacted the International Delivery segment's earnings.
(a)See "Commodity Price Risk (Non-trading) - Monetization of Certain Full-Requirement Sales Contracts" in Note 19 to the Financial Statements for additional information.
(b)Includes unrealized losses of $251 million, which are reflected in "Wholesale energy marketing - Unrealized economic activity" and "Energy purchases - Unrealized economic activity" on the Statement of Income.  Also includes net realized gains of $37 million, which are reflected in "Wholesale energy marketing - Realized" and "Energy purchases - Realized" on the Statement of Income.

  2009 2008 2007
             
Foreign currency-related economic hedges - unrealized impacts (Note 18) $1         
Sales of assets            
Latin American businesses (Note 9)  (27)     $259 
Impairments  (1)        
Workforce reduction (Note 12)  (2) $(1)  (4)
Other            
Change in U.K. tax rate (Note 5)          54 
Total $(29) $(1) $309 

20102013 Outlook

Excluding special items, PPL projects lower segment earnings from its International Delivery segment in 20102013 compared with 2009, as a result of2012, primarily driven by lower energy prices, higher income taxes,fuel costs, higher operation and maintenance, expenseshigher depreciation and higher financing costs.  These negative factorscosts, which are expected to be partially offset by higher electricity delivery marginscapacity prices and higher nuclear generation output despite scheduled outages for both Susquehanna units to implement a more favorable currency exchange rate.long-term solution to turbine blade issues.

In December 2009, Ofgem completed its rate review forEarnings in future periods are subject to various risks and uncertainties.  See "Forward-Looking Information," "Item 1. Business," "Item 1A. Risk Factors," the five-year period from April 1, 2010 through March 31, 2015.  Ofgem allowed WPD an average increase in total revenues, before inflationary adjustments,rest of 6.9% in each of the five years.  The revenue increase includes reimbursement to electricity distributors for higher operatingthis Item 7 and capital costs to be incurred.  Also, Ofgem set the weighted average cost of capital at 4.7%, which includes pre-tax debt and post-tax equity costs and excludes adjustments for inflation, for all distribution companies.  This is a 0.8% decrease from the previous regulatory period.  Additionally, Ofgem has established strong incentive mechanisms to provide companies significant opportunities to enhance overall returns by improving network efficiency, reliability or customer service.

Pennsylvania Delivery Segment

The Pennsylvania Delivery segment includes the regulated electric delivery operations of PPL Electric.  In October 2008, PPL sold its natural gas distribution and propane businesses.  See Note 9 to the Financial Statements for additional information.

The Pennsylvania Delivery segment results in 2008 and 2007 reflect the classification of PPL's natural gas distribution and propane businesses' as Discontinued Operations.

Pennsylvania Delivery segment net income attributable to PPL was:

  2009 2008 2007
Operating revenues            
External $3,222  $3,293  $3,254 
Intersegment  70   108   156 
Total operating revenues  3,292   3,401   3,410 
             
Fuel and energy purchases            
External  114   163   207 
Intersegment  1,806   1,826   1,810 
Other operation and maintenance  417   410   406 
Amortization of recoverable transition costs  304   293   310 
Depreciation  128   131   132 
Taxes, other than income  194   203   200 
Total operating expenses  2,963   3,026   3,065 
             
Other Income - net  10   14   31 
Interest Expense  118   111   135 
Income Taxes  79   102   81 
Income (Loss) from Discontinued Operations      3   (32)
Net Income  142   179   128 
Net Income Attributable to Noncontrolling Interests  18   18   18 
Net Income Attributable to PPL $124  $161  $110 

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

  2009 vs. 2008 2008 vs. 2007
       
Delivery revenues (net of CTC/ITC amortization, interest expense on transition bonds and ancillary charges) $(16) $32 
Other operation and maintenance  3   (5)
Other income - net  (2)  (10)
Interest expense  (12)  1 
Discontinued operations (Note 9)  (9)  (3)
Other  2   (3)
Special items  (3)  39 
  $(37) $51 

·
Delivery revenues decreased in 2009 compared with 2008, primarily due to unfavorable economic conditions, including industrial customers scaling back on production and the unfavorable impact of weather on sales volumes.  See "Revenue Recognition" in Note 1 to the Financial Statements for information on a true-up of FERC formula-based transmission revenues.
Delivery revenues increased in 2008 compared with 2007, primarily due to a base rate increase effective January 1, 2008 and normal load growth.
·Other operation and maintenance expenses increased in 2008 compared with 2007, primarily due to insurance recovery of storm costs in 2007, higher vegetation management costs and higher regulatory asset amortization.
·Other income - net decreased in 2008 compared with 2007, primarily due to a decrease in intersegment interest income resulting from a decrease in the average balance outstanding on a note receivable and a lower average floating interest rate.
·Interest expense increased in 2009 compared with 2008, primarily due to $400 million of debt issuances in October 2008 that prefunded a portion of August 2009 debt maturities.

The following after-tax amounts, which management considers special items, also impacted the Pennsylvania Delivery segment's earnings.

  2009 2008 2007
             
Sales of assets            
Gas and propane businesses (Note 9)     $(6) $(44)
Impairments $(1)        
Workforce reduction (a)  (5)      (1)
Other            
Change in tax accounting method related to repairs (Note 5)  (3)        
Total $(9) $(6) $(45)

(a)See Note 12 to the Financial Statements for additional information related to the 2009 workforce reduction.

2010 Outlook

Excluding special items, PPL projects lower earnings from its Pennsylvania Delivery segment in 2010 compared with 2009, as a net result of lower distribution revenues, primarily due to continued slow economic growth and weak customer demand; higher operation and maintenance expenses; offset by lower financing costs.

In late March 2010, PPL Electric expects to file a request with the PUC seeking an increase in its distribution rates beginning in January 2011.

See Note 1415 to the Financial Statements for a discussion of itemsthe risks, uncertainties and factors that couldmay impact future earnings, including Pennsylvania legislative and other regulatory activities.earnings.

Statement of Income Analysis --

Domestic Gross Energy Margins

Non-GAAP Financial MeasureMeasures

The following discussion includes financial information prepared in accordance with GAAP, as well as athree non-GAAP financial measure, "Domesticmeasures:  "Kentucky Gross Margins," "Pennsylvania Gross Delivery Margins" and "Unregulated Gross Energy Margins."  The presentation of "Domestic Gross Energy Margins" is intended to supplement the investor's understanding of PPL's domestic non-trading and trading activities by combining applicable income statement line items and related adjustments to calculate a single financial measure.  PPL believes that "Domestic Gross Energy Margins" are useful and meaningful to investors because they provide them with the results of PPL's domestic non-trading and trading activities as another criterion in making their investment decisions.  PPL's management also uses "Domestic Gross Energy Margins" in measuring certain corporate performance goals used in determining variable compensation.  Other companies may use differentThese measures to present the results of their non-trading and trading activities.  Additionally, "Domestic Gross Energy Margins" are not intended to replace "Operating Income," which is determined in accordance with GAAP, as an indicator of overall operating performance.  The following table provides a reconciliation between "Operating Income"Other companies may use different measures to analyze and "Domestic Gross Energy Margins" as definedto report on the results of their operations.  PPL believes that these measures provide additional criteria to make investment decisions.  These performance measures are used, in conjunction with other information, internally by PPL.
senior management and the Board of Directors to manage the Kentucky Regulated, Pennsylvania Regulated and Supply segment operations, analyze each respective segment's actual results compared with budget and, in certain cases, to measure certain corporate financial goals used in determining variable compensation.

  2009 2008 2007
             
Operating Income (a) $961  $1,793  $1,659 
Adjustments:            
Energy-related businesses, net (b)  (27)  (38)  (7)
Other operation and maintenance (a)  1,424   1,423   1,365 
Amortization of recoverable transition costs (a)  304   293   310 
Depreciation (a)  469   458   442 
Taxes, other than income (a)  280   288   298 
Revenue adjustments (c)  (1,705)  (3,219)  (1,981)
Expense adjustments (c)  25   566   (262)
Domestic gross energy margins $1,731  $1,564  $1,824 
PPL's three non-GAAP financial measures include:

·"Kentucky Gross Margins" is a single financial performance measure of the Kentucky Regulated segment'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, returns on capital investments primarily associated with environmental regulations and performance incentives.  Certain costs associated with these mechanisms, primarily ECR and DSM, are recorded as "Other operation and maintenance" and "Depreciation."  As a result, this measure represents the net revenues from the Kentucky Regulated segment's operations.

·"Pennsylvania Gross Delivery Margins" is a single financial performance measure of the Pennsylvania Regulated segment'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 table below.  As a result, this measure represents the net revenues from the Pennsylvania Regulated segment's electric delivery operations.
60


·"Unregulated Gross Energy Margins" is a single financial performance measure of the Supply segment's competitive energy non-trading and trading activities.  In calculating this measure, the Supply segment's energy revenues, which include operating revenues associated with certain Supply segment businesses that are classified as discontinued operations, are offset by the cost of fuel, energy purchases, certain other operation and maintenance expenses, primarily ancillary charges, gross receipts tax, which is recorded in "Taxes, other than income," and operating expenses associated with certain Supply segment businesses that are classified as discontinued operations.  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 table below.  PPL excludes from "Unregulated Gross Energy Margins" the Supply segment's 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 PPL's 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.  Also included in adjusted energy-related economic activity is the ineffective portion of qualifying cash flow hedges, the monetization of certain full-requirement sales contracts and premium amortization associated with options.  This economic activity is 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.
Reconciliation of Non-GAAP Financial Measures

The following tables reconcile "Operating Income" to PPL's three non-GAAP financial measures.

     2012  2011 
          Unregulated            Unregulated       
     Kentucky PA Gross Gross       Kentucky PA Gross Gross      
     Gross Delivery Energy    Operating Gross Delivery Energy     Operating
     Margins Margins Margins Other (a) Income (b) Margins Margins Margins Other (a) Income (b)
                          
Operating Revenues                               
 Utility$ 2,759  $ 1,760     $ 2,289 (d) $ 6,808  $ 2,791  $ 1,881     $ 1,620 (d) $ 6,292 
 PLR intersegment utility                               
  revenue (expense) (e)     (78) $ 78              (26) $ 26        
 Unregulated retail                               
  electric and gas        865    (21)(g)   844          696    30 (g)   726 
 Wholesale energy marketing                               
   Realized        4,412    21 (f)   4,433          3,745    62 (f)   3,807 
   Unrealized economic                               
    activity           (311)(g)   (311)            1,407 (g)   1,407 
 Net energy trading margins        4        4          (2)       (2)
 Energy-related businesses           508     508             507     507 
   Total Operating Revenues  2,759    1,682    5,359    2,486     12,286    2,791    1,855    4,465    3,626     12,737 
                                    
Operating Expenses                               
 Fuel  872       931    34 (h)   1,837    866       1,151    (71)(h)   1,946 
 Energy purchases                               
   Realized  195    550    2,204    48 (f)   2,997    238    738    912    242 (f)   2,130 
   Unrealized economic                               
    activity           (442)(g)   (442)            1,123 (g)   1,123 
 Other operation and                               
  maintenance  101    104    19    2,611     2,835    90    108    16    2,453     2,667 
 Depreciation  51          1,049     1,100    49          911     960 
 Taxes, other than income     91    34    241     366       99    30    197     326 
 Energy-related businesses           484     484             484     484 
 Intercompany eliminations     (3)   3              (11)   3    8     
   Total Operating Expenses  1,219    742    3,191    4,025     9,177    1,243    934    2,112    5,347     9,636 
 Discontinued operations                        12    (12)(i)   
Total$ 1,540  $ 940  $ 2,168  $ (1,539)  $ 3,109  $ 1,548  $ 921  $ 2,365  $ (1,733)  $ 3,101 
61

     2010   
          Unregulated                    
     Kentucky PA Gross Gross                  
     Gross Delivery Energy    Operating            
     Margins (c) Margins Margins Other (a) Income (b)          
                          
Operating Revenues                               
 Utility   $ 2,448     $ 1,220 (d) $ 3,668                 
 PLR intersegment utility                               
  revenue (expense) (e)     (320) $ 320                        
 Unregulated retail                               
  electric and gas        414    1     415                 
 Wholesale energy marketing                               
   Realized        4,511    321 (f)   4,832                 
   Unrealized economic                               
    activity           (805)(g)   (805)                
 Net energy trading margins        2        2                 
 Energy-related businesses           409     409                 
   Total Operating Revenues     2,128    5,247    1,146     8,521                 
                                    
Operating Expenses                               
 Fuel        1,132    103 (h)   1,235                 
 Energy purchases                               
   Realized     1,075    1,389    309 (f)   2,773                 
   Unrealized economic                               
    activity           (286)(g)   (286)                
 Other operation and                               
  maintenance     76    23    1,657     1,756                 
 Amortization of recoverable                               
  transition costs                               
 Depreciation           556     556                 
 Taxes, other than income     129    14    95     238                 
 Energy-related businesses           383     383                 
 Intercompany eliminations     (7)   3    4                     
   Total Operating Expenses     1,273    2,561    2,821     6,655                 
 Discontinued operations        84    (84)(i)                   
Total   $ 855  $ 2,770  $ (1,759)  $ 1,866                 

(a)Represents amounts excluded from Margins.
(b)As reported on the Statements of Income.
(b)(c)LKE was acquired on November 1, 2010.  Kentucky Gross Margins were not used to measure the financial performance of the Kentucky Regulated segment in 2010.
(d)AmountPrimarily represents WPD's utility revenue.  2010 also includes LKE's utility revenues for the two-month period subsequent to the November 1, 2010 acquisition.
(e)Primarily related to PLR supply sold by PPL EnergyPlus to PPL Electric.
(f)Represents energy-related economic activity as described in "Commodity Price Risk (Non-trading) - Economic Activity" within Note 19 to the Financial Statements.  For 2012, "Wholesale energy marketing - Realized" and "Energy purchases - Realized" include a net pre-tax loss of $35 million related to the monetization of certain full-requirement sales contracts.  2011 includes a net pre-tax loss of $216 million related to the monetization of certain full-requirement sales contracts and a net pre-tax gain of $19 million related to the amortization of option premiums.  2010 includes a net pre-tax gain of $37 million related to the monetization of certain full-requirement sales contracts and a net pre-tax gain of $32 million related to the amortization of option premiums.
(g)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 19 to the Financial Statements.
(h)Includes economic activity related to fuel as described in "Commodity Price Risk (Non-trading) - Economic Activity" within Note 19 to the Financial Statements.  2012 includes a net pre-tax loss of $29 million related to coal contract modification payments.  2011 includes pre-tax credits of $57 million for the spent nuclear fuel litigation settlement.
(i)Represents the net of "Energy-related businesses" revenue and expense as reported on the Statements of Income.
(c)The components of these adjustments are detailed in the tables below.

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

  2009 2008 Change
Revenue            
Utility (a) $3,902  $4,114  $(212)
Unregulated retail electric and gas (a)  152   151   1 
Wholesale energy marketing (a)  3,062   3,344   (282)
Net energy trading margins (a)  17   (121)  138 
Revenue adjustments (b)            
WPD utility revenue  (684)  (824)  140 
Domestic delivery component of utility revenue  (1,265)  (1,325)  60 
Other utility revenue  (61)  (52)  (9)
Impact from energy-related economic activity (c)  274   (1,061)  1,335 
Gains from sale of emission allowances (d)  2   6   (4)
Revenues from Supply segment discontinued operations (e)  29   37   (8)
Total revenue adjustments  (1,705)  (3,219)  1,514 
   5,428   4,269   1,159 
Expense            
Fuel (a)  931   1,084   (153)
Energy purchases (a)  2,791   2,187   604 
Expense adjustments (b)            
Impact from energy-related economic activity (c)  (109)  (632)  523 
Domestic electric ancillaries (f)  (43)  (54)  11 
Gross receipts tax (g)  112   113   (1)
Other  15   7   8 
Total expense adjustments  (25)  (566)  541 
   3,697   2,705   992 
Domestic gross energy margins $1,731  $1,564  $167 

  2008 2007 Change
Revenue            
Utility (a) $4,114  $4,114     
Unregulated retail electric and gas (a)  151   102  $49 
Wholesale energy marketing (a)  3,344   1,436   1,908 
Net energy trading margins (a)  (121)  41   (162)
Revenue adjustments (b)            
WPD utility revenue  (824)  (863)  39 
Domestic delivery component of utility revenue  (1,325)  (1,308)  (17)
Other utility revenue  (52)  (48)  (4)
RMR revenues      (52)  52 
Impact from energy-related economic activity (c)  (1,061)  145   (1,206)
Gains from sale of emission allowances (d)  6   109   (103)
Revenues from Supply segment discontinued operations (e)  37   36   1 
Total revenue adjustments  (3,219)  (1,981)  (1,238)
   4,269   3,712   557 
Expense            
Fuel (a)  1,084   890   194 
Energy purchases (a)  2,187   736   1,451 
Expense adjustments (b)            
Impact from energy-related economic activity (c)  (632)  200   (832)
Domestic electric ancillaries (f)  (54)  (50)  (4)
Gross receipts tax (g)  113   112   1 
Other  7       7 
Total expense adjustments  (566)  262   (828)
   2,705   1,888   817 
Domestic gross energy margins $1,564  $1,824  $(260)

(a)As reported on the Statements of Income.
(b)To include/exclude the impact of anycertain revenues and expenses not associated with domestic gross energy margins, consistent with the way management reviews domestic gross energy margins internally.
(c)See Note 18 to the Financial Statements for additional information regarding economic activity.
(d)Includedcertain businesses that are classified as discontinued operations.  These revenues and expenses are not reflected in "Other operation and maintenance" on the Statements of Income.
(e)Represents revenues associated with the Long Island generation business and the majority of the Maine hydroelectric generation business.  See Note 9 to the Financial Statements for additional information.
(f)Included in "Energy purchases" on the Statements of Income.
(g)Included in "Taxes, other than income""Operating Income" on the Statements of Income.

Domestic Gross Energy Margins By RegionChanges in Non-GAAP Financial Measures

Domestic gross energy marginsThe following table shows PPL's three non-GAAP financial measures, as well as the change between periods.  The factors that gave rise to the changes are generated through PPL's non-trading and trading activities.  PPL manages its non-trading energy business on a geographic basis that is aligned with its generation assets.described below the table.
62

   2012  2011  Change 2011  2010  Change
                    
Kentucky Gross Margins (a) $ 1,540  $ 1,548  $ (8) $ 1,548     $ 1,548 
                    
PA Gross Delivery Margins by Component                  
 Distribution $ 730  $ 741  $ (11) $ 741  $ 679  $ 62 
 Transmission   210    180    30    180    176    4 
Total $ 940  $ 921  $ 19  $ 921  $ 855  $ 66 
                    
Unregulated Gross Energy Margins by Region                  
Non-trading                  
 Eastern U.S. $ 1,865  $ 2,018  $ (153) $ 2,018  $ 2,429  $ (411)
 Western U.S.   299    349    (50)   349    339    10 
Net energy trading   4    (2)   6    (2)   2    (4)
Total $ 2,168  $ 2,365  $ (197) $ 2,365  $ 2,770  $ (405)

  2009 2008 Change
Non-trading            
Eastern U.S. $1,391  $1,396  $(5)
Western U.S.  323   289   34 
Net energy trading  17   (121)  138 
Domestic gross energy margins $1,731  $1,564  $167 
(a)LKE was acquired on November 1, 2010.  Kentucky Gross Margins were not used to measure the financial performance of the Kentucky Regulated segment in 2010.

  2008 2007 Change
Non-trading            
Eastern U.S. $1,396  $1,502  $(106)
Western U.S.  289   281   8 
Net energy trading  (121)  41   (162)
Domestic gross energy margins $1,564  $1,824  $(260)
Kentucky Gross Margins

Eastern U.S.

Eastern U.S. non-trading margins were $5 million lowerMargins decreased in 20092012 compared with 2008.  This decrease was2011, primarily due to $6 million of lower wholesale margins, on full-requirement sales contracts resulting from lower market prices.  Retail margins were $2 million lower, as volumes were impacted by unseasonably mild weather during the first four months of 2012.  Total heating degree days decreased demand, and customer migration.  Also contributing11% compared to the decrease were higher average baseload generation fuel costs of 7%,2011, partially offset by a 6% increase in cooling degree days.

PPL acquired LKE on November 1, 2010.  Margins for 2011 are included in PPL's results without comparable amounts for 2010.

Pennsylvania Gross Delivery Margins

Distribution

Margins decreased in 2012 compared with 2011, primarily due to higher coal prices.  Partially offsetting thesea $14 million unfavorable effect of mild weather early in 2012 and lower margins were net gains resulting fromrevenue applicable to certain energy-related costs of $3 million due to fewer PLR customers in 2012, partially offset by a $7 million charge recorded in 2011 to reduce a portion of the settlement of economic positionstransmission service charge regulatory asset associated with rebalancing PPL's portfolios to better align thema 2005 undercollection that was not included in any subsequent rate reconciliations filed with current strategies, higher capacity revenue, higher baseload generation outputthe PUC.

Margins increased in 2011 compared with 2010, largely due to unplanned major outagesthe PPL Electric distribution rate case which increased rates by approximately 1.6% effective January 1, 2011, resulting in 2008,improved residential distribution margins of $68 million.  Additionally, residential volume variances increased margins by an additional $4 million in 2011, compared with 2010, offset by unfavorable weather of $3 million for residential customers in 2011 compared with 2010.  Lastly, lower demand charges and increased efficiency as a 2.2% increaseresult of Act 129 programs resulted in the PLR sales pricesa $5 million decrease in accordance with the PUC Final Order.margins for commercial and industrial customers.

Eastern U.S. non-trading margins were $106 million lowerTransmission

Margins increased in 20082012 compared with 2007.  This decrease was2011, primarily due to higher fuelincreased investment in plant and the recovery of additional costs up 16%, primarily due to higher coal prices.  Also contributing tothrough the decrease was lower baseload generation, down 4%, primarily due to the unplanned outages at the eastern coal-fired units and retirement of the Martins Creek coal-fired units in September 2007.  Partially offsetting these lower margins were higher margins from the hedged sale of generation in the wholesale market and a 1.4% increase in PLR sales prices in accordance with the PUC Final Order.FERC formula-based rates.

Unregulated Gross Energy Margins
Eastern U.S.
The changes in Eastern U.S. non-trading margins were:
63

  2012 vs. 2011 2011 vs. 2010
       
Baseload energy prices $ (121) $ (109)
Baseload capacity prices   (37)   (90)
Intermediate and peaking capacity prices   (17)   (58)
Full-requirement sales contracts (a)   (15)   70 
Impact of non-core generation facilities sold in the first quarter of 2011   (12)   (48)
Higher nuclear fuel prices   (12)   (10)
Net economic availability of coal and hydroelectric units (b)   (10)   (72)
Higher coal prices   (2)   (40)
Nuclear generation volume (c)      (29)
Intermediate and peaking Spark Spreads   11    24 
Retail electric   15    (7)
Ironwood Acquisition, which eliminated tolling expense (d)   41    
Monetization of certain deals that rebalanced the business and portfolio      (41)
Other   6    (1)
  $ (153) $ (411)

(a)Higher margins in 2011 compared with 2010 were driven by the monetization of loss contracts in 2010 and lower customer migration to alternative suppliers in 2011.
(b)Volumes were lower in 2011 compared with 2010 as a result of unplanned outages and the sale of our interest in Safe Harbor Water Power Corporation.
(c)Volumes were flat in 2012 compared to 2011 due to an uprate in the third quarter of 2011 offset by higher plant outage costs in 2012.  Volumes were lower in 2011 compared with 2010 primarily as a result of the dual-unit turbine blade replacement outages beginning in May 2011.
(d)See Note 10 to the Financial Statements for additional information.

Western U.S.

Western U.S. non-tradingNon-trading margins were lower in 2012 compared with 2011 due to $34 million of lower wholesale volumes, including $31 million related to the bankruptcy of SMGT, $9 million of higher average fuel prices and $9 million of lower wholesale prices.

Non-trading margins were higher in 20092011 compared with 2008.  This2010 due to higher net wholesale prices of $58 million, partially offset by lower wholesale volumes of $45 million, primarily due to economic reductions in the coal unit output.

Utility Revenues      
          
The increase (decrease) in utility revenues was due to:
     2012 vs. 2011 2011 vs. 2010
Domestic:      
 PPL Electric (a) $(121) $ (567)
 LKE (b)  (34)   2,300 
 Total Domestic  (155)  1,733 
          
U.K.:      
 PPL WW      
  Price (c)   78    76 
  Volume (d)  (13)   (15)
  Recovery of allowed revenues (e)  (6)   7 
  Foreign currency exchange rates  (11)   25 
  Other  (10)   8 
  Total PPL WW  38    101 
 WPD Midlands (f)  633    790 
 Total U.K.  671    891 
Total $516  $ 2,624 

(a)See "Pennsylvania Gross Delivery Margins" for further information.
(b)See "Kentucky Gross Margins" for further information.
(c)The increase in 2012 compared with 2011 was due to price increases effective April 1, 2012 and April 1, 2011.  The increase in 2011 compared with 2010 was due to price increases effective April 1, 2011 and April 1, 2010.
(d)The decreases in both periods were primarily due to the downturn in the economy and the unfavorable effect of weather.
(e)The decrease in 2012 compared with 2011 was primarily due to a 2012 charge to income for the over-recovery of revenues from customers.  The increase in 2011 compared with 2010 was primarily due to higher wholesale volumes of 6% and increased generation from the hydroelectric units of 5%.

Western U.S. non-trading margins were $8 million higher in 2008 compared with 2007.  This increase was primarily due to increased generation from the hydroelectric units of 2%.

Net Energy Trading

PPL enters into energy contracts to take advantage of market opportunities.  As a result, PPL may at times create a net open position in its portfolio that could result in significant losses if prices do not move in the manner or direction anticipated.  However, these trading activities are subject to risk management program limits that are designed to protect PPL from undue financial loss.  The margins from these trading activities are reflected in the Statements of Income as "Net energy trading margins."  These physical and financial contracts cover trading activity associated with electricity, emission allowances, uranium, FTRs, natural gas, and oil.

Net energy trading margins increased by $138 million in 2009 compared with 2008.  This increase consisted of $215 million of higher unrealized margins partially offset by $77 million of lower realized margins.  These changes were primarily due to increased margins in the power, gas and oil trading positions resulting from unrealized trading losses in 2008 due to a dramatic decline in energy prices and a severe contraction of liquidity in the wholesale power markets.

Net energy trading margins decreased by $162 million in 2008 compared with 2007.  This decrease consists of $135 million of lower unrealized margins and $27 million of lower realized margins, both driven by significant decreases in power and gas prices in the second half of 2008.

Utility Revenues

The changes in utility revenues were attributable to:

  2009 vs. 2008 2008 vs. 2007
Domestic:        
Retail electric revenue (PPL Electric)        
Delivery $(60) $17 
PLR  (21)  19 
Other  9   3 
         
U.K.:        
Foreign currency exchange rates  (154)  (42)
Electric delivery revenue  14   3 
  $(212) $  

The decreases in utility revenues for 2009 compared with 2008, excluding foreign currency exchange rate impacts, were primarily due to:

·lower domestic retail electric revenues, attributable to unfavorable economic conditions, including industrial customers scaling back on production.  In addition, weather had an unfavorable impact on sales volumes.  These decreases were partially offset by favorable price increases.  See "Revenue Recognition" in Note 1 to the Financial Statements for information on a true-up of FERC formula-based transmission revenues.
·higher U.K. electric delivery revenues, attributable primarily to an increase in prices effective April 1, a revised estimate of network electricity losses, and favorable changes in customer mix.  These increases were partially offset by lower volumes due to unfavorable economic conditions, including industrial customers scaling back on production, and a decrease in engineering and metering services performed for third parties.line losses.

The increases in utility revenues for 2008 compared with 2007, excluding foreign currency exchange rate impacts, were primarily due to higher PLR revenue, attributable to normal load growth and a favorable price increase, and higher domestic delivery revenue, primarily due to a base rate increase effective January 1, 2008, as well as normal load growth.  These increases were partially offset by the unfavorable impact of weather on residential and commercial sales in 2008.

Energy-related Businesses

Energy-related businesses contributed $11 million less to operating income in 2009 compared with 2008.  The decrease was primarily attributable to:

·(f)contributions from domestic energy services-related businesses decreasing by $7 million,Amounts in each period were not comparable as 2011 includes eight months of WPD Midlands' results.  The increase in 2012 compared with 2011 was primarily due to a declinefour additional months of utility revenue in construction activity caused by the slowdown2012 of $446 million.  The comparable eight month period was $125 million higher in the economy; and
·contributions from U.K. energy-related businesses decreasing by $4 million, primarily2012 compared to 2011 due to changes in foreign currency exchange rates.a price increase effective April 1, 2012.

Energy-related businesses contributed $31 million more to operating income in 2008 compared with 2007.  The increase was primarily attributable to:
64


·a $39 million impairment in 2007 of domestic telecommunication operations that were sold in 2007; and
·an $11 million increase in contributions from domestic energy services-related businesses mainly due to increased construction activity; partially offset by
·$11 million of lower pre-tax contributions from synfuel projects.  This reflects a $77 million net gain recorded in 2007 on options purchased to hedge the risk associated with the phase-out of synthetic fuel tax credits.  This decrease was partially offset by $66 million less in operating losses from synfuel projects as the projects ceased operation at the end of 2007; and
·$5 million less in contributions from the domestic telecommunication operations sold in 2007.

See Note 8 to the Financial Statements for additional information on the sale of domestic telecommunications assets.  See Note 14 to the Financial Statements for additional information on the shutdown of the synfuel facilities in 2007.

Other Operation and Maintenance

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

  2009 vs. 2008 2008 vs. 2007
         
Payroll-related costs $29  $2 
Defined benefit costs - U.S. (Note 12)
  18   (7)
Domestic and international workforce reductions (Note 12)  18   (7)
WPD distribution costs  15   7 
Montana hydroelectric litigation (Note 14)  8   1 
Other costs at fossil/hydroelectric stations  7   1 
Other nuclear related expenses  7   (10)
Lower gains on sales of emission allowances  4   103 
Impairment of transmission rights (a)      (23)
Contractor-related expenses      (15)
U.K. foreign currency exchange rates  (24)  (8)
Impairment of cancelled generation expansion project in 2008 (Note 8)  (22)  22 
Defined benefit costs - U.K. (Note 12)  (16)  (28)
PUC-reportable storm costs  (11)  (4)
WPD recoverable engineering services  (9)  (17)
Impairment and other charges - emission allowances (Notes 14 and 17)  (9)  42 
Montana basin seepage litigation (Note 14)  (8)  8 
WPD meter operator expenses  (7)  (6)
Other - Domestic  6     
Other - U.K.  (5)  (3)
  $1  $58 
Other Operation and Maintenance
         
       
The increase (decrease) in other operation and maintenance was due to:
         
    2012 vs. 2011 2011 vs. 2010
Domestic:      
 LKE (a)    $ 612 
 LKE coal plant maintenance (b) $ 19    
 Act 129 costs incurred (c)   (6)  26 
 Vegetation management (d)   11    (8)
 Montana hydroelectric litigation (e)   75    (121)
 PPL Susquehanna nuclear plant costs (f)   27   27 
 Costs at Western fossil and hydroelectric plants (g)   (1)  12 
 Costs at Eastern fossil and hydroelectric plants (h)   13   23 
 Ironwood acquisition (i)   18    
 Payroll-related costs (j)   26    11 
 PUC-reportable storm costs, net of insurance recoveries   14    (10)
 Uncollectible accounts (k)   (4)   21 
 Pension expense   19    (5)
 Stock based compensation   17    7 
 Other   2    (12)
U.K. Regulated Segment:      
 PPL WW (l)   23    15 
 WPD Midlands (m)   (85)   313 
   $ 168  $ 911 

(a)2011 compared with 2010 is not comparable as 2010 includes two months of LKE's results.
(b)2012 compared with 2011 was higher primarily due to $11 million of expense related to an increased scope of scheduled outages.
(c)Relates to costs associated with PPL Electric's PUC-approved energy efficiency and conservation plan.  These costs are recovered in customer rates.  There were initially 15 Act 129 programs which began in 2010 and continued to ramp up in 2011.  Some of the energy efficiency programs were reduced or closed in 2012 resulting in lower operation and maintenance expense.
(d)PPL Electric incurred more expense in 2010 and 2012 compared to 2011 due to increased vegetation management activities related to transmission lines to comply with federal reliability requirements as well as increased vegetation management for the distribution system in 2012 in an effort to maintain and increase system reliability.
(e)In 2007, Maine Electric Power Company (MEPCO), ISO New England and other New England transmission owners submittedMarch 2010, the Montana Supreme Court substantially affirmed a filing to the FERC seeking to roll the revenue requirement of the MEPCO transmission facilities into the regional transmission rates in New England and to change certain rules concerningJune 2008 Montana District Court decision regarding lease payments for the use of certain Montana streambeds.  As a result, in the transmission linefirst quarter of 2010, PPL Montana recorded a charge of $56 million, representing estimated rental compensation for energythe first quarter of 2010 and capacity.  PPL protested this proposal and recorded an impairmentprior years, including interest.  The portion of the transmission rights basedtotal charge recorded to "Other operation and maintenance" on their estimated fair value.the Statement of Income totaled $49 million.  In August 2010, PPL Montana filed a petition for a writ of certiorari with the U.S. Supreme Court requesting the Court's review of this matter.  In June 2011, the U.S. Supreme Court granted PPL Montana's petition.  In February 2012, the U.S. Supreme Court overturned the Montana Supreme Court decision and remanded the case to the Montana Supreme Court for further proceedings consistent with the U.S. Supreme Court's decision.  As a result in 2011, PPL Montana reversed its total loss accrual of $89 million, which had been recorded prior to the U.S. Supreme Court decision, of which $75 million was credited to "Other operation and maintenance" on the Statement of Income.

(f)2012 compared with 2011 was higher primarily due to $11 million of higher payroll-related costs, $7 million of higher project costs and $7 million of higher costs from the refueling outage.  2011 compared with 2010 was higher primarily due to $11 million of higher payroll-related costs, $10 million of higher outage costs and $8 million of higher costs from the refueling outage.
Amortization of Recoverable Transition Costs
(g)2011 compared with 2010 was higher primarily due to $11 million of lower insurance proceeds.

(h)2012 compared with 2011 was higher primarily due to plant outage costs of $13 million.  2011 compared with 2010 was higher primarily due to plant outage costs of $13 million.
Amortization of recoverable transition costs increased by $11 million in 2009 compared with 2008 and decreased by $17 million in 2008 compared with 2007.  The amortization of recoverable transition costs was based on a PUC amortization schedule, adjusted for ITC and CTC recoveries in customer rates and related expenses.  Since the amortization substantially matches the revenue recorded based on recovery in customer rates, there is minimal impact on earnings.  At the end of 2009, PPL's recoverable transition costs have been fully amortized.
(i)There are no comparable amounts in 2011 as the Ironwood Acquisition occurred in April 2012.
(j)2012 compared with 2011 was higher primarily due to higher payroll costs of $17 million in 2012 for PPL Electric due to less project costs being capitalized.
(k)2011 compared with 2010 was higher primarily due to SMGT filing for protection under Chapter 11 of the U.S. Bankruptcy Code, $11 million of damages billed to SMGT were fully reserved.
(l)Both periods were higher due to higher pension costs resulting from increased amortization of actuarial losses.
(m)Amounts in each period were not comparable as 2011 includes eight months of WPD Midlands' results.  The increase in 2012 compared with 2011 was partially due to four additional months of expense in 2012 of $86 million.  The comparable eight month period was $171 million lower in 2012 compared to 2011 due to $86 million of lower severance compensation, early retirement deficiency costs and outplacement services for employees separating from the WPD Midlands companies as a result of a reorganization to transition the WPD Midlands companies to the same operating structure as WPD (South West) and WPD (South Wales), $34 million of lower other acquisition related costs, and $26 million of lower pension expense.

Depreciation

IncreasesThe increase (decrease) in depreciation expense werewas due to:

  2009 vs. 2008 2008 vs. 2007
       
Additions to PP&E (a) $43  $39 
U.K. foreign currency exchange rates  (25)  (7)
Extension of useful lives of certain WPD network assets in mid-2007 (Note 1)      (13)
Other  (7)  (3)
  $11  $16 
65

  2012 vs. 2011 2011 vs. 2010
       
Additions to PP&E $ 65  $ 20 
LKE (a) (b)      285 
WPD Midlands (c)   55    95 
Ironwood Acquisition (Note 10)   17    
Other   3    4 
Total $ 140  $ 404 

(a)For 2011 compared with 2010, includes $32 million of depreciation expense related to TC2, which began to dispatch in January 2011.
(b)Primarily attributable2011 compared with 2010 is not comparable as 2010 includes two months of LKE's results.
(c)Amounts in each period were not comparable as 2011 includes eight months of WPD Midlands' results.  The increase in 2012 compared with 2011 is primarily due to the completionfour additional months of the Susquehanna generation uprate and the Montour scrubber projectsexpense in 2008 and the Brunner Island scrubber projects in 2009.2012 of $49 million.

Taxes, Other Than Income

The decreasesincrease (decrease) in taxes, other than income werewas due to:

 2009 vs. 2008 2008 vs. 2007  2012 vs. 2011 2011 vs. 2010
          
U.K. foreign currency exchange rates $(12) $(3)
Pennsylvania gross receipts tax (a) (12) 6 
State gross receipts tax (a)State gross receipts tax (a) $ (4) $ (5)
Domestic property tax expense (b) 10 (8)Domestic property tax expense (b)  14   (10)
Domestic sales and use tax 4 (4)Domestic sales and use tax    (2)
State capital stock tax (c)State capital stock tax (c)  (11)  11 
LKE (d)LKE (d)    35 
WPD Midlands (e)WPD Midlands (e)  33   60 
Other  2   (1)Other   8    (1)
 $(8) $(10)
TotalTotal $ 40  $ 88 

(a)The decrease in 20092012 compared with 20082011 was primarily due to a decrease in the tax ratetaxable electricity revenue.  The decrease in 2009.  The increase in 20082011 compared with 2007 was primarily due to an increase in the tax rate in 2008.  Gross receipts tax is passed through to customers.
(b)The change in both periods2010 was primarily due to a $7 million propertydecrease in electricity revenue as customers chose alternative suppliers in 2010.  This tax is included in "Unregulated Gross Energy Margins" and "Pennsylvania Gross Delivery Margins" above.
(b)The increase in 2012 compared with 2011 is primarily due to the fully amortized PURTA refund that was refunded to the customers in 2011 pursuant to PUC regulations.  The decrease in 2011 compared with 2010 was primarily due to the amortization of the PURTA refund.  This tax is included in "Pennsylvania Gross Delivery Margins" above.
(c)The decrease in 2012 compared to 2011 was due to changes in the statutory rate from the prior year.  The increase in 2011 compared with 2010 was due in part to the expiration of the Keystone Opportunity Zone credit recorded by PPL Montana in 2008.2010 and an agreed to change in a capital stock filing position with the state.
(d)2011 compared with 2010 was not comparable as 2010 includes two months of LKE's results.
(e)Amounts in each period were not comparable as 2011 includes eight months of WPD Midlands' results.  The increase in 2012 compared with 2011 is primarily due to four additional months of expense in 2012 of $30 million.

Other Income - net
Other Income (Expense) - net      
       
The increase (decrease) in other income (expense) - net was due to:
       
  2012 vs. 2011 2011 vs. 2010
       
Change in the fair value of economic foreign currency exchange contracts (Note 19) $ (62) $ 7 
Net hedge gains associated with the 2011 Bridge Facility (a)   (55)   55 
Foreign currency loss on 2011 Bridge Facility (b)   57    (57)
Gain on redemption of debt (c)   (22)   22 
Cash flow hedges (d)      29 
WPD Midlands acquisition-related adjustments in 2011 (Note 10)   55    (55)
LKE acquisition-related adjustments in 2010 (Note 10)      31 
Losses from equity method investments   (9)   (1)
Other   (7)   4 
Total $ (43) $ 35 

See Note 16 to the Financial Statements for details of other income.
(a)Represents a gain on foreign currency contracts in 2011 that hedged the repayment of the 2011 Bridge Facility borrowing.
(b)Represents a foreign currency loss in 2011 related to the repayment of the 2011 Bridge Facility borrowing.
(c)In July 2011, as a result of PPL Electric's redemption of 7.125% Senior Secured Bonds due 2013, PPL recorded a gain on the accelerated amortization of the fair value adjustment to the debt recorded in connection with previously settled fair value hedges.
(d)Represents losses reclassified from AOCI into earnings in 2010 associated with discontinued hedges at PPL for debt that had been planned to be issued by PPL Energy Supply.  As a result of the expected net proceeds from the sale of certain non-core generation facilities, coupled with the monetization of full-requirement sales contracts, the debt issuance was no longer needed.

Other-Than-Temporary Impairments

Other-than-temporary impairments decreased by $18 million in 2009 compared with 2008, primarilyPrimarily due to strongera $25 million pre-tax impairment of the EEI investment, returns caused by improved market conditions within the financial markets.

Other-than-temporaryother-than-temporary impairments increased by $33$21 million in 20082012 compared with 2007, primarily due2011.  See Notes 1 and 18 to negative investment returns caused by the downturn in the financial markets in 2008.
Financial Statements for additional information.

66

Interest Expense

The decreasesincrease (decrease) in interest expense werewas due to:

  2009 vs. 2008 2008 vs. 2007
       
Hedging activities $(30) $(28)
Inflation adjustment on U.K. Index-linked Senior Unsecured Notes  (29)  6 
U.K. foreign currency exchange rates  (17)  (8)
Repayment of transition bonds  (13)  (22)
Capitalized interest  13   (1)
Short-term debt interest expense  6   7 
Long-term debt interest expense  4   28 
Amortization of debt issuance costs  3   5 
Other  4   (4)
  $(59) $(17)
   2012 vs. 2011 2011 vs. 2010
        
2011 Bridge Facility costs related to the acquisition of WPD Midlands (Notes 7 and 10) $ (44) $ 44 
2010 Bridge Facility costs related to the acquisition of LKE (Notes 7 and 10)      (80)
2010 Equity Units (a)   (2)   28 
2011 Equity Units (b)   12    34 
Short-term debt interest expense (c)   (12)   11 
Interest expense on the March 2010 WPD (South Wales) and WPD (South West) debt issuance      11 
Inflation adjustment on U.K. Index-linked Senior Unsecured Notes   (12)   5 
LKE (d)      126 
WPD Midlands (e)   80    154 
Ironwood Acquisition (Note 10)   12    
Hedging activities and ineffectiveness   29    11 
Capitalized interest (f)   (6)   (17)
Montana hydroelectric litigation (g)   10    (20)
Other   (4)   (2)
Total $ 63  $ 305 

(a)Interest related to the issuance in June 2010 to support the LKE acquisition.
(b)Interest related to the issuance in April 2011 to support the WPD Midlands acquisition.
(c)2012 compared with 2011 was lower primarily due to lower interest rates on 2012 short-term borrowings coupled with lower fees on credit facilities.  2011 compared with 2010 was higher primarily due to increased borrowings in 2011 and an increase in commitment fees on credit facilities.
(d)2011 compared with 2010 is not comparable as 2010 includes two months of LKE's results.
(e)Amounts in each period are not comparable as 2011 includes eight months of WPD Midlands' results.  The increase in 2012 compared with 2011 is primarily due to four additional months of expense in 2012 of $74 million.
(f)Includes AFUDC.
(g)In March 2010, the Montana Supreme Court substantially affirmed a June 2008 Montana District Court decision regarding lease payments for the use of certain Montana streambeds.  In August 2010, PPL Montana filed a petition for a writ of certiorari with the U.S. Supreme Court requesting the Court's review of this matter.  In 2011 and 2010, PPL Montana, recorded $4 million and $10 million of interest expense on the rental compensation covered by the court decision.  In February 2012, the U.S. Supreme Court overturned the Montana Supreme Court decision and remanded the case to the Montana Supreme Court for further proceedings consistent with the U.S. Supreme Court's opinion.  As a result, in the fourth quarter of 2011 PPL Montana reversed its total loss accrual of $89 million, which had been recorded prior to the U.S. Supreme Court decision, of which $14 million was credited to "Interest Expense" on the Statement of Income.

Income Taxes

The changesincrease (decrease) in income taxes werewas due to:

  2009 vs. 2008 2008 vs. 2007
       
Higher (lower) pre-tax book income $(298) $32 
Tax on foreign earnings (a)  (43)  (3)
Synthetic fuel and other tax credits (b)  (17)  72 
Valuation allowance adjustments  (13)    
Tax return adjustments (c)  40   (8)
Domestic manufacturing deduction  13   (2)
U.K. Finance Act adjustments (d)  8   46 
Tax reserve adjustments (a) (c) (e)  1   44 
Other  9   (10)
  $(300) $171 
   2012 vs. 2011 2011 vs. 2010
        
Higher (lower) pre-tax book income $ (296) $ 168 
State valuation allowance adjustments (a)   (23)   101 
State deferred tax rate change (b)   7    (26)
Domestic manufacturing deduction (c)      11 
Federal and state tax reserve adjustments (d)   (40)   99 
Federal and state tax return adjustments (e)   33    (14)
U.S. income tax on foreign earnings net of foreign tax credit (f)   57    (59)
U.K. Finance Act adjustments (g)   2    (16)
Foreign valuation allowance adjustments (h)   (147)   (68)
Foreign tax reserve adjustments (h)   134    (141)
U.K. capital loss benefit (h)      261 
Foreign tax return adjustments   (6)   
Health Care Reform      (8)
LKE (i)      125 
Depreciation not normalized (a)   9    (14)
WPD Midlands (j)   146    (2)
Net operating loss carryforward adjustments (k)   (9)   
Other   (13)   11 
Total $ (146) $ 428 

(a)During 2009, WPD recorded a $46 million foreign2011, the Pennsylvania Department of Revenue issued interpretive guidance on the treatment of bonus depreciation for Pennsylvania income tax benefit (and a fullpurposes.  The guidance allows 100% bonus depreciation for qualifying assets in the same year bonus depreciation is allowed for federal income tax reserve reflectedpurposes.  Due to the decrease in "Tax reserve adjustments")projected taxable income related to losses generated by restructuring.
(b)The Section 29/45K synthetic fuel tax credits expired at the end of 2007.  During 2008,bonus depreciation and a decrease in projected future taxable income, PPL recorded a $13$43 million adjustmentstate deferred income tax expense related to deferred tax valuation allowances during 2011.
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Additionally, the 100% Pennsylvania bonus depreciation deduction created a current state income tax benefit for the flow-through impact of Pennsylvania regulated state tax depreciation.  The federal provision for 100% bonus depreciation generally applies to property placed into service before January 1, 2012.  The placed in-service deadline is extended to January 1, 2013 for property that has a cost in excess of $1 million, has a production period longer than one year and has a tax life of at least ten years.  PPL's tax deduction for 100% bonus regulated tax depreciation was significantly lower in 2012 than in 2011.

Pennsylvania H.B. 1531, enacted in October 2009, increased the net operating loss limitation to 20% of taxable income for tax years beginning in 2010.  Based on the projected revenue increase related to the expiration of the generation rate caps in 2010, PPL recorded a $72 million state deferred income tax benefit related to the reversal of deferred tax valuation allowances related to the future projections of taxable income over the remaining carryforward period of the net operating losses during 2010.
(b)Changes in state apportionment resulted in reductions to the future estimated state tax rate at December 31, 2012 and 2011.  PPL recorded a $19 million deferred tax benefit in 2012 and a $26 million deferred tax benefit in 2011 related to its estimated 2007 fuelstate deferred tax credits asliabilities.
(c)In December 2010, Congress enacted legislation allowing for 100% bonus depreciation on qualified property.  The increased tax depreciation eliminated the tax benefit related to the domestic manufacturing deduction in 2012 and 2011.
(d)In 1997, the U.K. imposed a Windfall Profits Tax (WPT) on privatized utilities, including WPD.  PPL filed its federal income 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.  As a result and with the finalization of other issues, PPL recorded a $42 million tax benefit in 2010.  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 IRS publishingThird Circuit's adverse determination, PPL recorded a $39 million expense in 2011.  In February 2012, PPL filed a petition for rehearing of the final 2007 inflation-adjusted creditThird Circuit's opinion.  In March 2012, the Third Circuit denied PPL's petition.  In June 2012, the U.S. Court of Appeals for the Fifth Circuit issued a contrary opinion in April 2008.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 on October 29, 2012, and oral argument was held on February 20, 2013.  PPL expects the case to be decided before the end of the Supreme Court's current term in June 2013 and cannot predict the outcome of this matter.

In 2010, the Tax Court ruled in PPL's favor in a dispute with the IRS, concluding that street lighting assets are depreciable for tax purposes over seven years.  As a result, PPL recorded a $7 million tax benefit to federal and state income tax reserves and related deferred income taxes during 2010.

(c)(e)During 2009,2012, PPL received consent from the IRS to change its method of accounting for certain expenditures for tax purposes.  PPL deducted the resulting IRC Sec. 481 adjustment on its 2008 tax return and recorded a $24$16 million adjustment toin federal and state income tax expense which results fromrelated to the reductionfiling of the 2011 federal and state income tax returns.  Of this amount, $5 million relates to the reversal of prior years' state income tax benefits related to regulated depreciation.  PPL changed its method of accounting for repair expenditures for tax purposes effective for its 2008 tax year.  In August 2011, the domestic manufacturing deductionIRS issued guidance regarding the use and evaluation of statistical samples and sampling estimates for network assets.  The IRS guidance provided a reductionsafe harbor method of certaindetermining whether the repair expenditures for electric transmission and distribution property can be currently deducted for tax purposes.  PPL adopted the safe harbor method with the filing of its 2011 federal income tax return.

During 2011, PPL recorded $17 million in federal and state tax benefits related to the filing of the 2010 federal and state income tax returns.  Of this amount, $7 million in tax benefits related to an additional domestic manufacturing deduction resulting from revised bonus depreciation amounts and $3 million in tax benefits related to the flow-through impact of Pennsylvania regulated state tax depreciation.
(f)During 2012, PPL recorded a $23 million adjustment to federal income tax expense related to state net operating lossesthe recalculation of 2010 U.K. earnings and regulated depreciation.  During 2008, WPD recorded tax benefits of approximately $17 million from tax return adjustments that were fully reserved.profits.

During 2011, PPL recorded a $28 million federal income tax benefit related to U.K. pension contributions.

During 2010, PPL recorded additional U.S. income tax expense primarily resulting from increased taxable dividends.
(d)(g)
The U.K.'s Finance Act of 2008,2012, enacted in July 2008, included a phase-out of2012, reduced the U.K. statutory income tax depreciation on certain buildings.rate from 25% to 24% retroactive to April 1, 2012 and from 24% to 23% effective April 1, 2013.  As a result, WPD recorded an $8PPL reduced its net deferred tax liabilities and recognized a $75 million deferred tax benefit during 2008in 2012 related to the reduction in its deferred tax liabilities.
The U.K.'s Finance Actboth rate decreases.  WPD Midlands' portion of 2007, enacted in July 2007, included a reduction in the U.K.'s statutory income tax rate.  Effective April 1, 2008, the statutory income tax rate was reduced from 30% to 28%.  As a result, WPD recorded a $54 million deferred tax benefit during 2007 related to the reduction in its deferred tax liabilities.
(e)PPL recorded an $8 million and $35 million benefit in 2008 and 2007 as a result of the expiration of applicable statutes of limitations.  Additionally, PPL recorded tax benefits of $27 million in 2009 for the settlement of a tax dispute and foreign currency exchange losses.is $43 million.

The U.K.'s Finance Act of 2011, enacted in July 2011, reduced the U.K. statutory income tax rate from 27% to 26% retroactive to April 1, 2011 and from 26% to 25% effective April 1, 2012.  As a result, PPL reduced its net deferred tax liabilities and recognized a $69 million deferred tax benefit in 2011 related to both rate decreases. WPD Midlands' portion of the deferred tax benefit is $35 million.
The U.K.'s Finance Act of 2010, enacted in July 2010, reduced the U.K. statutory income tax rate from 28% to 27% effective April 1, 2011.  As a result, PPL reduced its net deferred tax liabilities and recognized an $18 million deferred tax benefit in 2010.
(h)During 2012, PPL recorded a $5 million tax benefit following resolution of a U.K. tax issue related to interest expense.

During 2011, WPD reached an agreement with the HMRC related to the amount of the capital losses that resulted from prior years' restructuring in the U.K. and recorded a $147 million foreign tax benefit for the reversal of tax reserves related to the capital losses.  Additionally, WPD recorded a $147 million valuation allowance for the amount of capital losses that, more likely than not, will not be utilized.

During 2010, PPL recorded a $261 million foreign tax benefit in conjunction with losses resulting from restructuring in the U.K.  A portion of these losses offset tax on a deferred gain from a prior year sale of WPD's supply business.  WPD recorded a $215 million valuation allowance for the amount of capital losses that, more likely than not, will not be utilized.
(i)2011 compared with 2010 was not comparable as 2010 includes two months of LKE's results.
(j)Amounts in each period were not comparable as 2011 includes eight months of WPD Midlands' results.  The increase in 2012 compared with 2011 was primarily due to higher pre-tax book income.
(k)During 2012, PPL recorded adjustments to deferred taxes related to net operating loss carryforwards of LKE based on income tax return adjustments.
See Note 5 to the Financial Statements for additional information on income taxes.

Discontinued Operations

Income (Loss) from Discontinued Operations (net of income taxes) decreased by $8 million in 2012 compared with 2011 primarily due to an adjustment recorded in 2012 to a liability for indemnifications related to the termination of the WKE lease in 2009.

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Income (Loss) from Discontinued Operations (net of income taxes) increased by $19 million in 2011 compared with 2010 primarily due to after-tax impairment charges recorded in 2010 totaling $62 million related to assets associated with certain non-core generation facilities sold in 2011 that were written down to their estimated fair value (less cost to sell).  The impacts of these charges were offset by the net results of certain other discontinued operations.

See Note 9 to the Financial Statements for information related to:additional information.

·the anticipated sale of the Long Island generation business;
·the sale of the majority of the Maine hydroelectric generation business in 2009;
·the sale of the 8.33% interest in Wyman Unit 4 in 2009;
·the sale of the Latin American businesses in 2007 and the substantial dissolution of the remaining holding companies in 2008; and
·the sale of the natural gas distribution and propane businesses in 2008.
Noncontrolling Interests

"Net Income Attributable to Noncontrolling Interests" decreased by $12 million in 2012 compared with 2011.  The decrease is primarily due to PPL Electric's June 2012 redemption of all 2.5 million shares of its preference stock.

Financial Condition

Liquidity and Capital Resources

PPL expects to continue to have adequate liquidity available through operating cash flows, cash and cash equivalents, credit facilities and its credit facilities.commercial paper issuances.  Additionally, subject to market conditions, PPL currently plans to access debt capital markets in 2010.  PPL currently does not plan to access commercial paper markets or equity capital markets in 2010.2013.

PPL's cash flows from operations and access to cost-effective bank and capital markets are subject to risks and uncertainties including, but not limited to:

·changes in market prices for electricity;electricity, fuel and other commodity prices;
·changes in commodity prices that may increase the cost of producing power or decrease the amount PPL receives from selling power;
·operational and credit risks associated with selling and marketing products in the wholesale power markets;
·potential ineffectiveness of the trading, marketing and risk management policy and programs used to mitigate PPL's risk exposure to adverse changes in electricity and fuel prices, interest rates, foreign currency exchange rates and counterparty credit;
·unusual or extreme weather that may damage PPL's transmission and distribution facilities or affect energy sales to customers;
·reliance on transmission and distribution facilities that PPL does not own or control to deliver its electricity and natural gas;
·unavailability of generating units (due to unscheduled or longer-than-anticipated generation outages, weather and natural disasters) and the resulting loss of revenues and additional costs of replacement electricity;
·the ability to recover and the timeliness and adequacy of recovery of costs associated with regulated utility businesses;
·costs of compliance with existing and new environmental laws and with new security and safety requirements for nuclear facilities;
·any adverse outcome of legal proceedings and investigations with respect to PPL's current and past business activities;
·deterioration in the financial markets that could make obtaining new sources of bank and capital markets funding more difficult and more costly; and
·a downgrade in PPL's or its rated subsidiaries' credit ratings that could adversely affect their ability to access capital and increase the cost of credit facilities and any new debt.

See "Item 1A. Risk Factors" for further discussion of risks and uncertainties affectingthat could affect PPL's cash flows.

At December 31, PPL had the following:

 2009 2008 2007 2012  2011  2010 
             
Cash and cash equivalents $801 $1,100 $430  $ 901  $ 1,202  $ 925 
Short-term investments (a) (b)      150   108 
Short-term investments (a)      16    163 
 $801  $1,250  $538  $ 901  $ 1,218  $ 1,088 
Short-term debt $639  $679  $92  $ 652  $ 578  $ 694 

(a)20082010 amount represents tax-exempt bonds issued by the PEDFA in December 2008Louisville/Jefferson County, Kentucky on behalf of PPL Energy Supply andLG&E that were subsequently purchased by a subsidiary of PPL Energy Supply upon issuance.LG&E.  Such bonds were refundedremarketed to unaffiliated investors in April 2009.January 2011.  See Note 723 to the Financial Statements for further discussion.
(b)Includes $15 million of auction rate securities at December 31, 2007.  See below for a discussion of auction rate securities.
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At December 31, 2012, $225 million of cash and cash equivalents were denominated in GBP.  If these amounts would be remitted as dividends, PPL may be subject to additional U.S. taxes, net of allowable foreign tax credits.  Historically, dividends paid by foreign subsidiaries have been limited to distributions of the current year's earnings.  See Note 5 to the Financial Statements for additional information on undistributed earnings of WPD.

The changes in PPL's cash and cash equivalents position for the years ended December 31 resulted from:

  2009 2008 2007
             
Net Cash Provided by Operating Activities $1,852  $1,589  $1,571 
Net Cash Used in Investing Activities  (880)  (1,627)  (614)
Net Cash Provided by (Used in) Financing Activities  (1,271)  721   (1,326)
Effect of Exchange Rates on Cash and Cash Equivalents      (13)  5 
Net Increase (Decrease) in Cash and Cash Equivalents $(299) $670  $(364)

Auction Rate Securities

PPL held auction rate securities with an aggregate par value of $25 million and $29 million at December 31, 2009 and 2008.  Historically, an active market existed for such investments, and the auctions provided an opportunity for investors either to hold an investment at a periodically reset interest rate or to sell the investment at its par value for immediate liquidity.  In early 2008, investor concerns about credit and liquidity in the financial markets, generally, as well as investor concerns over specific insurers that guarantee the credit of certain of the underlying securities, created uncertainty in the auction rate securities market and these securities generally failed to be remarketed through their established auction process.  The auctions continue to fail and the resulting illiquidity continues to impact PPL's investment in auction rate securities.

At December 31, 2008, PPL estimated that the fair value of its auction rate securities was $24 million, which is reflected in "Other investments" on the Balance Sheet and represented a temporary decline of $5 million from par value.

In 2009, PPL liquidated $4 million of auction rate securities at par.  At December 31, 2009, PPL estimated that the fair value of its auction rate securities was equal to par value, which was $25 million and is reflected in "Other investments" on the Balance Sheet.  PPL reversed the previously recorded temporary impairment.

Because PPL intends and has the ability to hold these auction rate securities until they can be liquidated at par value, PPL believes that it does not have significant exposure to realize losses on these securities.  Based upon the evaluation of available information, PPL believes these investments continue to be of high credit quality.  Additionally, PPL does not anticipate having to sell these securities to fund operations.  See Notes 17 and 21 to the Financial Statements for further discussion of auction rate securities.
  2012  2011  2010 
          
Net cash provided by (used in) operating activities $ 2,764  $ 2,507  $ 2,033 
Net cash provided by (used in) investing activities   (3,123)   (7,952)   (8,229)
Net cash provided by (used in) financing activities   48    5,767    6,307 
Effect of exchange rates on cash and cash equivalents   10    (45)   13 
Net Increase (Decrease) in Cash and Cash Equivalents $ (301) $ 277  $ 124 

Operating Activities

Net cash provided by operating activities increased by 17%10%, or $263$257 million, in 20092012 compared with 2008, primarily as a result of cash collateral received from counterparties and2011.  The increase was the benefit of lower income tax payments due tonet effect of:

·an increase of $339 million in net income, when adjusted for non-cash components; and
·a decrease of $60 million in defined benefit plan funding; partially offset by
·changes in working capital of $178 million, primarily driven by changes in prepayments and net regulatory assets/liabilities offset by the changes in counterparty collateral.

Included in the change in method of accounting for certain expenditures for tax purposes.  These increases were partially offset by a decrease in accounts payable andabove amounts is the unfavorable impact of foreign currency exchange rateshaving an additional four months of WPD Midlands operations in 20092012.  WPD Midlands' cash from operating activities increased by $190 million in 2012 compared with 2008.2011.

Net cash provided by operating activities increased by 1%23%, or $18$474 million, in 20082011 compared with 2007, primarily as a result of higher revenues, primarily due to2010.  The increase was the hedged sale of generation in the wholesale market, increased retail electric sales volumes and a 1.4% increase in domestic delivery sales prices, as well as less U.S. income tax payments, primarily as a result of a refund received in 2008, and operating losses incurred in 2007 in connection with synfuel projects that ceased operation at the end of 2007.  The increases to cash provided by operating activities resulting from these items were partially offset by increased expenditures for fuel, primarily due to higher coal prices, lower realized net energy trading margins, driven by significant decreases in power and gas prices, higher interest paid, primarily due to higher debt levels in 2008, cash flows provided by Latin America's operations in 2007 but not 2008, due to the sale of the Latin American businesses in 2007, and an insurance recovery of storm costs in 2007.effect of:

·operating cash provided by LKE, $743 million, and WPD Midlands, $234 million;
·cash from components of working capital, $435 million, primarily related to changes in prepaid income and gross receipts taxes; partially offset by
·      reduction in cash from counter party collateral, $172 million:
·      lower gross energy margins, $240 million after-tax:
·proceeds from monetizing certain full-requirement sales contracts in 2010, $249 million:
·higher interest payments of $44 million; and
·increases in other operating outflows of $233 million (including $90 million of higher operation and maintenance expenses and defined benefits funding).

A significant portion of PPL's Supply segment operating cash flows is derived from its Supply segmentcompetitive baseload generation business activities.  PPL employs a formal hedging program for its baseload generation fleet, the primary objective of which is to provide a reasonable level of near-term cash flow and earnings certainty over the next three years, while preserving upside potential ifof power prices increaseprice increases over the medium term.  See Note 1819 to the Financial Statements for further discussion.  Based on its generation portfolio contractingDespite PPL's hedging practices, (including related fuel purchases and commitments), PPL expects to achieve relatively stable cash flows related to baseload generation during the next three years, although, future cash flows from operating activities from its Supply segment are expected to be influenced more by commodity prices than during the past nine years when long-term supply contracts were in place between PPL EnergyPlus and, PPL Electric.  As discussed in "Item 1. Business," PPL estimates that, on average, approximately 94% of its total expected annual generation output (which includes baseload and other generation) for 2010 is committed under power sales contracts.  PPL has also entered into commitments of varying quantities and terms for the years 2011 and beyond.  In addition, PPL expectstherefore, will fluctuate from period to be able to achieve relatively stable cash flows related to PPL Electric's role as PLR due to contracts it has entered into to procure the 2010 and a portion of 2011 PLR electricity supply it expects to need for residential, small commercial and small industrial customers who do not choose an alternative supplier.  See Note 14 to the Financial Statements for information on these energy purchase contracts.period.

PPL's contracts for the sale and purchase of electricity and fuel often require cash collateral or other credit enhancements, or reductions or terminations of a portion of the entire contract through cash settlement, in the event of a downgrade of PPL's or its subsidiaries' credit ratings or adverse changes in market prices.  For example, in addition to limiting its trading ability, if PPL's or its subsidiaries' ratings were lowered to below "investment grade" and there was a 10% adverse movement in energy prices, PPL estimates that, based on its December 31, 20092012 positions, it would have hadbeen required to post additional collateral of approximately $291$438 million compared with $815 million at December 31, 2008.respect to electricity and fuel contracts.  PPL has in place risk management programs that are designed to monitor and manage its exposure to volatility of cash flows related to changes in energy and fuel prices, interest rates, foreign currency exchange rates, counterparty credit quality and the operating performance of its generating units.

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Investing Activities

The primary use of cash in investing activities isin 2012 was for capital expenditures.  In 2011, the primary uses of cash in investing activities were for the acquisition of WPD Midlands and capital expenditures.  In 2010, the primary uses of cash in investing activities were for the acquisition of LKE and capital expenditures.  See "Forecasted Uses of Cash" for detail regarding projected capital expenditures in 2009 and projected expenditures for the years 20102013 through 2012.2017.

Net cash used in investing activities decreased 46%, or $747was $3.1 billion in 2012 compared with $7.9 billion in 2011.  Excluding the impact of cash used for the 2011 acquisition of WPD Midlands, net cash used in investing activities increased by $934 million in 20092012 compared with 2008, primarily as2011.  This increase reflects $618 million of higher capital expenditures, $381 million less in asset sale proceeds (2011 sale of certain non-core generation facilities) and a result$143 million reduction in proceeds from the sale of certain investments (other than securities in the nuclear plant decommissioning trust funds) partially offset by a $239 million net change of $289 million fromin restricted cash and cash equivalents, a change of $249 million from purchases and sales of other investments, a change of $241 million from purchases and sales of intangible assets and a decrease of $193 million in capital expenditures.equivalents.  See Note 19 to the Financial Statements for a discussionadditional information on the sale of restricted cash and cash equivalentscertain non-core generation facilities and Note 710 to the Financial Statements for a discussion ofadditional information regarding the purchase and sale by a subsidiary of PPL Energy Supply of Exempt Facilities Revenue Bonds issued by the PEDFA on behalf of PPL Energy Supply.  The decrease in cash used in investing activities from the above items was partially offset by the change in proceeds received from the sale of businesses, which are discussed in Note 9 to the Financial Statements.  PPL received $303 million from the sale of the gas and propane businesses in 2008 compared to proceeds of $81 million received from the sale of the majority of the Maine hydroelectric generation business in 2009.WPD Midlands acquisition.

Net cash used in investing activities increased 165%, or $1.0was $7.9 billion in 20082011 compared with 2007, as$8.2 billion in 2010.  The 2011 amount includes the use of $5.8 billion of cash for the acquisition of WPD Midlands, while 2010 includes $6.8 billion for the acquisition of LKE.  See Note 10 to the Financial Statements for additional information regarding the acquisitions.  Excluding the impact of the acquisitions, net cash used in investing activities increased by $772 million in 2011 compared with 2010.  This increase reflects $890 million of higher capital expenditures and a $228 million net change in restricted cash, partially offset by $219 million of additional proceeds from the sale of certain businesses or facilities and $163 million of proceeds from the sale of investments, other than securities in the nuclear plant decommissioning trust funds.  PPL received $303proceeds of $381 million in 2011 from the sale of certain non-core generation facilities compared with proceeds of $162 million in 2010 from the sale of the gasLong Island generation business and propane businesses in 2008 compared to aggregate proceeds of $898 million received from the sale of the Latin American businesses and telecommunication operations in 2007.certain Maine hydroelectric generation facilities.  See Notes 8 andNote 9 to the Financial Statements for a discussionadditional information on the sale of these sales.  Additionally, there was a change of $354 million from purchases and sales of other investments and a change of $359 million from purchases and sales of intangible assets.  The increase in cash used in investing activities from the above items was partially offset by a decrease of $239 million in capital expenditures and a decrease of $54 million in the amount of cash and cash equivalents that became restricted.businesses or facilities.

Financing Activities

Net cash used inprovided by financing activities was $1.3$48 million in 2012 compared with $5.8 billion in 2009 compared with $7212011.  The decrease of $5.7 billion was primarily the result of lower net long-term debt issuances of $3.4 billion and less proceeds from the issuance of common stock of $2.2 billion.  Both of these decreases were primarily related to the 2011 acquisition of WPD Midlands.  The decrease also included $250 million paid to redeem a subsidiary's preference stock and $87 million of higher common stock dividends.  These decreases were partially offset by a $199 million net change in short-term debt.

Net cash provided by financing activities in 2008 and net cash used in financing activities of $1.3was $5.8 billion in 2007.  The change from 2008 to 20092011 compared with $6.3 billion in 2010, primarily reflects fewer issuances and increased retirementsas a result of issuance of long-term debt and equity related to the acquisition of WPD Midlands in 2009, as well as2011 and the net repaymentacquisition of short-term borrowingsLKE in 2009.2010.  The change from 2007 to 2008decrease of $540 million was primarily reflects increased issuances andthe result of lower retirements ofnet long-term debt issuances of $87 million, lower repurchasesproceeds from the issuance of common stock and increased short-term borrowings in 2008.

In 2009, cash used in financing activities primarily consisted of net debt retirements$144 million, $180 million of $770 million andhigher common stock dividends paid of $517and a $195 million partially offset by $60 million of common stock sale proceeds.

In 2008, cash provided by financing activities primarily consisted ofdecrease in net, debt issuances of $1.3 billion and $19 million of common stock sale proceeds, partially offset by common stock dividends paid of $491 million and the repurchase of 802,816 shares of common stock for $38 million.

In 2007, cash used in financing activities primarily consisted of net debt retirements of $170 million, the repurchase of 14,929,892 shares of common stock for $712 million and common stock dividends paid of $459 million, partially offset by $32 million of common stock sale proceeds.  See Note 7 to the Financial Statements for a discussion of the common stock repurchase program.short-term debt.

See "Forecasted Sources of Cash" for a discussion of PPL's plans to issue debt and equity securities, as well as a discussion of credit facility capacity available to PPL.  Also see "Forecasted Uses of Cash" for a discussion of plans to pay dividends on common and preferred securities in the future, as well as maturities of long-term debt.

PPL's debt financing activity in 2009 was:Long-term Debt and Equity Securities

  Issuances (a) Retirements
         
PPL Capital Funding Senior Unsecured Notes     $(201)
PPL Energy Supply Senior Unsecured Notes (a)      (220)
PPL Electric Senior Secured Bonds (b) $298   (586)
Variable Rate Pollution Control Facilities Note      (9)
PPL Electric short-term debt      (95)
WPD short-term debt (net change)  43     
Total $341  $(1,111)
Net decrease     $(770)
The long-term debt and equity securities activity for the year ended December 31, 2012 was:
          Equity
    Debt Issuances
    Issuances (a) Retirements (Redemptions)
            
PPL Capital Funding Senior Notes (b) $ 798  $ (99)   
PPL Electric First Mortgage Bonds   249       
WPD (East Midlands) Senior Notes   176       
PPL Electric preference stock (c)       $ (250)
  Total Cash Flow Impact $ 1,223  $ (99) $ (250)
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          Equity
    Debt Issuances
    Issuances (a) Retirements (Redemptions)
          
Assumed through consolidation - Ironwood Acquisition (d) $ 258       
Non-cash Exchanges:         
 LKE Senior Notes (e) $ 250  $ (250)   
            
Net Increase (decrease) $ 1,382     $ (250)

(a)In March 2009, PPL Energy Supply paid $220 million, plus accrued interest, to complete tender offers to purchase up to $250 million aggregate principal amount of certain of its outstanding senior notes in order to reduce future interest expense.  Under the Economic Stimulus Package, PPL will be permitted to defer recognition of income related to the extinguishment of these notes for tax purposes.  No amounts will be included in taxable income for the first five years.  Beginning in 2014, income related to the extinguishment of these notes will be included in taxable income ratably over five years.
(b)Issuance isIssuances are net of pricing discount.  Retirementsdiscounts, where applicable and exclude the impact of debt issuance costs.
(b)Senior unsecured notes of $99 million were redeemed at par prior to their 2047 maturity date.
(c)In June 2012, PPL Electric redeemed all 2.5 million shares of its 6.25% Series Preference Stock, par value $100 per share, which was included in "Noncontrolling Interests" on the 2011 Balance Sheet.
(d)Includes $24 million of fair value adjustments resulting from the purchase price allocation.  See Note 10 to the Financial Statements for additional information on the acquisition.
(e)In June 2012, LKE completed an exchange of all its outstanding 4.375% Senior Notes due 2021 issued in September 2011 in a $9 million premium paidtransaction not registered under the Securities Act of 1933, for similar securities that were issued in connectiona transaction registered with the December 2009 redemption of PPL Electric's 4.30% Senior Secured Bonds due 2013.SEC.

In addition to the above, in April 2012, PPL made a registered underwritten public offering of 9.9 million shares of its common stock.  In conjunction with that offering, the underwriters exercised an option to purchase 591 thousand additional shares of PPL common stock solely to cover over-allotments.

In connection with the registered public offering, PPL entered into forward sale agreements with two counterparties covering the 9.9 million shares of PPL common stock.  Settlement of these initial forward sale agreements will occur no later than April 2013.  As a result of the underwriters' exercise of the overallotment option, PPL entered into additional forward sale agreements covering the additional 591 thousand shares of PPL common stock.  Settlement of the subsequent forward sale agreements will occur no later than July 2013.  Upon any physical settlement of any forward sale agreement, PPL will issue and deliver to the forward counterparties shares of its common stock in exchange for cash proceeds per share equal to the forward sale price.  The forward sale price will be calculated based on an initial forward price of $27.02 per share reduced during the period the contracts are outstanding as specified in the forward sale agreements.  PPL may, in certain circumstances, elect cash settlement or net share settlement for all or a portion of its rights or obligations under the forward sale agreements.

PPL will not receive any proceeds or issue any shares of common stock until settlement of the forward sale agreements.  PPL intends to use any net proceeds that it receives upon settlement to repay short-term debt obligations and for other general corporate purposes.

The forward sale agreements are classified as equity transactions.  As a result, no amounts will be recorded in the consolidated financial statements until the settlement of the forward sale agreements.  Prior to those settlements, the only impact to the financial statements will be the inclusion of incremental shares within the calculation of diluted EPS using the treasury stock method.

See Note 7 to the Financial Statements for more detailedadditional information regarding PPL's financing activities in 2009.about long-term debt and equity securities.

Forecasted Sources of Cash

PPL expects to continue to have significantsufficient sources of cashliquidity available in the near term, including cash flows from operations, various credit facilities, a commercial paper programissuances and operating leases.  PPL currently does not plan to access commercial paper markets in 2010 and plans to issue up to $300 million and £400 million in long-term debt securities in 2010,Additionally, subject to market conditions.conditions, PPL currently plans to access capital markets in 2013.

Credit Facilities

At December 31, 2009,2012, PPL's total committed borrowing capacity under credit facilities and the use of this borrowing capacity were:


  Committed Capacity Borrowed Letters of Credit Issued (a) 
Unused Capacity
             
PPL Energy Supply Domestic Credit Facilities (b) $4,125  $285  $662  $3,178 
PPL Electric Credit Facilities (c)  340       6   334 
Total Domestic Credit Facilities (d) $4,465  $285  $668  $3,512 
                 
WPDH Limited Credit Facility (e) 150  132   n/a  18 
WPD (South West) Credit Facilities (f)  214   60  3   151 
Total WPD Credit Facilities (g) 364  192  3  169 
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         Letters of   
         Credit   
         Issued   
         and   
       Commercial  
   Committed   Paper Unused
   Capacity Borrowed Backstop Capacity
          
PPL Energy Supply Credit Facilities (a) $ 3,200     $ 631  $ 2,569 
PPL Electric Credit Facilities (a) (b)   400       1    399 
LG&E Credit Facility (a)   500       55    445 
KU Credit Facilities (a)   598       268    330 
 Total Domestic Credit Facilities (c) (f) $ 4,698     $ 955  $ 3,743 
              
PPL WW Credit Facility (d) (e) £ 150  £ 106   n/a £ 44 
WPD (South West) Credit Facility (e)   245      n/a   245 
WPD (East Midlands) Credit Facility (e) (g)   300          300 
WPD (West Midlands) Credit Facility (e) (g)   300          300 
 Total WPD Credit Facilities (h) (f) £ 995  £ 106     £ 889 

(a)The borrower under each of thesesyndicated credit facilities, has a reimbursement obligation to the extent any lettersas well as KU's letter of credit are drawn upon.
(b)PPL Energy Supply has the ability to borrow $3.6 billion under its credit facilities.  Such borrowings generally bear interest at LIBOR-based rates plus a spread, depending upon the company's public debt rating.  PPL Energy Supply also has the capability to cause the lenders to issue up to $3.9 billion of letters of credit under these facilities, which issuances reduce available borrowing capacity.  Under certain conditions, PPL Energy Supply may request that the capacity of one of its facilities be increased by up to $500 million.
These credit facilitiesfacility, each contain a financial covenant requiring debt to total capitalization not to not exceed 65%.  At December 31, 2009 and 2008, for PPL Energy Supply's consolidated debt to total capitalization percentages,Supply and 70% for PPL Electric, LG&E and KU, as calculated in accordance with itsthe facility, and other customary covenants.  See Note 7 to the Financial Statements for additional information regarding these credit facilities, were 46% and 44%.  The credit facilities also contain standard representations and warranties that must be made for PPL Energy Supply to borrow under them.facilities.
(b)
The committed capacity expires as follows:  $600 million in 2010, $300 million in 2011 and $3.2 billion in 2012.  PPL Energy Supply intends to renew or replace the two credit facilities that expire in 2010 in order to maintain its current total committed capacity level.
(c)Borrowings under PPL Electric's $190 million syndicated credit facility generally bear interest at LIBOR-based rates plusIncludes a spread, depending upon the company's public debt rating.  PPL Electric also has the capability to request the lenders to issue up to $190 million of letters of credit under this facility, which issuances reduce available borrowing capacity.  Under certain conditions, PPL Electric may request that the facility's capacity be increased by up to $100 million.
The syndicated credit facility contains a financial covenant requiring debt to total capitalization to not exceed 70%.  At December 31, 2009 and 2008, PPL Electric's consolidated debt to total capitalization percentages, as calculated in accordance with its credit facility, were 44% and 53%.  The syndicated credit facility also contains standard representations and warranties that must be made for PPL Electric to borrow under it.
Committed capacity includes a $150 million credit facility related to an asset-backed commercial paper program through which PPL Electric obtains financing by selling and contributing its eligible accounts receivable and unbilled revenuesrevenue to a special purpose, wholly owned subsidiary on an ongoing basis.  The subsidiary pledges these assets to secure loans of up to an aggregate of $150$100 million from a commercial paper conduit sponsored by a financial institution.  At December 31, 2009,2012, based on accounts receivable and unbilled revenue pledged, $150 million wasthe amount available for borrowing.borrowing under the facility was $100 million.
The committed capacity expires as follows:  $150 million in 2010 and $190 million in 2012.  PPL Electric intends to renew its existing $150 million asset-backed credit facility in 2010 in order to maintain its current total committed capacity level.
(d)(c)The commitments under PPL's domestic credit facilities are provided by a diverse bank group, with no one bank and its affiliates providing an aggregate commitment of more than 15%9% of the total committed capacity.
(d)In December 2012, the PPL WW credit facility was subsequently replaced with a credit facility expiring in December 2016 and the capacity was increased to £210 million.
(e)Borrowings under WPDH Limited's credit facility bear interest at LIBOR-based rates plus a spread, depending upon the company's public debt rating.
This credit facility containsThe facilities contain financial covenants that require WPDH Limited to maintain an interest coverage ratio of not less than 3.0 times consolidated earnings before income taxes, depreciation and amortization and a RAB that exceeds total net debt by the higher of an amount equal to 15% of total net debt or £150 million, in each case as calculated in accordance with the credit facility.  At December 31, 2009 and 2008, WPDH Limited's interest coverage ratios, as calculated in accordance with its credit facility, were 4.3 and 4.6.  At December 31, 2009 and 2008, WPDH Limited's RAB, as calculated in accordance with the credit facility, exceeded its total net debt by £325 million, or 25%, and £385 million, or 31%.
(f)WPD (South West) has two credit facilities:  one under which it can make cash borrowings and another under which it has the capability to cause the lender to issue up to approximately £4 million of letters of credit.  Borrowings bear interest at LIBOR-based rates plus a margin.
The credit facility under which it can make cash borrowings contains financial covenants that require WPD (South West)company to maintain an interest coverage ratio of not less than 3.0 times consolidated earnings before income taxes, depreciation and amortization and total net debt not in excess of 85% of RAB, in each case asits RAV, calculated in accordance with the credit facility.
(f)Each company pays customary fees under its respective syndicated credit facility, as does KU under its letter of credit facility, and borrowings generally bear interest at LIBOR-based rates plus an applicable margin.
(g)Under the facilities, WPD (East Midlands) and WPD (West Midlands) each have the ability to request the lenders to issue up to £80 million of letters of credit in lieu of borrowing.
(h)The total amount borrowed at December 31, 2012 was a USD-denominated borrowing of $171 million, which equated to £106 million at the time of borrowing and bore interest at 0.8452%.  At December 31, 2009, WPD (South West)'s interest coverage ratio, as calculated in accordance with its credit facility, was 5.3.  At December 31, 2009, WPD (South West)'s total net debt, as calculated in accordance with2012, the credit facility, was 67%unused capacity of RAB.
(g)The commitments under WPD's committed credit facilities are provided by eight banks, with no one bank providing more than 25%was approximately $1.4 billion.

The commitments under WPD's credit facilities are provided by a diverse bank group with no one bank providing more than 16% of the total committed capacity.
The committed capacity of WPD's credit facilities expires as follows:  £4 million in 2010, £210 million in 2012 and £150 million in 2013.  WPD (South West) intends to renew its letter of credit facility that expires in 2010 in order for WPD to maintain its current total committed capacity level.
At December 31, 2009, the unused capacity of WPD's credit facilities was approximately $276 million.

In addition to the financial covenants noted in the table above, the credit agreements governing the above credit facilities contain various other covenants.  Failure to comply with the covenants after applicable grace periods could result in acceleration of repayment of borrowings and/or termination of the agreements.  PPL monitors compliance with the covenants on a regular basis.  At December 31, 2009,2012, PPL was in material compliance with these covenants.  At this time, PPL believes that these covenants and other borrowing conditions will not limit access to these funding sources.

See Note 7 to the Financial Statements for further discussion of PPL's credit facilities.

Commercial Paper

PPL Energy Supply and PPL Electric usually maintain commercial paper programs, under which commercial paper issuances are supported by certain credit facilities of each company, to provide an additional financing source to fund their short-term liquidity needs, if and when necessary.

As discussed below under "Credit Ratings," S&P lowered its rating on PPL Energy Supply's commercial paper to A-3 from A-2 in January 2009.  Since PPL Energy Supply did not plan to issue any commercial paper during 2009 and there was essentially no liquidity in commercial paper markets for paper with an A-3 rating, PPL Energy Supply closed its $500maintains a $750 million commercial paper program in January 2009 and requested that Moody's, S&P and Fitch each withdraw their ratings on its commercial paper program, which each rating agency subsequently did.

PPL Energy Supply may reopen its commercial paper program in the future, depending on market conditions and credit ratings, to provide an additional financing source to fund its short-term liquidity needs, if and when necessary.  Any future commercialCommercial paper issuances would beare supported by PPL Energy Supply's credit facilities.Syndicated Credit Facility.  At December 31, 2012, PPL Energy Supply had $356 million of commercial paper outstanding at a weighted-average interest rate of 0.50%.

PPL Electric hasmaintains a $200$300 million commercial paper program in place.  As noted below under "Credit Ratings,"to provide an additional financing source to fund its short-term liquidity needs, if and when necessary.  Commercial paper issuances are currently supported by PPL Electric's Syndicated Credit Facility.  PPL Electric had no commercial paper for PPL Electric is rated P-2, A-2outstanding at December 31, 2012.
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In February 2012, LG&E and F2 by Moody's, S&P and Fitch.  Market conditions to issueKU each established a commercial paper with these ratings have strengthened significantly since 2008,program for up to $250 million to provide additional financing sources to fund its short-term liquidity needs, if and when the downturn in the financial markets created extremely limited liquidity resulting in high borrowing rates.  PPL Electric did not issue anynecessary.  Commercial paper issuances are supported by LG&E's and KU's Syndicated Credit Facilities.  At December 31, 2012, LG&E and KU had $55 million and $70 million of commercial paper during 2009.  Based on its current cash position and anticipated cash flows, PPL Electric currently does not plan to issue any commercial paper during 2010, but it may do so from time to time, subject to market conditions, to facilitate short-term cash flow needs.outstanding at a weighted average interest rate, for each, of 0.42%.

Operating Leases

PPL and its subsidiaries also have available funding sources that are provided through operating leases.  PPL's subsidiaries lease office space, land, buildings and certain equipment.  These leasing structures provide PPL additional operating and financing flexibility.  The operating leases contain covenants that are typical for these agreements, such as maintaining insurance, maintaining corporate existence and timely payment of rent and other fees.

PPL, through its subsidiary PPL Montana, leases a 50% interest in Colstrip Units 1 and 2 and a 30% interest in Unit 3, under four 36-year, non-cancelable operating leases.  These operating leases are not recorded on PPL's Balance Sheets.  The leases place certain restrictions on PPL Montana's ability to incur additional debt, sell assets and declare dividends.  At this time, PPL believes that these restrictions will not limit access to these funding sources or cause acceleration or termination of the leases.  See Note 7 to the Financial Statements for a discussion of other dividend restrictions related to PPL subsidiaries.

See Note 1011 to the Financial Statements for further discussion of the operating leases.

Long-TermLong-term Debt and Equity Securities

Subject to market conditions, PPL and its subsidiaries currently plan to issue upincur, subject to $300 million and £400 millionmarket conditions, approximately $2.0 billion of long-term indebtedness in long-term debt securities in 2010.  PPL expects to use2013, the proceeds from these issuances for the repayment of short-term debt,which will be used to fund capital expenditures and for other general corporate purposes.  In addition during 2013, two events will occur related to the components of the 2010 Equity Units.  PPL will receive proceeds of $1.150 billion through the issuance of PPL common stock to settle the 2010 Purchase Contracts; and PPL Capital Funding expects to remarket the 4.625% Junior Subordinated Notes due 2018.  See Note 7 to the Financial Statements for additional information.

In addition, PPL currently plans to issue new shares of common stock in 20102013 in an aggregate amount of approximately $75up to $350 million under its forward contracts (see Note 7 to the Financial Statements for more information), DRIP and various employee stock-based compensation plans and its dividend reinvestment plan.other plans.

Forecasted Uses of Cash

In addition to expenditures required for normal operating activities, such as purchased power, payroll, fuel and taxes, PPL currently expects to incur future cash outflows for capital expenditures, various contractual obligations, payment of dividends on its common and preferred securitiesstock and possibly the purchase or redemption of a portion of debt securities.

Capital Expenditures

The table below shows PPL's actual spending for the year 2009 and current capital expenditure projections for the years 20102013 through 2012.2017.

  Actual Projected
  2009 2010 2011 2012 
Construction expenditures (a) (b)             
Generating facilities $361 $671 $673 $507 
Transmission and distribution facilities  511  862  1,097  990 
Environmental  178  63  19  99 
Other  75  114  107  106 
Total Construction Expenditures  1,125  1,710  1,896  1,702 
Nuclear fuel  140  151  173  171 
Total Capital Expenditures $1,265 $1,861 $2,069 $1,873 
    Projected
    2013  2014  2015  2016  2017 
Construction expenditures (a) (b)               
 Generating facilities $ 814  $ 500  $ 514  $ 717  $ 831 
 Distribution facilities   1,780    1,654    1,712    1,711    1,763 
 Transmission facilities   723    599    457    413    390 
 Environmental   750    812    536    312    128 
 Other   139    126    117    105    99 
  Total Construction Expenditures   4,206    3,691    3,336    3,258    3,211 
Nuclear fuel   152    145    153    158    162 
  Total Capital Expenditures $ 4,358  $ 3,836  $ 3,489  $ 3,416  $ 3,373 

(a)Construction expenditures include capitalized interest and AFUDC, which are expected to betotal approximately $190$160 million for the years 20102013 through 2012.2017.
(b)Includes expenditures for certain intangible assets.


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PPL's capital expenditure projections for the years 20102013 through 20122017 total approximately $5.8$18.5 billion.  Capital expenditure plans are revised periodically to reflect changes in operational, market and regulatory conditions.  ThisFor the years presented, this table includes projected costs related to the planned 239793 MW of incremental capacity increases for both PPL Energy Supply and LKE, PPL Electric's asset optimization program focused on the replacement ofto replace aging transmission and distribution assets and the PJM-approved regional transmission line expansion project.  This table also includes LKE's environmental projects related to existing and proposed EPA compliance standards (actual costs may be significantly lower or higher depending on the final requirements; environmental compliance costs incurred by LG&E and KU in serving KPSC jurisdictional customers are generally eligible for recovery through the ECR mechanism).  See NoteNotes 6 and 8 to the Financial Statements for information on LG&E's and KU's ECR plans and the PJM-approved regional transmission line expansion project and the other significant development projects.

PPL plans to fund its capital expenditures in 20102013 with cash on hand, cash from operations and proceeds from the issuance of common stock and debt securities.

Contractual Obligations

PPL has assumed various financial obligations and commitments in the ordinary course of conducting its business.  At December 31, 2009,2012, the estimated contractual cash obligations of PPL were:

 Total Less Than 1 Year 1-3 Years 4-5 Years After 5 Years  Total 2013  2014 - 2015 2016 - 2017 After 2017
                      
Long-term Debt (a) $7,066   $500 $1,447 $5,119 Long-term Debt (a) $ 19,435  $ 751  $ 1,645  $ 946  $ 16,093 
Interest on Long-term Debt (b) 8,342 $421 812 705 6,404 Interest on Long-term Debt (b)  14,276   932   1,704   1,530   10,110 
Operating Leases(c) 968 108 216 223 421   507   109   191   58   149 
Purchase Obligations (c)(d) 8,123 3,153 2,212 868 1,890   8,770   2,642   2,847   1,604   1,677 
Other Long-term Liabilities Reflected on the Balance Sheet under GAAP (d) (e)  80   62   18         
Other Long-term LiabilitiesOther Long-term Liabilities          
Reflected on the Balance          
Sheet under GAAP (e) (f)   607    560    47       
Total Contractual Cash Obligations $24,579  $3,744  $3,758  $3,243  $13,834 Total Contractual Cash Obligations $ 43,595  $ 4,994  $ 6,434  $ 4,138  $ 28,029 

(a)Reflects principal maturities only based on legalstated maturity dates.dates, except for PPL Energy Supply's 5.70% REset Put Securities (REPS).  See Note 7 to the Financial Statements for a discussion of the remarketing feature related to PPL Energy Supply's 5.70% REset Put Securities,the REPS, as well as discussion of variable-rate remarketable bonds issued by the PEDFA on behalf of PPL Energy Supply, LG&E and PPL Electric.KU.  PPL does not have any significant capital lease obligations.
(b)Assumes interest payments through maturity.stated maturity, except for the REPS, for which interest is reflected to the put date.  The payments herein are subject to change, as payments for debt that is or becomes variable-rate debt have been estimated and payments denominated in British pounds sterling have been translated to U.S. dollars at a current foreign currency exchange rate.
(c)See Note 11 to the Financial Statements for additional information.
(d)The payments reflected hereinamounts include agreements to purchase goods or services that are subjectenforceable and legally binding and specify all significant terms, including: fixed or minimum quantities to change, as certainbe purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction.  Primarily includes PPL's purchase obligations included are estimates based on projected obligated quantities and/or projected pricing under the contracts.  Purchase orders made in the ordinary course of business are excluded from the amounts presented.  The payments also include obligations related toelectricity, coal, nuclear fuel and the installation of the scrubbers,limestone as well as certain construction expenditures, which are also reflectedincluded in the Capital Expenditures table presented above.  Financial swaps and open purchase orders that are provided on demand with no firm commitment are excluded from the amounts presented.
(d)(e)The amounts reflected representinclude WPD's contractual deficit pension funding requirements arising from an actuarial valuationvaluations performed in March 2007.2010 and June 2011.  The U.K. electricity regulator currently allows a recovery of a substantial portion of the contributions relating to the plan deficit; however, WPD cannot be certain that this will continue beyond the current and next review periods,period, which extendextends to March 31, 2015.  Based on the current funded status ofThe amounts also include contributions made or committed to be made for 2013 for PPL's and LKE's U.S. qualified pension plans, no cash contributions are required.plans.  See Note 1213 to the Financial Statements for a discussion of expected contributions.

Also included in the amounts are contract adjustment payments related to the Purchase Contract component of the Equity Units.  See Note 7 to the Financial Statements for additional information on the Equity Units.
(e)(f)At December 31, 2009,2012, total unrecognized tax benefits of $212$92 million were excluded from this table as PPL cannot reasonably estimate the amount and period of future payments.  See Note 5 to the Financial Statements for additional information.

Dividends

PPL views dividends as an integral component of shareowner return and expects to continue to pay dividends in amounts that are within the context of maintaining a capitalization structure that supports investment grade credit ratings.  In 2009, PPL increased the annualized2012, PPL's Board of Directors declared an increase to its quarterly dividend rate on its common stock from $1.34 to $1.3836.0 cents per share effective with the April 1, 2009(equivalent to $1.44 per share per annum).  In February 2013, PPL's Board of Directors declared an increase to its quarterly dividend payment.on its common stock to 36.75 cents per share (equivalent to $1.47 per share per annum).  Future dividends will be declared at the discretion of the Board of Directors and will depend upon availablefuture earnings, cash flows, financial and legal requirements and other relevant factors at the time.  As discussed in Note 7 to the Financial Statements, subject to certain exceptions, PPL may not declare or pay any cash dividend on its common stock during any period in which PPL Capital Funding defers interest payments on its 2007 Series A Junior Subordinated Notes due 2067.2067, its 4.625% Junior Subordinated Notes due 2018, or its 4.32% Junior Subordinated Notes due 2019 or until deferred contract adjustment payments on PPL's Purchase Contracts have been paid.  No such deferrals have occurred or are currently anticipated.

PPL Electric expects to continue to pay quarterly dividends on its outstanding preferred securities, if and as declared by its Board of Directors.
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See Note 7 to the Financial Statements for other restrictions related to distributions on capital interests for PPL subsidiaries.

Purchase or Redemption of Debt Securities

PPL will continue to evaluate purchasing or redeemingits outstanding debt securities and may decide to take actionpurchase or redeem these securities depending upon prevailing market conditions and available cash.

Credit RatingsRating Agency Actions

Moody's, S&P and Fitch periodically review the credit ratings on the debt and preferred securities of PPL and its subsidiaries.  Based on their respective independent reviews, the rating agencies may make certain ratings revisions or ratings affirmations.

A credit rating reflects an assessment by the rating agency of the creditworthiness associated with an issuer and particular securities that it issues.  The credit ratings of PPL and its subsidiaries are based on information provided by PPL and other sources.  The ratings of Moody's, S&P and Fitch are not a recommendation to buy, sell or hold any securities of PPL or its subsidiaries.  Such ratings may be subject to revisions or withdrawal by the agencies at any time and should be evaluated independently of each other and any other rating that may be assigned to the securities.  The credit ratings of PPL and its subsidiaries affect its liquidity, access to capital markets and cost of borrowing under its credit facilities.

The following table sets forth PPL's and its subsidiaries' security credit ratings as of December 31, 2012.

Senior UnsecuredSenior SecuredCommercial Paper
IssuerMoody'sS&PFitchMoody'sS&PFitchMoody'sS&PFitch
PPL Energy SupplyBaa2BBBBBBP-2A-2F-2
PPL Capital FundingBaa3BBB-BBB
PPL ElectricA3A-A-P-2A-2F-2
PPL IronwoodB2B
LKEBaa2BBB-BBB+
LG&EAA2A-A+P-2A-2F-2
KUAA2A-A+P-2A-2F-2
PPL WEMBaa3BBB-
WPD (East Midlands)Baa1BBB
WPD (West Midlands)Baa1BBB
PPL WWBaa3BBB-BBB
WPD (South Wales)Baa1BBBA-
WPD (South West)Baa1BBBA-P-2

A downgrade in PPL's or its subsidiaries' credit ratings could result in higher borrowing costs and reduced access to capital markets.  PPL and its 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 following table summarizesIn addition to the credit ratings ofnoted above, the rating agencies took the following actions related to PPL and its rated subsidiaries at December 31, 2009:in 2012.

In January 2012, S&P affirmed its rating and revised its outlook, from positive to stable, for PPL Montana's Pass Through Certificates due 2020.

In February 2012, Fitch assigned ratings to the two newly established commercial paper programs for LG&E and KU.

In March 2012, Moody's affirmed the following ratings:
·Moody'sS&P
Fitch (a)
PPL
Issuer RatingBaa2BBBBBB
OutlookNegativeNegativeSTABLE
PPL Capital Funding
Issuer RatingBBB
Senior Unsecured DebtBaa2BBB-BBB
Junior Subordinated NotesBaa3BB+BBB-
OutlookNegativeSTABLE
PPL Energy Supply (b)
Issuer RatingBBBBBB
Senior Unsecured NotesBaa2BBBBBB
OutlookSTABLENegativeSTABLE
the long-term ratings of the First Mortgage Bonds for LG&E and KU;
PPL Electric (c)
·
the issuer ratings for LG&E and KU; and

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·
Senior Unsecured/Issuer RatingBaa1A-BBB
First Mortgage Bonds/ Senior Secured BondsA3A-A-
Commercial PaperP-2A-2F2
Preferred StockBaa3BBBBBB
Preference StockBaa3BBBBBB
OutlookNegativeNegativeSTABLE
PPL Montana
Pass-Through CertificatesBaa3BBB-BBB
OutlookSTABLESTABLE
WPDH Limited
Issuer RatingBaa3BBB-BBB-
Senior Unsecured DebtBaa3BBB-BBB
Short-term DebtA-3
OutlookSTABLENegativePOSITIVE
WPD LLP
Issuer RatingBBB
OutlookPOSITIVE
WPD (South Wales)
Issuer RatingBBB+BBB+
Senior Unsecured DebtBaa1BBB+A-
Short-term DebtA-2F2
OutlookSTABLENegativePOSITIVE
WPD (South West)
Issuer RatingBaa1BBB+BBB+
Senior Unsecured DebtBaa1BBB+A-
Short-term DebtP-2A-2F2
OutlookSTABLENegativePOSITIVEthe bank loan ratings for LG&E and KU.

Also in March 2012, Moody's and S&P each assigned short-term ratings to the two newly established commercial paper programs for LG&E and KU.

In March and May 2012, Moody's, S&P and Fitch affirmed the long-term ratings for LG&E's 2003 Series A and 2007 Series B pollution control bonds.

Following the announcement of the then-pending acquisition of AES Ironwood, L.L.C. in February 2012, the rating agencies took the following actions:
(a)·In March 2012, Moody's placed AES Ironwood, L.L.C.'s senior secured bonds under review for possible ratings upgrade.
·All Issuer Ratings for Fitch are "Issuer Default Ratings."
(b)Excludes Exempt Facilities Revenue Bonds issued byIn April 2012, S&P affirmed the PEDFA on behalfrating of PPL Energy Supply, which are each currently supported by a letter of credit and are rated on the basis of the credit enhancement.
(c)Excludes Pollution Control Revenue Bonds issued by the LCIDA and the PEDFA on behalf of PPL Electric, of which the LCIDA bonds are insured and may be rated on the basis of relevant factors, including the insurer's ratings.AES Ironwood, L.L.C.'s senior secured bonds.

In January 2009, S&P completed a review of PPL, PPL Energy Supply and PPL ElectricMay 2012, Fitch downgraded its rating, from BBB to BBB- and revised its outlook, for all three entitiesfrom negative to negative from stable.  At that time, S&P affirmed the BBB issuer rating of both PPL and PPL Energy Supply and affirmed the A- issuer rating of PPL Electric.  As a result of the negative outlook at PPL Energy Supply, S&P lowered the commercial paper rating of PPL Energy Supply to A-3 from A-2.  S&P stated in its press release regarding PPL and PPL Energy Supply that the revision in the outlookstable, for PPL and PPL Energy Supply was based primarily on lower than expected cash flows for 2008 combined with concerns over further pressure on financial metrics in 2009.  S&P stated in its press release regarding PPL Electric that the revision in its outlook reflects the linkage with PPL along with their expectation that PPL Electric's financial metrics could weaken beginning in 2010.Montana's Pass Through Certificates due 2020.

At the requestIn June 2012, Fitch assigned a rating and outlook to PPL Capital Funding's $400 million of 4.20% Senior Notes.

In August 2012, Fitch assigned a rating and outlook to PPL Energy Supply, in the first quarter of 2009,Electric's $250 million First Mortgage Bonds.

In August 2012, S&P and Moody's assigned a rating to PPL Electric's $250 million First Mortgage Bonds.

In October 2012, Moody's, S&P and Fitch each withdrew their commercial paperassigned a rating forto PPL Energy Supply.Capital Funding's $400 million of 3.50% Senior Notes.

In February 2009, S&P revised its outlook to negative from stable for eachNovember 2012, Fitch affirmed the long-term issuer default rating and senior unsecured rating of WPDH Limited, WPD LLP,PPL WW, WPD (South Wales) and WPD (South West).

In November 2012, S&P revised its outlook, from stable to negative, for PPL Montana's Pass Through Certificates due 2020.

In November 2012, Moody's and S&P affirmed the long-term ratings for LG&E's 2007 Series A pollution control bonds.

In December 2012, Fitch affirmed the issuer default ratings, individual security ratings and short-term debt ratings of each of the entities.  S&P stated in its press release that the revision in the outlook is a reflection of the change to PPL's outlook and is not a result of any change in WPD's stand-alone credit profile.

In May 2009, Moody's completed a review of PPL, PPL Energy Supply and PPL Electric.  As a result of that review, Moody's revised its outlookoutlooks for PPL, PPL Capital Funding, and PPL Electric, to negative from stable.  At the same time, Moody's affirmed the Baa2 senior unsecured ratingLKE, LG&E and stable outlook of PPL Energy Supply.  Moody's stated in its press release that the revision in the outlook for PPL Electric reflects Moody's expectation that PPL Electric's financial metrics will deteriorate beyond 2009 and considers the potential for additional pressure on cash flows.  Moody's also stated that the revision in the outlook for PPL and PPL Capital Funding reflects the increasing support for corporate earnings and cash flow anticipated from PPL Energy Supply and the subordinate position of the unsecured lenders at these entities relative to the unsecured lenders at the subsidiary levels.

At WPD's request, in September 2009, S&P withdrew its ratings for WPD LLP, since it did not have any securities outstanding.KU.

In October 2009,December 2012, Fitch completed a review of PPL, PPL Electricaffirmed the issuer default rating, individual security rating and revised the outlook, from stable to negative, for PPL Energy Supply.  As a result of that
In February 2013, Moody's upgraded its rating, from Ba1 to B2, and revised the outlook from under review Fitch lowered the rating ofto stable for PPL Energy Supply's senior unsecured notes to BBB from BBB+ and affirmed all other ratings of PPL Energy Supply.  At the same time, Fitch affirmed all ratings of PPL, PPL Capital Funding and PPL Electric.  Fitch stated in its press release that the change in the rating of PPL Energy Supply's senior unsecured notes aligns such rating with the BBB Issuer Default Rating in a manner that is consistent with the approach Fitch applies to other competitive generators and also recognizes a lower valuation of PPL Energy Supply's power assets based on current and forward wholesale power prices.  The rating also reflects Fitch's forecast of lower than previously expected improvement in PPL Energy Supply's earnings and cash flow in 2010 and 2011.Ironwood.

In January 2010, as a result of implementing its recently revised guidelines for rating preferred stock and hybrid securities, Fitch lowered the rating of PPL Capital Funding's junior subordinated notes to BB+ from BBB- and lowered the ratings of PPL Electric's preferred stock and preference stock to BBB- from BBB.  Fitch stated in its press release that the new guidelines, which apply to instruments issued by companies in all sectors, typically resulted in downgrades of one notch for many instruments that provide for the ability to defer interest or dividend payments.  Fitch stated that it has no reason to believe that deferral will be activated.

Ratings Triggers

WPD (South West)'s 1.541% Index-linked Notes due 2053 and 2056 and WPD (South Wales)'s 4.80436% Notes due 2037As discussed in Note 7 to the Financial Statements, certain of WPD's senior unsecured notes may be put by the holders back to the issuer for redemption if the long-term credit ratings assigned to the notes by Moody's, S&P or Fitch are withdrawn by any of the rating agencies (Moody's, S&P, or Fitch) or reduced to a non-investment grade rating of Ba1 or BB+ in connection with a restructuring event.  A restructuring event includes the loss of, or a material adverse change to, the distribution licenselicenses under which WPD (East Midlands), WPD (South West) and, WPD (South Wales) operate.and WPD (West Midlands) operate and would be a trigger event in that company.  These notes totaled £467 million£3.3 billion (approximately $766 million)$5.3 billion) nominal value at December 31, 2009.2012.

PPL and PPL Energy Supply have various derivative and non-derivative contracts, including contracts for the sale and purchase of electricity and fuel, commodity transportation and storage, tolling agreements, and interest rate and foreign currency instruments, which contain provisions requiringthat require PPL and PPL Energy Supply to post additional collateral, or permit the counterparty to terminate the contract, if PPL's or PPL Energy Supply's credit rating were to fall below investment grade.  See Note 1819 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 December 31, 2009.2012.  At December 31, 2009,2012, if PPL's and PPL Energy Supply'sits subsidiaries' credit ratings had been below investment grade, PPL would have been required to prepay or post an additional $298$501 million of collateral to counterparties for both derivative and non-derivative commodity and commodity-related contracts used in its generation, marketing and trading operations and interest rate and foreign currency contracts.

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Guarantees for Subsidiaries

At times, PPL provides guarantees forcertain consolidated affiliate financing arrangements tothat enable certain transactions for its consolidated affiliates, excluding PPL Electric.transactions.  Some of the guarantees contain financial and other covenants that, if not met, would limit or restrict the consolidated affiliates' access to funds under these financing arrangements, require early maturity of such arrangements or limit the consolidated affiliates' ability to enter into certain transactions.  At this time, PPL believes that these covenants will not limit access to relevant funding sources.  See Note 1415 to the Financial Statements for additional information about guarantees.

Off-Balance Sheet Arrangements

PPL has entered into certain agreements that may contingently require payment to a guaranteed or indemnified party.  See Note 1415 to the Financial Statements for a discussion of these agreements.

Risk Management - Energy Marketing & Trading and Other

Market Risk

See Notes 1, 17,18, and 1819 to the Financial Statements for information about PPL's 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 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's competitive generation assets load-followingand full-requirement sales and retail activities.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).  Although they do not receive hedge accounting treatment, these transactions are considered non-trading activity.  The net fair value of economic positions at December 31, 20092012 and 20082011 was a net liabilityasset/(liability) of $77$346 million and $52$(63) million.  See Note 1819 to the Financial Statements for additional information on economic activity.information.

To hedge the impact of market price volatility on PPL's energy-related assets, liabilities and other contractual arrangements, PPL EnergyPlusboth 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's non-trading commodity derivative contracts mature at various timesrange in maturity through 2017.

Within PPL's non-trading portfolio, the decision to enter into energy contracts is influenced by the expected value of PPL's generation.  In determining the number of MWhs that are available to be sold forward, PPL first reduces the potential output by the amount of unavailable generation due to planned maintenance on a particular unit.  The potential output is further reduced by the amount of MWhs that historically is not produced by a plant due to such factors as equipment breakage.  Finally, the potential output of certain plants (such as peaking units) is reduced if their higher cost of production will not allow them to economically run during all hours.

PPL's non-trading portfolio also includes full requirements energy contracts.  The net obligation to serve these contracts changes minute-by-minute.  Anticipated usage patterns and energy peaks are affected by expected load changes, regional economic drivers, customer shopping or migration and seasonal weather patterns.  PPL analyzes historical on-peak and off-peak usage patterns, expected load changes, regional economic drivers, and weather patterns, among other factors, to determine monthly levels of electricity that best fits usage patterns to minimize earnings exposure.  To satisfy its full requirements obligations, PPL generally enters into contracts to purchase unbundled products of electricity, capacity, RECs and other ancillary products.  To a lesser extent, PPL reserves a portion of its generation for full requirements contracts that is expected to be the best match with anticipated usage patterns and energy peaks.2019.

The following charttable sets forth the changes in the net fair value of PPL's non-trading commodity derivative contracts.contracts at December 31, 2012.  See Notes 1718 and 1819 to the Financial Statements for additional information.

 Gains (Losses)  Gains (Losses)
 2009 2008  2012  2011 
          
Fair value of contracts outstanding at the beginning of the period $402 $(305)Fair value of contracts outstanding at the beginning of the period $ 1,082  $ 947 
Contracts realized or otherwise settled during the period 189 (49)Contracts realized or otherwise settled during the period  (1,005)  (517)
Fair value of new contracts entered into during the period(a) 143 101   7   13 
Changes in fair value attributable to changes in valuation techniques (a)   158 
Other changes in fair value  546   497 Other changes in fair value   389    639 
Fair value of contracts outstanding at the end of the period $1,280  $402 Fair value of contracts outstanding at the end of the period $ 473  $ 1,082 

(a)Amount representsRepresents the reduction of valuation reserves related to capacity and FTR contracts upon the adoption of fair value accounting guidance.of contracts at the end of the quarter of their inception.

The following table segregates the net fair value of PPL's non-trading commodity derivative contracts at December 31, 20092012 based on whetherthe level of observability of the information used to determine the fair value was determined by prices quoted in active markets for identical instruments or other more subjective means.value.


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  Net Asset (Liability)
  Maturity Less Than 1 Year 
Maturity
1-3 Years
 
Maturity
4-5 Years
 
Maturity
In Excess
of 5 Years
 
Total
Fair Value
Source of Fair Value                    
Prices quoted in active markets for identical instruments                    
Prices based on significant other observable inputs $363  $736  $73      $1,172 
Prices based on significant unobservable inputs  (1)  13   30  $66   108 
Fair value of contracts outstanding at the end of the period $362  $749  $103  $66  $1,280 

   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) $ 452  $ 15  $ (20) $ 5  $ 452 
Prices based on significant unobservable inputs (Level 3)   8    10    3       21 
Fair value of contracts outstanding at the end of the period $ 460  $ 25  $ (17) $ 5  $ 473 

PPL 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 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 own counterparties) with which it has energy contracts and other factors could affect PPL's ability to meet its obligations, or cause significant increases in the market price of replacement energy.  Although PPL attempts to mitigate these risks, there can be no assurance that it will be able to fully meet its firm obligations, that it will not be required to pay damages for failure to perform, or that it will not experience counterparty nonperformance in the future.  In connection with its bankruptcy proceedings, a significant counterparty, SMGT, had been purchasing lower volumes of electricity than prescribed in the contract and effective April 1, 2012 the contract was terminated.  PPL cannot predict the prices or other terms on which it will be able to market to third parties the power that SMGT will not purchase from PPL EnergyPlus due to the termination of this contract.  See Note 15 to the Financial Statements for additional information.

Commodity Price Risk (Trading)

PPL's trading commodity derivative contracts mature at various timesrange in maturity through 2015.2017.  The following table sets forth changes in the net fair value of PPL's trading commodity derivative contracts.contracts at December 31, 2012.  See Notes 1718 and 1819 to the Financial Statements for additional information.

 Gains (Losses) Gains (Losses)
 2009 2008 2012  2011 
         
Fair value of contracts outstanding at the beginning of the period $(75) $16  $ (4) $ 4 
Contracts realized or otherwise settled during the period 2 (18)  20   (14)
Fair value of new contracts entered into during the period(a) 31 28   17   10 
Changes in fair value attributable to changes in valuation techniques (a)   11 
Other changes in fair value  36   (112)   (4)   (4)
Fair value of contracts outstanding at the end of the period $(6) $(75) $ 29  $ (4)

(a)InRepresents the fourthfair value of contracts at the end of the quarter of 2008, PPL refined its valuation approach for FTR and PJM basis positions, consistent with PPL's practice of pricing other less active trading points, resulting in changes in valuation techniques.their inception.

PPL will reverse unrealized gains of approximately $1 million over the next three months as the transactions are realized.

The following table segregates the net fair value of PPL's trading commodity derivative contracts at December 31, 20092012 based on whetherthe level of observability of the information used to determine the fair value was determined by prices quoted in active markets for identical instruments or other more subjective means.value.

  Net Asset (Liability)
  
Maturity Less Than
1 Year
 
Maturity
1-3 Years
 
Maturity
4-5 Years
 
Maturity
in Excess
of 5 Years
 
Total Fair
Value
Source of Fair Value                    
Prices quoted in active markets for identical instruments $1              $1 
Prices based on significant other observable inputs  (4) $(5) $2  $1   (6)
Prices based on significant unobservable inputs  (1)              (1)
Fair value of contracts outstanding at the end of the period $(4) $(5) $2  $1  $(6)
   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) $ 18  $ 10        $ 28 
Prices based on significant unobservable inputs (Level 3)   1             1 
Fair value of contracts outstanding at the end of the period $ 19  $ 10        $ 29 

VaR Models

PPL utilizes aA VaR model is utilized to measure commodity price risk in domestic gross energy margins for its 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.  PPL calculates 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 conservativedisciplined hedging program, PPL'sthe non-trading VARVaR exposure is expected to be limited in the short term.  At December 31, 2009 and December 31, 2008, theshort-term.  The VaR for PPL's portfolios using end-of-quarterend-of-month results for the period was as follows.


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  Trading VaR Non-Trading VaR
  2009 2008 2009 2008
95% Confidence Level, Five-Day Holding Period                
Period End $3  $3  $8  $10 
Average for the Period  4   10   9   14 
High  8   22   11   20 
Low  1   3   8   9 

   Trading VaR Non-Trading VaR
   2012  2011  2012  2011 
95% Confidence Level, Five-Day Holding Period            
 Period End $ 2  $ 1  $ 12  $ 6 
 Average for the Period   3    3    10    5 
 High   8    6    12    7 
 Low   1    1    7    4 

The trading portfolio includes all speculativeproprietary trading positions, regardless of the delivery period.  All positions not considered speculativeproprietary trading are considered non-trading.  PPL'sThe non-trading portfolio includes PPL'sthe 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 December 31, 2009 was an unrealized loss of $3 million and consisted of the following.

  2010 2011 
          
Trading (a)         
Non-trading $(2) $(1) 
Total $(2) $(1) 

(a)The amount of trading FTR positions was less than $1 million at December 31, 2009.
2012.

Interest Rate Risk

PPL and its subsidiaries have issuedissue debt to finance their operations, which exposes them to interest rate risk.  PPL utilizes various financial derivative instruments to adjust the mix of fixed and floating interest rates in its debt portfolio, adjust the duration of its debt portfolio 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 PPL's debt portfolio due to changes in the absolute level of interest rates.

At December 31, 2009,2012 and 2011, PPL's potential annual exposure to increased interest expense, based on a 10% increase in interest rates, was $1 million, compared with $3 million at December 31, 2008.not significant.

PPL is also exposed to changes in the fair value of its domestic and international debt portfolios.  PPL estimated that a 10% decrease in interest rates at December 31, 20092012 would increase the fair value of its debt portfolio by $285$611 million, compared with $327$635 million at December 31, 2008.2011.

At December 31, PPL had the following interest rate hedges outstanding.outstanding at December 31.

  2009 2008
  
Exposure
Hedged
 Fair Value, Net - Asset (Liability) (a) 
Effect of a 10%
Adverse Movement
in Rates (b)
 
Exposure
Hedged
 Fair Value, Net - Asset (Liability) (a) 
Effect of a 10%
Adverse Movement
in Rates (b)
                         
Cash flow hedges                        
Interest rate swaps (c) $425  $24  $(24) $200  $(11) $(12)
Cross-currency swaps (d)  302   8   (41)  302   54   (8)
Fair value hedges                        
Interest rate swaps (e)  750   31   (12)  500   54   (5)
   2012  2011 
         Effect of a       Effect of a
     Fair Value, 10% Adverse   Fair Value, 10% Adverse
    Exposure Net - Asset Movement  Exposure Net - Asset Movement
   Hedged (Liability) (a) in Rates (b) Hedged (Liability) (a) in Rates (b)
Cash flow hedges                  
 Interest rate swaps (c) $ 1,165  $ (7) $ (34) $ 150  $ (3) $ (3)
 Cross-currency swaps (d)   1,262    10    (179)   1,262    22    (187)
Fair value hedges                  
 Interest rate swaps            99    4    
Economic hedges                  
 Interest rate swaps (e)   179    (58)   (3)   179    (60)   (4)

(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.
(c)PPL utilizes various risk management instruments to reduce its exposure to the expected future cash flow variability of its debt instruments.  These risks include exposure to adverse interest rate movements for outstanding variable rate debt and for future anticipated financing.  While PPL is exposed to changes in the fair value of these instruments, any changes in the fair value of these instrumentssuch cash flow hedges are recorded in equity andor as regulatory assets or liabilities, if recoverable through regulated 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.  Sensitivities represent a 10% adverse movement in interest rates.  The positions outstanding at December 31, 2012 mature through 2043.
(d)WPDH Limited usesPPL utilizes cross-currency swaps to hedge the interest payments and principal of itsWPD's U.S. dollar-denominated senior notes with maturity dates ranging from December 2017 to December 2028.notes.  While PPL is exposed to changes in the fair value of these instruments, any change in the fair value of these instruments is recorded in equity and reclassified into earnings in the same period during which the item being hedged affects earnings.  Sensitivities represent a 10% adverse movement in both interest rates and foreign currency exchange rates.  The positions outstanding at December 31, 2012 mature through 2028.
(e)PPL utilizes various risk management instruments to adjustreduce its exposure to the mixexpected future cash flow variability of fixed and floating interest rates in its debt portfolio.  The changeinstruments.  These risks include exposure to adverse interest rate movements for outstanding variable rate debt and for future anticipated financing.  While PPL is exposed to changes in the fair value of these instruments, any realized changes in the fair value of such economic hedges are recoverable through regulated rates and any subsequent changes in fair value of these instruments, as well as the offsetting changederivatives are included in the value of the hedged exposure of the debt, is reflected in earnings.regulatory assets or liabilities.  Sensitivities represent a 10% adverse movement in interest rates.  The positions outstanding at December 31, 2012 mature through 2033.

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Foreign Currency Risk

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.  See Note 1 to the Financial Statements for additional information regarding foreign currency translation.


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.

At December 31, PPL had the following foreign currency hedges outstanding.outstanding at December 31:

 2012  2011 
     Effect of a 10%     Effect of a 10%
   Fair Value, Adverse Movement   Fair Value, Adverse Movement
 2009 2008 Exposure Net - Asset in Foreign Currency Exposure Net - Asset in Foreign Currency
 
Exposure
Hedged
 Fair Value, Net - Asset (Liability) 
Effect of a 10%
Adverse Movement
in Foreign Currency Exchange Rates (a)
 
Exposure
Hedged
 Fair Value, Net - Asset (Liability) 
Effect of a 10%
Adverse Movement
in Foreign Currency Exchange Rates (a)
 Hedged (Liability) Exchange Rates (a) Hedged (Liability) Exchange Rates (a)
                         
Net investment hedges (b) £40 $13 $(6) £68 $34 $(10) £ 162  $ (2) $ (26) £ 92  $ 7  $ (13)
Economic hedges (c) 48 2 (4)         1,265   (42)  (192)  288   11   (37)

(a)Effects of adverse movements decrease assets or increase liabilities, as applicable, which could result in an asset becoming a liability.
(b)To protect the value of a portion of its net investment in WPD, PPL executedexecutes forward contracts to sell British pounds sterling.GBP.  The settlement datespositions outstanding at December 31, 2012 mature through 2013.  Excludes the amount of these contracts range from March 2010 through June 2011.an intercompany loan classified as a net investment hedge.  See Note 19 to the Financial Statements for additional information.
(c)To economically hedge the translation of 2010 expected income denominated in British pounds sterlingGBP to U.S. dollars, PPL enteredenters into a combination of average rate forwards and average rate options to sell British pounds sterling.GBP.  The forwards and options have termination dates ranging from January 2010outstanding at December 31, 2012 mature through June 2010.2015.

NDT Funds - Securities Price Risk

In connection with certain NRC requirements, PPL Susquehanna maintains trust funds to fund certain costs of decommissioning the PPL Susquehanna nuclear station.plant (Susquehanna).  At December 31, 2009,2012, these funds were invested primarily in domestic equity securities and fixed-rate, fixed-income securities and are reflected at fair value on PPL's Balance Sheet.  The mix of securities is designed to provide returns 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 December 31, 2009,2012, a hypothetical 10% increase in interest rates and a 10% decrease in equity prices would have resulted in an estimated $40$49 million reduction in the fair value of the trust assets, compared with $27$43 million at December 31, 2008.2011.  See Notes 1718 and 2123 to the Financial Statements for additional information regarding the NDT funds.

Defined Benefit Plans - Securities Price Risk

See "Application of Critical Accounting Policies - Defined Benefits" for additional information regarding the effect of securities price risk on plan assets.

Credit Risk

Credit risk is the risk that PPL would incur a loss as a result of nonperformance by counterparties of their contractual obligations.  PPL maintains credit policies and procedures with respect to counterparty credit (including requirements that counterparties maintain specified credit ratings) and requires other assurances in the form of credit support or collateral in certain circumstances in order to limit counterparty credit risk.  However, PPL has concentrations of suppliers and customers among electric utilities, financial institutions and other energy marketing and trading companies.  These concentrations may impact PPL's overall exposure to credit risk, positively or negatively, as counterparties may be similarly affected by changes in economic, regulatory or other conditions.

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PPL includes the effect of credit risk on its fair value measurements to reflect the probability that a counterparty will default when contracts are out of the money (from the counterparty's standpoint).  In this case, PPL would have to sell into a lower-priced market or purchase fromin a higher-priced market.  When necessary, PPL records an allowance for doubtful accounts to reflect the probability that a counterparty will not pay for deliveries PPL has made but not yet billed, which are reflected in "Unbilled revenues" on the Balance Sheets.  PPL also has established a reserve with respect to certain sales to the California ISO for which PPL has not yet been paid,receivables from SMGT, which is reflected in accounts receivable on the Balance Sheets.  See Note 1415 to the Financial Statements for additional information.

In 2007,2009, the PUC approved PPL Electric's post-rate cap plan to procure default electricity supply for retail customers who do not choose an alternative competitive supplier in 2010.  From 2007 through 2009, PPL Electric conducted six competitive solicitations to purchase electricity generation supply for these customers.

In October 2009, PPL Electric purchased 2010 supply for fixed-price default service to large commercial and large industrial customers who elect to take that service.  In November 2009, PPL Electric purchased supply to provide hourly default service to large commercial and industrial customers in 2010.

In June 2009, the PUC approved PPL Electric'sPLR procurement plan for the period January 2011 through May 2013.  The first twoTo date, PPL Electric has conducted all of 14its planned competitive solicitations occurred in 2009.solicitations.

Under the standard Supply Master Agreement (the Agreement) for the bidcompetitive solicitation process, PPL Electric requires all suppliers to post collateral if their credit exposure exceeds an established credit limit.  In the event a supplier defaults on its obligation, PPL Electric would be required to seek replacement power in the market.  All incremental costs incurred by PPL Electric would be recoverable from customers in future rates.  At December 31, 2009, all2012, most of the successful bidders under all of the solicitations had an investment grade credit rating from S&P, and were not required to post collateral under the Agreement.  A small portion of bidders were required to post collateral, which totaled less than $1 million, under the Agreement.  There is no instance under the Agreement in which PPL Electric is required to post collateral to its suppliers.

See "Overview" in this Item 7 and Notes 14, 15, 1716, 18 and 1819 to the Financial Statements for additional information on the competitive solicitations, the Agreement, credit concentration and credit risk.

Foreign Currency Translation

The value of the British pound sterling fluctuates in relation to the U.S. dollar.  In 2012, changes in this exchange rate resulted in a foreign currency translation gain of $99 million, which primarily reflected a $181 million increase to PP&E offset by an increase of $82 million to net liabilities.  In 2011, changes in this exchange rate resulted in a foreign currency translation loss of $51 million, which primarily reflected a $69 million reduction to PP&E offset by a reduction of $18 million to net liabilities.  In 2010, changes in this exchange rate resulted in a foreign currency translation loss of $63 million, which primarily reflected a $180 million reduction to PP&E offset by a reduction of $117 million to net liabilities.  The impact of foreign currency translation is recorded in AOCI.

Related Party Transactions

PPL is not aware of any material ownership interests or operating responsibility by senior management of PPL, PPL Energy Supply, or PPL Electric, LKE, LG&E or KU in outside partnerships, including leasing transactions with variable interest entities, or other entities doing business with PPL.

For  See Note 16 to the Financial Statements for additional information on related party transactions, see Note 15 to the Financial Statements.transactions.

Acquisitions, Development and Divestitures

PPL is currently planning incremental capacity increases of 239 MW, primarily at its existing generating facilities.  See "Item 2. Properties - Supply Segment"from time to time evaluates opportunities for additional information.

PPL continuously reexaminespotential 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.

In April 2012, an indirect wholly owned subsidiary of PPL Energy Supply completed the Ironwood Acquisition.  In April 2011, PPL, through its indirect, wholly owned subsidiary PPL WEM, completed its acquisition of WPD Midlands.  In November 2010, PPL completed its acquisition of LKE.  See Note 10 to the Financial Statements for additional information.

See Notes 8, 9 and 910 to the Financial Statements for additional information on the more significant activities.

Environmental Matters

Extensive federal, state and local environmental laws and regulations are applicable to PPL's air emissions, water discharges and the management of hazardous and solid waste, among other areas; and 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 cost for their products or their demand for PPL's services.
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Physical effects associated with climate change could include the impact of changes in weather patterns, such as storm frequency and intensity, and the resultant potential damage to PPL's generation assets, electricity transmission and distribution systems, as well as impacts on customers.  In addition, changed weather patterns could potentially reduce annual rainfall in areas where PPL has hydro generating facilities or where river water is used to cool its fossil and nuclear powered generators.  PPL cannot currently predict whether its businesses will experience these potential climate change-related risks or estimate the potential cost of their related consequences.

The below provides a discussion of the more significant environmental matters.

Coal Combustion Residuals (CCRs)
In June 2010, the EPA proposed two approaches to regulating CCRs (as either hazardous or non-hazardous) under existing solid waste regulations.  A final rulemaking is currently expected before the end of 2015.  However, the timing of the final regulations could be accelerated by certain litigation that could require the EPA to issue its regulations sooner.  Regulations could impact handling, disposal and/or beneficial use of CCRs.  The economic impact could be material if CCRs are regulated as hazardous waste, and significant if regulated as non-hazardous, in accordance with the proposed rule.

Effluent Limitation Guidelines
The EPA is to issue guidelines for technology-based limits in discharge permits for scrubber wastewater and is expected to require dry ash handling.  The EPA agreed, in recent settlement negotiations with environmentalists, to propose revisions to its effluent limitation guidelines (ELGs) by April 2013, with a final rule in late 2014.  Limits could be so stringent that plants may consider extensive new or modified wastewater treatment facilities and possibly zero liquid discharge operations, the cost of which could be significant.  Impacts should be better understood after the proposed rule is issued.

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: one requires installation of Best Technology Available (BTA) to reduce mortality of aquatic organisms that are pulled into the plant cooling water system (entrainment), and the second imposes standards for reduction of mortality of aquatic organisms trapped on water intake screens (impingement).  A final rule is expected in June 2013.  The proposed regulation would apply to nearly all PPL-owned steam electric plants in Pennsylvania, Kentucky, and Montana, potentially even including those equipped with closed-cycle cooling systems.  PPL'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.

GHG Regulations
In 2013, the EPA is expected to finalize limits on GHG emissions from new power plants and to begin working on a proposal for such emissions from existing power plants.  The EPA's proposal on GHG emissions from new power plants would effectively preclude construction of any coal-fired plants and could even be difficult for new gas-fired plants to meet.  With respect to existing power plants, the impact could be very significant, depending on the structure and stringency of the final rule.  PPL, along with others in the industry, filed comments on the EPA's proposal related to GHG emissions from new plants.  With respect to GHG limits for existing plants, PPL will advocate for reasonable, flexible requirements.

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 new coal plants.  PPL is generally well-positioned to comply with MATS, primarily due to recent investments in environmental controls and approved Environmental Cost Recovery (ECR) plans to install additional controls at some of our Kentucky plants.  PPL 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 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.
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CSAPR and CAIR
In 2011, the EPA finalized its CSAPR regulating emissions of nitrous 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 United States.  In December 2011, the U.S. Court of Appeals for the District of Columbia Circuit (the Court) stayed implementation of CSAPR, leaving CAIR in place.  Subsequently, in August 2012, the Court vacated and remanded CSAPR back to the EPA for further rulemaking, again leaving CAIR in place, pending further EPA action.  PPL plants in Pennsylvania and Kentucky will continue to comply with CAIR through optimization of existing controls, balanced with emission allowance purchases.  The Court's August 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 - Montana
The EPA signed its final Federal Implementation Plan (FIP) of the Regional Haze Rules for Montana in September 2012, with tighter emissions limits for 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 Corette (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 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).

See "Item 1. Business - Environmental Matters" and Note 1415 to the Financial Statements for afurther discussion of environmental matters.

Competition

See "Item 1. Business - Competition""Competition" under each of PPL's reportable segments in "Item 1. Business - Segment Information" and "Item 1A. Risk Factors" for a discussion of competitive factors affecting PPL.

New Accounting Guidance

See Notes 1 and 2224 to the Financial Statements for a discussion of new accounting guidance adopted and pending adoption.

Application of Critical Accounting Policies

PPL's financialFinancial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies.  The following accounting policies are particularly important to the financial condition or results of operations, of PPL, and require estimates or other judgments of matters inherently uncertain.  Changes in the estimates or other judgments included within these accounting policies could result in a significant change to the information presented in the Financial Statements (these accounting policies are also discussed in Note 1 to the Financial Statements).  PPL's seniorSenior management has reviewed these critical accounting policies, the following disclosures regarding their application and the estimates and assumptions regarding them, with its Audit Committee.  In addition, PPL's senior management has reviewed the following disclosures regarding the application of these critical accounting policies with the Audit Committee.

Effective January 1, 2009, PPL and its subsidiaries fully applied accounting guidance that provides a framework for measuring fair value.  The fair value measurement concepts provided by this guidance are used within its financial statements where applicable.  See Notes 1 and 17 to the Financial Statements for additional information regarding fair value measurements.

1)     Price Risk Management

See "Price Risk Management" in Note 1 to the Financial Statements, as well as "Risk Management - Energy Marketing & Trading and Other" above and Note 18 to the Financial Statements.above.

2)     Defined Benefits

Certain PPL and certain of its subsidiaries sponsor various qualified funded and non-qualified unfunded defined benefit pension plans.  Certain PPL subsidiaries also sponsor both funded and unfunded other postretirement benefit plans.  These plans are applicable to the majority of the employees of PPL and its subsidiaries.PPL.  PPL and certain of its subsidiaries record an asset or liability to recognize the funded status of all defined benefit plans with an offsetting entry to OCI or regulatory assets and liabilities for PPL Electric.amounts that are expected to be recovered through regulated customer rates.  Consequently, the funded status of all defined benefit plans is fully recognized on the Balance Sheets.  See Note 1213 to the Financial Statements for additional information about the plans and the accounting for defined benefits.

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PPL makesand its subsidiaries make certain assumptions regarding the valuation of benefit obligations and the performance of plan assets.  When accounting for defined benefits, delayed recognition in earnings of differences between actual results and expected or estimated results is a guiding principle.  Annual net periodic defined benefit costs are recorded in current earnings based on estimated results.  Any differences between actual and estimated results are recorded in OCI or regulatory assets and liabilities for PPL Electric.amounts that are expected to be recovered through regulated customer rates.  These amounts in AOCI or regulatory assets and liabilities are amortized to income over future periods.  The delayed recognition allows for a smoothed recognition of costs over the working lives of the employees who benefit under the plans.  The primary assumptions are:

·
Discount Rate - The discount rate is used in calculating the present value of benefits, which is based on projections of benefit payments to be made in the future. The objective in selecting the discount rate is to measure the single amount that, if invested at the measurement date in a portfolio of high-quality debt instruments, would provide the necessary future cash flows to pay the accumulated benefits when due.

·Expected Return on Plan Assets - Management projects the long-term rates of return on plan assets based on historical performance, future expectations and periodic portfolio rebalancing among the diversified asset classes.  These projected returns reduce the net benefit costs PPL records currently.

·Rate of Compensation Increase - Management projects employees' annual pay increases, which are used to project employees' pension benefits at retirement.

·Health Care Cost Trend Rate - Management projects the expected increases in the cost of health care.

In selecting a discount rate for its U.S. defined benefit plans, PPL starts with ana cash flow analysis of the expected benefit payment stream for its plans.  This information is firstThe plan-specific cash flows are matched against a spot-rate yield curve.  A portfoliothe coupons and expected maturity values of 526 Aa-gradedindividually selected bonds.  This bond matching process begins with the full universe of Aa-rated non-callable (or callable with make-whole provisions) bonds, with a total amount outstanding in excess of $541 billion, servesserving as the base from which those with the lowest and highest yields arewere eliminated to develop an appropriate subset of bonds.  Individual bonds were then selected based on the ultimate yield curve.  The resultstiming of this analysis are considered together with other economic dataeach plan's cash flows and movements in variousparameters were established as to the percentage of each individual bond indicesissue that could be hypothetically purchased and the surplus reinvestment rates to determine the discount rate assumption.be assumed.  At December 31, 2009,2012, PPL decreased the discount rate for its U.S. pension plans from 6.50%5.06% to 6.00% as a result of this assessment4.22% and decreased the discount rate for its other postretirement benefit plans from 6.45%4.80% to 5.81%4.00%.

A similar process is used to select theIn selecting a discount rate for its U.K. defined benefit plans, PPL starts with a cash flow analysis of the U.K. pension plans,expected benefit payment stream for its plans.  These plan-specific cash flows were matched against a spot-rate yield curve to determine the assumed discount rate, which usesused an iBoxx British pounds sterling denominated corporate bond index as its base.  An individual bond matching approach is not used for U.K. pension plans because the universe of bonds in the U.K. is not deep enough to adequately support such an approach.  At December 31, 2009, PPL decreased2012, the discount rate for the U.K. pension plans was decreased from 7.47%5.24% to 5.55%4.27% as a result of this assessment.

The expected long-term rates of return for PPL's U.S. defined benefit pension and other postretirement benefit plans have been developed using a best-estimate of expected returns, volatilities and correlations for each asset class.  PPL management corroborates these rates with expected long-term rates of return calculated by its independent actuary, who uses a building block approach that begins with a risk-free rate of return with factors being added such as inflation, duration, credit spreads and equity risk.  Each plan's specific asset allocation is also considered in developing a reasonable return assumption.

At December 31, 2009,2012, PPL's expected return on plan assets remained at 8.00%decreased from 7.07% to 7.02% for its U.S. pension plans and remained at 7.00%increased from 5.93% to 5.97% for its other postretirement benefit plans.  The expected long-term rates of return for PPL's U.K. pension plans have been developed by WPDPPL management with assistance from an independent actuary using a best-estimate of expected returns, volatilities and correlations for each asset class.  For the U.K. plans, PPL's expected return on plan assets remained at 7.90%decreased from 7.17% to 7.16% at December 31, 2009.2012.

In selecting a rate of compensation increase, PPL considers past experience in light of movements in inflation rates.  At December 31, 2009,2012, PPL's rate of compensation increase remained at 4.75%decreased from 4.02% to 3.98% for its U.S. pension plans and 4.00% to 3.97% for its other postretirement benefit plans.  For the U.K. plans, PPL's rate of compensation increase remained at 4.00% at December 31, 2009.2012.

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In selecting health care cost trend rates, PPL considers past performance and forecasts of health care costs.  At December 31, 2009,2012, PPL's health care cost trend rates were 8.00% for 2010,2013, gradually declining to 5.50% for 2016.
2019.
A variance in the assumptions listed above could have a significant impact on accrued defined benefit liabilities or assets, reported annual net periodic defined benefit costs and OCI or regulatory assets and liabilities for LG&E, KU and PPL Electric.  While the charts below reflect either an increase or decrease in each assumption, the inverse of this change would impact the accrued defined benefit liabilities or assets, reported annual net periodic defined benefit costs and OCI or regulatory assets and liabilities for LG&E, KU and PPL Electric by a similar amount in the opposite direction.  The sensitivities below reflect an evaluation of the change based solely on a change in that assumption and does not include income tax effects.

At December 31, 2009, PPL had recorded2012, the following defined benefit plan liabilities:plans were recorded as follows.

Pension liabilities $1,290 
Other postretirement benefit liabilities  197 
Pension liabilities (2,084)
Other postretirement benefit liabilities (301)

The following chart reflects the sensitivities in the December 31, 20092012 Balance Sheet associated with a change in certain assumptions based on PPL's primary defined benefit plans.

 Increase (Decrease)
   Impact on   Impact on
 Increase (Decrease) Change in defined benefit Impact on regulatory
Actuarial assumption Change in assumption Impact on defined benefit liabilities Impact on OCI Impact on regulatory assets assumption liabilities OCI assets
                 
Discount Rate (0.25)% $194 $(163) $31  (0.25)% $ 473  $ (389) $ 84 
Rate of Compensation Increase 0.25% 26 (21) 5  0.25%  66   (54)  12 
Health Care Cost Trend Rate (a) 1.0% 12 (8) 4  1.00%  7   (1)  6 

(a)Only impacts other postretirement benefits.

In 2009,2012, PPL recognized net periodic defined benefit costs charged to operating expense of $70$166 million.  This amount represents a $14$12 million increase from 2008.  This2011, excluding $50 million of separation costs recorded in 2011.  The increase in expense was primarily attributable to actual asset losses in 2008.  As a result, the expected return on assets in 2009 was lower andincreased amortization of gain/loss was impacted.losses and a non-qualified plan settlement charge recorded in 2012.

The following chart reflects the sensitivities in the 20092012 Statement of Income (excluding income tax effects) associated with a change in certain assumptions based on PPL's primary defined benefit plans.

Actuarial assumption Change in assumption Impact on defined benefit costs  Change in assumption  Impact on defined benefit costs
         
Discount Rate (0.25)% $7  (0.25)% $ 24 
Expected Return on Plan Assets (0.25)% 12  (0.25)%  26 
Rate of Compensation Increase 0.25% 3  0.25%  10 
Health Care Cost Trend Rate (a) 1.0% 2  1.00%  1 

(a)Only impacts other postretirement benefits.

3)  Asset Impairment
Asset Impairment (Excluding Investments)

PPL performs impairmentImpairment analyses are performed for long-lived assets that are subject to depreciation or amortization whenever events or changes in circumstances indicate that a long-lived asset's carrying valueamount may not be recoverable.  For these long-lived assets to beclassified as held and used, such events or changes in circumstances are:

·a significant decrease in the market price of an asset;
·a significant adverse change in the manner in which an asset is being used or in its physical condition;
·a significant adverse change in legal factors or in the business climate;
·an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of an asset;
·a current-periodcurrent period operating or cash flow loss combined with a history of losses or a forecast that demonstrates continuing losses; or
·a current expectation that, more likely than not, an asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.

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For a long-lived asset to beclassified as held and used, an impairment is recognized when the carrying amount of the asset is not recoverable and exceeds its fair value.  The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset.  If the asset is impaired, an impairment loss is recorded to adjust the asset's carrying valueamount to its estimated fair value.  Management must make significant judgments to estimate future cash flows, including the useful lives of long-lived assets, the fair value of the assets and management's intent to use the assets.  PPL considers alternateAlternate courses of action are considered to recover the carrying valueamount of a long-lived asset, and uses estimated cash flows from the "most likely" alternative are used to assess impairment whenever one alternative is clearly the most likely outcome.  If no alternative is clearly the most likely, then a probability-weighted approach is used taking into consideration estimated cash flows from the alternatives.  For assets tested for impairment as of the balance sheet date, the estimates of future cash flows used in that test consider the likelihood of possible outcomes that existed at the balance sheet date, including the assessment of the likelihood of a future sale of the assets.  That assessment is not revised based on events that occur after the balance sheet date.  Changes in assumptions and estimates could result in significantly different results than those identified and recorded in the financial statements.

In September 2012, PPL Energy Supply announced its intention, beginning in April 2015, to place the Corette coal-fired plant in Montana in long-term reserve status, suspending the plant's operation, due to expected market conditions and the costs to comply with MATS requirements.  The Corette plant asset group's carrying amount at December 31, 2012 was approximately $68 million.  An impairment analysis was performed for this asset group in the third and fourth quarters of 2012 and it was determined to not be impaired.  It is reasonably possible that an impairment could occur in future periods, as higher priced sales contracts settle, adversely impacting projected cash flows.

For a long-lived asset classified as held for sale, an impairment exists when the carrying amount of the asset (disposal group) exceeds its fair value less cost to sell.  If the asset (disposal group) is impaired, an impairment loss is recorded to adjust itsthe carrying amount to its fair value less cost to sell.  A gain is recognized for any subsequent increase in fair value less cost to sell, but not in excess of the cumulative impairment previously recognized.

For determining fair value, quoted market prices in active markets are the best evidence of fair value.evidence.  However, when market prices are unavailable, PPLthe Registrant considers all valuation techniques appropriate inunder the circumstances and for which market participant inputs can be obtained.  PPL has generally usedGenerally discounted cash flows are used to estimate fair value, which incorporates market participant inputs when available.  Discounted cash flows are calculated by estimating future cash flow streams and applying appropriate discount rates to determine the present value of the cash flow streams.

In 2009, PPL recorded impairments of certain long-lived assets.  See Note 17 to the Financial Statements for a discussion of impairments related to certain sulfur dioxide emission allowances and the Long Island generation business.

PPL tests goodwillGoodwill is tested for impairment at the reporting unit level.  PPL has determined itsPPL's reporting units have been determined to be at or one level below itsthe operating segments.  PPL performs asegment level.  A goodwill impairment test is performed annually or more frequently if events or changes in circumstances indicate that the carrying valueamount of the reporting unit may be greater than the unit's fair value.  Additionally, goodwill is tested for impairment after a portion of goodwill has been allocated to a business to be disposed of.

Goodwill is testedBeginning in 2012, PPL may elect either to initially make a qualitative evaluation about the likelihood of an impairment of goodwill or to bypass the qualitative evaluation and test goodwill for impairment using a two-step approach.  The firstquantitative test.  If the qualitative evaluation (referred to as "step zero") is elected and the assessment results in a determination that it is not more likely than not that the fair value of a reporting unit is less than the carrying amount, the two-step quantitative impairment test is not necessary.  However, the quantitative impairment test is required if PPL concludes it is more likely than not the fair value of a reporting unit is less than the carrying amount based on the step zero assessment.

When the two-step quantitative impairment test is elected or required as a result of the goodwillstep zero assessment, in step one, PPL identifies a potential impairment test comparesby comparing the estimated fair value of a reporting unit with its carrying amount, including goodwill.goodwill, on the measurement date.  If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired.  If the carrying amount exceeds the estimated fair value, of the reporting unit, the second step is performed to measure the amount of impairment loss, if any.

The second step of the quantitative test requires a calculation of the implied fair value of goodwill.  The implied fair value of goodwill, which is determined in the same manner as the amount of goodwill in a business combination.  That is, the estimated fair value of a reporting unit is allocated to all of the assets and liabilities of that reporting unit as if the reporting unit had been acquired in a business combination and the estimated fair value of the reporting unit was the price paid to acquire the reporting unit.  The excess of the estimated fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill.  The implied fair value of the reporting unit's goodwill is then compared with the carrying amount of that goodwill.  If the carrying amount exceeds the implied fair value, an impairment loss is recognized in an amount equal to that excess.  The loss recognized cannot exceed the carrying amount of the reporting unit's goodwill.

In 2009,
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PPL elected to perform the two-step quantitative impairment test of goodwill for all of its reporting units in the fourth quarter of 2012 and no impairment was not required to impair any goodwill.recognized.  Management primarily used both discounted cash flows and market multiples, which required significant assumptions, to estimate the fair value of eachthe reporting unit.  Aunits.  For the U.K. Regulated reporting unit, management used only discounted cash flows to estimate the fair value of the reporting unit due to lack of industry comparable transactions.  Applying an appropriate weighting to both the discounted cash flow and market multiple valuations (where applicable) a decrease in the forecasted cash flows of 10%, or an increase ofin the discount rate by 25 basis points, or a 10% decrease in the multiples would not have resulted in an impairment of goodwill.

Additionally, in 2009, PPL wrote off $3 million of goodwill allocated to discontinued operations.Loss Accruals

4)  Loss Accruals

PPL accrues lossesLosses are accrued for the estimated impacts of various conditions, situations or circumstances involving uncertain or contingent future outcomes.  For loss contingencies, the loss must be accrued if (1) information is available that indicates it is probable that a loss has been incurred, given the likelihood of the uncertain future events, and (2) the amount of the loss can be reasonably estimated.  Accounting guidance defines "probable" as cases in which "the future event or events are likely to occur."  PPL does not record theThe accrual of contingencies that might result in gains is not recorded unless recovery is assured.  PPL continuously assesses potentialPotential loss contingencies for environmental remediation, litigation claims, regulatory penalties and other events.events are continuously assessed.

The accounting aspects of estimated loss accruals include (1) the initial identification and recording of the loss, (2) the determination of triggering events for reducing a recorded loss accrual, and (3) the ongoing assessment as to whether a recorded loss accrual is sufficient.  All three of these aspects require significant judgment by PPL's management.  PPL uses its internalInternal expertise and outside experts (such as lawyers and engineers), are used, as necessary, to help estimate the probability that a loss has been incurred and the amount (or range) of the loss.

No new significant loss accruals were recorded in 2009.  In 2008, significant judgment was required by PPL's management to perform an assessment of the contingency related to the Montana hydroelectric litigation.2012.  

In June 2008, PPL's management assessed the loss exposure related to the Montana hydroelectric litigation, given the June 2008 decision by the Montana First Judicial District Court (District Court).  The District Court awarded compensation of approximately $34 million for the years 2000 through 2006, and approximately $6 million for 2007 as rent for the use of the State of Montana's streambeds by PPL Montana's hydroelectric facilities.  The District Court also deferred the determination of compensation for 2008 and subsequent years to the Montana State Land Board (Land Board).  In October 2008, PPL Montana filed an appeal of the decision to the Montana Supreme Court and a stay of judgment, including a stay of the Land Board's authority to assess compensation against PPL Montana for 2008 and future periods.  Oral agreement of the case was held before the Montana Supreme Court in September 2009.

As part of the preparation of its 2009 financial statements, PPL's management reassessed the loss exposure for the Montana hydroelectric litigation.  PPL's management concluded, based on its assessment and after consultations with its trial counsel, that it has meritorious arguments on appeal for the years 2000 through 2006.  PPL assessed the likelihood of a loss for these years as reasonably possible.  However, PPL Montana has not recorded a loss accrual for these years, as the likelihood of a loss was not deemed probable.

For 2007 and subsequent years, PPL's management believes that while it also has meritorious arguments, it is probable that its hydroelectric projects will be subject to annual estimated compensation ranging from $3 million to $6 million.  Given that there was no single amount within that range more likely than anyCertain other PPL Montana accrued $3 million for each of the years 2007 through 2009 for a total of $9 million.  See Note 14 to the Financial Statements for additional information on this contingency.

PPL hasevents have been identified certain other events that could give rise to a loss, but that do not meet the conditions for accrual.  Such events are disclosed, but not recorded, when it is "reasonably possible" that a loss has been incurred.  See Note 14 to the Financial Statements for disclosure of other potential loss contingencies that have not met the criteria for accrual.

When an estimated loss is accrued, PPL identifies, where applicable, the triggering events for subsequently reducing the loss accrual.accrual are identified, where applicable.  The triggering events generally occur when the contingency has been resolved and the actual loss is incurred,paid or written off, or when the risk of loss has diminished or been eliminated.  The following are some of the triggering events that provide for the reduction of certain recorded loss accruals:

·Allowances for uncollectible accounts are reduced when accounts are written off after prescribed collection procedures have been exhausted, a better estimate of the allowance is determined or underlying amounts are ultimately collected.

·Environmental and other litigation contingencies are reduced when the contingency is resolved and PPL makes actual payments are made, a better estimate of the loss is determined or the loss is no longer considered probable.

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

5)  See Note 6 and 15 to the Financial Statements for disclosure of loss contingencies accrued and other potential loss contingencies that have not met the criteria for accrual.  Note 6 to the Financial Statements includes a discussion of the Ofgem Review of Line Loss Calculation, including the $90 million reduction in the WPD liability.

Asset Retirement Obligations

PPL is required to recognize a liability for legal obligations associated with the retirement of long-lived assets.  The initial obligation should beis measured at its estimated fair value.  A conditional ARO must be recognized when incurred if the fair value of the ARO can be reasonably estimated.  An equivalent amount should beis recorded as an increase in the value of the capitalized asset and allocated to expense over the useful life of the asset.  Until the obligation is settled, the liability should beis increased, through the recognition of accretion expense in the statement of income, statement, for changes in the obligation due to the passage of time.  A conditional

In the case of LG&E and KU, since costs of removal are collected in rates, the depreciation and accretion expense related to an ARO must be recognizedare offset with a regulatory credit on the income statement, such that there is no earnings impact.  The regulatory asset created by the regulatory credit is relieved when incurred if the fair value of the ARO can be reasonably estimated.has been settled.
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See Note 21 to the Financial Statements for further discussion of AROs.

In determining AROs, management must make significant judgments and estimates to calculate fair value.  Fair value is developed using an expected present value technique based on assumptions of market participants that considers estimated retirement costs in current period dollars that are inflated to the anticipated retirement date and then discounted back to the date the ARO was incurred.  Changes in assumptions and estimates included within the calculations of the fair value of AROs could result in significantly different results than those identified and recorded in the financial statements.  Estimated ARO costs and settlement dates, which affect the carrying value of various AROsthe ARO and the related assets,capitalized asset, are reviewed periodically to ensure that any material changes are incorporated into the latest estimate of the obligations.ARO.  Any change to the capitalized asset, positive or negative, is amortized over the remaining life of the associated long-lived asset.

At December 31, 2009, PPL had2012, AROs totaling $426$552 million were recorded on the Balance Sheet, of which $10$16 million is included in "Other current liabilities."  Of the total amount, $348$316 million, or 82%57%, relates to PPL'sthe nuclear decommissioning ARO.  The most significant assumptions surrounding AROs are the forecasted retirement costs, the discount rates and the inflation rates.  A variance in the forecasted retirement costs, the discount rates or the inflation ratesany of these inputs could have a significant impact on the ARO liabilities.

The following charttable reflects the sensitivities related to PPL'sthe nuclear decommissioning ARO liability as of December 31, 2009, associated with a change in these assumptions at the timeas of initial recognition.December 31, 2012.  There is no significant change to the annual depreciation expense of the ARO asset or the annual accretion expense of the ARO liability as a result of changing the assumptions.  The sensitivities below reflect an evaluation of the change based solely on a change in that assumption.

Change in
Assumption
Impact on
ARO Liability
Retirement Cost10%/(10)%$32/$(32)
Discount Rate0.25%/(0.25)%$(31)/$34
Inflation Rate0.25%/(0.25)%$41/$(37)
  Change in Impact on
  Assumption ARO Liability
       
Retirement Cost  10% $32
Discount Rate  (0.25)%  28
Inflation Rate  0.25%  32

6)  Income Tax Uncertainties
Income Taxes

Significant management judgment is required in developing PPL'sthe provision for income taxes, primarily due to the uncertainty related to tax positions taken or expected to be taken in tax returns and the determination of deferred tax assets, liabilities and valuation allowances.

Significant management judgment is required to determine the amount of benefit recognized related to an uncertain tax position.  PPL evaluates its taxTax positions are evaluated following a two-step process.  The first step requires an entity to determine whether, based on the technical merits supporting a particular tax position, it is more likely than not (greater than a 50% chance) that the tax position will be sustained.  This determination assumes that the relevant taxing authority will examine the tax position and is aware of all the relevant facts surrounding the tax position.  The second step requires an entity to recognize in the financial statements the benefit of a tax position that meets the more-likely-than-not recognition criterion.  The benefit recognized is measured at the largest amount of benefit that has a likelihood of realization, upon settlement, that exceeds 50%.  PPL's managementManagement considers a number of factors in assessing the benefit to be recognized, including negotiation of a settlement.

On a quarterly basis, PPL reassesses its uncertain tax positions are reassessed by considering information known at the reporting date.  Based on management's assessment of new information, PPLa tax benefit may subsequently recognize a tax benefitbe recognized for a previously unrecognized tax position, de-recognize a previously recognized tax position may be derecognized, or re-measure the benefit of a previously recognized tax position.position may be remeasured.  The amounts ultimately paid upon resolution of issues raised by taxing authorities may differ materially from the amounts accrued and may materially impact PPL'sthe financial statements in the future.

At December 31, 2012, it was reasonably possible that during the next 12 months the total amount of unrecognized tax benefits could increase by as much as $10 million or decrease by up to $90 million.  This change 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.
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The balance sheet classification of unrecognized tax benefits and the need for valuation allowances to reduce deferred tax assets also require significant management judgment.  PPL classifies unrecognizedUnrecognized tax benefits are classified as current to the extent management expects to settle an uncertain tax position by payment or receipt of cash within one year of the reporting date.  Valuation allowances are initially recorded and reevaluated each reporting period by assessing the likelihood of the ultimate realization of a deferred tax asset.  Management considers a number of factors in assessing the realization of a deferred tax asset, including the reversal of temporary differences, future taxable income and ongoing prudent and feasible tax planning strategies.  Any tax planning strategy utilized in this assessment must meet the recognition and measurement criteria utilized by PPL to account for an uncertain tax positions.position.  Management also considers the uncertainty posed by political risk and the effect of this uncertainty on the various factors that management takes into account in evaluating the need for valuation allowances.  The amount of deferred tax assets ultimately realized may differ materially from the estimates utilized in the computation of valuation allowances and may materially impact the financial statements in the future.  See Note 5 to the Financial Statements for the requiredincome tax disclosures.

At December 31, 2009, it was reasonably possible that during the next 12 months the total amount of unrecognized tax benefits could increase by as much as $34 million or decrease by up to $179 million for PPL.  This change could result from subsequent recognition, derecognition and/or changes in the measurement of uncertain tax positions related to the creditability of foreign taxes, the timingRegulatory Assets 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.Liabilities

7)  Regulatory Assets

PPL's domestic electricity delivery business isPPL Electric, LG&E and KU, are subject to cost-based rate-regulation.rate regulation.  As a result, PPL is required to reflect the effects of regulatory actions are required to be reflected in itsthe financial statements.  PPL records assetsAssets and liabilities are recorded that result from the regulated ratemaking process that may not be recorded under GAAP for non-regulated entities.  Regulatory assets generally represent incurred costs that have been deferred because such costs are probable of future recovery in regulated customer rates.  Regulatory liabilities are recognized for amounts expected to be returned through future regulated customer rates.  In certain cases, regulatory liabilities are recorded based on an understanding or agreement with the regulator that rates have been set to recover costs that are expected to be incurred in the future, and the regulated entity is accountable for any amounts charged pursuant to such rates and not yet expended for the intended purpose.

Management continually assesses whether the regulatory assets are probable of future recovery by considering factors such as changes in the applicable regulatory and political environments, the ability to recover costs through regulated rates, recent rate orders to other regulated entities, and the status of any pending or potential deregulation legislation.  Based on this continual assessment, management believes the existing regulatory assets are probable of recovery.  This assessment reflects the current political and regulatory climate at the state and federal levels, and is subject to change in the future.  If future recovery of costs ceases to be probable, then asset write-offs would be required to be recognized in operating income.  Additionally, the regulatory agencies can provide flexibility in the manner and timing of the depreciation of PP&E and amortization of regulatory assets.

At December 31, 2009 and 2008,2012, PPL had regulatory assets of $531 million$1.5 billion and $763 million.regulatory liabilities of $1.1 billion.  All of PPL's regulatory assets are either currently being recovered under specific rate orders, or represent amounts that willare expected to be recovered in future rates or benefit future periods based upon established regulatory practices.

See Note 6 to the Financial Statements for additional information on regulatory assets and liabilities.

WPD operates in an incentive-based regulatory structure under distribution licenses granted by Ofgem.  WPD's electricity distribution revenues are set every five years through price controls that are not directly based on cost recovery; therefore, WPD is not subject to accounting for the effects of certain types of regulation as prescribed by GAAP and does not record regulatory assets and liabilities.

Other Information

PPL's Audit Committee has approved the independent auditor to provide audit and audit-related services, tax services and other services permitted by Sarbanes-Oxley and SEC rules.  The audit and audit-related services include services in connection with statutory and regulatory filings, reviews of offering documents and registration statements, and internal control reviews.

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PPL ENERGY SUPPLY, LLC AND SUBSIDIARIES

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

PPL Energy Supply is an energy companyThe information provided in this Item 7 should be read in conjunction with headquarters in Allentown, Pennsylvania.  Refer to "Item 1. Business - Background" for descriptions of its reportable segments, which are Supply and International Delivery.  Through its subsidiaries, PPL Energy Supply is primarily engaged in the generation and marketing of electricity in two key markets - the northeastern and western U.S. - and in the delivery of electricity in the U.K. PPL Energy Supply's overall strategy is to achieve disciplined growthConsolidated Financial Statements and the accompanying Notes.  Capitalized terms and abbreviations are defined in energy supply margins while limiting volatilitythe glossary.  Dollars are in both cash flows and earnings and to achieve stable, long-term growth in its regulated international electricity delivery business through efficient operations and strong customer and regulatory relations.  More specifically, PPL Energy Supply's strategy for its electricity generation and marketing business is to match energy supply with load, or customer demand, under contracts of varying lengths with creditworthy counterparties to capture profits while effectively managing exposure to energy and fuel price volatility, counterparty credit risk and operational risk.  PPL Energy Supply's strategy for its U.K. electricity delivery business is to own and operate this business at the most efficient cost while maintaining high quality customer service and reliability.millions unless otherwise noted.

PPL Energy Supply faces several risks in its supply business, principally electricity and capacity wholesale price risk, fuel supply and price risk, electricity and fuel basis risk, power plant performance, evolving regulatory frameworks and counterparty credit risk.  PPL Energy Supply attempts to manage these risks through various means.  For instance, PPL Energy Supply operates a portfolio of generation assets that is diversified as to geography, fuel source, cost structure and operating characteristics.  PPL Energy Supply expects to expand its generation capacity over the next several years through power uprates at certain of its existing power plants, and is continually evaluating the potential construction of new plants and the potential acquisition of existing plants or businesses.  PPL Energy Supply is and will continue to remain focused on the operating efficiency and availability of its existing and any newly constructed or acquired power plants.

In addition, PPL Energy Supply has executed and continues to pursue contracts of varying lengths for energy sales and fuel supply, while using other means to mitigate risks associated with adverse changes in the difference, or margin, between the cost to produce electricity and the price at which PPL Energy Supply sells it.  PPL Energy Supply's future profitability will be affected by prevailing market conditions and whether PPL Energy Supply decides to, or is able to, continue to enter into long-term or intermediate-term power sales and fuel purchase agreements or renew its existing agreements.  Currently, PPL Energy Supply's commitments for energy sales are satisfied through its own generation assets and supply purchased from third parties.  PPL Energy Supply markets and trades around its physical portfolio of generating assets through integrated generation, marketing and trading functions.

PPL Energy Supply has adopted financial and operational risk management programs that, among other things, are designed to monitor and manage its exposure to earnings and cash flow volatility related to changes in energy and fuel prices, interest rates, foreign currency exchange rates, counterparty credit quality and the operating performance of its generating units.

The principal challenge that PPL Energy Supply faces in its international electricity delivery business is to maintain high quality customer service and reliability in a cost-effective manner.  PPL Energy Supply's international electricity delivery business is rate-regulated.  Accordingly, the business is subject to regulatory risk with respect to the costs that may not be recovered and investment returns that may not be collected through customer rates.

PPL Energy Supply faces additional financial risks in conducting U.K. operations, such as fluctuations in foreign currency exchange rates and the effect these rates have on the conversion of U.K. earnings and cash flows to U.S. dollars.  PPL Energy Supply attempts to manage these financial risks through its risk management programs.

In order to manage financing costs and access to credit markets, a key objective for PPL Energy Supply's business as a whole is to maintain a strong credit profile.  PPL Energy Supply continually focuses on maintaining an appropriate capital structure and liquidity position.

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

In May 2009, PPL Generation signed a definitive agreement to sell its Long Island generation business and related tolling agreements and expects the sale to close on or about February 26, 2010.  In November 2009, PPL Maine completed the sale of the majority of its hydroelectric generation business.  These businesses are included in the Supply segment.  In 2007, PPL Energy Supply sold its regulated electricity delivery businesses in Latin America, which were included in the International Delivery segment.  See Note 9 to the Financial Statements for additional information.

The purpose of "Management's"Management's Discussion and Analysis of Financial Condition and Results of Operations" is to provide information concerning PPL Energy Supply's performance in implementingincludes the strategies and managing the risks and challenges mentioned above.  Specifically:following information:

·"Overview" provides a description of PPL Energy Supply and its business strategy, a summary of Net Income Attributable to PPL Energy Supply Member and a discussion of certain events related to PPL Energy Supply's results of operations and financial condition.

·  "Results of Operations" provides an overviewa summary of PPL Energy Supply's operating resultsearnings and a description of key factors expected to impact future earnings.  This section ends with explanations of significant changes in 2009, 2008principal items on PPL Energy Supply's Statements of Income, comparing 2012 with 2011 and 2007, including a review of earnings,2011 with details of results by reportable segment.  It also provides a brief outlook for 2010.

·"Financial Condition - Liquidity and Capital Resources" provides an analysis of PPL Energy Supply's liquidity position and credit profile, including itsprofile.  This section also includes a discussion of forecasted sources of cash (including bank credit facilities and sources of operating cash flow) and uses of cash (including contractual obligations and capital expenditure requirements) and the key risks and uncertainties that impact PPL Energy Supply's past and future liquidity position and financial condition.  This subsection also includes a listing and discussion of PPL Energy Supply's current credit ratings.rating agency actions.

·"Financial Condition - Risk Management - Energy Marketing & Trading and Other" provides an explanation of PPL Energy Supply's risk management programs relating to market risk and credit risk.

·"Application of Critical Accounting Policies" provides an overview of the accounting policies that are particularly important to the results of operations and financial condition of PPL Energy Supply and that require its management to make significant estimates, assumptions and other judgments.judgments of matters inherently uncertain.

The information provided in this Item 7 should be read in conjunction with PPL Energy Supply's Consolidated Financial Statements and the accompanying Notes.Overview

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

Customer Choice - End of Transition Period

In 1996, the Customer Choice Act was enacted to restructure Pennsylvania's electric utility industry in order to create retail access to a competitive market for generation of electricity.  The Customer Choice Act required each Pennsylvania electric utility, to file a restructuring plan to "unbundle" its rates into separate generation, transmission and distribution components and to permit its customers to directly access alternate suppliers of electricity.  Under the Customer Choice Act, regulated utilities were required to act as a PLR.  As part of a settlement approved by the PUC, PPL EnergyPlus and PPL Electric, a PPL EnergyPlus affiliate, entered into full requirements energy supply agreements at predetermined "capped" rates through 2009.  In addition, the PUC authorized recovery of approximately $2.97 billion of competitive transition or "stranded" costs (generation-related costs that might not otherwise be recovered in a competitive market) from customers during an 11-year transition period.  For PPL Electric, this transition period ended on December 31, 2009.

With the expiration of the long-term power purchase agreements between PPL Electric and PPL EnergyPlus, PPL EnergyPlus now has multiple options as to how, and to whom, it sells the electricity produced by PPL Energy Supply's generation plants.  These sales are based on prevailing market rates, as compared to pre-determined capped rates under the expired supply agreements with PPL Electric.  PPL EnergyPlus has entered into various wholesale and retail contracts to sell this power and at this time has hedged almost 100% of expected 2010 baseload generation output.  The expiration of the long-term supply agreements with PPL Electric also provides PPL Energy Supply the ability to adjust its exposure to fluctuations in demand that existed with supplying PPL Electric's PLR load.  Entry of new generation suppliers into the Pennsylvania marketplace provides PPL Energy Supply the ability to provide generation supply to additional wholesale customers.  Overall, these changes and the resulting level of hedged electricity prices are expected to have a positive impact on the financial condition, operating results and cash flows of PPL Energy Supply.

PPL Electric's customers are no longer funding contributions to Susquehanna's NDT funds.  PPL will continue to manage the NDT funds until the PPL Susquehanna plant is decommissioned.  If the balance of the NDT funds is not adequate to cover decommissioning costs, PPL Susquehanna will be responsible to fund 90% of the shortfall.  The Susquehanna nuclear units currently are licensed to operate until 2042 and 2044.

Market Events

In 2008, conditions in the financial markets became disruptive to the processes of managing credit risk, responding to liquidity needs, measuring derivatives and other financial instruments at fair value, and managing market risk.  Bank credit capacity was reduced and the cost of renewing or establishing new credit facilities increased, thereby introducing uncertainties as to PPL Energy Supply's ability to enter into long-term energy commitments or reliably estimate the longer-term cost and availability of credit.  In general, bank credit capacity has increased from the significantly constrained levels of 2008 and early 2009.  In addition, the cost of renewing or establishing new credit facilities has improved when compared with the 2008 and early 2009 periods.

Commodity Price Risk

The contraction in wholesale energy market liquidity and accompanying decline in wholesale energy prices due to conditions in the financial and commodity markets significantly impacted PPL Energy Supply's earnings during the second half of 2008 and the first half of 2009.  See "Statement of Income Analysis - Domestic Gross Energy Margins - Domestic Gross Energy Margins By Region" for further discussion.

Credit Risk

Credit risk is the risk that PPL Energy Supply would incur a loss as a result of nonperformance by counterparties of their contractual obligations.  PPL Energy Supply maintains credit policies and procedures to limit counterparty credit risk.  Conditions in the financial and commodity markets have generally increased PPL Energy Supply's exposure to credit risk.  See Notes 15, 17 and 18 to the Financial Statements, and "Risk Management - Energy Marketing & Trading and Other - Credit Risk" for more information on credit risk.

Liquidity RiskIntroduction

PPL Energy Supply expects to continue to have access to adequate sources of liquidity through operating cash flows, cash and cash equivalents, credit facilities and, from time to time, the issuance of capital market securities.  PPL Energy Supply's ability to access capital markets may be impacted by conditionsis an energy company with headquarters in the overall financial and capital markets, as well as conditions specific to the utility sector.  See "Financial Condition - Liquidity and Capital Resources" for an expanded discussion of PPL Energy Supply's liquidity position and a discussion ofAllentown, Pennsylvania.  Through its forecasted sources of cash.

Valuations in Inactive Markets

Conditions in the financial markets have generally made it difficult to determine the fair value of certain assets and liabilities in inactive markets.  Management has reviewed the activity in the energy and financial markets in whichsubsidiaries, PPL Energy Supply transacts, concluding that allis primarily engaged in the generation and marketing of theseelectricity in two key markets were active at December 31, 2009, with- the exception of the market for auction rate securities.  See Notes 17northeastern and 21 to the Financial Statements and "Financial Condition - Liquidity and Capital Resources - - Auction Rate Securities" for a discussion of these investments.northwestern U.S.

Securities Price Risk

Declines in the market price of debt and equity securities result in unrealized losses that reduce the asset values of PPL Energy Supply's investments in its defined benefit plans and NDT funds.  Both the defined benefit plans and the NDT funds earned positive returns in the second half of 2009, thereby recovering a portion of the negative returns incurred in 2008 and the first quarter of 2009.  PPL Energy Supply actively monitors the performance of the investments held in its defined benefit plans and NDT funds and periodically reviews the funds' investment allocations.  See "Financial Condition - Risk Management - Energy Marketing & Trading and Other - NDT Funds - Securities Price Risk" for additional information on securities price risk.Business Strategy

PPL Energy Supply's subsidiaries sponsor various defined benefit plansoverall strategy is to achieve disciplined optimization of energy supply margins while mitigating volatility in both cash flows and participateearnings.  More specifically, PPL Energy Supply's 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.

To manage financing costs and access to credit markets, a key objective of PPL Energy Supply's business strategy is to maintain a strong credit profile and strong liquidity position.  In addition, PPL Energy Supply has financial and operational risk management programs that, among other things, are designed to monitor and manage its exposure to earnings and cash flow volatility related to changes in energy and are allocated costsfuel prices, interest rates, counterparty credit quality and the operating performance of its generating units.

Financial and Operational Developments

Net Income Attributable to PPL Energy Supply Member

Net Income Attributable to PPL Energy Supply Member for 2012, 2011 and 2010 was $474 million, $768 million and $861 million.  Earnings in 2012 decreased 38% from defined benefit plans sponsored by PPL.  Determination2011 and earnings in 2011 decreased 11% from 2010.

See "Results of Operations" below for further discussion and analysis of the funded statusconsolidated results of defined benefitoperations.

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Economic and Market Conditions

Unregulated Gross Energy Margins associated with PPL Energy Supply's competitive generation and marketing business are impacted by changes in market prices and demand for electricity and natural gas, power plant availability, competition in the markets for retail customers, fuel costs and availability, fuel transportation costs and other costs.  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 production.  As a result of these factors, PPL Energy Supply has experienced a shift in the dispatching of its competitive generation from coal-fired to combined-cycle gas-fired generation as illustrated in the following table:

   Average Utilization Factors (a)
   2012   2009 - 2011
Pennsylvania coal plants  69%  87%
Montana coal plants  67%  89%
Combined-cycle gas plants  98%  72%

(a)All periods reflect the years ended December 31.

This reduction in coal-fired generation output had resulted in a surplus of coal inventory at certain of PPL Energy Supply's Pennsylvania coal plants.  To mitigate the risk of exceeding available coal storage, PPL Energy Supply incurred pre-tax charges of $29 million in 2012 to reduce its 2012 and 2013 contracted coal deliveries.  PPL Energy Supply will continue to manage its coal inventory to mitigate the financial impact and physical implications of an oversupply; however, no additional coal contract modifications are expected at this time.

In addition, current economic and commodity market conditions indicated a lower value of unhedged future energy margins (primarily in 2014 and forward years) compared to the energy margins in 2012.  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, contribution requirementsincluding capital and net periodic defined benefit costs for future yearsoperation and maintenance expenditures, as well as its hedging strategies, to help counter the financial effects of low commodity prices.

PPL Energy Supply's businesses are subject to changes in various assumptions, in addition to the actual performance of the assets in the plans.  See "Application of Critical Accounting Policies - Defined Benefits" for a discussion of the assumptionsextensive federal, state and sensitivities regarding those assumptions.

The Economic Stimulus Package

The Economic Stimulus Package was intended to stimulate the U.S. economy through federal tax relief, expansion of unemployment benefitslocal environmental laws, rules and other social stimulus provisions, domestic spending for education, health care and infrastructure, including the energy sector.  A portion of the benefits included in the Economic Stimulus Package are offered in the form of loan fee reductions, expanded loan guarantees and secondary market incentives, including delayed recognition for tax purposes of income related to the cancellation of certain types of debt.  See "Financial Condition - Liquidity and Capital Resources" for a discussion of the applicability to the purchase of notes byregulations.  PPL Energy Supply.

Funds from the Economic Stimulus Package have been allocatedSupply's competitive generation assets are well positioned to various federal agencies, such as the DOE, and provided to state agencies through block grants.  The DOE has made awards of the funds for smart grid, efficiency-related and renewable energy programs.  The Commonwealth of Pennsylvania has also made awards for funding certain energy projects, including solar projects.  As discussed inmeet these requirements.  See Note 815 to the Financial Statements for additional information on these requirements.  As a result of these requirements, PPL Energy Supply has reconsideredannounced in September 2012 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 decidedthe costs to pursue its Holtwood expansion projectcomply with MATS.  The Corette plant asset group's carrying amount at December 31, 2012 was approximately $68 million.  Although the Corette plant asset group was not determined to be impaired at December 31, 2012, it is reasonably possible that an impairment could occur in viewfuture periods, as higher priced sales contracts settle, adversely impacting projected cash flows.

In light of the tax incentivesthese economic and potential loan guarantees for renewable energy projects contained in the Economic Stimulus Package.  market conditions, as well as current and projected environmental regulatory requirements, PPL Energy Supply considered whether certain of its other generating assets were impaired, and determined that no impairment charges were required at December 31, 2012.  PPL Energy Supply is unable to predict whether future environmental requirements or market conditions will result in impairment charges for other generating assets or other retirements.

PPL Energy Supply and its subsidiaries may also be impacted in future periods by the uncertainty in the worldwide financial and credit markets.  In addition, PPL Energy Supply may be impacted by reductions in the credit ratings of financial institutions and evolving regulations in the financial sector.  Collectively, these factors could reduce availability or restrict PPL Energy Supply and its subsidiaries' ability to maintain sufficient levels of liquidity, reduce capital market activities, change collateral posting requirements and increase the associated costs to PPL Energy Supply and its subsidiaries.

PPL Energy Supply cannot predict the future impact that these economic and market conditions and regulatory requirements may have on its financial condition or results of operations.

Susquehanna Turbine Blade Inspection

During 2012, PPL Energy Supply performed inspections of the Unit 1 and Unit 2 turbine blades at the PPL Susquehanna nuclear power plant to further address the issue of turbine blade cracking that was first identified in 2011.  The after-tax earnings impact of these 2012 inspections, including reduced energy-sales margins and repair expenses, was approximately $53 million.  The after-tax earnings impact of turbine blade related outages in 2011 was approximately $63 million.

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Ironwood Acquisition

In April 2012, an indirect, wholly owned subsidiary of PPL Energy Supply completed the acquisition of the equity interests in the owner and operator of the Ironwood Facility.  The Ironwood Facility began operation in 2001 and, since 2008, PPL EnergyPlus has applied for DOE loan guaranteessupplied natural gas for the Holtwood expansion projectfacility and received the facility's full electricity output and capacity value pursuant to a tolling agreement that expires in 2021.  The acquisition provides PPL Energy Supply, through its subsidiarysubsidiaries, operational control of additional combined-cycle gas generation in PJM.  See Note 10 to the Financial Statements for additional information.

Bankruptcy of SMGT

In October 2011, SMGT, a Montana cooperative and purchaser of electricity under a long-term supply contract with PPL Montana,EnergyPlus expiring in June 2019 (SMGT Contract), filed for protection under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Rainbow redevelopment project.District of Montana.  At the time of the bankruptcy filing, SMGT was PPL EnergyPlus' largest unsecured credit exposure.  This contract was accounted for as NPNS by PPL EnergyPlus.

The SMGT Contract provided for fixed volume purchases on a monthly basis at established prices.  Pursuant to a court order and subsequent stipulations entered into between the SMGT bankruptcy trustee and PPL EnergyPlus, since the date of its Chapter 11 filing through January 2012, SMGT continued to purchase electricity from PPL EnergyPlus at the price specified in the SMGT Contract, and made timely payments for such purchases, but at lower volumes than as prescribed in the SMGT Contract.  In January 2012, the trustee notified PPL EnergyPlus that SMGT would not purchase electricity under the SMGT Contract for the month of February.  In March 2012, the U.S. Bankruptcy Court for the District of Montana issued an order approving the request of the SMGT bankruptcy trustee and PPL EnergyPlus to terminate the SMGT Contract.  As a result, the SMGT Contract was terminated effective April 1, 2012, allowing PPL EnergyPlus to resell the electricity previously contracted to SMGT under the SMGT Contract to other customers.

PPL EnergyPlus' receivable under the SMGT Contract totaled approximately $21 million at December 31, 2012, which has been fully reserved.

In July 2012, PPL EnergyPlus filed its proof of claim in the SMGT bankruptcy proceeding.  The total claim is approximately $375 million, including the above receivable, predominantly an unsecured claim representing the value for energy sales that will not occur as a result of the termination of the SMGT Contract.  No assurance can be given as to the collectability of the claim, thus no amounts have been recorded in the 2012 financial statements.

PPL Energy Supply cannot predict any amounts that it may recover in connection with the SMGT bankruptcy or the prices and other terms on which it will be able to market to third parties the power that SMGT will not purchase from PPL EnergyPlus due to the termination of the SMGT Contract.

Results of Operations

The following discussion provides a summary of PPL Energy Supply presents tables analyzing changes in amounts between periods within "Segment Results"Supply's earnings and a description of factors that are expected to impact future earnings.  This section ends with "Statement of Income Analysis"Analysis," which includes explanations of significant year-to-year changes in Unregulated Gross Energy Margins by region and principal line items on a constant U.K. foreign currency exchange rate basis, where applicable, in order to isolate the impactPPL Energy Supply's Statements 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 foreign currency exchange rate.Income.

Earnings

Net income attributable to PPL Energy Supply was:

  2009  2008  2007 
          
  $246  $768  $1,205 
Earnings
           
Net Income Attributable to PPL Energy Supply Member was:
           
   2012  2011  2010 
           
Net Income Attributable to PPL Energy Supply Member $ 474  $ 768  $ 861 

The changes in net income attributablethe components of Net Income Attributable to PPL Energy Supply from year to yearMember between these periods were in part, due to several specialthe following factors, which reflect reclassifications for items included in the Unregulated Gross Energy Margins and certain items that management considers significant.  Detailsspecial.  See additional detail of these special items are provided withinin the reviewtables below.

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  2012 vs. 2011 2011 vs. 2010
       
Unregulated Gross Energy Margins $ (197) $ (405)
Other operation and maintenance   (53)   (65)
Depreciation   (41)   (8)
Taxes, other than income   6    (9)
Other Income (Expense) - net   (5)   
Interest Expense   16    4 
Other   (1)   
Income Taxes   102    146 
Discontinued operations - Domestic, after-tax - excluding certain revenues and expenses included in margins   3    16 
Discontinued operations - International, after-tax      (261)
Special items, after-tax   (124)   489 
Total $ (294) $ (93)

·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 in 2012 compared with 2011 due to higher costs at PPL Susquehanna of $27 million including refueling outage costs, payroll-related costs and project costs, $18 million due to the Ironwood Acquisition, $13 million due to outages at eastern fossil and hydroelectric units and $10 million of charges from support groups partially offset by $34 million of trademark royalties with an affiliate in 2011 for which the agreement was terminated December 31, 2011.

Higher other operation and maintenance in 2011 compared with 2010, primarily due to higher costs at PPL Susquehanna of each segment's earnings.$30 million largely due to unplanned outages, the refueling outage and payroll-related costs, higher costs at eastern fossil and hydroelectric units of $20 million, largely due to outages, and higher costs at western fossil and hydroelectric units of $15 million, largely resulting from insurance recoveries received in 2010.

·Higher depreciation in 2012 compared with 2011 primarily due to a $16 million impact from PP&E additions and $17 million due to the Ironwood Acquisition.

·Lower interest expense in 2012 compared with 2011 of $14 million due to the impact of redeeming debt not replaced and redeeming debt replaced at a lower interest rate, $10 million due to lower interest on short-term borrowings and $7 million due to 2011 including the acceleration of deferred financing fees related to the July 2011 redemption, partially offset by a $12 million increase related to the debt assumed as a result of the Ironwood Acquisition.

·Lower income taxes in 2012 compared with 2011 due to lower 2012 pre-tax income, which reduced income taxes by $110 million and $20 million related to lower adjustments to valuation allowances on Pennsylvania net operating losses, partially offset by $26 million related to the impact of prior period tax return adjustments.

Lower income taxes in 2011 compared with 2010, due to lower 2011 pre-tax income, which reduced income taxes by $196 million and a $26 million reduction in deferred tax liabilities related to an updated blended state tax rate as a result of a change in state apportionment.  These decreases were partially offset by $74 million related to adjustments to valuation allowances on Pennsylvania net operating losses, $13 million in favorable adjustments to uncertain tax benefits recorded in 2010 and an $11 million decrease in the domestic manufacturing deduction tax benefit resulting from revised bonus depreciation estimates.

·Discontinued operations - International, represents the results of PPL Global which was distributed to PPL Energy Supply's parent, PPL Energy Funding in January 2011.  See Note 9 to the Financial Statements for additional information.

The year-to-year changesfollowing after-tax gains (losses), which management considers special items, also impacted the results.

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   Income Statement         
   Line Item 2012  2011  2010 
           
Adjusted energy-related economic activity, net, net of tax of ($26), ($52), $85(a) $ 38  $ 72  $ (121)
Sales of assets:          
 Maine hydroelectric generation business, net of tax of $0, $0, ($9) (b)Disc. Operations         15 
 Sundance indemnification, net of tax of $0, $0, $0Other Income-net         1 
Impairments:          
 Emission allowances, net of tax of $0, $1, $6 (c)Other O&M      (1)   (10)
 Renewable energy credits, net of tax of $0, $2, $0Other O&M      (3)   
 Adjustments - nuclear decommissioning trust investments, net of tax of ($2), $0, $0Other Income-net   2       
 Other asset impairments, net of tax of $0, $0, $0Other O&M   (1)      
LKE acquisition-related adjustments:          
 Monetization of certain full-requirement sales contracts, net of tax of $0, $0, $89(d)         (125)
 Sale of certain non-core generation facilities, net of tax of $0, $0, $37 (e)Disc. Operations      (2)   (64)
 Reduction of credit facility, net of tax of $0, $0, $4 (f)Interest Expense         (6)
Other:          
 Montana hydroelectric litigation, net of tax of $0, ($30), $22(g)      45    (34)
 Litigation settlement - spent nuclear fuel storage, net of tax of $0, ($24), $0 (h)Fuel      33    
 Health care reform - tax impact (i)Income Taxes         (5)
 Montana basin seepage litigation, net of tax of $0, $0, ($1)Other O&M         2 
 Counterparty bankruptcy, net of tax of $5, $5, $0 (j)Other O&M   (6)   (6)   
 Wholesale supply cost reimbursement, net of tax of $0, ($3), $0(k)   1    4    
 Ash basin leak remediation adjustment, net of tax of ($1), $0, $0Other O&M   1       
 Coal contract modification payments, net of tax of $12, $0, $0 (l)Fuel   (17)      
Total  $ 18  $ 142  $ (347)
(a)See "Reconciliation of Economic Activity" below.
(b)Gains recorded on completion of the sale of the Maine hydroelectric generation business.  See Note 9 to the Financial Statements for additional information.
(c)Primarily represents impairment charges of sulfur dioxide emission allowances.
(d)In July 2010, in order to raise additional cash for the LKE acquisition, certain full-requirement sales contracts were monetized that resulted in cash proceeds of $249 million.  See "Monetization of Certain Full-Requirement Sales Contracts" in Note 19 to the Financial Statements for additional information.  $343 million of pre-tax gains were recorded to "Wholesale energy marketing" and $557 million of pre-tax losses were recorded to "Energy purchases" on the Statement of Income.
(e)Consists primarily of the initial impairment charge recorded when the business was classified as held for sale.  See Note 9 to the Financial Statements for additional information.
(f)In October 2010, PPL Energy Supply made borrowings under its Syndicated Credit Facility in order to enable a subsidiary to make loans to certain affiliates to provide interim financing of amounts required by PPL to partially fund PPL's acquisition of LKE.  Subsequent to the repayment of such borrowing, the capacity was reduced, and as a result, PPL Energy Supply wrote off deferred fees in 2010.
(g)In March 2010, the Montana Supreme Court substantially affirmed a June 2008 Montana District Court decision regarding lease payments for the use of certain Montana streambeds.  In 2010, PPL Montana recorded a pre-tax charge of $56 million, representing estimated rental compensation for years prior to 2010, including interest.  Of this total charge $47 million, pre-tax, was recorded to "Other operation and maintenance" and $9 million, pre-tax, was recorded to "Interest Expense" on the Statement of Income.  In August 2010, PPL Montana filed a petition for a writ of certiorari with the U.S. Supreme Court requesting the Court's review of this matter.  In June 2011, the U.S. Supreme Court granted PPL Montana's petition.  In February 2012, the U.S. Supreme Court overturned the Montana Supreme Court decision and remanded the case to the Montana Supreme Court for further proceedings consistent with the U.S. Supreme Court's opinion.  Prior to the U.S. Supreme Court decision, $4 million, pre-tax, of interest expense on the rental compensation covered by the court decision was accrued in 2011.  As a result of the U.S. Supreme Court decision, PPL Montana reversed its total pre-tax loss accrual of $89 million, which had been recorded prior to the U.S. Supreme Court decision, of which $79 million pre-tax is considered a special item because it represented $65 million of rent for periods prior to 2011 and $14 million of interest accrued on the portion covered by the prior court decision.  These amounts were credited to "Other operation and maintenance" and "Interest Expense" on the Statement of Income.  See Note 15 to the Financial Statements for additional information.
(h)In May 2011, PPL Susquehanna entered into a settlement agreement with the U.S. Government relating to PPL Susquehanna's lawsuit, seeking damages for the Department of Energy's failure to accept spent nuclear fuel from the PPL Susquehanna plant.  PPL Susquehanna recorded credits to fuel expense to recognize recovery, under the settlement agreement, of certain costs to store spent nuclear fuel at the Susquehanna plant.  This special item represents amounts recorded in 2011 to cover the costs incurred from 1998 through December 2010.
(i)Represents income tax expense recorded as a result of the provisions within Health Care Reform which eliminated the tax deductibility of retiree health care costs to the extent of federal subsidies received by plan sponsors that provide retiree prescription drug benefits equivalent to Medicare Part D Coverage.
(j)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.
(k)In January 2012, PPL received $7 million pre-tax, related to electricity delivered to a wholesale customer in 2008 and 2009, recorded in "Wholesale energy marketing-Realized."  The additional revenue results from several transmission projects approved at PJM for recovery that were not initially anticipated at the time of the electricity auctions and therefore were not included in the auction pricing.  A FERC order was issued in 2011 approving the disbursement of these supply costs by the wholesale customer to the suppliers, therefore, PPL Energy Supply accrued its share of this additional revenue in 2011.
(l)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.
95

Reconciliation of Economic Activity

The following table reconciles unrealized pre-tax gains (losses) from the table within "Commodity Price Risk (Non-trading) - Economic Activity" in significant earnings components, including domestic gross energy margins by region and significant income statement line items, are explained inNote 19 to the "Statement of Income Analysis.Financial Statements to the special item identified as "Adjusted energy-related economic activity, net."

    2012  2011  2010 
Operating Revenues         
  Unregulated retail electric and gas $ (17) $ 31  $ 1 
  Wholesale energy marketing   (311)   1,407    (805)
Operating Expenses         
  Fuel   (14)   6    29 
  Energy Purchases   442    (1,123)   286 
Energy-related economic activity (a)   100    321    (489)
Option premiums (b)   (1)   19    32 
Adjusted energy-related economic activity   99    340    (457)
Less:  Unrealized economic activity associated with the monetization of certain         
 full-requirement sales contracts in 2010 (c)         (251)
Less:  Economic activity realized, associated with the monetization of certain         
 full-requirement sales contracts in 2010   35    216    
Adjusted energy-related economic activity, net, pre-tax $ 64  $ 124  $ (206)
            
Adjusted energy-related economic activity, net, after-tax $ 38  $ 72  $ (121)

(a)See Note 19 to the Financial Statements for additional information.
(b)Adjustment for the net deferral and amortization of option premiums over the delivery period of the item that was hedged or upon realization.  Option premiums are recorded in "Wholesale energy marketing - Realized" and "Energy purchases - Realized" on the Statements of Income.
(c)See "Components of Monetization of Certain Full-Requirement Sales Contracts" below.

Components of Monetization of Certain Full-Requirement Sales Contracts

The following table provides the components of the "Monetization of Certain Full-Requirement Sales Contracts" special item.

2010 
Full-requirement sales contracts monetized (a)$ (68)
Economic activity related to the full-requirement sales contracts monetized (146)
Monetization of certain full-requirement sales contracts, pre-tax (b)$ (214)
Monetization of certain full-requirement sales contracts, after-tax$ (125)

(a)See "Commodity Price Risk (Non-trading) - Monetization of Certain Full-Requirement Sales Contracts" in Note 19 to the Financial Statements for additional information.
(b)Includes unrealized losses of $251 million, which are reflected in "Wholesale energy marketing - Unrealized economic activity" and "Energy purchases - Unrealized economic activity" on the Statement of Income.  Also includes net realized gains of $37 million, which are reflected in "Wholesale energy marketing - Realized" and "Energy purchases - Realized" on the Statement of Income.

2013 Outlook

Excluding special items, PPL Energy Supply'sSupply projects lower earnings beyond 2009in 2013 compared with 2012, primarily driven by lower energy prices, higher fuel costs, higher operation and maintenance, higher depreciation and higher financing costs, which are partially offset by higher capacity prices and higher nuclear generation output despite scheduled outages for both Susquehanna units to implement a long-term solution to turbine blade issues.

Earnings in future periods are subject to various risks and uncertainties.  See "Forward-Looking Information," "Item 1. Business," "Item 1A. Risk Factors," the rest of this Item 7 and Note 1415 to the Financial Statements for a discussion of the risks, uncertainties and factors that may impact PPL Energy Supply's future earnings.

Segment Results
96


Net income attributable to PPL Energy Supply by segment was:

  2009 2008 2007
             
Supply $3  $478  $595 
International Delivery  243   290   610 
Total $246  $768  $1,205 

Supply Segment

The Supply segment primarily consists of the domestic energy marketing and trading activities, as well as the generation and development operations of PPL Energy Supply.  In December 2009, PPL Maine sold its 8.33% ownership interest in Wyman Unit 4.  In November 2009, PPL Maine completed the sale of the majority of its hydroelectric generation business.  In May 2009, PPL Generation signed a definitive agreement to sell its Long Island generation business and expects the sale to close on or about February 26, 2010.  In August 2007, PPL Energy Supply completed the sale of its domestic telecommunication operations.  See Notes 8 and 9 to the Financial Statements for additional information.

The Supply segment results reflect the classification of the Long Island generation business, the majority of the Maine hydroelectric generation business, and the 8.33% ownership interest in Wyman Unit 4, as Discontinued Operations.  See Note 9 to the Financial Statements for additional information.

Supply segment net income attributable to PPL Energy Supply was:

  2009 2008 2007
             
Energy revenues (a) $5,037  $5,200  $3,389 
Energy-related businesses  379   478   723 
Total operating revenues  5,416   5,678   4,112 
Fuel and energy purchases (a)  3,679   3,215   1,575 
Other operation and maintenance  927   884   753 
Depreciation  210   180   152 
Taxes, other than income  29   20   31 
Energy-related businesses  372   464   740 
Total operating expenses  5,217   4,763   3,251 
Other Income - net (b)  48   45   83 
Other-Than-Temporary Impairments  18   36   3 
Interest Expense (c)  185   169   106 
Income Taxes  27   290   249 
Income (Loss) from Discontinued Operations  (13)  15   12 
Net Income  4   480   598 
Net Income Attributable to Noncontrolling Interests  1   2   3 
Net Income Attributable to PPL Energy Supply $3  $478  $595 

(a)Includes impact from energy-related economic activity.  See "Commodity Price Risk (Non-trading) - Economic Activity" in Note 18 to the Financial Statements for additional information.
(b)Includes interest income from affiliates.
(c)Includes interest expense with affiliate.

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


  2009 vs. 2008 2008 vs. 2007
       
Eastern U.S. non-trading margins $(3) $(62)
Western U.S. non-trading margins  20   5 
Net energy trading margins  81   (95)
Energy-related businesses  (4)  (4)
Other operation and maintenance  (32)  12 
Depreciation  (18)  (16)
Taxes, other than income  (5)  6 
Other income - net (a)  (4)  (21)
Interest expense (b)  (9)  (38)
Income taxes  (24)  (61)
Discontinued operations (Note 9)  (9)  3 
Other  1   2 
Special items  (469)  152 
  $(475) $(117)

(a)Includes interest income from affiliates.
(b)Includes interest expense with affiliate.

·See "Domestic Gross Energy Margins" for an explanation of non-trading margins and net energy trading margins.
·Other operation and maintenance expenses increased in 2009 compared with 2008, primarily due to increased payroll-related costs, higher contractor-related costs and other costs at PPL Energy Supply's generation plants.
·
Depreciation expense increased in 2009 compared with 2008, primarily due to the scrubbers at Brunner Island and Montour and the portions of the Susquehanna uprate projects that were placed in service in 2008 and 2009.
Depreciation expense increased in 2008 compared with 2007, primarily due to the Montour scrubbers and the Susquehanna uprate project that were placed in service in 2008.
·Other income - net decreased in 2008 compared with 2007, primarily due to a decrease in earnings on nuclear plant decommissioning trust investments and lower gains on sales of real estate.
·Interest expense increased in 2008 compared with 2007, primarily due to increased interest on long-term debt resulting from new issuances.
·
Income taxes increased in 2009 compared with 2008, in part due to lower domestic manufacturing deductions in 2009.
Income taxes increased in 2008 compared with 2007, primarily due to the loss of synfuel tax credits as the projects ceased operation at the end of 2007.
·Special items decreased in 2009 compared with 2008, primarily due to a $476 million after-tax change in energy-related economic activity.  The change is primarily the result of certain power and gas cash flow hedges failing hedge effectiveness testing in the third and fourth quarters of 2008, as well as the first quarter of 2009.  Hedge accounting is not permitted for the quarter in which this occurs and, accordingly, the entire change in fair value for the periods that failed was recorded to the income statement.  However, these transactions were not dedesignated as hedges, as prospective regression analysis demonstrated that these hedges are expected to be highly effective over their term.  For 2008, an after-tax gain of $298 million was recognized in earnings as a result of these hedge failures.  During the second, third and fourth quarters of 2009, fewer power and gas cash flow hedges failed hedge effectiveness testing; therefore, a portion of the previously recognized unrealized gains recorded in the second half of 2008 and the first quarter of 2009 associated with these hedges were reversed.  For 2009, after-tax losses of $215 million were recognized in earnings.

The following after-tax amounts, which management considers special items, also impacted the Supply segment's earnings.

  2009 2008 2007
             
Energy-related economic activity (Note 18) $(225) $251  $32 
Sales of assets            
Long Island generation business (a)  (33)        
Interest in Wyman Unit 4 (Note 9)  (4)        
Majority of Maine hydroelectric generation business (Note 9)  22         
Domestic telecommunication operations (Note 8)          (23)
Impairments            
Impacts from emission allowances (b)  (19)  (25)    
Other asset impairments (c)  (4)  (15)    
Adjustments - NDT investments (d)      (17)    
Transmission rights (e)          (13)
Workforce reduction (Note 12)  (6)  (1)  (4)
Other            
Change in tax accounting method related to repairs (Note 5)  (21)        
Montana hydroelectric litigation (Note 14)  (3)        
Synthetic fuel tax adjustment (Note 14)      (13)    
Montana basin seepage litigation (Note 14)      (5)    
Off-site remediation of ash basin leak (Note 14)      1     
Settlement of Wallingford cost-based rates (f)          33 
PJM billing dispute          (1)
Total $(293) $176  $24 

(a)Consists primarily of the initial impairment charge recorded in June 2009 when this business was classified as held for sale.  See Note 9 to the Financial Statements for additional information on the anticipated sale.
(b)
2009 primarily consists of a pre-tax charge of $37 million related to sulfur dioxide emission allowances.  See Note 17 to the Financial Statements for additional information.
2008 consists of charges related to annual nitrogen oxide allowances and put options.  See Note 14 to the Financial Statements for additional information.
(c)2008 primarily consists of a pre-tax charge of $22 million related to the cancellation of the Holtwood hydroelectric expansion project.  See Note 8 to the Financial Statements for additional information.
(d)Represents other-than-temporary impairment charges on securities, including reversals of previous impairments when previously impaired securities were sold.
(e)See "Other Operation and Maintenance" for more information on the $23 million pre-tax impairment recorded in 2007.
(f)In 2003, PPL Wallingford and PPL EnergyPlus sought from the FERC cost-based payments based upon the RMR status of four units at the Wallingford, Connecticut generating facility.  In 2007, as a result of a settlement agreement, PPL Energy Supply recognized $55 million of revenue and $4 million of interest income.

2010 Outlook

Excluding special items, PPL Energy Supply projects higher earnings from its Supply segment in 2010 compared with 2009, due to growth in energy margins.  The forecast for growth in energy margins is based on hedged power and fuel prices as well as established capacity prices in PJM.  These positive factors are expected to be partially offset by higher depreciation, financing costs and operation and maintenance expenses.

International Delivery Segment

The International Delivery segment consists primarily of the electricity distribution operations in the U.K.  In 2007, PPL Energy Supply completed the sale of its Latin American businesses.  In 2008, the International Delivery segment recognized income tax benefits and miscellaneous expenses in Discontinued Operations in connection with the dissolution of certain Latin American holding companies.  In 2009, the International Delivery segment recognized $24 million of income tax expense in Discontinued Operations related to a correction of the calculation of tax bases of the Latin American businesses sold in 2007.  See Note 9 to the Financial Statements for additional information.

The International Delivery segment results reflect the classification of its Latin American businesses as Discontinued Operations.

International Delivery segment net income attributable to PPL Energy Supply was:

  2009 2008 2007
             
Utility revenues $684  $824  $863 
Energy-related businesses  32   33   37 
Total operating revenues  716   857   900 
Other operation and maintenance  140   186   252 
Depreciation  115   134   147 
Taxes, other than income  57   66   67 
Energy-related businesses  16   14   17 
Total operating expenses  328   400   483 
Other Income - net  (11)  17   26 
Interest Expense  87   144   183 
Income Taxes  20   45   (43)
Income (Loss) from Discontinued Operations  (27)  5   313 
Net Income  243   290   616 
Net Income Attributable to Noncontrolling Interests          6 
Net Income Attributable to PPL Energy Supply $243  $290  $610 

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

  2009 vs. 2008 2008 vs. 2007
U.K.        
Delivery margins $17  $12 
Other operating expenses  7   22 
Other income – net  (4)  (7)
Depreciation  (4)  4 
Interest expense  28   5 
Income taxes  24   24 
Foreign currency exchange rates  (69)  (14)
Gain on transfer of equity investment      (5)
Other  (4)  (3)
Discontinued Operations (Note 9)  (5)  (49)
U.S. interest expense      17 
U.S. income taxes  1   (32)
Gain (loss) on economic hedges (Note 15)  (12)  10 
Other  2   6 
Special items  (28)  (310)
  $(47) $(320)

·Lower U.K. other operating expenses in 2008 compared with 2007, were primarily due to lower compensation and lower pension costs.
·Lower U.K. interest expense in 2009 compared with 2008, was primarily due to lower inflation rates on U.K. Index-linked Senior Unsecured Notes and lower debt balances.
·
Lower U.K. income taxes in 2009 compared with 2008, were primarily due to HMRC's determination related to the valuation of a business activity sold in 1999 and to the deductibility of foreign currency exchange losses, partially offset by the items in 2008 mentioned below.
Lower U.K. income taxes in 2008 compared with 2007, were primarily due to HMRC's determination related to deductibility of imputed interest on a loan from Hyder and a change in tax law that included the phase-out of tax depreciation on industrial buildings over a four-year period.
·Changes in foreign currency exchange rates negatively impacted U.K. earnings for both periods.  The weighted-average exchange rates for the British pound sterling were approximately $1.53 in 2009, $1.91 in 2008 and $2.00 in 2007.
·Higher U.S. income taxes in 2008 compared with 2007, was primarily due to the change in a U.S. income tax reserve resulting from the lapse in 2007 of an applicable statute of limitations.

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

  2009 2008 2007
             
Foreign currency-related economic hedges - unrealized impacts (Note 18) $1         
Sales of assets            
Latin American businesses (Note 9)  (27)     $259 
Impairments  (1)        
Workforce reduction (Note 12)  (2) $(1)  (4)
Other            
Change in U.K. tax rate (Note 5)          54 
Total $(29) $(1) $309 

2010 Outlook

Excluding special items, PPL Energy Supply projects lower earnings from its International Delivery segment in 2010 compared with 2009, as a result of higher income taxes, higher operation and maintenance expenses and higher financing costs. These negative factors are expected to be partially offset by higher electricity delivery margins and a more favorable currency exchange rate.

In December 2009, Ofgem completed its rate review for the five-year period from April 1, 2010 through March 31, 2015.  Ofgem allowed WPD an average increase in total revenues, before inflationary adjustments, of 6.9% in each of the five years.  The revenue increase includes reimbursement to electricity distributors for higher operating and capital costs to be incurred.  Also, Ofgem set the weighted average cost of capital at 4.7%, which includes pre-tax debt and post-tax equity costs and excludes adjustments for inflation, for all distribution companies.  This is a 0.8% decrease from the previous regulatory period.  Additionally, Ofgem has established strong incentive mechanisms to provide companies significant opportunities to enhance overall returns by improving network efficiency, reliability or customer service.

Statement of Income Analysis --

DomesticUnregulated Gross Energy Margins

Non-GAAP Financial Measure

The following discussion includes financial information prepared in accordance with GAAP, as well as a non-GAAP financial measure, "Domestic"Unregulated Gross Energy Margins."  The presentation of "Domestic"Unregulated Gross Energy Margins" is intended to supplement the investor's understandinga single financial performance measure of PPL Energy Supply's domesticcompetitive energy non-trading and trading activities by combining applicable income statement line items and related adjustments to calculate a single financial measure.activities.  In calculating this measure, PPL Energy Supply's energy revenues, which include operating revenues associated with certain PPL Energy Supply believesbusinesses that "Domesticare classified as discontinued operations, are offset by the cost of fuel, energy purchases, certain other operation and maintenance expenses, primarily ancillary charges, gross receipts tax, which is recorded in "Taxes, other than income," and operating expenses associated with certain PPL Energy Supply businesses that are classified as discontinued operations.  This performance measure is relevant to PPL Energy Supply 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 "Wholesale energy marketing to affiliate" revenue.  PPL Energy Supply excludes from "Unregulated Gross Energy Margins" are useful and meaningfuladjusted energy-related economic activity, which includes the changes in fair value of positions used to investors because they provide them witheconomically hedge a portion of the resultseconomic value of PPL Energy Supply's domestic non-tradingcompetitive generation assets, full-requirement sales contracts and trading activities as another criterionretail activities.  This economic value is subject to changes in making their investment decisions.  PPL Energy Supply's management also uses "Domesticfair 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.  Also included in adjusted energy-related economic activity is the ineffective portion of qualifying cash flow hedges, the monetization of certain full-requirement sales contracts and premium amortization associated with options.  This economic activity is deferred, with the exception of the full-requirement sales contracts that were monetized, and included in "Unregulated Gross Energy Margins" in measuring certain corporate performance goals used in determining variable compensation.  Other companies may use different measures to presentover the results of their non-trading and trading activities.  Additionally, "Domestic Gross Energy Margins" aredelivery period that was hedged or upon realization.  This measure is 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.  PPL Energy Supply believes that "Unregulated Gross Energy Margins" provides another criterion to make investment decisions.  This performance measure is used, in conjunction with other information, internally by senior management to manage PPL Energy Supply's operations, analyze actual results compared with budget and measure certain corporate financial goals used in determining variable compensation.

Reconciliation of Non-GAAP Financial Measures

The following table provides a reconciliation betweentables reconcile "Operating Income" and "Domesticto "Unregulated Gross Energy Margins" as defined by PPL Energy Supply.
Supply for the period ended December 31.

  2009 2008 2007
             
Operating Income (a) $587  $1,372  $1,278 
Adjustments:            
Utility (a)  (684)  (824)  (863)
Energy-related businesses, net (b)  (23)  (33)  (3)
Other operation and maintenance (a)  1,067   1,070   1,005 
Depreciation (a)  325   314   299 
Taxes, other than income (a)  86   86   98 
Revenue adjustments (c)  293   (1,032)  223 
Expense adjustments (c)  80   611   (213)
Domestic gross energy margins $1,731  $1,564  $1,824 
      2012  2011 
      Unregulated       Unregulated      
      Gross Energy    Operating Gross Energy     Operating
      Margins Other (a) Income (b) Margins Other (a) Income (b)
                   
Operating Revenues                    
 Wholesale energy marketing                    
    Realized $ 4,412  $ 21 (c) $ 4,433  $ 3,745  $ 62 (c) $ 3,807 
    Unrealized economic activity      (311)(d)   (311)      1,407 (d)   1,407 
 Wholesale energy marketing                    
  to affiliate   78        78    26        26 
 Unregulated retail electric and gas   865    (17)(d)   848    696    31 (d)   727 
 Net energy trading margins   4        4    (2)       (2)
 Energy-related businesses      448     448       464     464 
   Total Operating Revenues   5,359    141     5,500    4,465    1,964     6,429 


97

      2012  2011 
      Unregulated       Unregulated      
      Gross Energy    Operating Gross Energy     Operating
      Margins Other (a) Income (b) Margins Other (a) Income (b)
Operating Expenses                    
 Fuel   931    34 (e)   965    1,151    (71)(e)   1,080 
 Energy purchases                    
    Realized   2,204    56 (c)   2,260    912    248 (c)   1,160 
    Unrealized economic activity      (442)(d)   (442)      1,123 (d)   1,123 
 Energy purchases from affiliate   3        3    3        3 
 Other operation and maintenance   19    1,022     1,041    16    913     929 
 Depreciation      285     285       244     244 
 Taxes, other than income   34    35     69    30    41     71 
 Energy-related businesses      432     432       458     458 
   Total Operating Expenses   3,191    1,422     4,613    2,112    2,956     5,068 
 Discontinued Operations             12    (12)(f)   
Total $ 2,168  $ (1,281)  $ 887  $ 2,365  $ (1,004)  $ 1,361 
      2010  
      Unregulated       
      Gross Energy    Operating 
      Margins Other (a) Income (b) 
Operating Revenues           
 Wholesale energy marketing           
    Realized $ 4,511  $ 321 (c) $ 4,832  
    Unrealized economic activity      (805)(d)   (805) 
 Wholesale energy marketing           
  to affiliate   320        320  
 Unregulated retail electric and gas   414    1 (d)   415  
 Net energy trading margins   2        2  
 Energy-related businesses      364     364  
   Total Operating Revenues   5,247    (119)    5,128  
                
Operating Expenses           
 Fuel   1,132    (36)(e)   1,096  
 Energy purchases           
    Realized   1,389    247 (c)   1,636  
    Unrealized economic activity      (286)(d)   (286) 
 Energy purchases from affiliate   3        3  
 Other operation and maintenance   23    956     979  
 Depreciation      236     236  
 Taxes, other than income   14    32     46  
 Energy-related businesses      357     357  
   Total Operating Expenses   2,561    1,506     4,067  
 Discontinued Operations   84    (84)(f)    
Total $ 2,770  $ (1,709)  $ 1,061  
(a)Represents amounts excluded from Margins.
(b)As reported on the Statements of Income.
(b)(c)Represents energy-related economic activity as described in "Commodity Price Risk (Non-trading) - Economic Activity" within Note 19 to the Financial Statements.  For 2012, "Wholesale energy marketing - Realized" and "Energy purchases - Realized" include a net pre-tax loss of $35 million related to the monetization of certain full-requirement sales contracts.  2011 includes a net pre-tax loss of $216 million related to the monetization of certain full-requirement sales contracts and a net pre-tax gain of $19 million related to the amortization of option premiums.  2010 includes a net pre-tax gain of $37 million related to the monetization of certain full-requirement sales contracts and a net pre-tax gain of $32 million related to the amortization of option premiums.
(d)Amount representsRepresents 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 19 to the Financial Statements.
(e)Includes economic activity related to fuel as described in "Commodity Price Risk (Non-trading) - Economic Activity" within Note 19 to the Financial Statements.  2012 includes a net pre-tax loss of $29 million related to coal contract modification payments.  2011 includes pre-tax credits of $57 million for the spent nuclear fuel litigation settlement.
(f)Represents the net of "Energy-related businesses" revenuecertain revenues and expenseexpenses associated with certain businesses that are classified as reporteddiscontinued operations.  These revenues and expenses are not reflected in "Operating Income" on the Statements of Income.
(c)The components of these adjustments are detailed in the tables below.

The following tables provide the income statement line items and other adjustments that comprise domestic gross energy margins.Changes in Non-GAAP Financial Measures

  2009 2008 Change
Revenue            
Wholesale energy marketing (a) $3,062  $3,344  $(282)
Wholesale energy marketing to affiliate (a)  1,806   1,826   (20)
Unregulated retail electric and gas (a)  152   151   1 
Net energy trading margins (a)  17   (121)  138 
Revenue adjustments (b)            
Miscellaneous wholesale energy marketing to affiliate  (12)  (14)  2 
Impact from energy-related economic activity (c)  274   (1,061)  1,335 
Gains from sale of emission allowances (d)  2   6   (4)
Revenues from Supply segment discontinued operations (e)  29   37   (8)
Total revenue adjustments  293   (1,032)  1,325 
   5,330   4,168   1,162 
Expense            
Fuel (a)  931   1,084   (153)
Energy purchases (a)  2,678   2,023   655 
Energy purchases from affiliate (a)  70   108   (38)
Expense adjustments (b)            
Impact from energy-related economic activity (c)  (109)  (632)  523 
Other  29   21   8 
Total expense adjustments  (80)  (611)  531 
   3,599   2,604   995 
Domestic gross energy margins $1,731  $1,564  $167 
Unregulated Gross Energy Margins are generated through PPL Energy Supply's competitive non-trading and trading activities.  PPL Energy Supply's non-trading energy business is managed on a geographic basis that is aligned with its generation fleet.  The following table shows PPL Energy Supply's non-GAAP financial measure, Unregulated Gross Energy Margins, for the periods ended December 31, as well as the change between periods.  The factors that gave rise to the changes are described below the table.
98

   2012  2011  Change 2011  2010  Change
                    
Non-trading                  
 Eastern U.S. $ 1,865  $ 2,018  $ (153) $ 2,018  $ 2,429  $ (411)
 Western U.S.   299    349    (50)   349    339    10 
Net energy trading   4    (2)   6    (2)   2    (4)
Total $ 2,168  $ 2,365  $ (197) $ 2,365  $ 2,770  $ (405)

  2008 2007 Change
Revenue            
Wholesale energy marketing (a) $3,344  $1,436  $1,908 
Wholesale energy marketing to affiliate (a)  1,826   1,810   16 
Unregulated retail electric and gas (a)  151   102   49 
Net energy trading margins (a)  (121)  41   (162)
Revenue adjustments (b)            
Miscellaneous wholesale energy marketing to affiliate  (14)  (15)  1 
Impact from energy-related economic activity (c)  (1,061)  145   (1,206)
Gains from sale of emission allowances (d)  6   109   (103)
RMR revenues      (52)  52 
Revenues from Supply segment discontinued operations (e)  37   36   1 
Total revenue adjustments  (1,032)  223   (1,255)
   4,168   3,612   556 
Expense            
Fuel (a)  1,084   890   194 
Energy purchases (a)  2,023   529   1,494 
Energy purchases from affiliate (a)  108   156   (48)
Expense adjustments (b)            
Impact from energy-related economic activity (c)  (632)  200   (832)
Other  21   13   8 
Total expense adjustments  (611)  213   (824)
   2,604   1,788   816 
Domestic gross energy margins $1,564  $1,824  $(260)
Unregulated Gross Energy Margins      
       
Eastern U.S.      
       
The changes in Eastern U.S. non-trading margins were:
       
  2012 vs. 2011 2011 vs. 2010
       
Baseload energy prices $ (121) $ (109)
Baseload capacity prices   (37)   (90)
Intermediate and peaking capacity prices   (17)   (58)
Full-requirement sales contracts (a)   (15)   70 
Impact of non-core generation facilities sold in the first quarter of 2011   (12)   (48)
Higher nuclear fuel prices   (12)   (10)
Net economic availability of coal and hydroelectric units (b)   (10)   (72)
Higher coal prices   (2)   (40)
Nuclear generation volume (c)      (29)
Intermediate and peaking Spark Spreads   11    24 
Retail electric   15    (7)
Ironwood Acquisition, which eliminated tolling expense (d)   41    
Monetization of certain deals that rebalanced the business and portfolio      (41)
Other   6    (1)
  $ (153) $ (411)

(a)As reported onHigher margins in 2011 compared with 2010 were driven by the Statementsmonetization of Income.loss contracts in 2010 and lower customer migration to alternative suppliers in 2011.
(b)To include/excludeVolumes were lower in 2011 compared with 2010 as a result of unplanned outages and the impactsale of any revenues and expenses not associated with domestic gross energy margins, consistent with the way management reviews domestic gross energy margins internally.our interest in Safe Harbor Water Power Corporation.
(c)Volumes were flat in 2012 compared to 2011 due to an uprate in the third quarter of 2011 offset by higher plant outage costs in 2012.  Volumes were lower in 2011 compared with 2010 primarily as a result of the dual-unit turbine blade replacement outages beginning in May 2011.
(d)See Note 18 to the Financial Statements for additional information regarding economic activity.
(d)Included in "Other operation and maintenance" on the Statements of Income.
(e)Represents revenues associated with the Long Island generation business and the majority of the Maine hydroelectric generation business.  See Note 910 to the Financial Statements for additional information.

Domestic Gross Energy Margins By Region

Domestic gross energy margins are generated through PPL Energy Supply's non-trading and trading activities.  PPL Energy Supply manages its non-trading energy business on a geographic basis that is aligned with its generation assets.

  2009 2008 Change
Non-trading            
Eastern U.S. $1,391  $1,396  $(5)
Western U.S.  323   289   34 
Net energy trading  17   (121)  138 
Domestic gross energy margins $1,731  $1,564  $167 

  2008 2007 Change
Non-trading            
Eastern U.S. $1,396  $1,502  $(106)
Western U.S.  289   281   8 
Net energy trading  (121)  41   (162)
Domestic gross energy margins $1,564  $1,824  $(260)

Eastern U.S.

Eastern U.S. non-trading margins were $5 million lower in 2009 compared with 2008.  This decrease was primarily due to lower margins on full-requirement sales contracts resulting from mild weather, decreased demand, and customer migration.  Also contributing to the decrease were higher average baseload generation fuel costs of 7%, primarily due to higher coal prices.  Partially offsetting these lower margins were net gains resulting from the settlement of economic positions associated with rebalancing PPL Energy Supply's portfolios to better align them with current strategies, higher capacity revenue, higher baseload generation output due to unplanned major outages in 2008, and a 2.2% increase in the PLR sales prices in accordance with the PUC Final Order.

Eastern U.S. non-trading margins were $106 million lower in 2008 compared with 2007.  This decrease was primarily due to higher fuel costs, up 16%, primarily due to higher coal prices.  Also contributing to the decrease was lower baseload generation, down 4%, primarily due to the unplanned outages at the eastern coal-fired units and retirement of the Martins Creek coal-fired units in September 2007.  Partially offsetting these lower margins were higher margins from the hedged sale of generation in the wholesale market and a 1.4% increase in PLR sales prices in accordance with the PUC Final Order.

Western U.S.

Western U.S. non-tradingNon-trading margins were lower in 2012 compared with 2011 due to $34 million of lower wholesale volumes, including $31 million related to the bankruptcy of SMGT, $9 million of higher average fuel prices and $9 million of lower wholesale prices.

Non-trading margins were higher in 20092011 compared with 2008.  This increase was primarily2010 due to higher net wholesale volumesprices of 6% and increased generation from the hydroelectric units of 5%.

Western U.S. non-trading margins were $8$58 million, higher in 2008 compared with 2007.  This increase was primarily due to increased generation from the hydroelectric units of 2%.

Net Energy Trading

PPL Energy Supply enters into energy contracts to take advantage of market opportunities.  As a result, PPL Energy Supply may at times create a net open position in its portfolio that could result in significant losses if prices do not move in the manner or direction anticipated.  However, these trading activities are subject to risk management program limits that are designed to protect PPL Energy Supply from undue financial loss.  The margins from these trading activities are reflected in the Statements of Income as "Net energy trading margins."  These physical and financial contracts cover trading activity associated with electricity, emission allowances, uranium, FTRs, natural gas, and oil.

Net energy trading margins increased by $138 million in 2009 compared with 2008.  This increase consisted of $215 million of higher unrealized margins partially offset by $77 million of lower realized margins.  These changes were primarily due to increased margins in the power, gas and oil trading positions resulting from unrealized trading losses in 2008 due to a dramatic decline in energy prices and a severe contraction of liquidity in the wholesale power markets.

Net energy trading margins decreased by $162 million in 2008 compared with 2007.  This decrease consists of $135 million of lower unrealized margins and $27 million of lower realized margins, both driven by significant decreases in power and gas prices in the second half of 2008.

Utility Revenues

The changes in utility revenues were attributable to:

  2009 vs. 2008 2008 vs. 2007
         
U.K. foreign currency exchange rates $(154) $(42)
U.K. electric delivery revenue  14   3 
  $(140) $(39)

Higher U.K. electric delivery revenues for 2009 compared with 2008, excluding foreign currency exchange rate impacts, were primarily due to an increase in prices effective April 1, a revised estimate of network electricity losses, and favorable changes in customer mix.  These increases were partially offset by lower wholesale volumes of $45 million, primarily due to unfavorable economic conditions, including industrial customers scaling backreductions in the coal unit output.

Energy-Related Businesses

The $10 million increase in contributions from energy-related businesses in 2012 compared with 2011 primarily relates to the mechanical services businesses, due to improved margins on production,construction and energy service projects in 2012 and a decrease in engineering and metering services performed for third parties.

Energy-related Businesses

Energy-related businesses contributed $10 million less to operating income in 2009 compared with 2008.  The decrease was primarily attributable to:

·contributions from domestic energy services-related businesses decreasing by $6 million, primarily due to a decline in construction activity caused by the slowdown in the economy; and
·contributions from U.K. energy-related businesses decreasing by $4 million, primarily due to changes in foreign currency exchange rates.

Energy-related businesses contributed $30 million more to operating income in 2008 compared with 2007.  The increase was primarily attributable to:

·a $39 million impairment in 2007 of domestic telecommunication operations that were sold in 2007; and
·an $11 million increase in contributions from domestic energy services-related businesses mainly due to increased construction activity; partially offset by
·$11 million of lower pre-tax contributions from synfuel projects.  This reflects a $77 million net gain recorded in 2007 on options purchased to hedge the risk associated with the phase-out of synthetic fuel tax credits.  This decrease was partially offset by $66 million less in operating losses from synfuel projects as the projects ceased operation at the end of 2007; and
·$5 million less in contributions from the domestic telecommunication operations sold in 2007.

See Note 8 to the Financial Statements for additional information on the sale of domestic telecommunication assets.  See Note 14 to the Financial Statements for additional information on the shutdown of the synfuel facilities in 2007.affiliate trademark expenses.

Other Operation and Maintenance

The changesincrease (decrease) in other operation and maintenance expenses werewas due to:


  2009 vs. 2008 2008 vs. 2007
       
U.K. foreign currency exchange rates $(24) $(8)
Impairment of cancelled generation expansion project in 2008 (Note 8)  (22)  22 
Defined benefit costs - U.K. (Note 12)  (16)  (28)
WPD recoverable engineering services  (9)  (17)
Impairment and other charges - emission allowances (Notes 14 and 17)  (9)  42 
Montana basin seepage litigation (Note 14)  (8)  8 
Uncollectible accounts  (8)  4 
Trademark royalty fees from a PPL subsidiary (Note 15)  (7)  9 
WPD meter operator expenses  (7)  (6)
Payroll-related costs  24   (6)
Allocation of corporate service costs  16   (21)
WPD distribution costs  15   7 
Domestic and international workforce reductions (Note 12)  13   (10)
Contractor-related expenses  11   (7)
Defined benefit costs - U.S. (Note 12)  11   (3)
Montana hydroelectric litigation (Note 14)  8   1 
Other costs at fossil/hydroelectric stations  7   1 
Other nuclear related expenses  7   (10)
Lower gains on sales of emission allowances  4   103 
Impairment of transmission rights (a)      (23)
Other - Domestic  (4)  10 
Other - U.K.  (5)  (3)
  $(3) $65 
99

   2012 vs. 2011 2011 vs. 2010
        
Montana hydroelectric litigation (a) $ 75  $ (121)
PPL Susquehanna nuclear plant costs (b)   27    30 
Uncollectible accounts (c)   (5)   15 
Costs at Western fossil and hydroelectric plants (d)   (1)   15 
Costs at Eastern fossil and hydroelectric plants (e)   13    20 
Impacts from emission allowances (f)      (15)
Ironwood Acquisition (g)   18    
Trademark royalties (h)   (34)   
Pension expense   11    1 
Other   8    5 
Total $ 112  $ (50)

(a)In 2007, Maine Electric Power Company (MEPCO), ISO New England and other New England transmission owners submittedMarch 2010, the Montana Supreme Court substantially affirmed a filing to the FERC seeking to roll the revenue requirement of the MEPCO transmission facilities into the regional transmission rates in New England and to change certain rules concerningJune 2008 Montana District Court decision regarding lease payments for the use of certain Montana streambeds.  As a result, in the transmission linefirst quarter of 2010, PPL Montana recorded a charge of $56 million, representing estimated rental compensation for energythe first quarter of 2010 and capacity.prior years, including interest.  The portion of the total charge recorded to "Other operation and maintenance" on the Statement of Income totaled $49 million.  In August 2010, PPL Montana filed a petition for a writ of certiorari with the U.S. Supreme Court requesting the Court's review of this matter.  In June 2011, the U.S. Supreme Court granted PPL Montana's petition.  In February 2012, the U.S. Supreme Court overturned the Montana Supreme Court decision and remanded the case to the Montana Supreme Court for further proceedings consistent with the U.S. Supreme Court's opinion.  As a result, in 2011 PPL Montana reversed its total loss accrual of $89 million, which had been recorded prior to the U.S. Supreme Court decision, of which $75 million was credited to "Other operation and maintenance" on the Statement of Income.
(b)2012 compared with 2011 was higher primarily due to $11 million of higher payroll-related costs, $7 million of higher project costs and $7 million of higher costs from the refueling outage.  2011 compared with 2010 was higher primarily due to $11 million of higher payroll-related costs, $10 million of higher outage costs and $8 million of higher costs from the refueling outage.
(c)2011 compared with 2010 was higher primarily due to SMGT filing for protection under Chapter 11 of the U.S. Bankruptcy Code, $11 million of damages billed to SMGT were fully reserved.
(d)2011 compared with 2010 was higher primarily due to $11 million of lower insurance proceeds.
(e)2012 compared with 2011 was higher primarily due to net plant outage costs of $13 million.  2011 compared with 2010 was higher primarily due to plant outage costs of $13 million.
(f)2011 compared with 2010 was lower due to lower impairment charges of sulfur dioxide emission allowances.
(g)There are no comparable amounts in the 2011 periods as the Ironwood Acquisition occurred in April 2012.
(h)In 2011 and 2010, PPL Energy Supply protested this proposal and recordedwas charged trademark royalties by an impairment of the transmission rights based on their estimated fair value.affiliate.  The agreement was terminated in December 2011.

Depreciation

The increasesDepreciation increased by $41 million in depreciation expense were2012 compared with 2011, primarily due to:

  2009 vs. 2008 2008 vs. 2007
         
Additions to PP&E (a) $40  $37 
U.K. foreign currency exchange rates  (25)  (7)
Extension of useful lives of certain WPD network assets in mid-2007 (Note 1)      (13)
Other  (4)  (2)
  $11  $15 

(a)Primarily attributable to the completion of the Susquehanna generation uprate and the Montour scrubber projects in 2008 and the Brunner Island scrubber projects in 2009.
to $16 million attributable to PP&E additions and $17 million attributable to the Ironwood Acquisition in April 2012.  Depreciation increased by $8 million in 2011 compared with 2010, primarily due to PP&E additions.

Taxes, Other Than Income

The changes in taxes,Taxes, other than income weredecreased by $2 million in 2012 compared with 2011, primarily due to:to a $7 million decrease in state capital stock tax offset by a $4 million increase in state gross receipts tax.

  2009 vs. 2008 2008 vs. 2007
         
Domestic property tax expense (a) $10  $(7)
U.K. foreign currency exchange rates  (12)  (3)
Other  2   (2)
  $   $(12)

(a)The change in both periods was primarily due to a $7 million property tax credit recorded by PPL Montana in 2008.
Taxes, other than income increased by $25 million in 2011 compared with 2010, primarily due to $16 million of higher Pennsylvania gross receipts tax expense as a result of an increase in retail electricity sales by PPL EnergyPlus.  This tax is included in "Unregulated Gross Energy Margins."  The increase also includes $8 million of higher Pennsylvania capital stock tax due in part to the expiration of the Keystone Opportunity Zone credit in 2010 and an agreed to change in a capital stock tax filing position with the state.

Other Income (Expense) - net

See Note 1617 to the Financial Statements for details of other income.details.

Other-Than-Temporary Impairments

Other-than-temporary impairments decreased by $18 million in 2009 compared with 2008, primarily due to stronger investment returns caused by improved market conditions within the financial markets.

Other-than-temporary impairments increased by $33 million in 2008 compared with 2007, primarily due to negative investment returns caused by the downturn in the financial markets in 2008.

Interest Income from Affiliates

Interest income from affiliates decreased by $12$6 million in 20092012 compared with 2008, and decreased by $15 million in 2008 compared with 2007.  The decrease in 2009 was2011, primarily due to the decline in thelower average balance outstanding and the floating interest rate on the collateral deposit related to the PLR contract.  The decrease in 2008 was the result of reduced averageloan balances outstanding on notes receivable from affiliates and the floating interest rate on the collateral deposit related to the PLR contract.with PPL Energy Funding.

Interest Expense

The changesincrease (decrease) in interest expense which includes "Interest Expense with Affiliate," werewas due to:

100

   2012 vs. 2011 2011 vs. 2010
        
Long-term debt interest expense (a) $ (11)   
Short-term debt interest expense (b)   (10) $
Ironwood Acquisition (Note 10)  12    
Capitalized interest      (16)
Net amortization of debt discounts, premiums and issuance costs (c)   (9)   (3)
Montana hydroelectric litigation (d)   10    (20)
Other   2    (2)
Total $ (6) $ (34)

  2009 vs. 2008 2008 vs. 2007
       
Inflation adjustment on U.K. Index-linked Senior Unsecured Notes $(29) $6 
U.K. foreign currency exchange rates  (17)  (8)
Long-term debt interest expense  (13)  21 
Hedging activities  (3)  (4)
Capitalized interest  12   (1)
Short-term debt interest expense  6   8 
Amortization of debt issuance costs  6   5 
Other  (3)  (3)
  $(41) $24 
(a)The decrease was primarily due to the redemption of $250 million of 7.0% Senior Notes due 2046 in July 2011 along with the repayment of $500 million of 6.4% Senior Notes due 2011 and subsequent issuance of $500 million of 4.6% Senior Notes due 2021, both in the fourth quarter of 2011.
(b)2012 compared with 2011 was lower primarily due to lower interest rates on 2012 short-term borrowings coupled with lower fees on credit facilities.  2011 compared with 2010 was higher primarily due to increased borrowings in 2011 and an increase in commitment fees on credit facilities.
(c)The periods include the impact of accelerating the amortization of deferred financing fees of $7 million in 2011, due to the July 2011 redemption, as noted above, of its 7.00% Senior Notes due 2046.  2011 compared with 2010 was slightly offset by the impact of accelerating the amortization of deferred financing fees of $10 million in 2010, due to the September 2010 expiration and subsequent replacement of its $3.2 billion 5-year Syndicated Credit Facility.
(d)In March 2010, the Montana Supreme Court substantially affirmed a June 2008 Montana District Court decision regarding lease payments for the use of certain Montana streambeds.  In August 2010, PPL Montana filed a petition for a writ of certiorari with the U.S. Supreme Court requesting the Court's review of this matter.  In 2011 and 2010, PPL Montana recorded $4 million and $10 million of interest expense on the rental compensation covered by the court decision.  In February 2012, the U.S. Supreme Court overturned the Montana Supreme Court decision and remanded the case to the Montana Supreme Court for further proceedings consistent with the U.S. Supreme Court's opinion.  As a result, in the fourth quarter of 2011 PPL Montana reversed its total loss accrual of $89 million, which had been recorded prior to the U.S. Supreme Court decision, of which $14 million was credited to "Interest Expense" on the Statement of Income.

Income Taxes

The changesincrease (decrease) in income taxes werewas due to:

  2009 vs. 2008 2008 vs. 2007
       
Lower pre-tax book income $(300) $(6)
Tax on foreign earnings (a)  (43)  (3)
Synthetic fuel and other tax credits (b)  (17)  72 
Tax reserve adjustments (a) (c) (d)  (2)  44 
Tax return adjustments (d)  44   (16)
Domestic manufacturing deduction  13   (2)
U.K. Finance Act adjustments (e)  8   46 
Other  9   (6)
  $(288) $129 
  2012 vs. 2011 2011 vs. 2010
       
Higher (lower) pre-tax book income $ (191) $ 134 
State valuation allowance adjustments (a)   (20)   74 
State deferred tax rate change (b)   7    (26)
Domestic manufacturing deduction (c) (d)      11 
Federal and state tax reserve adjustments   (4)   13 
Federal and state tax return adjustments (d)   26    (16)
Health Care Reform (e)      (5)
Other      (1)
  $ (182) $ 184 

(a)During 2009, WPD recorded a $46 million foreign2011, the Pennsylvania Department of Revenue issued interpretive guidance on the treatment of bonus depreciation for Pennsylvania income tax benefit (and a fullpurposes.  The guidance allows 100% bonus for qualifying assets in the same year bonus depreciation is allowed for federal income tax reserve reflectedpurposes.  Due to the decrease in "Tax reserve adjustments")projected taxable income related to losses generated by restructuring.bonus depreciation and a decrease in projected future taxable income, PPL Energy Supply recorded $22 million in state deferred income tax expense related to deferred tax valuation allowances during 2011.

Pennsylvania H.B. 1531, enacted in October 2009, increased the net operating loss limitation to 20% of taxable income for tax years beginning in 2010.  Based on the projected revenue increase related to the expiration of the generation rate caps, PPL Energy Supply recorded a $52 million state deferred income tax benefit related to the reversal of deferred tax valuation allowances over the remaining carryforward period of the net operating losses during 2010.
(b)The Section 29/45K synthetic fuelChanges in state apportionment resulted in reductions to the future estimated state tax credits expiredrate at the end of 2007.  During 2008, PPL recorded a $13 million adjustment to its estimated 2007 fuel tax credits as a result of the IRS publishing the final 2007 inflation-adjusted credit in April 2008.
(c)During 2007,December 31, 2012 and 2011.  PPL Energy Supply recorded a $35$19 million deferred tax benefit asin 2012 and a result$26 million deferred tax benefit in 2011 related to its state deferred tax liabilities.
(c)In December 2010, Congress enacted legislation allowing for 100% bonus depreciation on qualified property.  The increased tax depreciation deduction eliminated the tax benefits related to domestic manufacturing deductions in 2012 and 2011.
(d)During 2011, PPL recorded $22 million in federal and state tax benefits related to the filing of the expiration of applicable statutes of limitations.  The expiration of applicable statues of limitations resulted in an $8 million benefit in 2008.  Additionally, PPL Energy Supply recorded tax benefits of $27 million in 2009 for the settlement of a tax dispute and foreign currency exchange losses.
(d)
During 2009, PPL Energy Supply received consent from the IRS to change its method of accounting for certain expenditures for tax purposes.  PPL Energy Supply deducted the resulting IRC Sec. 481 adjustment on its 2008 tax return and recorded a $21 million adjustment to2010 federal and state income tax expense, which results from the reduction of federal incomereturns.  Of that amount, $7 million in tax benefits related to thean additional domestic manufacturing deduction and a reduction of certain state tax benefits related to state net operating losses.  During 2008, WPD recorded tax benefits of approximately $17 millionresulting from tax return adjustments that were fully reserved.
revised bonus depreciation amounts.
(e)
The U.K.'s Finance ActBeginning in 2013, provisions within Health Care Reform eliminated the tax deductibility of 2008, enacted in July 2008, included a phase-outretiree health care costs to the extent of tax depreciation on certain buildings.federal subsidies received by plan sponsors that provide retiree prescription drug benefits equivalent to Medicare Part D Coverage.  As a result, WPDPPL Energy Supply recorded an $8 million deferred tax benefit during 2008 related to the reduction in its deferred tax liabilities.
The U.K.'s Finance Act of 2007, enacted in July 2007, included a reduction in the U.K.'s statutory income tax rate.  Effective April 1, 2008, the statutory income tax rate was reduced from 30% to 28%.  As a result, WPD recorded a $54 million deferred tax benefitexpense during 2007 related to the reduction in its deferred tax liabilities.
2010.

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

101

Discontinued Operations

Income (Loss) from Discontinued Operations (net of income taxes) decreased by $240 million in 2011 compared with 2010.  The decrease in 2011 compared with 2010 was primarily due to the presentation of PPL Global as Discontinued Operations as a result of the January 2011 distribution by PPL Energy Supply of its membership interest in PPL Global to its parent, PPL Energy Funding.  In 2011, the results of PPL Global are no longer consolidated within PPL Energy Supply.  See Note 9 to the Financial Statements for information related to:

·the anticipated sale of the Long Island generation business;
·the sale of the majority of the Maine hydroelectric generation business in 2009;
·the sale of the 8.33% interest in Wyman Unit 4 in 2009; and
·the sale of the Latin American businesses in 2007 and the substantial dissolution of the remaining holding companies in 2008.
additional information.

Financial Condition

Liquidity and Capital Resources

PPL Energy Supply expects to continue to have adequate liquidity available through operating cash flows, cash and cash equivalents, credit facilities and its credit facilities.  Additionally, subject to market conditions,commercial paper issuances.  In 2013, PPL Energy Supply currently plans to access debtanticipates receiving capital markets in 2010.contributions from its member, as well.

PPL Energy Supply's cash flows from operations and access to cost-effective bank and capital markets are subject to risks and uncertainties including, but not limited to:

·changes in market prices for electricity;electricity, fuel and other commodity prices;
·changes in commodity prices that may increase the cost of producing power or decrease the amount PPL Energy Supply receives from selling power;
·operational and credit risks associated with selling and marketing products in the wholesale power markets;
·potential ineffectiveness of the trading, marketing and risk management policy and programs used to mitigate PPL Energy Supply's risk exposure to adverse changes in electricity and fuel prices, interest rates foreign currency exchange rates and counterparty credit;
·unusual or extreme weather that may damage PPL Energy Supply's international distribution facilities or affect energy sales to customers;
·reliance on transmission and distribution facilities that PPL Energy Supply does not own or control to deliver its electricity and natural gas;
·unavailability of generating units (due to unscheduled or longer-than-anticipated generation outages, weather and natural disasters) and the resulting loss of revenues and additional costs of replacement electricity;
·the ability to recover and the timeliness and adequacy of recovery of costs associated with international electricity delivery businesses;
·costs of compliance with existing and new environmental laws and with new security and safety requirements for nuclear facilities;
·any adverse outcome of legal proceedings and investigations with respect to PPL Energy Supply's current and past business activities;
·deterioration in the financial markets that could make obtaining new sources of bank and capital markets funding more difficult and more costly; and
·a downgrade in PPL Energy Supply's or its rated subsidiaries' credit ratings that could adversely affect their ability to access capital and increase the cost of credit facilities and any new debt.

See "Item 1A. Risk Factors" for further discussion of risks and uncertainties affectingthat could affect PPL Energy Supply's cash flows.

At December 31, PPL Energy Supply had the following:

  2009 2008 2007
             
Cash and cash equivalents $245  $464  $355 
Short-term investments (a) (b)      150   102 
  $245  $614  $457 
Short-term debt $639  $584  $51 

(a)2008 amount represents tax-exempt bonds issued by the PEDFA in December 2008 on behalf of PPL Energy Supply and purchased by a subsidiary of PPL Energy Supply upon issuance.  Such bonds were refunded in April 2009.  See Note 7 to the Financial Statements for further discussion.
(b)Includes $10 million of auction rate securities at December 31, 2007.  See below for a discussion of auction rate securities.
  2012  2011  2010 
          
Cash and cash equivalents $ 413  $ 379  $ 661 
Short-term debt $ 356  $ 400  $ 531 

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

  2009 2008 2007
          
Net Cash Provided by Operating Activities $1,413  1,039  $1,094 
Net Cash Used in Investing Activities  (551)  (1,696)  (305)
Net Cash Provided by (Used in) Financing Activities  (1,081)  779   (963)
Effect of Exchange Rates on Cash and Cash Equivalents      (13)  5 
Net Increase (Decrease) in Cash and Cash Equivalents $(219) $109  $(169)
  2012  2011  2010 
          
Net cash provided by (used in) operating activities $ 784  $ 776  $ 1,840 
Net cash provided by (used in) investing activities   (469)   (668)   (825)
Net cash provided by (used in) financing activities   (281)   (390)   (612)
Effect of exchange rates on cash and cash equivalents         13 
Net Increase (Decrease) in Cash and Cash Equivalents $ 34  $ (282) $ 416 

Auction Rate Securities

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PPL Energy Supply held auction rate securities with an aggregate par value of $20 million and $24 million at December 31, 2009 and 2008.  Historically, an active market existed for such investments, and the auctions provided an opportunity for investors either to hold an investment at a periodically reset interest rate or to sell the investment at its par value for immediate liquidity.  In early 2008, investor concerns about credit and liquidity in the financial markets, generally, as well as investor concerns over specific insurers that guarantee the credit of certain of the underlying securities, created uncertainty in the auction rate securities market and these securities generally failed to be remarketed through their established auction process.  The auctions continue to fail and the resulting illiquidity continues to impact PPL Energy Supply's investment in auction rate securities.

At December 31, 2008, PPL Energy Supply estimated that the fair value of its auction rate securities was $19 million, which is reflected in "Other investments" on the Balance Sheet and represented a temporary decline of $5 million from par value.

In 2009, PPL Energy Supply liquidated $4 million of auction rate securities at par.  At December 31, 2009, PPL Energy Supply estimated that the fair value of its auction rate securities was equal to par value, which was $20 million and is reflected in "Other investments" on the Balance Sheet.  PPL Energy Supply reversed the previously recorded temporary impairment.

Because PPL Energy Supply intends and has the ability to hold these auction rate securities until they can be liquidated at par value, PPL Energy Supply believes that it does not have significant exposure to realize losses on these securities.  Based upon the evaluation of available information, PPL Energy Supply believes these investments continue to be of high credit quality.  Additionally, PPL Energy Supply does not anticipate having to sell these securities to fund operations.  See Notes 17 and 21 to the Financial Statements for further discussion of auction rate securities.

Operating Activities

Net cash provided by operating activities increased by 36%1%, or $374$8 million, in 20092012 compared with 2008,2011.  This was primarily as a result of the return of $300 million in cash collateral from PPL Electric related to the long-term PLR energy supply agreements (which expired at the end of 2009); cash collateral received from counterparties; and the benefit of lower income tax payments due to thea $92 million decrease in net cash used in other operating activities (includes a $77 million reduction in defined benefit plan funding) and a $23 million decrease in net cash used in working capital (including a change in method of accounting for certain expenditures for tax purposes.  These increases were partially$156 million from counterparty collateral, offset by a $92 million change in accounts receivable).  These impacts were offset by a $107 million decrease in accounts payable and the unfavorable impact of foreign currency exchange rates in 2009 compared with 2008.net income, when adjusted for non-cash components.

Net cash provided by operating activities decreased by 5%58%, or $55 million,$1.1 billion, in 20082011 compared with 2007, primarily as a result of increased expenditures for fuel,2010.  This was primarily due to lower gross energy margins of $240 million, after-tax, proceeds from monetizing certain full-requirements sales contracts in 2010 of $249 million, a reduction in cash from counter party collateral of $172 million, increases in other operating outflows of $200 million (including higher coal prices, lower realized net energy trading margins, driven by significant decreasesoperation and maintenance expenses and defined benefits funding of $123 million) and the loss of operating cash from PPL Global ($203 million for 2010).  In January 2011, PPL Energy Supply distributed its membership interest in power and gas prices, higher interest paid, primarily duePPL Global to higher debt levels in 2008, and cash flows provided by Latin America's operations in 2007 but not 2008, dueits parent, PPL Energy Funding.  See Note 9 to the sale ofFinancial Statements for additional information on the Latin American businesses in 2007.  The decreases to cash provided by operating activities resulting from these items were partially offset by higher revenues, due primarily to the hedged sale of generation in the wholesale market, increased sales volumes to PPL Electric under the PLR contracts to support the PLR load and a 1.4% increase in PLR sales prices, as well as less U.S. income tax payments, primarily as a result of a refund received in 2008, and operating losses incurred in 2007 in connection with synfuel projects that ceased operation at the end of 2007.distribution.

A significant portion of PPL Energy Supply's operating cash flows is derived from its Supply segment baseload generation business activities.  PPL Energy Supply employs a formal hedging program for its competitive baseload generation fleet, the primary objective of which is to provide a reasonable level of near-term cash flow and earnings certainty over the next three years, while preserving upside potential ifof power prices increaseprice increases over the medium term.  See Note 1819 to the Financial Statements for further discussion.  Based on its generation portfolio contracting practices (including related fuel purchases and commitments),Despite PPL Energy Supply expects to achieve relatively stable cash flows related to baseload generation during the next three years, although,Supply's hedging practices, future cash flows from operating activities are expected to be influenced more by commodity prices than during the past nine years when long-term supply contracts were in place between PPL EnergyPlus and PPL Electric.  As discussed in "Item 1. Business," PPL Energy Supply estimates that, on average, approximately 94% of its total expected annual generation output (which includes baseload and other generation) for 2010 is committed under power sales contracts.  PPL Energy Supply has also entered into commitments of varying quantities and terms for the years 2011 and beyond.therefore, will fluctuate from period to period.

PPL Energy Supply's contracts for the sale and purchase of electricity and fuel often require cash collateral or other credit enhancements, or reductions or terminations of a portion of the entire contract through cash settlement, in the event of a downgrade of PPL Energy Supply's or its subsidiary's credit ratings or adverse changes in market prices.  For example, in addition to limiting its trading ability, if PPL Energy Supply's or its subsidiary's ratings were lowered to below "investment grade" and there was a 10% adverse movement in energy prices, PPL Energy Supply estimates that, based on its December 31, 20092012 positions, it would have had to post additional collateral of approximately $291$368 million compared with $815 million at December 31, 2008.respect to electricity and fuel contracts.  PPL Energy Supply has in place risk management programs that are designed to monitor and manage its exposure to volatility of cash flows related to changes in energy and fuel prices, interest rates, foreign currency exchange rates, counterparty credit quality and the operating performance of its generating units.

Investing Activities

The primary use of cash in investing activities is capital expenditures.  See "Forecasted Uses of Cash" for detail regarding projected capital expenditures in 2009 and projected expenditures for the years 20102013 through 2012.2017.

Net cash used in investing activities decreased 68%, or $1.1 billion$199 million in 20092012 compared with 2008,2011, primarily as a result of a $396 million change of $371in notes receivable from affiliates and a $232 million fromchange in restricted cash and cash equivalents, a change of $249partially offset by $381 million from purchases and sales of other investments, a change of $244 million from purchases and sales of intangible assets, a decrease of $207 millionless in capital expenditures and $81 million ofasset sale proceeds received in 2009 from the(2011 sale of non-core generation facilities) and $84 million used to fund the majority of the Maine hydroelectric generation business.  See2012 Ironwood Acquisition (see Note 110 to the Financial Statements for a discussion of restricted cash and cash equivalents and Note 7 to the Financial Statements for a discussion of the purchase and sale by a subsidiary of PPL Energy Supply of Exempt Facilities Revenue Bonds issued by the PEDFAadditional information on behalf of PPL Energy Supply and Note 9 to the Financial Statements for a discussion of the sale of the majority of the Maine hydroelectric generation business.this acquisition).

Net cash used in investing activities increased 456%, or $1.4 billion,decreased $157 million in 20082011 compared with 2007,2010, primarily as PPL Energy Supplya result of a decrease of $348 million in capital expenditures and a $219 million increase in the proceeds received aggregate proceeds of $898 million from the sale of its Latin American businesses, and telecommunication operations in 2007, which are discussed in Notes 8 andNote 9 to the Financial Statements.  Additionally, there was a change of $329 million from purchases and sales of other investments, a change of $352 million from purchases and sales of intangible assets, and an increase of $42 million in the amount of cash and cash equivalents that became restricted.  The increasedecrease in cash used in investing activities from the above items was partially offset by a decreasean increase of $217$198 million related to notes receivable from affiliates and $212 million from changes in capital expenditures.restricted cash and cash equivalents.

In January 2011, PPL Energy Supply distributed its 100% membership interest in PPL Global to its parent, PPL Energy Funding.  See Note 9 to the Financial Statements for additional information.  Excluding PPL Global, PPL Energy Supply's net cash used in investing activities was $544 million for 2010.
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Financing Activities

Net cash used in financing activities was $1.1 billion$281 million in 20092012 compared with $779 million of net cash provided by financing activities in 2008 and net cash used in financing activities of $963$390 million in 2007.2011 and $612 million in 2010.  The changedecrease from 20082011 to 20092012 primarily reflects nothe 2011 distribution of cash included in the net assets of PPL Global to PPL Energy Funding and a decrease in net retirement of long-term debt, partially offset by higher net distributions to Member.  The decrease from 2010 to 2011 primarily reflects lower net distributions to Member, partially offset by lower net issuances of long-term debt and the distribution of cash included in 2009, reduced contributions from Member, increased distributionsthe net assets of PPL Global to Member and less short-term borrowings in 2009.  The change from 2007 to 2008 primarily reflects increased issuances and lower retirements of long-term debt, reduced distributions to and contributions from Member and increased short-term borrowings in 2008.PPL Energy Funding.

In 2009,2012, cash used in financing activities primarily consisted of $943$787 million in distributions to Member and a $44 million net decrease in short-term debt, partially offset by $563 million in contributions from Member.

In 2011, cash used in financing activities primarily consisted of a $325 million distribution of cash included in the net assets of PPL Global to PPL Energy Funding, $316 million in distributions to Member, and net debt retirements of $177$200 million, partially offset by $50$461 million in contributions from Member.

In 2008, cash provided by financing activities primarily consisted of net debt issuances of $1.1 billion and $421 million in contributions from Member, partially offset by $750 million in distributions to Member.  In 2007,2010, cash used in financing activities primarily consisted of net debt retirements of $180 million and $1.5$4.7 billion ofin distributions to Member, partially offset by $700 million$3.6 billion in contributions from Member.Member and net debt issuances of $509 million.  The distributions to and contributions from Member during 2010 primarily relate to the funds received by PPL in June 2010 from the issuance of common stock and 2010 Equity Units.  These funds were invested by a subsidiary of PPL Energy Supply until they were returned to its Member in October 2010 to be available to partially fund PPL's acquisition of LKE and pay certain acquisition-related fees and expenses.

See "Forecasted Sources of Cash" for a discussion of PPL Energy Supply's plans to issue debt securities, as well as a discussion of credit facility capacity available to PPL Energy Supply.  Also see "Forecasted Uses of Cash" for information regarding maturities of PPL Energy Supply's long-term debt.

PPL Energy Supply's debt financing activity in 2009 was:

  Issuances Retirements
         
PPL Energy Supply Senior Unsecured Notes (a)     $(220)
WPD short-term debt (net change) $43     
Total $43  $(220)
Net decrease     $(177)

(a)In March 2009, PPL Energy Supply paid $220 million, plus accrued interest, to complete tender offers to purchase up to $250 million aggregate principal amount of certain of its outstanding senior notes in order to reduce future interest expense.  Under the Economic Stimulus Package, PPL will be permitted to defer recognition of income related to the extinguishment of these notes for tax purposes.  No amounts will be included in taxable income for the first five years.  Beginning in 2014, income related to the extinguishment of these notes will be included in taxable income ratably over five years.

See Note 7 to the Financial Statements for more detailed information regarding PPL Energy Supply's financing activities in 2009.

Forecasted Sources of Cash

PPL Energy Supply expects to continue to have significantsufficient sources of cashliquidity available in the near term, including cash flows from operations, various credit facilities, commercial paper issuances, operating leases and contributions from Member.  Additionally, PPL Energy Supply expects to have access to debt capital markets and currently plans to issue up to $300 million and £400 million in long-term debt securities in 2010, subject to market conditions.member.

Credit Facilities

At December 31, 2009,2012, PPL Energy Supply's total committed borrowing capacity under credit facilities and the use of this borrowing capacity were:

  Committed Capacity Borrowed Letters of Credit Issued (a) 
Unused Capacity
             
PPL Energy Supply Domestic Credit Facilities (b) $4,125  $285  $662  $3,178 
                 
WPDH Limited Credit Facility (c) 150  132   n/a  18 
WPD (South West) Credit Facilities (d)  214   60  3   151 
Total WPD Credit Facilities (e) 364  192  3  169 
         Letters of   
         Credit   
         Issued   
         and   
         Commercial   
   Committed    Paper Unused
   Capacity Borrowed Backup Capacity
              
Syndicated Credit Facility (a) $ 3,000     $ 499  $ 2,501 
Letter of Credit Facility   200   n/a   132    68 
Total PPL Energy Supply Credit Facilities (b) $ 3,200     $ 631  $ 2,569 

(a)The borrower under each of these facilities has a reimbursement obligation to the extent any letters of credit are drawn upon.
(b)PPL Energy Supply has the ability to borrow $3.6 billion under its credit facilities.  Such borrowings generally bear interest at LIBOR-based rates plus a spread, depending upon the company's public debt rating.  PPL Energy Supply also has the capability to cause the lenders to issue up to $3.9 billion of letters of credit under these facilities, which issuances reduce available borrowing capacity.  Under certain conditions, PPL Energy Supply may request that the capacity of one of its facilities be increased by up to $500 million.
These credit facilities containThis facility contains a financial covenant requiring PPL Energy Supply's debt to total capitalization not to not exceed 65%.  At December 31, 2009 and 2008, PPL Energy Supply's consolidated debt to total capitalization percentages,, as calculated in accordance with its credit facilities, were 46%the facility, and 44%.  The credit facilities also contain standard representations and warranties that must be made for PPL Energy Supply to borrow under them.other customary covenants.
(b)The commitments under PPL Energy Supply's domestic credit facilities are provided by a diverse bank group, with no one bank and its affiliates providing an aggregate commitment of more than 16%11% of the total committed capacity.
The committed capacity expires as follows:  $600 million in 2010, $300 million in 2011 and $3.2 billion in 2012.  PPL Energy Supply intends to renew or replace the two credit facilities that expire in 2010 in order to maintain its current total committed capacity level.
(c)Borrowings under WPDH Limited's credit facility bear interest at LIBOR-based rates plus a spread, depending upon the company's public debt rating.
This credit facility contains financial covenants that require WPDH Limited to maintain an interest coverage ratio of not less than 3.0 times consolidated earnings before income taxes, depreciation and amortization and a RAB that exceeds total net debt by the higher of an amount equal to 15% of total net debt or £150 million, in each case as calculated in accordance with the credit facility.  At December 31, 2009 and 2008, WPDH Limited's interest coverage ratios, as calculated in accordance with its credit facility, were 4.3 and 4.6.  At December 31, 2009 and 2008, WPDH Limited's RAB, as calculated in accordance with the credit facility, exceeded its total net debt by £325 million, or 25%, and £385 million, or 31%.
(d)WPD (South West) has two credit facilities:  one under which it can make cash borrowings and another under which it has the capability to cause the lender to issue up to approximately £4 million of letters of credit.  Borrowings bear interest at LIBOR-based rates plus a margin.
The credit facility under which it can make cash borrowings contains financial covenants that require WPD (South West) to maintain an interest coverage ratio of not less than 3.0 times consolidated earnings before income taxes, depreciation and amortization and total net debt not in excess of 85% of RAB, in each case as calculated in accordance with the credit facility.  At December 31, 2009, WPD (South West)'s interest coverage ratio, as calculated in accordance with its credit facility, was 5.3.  At December 31, 2009, WPD (South West)'s total net debt, as calculated in accordance with the credit facility, was 67% of RAB.
(e)The commitments under WPD's credit facilities are provided by eight banks, with no one bank providing more than 25% of the total committed capacity.
The committed capacity of WPD's credit facilities expires as follows:  £4 million in 2010, £210 million in 2012 and £150 million in 2013.  WPD (South West) intends to renew its letter of credit facility that expires in 2010 in order for WPD to maintain its current total committed capacity level.
At December 31, 2009, the unused capacity of WPD's credit facilities was approximately $276 million.

In addition to the financial covenants noted in the table above, the credit agreements governing the above credit facilities contain various other covenants.  Failure to comply with the covenants after applicable grace periods could result in acceleration of repayment of borrowings and/or termination of the agreements.  PPL Energy Supply monitors compliance with the covenants on a regular basis.  At December 31, 2009,2012, PPL Energy Supply was in material compliance with these covenants.  At this time, PPL Energy Supply believes that these covenants and other borrowing conditions will not limit access to these funding sources.

See Note 7 to the Financial Statements for further discussion of PPL Energy Supply's credit facilities.

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Commercial Paper

As discussed below under "Credit Ratings," S&P lowered its rating on PPL Energy Supply's commercial paper to A-3 from A-2 in January 2009.  Since PPL Energy Supply did not plan to issue any commercial paper during 2009 and there was essentially no liquidity in commercial paper markets for paper with an A-3 rating, PPL Energy Supply closed its $500 million commercial paper program in January 2009 and requested that Moody's, S&P and Fitch each withdraw their ratings on its commercial paper program, which each rating agency subsequently did.

PPL Energy Supply may reopen itsmaintains a $750 million commercial paper program in the future, depending on market conditions and credit ratings, to provide an additional financing source to fund its short-term liquidity needs, if and when necessary.  Any future commercialCommercial paper issuances would beare supported by PPL Energy Supply's credit facilities.Syndicated Credit Facility.  At December 31, 2012, PPL Energy Supply had $356 million of commercial paper outstanding at a weighted-average interest rate of approximately 0.50%.

Operating Leases

PPL Energy Supply and its subsidiaries also have available funding sources that are provided through operating leases.  PPL Energy Supply's subsidiaries lease office space, land, buildings and certain equipment.  These leasing structures provide PPL Energy Supply additional operating and financing flexibility.  The operating leases contain covenants that are typical for these agreements, such as maintaining insurance, maintaining corporate existence and timely payment of rent and other fees.

PPL Energy Supply, through its subsidiary PPL Montana, leases a 50% interest in Colstrip Units 1 and 2 and a 30% interest in Unit 3, under four 36-year, non-cancelable operating leases.  These operating leases are not recorded on PPL Energy Supply's Balance Sheets.  The leases place certain restrictions on PPL Montana's ability to incur additional debt, sell assets and declare dividends.  At this time, PPL Energy Supply believes that these restrictions will not limit access to these funding sources or cause acceleration or termination of the leases.  See Note 7 to the Financial Statements for a discussion of other dividend restrictions related to WPD.

See Note 1011 to the Financial Statements for further discussion of the operating leases.

Long-Term Debt Securities and Contributions from Member

Subject to market conditions, PPL Energy Supply currently plans to issue up to $300 million and £400 million in long-term debt securities in 2010.  PPL expects to use the proceeds from these issuances for the repayment of short-term debt, to fund capital expenditures, and for general corporate purposes.

From time to time, as determined by its Board of Directors, PPL Energy Supply's Member, PPL Energy Funding, makes capital contributions to PPL Energy Supply.  PPL Energy Supply uses these contributions to fund capital expenditures and for other general corporate purposes.

Forecasted Uses of Cash

In addition to expenditures required for normal operating activities, such as purchased power, payroll, fuel and taxes, PPL Energy Supply currently expects to incur future cash outflows for capital expenditures, various contractual obligations, distributions to its Member and possibly the purchase or redemption of a portion of its debt securities.

Capital Expenditures

The table below shows PPL Energy Supply's actual spending for the year 2009 and current capital expenditure projections for the years 20102013 through 2012.2017.

  Actual Projected
  2009 2010 2011 2012
Construction expenditures (a) (b)            
Generating facilities $361 $671 $673 $507
Transmission and distribution facilities  247  320  358  385
Environmental  178  63  19  99
Other  11  31  33  31
Total Construction Expenditures  797  1,085  1,083  1,022
Nuclear fuel  140  151  173  171
Total Capital Expenditures $937 $1,236 $1,256 $1,193
    Projected
    2013  2014  2015  2016  2017 
Construction expenditures (a) (b)               
 Generating facilities $ 387  $ 248  $ 247  $ 241  $ 292 
 Environmental   94    89    22    20    21 
 Other   26    34    15    15    15 
  Total Construction Expenditures   507    371    284    276    328 
Nuclear fuel   152    145    153    158    162 
Total Capital Expenditures $ 659  $ 516  $ 437  $ 434  $ 490 

(a)Construction expenditures include capitalized interest, which is expected to betotal approximately $156$82 million for the years 20102013 through 2012.2017.
(b)Includes expenditures for certain intangible assets.

PPL Energy Supply's capital expenditure projections for the years 20102013 through 20122017 total approximately $3.7$2.5 billion.  Capital expenditure plans are revised periodically to reflect changes in operational, market and regulatory conditions.  This table includes projected costs related to the planned 239153 MW of incremental capacity increases.  See Note 8 to the Financial Statements for information regarding the significant development projects.

PPL Energy Supply plans to fund its capital expenditures in 20102013 with cash on hand, cash from operations and equity contributions from Member and proceeds from the issuance of debt securities.PPL Energy Funding.

Contractual Obligations

PPL Energy Supply has assumed various financial obligations and commitments in the ordinary course of conducting its business.  At December 31, 2009,2012, the estimated contractual cash obligations of PPL Energy Supply were:

  Total Less Than 1 Year 1-3 Years 4-5 Years After 5 Years
                
Long-term Debt (a) $4,992      $500  $1,037  $3,455 
Interest on Long-term Debt (b)  4,497  $291   558   477   3,171 
Operating Leases  968   108   216   223   421 
Purchase Obligations (c)  5,896   1,459   1,680   867   1,890 
Other Long-term Liabilities Reflected on the Balance Sheet under GAAP (d) (e)  80   62   18         
Total Contractual Cash Obligations $16,433  $1,920  $2,972  $2,604  $8,937 
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   Total 2013  2014 - 2015 2016 - 2017 After 2017
                 
Long-term Debt (a) $ 3,249  $ 751  $ 635  $ 386  $ 1,477 
Interest on Long-term Debt (b)   1,169    196    265    167    541 
Operating Leases (c)   362    76    143    39    104 
Purchase Obligations (d)   3,047    863    878    696    610 
Other Long-term Liabilities               
 Reflected on the Balance               
 Sheet under GAAP (e) (f)   105    105          
Total Contractual Cash Obligations $ 7,932  $ 1,991  $ 1,921  $ 1,288  $ 2,732 

(a)Reflects principal maturities only based on legalstated maturity dates.dates, except for the 5.70% REset Put Securities (REPS).  See Note 7 to the Financial Statements for a discussion of the remarketing feature related to PPL Energy Supply's 5.70% REset Put Securities,the REPS, as well as discussion of variable-rate remarketable bonds issued by the PEDFA on behalf of PPL Energy Supply.bonds.  PPL Energy Supply does not have any significant capital lease obligations.
(b)Assumes interest payments through maturity.stated maturity, except for the REPS, for which interest is reflected to the put date.  The payments herein are subject to change, as payments for debt that is or becomes variable-rate debt have been estimated and payments denominated in British pounds sterling have been translated to U.S. dollars at a current foreign currency exchange rate.estimated.
(c)See Note 11 to the Financial Statements for additional information.
(d)The payments reflected hereinamounts include agreements to purchase goods or services that are subjectenforceable and legally binding and specify all significant terms, including: fixed or minimum quantities to change, as certainbe purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction.  Primarily includes PPL Energy Supply's purchase obligations included are estimates based on projected obligated quantities and/or projected pricing under the contracts.  Purchase orders made in the ordinary course of business are excluded from the amounts presented.  The payments also include obligations related toelectricity, coal, nuclear fuel and the installation of the scrubbers,limestone as well as certain construction expenditures, which are also reflectedincluded in the Capital Expenditures table presented above.  Financial swaps and open purchase orders that are provided on demand with no firm commitment are excluded from the amounts presented.
(d)(e)The amounts reflected represent WPD's contractual deficitcontributions made or committed to be made for 2013 for PPL's U.S. pension funding requirements arising from an actuarial valuation performed in March 2007.  The U.K. electricity regulator currently allows a recovery of a substantial portion of the contributions relating to the plan deficit; however, WPD cannot be certain that this will continue beyond the current and next review periods, which extend to March 31, 2015.  Based on the current funded status of PPL Energy Supply's U.S. qualified pension plans, no cash contributions are required.plans.  See Note 1213 to the Financial Statements for a discussion of expected contributions.
(e)(f)At December 31, 2009,2012, total unrecognized tax benefits of $124$30 million were excluded from this table as PPL Energy Supply cannot reasonably estimate the amount and period of future payments.  See Note 5 to the Financial Statements for additional information.

Distributions to Member

From time to time, as determined by its Board of Managers, PPL Energy Supply makes return of capital distributions to its Member.member.

Purchase or Redemption of Debt Securities

PPL Energy Supply will continue to evaluate purchasing or redeemingits outstanding debt securities and may decide to take actionpurchase or redeem these securities depending upon prevailing market conditions and available cash.

Credit RatingsRating Agency Actions

Moody's, S&P and Fitch periodically review the credit ratings on the debt securities of PPL Energy Supply and its subsidiaries.  Based on their respective independent reviews, the rating agencies may make certain ratings revisions or ratings affirmations.

A credit rating reflects an assessment by the rating agency of the creditworthiness associated with an issuer and particular securities that it issues.  The credit ratings of PPL Energy Supply and its subsidiaries are based on information provided by PPL Energy Supply and other sources.  The ratings of Moody's, S&P and Fitch are not a recommendation to buy, sell or hold any securities of PPL Energy Supply or its subsidiaries.  Such ratings may be subject to revisions or withdrawal by the agencies at any time and should be evaluated independently of each other and any other rating that may be assigned to the securities.  The credit ratings of PPL Energy Supply and its subsidiaries affect its liquidity, access to capital markets and cost of borrowing under its credit facilities.

The following table sets forth PPL Energy Supply's and its subsidiaries' security credit ratings as of December 31, 2012.

Senior UnsecuredSenior SecuredCommercial Paper
IssuerMoody'sS&PFitchMoody'sS&PFitchMoody'sS&PFitch
PPL Energy SupplyBaa2BBBBBBP-2A-2F-2
PPL IronwoodB2B
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A downgrade in PPL Energy Supply's or its subsidiaries' credit ratings could result in higher borrowing costs and reduced access to capital markets.

The following table summarizes the credit ratings of  PPL Energy Supply and its rated subsidiaries at December 31, 2009: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.

In addition to the credit ratings noted above, the rating agencies took the following actions related to PPL Energy Supply and its subsidiaries in 2012.

In January 2012, S&P affirmed its rating and revised its outlook, from positive to stable, for PPL Montana's Pass Through Certificates due 2020.

Following the announcement of the then-pending acquisition of AES Ironwood, L.L.C. in February 2012, the rating agencies took the following actions:

·In March 2012, Moody'sS&P
Fitch (a)
PPL Energy Supply (b)
Issuer RatingBBBBBB
Senior Unsecured NotesBaa2BBBBBB
OutlookSTABLENegativeSTABLE
PPL Montana
Pass-Through CertificatesBaa3BBB-BBB
OutlookSTABLESTABLE
WPDH Limited
Issuer RatingBaa3BBB-BBB-
Senior Unsecured DebtBaa3BBB-BBB
Short-term DebtA-3
OutlookSTABLENegativePOSITIVE
WPD LLP
Issuer RatingBBB
OutlookPOSITIVE
WPD (South Wales)
Issuer RatingBBB+BBB+
Senior Unsecured DebtBaa1BBB+A-
Short-term DebtA-2F2
OutlookSTABLENegativePOSITIVE
WPD (South West)
Issuer RatingBaa1BBB+BBB+
Senior Unsecured DebtBaa1BBB+A-
Short-term DebtP-2A-2F2
OutlookSTABLENegativePOSITIVE placed AES Ironwood, L.L.C.'s senior secured bonds under review for possible ratings upgrade.

(a)·All Issuer Ratings for Fitch are "Issuer Default Ratings."
(b)Excludes Exempt Facilities Revenue Bonds issued byIn April 2012, S&P affirmed the PEDFA on behalfrating of PPL Energy Supply, which are each currently supported by a letter of credit and are rated on the basis of the credit enhancement.AES Ironwood, L.L.C.'s senior secured bonds.

In January 2009, S&P completed a review of PPL Energy Supply, upon which itMay 2012, Fitch downgraded its rating, from BBB to BBB- and revised its outlook, from negative to negative from stable, and affirmed its BBB issuer rating.  As a result of the negative outlook, S&P lowered PPL Energy Supply's commercial paper rating to A-3 from A-2.  S&P stated in its press release that the revision in the outlook for PPL Energy Supply was based primarily on lower than expected cash flows for 2008 combined with concerns over further pressure on financial metrics in 2009.Montana's Pass Through Certificates due 2020.

AtIn November 2012, S&P revised its outlook, from stable to negative, for PPL Montana's Pass Through Certificates due 2020.

In December 2012, Fitch affirmed the request of PPL Energy Supply, inissuer default rating, individual security rating and revised the first quarter of 2009, Moody's, S&P and Fitch, each withdrew their commercial paper ratingoutlook, from stable to negative, for PPL Energy Supply.

In February 2009, S&P2013, Moody's upgraded its rating, from Ba1 to B2, and revised itsthe outlook from under review to negative from stable for each of WPDH Limited, WPD LLP, WPD (South Wales) and WPD (South West) and affirmed the issuer and short-term debt ratings of each of the entities.  S&P stated in its press release that the revision in the outlook is a reflection of the change to PPL's outlook to negative from stable and is not a result of any change in WPD's stand-alone credit profile.

In May 2009, Moody's completed a review of PPL Energy Supply and affirmed the Baa2 senior unsecured rating and stable outlook of PPL Energy Supply.Ironwood.

At WPD's request, in September 2009, S&P withdrew its ratings for WPD LLP, since it did not have any securities outstanding.

In October 2009, Fitch completed a review of PPL Energy Supply.  As a result of that review, Fitch lowered the rating of PPL Energy Supply's senior unsecured notes to BBB from BBB+ and affirmed all other ratings of PPL Energy Supply.  Fitch stated in its press release that the change in the rating of PPL Energy Supply's senior unsecured notes aligns such rating with the BBB Issuer Default Rating in a manner that is consistent with the approach Fitch applies to other competitive generators and also recognizes a lower valuation of PPL Energy Supply's power assets based on current and forward wholesale power prices.  The rating also reflects Fitch's forecast of lower than previously expected improvement in PPL Energy Supply's earnings and cash flow in 2010 and 2011.

Ratings Triggers

WPD (South West)'s 1.541% Index-linked Notes due 2053 and 2056 and WPD (South Wales)'s 4.80436% Notes due 2037 may be put by the holders back to the issuer for redemption if the long-term credit ratings assigned to the notes by Moody's, S&P or Fitch are withdrawn by any of the rating agencies or reduced to a non-investment grade rating of Ba1 or BB+ in connection with a restructuring event.  A restructuring event includes the loss of, or a material adverse change to, the distribution license under which WPD (South West) and WPD (South Wales) operate.  These notes totaled £467 million (approximately $766 million) at December 31, 2009.

PPL Energy Supply has various derivative and non-derivative contracts, including contracts for the sale and purchase of electricity and fuel, commodity transportation and storage, tolling agreements and interest rate and foreign currency instruments, which contain provisions requiringthat require PPL Energy Supply to post additional collateral, or permit the counterparty to terminate the contract, if PPL Energy Supply's credit rating were to fall below investment grade.  See Note 1819 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 December 31, 2009.2012.  At December 31, 2009,2012, if PPL Energy Supply's credit rating had been below investment grade, PPL Energy Supply would have been required to prepay or post an additional $298$385 million of collateral to counterparties for both derivative and non-derivative commodity and commodity-related contracts used in its generation, marketing and trading operations and interest rate and foreign currency contracts.

Guarantees for Subsidiaries

At times, PPL Energy Supply provides guarantees forcertain consolidated affiliate financing arrangements tothat enable certain transactions for its consolidated affiliates.transactions.  Some of the guarantees contain financial and other covenants that, if not met, would limit or restrict the consolidated affiliates' access to funds under these financing arrangements, require early maturity of such arrangements or limit the consolidated affiliates' ability to enter into certain transactions.  At this time, PPL Energy Supply believes that these covenants will not limit access to relevant funding sources.  See Note 1415 to the Financial Statements for additional information about guarantees.

Off-Balance Sheet Arrangements

PPL Energy Supply has entered into certain agreements that may contingently require payment to a guaranteed or indemnified party.  See Note 1415 to the Financial Statements for a discussion of these agreements.

Risk Management - Energy Marketing & Trading and Other

Market Risk

See Notes 1, 17,18, and 1819 to the Financial Statements for information about PPL Energy Supply's risk management objectives, valuation techniques and accounting designations.

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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 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 load-followingand full-requirement sales and retail activities.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).  Although they do not receive hedge accounting treatment, these transactions are considered non-trading activity.  The net fair value of economic positions at December 31, 20092012 and 20082011 was a net liabilityasset/(liability) of $77$346 million and $52$(63) million.  See Note 1819 to the Financial Statements for additional information on economic activity.information.

To hedge the impact of market price volatility on PPL Energy Supply's energy-related assets, liabilities and other contractual arrangements, PPL EnergyPlusEnergy 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 mature at various timesrange in maturity through 2017.

Within PPL's non-trading portfolio, the decision to enter into energy contracts is influenced by the expected value of PPL Energy Supply's generation.  In determining the number of MWhs that are available to be sold forward, PPL Energy Supply first reduces the potential output by the amount of unavailable generation due to planned maintenance on a particular unit.  The potential output is further reduced by the amount of MWhs that historically is not produced by a plant due to such factors as equipment breakage.  Finally, the potential output of certain plants (such as peaking units) is reduced if their higher cost of production will not allow them to economically run during all hours.

PPL Energy Supply's non-trading portfolio also includes full requirements energy contracts.  The net obligation to serve these contracts changes minute-by-minute.  Anticipated usage patterns and energy peaks are affected by expected load changes, regional economic drivers, customer shopping or migration and seasonal weather patterns.  PPL Energy Supply analyzes historical on-peak and off-peak usage patterns, expected load changes, regional economic drivers, and weather patterns, among other factors, to determine monthly levels of electricity that best fits usage patterns to minimize earnings exposure.  To satisfy its full requirements obligations, PPL Energy Supply generally enters into contracts to purchase unbundled products of electricity, capacity, RECs and other ancillary products.  To a lesser extent, PPL Energy Supply reserves a portion of its generation for full requirements contracts that is expected to be the best match with anticipated usage patterns and energy peaks.2019.

The following charttable sets forth the changes in the net fair value of PPL Energy Supply's non-trading commodity derivative contracts.contracts at December 31, 2012.  See Notes 1718 and 1819 to the Financial Statements for additional information.

 Gains (Losses) Gains (Losses)
 2009 2008 2012  2011 
         
Fair value of contracts outstanding at the beginning of the period $402 $(305) $ 1,082  $ 958 
Contracts realized or otherwise settled during the period 189 (49)  (1,005)  (523)
Fair value of new contracts entered into during the period(a) 143 101   7   13 
Changes in fair value attributable to changes in valuation techniques (a)   158 
Other changes in fair value  546   497    389    634 
Fair value of contracts outstanding at the end of the period $1,280  $402  $ 473  $ 1,082 

(a)Amount representsRepresents the reduction of valuation reserves related to capacity and FTR contracts upon the adoption of fair value accounting guidance.of contracts at the end of the quarter of their inception.

The following table segregates the net fair value of PPL Energy Supply's non-trading commodity derivative contracts at December 31, 20092012, based on whetherthe level of observability of the information used to determine the fair value was determined by prices quoted in active markets for identical instruments or other more subjective means.value.

  Net Asset (Liability)
  Maturity Less Than 1 Year Maturity 1-3 Years Maturity 4-5 Years Maturity in Excess of 5 Years Total Fair Value
Source of Fair Value                    
Prices quoted in active markets for identical instruments                    
Prices based on significant other observable inputs $363  $736  $73      $1,172 
Prices based on significant unobservable inputs  (1)  13   30  $66   108 
Fair value of contracts outstanding at the end of the period $362  $749  $103  $66  $1,280 
   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) $ 452  $ 15  $ (20) $ 5  $ 452 
Prices based on significant unobservable inputs (Level 3)   8    10    3       21 
Fair value of contracts outstanding at the end of the period $ 460  $ 25  $ (17) $ 5  $ 473 

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 own counterparties) with which it has energy contracts and other factors could affect PPL Energy Supply's ability to meet its obligations, or cause significant increases in the market price of replacement energy.  Although PPL Energy Supply attempts to mitigate these risks, there can be no assurance that it will be able to fully meet its firm obligations, that it will not be required to pay damages for failure to perform, or that it will not experience counterparty nonperformance in the future.  In connection with its bankruptcy proceedings, a significant counterparty, SMGT, had been purchasing lower volumes of electricity than prescribed in the contract and effective April 1, 2012 the contract was terminated.  PPL Energy Supply cannot predict the prices or other terms on which it will be able to market to third parties the power that SMGT will not purchase from PPL EnergyPlus due to the termination of this contract.  See Note 15 to the Financial Statements for additional information.

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Commodity Price Risk (Trading)

PPL Energy Supply's trading commodity derivative contracts mature at various timesrange in maturity through 2015.2017.  The following table sets forth changes in the net fair value of PPL Energy Supply's trading commodity derivative contracts.contracts at December 31, 2012 .  See Notes 1718 and 1819 to the Financial Statements for additional information.

 Gains (Losses)  Gains (Losses)
 2009 2008  2012  2011 
          
Fair value of contracts outstanding at the beginning of the period $(75) $16 Fair value of contracts outstanding at the beginning of the period $ (4) $ 4 
Contracts realized or otherwise settled during the period 2 (18)Contracts realized or otherwise settled during the period  20   (14)
Fair value of new contracts entered into during the period(a) 31 28   17   10 
Changes in fair value attributable to changes in valuation techniques (a)   11 
Other changes in fair value  36   (112)Other changes in fair value   (4)   (4)
Fair value of contracts outstanding at the end of the period $(6) $(75)Fair value of contracts outstanding at the end of the period $ 29  $ (4)

(a)InRepresents the fourthfair value of contracts at the end of the quarter of 2008, PPL Energy Supply refined its valuation approach for FTR and PJM basis positions, consistent with PPL Energy Supply's practice of pricing other less active trading points, resulting in changes in valuation techniques.their inception.

PPL Energy Supply will reverse unrealized gains of approximately $1 million over the next three months as the transactions are realized.

The following table segregates the net fair value of PPL Energy Supply's trading commodity derivative contracts at December 31, 20092012, based on whetherthe level of observability of the information used to determine the fair value was determined by prices quoted in active markets for identical instruments or other more subjective means.
value.

  Net Asset (Liability)
  Maturity Less Than 1 Year Maturity 1-3 Years Maturity 4-5 Years Maturity in Excess of 5 Years Total Fair Value
Source of Fair Value                    
Prices quoted in active markets for identical instruments $1              $1 
Prices based on significant other observable inputs  (4) $(5) $2  $1   (6)
Prices based on significant unobservable inputs  (1)              (1)
Fair value of contracts outstanding at the end of the period $(4) $(5) $2  $1  $(6)
   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) $ 18  $ 10        $ 28 
Prices based on significant unobservable inputs (Level 3)   1             1 
Fair value of contracts outstanding at the end of the period $ 19  $ 10        $ 29 

VaR Models

PPL Energy Supply utilizes aA VaR model is utilized to measure commodity price risk in domestic gross energy margins for its 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.  PPL Energy Supply calculates 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 conservativedisciplined hedging program, PPL'sthe non-trading VARVaR exposure is expected to be limited in the short term.  At December 31, 2009 and December 31, 2008, theshort-term.  The VaR for PPL Energy Supply's portfolios using end-of-quarterend-of-month results for the period was as follows.

  Trading VaR Non-Trading VaR
  2009 2008 2009 2008
                 
95% Confidence Level, Five-Day Holding Period                
Period End $3  $3  $8  $10 
Average for the Period  4   10   9   14 
High  8   22   11   20 
Low  1   3   8   9 
   Trading VaR Non-Trading VaR
   2012  2011  2012  2011 
95% Confidence Level, Five-Day Holding Period            
 Period End $ 2  $ 1  $ 12  $ 6 
 Average for the Period   3    3    10    5 
 High   8    6    12    7 
 Low   1    1    7    4 

The trading portfolio includes all speculativeproprietary trading positions, regardless of the delivery period.  All positions not considered speculativeproprietary trading are considered non-trading.  PPL Energy Supply'sThe non-trading portfolio includes PPL Energy Supply'sthe 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 December 31, 2009 was an unrealized loss of $3 million and consisted of the following.

  2010 2011
         
Trading (a)        
Non-trading $(2) $(1)
Total $(2) $(1)

(a)The amount of trading FTR positions was less than $1 million at December 31, 2009.
2012.

Interest Rate Risk

PPL Energy Supply and its subsidiaries have issuedissue debt to finance their operations, which exposes them to interest rate risk.  Both PPL and PPL Energy Supply manage the interest rate risk of PPL Energy Supply by usingutilize various financial derivative instruments to adjust the mix of fixed and floating interest rates in itsPPL Energy Supply's debt portfolio, adjust the duration of its debt portfolio 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 PPL Energy Supply's debt portfolio due to changes in the absolute level of interest rates.

At December 31, 2009,2012 and 2011, PPL Energy Supply's potential annual exposure to increased interest expense, based on a 10% increase in interest rates, was not significant, compared with $2 million at December 31, 2008.significant.

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PPL Energy Supply is also exposed to changes in the fair value of its domestic and international debt portfolios.portfolio.  PPL Energy Supply estimated that a 10% decrease in interest rates at December 31, 20092012 would increase the fair value of its debt portfolio by $187$52 million, compared with $234$53 million at December 31, 2008.

At December 31, PPL Energy Supply had the following interest rate hedges outstanding.

  2009 2008
  
Exposure
Hedged
 Fair Value, Net - Asset (Liability) (a) 
Effect of a 10%
Adverse Movement
in Rates (b)
 
Exposure
Hedged
 Fair Value, Net - Asset (Liability) (a) 
Effect of a 10%
Adverse Movement
in Rates (b)
Cash flow hedges                        
Interest rate swaps (c)                        
Cross-currency swaps (d) $302  $8  $(41) 302  $54  $(8)
Fair value hedges                        
Interest rate swaps (e)              50     3     

(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.
(c)PPL and PPL Energy Supply utilize various risk management instruments to reduce PPL Energy Supply's exposure to the expected future cash flow variability of PPL Energy Supply's debt instruments.  These risks include exposure to adverse interest rate movements for outstanding variable rate debt and for future anticipated financing.  While PPL Energy Supply is exposed to changes in the fair value of these instruments, any changes in the fair value of these instruments are recorded in equity and then reclassified into earnings in the same period during which the item being hedged affects earnings.
(d)WPDH Limited uses cross-currency swaps to hedge the interest payments and principal of its U.S. dollar-denominated senior notes with maturity dates ranging from December 2017 to December 2028.  While PPL Energy Supply is exposed to changes in the fair value of these instruments, any change in the fair value of these instruments is recorded in equity and reclassified into earnings in the same period during which the item being hedged affects earnings.  Sensitivities represent a 10% adverse movement in both interest rates and foreign currency exchange rates.
(e)PPL and PPL Energy Supply utilize various risk management instruments to adjust the mix of fixed and floating interest rates in PPL Energy Supply's debt portfolio.  The change in fair value of these instruments, as well as the offsetting change in the value of the hedged exposure of the debt, is reflected in earnings.  Sensitivity represents a 10% adverse movement in interest rates.

Foreign Currency Risk

PPL Energy Supply is exposed to foreign currency risk, primarily through investments in U.K. affiliates.  In addition, PPL Energy Supply's domestic operations may make purchases of equipment in currencies other than U.S. dollars.  See Note 1 to the Financial Statements for additional information regarding foreign currency translation.

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

At December 31, PPL Energy Supply had the following foreign currency hedges outstanding.

  2009 2008
  
Exposure
Hedged
 Fair Value, Net - Asset (Liability) 
Effect of a 10%
Adverse Movement
in Foreign Currency Exchange Rates (a)
 
Exposure
Hedged
 Fair Value, Net - Asset (Liability) 
Effect of a 10%
Adverse Movement
in Foreign Currency Exchange Rates (a)
                         
Net investment hedges (b) £40  $13  $(6) £68  $34  $(10)
Economic hedges (c)  48   2   (4)            

(a)Effects of adverse movements decrease assets or increase liabilities, as applicable, which could result in an asset becoming a liability.
(b)To protect the value of a portion of PPL Energy Supply's net investment in WPD, PPL executed forward contracts to sell British pounds sterling.  The settlement dates of these contracts range from March 2010 through June 2011.
(c)To economically hedge the translation of 2010 expected income denominated in British pounds sterling to U.S. dollars, PPL entered into a combination of average rate forwards and average rate options to sell British pounds sterling.  The forwards and options have termination dates ranging from January 2010 through June 2010.

NDT Funds - Securities Price Risk

In connection with certain NRC requirements, PPL Susquehanna maintains trust funds to fund certain costs of decommissioning the PPL Susquehanna nuclear station.plant (Susquehanna).  At December 31, 2009,2012, these funds were invested primarily in domestic equity securities and fixed-rate, fixed-income securities and are reflected at fair value on PPL Energy Supply's Balance Sheet.  The mix of securities is designed to provide returns 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 December 31, 2009,2012, a hypothetical 10% increase in interest rates and a 10% decrease in equity prices would have resulted in an estimated $40$49 million reduction in the fair value of the trust assets, compared with $27$43 million at December 31, 2008.2011.  See Notes 1718 and 2123 to the Financial Statements for additional information regarding the NDT funds.

Defined Benefit Plans - Securities Price Risk

See "Application of Critical Accounting Policies - Defined Benefits" for additional information regarding the effect of securities price risk on plan assets.

Credit Risk

Credit risk is the risk that PPL Energy Supply would incur a loss as a result of nonperformance by counterparties of their contractual obligations.  PPL Energy Supply maintains credit policies and procedures with respect to counterparty credit (including requirements that counterparties maintain specified credit ratings) and requires other assurances in the form of credit support or collateral in certain circumstances in order to limit counterparty credit risk.  However, PPL Energy Supply has concentrations of suppliers and customers among electric utilities, financial institutions and other energy marketing and trading companies.  These concentrations may impact PPL Energy Supply's overall exposure to credit risk, positively or negatively, as counterparties may be similarly affected by changes in economic, regulatory or other conditions.

PPL Energy Supply includes the effect of credit risk on its fair value measurements to reflect the probability that a counterparty will default when contracts are out of the money (from the counterparty's standpoint).  In this case, PPL Energy Supply would have to sell into a lower-priced market or purchase from a higher-priced market.  When necessary, PPL Energy Supply records an allowance for doubtful accounts to reflect the probability that a counterparty will not pay for deliveries PPL Energy Supply has made but not yet billed, which are reflected in "Unbilled revenues" on the Balance Sheets.  PPL Energy Supply also has established a reserve with respect to certain sales to the California ISO for which PPL Energy Supply has not yet been paid,receivables from SMGT, which is reflected in accounts receivable on the Balance Sheets.  See Note 1415 to the Financial Statements for additional information.

See "Overview" in this Item 7 and Notes 15, 1716, 18 and 1819 to the Financial Statements for additional information on credit concentration and credit risk.

Related Party Transactions

PPL Energy Supply is not aware of any material ownership interests or operating responsibility by senior management of PPL Energy Supply in outside partnerships, including leasing transactions with variable interest entities, or other entities doing business with PPL Energy Supply.

For  See Note 16 to the Financial Statements for additional information on related party transactions, see Note 15 to the Financial Statements.transactions.

Acquisitions, Development and Divestitures

PPL Energy Supply is currently planning incremental capacity increases of 239 MW, primarily at its existing generating facilities.  See "Item 2.Properties - Supply Segment"from time to time evaluates opportunities for additional information.

PPL Energy Supply continuously reexaminespotential 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.

Incremental capacity increases of 153 MW are currently planned, primarily at existing PPL Energy Supply generating facilities.  See "Item 2. Properties - Supply Segment" for additional information.

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See Notes 8 and 9 to the Financial Statements for additional information on the more significant activities.activities, including the 2012 Ironwood Acquisition.

Environmental Matters

Extensive federal, state and local environmental laws and regulations are applicable to PPL Energy Supply's air emissions, water discharges and the management of hazardous and solid waste, among other areas; and 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 cost of their products or their demand for PPL Energy Supply's services.

Physical effects associated with climate change could include the impact of changes in weather patterns, such as storm frequency and intensity, and the resultant potential damage to PPL Energy Supply's generation assets as well as impacts on customers.  In addition, changed weather patterns could potentially reduce annual rainfall in areas where PPL Energy Supply has hydro generating facilities or where river water is used to cool its fossil and nuclear powered generators.  PPL Energy Supply cannot currently predict whether its businesses will experience these potential climate change-related risks or estimate the potential cost of their related consequences.

The below provides a discussion of the more significant environmental matters.

Coal Combustion Residuals (CCRs)
In June 2010, the EPA proposed two approaches to regulating CCRs (as either hazardous or non-hazardous) under existing solid waste regulations.  A final rulemaking is currently expected before the end of 2015.  However, the timing of the final regulations could be accelerated by certain litigation that could require the EPA to issue its regulations sooner.  Regulations could impact handling, disposal and/or beneficial use of CCRs.  The economic impact could be material if CCRs are regulated as hazardous waste, and significant if regulated as non-hazardous, in accordance with the proposed rule.

Effluent Limitation Guidelines
The EPA is to issue guidelines for technology-based limits in discharge permits for scrubber wastewater and is expected to require dry ash handling.  The EPA agreed, in recent settlement negotiations with environmentalists, to propose revisions to its effluent limitation guidelines (ELGs) by April 2013, with a final rule in late 2014.  Limits could be so stringent that plants may consider extensive new or modified wastewater treatment facilities and possibly zero liquid discharge operations, the cost of which could be significant.  Impacts should be better understood after the proposed rule is issued.

316(b) Cooling Water Intake Structures 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: one requires installation of Best Technology Available (BTA) to reduce mortality of aquatic organisms that are pulled into the plants cooling water system (entrainment), and the second imposes standards for reduction of mortality of aquatic organisms trapped on water intake screens (impingement).  A final rule is expected in June 2013.  The proposed regulation would apply to nearly all PPL Energy Supply-owned steam electric plants in Pennsylvania and Montana, potentially even including those equipped with closed-cycle cooling systems.  PPL Energy Supply'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.

GHG Regulations
In 2013, the EPA is expected to finalize limits on GHG emissions from new power plants and to begin working on a proposal for such emissions from existing power plants.  The EPA's proposal on GHG emissions from new power plants would effectively preclude construction on any coal-fired plants and could even be difficult for new gas-fired plants to meet.  With respect to existing power plants, the impact could be very significant, depending on the structure and stringency of the final rule.  PPL Energy Supply, along with others in the industry, filed comments on the EPA's proposal related to GHG emissions from new plants.  With respect to GHG limits for existing plants, PPL Energy Supply will advocate for reasonable, flexible requirements.
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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 new coal plants.  PPL Energy Supply is generally well-positioned to comply with MATS due to its recent investment in, and installation of, environmental controls such as wet flue gas desulfurization systems.  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.

CSAPR and CAIR
In 2011, the EPA finalized its CSAPR regulating emissions of nitrous 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 United States.  In December 2011, the Court of Appeals for the D.C. Circuit (the Court) stayed implementation of CSAPR, leaving CAIR in place.  Subsequently, in August 2012, the Court vacated and remanded CSAPR back to the EPA for further rulemaking, again leaving CAIR in place, pending further EPA action.  PPL Energy Supply plants in Pennsylvania will continue to comply with CAIR through optimization of existing controls, balanced with emission allowance purchases.  The Court's August 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 - Montana
The EPA signed its final Federal Implementation Plan (FIP) of the Regional Haze Rules for Montana in September 2012, with tighter emissions limits for 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 Corette (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).

See "Item 1. Business - Environmental Matters" and Note 1415 to the Financial Statements for a discussion ofadditional information on environmental matters.

Competition

See "Item 1. Business - Competition" under theSegment Information - Supply and International Delivery segmentsSegment - Competition" and "Item 1A. Risk Factors" for a discussion of competitive factors affecting PPL Energy Supply.

New Accounting Guidance

See Notes 1 and 2224 to the Financial Statements for a discussion of new accounting guidance adopted and pending adoption.

Application of Critical Accounting Policies

PPL Energy Supply's financialFinancial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies.  The following accounting policies are particularly important to the financial condition or results of operations, of PPL Energy Supply, and require estimates or other judgments of matters inherently uncertain.  Changes in the estimates or other judgments included within these accounting policies could result in a significant change to the information presented in the Financial Statements (these accounting policies are also discussed in Note 1 to the Financial Statements).  PPL's seniorSenior management has reviewed these critical accounting policies, the following disclosures regarding their application and the estimates and assumptions regarding them, with itsPPL's Audit Committee. In addition, PPL's senior management has reviewed the following disclosures regarding the application of these critical accounting policies with the Audit Committee.

Effective January 1, 2009, PPL Energy Supply fully applied accounting guidance that provides a framework for measuring fair value.  The fair value measurement concepts provided by this guidance are used within its financial statements where applicable.  See Notes 1 and 17 to the Financial Statements for additional information regarding fair value measurements.

1)    Price Risk Management

See "Price Risk Management" in Note 1 to the Financial Statements, as well as "Risk Management - Energy Marketing & Trading and Other" above and Note 18 to the Financial Statements.above.

2)   
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Defined Benefits

PPL Energy Supply subsidiaries sponsor and participate in various qualified funded and non-qualified unfunded defined benefit pension andplans.  A PPL Energy Supply subsidiary also sponsors an unfunded other postretirement plans and participate in and are allocated a significant portion ofbenefit plan.  PPL Energy Supply records the liability and net periodic defined benefit costs of its plans and the allocated portion of those plans sponsored by PPL Services based on participation in those plans.  PPL Energy Supply subsidiaries record an asset or liability to recognize the funded status of all defined benefit plans with an offsetting entry to OCI.  Consequently, the funded status of all defined benefit plans is fully recognized on the Balance Sheets.  See Note 1213 to the Financial Statements for additional information about the plans and the accounting for defined benefits.

PPL Services and PPL Energy Supply make certain assumptions regarding the valuation of benefit obligations and the performance of plan assets.  When accounting for defined benefits, delayed recognition in earnings of differences between actual results and expected or estimated results is a guiding principle.  Annual net periodic defined benefit costs are recorded in current earnings based on estimated results.  Any differences between actual and estimated results are recorded in OCI.  These amounts in AOCI are amortized to income over future periods.  The delayed recognition allows for a smoothed recognition of costs over the working lives of the employees who benefit under the plans.  The primary assumptions are:

·
Discount Rate - The discount rate is used in calculating the present value of benefits, which is based on projections of benefit payments to be made in the future. The objective in selecting the discount rate is to measure the single amount that, if invested at the measurement date in a portfolio of high-quality debt instruments, would provide the necessary future cash flows to pay the accumulated benefits when due.

·Expected Return on Plan Assets - Management projects the long-term rates of return on plan assets based on historical performance, future expectations and periodic portfolio rebalancing among the diversified asset classes.  These projected returns reduce the net benefit costs PPL Energy Supply records currently.

·Rate of Compensation Increase - Management projects employees' annual pay increases, which are used to project employees' pension benefits at retirement.

·Health Care Cost Trend Rate - Management projects the expected increases in the cost of health care.

In selecting a discount rate for itstheir U.S. defined benefit plans, PPL Services and PPL Energy Supply start with ana cash flow analysis of the expected benefit payment stream for itstheir plans.  This information is firstThe plan-specific cash flows are matched against a spot-rate yield curve.  A portfoliothe coupons and expected maturity values of 526 Aa-gradedindividually selected bonds.  This bond matching process begins with the full universe of Aa-rated non-callable (or callable with make-whole provisions) bonds, with a total amount outstanding in excess of $541 billion, servesserving as the base from which those with the lowest and highest yields arewere eliminated to develop an appropriate subset of bonds.  Individual bonds were then selected based on the ultimate yield curve.  The resultstiming of this analysis are considered together with other economic dataeach plan's cash flows and movements in variousparameters were established as to the percentage of each individual bond indicesissue that could be hypothetically purchased and the surplus reinvestment rates to determinebe assumed.  At December 31, 2012, PPL Services decreased the discount rate assumption.  At December 31, 2009, PPLfor its U.S. pension plans from 5.07% to 4.22% and PPL Energy Supply decreased the discount rate for their U.S.its pension plansplan from 6.50%5.12% to 6.00% as a result of this assessment.4.25%.  PPL Services decreased the discount rate for its other postretirement benefit plansplan from 6.45%4.81% to 5.81%4.02% and PPL Energy Supply decreased the discount rate for its other postretirement benefit plansplan from 6.37%4.60% to 5.55%3.77%.

A similar process is used to select the discount rate for the U.K. pension plans, which uses an iBoxx British pounds sterling denominated corporate bond index as its base.  At December 31, 2009, PPL and PPL Energy Supply decreased the discount rate for the U.K. pension plans from 7.47% to 5.55% as a result of this assessment.

The expected long-term rates of return for PPL Services and PPL Energy Supply's U.S. defined benefit pension and other postretirement benefit plans have been developed using a best-estimate of expected returns, volatilities and correlations for each asset class.  PPL management corroborates these rates with expected long-term rates of return calculated by its independent actuary, who uses a building block approach that begins with a risk-free rate of return with factors being added such as inflation, duration, credit spreads and equity risk.  Each plan's specific asset allocation is also considered in developing a reasonable return assumption.

At December 31, 2009, PPL's expected return on plan assets remained at 8.00% for its U.S. pension plans and remained at 7.00% for PPL's other postretirement benefit plans.2012, PPL Energy Supply's expected return on plan assets increased from 7.78% to 8.00% as a result of the settlement of the PA Mines, LLC Retirement plan, which historically earned a lower rate of return.  The expected long-term rates of return for PPL and PPL Energy Supply's U.K. pension plans have been developed by WPD management with assistance from an independent actuary using a best-estimate of expected returns, volatilities and correlations for each asset class.  For the U.K. plans, PPLServices' and PPL Energy Supply's expected return on plan assets remained at 7.90% at December 31, 2009.7.00% for their U.S. pension plans and increased from 5.70% to 5.75% for PPL Services' other postretirement benefit plan.

In selecting a rate of compensation increase, PPL Energy Supply considers past experience in light of movements in inflation rates.  At December 31, 2009,2012, PPL Services and PPL Energy Supply's rate of compensation increase remained at 4.75%decreased from 4.00% to 3.95% for their U.S. plans.  For the U.K. plans, PPL and PPL Energy Supply's rate of compensation increase remained at 4.00% at December 31, 2009.

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In selecting health care cost trend rates, PPL Services and PPL Energy Supply consider past performance and forecasts of health care costs.  At December 31, 2009,2012, PPL Services' and PPL Energy Supply's health care cost trend rates were 8.00% for 2010,2013, gradually declining to 5.50% for 2016.2019.

A variance in the assumptions listed above could have a significant impact on accrued defined benefit liabilities or assets, reported annual net periodic defined benefit costs and OCI.  While the charts below reflect either an increase or decrease in each assumption, the inverse of this change would impact the accrued defined benefit liabilities or assets, reported annual net periodic defined benefit costs and OCI by a similar amount in the opposite direction.  The sensitivities below reflect an evaluation of the change based solely on a change in that assumption and does not include income tax effects.

At December 31, 2009, PPL Energy Supply had recorded2012, the following defined benefit plan liabilities:plans were recorded as follows.

Pension liabilities $884 
Other postretirement benefit liabilities  91 
Pension liabilities$ (295)
Other postretirement benefit liabilities (77)

The following chart reflects the sensitivities in the December 31, 20092012 Balance Sheet associated with a change in certain assumptions based on PPL'sPPL Services' and PPL Energy Supply's primary defined benefit plans.

  Increase (Decrease)
 Increase (Decrease) Change in Impact on defined  
Actuarial assumption Change in assumption Impact on defined benefit liabilities Impact on OCI  assumption  benefit liabilities  Impact on OCI
             
Discount Rate (0.25)% $146 $(146)  (0.25)% $ 56  $ (56)
Rate of Compensation Increase 0.25% 18 (18)  0.25%  9   (9)
Health Care Cost Trend Rate (a) 1.0% 5 (5)  1.00%  1   (1)

(a)Only impacts other postretirement benefits.

In 2009,2012, PPL Energy Supply was allocated and recognized net periodic defined benefit costs charged to operating expense of $23$44 million.  This amount represents a $1$10 million increase from 2008.2011.

The following chart reflects the sensitivities in the 20092012 Statement of Income (excluding income tax effects) associated with a change in certain assumptions based on PPL's and PPL Energy Supply's primary defined benefit plans.

Actuarial assumption Change in assumption Impact on defined benefit costs  Change in assumption  Impact on defined benefit costs
         
Discount Rate (0.25)% $6  (0.25)% $ 4 
Expected Return on Plan Assets (0.25)% 9  (0.25)%  3 
Rate of Compensation Increase 0.25% 2  0.25%  2 
Health Care Cost Trend Rate (a) 1.0% 1 

(a)Only impacts other postretirement benefits.
Asset Impairment (Excluding Investments)

3)     Asset Impairment

PPL Energy Supply performs impairment analyses are performed for long-lived assets that are subject to depreciation or amortization whenever events or changes in circumstances indicate that a long-lived asset's carrying valueamount may not be recoverable.  For these long-lived assets to beclassified as held and used, such events or changes in circumstances are:

·a significant decrease in the market price of an asset;
·a significant adverse change in the manner in which an asset is being used or in its physical condition;
·a significant adverse change in legal factors or in the business climate;
·an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of an asset;
·a current-periodcurrent period operating or cash flow loss combined with a history of losses or a forecast that demonstrates continuing losses; or
·a current expectation that, more likely than not, an asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.

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For a long-lived asset to beclassified as held and used, an impairment is recognized when the carrying amount of the asset is not recoverable and exceeds its fair value.  The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset.  If the asset is impaired, an impairment loss is recorded to adjust the asset's carrying valueamount to its estimated fair value.  Management must make significant judgments to estimate future cash flows, including the useful lives of long-lived assets, the fair value of the assets and management's intent to use the assets.  PPL Energy Supply considers alternateAlternate courses of action are considered to recover the carrying valueamount of a long-lived asset, and uses estimated cash flows from the "most likely" alternative are used to assess impairment whenever one alternative is clearly the most likely outcome.  If no alternative is clearly the most likely, then a probability-weighted approach is used taking into consideration estimated cash flows from the alternatives.  For assets tested for impairment as of the balance sheet date, the estimates of future cash flows used in that test consider the likelihood of possible outcomes that existed at the balance sheet date, including the assessment of the likelihood of a future sale of the assets.  That assessment is not revised based on events that occur after the balance sheet date.  Changes in assumptions and estimates could result in significantly different results than those identified and recorded in the financial statements.

In September 2012, PPL Energy Supply announced its intention, beginning in April 2015, to place the Corette coal-fired plant in Montana in long-term reserve status, suspending the plant's operation, due to expected market conditions and the costs to comply with MATS requirements.  The Corette plant asset group's carrying amount at December 31, 2012 was approximately $68 million.  An impairment analysis was performed for this asset group in the third and fourth quarters of 2012 and it was determined to not be impaired.  It is reasonably possible that an impairment could occur in future periods, as higher priced sales contracts settle, adversely impacting projected cash flows.

For a long-lived asset classified as held for sale, an impairment exists when the carrying amount of the asset (disposal group) exceeds its fair value less cost to sell.  If the asset (disposal group) is impaired, an impairment loss is recorded to adjust itsthe carrying amount to its fair value less cost to sell.  A gain is recognized for any subsequent increase in fair value less cost to sell, but not in excess of the cumulative impairment previously recognized.

For determining fair value, quoted market prices in active markets are the best evidence of fair value.evidence.  However, when market prices are unavailable, PPL Energy Supplythe Registrant considers all valuation techniques appropriate inunder the circumstances and for which market participant inputs can be obtained.  PPL Energy Supply has generally usedGenerally discounted cash flows are used to estimate fair value, which incorporates market participant inputs when available.  Discounted cash flows are calculated by estimating future cash flow streams and applying appropriate discount rates to determine the present value of the cash flow streams.

In 2009, PPL Energy Supply recorded impairments of certain long-lived assets.  See Note 17 to the Financial Statements for a discussion of impairments related to certain sulfur dioxide emission allowances and the Long Island generation business.

PPL Energy Supply tests goodwillGoodwill is tested for impairment at the reporting unit level.  PPL Energy SupplySupply's reporting unit has been determined its reporting units to be at or one level below itsthe operating segments.  PPL Energy Supply performs asegment level.  A goodwill impairment test is performed annually or more frequently if events or changes in circumstances indicate that the carrying valueamount of the reporting unit may be greater than the unit's fair value.  Additionally, goodwill is tested for impairment after a portion of goodwill has been allocated to a business to be disposed of.

Goodwill is testedBeginning in 2012, PPL Energy Supply may elect either to initially make a qualitative evaluation about the likelihood of an impairment of goodwill or to bypass the qualitative evaluation and test goodwill for impairment using a two-step approach.  The first stepquantitative test.  If the qualitative evaluation (referred to as "step zero") is elected and the assessment results in a determination that it is not more likely than not the fair value of the goodwillreporting unit is less than the carrying amount, the two-step quantitative impairment test comparesis not necessary.  However, the quantitative impairment test is required if PPL Energy Supply concludes it is more likely than not that the fair value of the reporting unit is less than the carrying amount based on the step zero assessment.

When the two-step quantitative impairment test is elected or required as a result of the step zero assessment, in step one, PPL Energy Supply identifies a potential impairment by comparing the estimated fair value of aPPL Energy Supply (the goodwill reporting unitunit) with its carrying amount, including goodwill.goodwill, on the measurement date.  If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired.  If the carrying amount exceeds the estimated fair value, of the reporting unit, the second step is performed to measure the amount of impairment loss, if any.

The second step of the quantitative test requires a calculation of the implied fair value of goodwill.  The implied fair value of goodwill, which is determined in the same manner as the amount of goodwill in a business combination.  That is, the estimated fair value of a reporting unit is allocated to all of thePPL Energy Supply's assets and liabilities of that unit as if the reporting unitPPL Energy Supply had been acquired in a business combination and the estimated fair value of the reporting unitPPL Energy Supply was the price paid to acquire the reporting unit.paid.  The excess of the estimated fair value of a reporting unitPPL Energy Supply over the amounts assigned to its assets and liabilities is the implied fair value of goodwill.  The implied fair value of the reporting unit'sPPL Energy Supply's goodwill is then compared with the carrying amount of that goodwill.  If the carrying amount exceeds the implied fair value, an impairment loss is recognized in an amount equal to that excess.  The loss recognized cannot exceed the carrying amount of the reporting unit'sPPL Energy Supply's goodwill.

In 2009,
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PPL Energy Supply elected to perform the two-step quantitative impairment test of goodwill in the fourth quarter of 2012 and no impairment was not required to impair any goodwill.recognized.  Management primarily used both discounted cash flows and market multiples, which required significant assumptions, to estimate the fair value of each reporting unit.  APPL Energy Supply.  Applying an appropriate weighting to both the discounted cash flow and market multiple valuations, a decrease in the forecasted cash flows of 10%, or an increase ofin the discount rate by 25 basis points, or a 10% decrease in the multiples would not have resulted in an impairment of goodwill.

Additionally, in 2009, PPL Energy Supply wrote off $3 million of goodwill allocated to discontinued operations.

4)    Loss Accruals

PPL Energy Supply accrues lossesLosses are accrued for the estimated impacts of various conditions, situations or circumstances involving uncertain or contingent future outcomes.  For loss contingencies, the loss must be accrued if (1) information is available that indicates it is probable that a loss has been incurred, given the likelihood of the uncertain future events, and (2) the amount of the loss can be reasonably estimated.  Accounting guidance defines "probable" as cases in which "the future event or events are likely to occur."  PPL Energy Supply does not record theThe accrual of contingencies that might result in gains is not recorded unless recovery is assured.  PPL Energy Supply continuously assesses potentialPotential loss contingencies for environmental remediation, litigation claims, regulatory penalties and other events.events are continuously assessed.

The accounting aspects of estimated loss accruals include (1) the initial identification and recording of the loss, (2) the determination of triggering events for reducing a recorded loss accrual, and (3) the ongoing assessment as to whether a recorded loss accrual is sufficient.  All three of these aspects require significant judgment by PPL Energy Supply's management.  PPL Energy Supply uses its internalInternal expertise and outside experts (such as lawyers and engineers), are used, as necessary, to help estimate the probability that a loss has been incurred and the amount (or range) of the loss.

No new significant loss accruals were recorded in 2009.  In 2008, significant judgment was required by PPL Energy Supply's management to perform an assessment of the contingency related to the Montana hydroelectric litigation.2012.  

In June 2008, PPL's management assessed the loss exposure related to the Montana hydroelectric litigation, given the June 2008 decision by the Montana First Judicial District Court (District Court).  The District Court awarded compensation of approximately $34 million for the years 2000 through 2006, and approximately $6 million for 2007 as rent for the use of the State of Montana's streambeds by PPL Montana's hydroelectric facilities.  The District Court also deferred the determination of compensation for 2008 and subsequent years to the Montana State Land Board (Land Board).  In October 2008, PPL Montana filed an appeal of the decision to the Montana Supreme Court and a stay of judgment, including a stay of the Land Board's authority to assess compensation against PPL Montana for 2008 and future periods.  Oral agreement of the case was held before the Montana Supreme Court in September 2009.

As part of the preparation of its 2009 financial statements, PPL Energy Supply's management reassessed the loss exposure for the Montana hydroelectric litigation.  PPL's management concluded, based on its assessment and after consultations with its trial counsel, that it has meritorious arguments on appeal for the years 2000 through 2006.  PPL assessed the likelihood of a loss for these years as reasonably possible.  However, PPL Montana has not recorded a loss accrual for these years, as the likelihood of a loss was not deemed probable.

For 2007 and subsequent years, PPL's management believes that while it also has meritorious arguments, it is probable that its hydroelectric projects will be subject to annual estimated compensation ranging from $3 million to $6 million.  Given that there was no single amount within that range more likely than anyCertain other PPL Montana accrued $3 million for each of the years 2007 through 2009 for a total of $9 million.  See Note 14 to the Financial Statements for additional information on this contingency.

PPL Energy Supply hasevents have been identified certain other events that could give rise to a loss, but that do not meet the conditions for accrual.  Such events are disclosed, but not recorded, when it is "reasonably possible" that a loss has been incurred.  See Note 14 to the Financial Statements for disclosure of other potential loss contingencies that have not met the criteria for accrual.

When an estimated loss is accrued, PPL Energy Supply identifies, where applicable, the triggering events for subsequently reducing the loss accrual.accrual are identified, where applicable.  The triggering events generally occur when the contingency has been resolved and the actual loss is incurred,paid or written off, or when the risk of loss has diminished or been eliminated.  The following are some of the triggering events that provide for the reduction of certain recorded loss accruals:

·Allowances for uncollectible accounts are reduced when accounts are written off after prescribed collection procedures have been exhausted, a better estimate of the allowance is determined or underlying amounts are ultimately collected.

·Environmental and other litigation contingencies are reduced when the contingency is resolved and PPL Energy Supply makes actual payments are made, a better estimate of the loss is determined or the loss is no longer considered probable.

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

5)    See Note 15 to the Financial Statements for disclosure of loss contingencies accrued and other potential loss contingencies that have not met the criteria for accrual.

Asset Retirement Obligations

PPL Energy Supply is required to recognize a liability for legal obligations associated with the retirement of long-lived assets.  The initial obligation should be measured at its estimated fair value.  A conditional ARO must be recognized when incurred if the fair value of the ARO can be reasonably estimated.  An equivalent amount should be recorded as an increase in the value of the capitalized asset and allocated to expense over the useful life of the asset.  Until the obligation is settled, the liability should beis increased, through the recognition of accretion expense in the statement of income, statement, for changes in the obligation due to the passage of time.  A conditional ARO must be recognized when incurred ifSee Note 21 to the fair valueFinancial Statements for further discussion of the ARO can be reasonably estimated.AROs.

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In determining AROs, management must make significant judgments and estimates to calculate fair value.  Fair value is developed using an expected present value technique based on assumptions of market participants that considers estimated retirement costs in current period dollars that are inflated to the anticipated retirement date and then discounted back to the date the ARO was incurred.  Changes in assumptions and estimates included within the calculations of the fair value of AROs could result in significantly different results than those identified and recorded in the financial statements.  Estimated ARO costs and settlement dates, which affect the carrying value of various AROsthe ARO and the related assets,capitalized asset, are reviewed periodically to ensure that any material changes are incorporated into the latest estimate of the obligations.ARO.  Any change to the capitalized asset, positive or negative, is amortized over the remaining life of the associated long-lived asset.

At December 31, 2009, PPL Energy Supply had2012, AROs totaling $426$375 million were recorded on the Balance Sheet, of which $10 million is included in "Other current liabilities."  Of the total amount, $348$316 million, or 82%84%, relates to PPL Energy Supply'sthe nuclear decommissioning ARO.  The most significant assumptions surrounding AROs are the forecasted retirement costs, the discount rates and the inflation rates.  A variance in the forecasted retirement costs, the discount rates or the inflation ratesany of these inputs could have a significant impact on the ARO liabilities.

The following charttable reflects the sensitivities related to PPL Energy Supply'sthe nuclear decommissioning ARO liability as of December 31, 2009, associated with a change in these assumptions at the timeas of initial recognition.December 31, 2012.  There is no significant change to the annual depreciation expense of the ARO asset or the annual accretion expense of the ARO liability as a result of changing the assumptions.  The sensitivities below reflect an evaluation of the change based solely on a change in that assumption.

Change in AssumptionImpact on ARO Liability
Retirement Cost10%/(10)%$32/$(32)
Discount Rate0.25%/(0.25)%$(31)/$34
Inflation Rate0.25%/(0.25)%$41/$(37)
  Change in Impact on
  Assumption ARO Liability
       
Retirement Cost  10% $32
Discount Rate  (0.25)%  28
Inflation Rate  0.25%  32

6)    Income Tax UncertaintiesTaxes

Significant management judgment is required in developing PPL Energy Supply'sthe provision for income taxes, primarily due to the uncertainty related to tax positions taken or expected to be taken in tax returns and the determination of deferred tax assets, liabilities and valuation allowances.

Significant management judgment is required to determine the amount of benefit recognized related to an uncertain tax position.  PPL Energy Supply evaluates its taxTax positions are evaluated following a two-step process.  The first step requires an entity to determine whether, based on the technical merits supporting a particular tax position, it is more likely than not (greater than a 50% chance) that the tax position will be sustained.  This determination assumes that the relevant taxing authority will examine the tax position and is aware of all the relevant facts surrounding the tax position.  The second step requires an entity to recognize in the financial statements the benefit of a tax position that meets the more-likely-than-not recognition criterion.  The benefit recognized is measured at the largest amount of benefit that has a likelihood of realization, upon settlement, that exceeds 50%.  PPL Energy Supply's managementManagement considers a number of factors in assessing the benefit to be recognized, including negotiation of a settlement.

On a quarterly basis, PPL Energy Supply reassesses its uncertain tax positions are reassessed by considering information known at the reporting date.  Based on management's assessment of new information, PPL Energy Supplya tax benefit may subsequently recognize a tax benefitbe recognized for a previously unrecognized tax position, de-recognize a previously recognized tax position may be derecognized, or re-measure the benefit of a previously recognized tax position.position may be remeasured.  The amounts ultimately paid upon resolution of issues raised by taxing authorities may differ materially from the amounts accrued and may materially impact PPL Energy Supply'sthe financial statements in the future.

At December 31, 2012, it was reasonably possible that during the next 12 months the total amount of unrecognized tax benefits could increase by as much as $1 million or decrease by up to $30 million.  This change could result from subsequent recognition, derecognition and/or changes in the measurement of uncertain tax positions related to the timing and utilization of tax credits and the related impact on alternative minimum tax, 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.
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The balance sheet classification of unrecognized tax benefits and the need for valuation allowances to reduce deferred tax assets also require significant management judgment.  PPL Energy Supply classifies unrecognizedUnrecognized tax benefits are classified as current to the extent management expects to settle an uncertain tax position by payment or receipt of cash within one year of the reporting date.  Valuation allowances are initially recorded and reevaluated each reporting period by assessing the likelihood of the ultimate realization of a deferred tax asset.  Management considers a number of factors in assessing the realization of a deferred tax asset, including the reversal of temporary differences, future taxable income and ongoing prudent and feasible tax planning strategies.  Any tax planning strategy utilized in this assessment must meet the recognition and measurement criteria utilized by PPL Energy Supply to account for an uncertain tax positions.position.  Management also considers the uncertainty posed by political risk and the effect of this uncertainty on the various factors that management takes into account in evaluating the need for valuation allowances.  The amount of deferred tax assets ultimately realized may differ materially from the estimates utilized in the computation of valuation allowances and may materially impact the financial statements in the future.  See Note 5 to the Financial Statements for the requiredincome tax disclosures.

At December 31, 2009, it was reasonably possible that during the next 12 months the total amount of unrecognized tax benefits could increase by as much as $11 million or decrease by up to $123 million for PPL Energy Supply.  This change 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.


Other Information

PPL's Audit Committee has approved the independent auditor to provide audit, audit-related and audit-related services and othertax services permitted by Sarbanes-Oxley and SEC rules.  The audit and audit-related services include services in connection with statutory and regulatory filings, reviews of offering documents and registration statements, and internal control reviews. See "Item 14. Principal Accounting Fees and Services" for more information.

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PPL ELECTRIC UTILITIES CORPORATION AND SUBSIDIARIES

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview
The information provided in this Item 7 should be read in conjunction with PPL Electric's Consolidated Financial Statements and the accompanying Notes.  Capitalized terms and abbreviations are defined in the glossary.  Dollars are in millions unless otherwise noted.

PPL Electric is an electricity delivery service provider in eastern and central Pennsylvania with headquarters in Allentown, Pennsylvania.  Refer to "Item 1. Business - Background" for a description of its business.  PPL Electric's strategy and principal challenge is to own and operate its electricity delivery business at the most efficient cost while maintaining high quality customer service and reliability.

PPL Electric's electricity delivery business is rate-regulated.  Accordingly, this business is subject to regulatory risk with respect to costs that may be recovered and investment returns that may be collected through customer rates.  See "Customer Choice - End of Transition Period" below for information on additional risks PPL Electric may face.

In order to manage financing costs and access to credit markets, a key objective for PPL Electric's business as a whole is to maintain a strong credit profile.  PPL Electric continually focuses on maintaining an appropriate capital structure and liquidity position.

See "Item 1A. Risk Factors" for more information concerning these and other material risks PPL Electric faces in its business.

The purpose of "Management's"Management's Discussion and Analysis of Financial Condition and Results of Operations" is to provide information concerning PPL Electric's performance in implementingincludes the strategies and managing the risks and challenges mentioned above.  Specifically:following information:

·"Overview" provides a description of PPL Electric and its business strategy, a summary of Net Income Available to PPL and a discussion of certain events related to PPL Electric's results of operations and financial condition.

·  "Results of Operations" provides an overviewa summary of PPL Electric's operating resultsearnings and a description of key factors expected to impact future earnings.  This section ends with explanations of significant changes in 2009, 2008principal items on PPL Electric's Statements of Income, comparing 2012 with 2011 and 2007, including a review of earnings.  It also provides a brief outlook for2011 with 2010.

·"Financial Condition - Liquidity and Capital Resources" provides an analysis of PPL Electric's liquidity position and credit profile, including itsprofile.  This section also includes a discussion of forecasted sources of cash (including bank credit facilities and sources of operating cash flow) and uses of cash (including contractual obligations and capital expenditure requirements) and the key risks and uncertainties that impact PPL Electric's past and future liquidity position and financial condition.  This subsection also includes a listing and discussion of PPL Electric's current credit ratings.rating agency actions.

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

·"Application of Critical Accounting Policies" provides an overview of the accounting policies that are particularly important to the results of operations and financial condition of PPL Electric and that require its management to make significant estimates, assumptions and other judgments.judgments of matters inherently uncertain.

The information provided in this Item 7 should be read in conjunction with PPL Electric's Consolidated Financial Statements and the accompanying Notes.Overview

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

PPL Electric is an electricity transmission and distribution service provider in eastern and central Pennsylvania with headquarters in Allentown, 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 territory as a PLR under the Customer Choice – EndAct.

Business Strategy

PPL Electric's strategy and principal challenge is to own and operate its electricity delivery business at the most efficient cost while maintaining high quality customer service and reliability.  PPL Electric anticipates that it will have significant capital expenditure requirements for at least the next five years.  In order to manage financing costs and access to credit markets, a key objective for PPL Electric's business is to maintain a strong credit profile and strong liquidity position.

Timely recovery of Transition Periodcosts to maintain and enhance the reliability of PPL Electric's delivery system including the replacement of aging distribution assets is required in order to maintain strong cash flows and a strong credit profile.  Traditionally, such cost recovery would be pursued through periodic base rate case proceedings with the PUC.  As such costs continue to increase, more frequent rate case proceedings may be required or an alternative rate-making process would need to be implemented in order to achieve more timely recovery.  See "Regulatory Matters - Pennsylvania Activities - Legislation - Regulatory Procedures and Mechanisms" in Note 6 to the Financial Statements for information on Pennsylvania's new alternative rate-making mechanism.

Transmission costs are recovered through a FERC Formula Rate mechanism which is updated annually for costs incurred and assets placed in service.  Accordingly, increased costs including for the replacement of aging transmission assets and the PJM-approved Regional Transmission Line Expansion Plan are recovered on a timely basis.


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Financial and Operational Developments

Net Income Available to PPL

Net Income Available to PPL for 2012, 2011 and 2010 was $132 million, $173 million and $115 million.  Earnings in 2012 decreased 24% from 2011 and earnings in 2011 increased 50% over 2010.

See "Results of Operations" below for further discussion and analysis of PPL Electric's earnings.

Redemption of Preference Stock

In 1996,June 2012, PPL Electric redeemed all 2.5 million shares of its 6.25% Series Preference Stock, par value $100 per share.  The price paid for the Customer Choice Actredemption was enactedthe par value, without premium ($250 million in the aggregate).  At December 31, 2011, the preference stock was reflected on PPL Electric's Balance Sheet in "Preferred securities."

Storm Costs

During 2012, PPL Electric experienced several PUC-reportable storms, including Hurricane Sandy, resulting in total restoration costs of $81 million, of which $61 million were initially recorded in "Other operation and maintenance" on the Statement of Income.  In particular, in late October 2012, PPL Electric experienced widespread significant damage to restructure Pennsylvania's electric utility industryits distribution network from Hurricane Sandy resulting in total restoration costs of $66 million, of which $50 million were initially recorded in "Other operation and maintenance" on the Statement of Income.  Although PPL Electric had storm insurance coverage, the costs incurred from Hurricane Sandy exceeded the policy limits.  Probable insurance recoveries recorded during 2012 were $18.25 million, of which $14 million were included in "Other operation and maintenance" on the Statements of Income.  PPL Electric recorded a regulatory asset of $28 million in December 2012 (offset to "Other operation and maintenance" on the Statement of Income).  In February 2013, PPL Electric received an order from the PUC granting permission to create retail accessdefer qualifying storm costs in excess of insurance recoveries associated with Hurricane Sandy.

See "Regulatory Matters - Pennsylvania Activities - Storm Costs" in Note 6 to the Financial Statements for information on $84 million of storm costs incurred in 2011.

Rate Case Proceeding

In March 2012, PPL Electric filed a competitive market for generationrequest with the PUC to increase distribution rates by approximately $105 million, effective January 1, 2013.  In its December 28, 2012 final order, the PUC approved a 10.4% return on equity and a total distribution revenue increase of electricity.about $71 million.  The Customer Choice Act required each Pennsylvania electric utility, includingapproved rates became effective January 1, 2013.

Also, in its December 28, 2012 final order, the PUC directed PPL Electric to file a restructuring plan to "unbundle" its rates into separate generation, transmission and distribution components and to permit its customers to directly access alternate suppliers of electricity.  Underproposed Storm Damage Expense Rider within 90 days following the Customer Choice Act,order.  PPL Electric was requiredplans to actfile a proposed Storm Damage Expense Rider with the PUC and, as part of that filing, request recovery of the $28 million of qualifying storm costs incurred as a PLR.  As partresult of the October 2012 landfall of Hurricane Sandy.

Regional Transmission Line Expansion Plan

Susquehanna-Roseland

In 2007, PJM directed the construction of a settlementnew 150-mile, 500-kilovolt transmission line between the Susquehanna substation in Pennsylvania and the Roseland substation in New Jersey that it identified as essential to long-term reliability of the Mid-Atlantic electricity grid.  PJM determined that the line was needed to prevent potential overloads that could occur on several existing transmission lines in the interconnected PJM system.  PJM directed PPL Electric to construct the portion of the Susquehanna-Roseland line in Pennsylvania and Public Service Electric & Gas Company to construct the portion of the line in New Jersey.

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 as the preferred alternative under the NPS's National Environmental Policy Act review.  On October 15, 2012, a complaint was filed in the United States District Court for the District of Columbia by various environmental groups, including the Sierra Club, challenging the ROD and seeking to prohibit its implementation; and on December 6, 2012, the groups filed a petition for injunctive relief seeking to prohibit all construction activities until the court issues a final decision on the complaint.  PPL Electric has intervened in the lawsuit.  The chosen route had previously been approved by the PUC and in connection with the restructuring planNew Jersey Board of Public Utilities.
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On December 13, 2012, PPL Electric filed underreceived federal construction and right of way permits to build on National Park Service lands.

Construction activities have begun on portions of the Customer Choice Act, PPL Electric agreed101-mile route in Pennsylvania.  The line is expected to provide electricity as a PLR at predetermined "capped" rates through 2009.  In addition,be in service before the PUC authorized recoverypeak summer demand period of approximately $2.97 billion of competitive transition or "stranded" costs (generation-related costs that might not otherwise be recovered in a competitive market) from customers during an 11-year transition period.  For PPL Electric, this transition period ended on2015.  At December 31, 2009.

As a result2012, PPL Electric's estimated share of the PUC settlement order and the PLR obligation, PPL Electric, through 2009, generally bore the risk that it would not be able to obtain adequate energy supply at the "capped" rates it could charge to its customers who did not select an alternate electricity supplier.  To mitigate this risk, PPL Electric entered into full requirements energy supply agreements with PPL EnergyPlus, a PPL Electric affiliate.  Under these agreements, through 2009, PPL EnergyPlus supplied PPL Electric's entire PLR load at predetermined prices equal to the capped generation rates that PPL Electricproject cost was authorized to charge its customers.

Related to PPL Electric's transition period, the following has occurred or will occur:

·In August 1999, CTC of $2.4 billion were converted to intangible transition costs when they were securitized by the issuance of transition bonds.  The intangible transition costs were amortized over the life of the transition bonds, through December 2008, in accordance with an amortization schedule filed with the PUC.  These transition bonds matured in tranches, with the final tranche being repaid in December 2008.
·During the transition period, PPL Electric was authorized by the PUC to bill its customers $130 million for a portion of the costs associated with decommissioning of PPL's Susquehanna nuclear plant.  Under the power supply agreements between PPL Electric and PPL EnergyPlus, these revenues were passed on to PPL EnergyPlus.  Similarly, these revenues were passed on to PPL Susquehanna under a power supply agreement between PPL EnergyPlus and PPL Susquehanna and invested in the NDT funds.  Effective January 1, 2010, these ratepayer billings have ceased.
·In December 2009, PPL Electric filed with the PUC a final reconciliation of CTC and ITC recoveries during the transition period.  At December 31, 2009, PPL Electric has recorded a net regulatory liability of $33 million related to these recoveries.  The net overcollection will be reflected in customer rates in 2010.
·At December 31, 2009, PPL Electric's long-term power purchase agreements with PPL EnergyPlus (effective since 2000 and 2002) expired.
·To mitigate 2010 rate increases, PPL Electric implemented two programs in 2008 and 2009 that allowed customers to make prepayments toward their 2010 and 2011 electric bills or to defer any 2010 electric bill increases exceeding 25%.  Any deferred amounts are to be repaid by 2012.  At December 31, 2009, PPL Electric has recorded a liability of $36 million for these programs.
·Effective January 1, 2010, PPL Electric's rates for generation supply as a PLR are no longer capped and the cost of electric generation is based on a competitive solicitation process.  During 2007 through 2009, PPL Electric procured through PUC-approved solicitation procedures, the electric generation supply it will need in 2010 for customers who do not choose an alternative supplier.  The prices in these contracts will result in an average residential customer paying approximately 30% higher rates, as compared to the previously-capped rates on delivered electricity.  PPL Electric is currently procuring the PLR supply it will need for the January 2011 through May 2013 period.  The results of all procurements continue to require the approval of the PUC.
·For those customers who choose to procure generation supply from alternative providers, PPL Electric will provide services for these alternative generation suppliers to bill usage charges, among other duties.  As required by a PUC-approved plan, PPL Electric will be purchasing certain receivables from alternative suppliers at a discount.

In October 2008, Act 129 became effective.  This law created requirements for energy efficiency and conservation programs and for the use of smart metering technology, imposed new PLR electricity supply procurement rules, provided remedies for market misconduct, and made changes to the existing Alternative Energy Portfolio Standard.

Prior to the expiration of the generation rate caps, customers' interest in purchasing generation supply from other providers was limited because in recent years, the long-term supply agreement between PPL Electric and PPL EnergyPlus provided a below-market cost of generation supply for these customers.  As a result, a limited amount of "shopping" occurred.  In 2010, several alternative suppliers have offered to provide generation supply in PPL Electric's service territory.  When its customers purchase supply from these alternative suppliers or from PPL Electric as PLR, the purchase of such supply has no significant impact on the operating results of PPL Electric.  The cost to purchase PLR supply is passed directly by PPL Electric to its customers without markup.  For those customers who receive their supply from an alternative supplier, PPL Electric may act as billing agent or the alternative supplier may bill for their supply directly, and in either case, PPL Electric does not record revenues or expenses related to this supply.  PPL Electric remains the distribution provider for all the customers in its service territory and charges a regulated rate for the service of delivering that electricity.

Lower demand for electric power due to increased prices, the economic downturn or the conservation provisions of Act 129 that require PPL Electric to reduce its customers' electricity usage in future periods, could impact future revenues.  The reduction in volume could be offset by changes in customer rates for this service, subject to PUC approval, depending on PPL Electric's cost structure.  Act 129 includes one-time penalties of up to $20 million for not attaining the required reductions by 2011 and 2013.  At this time, PPL Electric expects to meet these targeted reductions.  The costs of complying with the other provisions of Act 129 would, subject to PUC approval, be recoverable through an automatic adjustment clause.  None of the above changes are expected to have a significant impact on PPL Electric's 2010 financial condition, operating results or cash flows.

The final expiration of generation rate caps in Pennsylvania, applicable to three other large regulated utilities, is scheduled to occur at the end of 2010.  Discussions concerning generation rate caps and rate increase mitigation are continuing.  The final result of those discussions and the future impact on the financial condition and future cash flows of PPL Electric cannot be predicted at this time.

See Note 14 to the Financial Statements for additional information on Pennsylvania legislative and other regulatory activities.

Market Events

In 2008, conditions in the financial markets became disruptive to the processes of managing credit risk, responding to liquidity needs, measuring financial instruments at fair value, and managing market price risk.  Bank credit capacity was reduced and the cost of renewing or establishing new credit facilities increased, thereby introducing uncertainties as to PPL Electric's ability to reliably estimate the longer-term cost and availability of credit.  In general, bank credit capacity has increased from the significantly constrained levels of 2008 and early 2009.  In addition, the cost of renewing or establishing new credit facilities has improved when compared with the 2008 and early 2009 periods.

Credit Risk

Credit risk is the risk that PPL Electric would incur a loss as a result of nonperformance by counterparties of their contractual obligations.  PPL Electric maintains credit policies and procedures to limit counterparty credit risk.  Conditions in the financial and commodity markets have generally increased PPL Electric's exposure to credit risk.  See Notes 15, 17 and 18 to the Financial Statements, and "Risk Management - Credit Risk" for more information on credit risk.

Liquidity Risk$560 million.

PPL Electric expects to continue to have access to adequate sources of liquidity through operating cash flows, cash and cash equivalents, credit facilities and, from time to time, the issuance of capital market securities.  PPL Electric's ability to access capital markets may be impacted by conditions in the overall financial and capital markets, as well as conditions specific to the utility sector.  See "Financial Condition - Liquidity and Capital Resources" for an expanded discussion of PPL Electric's liquidity position and a discussion of its forecasted sources of cash.

Securities Price Risk

PPL Electric participates in and is allocated costs from defined benefit plans sponsored by PPL.  Declines in the market price of debt and equity securities result in unrealized losses that reduce the asset values of PPL's defined benefit plans.  PPL's defined benefit plans earned positive returns in the second half of 2009, thereby recovering a portion of the negative returns incurred in 2008 and the first quarter of 2009.

Determination of the funded status of defined benefit plans, contribution requirements and net periodic defined benefit costs for future years are subject to changes in various assumptions, in addition to the actual performance of the assets in the plans.  See "Application of Critical Accounting Policies - Defined Benefits" for a discussion of the assumptions and sensitivities regarding those assumptions.

The Economic Stimulus Package

The Economic Stimulus Package was intended to stimulate the U.S. economy through federal tax relief, expansion of unemployment benefits and other social stimulus provisions, domestic spending for education, health care and infrastructure, including the energy sector.  A portion of the benefits included in the Economic Stimulus Package are offered in the form of loan fee reductions, expanded loan guarantees and secondary market incentives.

Funds from the Economic Stimulus Package have been allocated to various federal agencies, such as the DOE, and provided to state agencies through block grants.  The DOE has made awards of the funds for smart grid and efficiency-related programs.  In addition, in July 2009, PPL Electric proposed to the DOE that the agency provide funding for one-half of a $38 million smart grid project.  The project would use smart grid technology to strengthen reliability, save energy and improve electric service for 60,000 Harrisburg, Pennsylvania area customers.  It would also provide benefits beyond the Harrisburg region, helping to speed power restoration across PPL Electric's 29-county service territory.  In October 2009, PPL Electric received notification that its grant proposal had been selected by the DOE for award negotiations. PPL Electric cannot predict the ultimate outcome or timing of these award negotiations.any legal challenges to the project or what additional actions, if any, PJM might take in the event of a further delay to its 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, three new substations and upgrades to adjacent facilities).  The incentives were specifically tailored to address the risks and challenges PPL Electric will face in building the project.  The FERC granted the incentive for inclusion of all prudently incurred construction work in progress (CWIP) costs in rate base and denied the request for a 100 basis point adder to the return on equity incentive.  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 will submit to the FERC in March 2013.  PPL Electric expects the project to be completed in 2017.  At December 31, 2012, PPL Electric estimates the total project costs to be approximately $200 million with approximately $190 million qualifying for the CWIP incentive.

Legislation - Regulatory Procedures and Mechanisms

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 DISC.  The LTIIP is mandated to be a five- to ten-year plan describing projects eligible for inclusion in the DISC.  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 PPL Electric filed a petition requesting permission to establish a DSIC on January 15, 2013, with rates proposed to be effective beginning May 1, 2013.

FERC Formula Rates

In March 2012, PPL Electric filed a request with the FERC seeking recovery of its regulatory asset related to the deferred state tax liability that existed at the time of the transition from the flow-through treatment of state income taxes to full normalization.  This change in tax treatment occurred in 2008 as a result of prior FERC initiatives that transferred regulatory jurisdiction of certain transmission assets from the PUC to FERC.  At December 31, 2012 and December 31, 2011, $52 million and $53 million respectively, are classified as taxes recoverable through future rates and are included on the Balance Sheets in "Other Noncurrent Assets - Regulatory assets."  In May 2012, the FERC issued an order approving PPL Electric's request recover the deferred tax regulatory asset over a 34 year period beginning June 1, 2012.

Results of Operations

EarningsThe following discussion provides a summary of PPL Electric's earnings and a description of factors that are expected to impact future earnings.  This section ends with "Statement of Income Analysis," which includes explanations of significant year-to-year changes in Pennsylvania Gross Delivery Margins by component and principal line items on PPL Electric's Statements of Income.

Income availableThe utility business is influenced by seasonality in the weather.  As a result, operating revenues (and associated operating expenses) are not generated evenly throughout the year.  Revenue is generally higher during the first and third quarters of a year due to PPL was:higher demand as a result of winter and summer periods.  On the other hand, revenue tends to be lower during the second and fourth quarters due to lower demand as a result of milder weather.


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  2009  2008  2007 
          
  $124  $158  $145 

Earnings         
           
Net Income Available to PPL was:
           
   2012  2011  2010 
           
Net Income Available to PPL $ 132  $ 173  $ 115 

The changes in income available to PPL from year to year were, in part, attributable to several special items that management considers significant.  Detailsthe components of these special items are provided below.

The after-tax changes in income availableNet Income Available to PPL between these periods were due to the following factors.factors which reflect reclassifications for items included in gross delivery margins.

  2009 vs. 2008 2008 vs. 2007
       
Delivery revenues (net of CTC/ITC amortization, interest expense on transition bonds and ancillary charges) $(16) $32 
Other operation and maintenance  3   (8)
Other income - net (a)  (2)  (10)
Interest expense  (12)  1 
Other  2   (3)
Special items  (9)  1 
  $(34) $13 
  2012 vs. 2011 2011 vs. 2010
       
Pennsylvania Gross Delivery Margins $ 19  $ 66 
Other operation and maintenance   (50)   4 
Depreciation   (14)   (10)
Taxes, other than income   (9)   4 
Other   1    1 
Income Taxes      (11)
Distributions on Preferred Securities   12    4 
Total $ (41) $ 58 

(a)·See "Statement of Income Analysis - Margins - Changes in Non-GAAP Financial Measures" for an explanation of Pennsylvania Gross Delivery Margins.

·  Includes interestHigher other operation and maintenance for 2012 compared with 2011, primarily due to $17 million in higher payroll-related costs due to less project costs being capitalized in 2012, higher support group costs of $11 million and $10 million for increased vegetation management.

·  Higher depreciation for 2012 compared with 2011 and 2011 compared with 2010 primarily due to PP&E additions.

·  Higher taxes, other than income from affiliate.for 2012 primarily due to a $10 million tax provision related to gross receipts tax.

·
Delivery revenues decreasedIncome taxes were flat in 20092012 compared with 2008,2011 primarily due to unfavorable economic conditions, including industrial customers scaling back on production and the unfavorable$22 million impact of weather on sales volumes.  See "Revenue Recognition" in Note 1 to the Financial Statements for information on a true-up of FERC formula-based transmission revenues.
Delivery revenues increased in 2008 compared with 2007,lower 2012 pre-tax income primarily due to a base rate increase effective January 1, 2008 and normal load growth.
·Other operation and maintenance expenses increased in 2008 compared with 2007, primarily due to insurance recovery of storm costs in 2007, higher vegetation management costs and higher regulatory asset amortization.
·Other income - net decreased in 2008 compared with 2007, primarily due to a decrease in interest income from affiliate resulting from a decrease in the average balance outstanding on a note receivable from an affiliate and a lower average floating interest rate.
·Interest expense increased in 2009 compared with 2008, primarily due to $400offset by $9 million of debt issuancesdepreciation not normalized and $9 million of income tax return adjustments, largely related to changes in October 2008 that prefunded a portion of August 2009 debt maturities.flow-through regulated tax depreciation.

The following after-tax amounts, which management considers special items, also impacted earnings.

  2009 2008 2007
             
Impairments $(1)        
Workforce reduction (a)  (5)     $(1)
Other            
Change in tax accounting method related to repairs (Note 5)  (3)        
Total $(9)     $(1)
Income taxes were higher in 2011 compared with 2010, due to the $26 million impact of higher 2011 pre-tax income, partially offset by a $14 million tax benefit related to changes in flow-through regulated tax depreciation.

(a)·See Note 12Lower distributions on preferred securities in 2012 compared to 2011 due to the Financial Statements for additional information related to the 2009 workforce reduction.preference stock redemption in June 2012.

2013 Outlook

PPL Electric'sElectric projects higher earnings beyond 2009in 2013 compared with 2012, due to higher distribution revenues from a distribution base rate increase effective January 1, 2013, and higher transmission margins, partially offset by higher depreciation.

Earnings in future periods are subject to various risks and uncertainties.  See "Forward-Looking Information," "Item 1. Business," "Item 1A. Risk Factors," the rest of this Item 7 and Note 14Notes 6 and 15 to the Financial Statements for a discussion of the risks, uncertainties and factors that may impact PPL Electric's future earnings.

2010 Outlook

Excluding special items, PPL Electric projects lower earnings in 2010 compared with 2009, as a net result of lower distribution revenues, primarily due to continued slow economic growth and weak customer demand; higher operation and maintenance expenses; offset by lower financing costs.

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In late March 2010, PPL Electric expects to file a request with the PUC seeking an increase in its distribution rates beginning in January 2011.

 
See Note 14 to the Financial Statements for a discussion of items that could impact future earnings, including Pennsylvania legislative and other regulatory activities.

Statement of Income Analysis --

Operating RevenuesPennsylvania Gross Delivery Margins

Retail ElectricNon-GAAP Financial Measure

The changesfollowing discussion includes financial information prepared in revenues from retail electric operations were attributable to:

  2009 vs. 2008 2008 vs. 2007
       
Delivery $(60) $17 
PLR  (20)  19 
Other  9   3 
  $(71) $39 

The decrease in retail electric revenues for 2009 comparedaccordance with 2008 was attributable to unfavorable economic conditions, including industrial customers scaling back on production.  In addition, weather had an unfavorable impact on sales volumes.  These decreases were partially offset by favorable price increases.  See "Revenue Recognition" in Note 1 to the Financial Statements for information on a true-up of FERC formula-based transmission revenues.

The increase in PLR revenue for 2008 compared with 2007 was attributable to normal load growth,GAAP, as well as a favorable price increase.  non-GAAP financial measure, "Pennsylvania Gross Delivery Margins."  "Pennsylvania Gross Delivery Margins" is a single financial performance measure of PPL Electric's Pennsylvania regulated 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," "Energy purchases from affiliate," "Other operation and maintenance," which is primarily Act 129 costs, and "Taxes, other than income" which is primarily gross receipts tax.  As a result, this measure represents the net revenues from PPL Electric's Pennsylvania regulated electric delivery operations.  This measure is 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.  PPL Electric believes that "Pennsylvania Gross Delivery Margins" provides another criterion to make investment decisions.  This performance measure is used, in conjunction with other information, internally by senior management to manage PPL Electric's operations and analyze actual results to budget.
Reconciliation of Non-GAAP Financial Measures

The increase in delivery revenuefollowing tables reconcile "Operating Income" to "Pennsylvania Gross Delivery Margins" as defined by PPL Electric for the same period wasended December 31.

      2012  2011 
      PA Gross       PA Gross      
      Delivery    Operating Delivery     Operating
      Margins Other (a) Income (b) Margins Other (a) Income (b)
                   
Operating Revenues                    
 Retail electric $ 1,760      $ 1,760  $ 1,881      $ 1,881 
 Electric revenue from affiliate   3        3    11        11 
   Total Operating Revenues   1,763        1,763    1,892        1,892 
                         
Operating Expenses                    
 Energy purchases   550        550    738        738 
 Energy purchases from affiliate   78        78    26        26 
 Other operation and                    
  maintenance   104  $ 472     576    108  $ 422     530 
 Depreciation      160     160       146     146 
 Taxes, other than income   91    14     105    99    5     104 
   Total Operating Expenses   823    646     1,469    971    573     1,544 
Total $ 940  $ (646)  $ 294  $ 921  $ (573)  $ 348 

      2010   
      PA Gross              
      Delivery    Operating        
      Margins Other (a) Income (b)      
                   
Operating Revenues                    
 Retail electric $ 2,448      $ 2,448           
 Electric revenue from affiliate   7        7           
   Total Operating Revenues   2,455        2,455           
                         
Operating Expenses                    
 Energy purchases   1,075        1,075           
 Energy purchases from affiliate   320        320           
 Other operation and                    
  maintenance   76  $ 426     502           
 Amortization of recoverable                    
 Depreciation      136     136           
 Taxes, other than income   129    9     138           
   Total Operating Expenses   1,600    571     2,171           
Total $ 855  $ (571)  $ 284           

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

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Changes in Non-GAAP Financial Measures

The following table shows PPL Electric's non-GAAP financial measure, "Pennsylvania Gross Delivery Margins" for the periods ended December 31, as well as the change between periods.  The factors that gave rise to the change are described below the table.

   2012  2011  Change 2011  2010  Change
                    
PA Gross Delivery Margins by Component                  
 Distribution $ 730  $ 741  $ (11) $ 741  $ 679  $ 62 
 Transmission   210    180    30    180    176    4 
 Total $ 940  $ 921  $ 19  $ 921  $ 855  $ 66 

Distribution

Margins decreased in 2012 compared with 2011, primarily due to a base$14 million unfavorable effect of mild weather early in 2012 and lower revenue applicable to certain energy-related costs of $3 million due to fewer PLR customers in 2012, partially offset by a $7 million charge recorded in 2011 to reduce a portion of the transmission service charge regulatory asset associated with a 2005 undercollection that was not included in any subsequent rate increasereconciliations filed with the PUC.

Margins increased in 2011 compared with 2010, largely due to the PPL Electric distribution rate case which increased rates by approximately 1.6% effective January 1, 2008, and normal load growth.  These increases were partially2011, resulting in improved residential distribution margins of $68 million.  Additionally, residential volume variances increased margins by an additional $4 million in 2011, compared with 2010, offset by the unfavorable impactweather of weather on$3 million for residential customers in 2011 compared with 2010.  Lastly, lower demand charges and increased efficiency as a result of Act 129 programs resulted in a $5 million decrease in margins for commercial sales in 2008.and industrial customers.

Wholesale Electric to AffiliateTransmission

PPL Electric has a contract to sell to PPL EnergyPlus the electricity that PPL Electric purchases under contracts with NUGs.  The decrease of $38 millionMargins increased in wholesale electric to affiliate in 20092012 compared with 2008 was2011, primarily due to the expiration of NUG contractsincreased investment in 2008 and 2009.  The final NUG contract will expire in 2014.

The decrease of $48 million in wholesale electric to affiliate in 2008 compared with 2007 was primarily due to the expiration of a NUG contract at the end of 2007plant and the expirationrecovery of two NUG contracts during 2008.  The decrease was partially offset by higher prices on certain NUG contracts.

Energy Purchases

Energy purchases decreased by $49 million for 2009 compared with 2008, primarily due toadditional costs through the expiration of NUG contracts in 2008 and 2009, as well as lower ancillary charges, which are primarily the result of lower pricing.  The final NUG contract will expire in 2014.

Energy purchases decreased by $43 million for 2008 compared with 2007, primarily due to the expiration of a NUG contract at the end of 2007 and two NUG contracts in 2008, partially offset by higher prices on certain NUG contracts.

Energy Purchases from Affiliate

Energy purchases from affiliate decreased by $20 million in 2009 compared with 2008.  The decrease was attributable to unfavorable weather and the impact of economic conditions, primarily on industrial customers' load, partially offset by higher prices for energy purchased under the power supply contracts with PPL EnergyPlus that support the PLR load.

Energy purchases from affiliate increased by $16 million in 2008 compared with 2007.  The increase was primarily due to higher prices for energy purchased under the power supply contracts with PPL EnergyPlus that support the PLR load, as well as higher PLR load.FERC formula-based rates.

Other Operation and Maintenance

The increasesincrease (decrease) in other operation and maintenance expense werewas due to:

  2009 vs. 2008 2008 vs. 2007
         
Workforce reduction (Note 12) $9     
Uncollectible accounts  7  $1 
Employee benefits  5   (6)
Insurance recovery of storm costs  3   5 
Payroll-related costs  3   (3)
Regulatory asset amortization      4 
PUC-reportable storm costs  (11)  (4)
Vegetation management costs  (5)  5 
Contractor-related expenses  (2)  1 
Customer education programs  (2)    
Other      5 
  $7  $8 
  2012 vs. 2011 2011 vs. 2010
       
Act 129 costs incurred (a) $ (6) $ 26 
Vegetation management (b)   10    (8)
Payroll-related costs (c)   17    4 
Allocation of certain corporate support group costs   11    3 
PUC-reportable storm costs, net of insurance recovery   7    
Uncollectible accounts   1    7 
Other   6    (4)
Total $ 46  $ 28 

Amortization of Recoverable Transition Costs
(a)Relates to costs associated with PPL Electric's PUC-approved energy efficiency and conservation plan.  These costs are recovered in customer rates.  There were initially 15 Act 129 programs which began in 2010 and continued to ramp up in 2011.  Some of the energy efficiency programs were reduced or closed in 2012 resulting in lower operation and maintenance expense.

(b)PPL Electric incurred more expense in 2010 and 2012 compared to 2011 due to increased vegetation management activities related to transmission lines to comply with federal reliability requirements as well as increased vegetation management for the distribution system in 2012 in an effort to maintain and increase system reliability.
Amortization of recoverable transition costs increased by $11 million in 2009 compared with 2008 and decreased by $17 million in 2008 compared with 2007.  The amortization of recoverable transition costs was based on a PUC amortization schedule, adjusted for ITC and CTC recoveries in customer rates and related expenses.  Since the amortization substantially matches the revenue recorded based on recovery in customer rates, there is minimal impact on earnings.  At the end of 2009, PPL Electric's recoverable transition costs have been fully amortized.
(c)Higher payroll costs of $17 million in 2012 compared to 2011 due to less project costs being capitalized.

Taxes, Other Than Income

Taxes, other than income increased by $1 million in 2012 compared with 2011.  The increase was primarily a result of the net effect of the fully amortized PURTA refund to customers of $10 million in 2011, partially offset by a decrease in gross receipts tax of $7 million in 2012.
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Taxes, other than income decreased by $9$34 million in 20092011 compared with 2008.  The2010.  This decrease was primarily due to a $12$21 million decrease inof lower Pennsylvania gross receipts tax expense which reflectson lower retail electricity revenue as customers continue to select alternative suppliers in 2011.  The decrease was also impacted by the amortization of a decrease in the tax rate in 2009.  Gross receipts tax is passed through to customers.

Taxes, other than income increased by $3PURTA refund of $10 million in 2008 compared with 2007.  The increase was primarily due to a $6 million increase in2011.  Pennsylvania gross receipts tax expense, which reflects an increaseand the PURTA refund are included in the tax rate in 2008."Pennsylvania Gross Delivery Margins."

Other Income - netDepreciation

See Note 16 to the Financial Statements for details of other income.

Interest Income from Affiliate

Interest income from affiliate decreasedDepreciation increased by $5$14 million in 20092012 compared with 2008,2011 and decreased by $10 million in 20082011 compared with 2007.  These decreases were the result of a reduced average balance outstanding on a note receivable from an affiliate and a lower average rate on this note2010, primarily due to the floating interest rate.PP&E additions as part of ongoing investments to replace aging infrastructure.

Interest ExpenseFinancing Costs

The changesincrease (decrease) in interest expense,financing costs, which includes "Interest Expense" and, "Interest Expense with Affiliate,Affiliate" and "Distributions on Preferred Securities," werewas due to:

 2009 vs. 2008 2008 vs. 2007 2012 vs. 2011 2011 vs. 2010
         
Long-term debt interest expense (a) $24 $7  $ 1  $ (3)
Repayment of transition bonds (13) (22)
Interest on PLR contract collateral (Note 15) (8) (7)
Distributions on preferred securities (a)  (12)  (4)
Amortization of debt issuance costs (b)  1   5 
Other  4   (2)   (1)   (3)
 $7  $(24)
Total $ (11) $ (5)

(a)Decreases for both periods are due to the redemption of preference stock in 2012 and preferred stock in 2010.
(b)The increases wereincrease in 2011 compared with 2010 was primarily due to $400 millionamortization of loss on reacquired debt issuancesassociated with the redemption of senior    secured bonds in October 2008 that prefunded a portion of August 2009 debt maturities.2011.

Income Taxes

The changesincrease (decrease) in income taxes werewas due to:

 2009 vs. 2008 2008 vs. 2007 2012 vs. 2011 2011 vs. 2010
         
Higher (lower) pre-tax book income $(19) $16  $ (22) $ 26 
Tax return adjustments (a) (2) 7 
Tax reserve adjustments (2) (1)
Federal and state tax reserve adjustments (a)  1   3 
Federal and state tax return adjustments (b)  11   (3)
Depreciation not normalized (c)  9   (14)
Other      (3)   1    (1)
 $(23) $19 
Total $  $ 11 

(a)During 2009,In July 2010, the U.S. Tax Court ruled in PPL Electric's favor in a dispute with the IRS, concluding that street lighting assets are depreciable for tax purposes over seven years.  As a result, PPL Electric received consent from the IRSrecorded a $7 million tax benefit to changefederal and state income tax reserves and related deferred income taxes during 2010.

(b)PPL Electric changed its method of accounting for certainrepair expenditures for tax purposes effective for its 2008 tax year.  In August, 2011, the IRS issued guidance regarding the use and evaluation of statistical samples and sampling estimates for network assets.  The IRS guidance provided a safe harbor method of determining whether the repair expenditures for electric transmission and distribution property can be currently deducted for tax purposes.  PPL deductedElectric adopted the resulting IRC Sec. 481 adjustment onsafe harbor method with the filing of its 20082011 federal income tax return and recorded a $3$5 million adjustment to federal and state income tax expense which resultsresulting from the reversal of prior years' state income tax benefits related to regulated depreciation.

During 2011, PPL Electric recorded a $5 million federal and state income tax benefit as a result of filing its 2010 federal and state income tax returns.  The tax benefit primarily related to the flow-through impact of Pennsylvania regulated 100% bonus tax depreciation.
(c)During 2011, the Pennsylvania Department of Revenue issued interpretive guidance on the treatment of bonus depreciation for Pennsylvania income tax purposes.  The guidance allows 100% bonus depreciation for qualifying assets in the same year bonus depreciation is allowed for federal income tax purposes.  The 100% Pennsylvania bonus depreciation deduction created a current state income tax benefit for the flow-through impact of Pennsylvania regulated state tax depreciation.  The federal provision for 100% bonus depreciation generally applies to property placed in service before January 1, 2012.  The placed in-service deadline is extended to January 1, 2013 for property that has a cost in excess of $1 million, has a production period longer that one year and has a tax life of at least ten years.  The PPL Electric's tax deduction for 100% bonus depreciation was significantly lower in 2012 than in 2011.

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

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Financial Condition

Liquidity and Capital Resources

PPL Electric continues to focus on maintaining a strong credit profile and liquidity position.  PPL Electric expects to continue to have adequate liquidity available through operating cash flows, cash and cash equivalents, credit facilities and its credit facilities.commercial paper issuances.  Additionally, subject to market conditions, PPL Electric currently does not planplans to access commercial paper markets orissue long-term debt and equity capital markets in 2010.2013.

PPL Electric's cash flows from operations and access to cost-effective bank and capital markets are subject to risks and uncertainties including, but not limited to:

·unusual or extreme weather that may damage PPL Electric's transmission and distribution facilities or affect energy sales to customers;
·the ability to recover and the timeliness and adequacy of recovery of costs associated with regulated utility businesses;
·any adverse outcome of legal proceedings and investigations with respect to PPL Electric's current and past business activities;
·deterioration in the financial markets that could make obtaining new sources of bank and capital markets funding more difficult and more costly; and
·a downgrade in PPL Electric's credit ratings that could adversely affect its ability to access capital and increase the cost of credit facilities and any new debt.

See "Item 1A. Risk Factors" for further discussion of risks and uncertainties affectingthat could affect PPL Electric's cash flows.

At December 31, PPL Electric had the following:

  2009 2008 2007
             
Cash and cash equivalents $485  $483  $33 
Short-term debt     $95  $41 
  2012  2011  2010 
          
Cash and cash equivalents $ 140  $ 320  $ 204 

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

  2009 2008 2007
             
Net Cash Provided by Operating Activities $294  $648  $568 
Net Cash Provided by (Used in) Investing Activities  6   (226)  (239)
Net Cash Provided by (Used in) Financing Activities  (298)  28   (446)
Net Increase (Decrease) in Cash and Cash Equivalents $2  $450  $(117)
  2012  2011  2010 
          
Net cash provided by (used in) operating activities $ 389  $ 420  $ 212 
Net cash provided by (used in) investing activities   (613)   (477)   (403)
Net cash provided by (used in) financing activities   44    173    (90)
Net Increase (Decrease) in Cash and Cash Equivalents $ (180) $ 116  $ (281)

Operating Activities

Net cash provided by operating activities decreased by 55%7%, or $354$31 million, in 20092012 compared with 2008,2011, primarily asdue to changes in working capital of $82 million partially offset by a resultdecrease in defined benefit plan contributions of the repayment$54 million.  Changes in working capital included $108 million from regulatory assets and liabilities, net and $56 million from prepayments, partially offset by PPL Electric of $300$95 million in cash collateral related to the long-term PLR energy supply agreements with PPL Energy Supply, which expired at the end of 2009.  The decrease also reflects the impact of lower delivery revenues and higher payments of interest and income taxes.from accounts payable.

Net cash provided by operating activities increased by 14%98%, or $80$208 million, in 20082011 compared with 2007,2010, primarily asdue to changes in working capital of $322 million (including lower gross receipts tax payments, a result of increased revenues, which was due primarily to a base rate increase effective January 1, 2008federal income tax refund and normal load growth, as well as less interest incurred on long-term debt, as a resultchanges in over/under collections of the repayment of transition bonds during 2007generation supply and 2008.  The increases to cash provided by operating activities resulting from these itemstransmission service charges).  These changes were partially offset by increased energy purchases, primarilyan increase in defined benefit plan contributions of $58 million and $25 million related to storm costs incurred in 2011 and recorded as a result of higher prices for energy purchased from PPL EnergyPlus under the PLR contracts and higher PLR load, as well as an insurance recovery of storm costs in 2007.

PPL Electric expects be able to achieve relatively stable cash flows from operations through the support of (i) contracts it has entered into to procure the 2010 and a portion of 2011 PLR electricity supply it expects to need for residential, small commercial and small industrial customers who do not choose an alternative supplier and (ii) purchasing receivables from alternative suppliers for those customers who purchase generation from other suppliers.  See Note 14 to the Financial Statements for information on the energy purchase contracts and "Customer Choice - End of Transition Period" in "Overview" in this Item 7 for a discussion of the ability of customers to purchase generation supply from other providers and PPL Electric's purchase of the related receivables.
long-term regulatory asset.

Investing Activities

The primary use of cash in investing activities is capital expenditures.  See "Forecasted Uses of Cash" for detail regarding projected capital expenditures in 2009 and projected expenditures for the years 20102013 through 2012.

Net cash provided by investing activities was $6 million in 2009 compared with cash used in investing activities of $226 million in 2008.  The change from 2008 to 2009 primarily reflects the receipt of $300 million from an affiliate as repayment of a demand loan.2017.

Net cash used in investing activities remained relatively stablewas $613 million in 20082012 compared with 2007, but there were significant changes in certain components.  In 2008, there was a net decrease of $69$477 million in restricted cash and cash equivalents compared2011.  The change from 2011 to a net2012 primarily reflects an increase of $8$143 million in 2007.  Capitalcapital expenditures decreased $18 million in 2008 compared with 2007.  In 2008, PPL Electric loaned $23 million to an affiliate compared with receiving $23 million in 2007 from an affiliate as partial repayment of a demand loan.  Additionally, PPL Electric received net proceeds of $25 million from purchases and sales of investments in 2007 compared with none in 2008.

Financing Activities2012.

Net cash used in financinginvesting activities was $298$477 million in 20092011 compared with net cash provided by financing activities of $28$403 million in 2008.2010.  The change from 20082010 to 20092011 primarily reflects less issuances and increased retirementsan increase of long-term debt, contributions received from PPL, increased common stock dividends to PPL and the repayment of short-term borrowings in 2009.  PPL Electric had net debt retirements of $392$80 million in 2009 compared with net debt issuances of $148 millioncapital expenditures in 2008, received $400 million of contributions from PPL in 2009 and paid $176 million more of common stock dividends to PPL in 2009 compared to 2008.2011.

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Financing Activities

Net cash provided by financing activities was $28$44 million in 20082012 compared with $173 million in 2011.  The change from 2011 to 2012 primarily reflects the $250 million preference stock redemption in 2012, offset by a $62 million increase in net debt issuances and a $50 million increase in contributions from PPL.

Net cash provided by financing activities was $173 million in 2011 compared with net cash used in financing activities of $446$90 million in 2007.2010.  The change from 20072010 to 20082011 primarily reflects increased issuances and less retirements$187 million of long-term debt, less common stock dividends to PPL and increased short-term borrowings in 2008.  PPL Electric had net debt issuances in 2011 and $54 million of $148 millionpreferred stock redemptions in 2008 compared to net debt retirements of $306 million in 2007, and it paid $21 million less of common stock dividends to PPL in 2008 compared to 2007.

See "Forecasted Sources of Cash" for a discussion of PPL Electric's plans to issue debt and equity securities, as well as a discussion of credit facility capacity available to PPL Electric.  Also see "Forecasted Uses of Cash" for a discussion of PPL Electric's plans to pay dividends on its common and preferred securities, as well as maturities of PPL Electric's long-term debt.2010.

PPL Electric's debt and equity financing activity in 20092012 was:

  Issuance Retirements
         
Senior Secured Bonds (a) $298  $(586)
Variable Rate Pollution Control Facilities Note      (9)
Short-term debt      (95)
Total $298  $(690)
Net decrease     $(392)

(a)Issuance is net of pricing discount.  Retirements exclude a $9 million premium paid in connection with the December 2009 redemption of PPL Electric's 4.30% Senior Secured Bonds due 2013.
    Issuance  Retirements
        
Preference Stock    $ (250)
First Mortgage Bonds, net of a discount or underwriting fees  249    
 Total $ 249  $ (250)
Net decrease    $ (1)

See Note 7 to the Financial Statements for more detailed information regarding PPL Electric's financing activities in 2009.2012.

Forecasted Sources of Cash

PPL Electric expects to continue to have significantsufficient sources of cashliquidity available in the near term, including variouscash flows from operations, credit facilities, and a commercial paper program.  PPL Electric currently does not plan to access commercial paper markets or debtissuances and equity capital markets in 2010, but may decide to do so, subject to market conditions, to enhance its liquidity.the issuance of long-term debt.

Credit Facilities

At December 31, 2009,2012, PPL Electric's total committed borrowing capacity under its credit facilities and the use of this borrowing capacity were:

  Committed Capacity Borrowed Letters of Credit Issued (d) 
Unused Capacity
                 
5-year Syndicated Credit Facility (a) $190      $6  $184 
Asset-backed Credit Facility (b)  150           150 
Total PPL Electric Credit Facilities (c) $340      $6  $334 
         Letters of   
         Credit Issued   
       and  
   Committed   Commercial Unused
   Capacity Borrowed Paper Backstop Capacity
          
Syndicated Credit Facility (a) $ 300     $ 1  $ 299 
Asset-backed Credit Facility (b)   100      n/a   100 
Total PPL Electric Credit Facilities $ 400     $ 1  $ 399 

(a)The commitments under this credit facility are provided by a diverse bank group, with no one bank and its affiliates providing an aggregate commitment of more than 18% of the total committed capacity.
Borrowings under this credit facility generally bear interest at LIBOR-based rates plus a spread, depending upon the company's public debt rating.  PPL Electric also has the capability to request the lenders to issue up to $190 million of letters of credit under this facility, which issuances reduce available borrowing capacity.  Under certain conditions, PPL Electric may request that the facility's capacity be increased by up to $100 million.
This credit facilityElectric's Syndicated Credit Facility contains a financial covenant requiring PPL Electric's debt to total capitalization not to not exceed 70%.  At December 31, 2009 and 2008, PPL Electric's consolidated debt to total capitalization percentages,, as calculated in accordance with itsthe credit facility, were 44% and 53%.  This credit facility also contains standard representations and warranties that must be made for PPL Electric to borrow under it.other customary covenants.

The commitments under this credit facility are provided by a diverse bank group, with no one bank and its affiliates providing an aggregate commitment of more than 5% of the total committed capacity.
(b)This credit facility relates to an asset-backed commercial paper program through which PPL Electric obtains financing by selling and contributing its eligible accounts receivable and unbilled revenuesrevenue to a special purpose, wholly owned subsidiary on an ongoing basis.  The subsidiary pledges these assets to secure loans of up to an aggregate of $150$100 million from a commercial paper conduit sponsored by a financial institution.  At December 31, 2009,2012, based on accounts receivable and unbilled revenue pledged, $150 million wasthe amount available for borrowing.
(c)The committed capacity expires as follows:  $150 million in 2010 and $190 million in 2012.  PPL Electric intends to renew its existing $150 million asset-backed creditborrowing under this facility in 2010 in order to maintain its current total committed capacity level.
(d)PPL Electric has a reimbursement obligation to the extent any letters of credit are drawn upon.was $100 million.

In addition to the financial covenantcovenants noted in the table above, the credit agreements governing the credit facilities contain financial and various other covenants.  Failure to comply with the covenants after applicable grace periods could result in acceleration of repayment of borrowings and/or termination of the agreements.  PPL Electric monitors compliance with the covenants on a regular basis.  At December 31, 2009,2012, PPL Electric was in material compliance with these covenants.  At this time, PPL Electric believes that these covenants and other borrowing conditions will not limit access to these funding sources.

See Note 7 to the Financial Statements for further discussion of PPL Electric's credit facilities.

Commercial Paper

PPL Electric maintains a $300 million commercial paper program for up to $200 million to provide an additional financing source to fund its short-term liquidity needs, if and when necessary.  Commercial paper issuances are currently supported by PPL Electric's five-year syndicated credit facility based on available capacity.

As noted below under "Credit Ratings,"Syndicated Credit Facility.  PPL Electric had no commercial paper for PPL Electric is rated P-2, A-2 and F2 by Moody's, S&P and Fitch.  Market conditions to issue commercial paper with these ratings have strengthened significantly since 2008, when the downturn in the financial markets created extremely limited liquidity resulting in high borrowing rates.  PPL Electric did not issue any commercial paper during 2009.  Based on its current cash position and anticipated cash flows, PPL Electric currently does not plan to issue any commercial paper during 2010, but it may do so from time to time, subject to market conditions, to facilitate short-term cash flow needs.outstanding at December 31, 2012.


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Contributions from PPL

From time to time PPL may make capital contributions to PPL Electric.  PPL Electric may use these contributions for general corporate purposes.

Long-TermLong-term Debt and Equity Securities

PPL Electric currently does not planplans to issue any debt or equity securitiesincur, subject to market conditions, up to $400 million of long-term indebtedness in 2010.2013, the proceeds of which will be used to fund capital expenditures and for other general corporate purposes.

The Economic Stimulus Package

In April 2010, PPL Electric entered into an agreement with the DOE, in which the agency is to provide funding for one-half of a $38 million smart grid project.  The project included the deployment of smart grid technology to strengthen reliability, save energy and improve electric service for 60,000 Harrisburg, Pennsylvania area customers.  It also provides benefits beyond the Harrisburg region, helping to speed power restoration across PPL Electric's 29-county service territory.  Work on the grant project is complete as of December 31, 2012.

Forecasted Uses of Cash

In addition to expenditures required for normal operating activities, such as purchased power, payroll, and taxes, PPL Electric currently expects to incur future cash outflows for capital expenditures, various contractual obligations, payment of dividends on its common and preferred securitiesstock and possibly the purchase or redemption of a portion of its debt securities.

Capital Expenditures

The table below shows PPL Electric's actual spending for the year 2009 and current capital expenditure projections for the years 20102013 through 2012.2017.

  Actual Projected
  2009 2010 2011 2012
Construction expenditures (a) (b)            
Transmission and distribution facilities $264 $542 $739 $605
Other  34  47  38  39
Total Capital Expenditures $298 $589 $777 $644
    Projected
    2013  2014  2015  2016  2017 
Construction expenditures (a) (b)               
 Distribution facilities $ 352  $ 321  $ 309  $ 294  $ 297 
 Transmission facilities   616    532    399    357    313 
 Total Capital Expenditures $ 968  $ 853  $ 708  $ 651  $ 610 

(a)Construction expenditures include AFUDC, which is expected to betotal approximately $34$54 million for the years 20102013 through 2012.2017.
(b)Includes expenditures for intangible assets.

PPL Electric's capital expenditure projections for the years 20102013 through 20122017 total approximately $2.0$3.8 billion.  Capital expenditure plans are revised periodically to reflect changes in operational, market and regulatory conditions.  The table includes projected costs for the asset optimization program focused on the replacement of aging transmission and distribution assets, and the PJM-approved regional transmission line expansion project.  See Note 8 to the Financial Statements for additional information.

PPL Electric plans to fund its capital expenditures in 20102013 with cash on handfrom operations, equity contributions from PPL, and cashproceeds from operations.the issuance of debt securities.

Contractual Obligations

PPL Electric has assumed various financial obligations and commitments in the ordinary course of conducting its business.  At December 31, 2009,2012, the estimated contractual cash obligations of PPL Electric were:

 Total Less Than 1 Year 1-3 Years 4-5 Years After 5 Years   Total 2013  2014 - 2015 2016 - 2017 After 2017
                       
Long-term Debt (a) $1,474     $410 $1,064 Long-term Debt (a) $ 1,974    $ 110    $ 1,864 
Interest on Long-term Debt (b) 1,454 $89 $173 147 1,045 Interest on Long-term Debt (b)  1,711  $ 91   181  $ 171   1,268 
Purchase Obligations (c) 3,142 2,599 537 6   Purchase Obligations (c)  357   111   103   53   90 
Other Long-term Liabilities Reflected on the Balance Sheets under GAAP (d)                    
Other Long-term LiabilitiesOther Long-term Liabilities          
Reflected on the Balance          
Sheet under GAAP (d) (e)   88    88          
Total Contractual Cash Obligations $6,070  $2,688  $710  $563  $2,109 Total Contractual Cash Obligations $ 4,130  $ 290  $ 394  $ 224  $ 3,222 

(a)Reflects principal maturities only based on legalstated maturity dates.  See Note 7 to the Financial Statements for a discussion of variable-rate remarketable bonds issued by the PEDFA on behalf of PPL Electric.  PPL Electric does not have any capital or operating lease obligations.
(b)Assumes interest payments through stated maturity.  The payments herein are subject to change, as payments for variable-rate debt have been estimated.

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(c)The payments reflected hereinamounts include agreements to purchase goods or services that are subjectenforceable and legally binding and specify all significant terms, including: fixed or minimum quantities to change, asbe purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction.  Primarily includes PPL Electric's purchase obligation reflected is an estimate basedobligations of electricity.  Open purchase orders that are provided on projected obligated quantities and projected pricing under the contract.  Purchase orders made in the ordinary course of businessdemand with no firm commitment are excluded from the amounts presented.
(d)The amounts represent contributions made or committed to be made for 2013 for PPL's U.S. pension plans.  See Note 13 to the Financial Statements for a discussion of expected contributions.
(e)At December 31, 2009,2012, total unrecognized tax benefits of $74$26 million were excluded from this table as PPL Electric cannot reasonably estimate the amount and period of future payments.  See Note 5 to the Financial Statements for additional information.

Dividends

From time to time, as determined by its Board of Directors, PPL Electric pays dividends on its common stock to its parent, PPL.

As discussed in Note 7 to the Financial Statements, PPL Electric may not pay dividends on its common stock, except in certain circumstances, unless full dividends have been paid on the 6.25% Series Preference Stock for the then-current dividend period.  PPL Electric does not, at this time, expect that such limitation would significantly impact its ability to declare dividends.

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

Purchase or Redemption of Debt Securities

PPL Electric will continue to evaluate purchasing or redeemingits outstanding debt securities and may decide to take actionpurchase or redeem these securities depending upon prevailing market conditions and available cash.

Credit RatingsRating Agency Actions

Moody's, S&P and Fitch periodically review the credit ratings on the debt and preferred securities of PPL Electric.  Based on their respective independent reviews, the rating agencies may make certain ratings revisions or ratings affirmations.

A credit rating reflects an assessment by the rating agency of the creditworthiness associated with an issuer and particular securities that it issues.  The credit ratings of PPL Electric are based on information provided by PPL Electric and other sources.  The ratings of Moody's, S&P and Fitch are not a recommendation to buy, sell or hold any securities of PPL Electric.  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.  PPL Electric's credit ratings affect its liquidity, access to capital markets and cost of borrowing under its credit facilities.

The following table sets forth PPL Electric's security credit ratings as of December 31, 2012.

Senior SecuredCommercial Paper
IssuerMoody'sS&PFitchMoody'sS&PFitch
PPL ElectricA3A-A-P-2A-2F-2

A downgrade in PPL Electric's credit ratings could result in higher borrowing costs and reduced access to capital markets.  PPL Electric does not have credit rating triggers that would result in the reduction of access to capital markets or the acceleration of maturity dates of outstanding debt.

The following table summarizesIn addition to the credit ratings ofnoted above, the rating agencies took the following actions related to PPL Electric at December 31, 2009:

Moody'sS&P
Fitch (a)
PPL Electric (b)
Senior Unsecured/Issuer RatingBaa1A-BBB
First Mortgage Bonds/Senior Secured BondsA3A-A-
Commercial PaperP-2A-2F2
Preferred StockBaa3BBBBBB
Preference StockBaa3BBBBBB
OutlookNegativeNegativeSTABLE

(a)Issuer Rating for Fitch is an "Issuer Default Rating."
(b)Excludes Pollution Control Revenue Bonds issued by the LCIDA and the PEDFA on behalf of PPL Electric, of which the LCIDA bonds are insured and may be rated on the basis of relevant factors, including the insurer's ratings.
in 2012.

In January 2009, S&P completedAugust 2012, Fitch assigned a review of PPL Electric, upon which it revised itsrating and outlook to negative from stable and affirmed the A- issuer rating of PPL Electric.  S&P stated in its press release that the revision in its outlook reflects the linkage with PPL, whose outlook was also revised to negative from stable, along with their expectation that PPL Electric's financial metrics could weaken beginning in 2010.$250 million First Mortgage Bonds.

In May 2009,August 2012, S&P and Moody's completedassigned a review ofrating to PPL Electric.  As a result of that review, Moody's revised its outlook for PPL Electric to negative from stable.  Moody's stated in its press release thatElectric's $250 million First Mortgage Bonds.

In December 2012, Fitch affirmed the revision inissuer default rating, individual security rating and the outlook for PPL Electric reflects Moody's expectation that PPL Electric's financial metrics will deteriorate beyond 2009 and considers the potential for additional pressure on cash flows.Electric.

In October 2009, Fitch completed a review of PPL Electric, upon which it affirmed all ratings of PPL Electric.  
In January 2010, as a result of implementing its recently revised guidelines for rating preferred stock and hybrid securities, Fitch lowered the ratings of PPL Electric's preferred stock and preference stock to BBB- from BBB.  Fitch stated in its press release that the new guidelines, which apply to instruments issued by companies in all sectors, typically resulted in downgrades of one notch for many instruments that provide for the ability to defer interest or dividend payments.  Fitch stated that it has no reason to believe that deferral will be activated.

Off-Balance Sheet Arrangements

PPL Electric has entered into certain agreements that may contingently require payment to a guaranteed or indemnified party.  See Note 1415 to the Financial Statements for a discussion of these agreements.

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Risk Management

Market Risk

Commodity Price and Volumetric Risk - PLR Contracts

PPL Electric is exposed to market price and volumetric risks from its obligation as PLR.  The PUC has an obligation to act asapproved a PLR.  This role has the potential to exposecost recovery mechanism that allows PPL Electric to electric generationpass through to customers the cost associated with fulfilling its PLR obligation.  This cost recovery mechanism substantially eliminates PPL Electric's exposure to market price and volumetric risk.  Through 2009,  PPL Electric and PPL EnergyPlus had poweralso mitigates its exposure to volumetric risk by entering into full-requirement energy supply agreements under which PPL EnergyPlus sold PPL Electric (under a predetermined pricing arrangement) energy and capacity to fulfill thiscontracts for the majority of its PLR obligation.  As a result, PPL Electric had shifted these risks to PPL EnergyPlus.  For its 2010obligations.  These supply contracts transfer the volumetric risk associated with the PLR obligation PPL Electric has entered into power purchase agreements with several counterparties, which include fixed prices that shift these risks to the counterparties.  PPL Electric is in the process of procuring such supply for the period January 2011 through May 2013.  In the event a supplier defaults on its obligation, PPL Electric would be required to seek replacement power in the market.  All incremental costs incurred by PPL Electric would be recoverable from customers in future rates.  See "Overview" in this Item 7 and Note 14 to the Financial Statements for information on the PUC-approved procurement plan and other ongoing Pennsylvania regulatory and legislative activities.energy suppliers.

Interest Rate Risk

PPL Electric has issuedissues debt to finance its operations, which exposes it to interest rate risk.  At December 31, 2012 and 2011, PPL Electric'sElectric had no potential annual exposure to increased interest expense, based on a 10% increaseits current debt portfolio.  PPL Electric is also exposed to changes in interest rates, was not significant at December 31, 2009 and 2008.the fair value of its debt portfolio.  PPL Electric estimated that a 10% decrease in interest rates at December 31, 20092012 would increase the fair value of its debt portfolio by $69$93 million, compared with $50$94 million at December 31, 2008.
2011.

Credit Risk

Credit risk is the risk that PPL Electric would incur a loss as a result of nonperformance by counterparties of their contractual obligations.  PPL Electric requires that counterparties maintain specified credit ratings and requires other assurances in the form of credit support or collateral in certain circumstances in order to limit counterparty credit risk.  However, PPL Electric has concentrations of suppliers, financial institutions and customers.  These concentrations may impact PPL Electric's overall exposure to credit risk, positively or negatively, as counterparties may be similarly affected by changes in economic, regulatory or other conditions.

In 2007,2009, the PUC approved PPL Electric's post-rate cap plan to procure default electricity supply for retail customers who do not choose an alternative competitive supplier in 2010.  From 2007 through 2009, PPL Electric conducted six competitive solicitations to purchase electricity generation supply for these customers.

In October 2009, PPL Electric purchased 2010 supply for fixed-price default service to large commercial and large industrial customers who elect to take that service.  In November 2009, PPL Electric purchased supply to provide hourly default service to large commercial and industrial customers in 2010.

In June 2009, the PUC approved PPL Electric'sPLR procurement plan for the period January 2011 through May 2013.  The first twoTo date, PPL Electric has conducted all of 14its planned competitive solicitations occurred in 2009.solicitations.

Under the standard Supply Master Agreement (the Agreement) for the bidcompetitive solicitation process, PPL Electric requires all suppliers to post collateral if their credit exposure exceeds an established credit limit.  In the event a supplier defaults on its obligation, PPL Electric would be required to seek replacement power in the market.  All incremental costs incurred by PPL Electric would be recoverable from customers in future rates.  At December 31, 2009, all2012, most of the successful bidders under all of the solicitations had an investment grade credit rating from S&P, and were not required to post collateral under the Agreement.  A small portion of bidders were required to post collateral, which totaled less than $1 million, under the Agreement.  There is no instance under the Agreement in which PPL Electric is required to post collateral to its suppliers.

See "Overview" in this Item 7Notes 15, 16, 18 and Notes 14, 15, 17 and 1819 to the Financial Statements for additional information on the competitive solicitations, the Agreement, and credit concentration and credit risk.

Related Party Transactions

PPL Electric is not aware of any material ownership interests or operating responsibility by senior management of PPL Electric in outside partnerships, including leasing transactions with variable interest entities, or other entities doing business with PPL Electric.

For  See Note 16 to the Financial Statements for additional information on related party transactions, see Note 15 to the Financial Statements.
transactions.

Environmental Matters

Physical effects associated with climate change could include the impact of changes in weather patterns, such as storm frequency and intensity, and the resultant potential damage to PPL Electric's electricity transmission and distribution systems, as well as impacts on customers.  PPL Electric cannot currently predict whether its businesses will experience these potential climate change-related risks or estimate the potential cost of their related consequences.

See "Item 1. Business - Environmental Matters" and Note 1415 to the Financial Statements for a discussion of environmental matters.

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Competition

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

New Accounting Guidance

See Notes 1 and 2224 to the Financial Statements for a discussion of new accounting guidance adopted and pending adoption.

Application of Critical Accounting Policies

PPL Electric's financialFinancial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies.  The following accounting policies are particularly important to the financial condition or results of operations, of PPL Electric, and require estimates or other judgments of matters inherently uncertain.  Changes in the estimates or other judgments included within these accounting policies could result in a significant change to the information presented in the Financial Statements (these accounting policies are also discussed in Note 1 to the Financial Statements).  PPL's seniorSenior management has reviewed these critical accounting policies, the following disclosures regarding their application and the estimates and assumptions regarding them, with itsPPL's Audit Committee. In addition, PPL's senior management has reviewed the following disclosures regarding the application of these critical accounting policies with the Audit Committee.

Effective January 1, 2009, PPL Electric fully applied accounting guidance that provides a framework for measuring fair value.  The fair value measurement concepts provided by this guidance are used within its financial statements where applicable.  See Notes 1 and 17 to the Financial Statements for additional information regarding fair value measurements.

1)    Defined Benefits

PPL Electric participates in a qualified funded defined benefit pension plan, an unfunded non-qualified defined benefit plan and a funded other postretirement benefit plan, sponsored by other PPL subsidiaries and administered through PPL Services.  PPL Electric is allocated a significant portion of the liability and net periodic defined benefit pension and other postretirement costs of the plans sponsored by other PPL Servicessubsidiaries based on participation in those plans.  PPL Electric records an asset or liability to recognize the funded status of all defined benefit plans with an offsetting entry to regulatory assets.  Consequently, the funded status of all defined benefit plans is fully recognized on the Balance Sheets.  See Note 1213 to the Financial Statements for additional information about the plans and the accounting for defined benefits.

PPL Services makes certain assumptions regarding the valuation of benefit obligations and the performance of plan assets.  When accounting for defined benefits, delayed recognition in earnings of differences between actual results and expected or estimated results is a guiding principle.  Annual net periodic defined benefit costs are recorded in current earnings based on estimated results.  Any differences between actual and estimated results are recorded in regulatory assets.assets for amounts that are expected to be recovered through regulated customer rates.  The amount in regulatory assets is amortized to income over future periods.  The delayed recognition allows for a smoothed recognition of costs over the working lives of the employees who benefit under the plans.  The primary assumptions are:

·
Discount Rate - The discount rate is used in calculating the present value of benefits, which is based on projections of benefit payments to be made in the future. The objective in selecting the discount rate is to measure the single amount that, if invested at the measurement date in a portfolio of high-quality debt instruments, would provide the necessary future cash flows to pay the accumulated benefits when due.

·Expected Return on Plan Assets - Management projects the long-term rates of return on plan assets based on historical performance, future expectations and periodic portfolio rebalancing among the diversified asset classes.  These projected returns reduce the net benefit costs PPL Electric records currently.

·Rate of Compensation Increase - Management projects employees' annual pay increases, which are used to project employees' pension benefits at retirement.

·Health Care Cost Trend Rate - Management projects the expected increases in the cost of health care.

In selecting a discount rate for its U.S. defined benefit plans, PPL Services starts with ana cash flow analysis of the expected benefit payment stream for its plans.  This information is firstThe plan-specific cash flows are matched against a spot-rate yield curve.  A portfoliothe coupons and expected maturity values of 526 Aa-gradedindividually selected bonds.  This bond matching process begins with the full universe of Aa-rated non-callable (or callable with make-whole provisions) bonds, with a total amount outstanding in excess of $541 billion, servesserving as the base from which those with the lowest and highest yields arewere eliminated to develop an appropriate subset of bonds.  Individual bonds were then selected based on the ultimate yield curve.  The resultstiming of this analysis are considered together with other economic dataeach plan's cash flows and movements in variousparameters were established as to the percentage of each individual bond indicesissue that could be hypothetically purchased and the surplus reinvestment rates to determine the discount rate assumption.be assumed.  At December 31, 2009,2012, PPL Services decreased the discount rate for its U.S. pension plans from 6.50%5.07% to 6.00% as a result of this assessment4.22% and decreased the discount rate for its other postretirement benefit plans from 6.45%4.81% to 5.81%4.02%.


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The expected long-term rates of return for PPL'sPPL Services' U.S. defined benefit pension and other postretirement benefitsbenefit plans have been developed using a best-estimate of expected returns, volatilities and correlations for each asset class.  PPL management corroborates these rates with expected long-term rates of return calculated by its independent actuary, who uses a building block approach that begins with a risk-free rate of return with factors being added such as inflation, duration, credit spreads and equity risk.  Each plan's specific asset allocation is also considered in developing a reasonable return assumption.  At December 31, 2009, PPL's2012, PPL Services' expected return on plan assets remained at 8.00%7.00% for its U.S. pension plansplan and remained at 7.00%increased from 5.70% to 5.75% for its other postretirement benefit plans.plan.

In selecting a rate of compensation increase, PPL Services considers past experience in light of movements in inflation rates.  At December 31, 2009, PPL's2012, PPL Services' rate of compensation increase remained at 4.75%decreased from 4.00% to 3.95% for its U.S. plans.

In selecting health care cost trend rates for PPL'sPPL Services' other postretirement benefit plans, PPL Services considers past performance and forecasts of health care costs.  At December 31, 2009, PPL's2012, PPL Services' health care cost trend rates were 8.00% for 2010,2013, gradually declining to 5.50% for 2016.2019.

A variance in the assumptions listed above could have a significant impact on the accrued defined benefit liabilities or assets, reported annual net periodic defined benefit costs and the regulatory assets allocated to PPL Electric.  While the charts below reflect either an increase or decrease in each assumption, the inverse of this change would impact the accrued defined benefit liabilities or assets, reported annual net periodic defined benefit costs and regulatory assets by a similar amount in the opposite direction.  The sensitivities below reflect an evaluation of the change based solely on a change in that assumption and does not include income tax effects.

At December 31, 2009, PPL Electric had recorded2012, the following defined benefit plan liabilities:plans were recorded as follows.

Pension liabilities $245 
Other postretirement benefit liabilities  73 
Pension liabilities$ (237)
Other postretirement benefit liabilities (61)

The following chart reflects the sensitivities in the December 31, 20092012 Balance Sheet associated with a change in certain assumptions based on PPL'sPPL Services' primary defined benefit plans.

 Increase (Decrease)
 Increase (Decrease) Change in Impact on defined Impact on
Actuarial assumption Change in assumption Impact on defined benefit liabilities Impact on regulatory assets assumption benefit liabilities regulatory assets
             
Discount Rate (0.25)% $31 $31  (0.25)% $ 46  $ (46)
Rate of Compensation Increase 0.25% 5 5  0.25%  7   (7)
Health Care Cost Trend Rate (a) 1.0% 5 5  1.00%  1   (1)

(a)Only impacts other postretirement benefits.

In 2009,2012, PPL Electric was allocated net periodic defined benefit costs charged to operating expense of $24$22 million.  This amount represents a $6$4 million increase compared with the charge recognized during 2008.2011.

The following chart reflects the sensitivities in the 20092012 Statement of Income (excluding income tax effects) associated with a change in certain assumptions based on PPL'sPPL Services' primary defined benefit plans.

Actuarial assumption Change in assumption Impact on defined benefit costs  Change in assumption  Impact on defined benefit costs
         
Discount Rate (0.25)% $1  (0.25)% $ 3 
Expected Return on Plan Assets (0.25)% 2  (0.25)%  3 
Rate of Compensation Increase 0.25% 1  0.25%  1 
Health Care Cost Trend Rate (a) 1.0% 1 

(a)Only impacts other postretirement benefits.


2)    Loss Accruals

PPL Electric accrues lossesLosses are accrued for the estimated impacts of various conditions, situations or circumstances involving uncertain or contingent future outcomes.  For loss contingencies, the loss must be accrued if (1) information is available that indicates it is probable that a loss has been incurred, given the likelihood of the uncertain future events, and (2) the amount of the loss can be reasonably estimated.  Accounting guidance defines "probable" as cases in which "the future event or events are likely to occur."  PPL Electric does not record theThe accrual of contingencies that might result in gains is not recorded unless recovery is assured.  PPL Electric continuously assesses potentialPotential loss contingencies for environmental remediation, litigation claims, regulatory penalties and other events.events are continuously assessed.

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The accounting aspects of estimated loss accruals include (1) the initial identification and recording of the loss, (2) the determination of triggering events for reducing a recorded loss accrual, and (3) the ongoing assessment as to whether a recorded loss accrual is sufficient.  All three of these aspects require significant judgment by PPL Electric's management.  PPL Electric uses its internalInternal expertise and outside experts (such as lawyers and engineers), are used, as necessary, to help estimate the probability that a loss has been incurred and the amount (or range) of the loss.

No new significant loss accruals were recorded in 2009.2012.

PPL Electric has identified certainCertain other events have been identified that could give rise to a loss, but that do not meet the conditions for accrual.  Such events are disclosed, but not recorded, when it is "reasonably possible" that a loss has been incurred.  See Note 14 to the Financial Statements for disclosure of other potential loss contingencies that have not met the criteria for accrual.

When an estimated loss is accrued, PPL Electric identifies, where applicable, the triggering events for subsequently reducing the loss accrual.accrual are identified, where applicable.  The triggering events generally occur when the contingency has been resolved and the actual loss is incurred,paid or written off, or when the risk of loss has diminished or been eliminated.  The following are some of the triggering events that provide for the reduction of certain recorded loss accruals:

·Allowances for uncollectible accounts are reduced when accounts are written off after prescribed collection procedures have been exhausted, a better estimate of the allowance is determined or underlying amounts are ultimately collected.

·Environmental and other litigation contingencies are reduced when the contingency is resolved and PPL Electric makes actual payments are made, a better estimate of the loss is determined or the loss is no longer considered probable.

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

3)    See Note 15 to the Financial Statements for disclosure of loss contingencies accrued and other potential loss contingencies that have not met the criteria for accrual.

Income Tax UncertaintiesTaxes

Significant management judgment is required in developing PPL Electric'sthe provision for income taxes, primarily due to the uncertainty related to tax positions taken or expected to be taken in tax returns and the determination of deferred tax assets, liabilities and valuation allowances.

Significant management judgment is required to determine the amount of benefit recognized related to an uncertain tax position.  PPL Electric evaluates its taxTax positions are evaluated following a two-step process.  The first step requires an entity to determine whether, based on the technical merits supporting a particular tax position, it is more likely than not (greater than a 50% chance) that the tax position will be sustained.  This determination assumes that the relevant taxing authority will examine the tax position and is aware of all the relevant facts surrounding the tax position.  The second step requires an entity to recognize in the financial statements the benefit of a tax position that meets the more-likely-than-not recognition criterion.  The benefit recognized is measured at the largest amount of benefit that has a likelihood of realization, upon settlement, that exceeds 50%.  PPL Electric's managementManagement considers a number of factors in assessing the benefit to be recognized, including negotiation of a settlement.

On a quarterly basis, PPL Electric reassesses its uncertain tax positions are reassessed by considering information known at the reporting date.  Based on management's assessment of new information, PPL Electrica tax benefit may subsequently recognize a tax benefitbe recognized for a previously unrecognized tax position, de-recognize a previously recognized tax position may be derecognized, or re-measure the benefit of a previously recognized tax position.position may be remeasured.  The amounts ultimately paid upon resolution of issues raised by taxing authorities may differ materially from the amounts accrued and may materially impact PPL Electric'sthe financial statements in the future.

At December 31, 2012, it was reasonably possible that during the next 12 months the total amount of unrecognized tax benefits could increase by as much as $11 million or decrease by up to $25 million.  This change could result from 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.
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The balance sheet classification of unrecognized tax benefits and the need for valuation allowances to reduce deferred tax assets also require significant management judgment.  PPL Electric classifies unrecognizedUnrecognized tax benefits are classified as current to the extent management expects to settle an uncertain tax position by payment or receipt of cash within one year of the reporting date.  Valuation allowances are initially recorded and reevaluated each reporting period by assessing the likelihood of the ultimate realization of a deferred tax asset.  Management considers a number of factors in assessing the realization of a deferred tax asset, including the reversal of temporary differences, future taxable income and ongoing prudent and feasible tax planning strategies.  Any tax planning strategy utilized in this assessment must meet the recognition and measurement criteria utilized by PPL Electric to account for an uncertain tax positions.position.  See Note 5 to the Financial Statements for the requiredincome tax disclosures.

At December 31, 2009, it was reasonably possible that during the next 12 months the total amount of unrecognized tax benefits could increase by as much as $23 million or decrease by up to $22 million for PPL Electric.  This change could result from the timing and/or valuation of certain deductions, intercompany transactionsRegulatory Assets 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.

4)    Regulatory AssetsLiabilities

PPL Electric's electricity delivery business is subject to cost-based rate-regulation.rate regulation.  As a result, PPL Electric is required to reflect the effects of regulatory actions are required to be reflected in itsthe financial statements.  PPL Electric records assetsAssets and liabilities are recorded that result from the regulated ratemaking process that may not be recorded under GAAP for non-regulated entities.  Regulatory assets generally represent incurred costs that have been deferred because such costs are probable of future recovery in regulated customer rates.  Regulatory liabilities are recognized for amounts expected to be returned through future regulated customer rates.  In certain cases, regulatory liabilities are recorded based on an understanding or agreement with the regulator that rates have been set to recover costs that are expected to be incurred in the future, and the regulated entity is accountable for any amounts charged pursuant to such rates and not yet expended for the intended purpose.

Management continually assesses whether the regulatory assets are probable of future recovery by considering factors such as changes in the applicable regulatory and political environments, the ability to recover costs through regulated rates, recent rate orders to other regulated entities, and the status of any pending or potential deregulation legislation.  Based on this continual assessment, management believes the existing regulatory assets are probable of recovery.  This assessment reflects the current political and regulatory climate at the state and federal levels, and is subject to change in the future.  If future recovery of costs ceases to be probable, then asset write-offs would be required to be recognized in operating income.  Additionally, the regulatory agencies can provide flexibility in the manner and timing of the depreciation of PP&E and amortization of regulatory assets.

At December 31, 2009 and 2008,2012, PPL Electric had regulatory assets of $531$853 million and $763regulatory liabilities of $60 million.  All of PPL Electric's regulatory assets are either currently being recovered under specific rate orders, or represent amounts that willare expected to be recovered in future rates or benefit future periods based upon established regulatory practices.

See Note 6 to the Financial Statements for additional information on regulatory assets and liabilities.

Revenue Recognition - Unbilled Revenue

Revenues related to the sale of energy are recorded when energy is delivered to customers.  Because customers are billed on cycles which vary based on the timing of the actual meter reads taken throughout the month, PPL Electric records estimates for unbilled revenues at the end of each reporting period.  Such unbilled revenue amounts reflect estimates of the amount of energy delivered to customers since the date of the last reading of their meters.  The unbilled estimate is based on daily load models, the meter read schedule, and actual weather data.  The unbilled accrual is based on estimated usage for each customer class, and the current rate schedule pricing.  At December 31, 2012 and 2011, PPL Electric had unbilled revenue of $110 million and $102 million.

Other Information

PPL's Audit Committee has approved the independent auditor to provide audit, audit-related and audit-related services and othertax services permitted by Sarbanes-Oxley and SEC rules.  The audit and audit-related services include services in connection with statutory and regulatory filings, reviews of offering documents and registration statements, and internal control reviews. See "Item 14. Principal Accounting Fees and Services" for more information.
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LG&E AND KU ENERGY LLC AND SUBSIDIARIES

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations

The information provided in this Item 7 should be read in conjunction with LKE's Consolidated Financial Statements and the accompanying Notes.  Capitalized terms and abbreviations are defined in the glossary.  Dollars are in millions, unless otherwise noted.

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

·  "Overview" provides a description of LKE and its business strategy, a summary of Net Income and a discussion of certain events related to LKE's results of operations and financial condition.

·  "Results of Operations" provides a summary of LKE's earnings and a description of key factors expected to impact future earnings.  This section ends with explanations of significant changes in principal items on LKE's Statements of Income, comparing 2012 with 2011 and 2011 with 2010.

·  "Financial Condition - Liquidity and Capital Resources" provides an analysis of LKE's liquidity position and credit profile.  This section also includes a discussion of forecasted sources and uses of cash and rating agency actions.

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

·  "Application of Critical Accounting Policies" provides an overview of the accounting policies that are particularly important to the results of operations and financial condition of LKE and that require its management to make significant estimates, assumptions and other judgments of matters inherently uncertain.

Overview

Introduction

LKE, headquartered in Louisville, Kentucky, is a holding company.  LKE became a wholly owned subsidiary of PPL when PPL acquired all of LKE's interests from E.ON US Investments Corp. on November 1, 2010.  LKE has 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 electric energy.  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.  Refer to "Item 1. Business - Background" for a description of LKE's business.

Business Strategy

LKE's overall strategy is to provide reliable, safe, competitively priced energy to its customers and reasonable returns on regulated investments to its member.

A key objective for LKE is to maintain a strong credit profile through managing financing costs and access to credit markets.  LKE continually focuses on maintaining an appropriate capital structure and liquidity position.

Successor and Predecessor Financial Presentation

LKE's Financial Statements and related financial and operating data include the periods before and after PPL's acquisition of LKE on November 1, 2010 and have been segregated to present pre-acquisition activity as the Predecessor and post-acquisition activity as the Successor.  Certain accounting and presentation methods were changed to acceptable alternatives to conform to PPL's accounting policies, and the cost bases of certain assets and liabilities were changed as of November 1, 2010 as a result of the application of push-down accounting.  Consequently, the financial position, results of operations and cash flows for the Successor periods are not comparable to the Predecessor periods; however, the core operations of LKE have not changed as a result of the acquisition.
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Financial and Operational Developments

Net Income

Net Income for 2012, 2011 and 2010 was $219 million, $265 million and $237 million.  Earnings in 2012 decreased 17% from 2011 and earnings in 2011 increased 12% from 2010.

See "Results of Operations" for a discussion and analysis of LKE's earnings.

Rate Case Proceedings

In June 2012, LG&E and KU filed requests with the KPSC for increases in annual base electric rates of approximately $62 million at LG&E and approximately $82 million at KU and an increase in annual base gas rates of approximately $17 million at LG&E.  In November 2012, LG&E and KU along with all of the parties filed a unanimous settlement agreement.  Among other things, the settlement provided for increases in annual base electric rates of $34 million at LG&E and $51 million at KU and an increase in annual base gas rates of $15 million at LG&E.  The settlement agreement also included revised depreciation rates that result in reduced annual electric depreciation expense of approximately $9 million for LG&E and approximately $10 million for KU.  The settlement agreement included an authorized return on equity at LG&E and KU of 10.25%.  On December 20, 2012, the KPSC issued orders approving the provisions in the settlement agreement.  The new rates became effective on January 1, 2013.  In addition to the increased base rates, the KPSC approved a gas line tracker mechanism for LG&E to provide for recovery of costs associated with LG&E's gas main replacement program, gas service lines and risers.

Equity Method Investment

KU owns 20% of the common stock of EEI.  Through a power marketer affiliated with its majority owner, EEI sells its output to third parties.  KU's investment in EEI is accounted for under the equity method of accounting.  KU's direct exposure to loss as a result of its involvement with EEI is generally limited to the value of its investment.  During the fourth quarter of 2012, KU concluded that an other-than-temporary decline in the value of its investment in EEI had occurred.  Accordingly, KU recorded a $15 million impairment charge, net of taxes, related to this investment as of December 31, 2012, bringing the investment balance to zero.  The impairment charge is shown in the line "Other-Than-Temporary Impairments" on the Statement of Income for the year ended December 31, 2012.            

Registered Debt Exchange Offer by LKE

In June 2012, LKE completed an exchange of all its outstanding 4.375% Senior Notes due 2021 issued in September 2011 in a transaction not registered under the Securities Act of 1933, for similar securities that were issued in a transaction registered under the Securities Act of 1933.  See Note 7 to the Financial Statements for additional information.

Commercial Paper

In February 2012, LG&E and KU each established a commercial paper program for up to $250 million to provide an additional financing source to fund their short-term liquidity needs, if and when necessary.  Commercial paper issuances are supported by the issuer's credit facility.  At December 31, 2012, $125 million of commercial paper was outstanding.

Terminated Bluegrass CTs Acquisition

In September 2011, LG&E and KU entered into an asset purchase agreement with Bluegrass Generation for the purchase of the Bluegrass CTs, aggregating approximately 495 MW, plus limited associated contractual arrangements required for operation of the units, for a purchase price of $110 million, pending receipt of applicable regulatory approvals.  In May 2012, the KPSC issued an order approving the request to purchase the Bluegrass CTs.  In November 2011, LG&E and KU filed an application with the FERC under the Federal Power Act requesting approval to purchase the Bluegrass CTs.  In May 2012, the FERC issued an order conditionally authorizing the acquisition of the Bluegrass CTs, subject to approval by the FERC of satisfactory mitigation measures to address market-power concerns.  After a review of potentially available mitigation options, LG&E and KU determined that the options were not commercially justifiable.  In June 2012, LG&E and KU terminated the asset purchase agreement for the Bluegrass CTs in accordance with its terms and made applicable filings with the KPSC and FERC.
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Cane Run Unit 7 Construction

In September 2011, LG&E and KU filed a CPCN with the KPSC requesting approval to build Cane Run Unit 7.  In May 2012, the KPSC issued an order approving the request.  A formal request for recovery of the costs associated with the construction was not included in the CPCN filing with the KPSC but is expected to be included in future rate case proceedings.  LG&E and KU commenced preliminary construction activities in the third quarter of 2012 and project construction is expected to be completed by May 2015.  The project, which includes building a natural gas supply pipeline and related transmission projects, has an estimated cost of approximately $600 million.

In conjunction with this construction and to meet new, more stringent EPA regulations with a 2015 compliance date, LG&E and KU anticipate retiring five older coal-fired electric generating units at the Cane Run and Green River plants, which have a combined summer capacity rating of 726 MW.  In addition, KU retired the remaining 71 MW unit at the Tyrone plant in February 2013.

Future Capacity Needs

In addition to the construction of a combined cycle gas unit at the Cane Run station, LG&E and KU continue to assess future capacity needs.  As a part of the assessment, LG&E and KU issued an RFP in September 2012 for up to 700 MW of capacity beginning as early as 2015.

Results of Operations

As previously noted, LKE's results for the periods after October 31, 2010 are on a basis of accounting different from its results for periods prior to November 1, 2010.  See "Overview - Successor and Predecessor Financial Presentation" for further information.

The utility business is affected by seasonal weather.  As a result, operating revenues (and associated operating expenses) are not generated evenly throughout the year.  Revenue and earnings are generally higher during the first and third quarters and lower during the second and fourth quarters due to weather.

The following table summarizes the significant components of net income for 2012, 2011 and 2010 and the changes therein:

Earnings

    Successor  Predecessor
        Two Months  Ten Months
    Year Ended Year Ended Ended  Ended
    December 31, December 31, December 31,  October 31,
    2012  2011  2010   2010 
                
 Net Income $ 219  $ 265  $ 47   $ 190 

The changes in the components of Net Income between these periods were due to the following factors, which reflect reclassifications for items included in Margins and certain items that management considers special.  See additional detail of these special items in the table below.

  2012 vs. 2011 2011 vs. 2010
     
Margins $ (8) $ 92 
Other operation and maintenance   (16)   (5)
Depreciation   (10)   (43)
Taxes, other than income   (9)   (14)
Other Income (Expense) - net   (14)   (13)
Interest Expense   (4)   29 
Income Taxes   31    (18)
Special items, after-tax   (16)   
Total $ (46) $ 28 

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

·
Higher other operation and maintenancein 2012 compared with 2011 primarily due to $11 million of expenses related to an increased scope of scheduled outages and a $6 million credit to establish a regulatory asset recorded when approved in 2011 related to 2009 storm costs.

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·Higher depreciation in 2012 compared with 2011 due to PP&E additions.

Higher depreciation in 2011 compared with 2010 primarily due to TC2 commencing dispatch in January 2011.

·Higher taxes, other than income in 2011 compared with 2010 primarily due to a $9 million state coal tax credit that was applied to 2010 property taxes.  The remaining increase was due to higher assessments, primarily from significant property additions.

·Lower other income (expense) - net in 2012 compared with 2011 primarily due to losses from the EEI investment.

Lower other income (expense) - net in 2011 compared with 2010 primarily due to $19 million of other income from the establishment of a regulatory asset in 2010 for previously recorded losses on interest rate swaps.

·Lower interest expense in 2011 compared with 2010 due to lower interest rates and lower average long-term debt balances.  Lower interest rates contributed $17 million to the decrease in interest expense, as the interest rates on the first mortgage bonds were lower than the rates on the loans from E.ON AG affiliates, which were replaced.

·Lower income taxes in 2012 compared with 2011 primarily due to lower pre-tax income.

Higher income taxes in 2011 compared with 2010 primarily due to higher pre-tax income.

The following after-tax gains (losses), which management considers special items, also impacted earnings.

  Income Statement Successor  Predecessor
  Line Item 2012  2011  2010   2010 
                
 Net operating loss carryforward and other tax-related adjustmentsIncome Taxes and Other O&M $ 4           
 Asset impairment, net of tax of $10 (a)Other-Than-Temporary Impairments   (15)          
 Discontinued operations adjustment, net of tax of $4 (b)Discontinued Operations   (5)          
 Energy-related economic activity, net of tax of $0, ($1), $1, $0 (c)Operating Revenues    $ 1  $ (1)    
 BREC terminated lease, net of tax of $0, $1, ($2), $1 (d)Discontinued Operations      (1)   2   $ (1)
Total  $ (16) $  $ 1   $ (1)

(a)KU recorded an impairment of its equity method investment in EEI.  See Note 18 to the Financial Statements for additional information.
(b)2012 includes an adjustment to an indemnification liability.
(c)Represents net unrealized gains (losses) on contracts that economically hedge anticipated cash flows.
(d)Represents costs associated with a terminated lease of WKE for the generating facilities of BREC.  See Note 9 to the Financial Statements for additional information.

2013 Outlook

Excluding special items, LKE projects higher earnings in 2013 compared with 2012, primarily driven by electric and gas base rate increases effective January 1, 2013, returns on additional environmental capital investments and retail load growth, partially offset by higher operation and maintenance.

Earnings in future periods are subject to various risks and uncertainties.  See "Forward-Looking Information," "Item 1. Business," "Item 1A. Risk Factors," the rest of this Item 7 and Notes 6 and 15 to the Financial Statements for a discussion of the risks, uncertainties and factors that may impact future earnings.
Statement of Income Analysis --

Margins

Non-GAAP Financial Measure

The following discussion includes financial information prepared in accordance with GAAP, as well as a non-GAAP financial measure, "Margins."  Margins is 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.  Margins is a single financial performance measure of LKE's electricity generation,
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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, returns on capital investments primarily associated with environmental regulations and performance incentives.  Certain costs associated with these mechanisms, primarily ECR and DSM, are recorded as "Other operation and maintenance" and "Depreciation."  As a result, this measure represents the net revenues from LKE's operations.  This performance measure is used, in conjunction with other information, internally by senior management to manage operations and analyze actual results compared with budget.

Reconciliation of Non-GAAP Financial Measures

The following tables reconcile "Operating Income" to "Margins" as defined by LKE for 2012, 2011 and 2010.

       2012 Successor    2011 Successor
           Operating        Operating
      Margins Other (a) Income (b)   Margins Other (a) Income (b)
                   
Operating Revenues $ 2,759     $ 2,759    $ 2,791  $ 2  $ 2,793 
Operating Expenses                    
 Fuel   872       872      866       866 
 Energy purchases   195       195      238       238 
 Other operation and maintenance   101  $ 677    778      90    661    751 
 Depreciation   51    295    346      49    285    334 
 Taxes, other than income      46    46         37    37 
   Total Operating Expenses   1,219    1,018    2,237      1,243    983    2,226 
Total $ 1,540  $ (1,018) $ 522    $ 1,548  $ (981) $ 567 

      Successor  Predecessor
      Two Months Ended December 31, 2010  Ten Months Ended October 31, 2010
           Operating        Operating
      Margins Other (a) Income (b)  Margins Other (a) Income (b)
                   
Operating Revenues $ 495  $ (1) $ 494   $ 2,214     $ 2,214 
Operating Expenses                   
 Fuel   138       138     723       723 
 Energy purchases   68       68     211       211 
 Other operation and maintenance   14    127    141     57  $ 529    586 
 Depreciation   7    42    49     35    200    235 
 Taxes, other than income      2    2        21    21 
   Total Operating Expenses   227    171    398     1,026    750    1,776 
Total $ 268  $ (172) $ 96   $ 1,188  $ (750) $ 438 

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

Changes in Non-GAAP Financial Measures

Margins decreased by $8 million for 2012 compared with 2011, primarily due to $6 million of lower wholesale margins resulting from lower market prices.  Retail margins were $2 million lower, as volumes were impacted by unseasonably mild weather during the first four months of 2012.  Total heating degree days decreased 11% compared to 2011, partially offset by a 6% increase in cooling degree days.

Margins increased by $92 million for 2011 compared with 2010.  New KPSC rates went into effect on August 1, 2010, contributing to an additional $112 million in operating revenue over the prior year.  Partially offsetting the rate increase were lower retail volumes resulting from weather and economic conditions.
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Other Operation and Maintenance     
       
The increase (decrease) in other operation and maintenance was due to:
   
 2012 vs. 2011 2011 vs. 2010
       
Coal plant maintenance (a)$ 19  $
Distribution maintenance (b)  7   
Administrative and general (c)  (7)  (1)
Steam operation (d)  2   10 
Fuel for generation (e)    11 
Other generation maintenance    (4)
Other  6   (4)
Total$ 27  $ 24 

(a)Coal plant maintenance costs increased in 2012 compared with 2011 primarily due to $11 million of expenses related to an increased scope of scheduled outages, as well as $5 million of increased maintenance at the Ghent plant on the scrubber system and primary fuel combustion system.
(b)Distribution maintenance costs increased in 2012 compared with 2011 primarily due to a $6 million credit to establish a regulatory asset recorded when approved in 2011 related to 2009 storm costs.

Distribution maintenance costs increased in 2011 compared with 2010 primarily due to $17 million of expenses related to amortization of storm restoration-related costs, a hazardous tree removal project initiated in August 2010 and an increase in pipeline integrity work.  This increase was offset by a $6 million credit to establish a regulatory asset recorded when approved in 2011 related to 2009 storm costs.
(c)Administrative and general costs decreased in 2012 compared with 2011 primarily due to a decrease in pension expense resulting from pension funding and lower interest cost.
(d)Steam operation costs increased in 2011 compared with 2010 primarily due to higher variable costs as a result of TC2 commencing dispatch in 2011.
(e)Fuel handling costs are included in other operation and maintenance on the Statements of Income for the Successor periods and are in fuel on the Statement of Income for the Predecessor period.

Depreciation

The increase (decrease) in depreciation was due to:

  2012 vs. 2011 2011 vs. 2010
       
TC2 (dispatch began in January 2011)   $ 32 
E.W. Brown sulfur dioxide scrubber equipment (placed in-service in June 2010)     8 
Other additions to PP&E$ 12    10 
Total$ 12  $ 50 

Taxes, Other Than Income

Taxes, other than income increased by $9 million in 2012 compared with 2011 due in part to a $4 million increase in property taxes resulting from property additions, higher assessed values and changes in property classifications to categories with higher tax rates.

Taxes, other than income increased by $14 million in 2011 compared with 2010 primarily due to a $9 million state coal tax credit that was applied to 2010 property taxes.  The remaining increase was due to higher assessments, primarily from significant property additions.

Other Income (Expense) - net

The increase (decrease) in other income (expense) - net was due to:

  2012 vs. 2011 2011 vs. 2010
       
Earnings (losses) from the EEI investment$ (9) $ (2)
Depreciation expense on TC2 joint-use assets held for future use     3 
Losses on interest rate swaps (a)     (19)
Other  (5)   5 
Total$ (14) $ (13)

(a)A regulatory asset was established in 2010 for previously recorded losses on interest rate swaps.
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Other-Than-Temporary Impairments

Other-than-temporary impairments increased by $25 million in 2012 compared with 2011 due to the $25 million pre-tax impairment of the EEI investment.  See Notes 1 and 18 to the Financial Statements for additional information.

Interest Expense

The increase (decrease) in interest expense was due to:

   2012 vs. 2011 2011 vs. 2010
        
Interest rates (a) $ (2) $ (17)
Long-term debt balances (b)   8    (15)
Other   (2)   3 
Total $ 4  $ (29)

(a)Interest expense decreased in 2011 compared with 2010 primarily due to lower interest rates on senior notes and first mortgage bonds issued in November 2010 compared with the rates on the loans from E.ON AG affiliates that were in place through October 2010.
(b)Interest expense increased in 2012 compared with 2011 due to the LKE $250 million senior notes that were issued in September 2011.

Interest expense decreased in 2011 compared with 2010 as the long-term debt balances were lower for the majority of 2011.  The debt balances increased in September 2011 due to the issuance of the LKE $250 million senior notes.

Income Taxes  
        
The increase (decrease) in income taxes was due to:
    
   2012 vs. 2011 2011 vs. 2010
        
Change in pre-tax income $ (34) $ 19 
Net operating loss carryforward adjustments (a)   (9)   
Other   (4)   
Total $ (47) $ 19 

(a)Adjustments to deferred taxes related to net operating loss carryforwards based on income tax return adjustments.

Income (Loss) from Discontinued Operations (net of income taxes)

Income (loss) from discontinued operations (net of income taxes) decreased by $5 million in 2012 compared with 2011 primarily related to an adjustment to the estimated liability for indemnifications related to the termination of the WKE lease in 2009.

Financial Condition

Liquidity and Capital Resources

LKE expects to continue to have adequate liquidity available through operating cash flows, cash and cash equivalents and its credit facilities, including commercial paper issuances. Additionally, subject to market conditions, subsidiaries of LKE currently plan to access capital markets in 2013.

LKE's cash flows from operations and access to cost-effective bank and capital markets are subject to risks and uncertainties including, but not limited to:

·changes in commodity prices that may increase the cost of producing or purchasing power or decrease the amount LKE receives from selling power;
·operational and credit risks associated with selling and marketing products in the wholesale power markets;
·unusual or extreme weather that may damage LKE's transmission and distribution facilities or affect energy sales to customers;
·reliance on transmission facilities that LKE does not own or control to deliver its electricity and natural gas;
·unavailability of generating units (due to unscheduled or longer-than-anticipated generation outages, weather and natural disasters) and the resulting loss of revenues and additional costs of replacement electricity;
·the ability to recover and the timeliness and adequacy of recovery of costs associated with regulated utility businesses;
·costs of compliance with existing and new environmental laws;
·any adverse outcome of legal proceedings and investigations with respect to LKE's current and past business activities;

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·deterioration in the financial markets that could make obtaining new sources of bank and capital markets funding more difficult and more costly; and
·a downgrade in LKE's or its rated subsidiaries' credit ratings that could adversely affect their ability to access capital and increase the cost of credit facilities and any new debt.

See "Item 1A. Risk Factors" for further discussion of risks and uncertainties affecting LKE's cash flows.

At December 31, LKE had the following:

     
  2012  2011  2010 
          
Cash and cash equivalents $ 43  $ 59  $ 11 
Short-term investments (a)         163 
  $ 43  $ 59  $ 174 
          
Short-term debt (b) $ 125     $ 163 

(a)Represents tax-exempt bonds issued by Louisville/Jefferson County, Kentucky, on behalf of LG&E that were purchased from the remarketing agent in 2008.  Such bonds were remarketed to unaffiliated investors in January 2011.  See Note 7 to the Financial Statements for additional information.
(b)Borrowings in 2012 were made under LG&E's and KU's commercial paper programs and borrowings in 2010 were made under LG&E's syndicated credit facility.  See Note 7 to the Financial Statements for additional information.

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

     Successor  Predecessor
         Two Months  Ten Months
     Year Ended Year Ended Ended  Ended
     December 31, December 31, December 31,  October 31,
     2012  2011  2010   2010 
              
Net cash provided by (used in) operating activities $ 747  $ 781  $ 26   $ 488 
Net cash provided by (used in) investing activities   (756)   (277)   (211)    (426)
Net cash provided by (used in) financing activities   (7)   (456)   167     (40)
Net Increase (Decrease) in Cash and Cash Equivalents $ (16) $ 48  $ (18)  $ 22 

Operating Activities

Net cash provided by operating activities decreased by 4%, or $34 million, in 2012 compared with 2011, primarily as a result of:
·Net income adjusted for non-cash items declined by $94 million, which included an $85 million reduction in deferred income taxes due primarily to the utilization of a capital loss carry forward in 2011.
·Working capital cash flow changes declined by $66 million driven primarily by changes in receivables and unbilled revenues due to milder December weather in 2011 than in 2012 and 2010 and more income tax receivables collected in 2011 than in 2012.
·These items were offset by $126 million increase in other operating cash flows driven by $100 million reduction in pension funding.
Net cash provided by operating activities increased by 52%, or $267 million, in 2011 compared with 2010, primarily as a result of:

·an increase in net income adjusted for non-cash effects of $178 million (deferred income taxes and investment tax credits of $101 million, depreciation of $50 million, amortization of regulatory assets of $24 million and other noncash items of $3 million, partially offset by unrealized (gains) losses on derivatives of $14 million, defined benefit plans - expense of $13 million and loss from discontinued operations - net of tax of $1 million);
·an increase in cash inflows related to income tax receivable of $79 million primarily due to net operating losses of $40 million recorded in 2010 and the payment of $40 million received by LKE for tax benefits in 2011;
·a net decrease in cash provided from accounts receivable and unbilled revenues of $75 million due to colder weather in December 2010 as compared with December 2009 and milder weather in December 2011 as compared with December 2010; and

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·a decrease in cash outflows of $28 million due to lower inventory levels in 2011 as compared with 2010 driven by $32 million for fuel inventory purchased in 2010 for TC2 that was not used until 2011 when TC2 began dispatch, $21 million due to lower coal burn as a result of unplanned outages at LG&E's Mill Creek plant and $6 million for decreases in gas storage volumes, partially offset by $22 million for KU's E.W. Brown and Ghent plants due primarily to increases in coal prices and $7 million for increases in coal in-transit; partially offset by
·an increase in discretionary defined benefit plan contributions of $105 million made in order to achieve LKE's long-term funding requirements.

Investing Activities

Net cash used in investing activities increased by 173%, or $479 million, in 2012 compared with 2011, primarily as a result of:

·
an increase in capital expenditures of $291 million, primarily due to coal combustion residuals projects at Ghent and E.W. Brown, environmental air projects at Mill Creek and Ghent, and construction of Cane Run Unit 7; and
·a decrease in the proceeds from the sale of other investments of $163 million in 2011.

Net cash used in investing activities decreased by 57%, or $360 million, in 2011 compared with 2010, as a result of:

·
proceeds from the sale of other investments of $163 million in 2011;
·
a decrease in capital expenditures of $122 million, primarily due to the completion of KU's scrubber program in 2010 and TC2 being dispatched in 2011; and
·an increase from a change in notes receivable from affiliates of $107 million; partially offset by
·
proceeds from sales of discontinued operations of $21 million in 2010; and
·
a decrease in restricted cash of $11 million.

See "Forecasted Uses of Cash" for detail regarding capital expenditures for the years 2013 through 2017.

Financing Activities

Net cash used in financing activities was $7 million in 2012 compared with net cash used in financing activities of $456 million in 2011, primarily as a result of decrease in distributions to PPL.

In 2012, cash used in financing activities consisted of:

·
distributions to PPL of $155 million; partially offset by
·
the issuance of $125 million of short-term debt in the form of commercial paper; and
·
an increase in notes payable with affiliates of $25 million.

Net cash used in financing activities was $456 million in 2011 compared with net cash provided by financing activities of $127 million in 2010, primarily as a result of increased distributions to PPL and reduced contributions from PPL.

In 2011, cash used in financing activities consisted of:

·
distributions to PPL of $533 million, which includes $248 million using the proceeds of the long-term debt issuance noted below;
·a repayment on a revolving line of credit of $163 million;
·the payment of debt issuance and credit facility costs of $8 million; and
·the repayment of debt of $2 million; partially offset by
·the issuance of senior notes of $250 million.

In the two months of 2010 following PPL's acquisition of LKE, cash provided by financing activities of the Successor consisted of:

·the issuance of senior unsecured notes and first mortgage bonds of $2,890 million after discounts;
·the issuance of debt of $2,784 million to a PPL affiliate to repay debt due to E.ON AG affiliates upon the closing of PPL's acquisition of LKE;
·an equity contribution from PPL of $1,565 million; and
·a draw on a revolving line of credit of $163 million; partially offset by
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·the repayment of debt to E.ON AG affiliates of $4,319 million upon the closing of PPL's acquisition of LKE;
·the repayment of debt to a PPL affiliate of $2,784 million upon the issuance of senior unsecured notes and first mortgage bonds;
·distributions to PPL of $100 million; and
·the payment of debt issuance and credit facility costs of $32 million.

In the ten months of 2010 preceding PPL's acquisition of LKE, cash used in financing activities by the Predecessor consisted of:

·the repayment of debt to an E.ON AG affiliate of $900 million;
·distributions to E.ON US Investments Corp. of $87 million; and
·a net decrease in notes payable with affiliates of $3 million; partially offset by
·the issuance of debt of $950 million to an E.ON AG affiliate.

See "Forecasted Sources of Cash" for a discussion of LKE's plans to issue debt securities, as well as a discussion of credit facility capacity available to LKE.  Also see "Forecasted Uses of Cash" for a discussion of plans to pay dividends on common securities in the future, as well as maturities of long-term debt.

LKE's long-term debt securities activity through December 31, 2012 was:

    Debt
    Issuances Retirement
Non-cash Exchanges (a)      
 LKE Senior Unsecured Notes $ 250  $ (250)

(a)In June 2012, LKE completed an exchange of all of its outstanding 4.375% Senior Notes due 2021 issued in September 2011, in a transaction not registered under the Securities Act of 1933, for similar securities that were issued in a transaction registered under the Securities Act of 1933.

See Note 7 to the Financial Statements for additional information about long-term debt securities.

Auction Rate Securities

At December 31, 2012, LG&E's and KU's tax-exempt revenue bonds that are in the form of auction rate securities and total $231 million continue to experience failed auctions.  Therefore, the interest rate continues to be set by a formula pursuant to the relevant indentures.  For the period ended December 31, 2012, the weighted-average rate on LG&E's and KU's auction rate bonds in total was 0.22%.

Forecasted Sources of Cash

LKE expects to continue to have sufficient sources of cash available in the near term, including various credit facilities, its commercial paper programs, issuance of debt securities and operating cash flow.

Credit Facilities

At December 31, 2012, LKE's total committed borrowing capacity under its credit facilities and the use of this borrowing capacity were:

      Borrowed /      
   Committed Commercial Letters of Unused
   Capacity Paper Issued Credit Issued Capacity
          
LKE Credit Facility with a subsidiary of PPL Energy Funding Corporation $ 300  $ 25     $ 275 
LG&E Credit Facility (a) (d)   500    55       445 
KU Credit Facilities (a) (b) (d)   598    70  $ 198    330 
 Total Credit Facilities (c) $ 1,398   150  $ 198  $ 1,050 

(a)In November 2012, LG&E and KU amended their syndicated credit facilities to extend the expiration dates to November 2017.  In addition, LG&E increased its credit facility's capacity to $500 million.
(b)In August 2012, the KU letter of credit facility agreement was amended and restated to allow for certain payments under the letter of credit facility to be converted to loans rather than requiring immediate payment.

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(c)The $1.098 billion of commitments under LG&E's and KU's domestic credit facilities are provided by a diverse bank group, with no one bank and its affiliates providing an aggregate commitment of more than 11% of the total committed capacity; however, the PPL affiliate provided a commitment of approximately 21% of the total facilities listed above. The syndicated credit facilities, as well as KU's letter of credit facility, each contain a financial covenant requiring debt to total capitalization not to exceed 70% for LG&E or KU, as calculated in accordance with the facility, and other customary covenants.
(d)Each company pays customary fees under their respective syndicated credit facilities, as well as KU's letter of credit facility, and borrowings generally bear interest at LIBOR-based rates plus an applicable margin.

See Note 7 to the Financial Statements for further discussion of LKE's credit facilities.

Operating Leases

LKE and its subsidiaries also have available funding sources that are provided through operating leases.  LKE's subsidiaries lease office space, gas storage and certain equipment.  These leasing structures provide LKE additional operating and financing flexibility.  The operating leases contain covenants that are typical for these agreements, such as maintaining insurance, maintaining corporate existence and timely payment of rent and other fees.

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

Capital Contributions from PPL

From time to time PPL may make capital contributions to LKE.  LKE may use these contributions to fund capital expenditures, make capital contributions to its subsidiaries and for other general corporate purposes.

Long-term Debt Securities

LG&E and KU currently plan to issue, subject to market conditions, up to $350 million for LG&E and $300 million for KU, of first mortgage bond indebtedness in 2013, the proceeds of which will be used to fund capital expenditures and for other general corporate purposes.

Forecasted Uses of Cash

In addition to expenditures required for normal operating activities, such as purchased power, payroll, fuel and taxes, LKE currently expects to incur future cash outflows for capital expenditures, various contractual obligations, distributions to PPL and possibly the purchase or redemption of a portion of debt securities.

Capital Expenditures

The table below shows LKE's current capital expenditure projections for the years 2013 through 2017.

    Projected
    2013  2014  2015  2016  2017 
Capital expenditures (a)               
 Generating facilities $ 427  $ 251  $ 267  $ 476  $ 540 
 Distribution facilities   233    227    263    257    281 
 Transmission facilities   107    68    59    56    77 
 Environmental   655    722    513    292    107 
 Other   48    45    43    48    39 
  Total Capital Expenditures $ 1,470  $ 1,313  $ 1,145  $ 1,129  $ 1,044 

(a)LKE generally expects to recover these costs over a period equivalent to the related depreciable lives of the assets through rates.  The 2013 total excludes amounts included in accounts payable as of December 31, 2012.

LKE's capital expenditure projections for the years 2013 through 2017 total approximately $6.1 billion.  Capital expenditure plans are revised periodically to reflect changes in operational, market and regulatory conditions.  This table includes current estimates for LKE's environmental projects related to existing and proposed EPA compliance standards.  Actual costs may be significantly lower or higher depending on the final requirements and market conditions.  Environmental compliance costs incurred by LG&E and KU in serving KPSC jurisdictional customers are generally eligible for recovery through the ECR mechanism.

LKE plans to fund its capital expenditures in 2013 with cash on hand, cash from operations, short-term debt and issuance of debt securities.
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Contractual Obligations

LKE has assumed various financial obligations and commitments in the ordinary course of conducting its business.  LKE is not liable for the debts of LG&E and KU, nor are LG&E and KU liable for the debts of one another.  Accordingly, creditors of LG&E and KU may not satisfy their debts from the assets of LKE absent a specific contractual undertaking by LKE or LG&E and KU to pay the creditors or as required by applicable law or regulation.  At December 31, 2012, the estimated contractual cash obligations of LKE were:

    Total 2013  2014 - 2015 2016 - 2017 After 2017
                  
Long-term Debt (a) $ 4,085     $ 900     $ 3,185 
Interest on Long-term Debt (b)   2,586  $ 139    274  $ 250    1,923 
Operating Leases (c)   90    15    27    14    34 
Coal and Natural Gas Purchase               
  Obligations (d)   2,558    789    1,176    501    92 
Unconditional Power Purchase               
  Obligations (e)   1,038    30    60    64    884 
Construction Obligations (f)   1,757    836    639    282    
Pension Benefit Plan Obligations (g) 153    153          
Other Obligations (h)   30    7    14    8    1 
Total Contractual Cash Obligations $ 12,297  $ 1,969  $ 3,090  $ 1,119  $ 6,119 

(a)Reflects principal maturities only based on stated maturity dates.  See Note 7 to the Financial Statements for a discussion of variable-rate remarketable bonds issued on behalf of LG&E and KU.  LKE has no capital lease obligations.
(b)Assumes interest payments through stated maturity.  The payments herein are subject to change, as payments for debt that is or becomes variable-rate debt have been estimated.
(c)See Note 11 to the Financial Statements for additional information.
(d)Represents contracts to purchase coal, natural gas and natural gas transportation.  See Note 15 to the Financial Statements for additional information.
(e)Represents future minimum payments under OVEC power purchase agreements through June 2040.  See Note 15 to the Financial Statements for additional information.
(f)Represents construction commitments, including commitments for the Mill Creek and Ghent environmental air projects, Cane Run Unit 7, Ghent landfill and Ohio Falls refurbishment which are also reflected in the Capital Expenditures table presented above.
(g)Based on the current funded status of LKE's qualified pension plans, no cash contributions are required.  See Note 13 to the Financial Statements for a discussion of expected contributions.
(h)Represents other contractual obligations.

Dividends

From time to time, as determined by its Board of Directors, LKE pays dividends to the sole member, PPL.

As discussed in Note 7 to the Financial Statements, LG&E's and KU's ability to pay dividends is limited under a covenant in each of their revolving line of credit facilities.  This covenant restricts their debt to total capital ratio to not more than 70%.  See Note 7 to the Financial Statements for other restrictions related to distributions on capital interests for LKE subsidiaries.

Purchase or Redemption of Debt Securities

LKE will continue to evaluate purchasing or redeeming outstanding debt securities and may decide to take action depending upon prevailing market conditions and available cash.

Rating Agency Actions

Moody's, S&P and Fitch periodically review the credit ratings on the debt securities of LKE and its subsidiaries.  Based on their respective independent reviews, the rating agencies may make certain ratings revisions or ratings affirmations.

A credit rating reflects an assessment by the rating agency of the creditworthiness associated with an issuer and particular securities that it issues.  The credit ratings of LKE and its subsidiaries are based on information provided by LKE and other sources.  The ratings of Moody's, S&P and Fitch are not a recommendation to buy, sell or hold any securities of LKE or its subsidiaries.  Such ratings may be subject to revisions or withdrawal by the agencies at any time and should be evaluated independently of each other and any other rating that may be assigned to the securities.  The credit ratings of LKE and its subsidiaries affect its liquidity, access to capital markets and cost of borrowing under its credit facilities.
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The following table sets forth LKE's and its subsidiaries' security credit ratings as of December 31, 2012.

Senior UnsecuredSenior SecuredCommercial Paper
IssuerMoody'sS&PFitchMoody'sS&PFitchMoody'sS&PFitch
LKEBaa2BBB-BBB+
LG&EAA2A-A+P-2A-2F-2
KUAA2A-A+P-2A-2F-2

In addition to the credit ratings noted above, the rating agencies took the following actions related to LKE and its subsidiaries:

In February 2012, Fitch assigned ratings to the two newly established commercial paper programs for LG&E and KU.

In March 2012, Moody's affirmed the following ratings:
·the long-term ratings of the First Mortgage Bonds for LG&E and KU;
·the issuer ratings for LG&E and KU; and
·the bank loan ratings for LG&E and KU.

Also in March 2012, Moody's and S&P each assigned short-term ratings to the two newly established commercial paper programs for LG&E and KU.
In March and May 2012, Moody's, S&P and Fitch affirmed the long-term ratings for LG&E's 2003 Series A, and 2007 Series B pollution control bonds.

In November 2012, Moody's and S&P affirmed the long-term ratings for LG&E's 2007 Series A pollution control bonds.

In December 2012, Fitch affirmed the issuer default ratings, individual security ratings and outlooks for LKE, LG&E and KU.

Ratings Triggers

LKE and its subsidiaries have various derivative and non-derivative contracts, including contracts for the sale and purchase of electricity, fuel, commodity transportation and storage and interest rate instruments, which contain provisions requiring LKE and its subsidiaries to post additional collateral, or permitting the counterparty to terminate the contract, if LKE's or the subsidiaries' credit rating were to fall below investment grade.  See Note 19 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 December 31, 2012.  At December 31, 2012, if LKE's or its subsidiaries' credit ratings had been below investment grade, the maximum amount that LKE would have been required to post as additional collateral to counterparties was $78 million for both derivative and non-derivative commodity and commodity-related contracts used in its generation and marketing operations, gas supply and interest rate contracts.

Off-Balance Sheet Arrangements

LKE has entered into certain agreements that may contingently require payment to a guaranteed or indemnified party.  See Note 15 to the Financial Statements for a discussion of these agreements.

Risk Management

Market Risk

See Notes 1, 18 and 19 to the Financial Statements for information about LKE's risk management objectives, valuation techniques and accounting designations.
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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)

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.  LKE sells 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 19 to the Financial Statements for additional disclosures.

The balance and change in net fair value of LKE's commodity derivative contracts for the periods ended December 31, 2012, 2011 and 2010 are shown in the table below.

     Gains (Losses)
     Successor  Predecessor
         Two Months  Ten Months
     Year Ended Year Ended Ended  Ended
     December 31, December 31, December 31,  October 31,
     2012  2011  2010   2010 
                 
Fair value of contracts outstanding at the beginning of the period    $ (2)       
Contracts realized or otherwise settled during the period      (3)     $ 3 
Fair value of new contracts entered into during the period             (4)
Other changes in fair value (a)      5  $ (2)    1 
Fair value of contracts outstanding at the end of the period    $  $ (2)  $ 
(a)Represents the change in value of outstanding transactions and the value of transactions entered into and settled during the period.

Interest Rate Risk

LKE and its subsidiaries issue debt to finance their operations, which exposes them to interest rate risk.  LKE utilizes various financial derivative instruments to adjust the mix of fixed and floating interest rates in its debt portfolio when appropriate.  Risk limits under LKE's risk management program are designed to balance risk, exposure to volatility in interest expense and changes in the fair value of LKE's debt portfolio due to changes in the absolute level of interest rates.

At December 31, 2012 and 2011, LKE's potential annual exposure to increased interest expense, based on a 10% increase in interest rates, was not significant.

LKE is also exposed to changes in the fair value of its debt portfolio.  LKE estimated that a 10% decrease in interest rates at December 31, 2012, would increase the fair value of its debt portfolio by $113 million compared with $125 million at December 31, 2011.

LKE had the following interest rate hedges outstanding at:  
                    
   December 31, 2012 December 31, 2011
         Effect of a       Effect of a
      Fair Value, 10% Adverse    Fair Value, 10% Adverse
   Exposure Net - Asset Movement Exposure Net - Asset Movement
   Hedged (Liability) (a) in Rates Hedged (Liability) (a) in Rates
Economic hedges                  
 Interest rate swaps (b) $179  $(58) $(3) $179  $(60) $(4)
Cash flow hedges                  
 Interest rate swaps (b)  300   14   (18)         

(a)Includes accrued interest.
(b)LKE utilizes various risk management instruments to reduce its exposure to the expected future cash flow variability of its debt instruments.  These risks include exposure to adverse interest rate movements for outstanding variable rate debt and for future anticipated financing.  While LKE is exposed to changes in the fair value of these instruments, any realized changes in the fair value of such economic and cash flow hedges are recoverable through regulated rates and any subsequent changes in fair value of these derivatives are included in regulatory assets or liabilities.  Sensitivities represent a 10% adverse movement in interest rates.  The positions outstanding at December 31, 2012 mature through 2043.
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Credit Risk

LKE is exposed to potential losses as a result of nonperformance by counterparties of their contractual obligations.  LKE maintains credit policies and procedures to limit counterparty credit risk including evaluating credit ratings and financial information along with having certain counterparties post margin if the credit exposure exceeds certain thresholds.  LKE is exposed to potential losses as a result of nonpayment by customers.  LKE maintains an allowance for doubtful accounts based on a historical charge-off percentage for retail customers.  Allowances for doubtful accounts from wholesale and municipal customers and for miscellaneous receivables are based on specific identification by management.  Retail, wholesale and municipal customer accounts are written-off after four months of no payment activity.  Miscellaneous receivables are written-off as management determines them to be uncollectible.

Certain of LKE's derivative instruments contain provisions that require it to provide immediate and on-going collateralization of derivative instruments in net liability positions based upon LKE's credit ratings from each of the major credit rating agencies.  See Notes 18 and 19 to the Financial Statements for information regarding exposure and the risk management activities.

Related Party Transactions

LKE is not aware of any material ownership interest or operating responsibility by senior management of LKE, LG&E or KU in outside partnerships, including leasing transactions with variable interest entities or other entities doing business with LKE.  See Note 16 to the Financial Statements for additional information on related party transactions.

Environmental Matters

Protection of the environment is a major priority for LKE and a significant element of its business activities.  Extensive federal, state and local environmental laws and regulations are applicable to LKE's air emissions, water discharges and the management of hazardous and solid waste, among other areas, and the costs 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 from prior versions by the relevant agencies.  Costs may take the form of increased capital expenditures or operating and maintenance expenses; monetary fines, penalties or forfeitures or other restrictions.  Many of these environmental law considerations are also applicable to the operations of key suppliers, or customers, such as coal producers, industrial power users, etc.; and may impact the costs for their products or their demand for LKE's services.

Physical effects associated with climate change could include the impact of changes in weather patterns, such as storm frequency and intensity, and the resultant potential damage to LKE's generation assets and electricity transmission and distribution systems, as well as impacts on customers.  In addition, changed weather patterns could potentially reduce annual rainfall in areas where LKE has hydro generating facilities or where river water is used to cool its fossil powered generators.  LKE cannot currently predict whether its businesses will experience these potential climate change-related risks or estimate the potential cost of their related consequences.

See "Item 1. Business - Environmental Matters" and Note 15 to the Financial Statements for a discussion of environmental matters.

New Accounting Guidance

See Notes 1 and 24 to the Financial Statements for a discussion of new accounting guidance adopted and pending adoption.

Application of Critical Accounting Policies

Financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies.  The following accounting policies are particularly important to the financial condition or results of operations, and require estimates or other judgments of matters inherently uncertain.  Changes in the estimates or other judgments included within these accounting policies could result in a significant change to the information presented in the Financial Statements (these accounting policies are also discussed in Note 1 to the Financial Statements).  LKE's senior management has reviewed these critical accounting policies, the following disclosures regarding their application and the estimates and assumptions regarding them, with PPL's Audit Committee.
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Revenue Recognition - Unbilled Revenue
Revenues related to the sale of energy are recorded when service is rendered or when energy is delivered to customers.  Because customers of LG&E's and KU's retail operations are billed on cycles which vary based on the timing of the actual reading of their electric and gas meters, LKE records estimates for unbilled revenues at the end of each reporting period.  Such unbilled revenue amounts reflect estimates of the amount of electricity and gas delivered to customers since the date of the last reading of their meters.  The unbilled revenues reflect consideration of estimated usage by customer class, the effect of different rate schedules, changes in weather, and where applicable, the impact of weather normalization or other regulatory provisions of rate structures.  In addition to the unbilled revenue accrual resulting from cycle billing, LKE makes additional accruals resulting from the timing of customer bills.  The accrual of unbilled revenues in this manner properly matches revenues and related costs.  At December 31, 2012 and 2011, LKE had unbilled revenue balances of $156 million and $146 million.
Defined Benefits

LKE and certain of its subsidiaries sponsor and participate in qualified funded and non-qualified unfunded defined benefit pension plans.  LKE also sponsors a funded other postretirement benefit plan.  These plans are applicable to the majority of the employees of LKE and its subsidiaries.  LKE records an asset or liability to recognize the funded status of all defined benefit plans with an offsetting entry to OCI or regulatory assets or liabilities.  Consequently, the funded status of all defined benefit plans is fully recognized on the Balance Sheets.  See Note 13 to the Financial Statements for additional information about the plans and the accounting for defined benefits.

Certain assumptions are made by LKE and certain of its subsidiaries regarding the valuation of benefit obligations and the performance of plan assets.  When accounting for defined benefits, delayed recognition in earnings of differences between actual results and expected or estimated results is a guiding principle.  Annual net periodic defined benefit costs are recorded in current earnings based on estimated results.  Any differences between actual and estimated results are recorded in OCI or regulatory assets and liabilities for amounts that are expected to be recovered through regulated customer rates.  These amounts in regulatory assets and liabilities are amortized to income over future periods.  The delayed recognition allows for a smoothed recognition of costs over the working lives of the employees who benefit under the plans.  The primary assumptions are:
·Discount Rate - The discount rate is used in calculating the present value of benefits, which is based on projections of benefit payments to be made in the future.  The objective in selecting the discount rate is to measure the single amount that, if invested at the measurement date in a portfolio of high-quality debt instruments, would provide the necessary future cash flows to pay the accumulated benefits when due.

·Expected Long-term Return on Plan Assets - Management projects the long-term rates of return on plan assets based on historical performance, future expectations and periodic portfolio rebalancing among the diversified asset classes.  These projected returns reduce the net benefit costs LKE records currently.

·Rate of Compensation Increase - Management projects employees' annual pay increases, which are used to project employees' pension benefits at retirement.

·Health Care Cost Trend Rate - Management projects the expected increases in the cost of health care.
In selecting a discount rate for its defined benefit plans LKE starts with a cash flow analysis of the expected benefit payment stream for its plans.  The plan-specific cash flows are matched against the coupons and expected maturity values of individually selected bonds.  This bond matching process begins with the full universe of Aa-rated non-callable (or callable with make-whole provisions) bonds, serving as the base from which those with the lowest and highest yields are eliminated to develop an appropriate subset of bonds.  Individual bonds are then selected based on the timing of each plan's cash flows and parameters are established as to the percentage of each individual bond issue that could be hypothetically purchased and the surplus reinvestment rates to be assumed.  At December 31, 2012, LKE decreased the discount rate for its pension plans from 5.08% to 4.24% and decreased the discount rate for its other postretirement benefit plan from 4.78% to 3.99%.
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The expected long-term rates of return for LKE's defined benefit pension plans and defined other postretirement benefit plan have been developed using a best-estimate of expected returns, volatilities and correlations for each asset class.  LKE management corroborates these rates with expected long-term rates of return calculated by its independent actuary, who uses a building block approach that begins with a risk-free rate of return with factors being added such as inflation, duration, credit spreads and equity risk.  Each plan's specific asset allocation is also considered in developing a reasonable return assumption.  At December 31, 2012, LKE's expected return on plan assets decreased from 7.25% to 7.10%.

In selecting a rate of compensation increase, LKE considers past experience in light of movements in inflation rates.  At December 31, 2012, LKE's rate of compensation increase remained at 4.00%.

In selecting health care cost trend rates LKE considers past performance and forecasts of health care costs.  At December 31, 2012, LKE's health care cost trend rates were 8.00% for 2013, gradually declining to 5.50% for 2019.

A variance in the assumptions listed above could have a significant impact on accrued defined benefit liabilities or assets, reported annual net periodic defined benefit costs and OCI or regulatory assets and liabilities for LKE.  While the charts below reflect either an increase or decrease in each assumption, the inverse of the change would impact the accrued defined benefit liabilities or assets, reported annual net periodic defined benefit costs and OCI or regulatory assets and liabilities for LKE by a similar amount in the opposite direction.  The sensitivities below reflect an evaluation of the change based solely on a change in that assumption and does not include income tax effects.

At December 31, 2012, the defined benefit plans were recorded as follows:

Pension liabilities (a)$ 417 
Other postretirement benefit liabilities 141 

(a)Amount includes current and noncurrent portions.

The following chart reflects the sensitivities in the December 31, 2012 Balance Sheet associated with a change in certain assumptions based on LKE's primary defined benefit plans.

  Increase (Decrease)
     Impact on    Impact on
  Change in defined benefit Impact on regulatory
Actuarial assumption assumption liabilities OCI assets
             
Discount Rate  (0.25)% $ 59  $ (22) $ 37 
Rate of Compensation Increase  0.25%   10    (6)   4 
Health Care Cost Trend Rate (a)  1%   5    (1)   4 

(a)Only impacts other postretirement benefits.

In 2012, LKE recognized net periodic defined benefit costs charged to operating expense of $40 million.  This amount represents an $11 million decrease from 2011.  This decrease in expense for 2012 was primarily attributable to the increase in the expected return on plan assets resulting from pension contributions of $57 million, a reduction in the amortization of outstanding losses and lower interest cost.

The following chart reflects the sensitivities in the 2012 Statement of Income (excluding income tax effects) associated with a change in certain assumptions based on LKE's primary defined benefit plans.

Actuarial assumption   Change in assumption   Impact on defined benefit costs
       
Discount Rate  (0.25)% $ 4 
Expected Return on Plan Assets  (0.25)%   3 
Rate of Compensation Increase  0.25%   1 
Health Care Cost Trend Rate (a)  1%   

(a)Only impacts other postretirement benefits.
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Asset Impairment (Excluding Investments)
Impairment analyses are performed for long-lived assets that are subject to depreciation or amortization whenever events or changes in circumstances indicate that a long-lived asset's carrying amount may not be recoverable.  For these long-lived assets classified as held and used, such events or changes in circumstances are:
·a significant decrease in the market price of an asset;
·a significant adverse change in the extent or manner in which an asset is being used or in its physical condition;
·a significant adverse change in legal factors or in the business climate;
·an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of an asset;
·a current-period operating or cash flow loss combined with a history of losses or a forecast that demonstrates continuing losses; or
·a current expectation that, more likely than not, an asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.
For a long-lived asset classified as held and used, impairment is recognized when the carrying amount of the asset is not recoverable and exceeds its fair value.  The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset.  If the asset is impaired, an impairment loss is recorded to adjust the asset's carrying amount to its estimated fair value.  Management must make significant judgments to estimate future cash flows including the useful lives of long-lived assets, the fair value of the assets and management's intent to use the assets.  Alternate courses of action are considered to recover the carrying amount of a long-lived asset, and estimated cash flows from the "most likely" alternative are used to assess impairment whenever one alternative is clearly the most likely outcome.  If no alternative is clearly the most likely, then a probability-weighted approach is used taking into consideration estimated cash flows from the alternatives.  For assets tested for impairment as of the balance sheet date, the estimates of future cash flows used in that test consider the likelihood of possible outcomes that existed at the balance sheet date, including the assessment of the likelihood of a future sale of the assets.  That assessment is not revised based on events that occur after the balance sheet date.  Changes in assumptions and estimates could result in significantly different results than those identified and recorded in the financial statements.

For a long-lived asset classified as held for sale, impairment exists when the carrying amount of the asset (disposal group) exceeds its fair value less cost to sell.  If the asset (disposal group) is impaired, an impairment loss is recorded to adjust the carrying amount to its fair value less cost to sell.  A gain is recognized for any subsequent increase in fair value less cost to sell, but not in excess of the cumulative impairment previously recognized.
For determining fair value, quoted market prices in active markets are the best evidence.  However, when market prices are unavailable, LKE considers all valuation techniques appropriate under the circumstances and for which market participant inputs can be obtained.  Generally discounted cash flows are used to estimate fair value, which incorporates market participant inputs when available.  Discounted cash flows are calculated by estimating future cash flow streams and applying appropriate discount rates to determine the present value of the cash flow streams.
Goodwill is tested for impairment at the reporting unit level.  LKE's reporting units have been determined to be at the operating segment level.  A goodwill impairment test is performed annually or more frequently if events or changes in circumstances indicate that the carrying amount of the reporting unit may be greater than the unit's fair value.  Additionally, goodwill is tested for impairment after a portion of goodwill has been allocated to a business to be disposed of.
Beginning in 2012, LKE may elect either to initially make a qualitative evaluation about the likelihood of an impairment of goodwill or to bypass the qualitative assessment and directly test goodwill for impairment using a two-step quantitative test.  If the qualitative evaluation (referred to as "step zero") is elected and the assessment results in a determination that it is not more likely than not the fair value of a reporting unit is less than the carrying amount, the two-step quantitative impairment test is not necessary.  However, the quantitative impairment test is required if LKE concludes it is more likely than not the fair value of a reporting unit is less than the carrying amount based on the step zero assessment.
When the two-step quantitative impairment test is elected or required as a result of the step zero assessment in step one, LKE identifies a potential impairment by comparing the estimated fair value of a reporting unit with its carrying amount, including goodwill, on the measurement date.  If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill is not considered impaired.  If the carrying amount exceeds the estimated fair value, the second step is performed to measure the amount of impairment loss, if any.
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The second step of the quantitative test requires a calculation of the implied fair value of goodwill which is determined in the same manner as the amount of goodwill in a business combination.  That is, the estimated fair value of a reporting unit is allocated to all of the assets and liabilities of that reporting unit as if the reporting unit had been acquired in a business combination and the estimated fair value of the reporting unit was the price paid to acquire the reporting unit.  The excess of the estimated fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill.  The implied fair value of the reporting unit's goodwill is then compared with the carrying amount of that goodwill.  If the carrying amount exceeds the implied fair value, an impairment loss is recognized in an amount equal to that excess.  The loss recognized cannot exceed the carrying amount of the reporting unit's goodwill.
LKE elected to perform the two-step quantitative impairment test of goodwill for all of its reporting units in the fourth quarter of 2012 and no impairment was recognized.  Management used both discounted cash flows and market multiples, which required significant assumptions to estimate the fair value of each reporting unit.  Applying an appropriate weighting to both the discounted cash flow and market multiple valuations, a decrease in the forecasted cash flows of 10%, an increase in the discount rate by 25 basis points, or a 10% decrease in the multiples would not have resulted in an impairment of goodwill.
Loss Accruals

Losses are accrued for the estimated impacts of various conditions, situations or circumstances involving uncertain or contingent future outcomes.  For loss contingencies, the loss must be accrued if (1) information is available that indicates it is probable that a loss has been incurred, given the likelihood of the uncertain future events and (2) the amount of the loss can be reasonably estimated.  Accounting guidance defines "probable" as cases in which "the future event or events are likely to occur." The accrual of contingencies that might result in gains is not recorded unless recovery is assured.  Potential loss contingencies for environmental remediation, litigation claims, regulatory penalties and other events are continuously assessed.

The accounting aspects of estimated loss accruals include (1) the initial identification and recording of the loss, (2) the determination of triggering events for reducing a recorded loss accrual and (3) the ongoing assessment as to whether a recorded loss accrual is sufficient.  All three of these aspects require significant judgment by management.  Internal expertise and outside experts (such as lawyers and engineers) are used, as necessary to help estimate the probability that a loss has been incurred and the amount (or range) of the loss.

In 2012, the estimated liability for indemnifications related to the 2009 termination of the WKE lease was increased.

Certain other events have been identified that could give rise to a loss, but that do not meet the conditions for accrual.  Such events are disclosed, but not recorded, when it is reasonably possible that a loss has been incurred.  Accounting guidance defines "reasonably possible" as cases in which "the future event or events occurring is more than remote, but less than likely to occur."

When an estimated loss is accrued, the triggering events for subsequently adjusting the loss accrual are identified, where applicable.  The triggering events generally occur when the contingency has been resolved and the actual loss is paid or written off, or when the risk of loss has diminished or been eliminated.  The following are some of the triggering events that provide for the adjustment of certain recorded loss accruals:
·Allowances for uncollectible accounts are reduced when accounts are written off after prescribed collection procedures have been exhausted, a better estimate of the allowance is determined or underlying amounts are ultimately collected.

·Environmental and other litigation contingencies are reduced when the contingency is resolved, LKE makes actual payments, a better estimate of the loss is determined or the loss is no longer considered probable.
Loss accruals are reviewed on a regular basis to assure that the recorded potential loss exposures are appropriate.  This involves ongoing communication and analyses with internal and external legal counsel, engineers, operation management and other parties.

See Note 15 to the Financial Statements for additional information.
Asset Retirement Obligations

LKE is required to recognize a liability for legal obligations associated with the retirement of long-lived assets.  The initial obligation is measured at its estimated fair value.  An equivalent amount is recorded as an increase in the value of the capitalized asset and allocated to expense over the useful life of the asset.  Until the obligation is settled, the liability is increased, through the recognition of accretion expense in the Consolidated Statements of Income, for changes in the obligation due to the passage of time.  Since costs of removal are collected in rates, the accretion and depreciation are offset with a regulatory credit on the income statement, such that there is no earnings impact.  The regulatory asset created by the
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regulatory credit is relieved when the ARO has been settled.  An ARO must be recognized when incurred if the fair value of the ARO can be reasonably estimated.  See Note 21 to the Financial Statements for related disclosures.

In determining AROs, management must make significant judgments and estimates to calculate fair value.  Fair value is developed using an expected present value technique based on assumptions of market participants that considers estimated retirement costs in current period dollars that are inflated to the anticipated retirement date and then discounted back to the date the ARO was incurred.  Changes in assumptions and estimates included within the calculations of the fair value of AROs could result in significantly different results than those identified and recorded in the financial statements.  Estimated ARO costs and settlement dates, which affect the carrying value of various AROs and the related assets, are reviewed periodically to ensure that any material changes are incorporated into the estimate of the obligations.  Any change to the capitalized asset is amortized over the remaining life of the associated long-lived asset.

At December 31, 2012, LKE had AROs comprised of current and noncurrent amounts, totaling $131 million recorded on the Balance Sheet.  Of the total amount, $90 million, or 69%, relates to LKE's ash ponds, landfills and natural gas mains.  The most significant assumptions surrounding AROs are the forecasted retirement costs, the discount rates and the inflation rates.  A variance in the forecasted retirement costs, the discount rates or the inflation rates could have a significant impact on the ARO liabilities.

The following chart reflects the sensitivities related to LKE's ARO liabilities for ash ponds, landfills and natural gas mains at December 31, 2012:

  Change in Impact on
  Assumption ARO Liability
       
Retirement Cost  10% $ 11 
Discount Rate  (0.25)%   3 
Inflation Rate  0.25%   8 
Income Taxes

Significant management judgment is required in developing the provision for income taxes, primarily due to the uncertainty related to tax positions taken or expected to be taken in tax returns and the determination of deferred tax assets, liabilities and valuation allowances.

Significant management judgment is required to determine the amount of benefit recognized related to an uncertain tax position.  Tax positions are evaluated following a two-step process.  The first step requires an entity to determine whether, based on the technical merits supporting a particular tax position, it is more likely than not (greater than a 50% chance) that the tax position will be sustained.  This determination assumes that the relevant taxing authority will examine the tax position and is aware of all the relevant facts surrounding the tax position.  The second step requires an entity to recognize in the financial statements the benefit of a tax position that meets the more-likely-than-not recognition criterion.  The benefit recognized is measured at the largest amount of benefit that has a likelihood of realization, upon settlement, that exceeds 50%.  Management considers a number of factors in assessing the benefit to be recognized, including negotiation of a settlement.

On a quarterly basis, uncertain tax positions are reassessed by considering information known at the reporting date.  Based on management's assessment of new information, a tax benefit may subsequently be recognized for a previously unrecognized tax position, a previously recognized tax position may be derecognized, or the benefit of a previously recognized tax position may be remeasured.  The amounts ultimately paid upon resolution of issues raised by taxing authorities may differ materially from the amounts accrued and may materially impact the financial statements in the future.

At December 31, 2012, LKE's existing reserve exposure to either increases or decreases in unrecognized tax benefits during the next 12 months is $1 million.  This change could result from subsequent recognition, derecognition and/or changes in the measurement of uncertain tax positions.  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.
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The balance sheet classification of unrecognized tax benefits and the need for valuation allowances to reduce deferred tax assets also require significant management judgment.  Unrecognized tax benefits are classified as current to the extent management expects to settle an uncertain tax position by payment or receipt of cash within one year of the reporting date.  Valuation allowances are initially recorded and reevaluated each reporting period by assessing the likelihood of the ultimate realization of a deferred tax asset.  Management considers a number of factors in assessing the realization of a deferred tax asset, including the reversal of temporary differences, future taxable income and ongoing prudent and feasible tax planning strategies.  Any tax planning strategy utilized in this assessment must meet the recognition and measurement criteria utilized to account for an uncertain tax position.  See Note 5 to the Financial Statements for related disclosures.
Regulatory Assets and Liabilities
LKE's subsidiaries, LG&E and KU, are cost-based rate-regulated utilities.  As a result, the effects of regulatory actions are required to be reflected in the financial statements.  Assets and liabilities are recorded that result from the regulated ratemaking process that may not be recorded under GAAP for non-regulated entities.  Regulatory assets generally represent incurred costs that have been deferred because such costs are probable of future recovery in regulated customer rates.  Regulatory liabilities are recognized for amounts expected to be returned through future regulated customer rates.  In certain cases, regulatory liabilities are recorded based on an understanding with the regulator that rates have been set to recover costs that are expected to be incurred in the future, and the regulated entity is accountable for any amounts charged pursuant to such rates and not yet expended for the intended purpose.  The accounting for regulatory assets and liabilities is based on specific ratemaking decisions or precedent for each transaction or event as prescribed by the FERC, the KPSC, the VSCC and the TRA.

Management continually assesses whether the regulatory assets are probable of future recovery by considering factors such as changes in the applicable regulatory and political environments, the ability to recover costs through regulated rates, recent rate orders to other regulated entities and the status of any pending or potential deregulation legislation.  Based on this continual assessment, management believes the existing regulatory assets are probable of recovery.  This assessment reflects the current political and regulatory climate at the state and federal levels, and is subject to change in the future.  If future recovery of costs ceases to be probable, then asset write-off would be required to be recognized in operating income.  Additionally, the regulatory agencies can provide flexibility in the manner and timing of the depreciation of PP&E and amortization of regulatory assets.

At December 31, 2012, LKE had regulatory assets of $649 million and regulatory liabilities of $1,011 million.  All regulatory assets are either currently being recovered under specific rate orders, represent amounts that are expected to be recovered in future rates or benefit future periods based upon established regulatory practices.

See Note 6 to the Financial Statements for additional information on regulatory assets and liabilities.

Other Information

PPL's Audit Committee has approved the independent auditor to provide audit, tax and other services permitted by Sarbanes-Oxley and SEC rules.  The audit services include services in connection with statutory and regulatory filings, reviews of offering documents and registration statements, and internal control reviews.  See "Item 14. Principal Accounting Fees and Services" for more information.

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LOUISVILLE GAS AND ELECTRIC COMPANY

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations

The information provided in this Item 7 should be read in conjunction with LG&E's Financial Statements and the accompanying Notes.  Capitalized terms and abbreviations are defined in the glossary.  Dollars are in millions, unless otherwise noted.

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

·  "Overview" provides a description of LG&E and its business strategy, a summary of Net Income and a discussion of certain events related to LG&E's results of operations and financial condition.

·  "Results of Operations" provides a summary of LG&E's earnings and a description of key factors expected to impact future earnings.  This section ends with explanations of significant changes in principal items on LG&E's Statements of Income, comparing 2012 with 2011 and 2011 with 2010.

·  "Financial Condition - Liquidity and Capital Resources" provides an analysis of LG&E's liquidity position and credit profile.  This section also includes a discussion of forecasted sources and uses of cash and rating agency actions.

·  "Financial Condition - Risk Management" provides an explanation of LG&E's risk management programs relating to market and credit risk.

·  
"Application of Critical Accounting Policies" provides an overview of the accounting policies that are particularly important to the results of operations and financial condition of LG&E and that require its management to make significant estimates, assumptions and other judgments of matters inherently uncertain.

Overview

Introduction

LG&E, headquartered in Louisville, Kentucky, is a regulated utility engaged in the generation, transmission, distribution and sale of electric energy and distribution and sale of natural gas in Kentucky.  LG&E and its affiliate, KU, are wholly owned subsidiaries of LKE.  LKE, a holding company, became a wholly owned subsidiary of PPL when PPL acquired all of LKE's interests from E.ON US Investments Corp. on November 1, 2010.  Following the acquisition, both LG&E and KU continue operating as subsidiaries of LKE, which is now an intermediary holding company in PPL's group of companies.  Refer to "Item 1. Business - Background" for a description of LG&E's business.

Business Strategy

LG&E's overall strategy is to provide reliable, safe, competitively priced energy to its customers and reasonable returns on regulated investments to its shareowner.

A key objective for LG&E is to maintain a strong credit profile through managing financing costs and access to credit markets.  LG&E continually focuses on maintaining an appropriate capital structure and liquidity position.

Successor and Predecessor Financial Presentation

LG&E's Financial Statements and related financial and operating data include the periods before and after PPL's acquisition of LKE on November 1, 2010 and have been segregated to present pre-acquisition activity as the Predecessor and post-acquisition activity as the Successor.  Certain accounting and presentation methods were changed to acceptable alternatives to conform to PPL's accounting policies, and the cost bases of certain assets and liabilities were changed as of November 1, 2010 as a result of the application of push-down accounting.  Consequently, the financial position, results of operations and cash flows for the Successor periods are not comparable to the Predecessor periods; however, the core operations of LG&E have not changed as a result of the acquisition.
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Financial and Operational Developments

Net Income

Net Income for 2012, 2011 and 2010 was $123 million, $124 million and $128 million.  Earnings in 2012 decreased 1% from 2011 and earnings in 2011 decreased 3% from 2010.

See "Results of Operations" for a discussion and analysis of LG&E's earnings.

Rate Case Proceedings

In June 2012, LG&E filed a request with the KPSC for an increase in annual base electric rates of approximately $62 million and an increase in annual base gas rates of approximately $17 million.  In November 2012, LG&E along with all of the parties filed a unanimous settlement agreement.  Among other things, the settlement provided for increases in annual base electric rates of $34 million and an increase in annual base gas rates of $15 million.  The settlement agreement also included revised depreciation rates that result in reduced annual electric depreciation expense of approximately $9 million.  The settlement agreement included an authorized return on equity of 10.25%.  On December 20, 2012, the KPSC issued an order approving the provisions in the settlement agreement.  The new rates became effective on January 1, 2013.  In addition to the increased base rates, the KPSC approved a gas line tracker mechanism to provide for recovery of costs associated with LG&E's gas main replacement program, gas service lines and risers.

Commercial Paper

In February 2012, LG&E established a commercial paper program for up to $250 million to provide an additional financing source to fund its short-term liquidity needs, if and when necessary.  Commercial paper issuances are supported by LG&E's Syndicated Credit Facility.  At December 31, 2012, LG&E had $55 million of commercial paper outstanding.

Terminated Bluegrass CTs Acquisition

In September 2011, LG&E and KU entered into an asset purchase agreement with Bluegrass Generation for the purchase of the Bluegrass CTs, aggregating approximately 495 MW, plus limited associated contractual arrangements required for operation of the units, for a purchase price of $110 million, pending receipt of applicable regulatory approvals.  In May 2012, the KPSC issued an order approving the request to purchase the Bluegrass CTs.  In November 2011, LG&E and KU filed an application with the FERC under the Federal Power Act requesting approval to purchase the Bluegrass CTs.  In May 2012, the FERC issued an order conditionally authorizing the acquisition of the Bluegrass CTs, subject to approval by the FERC of satisfactory mitigation measures to address market-power concerns.  After a review of potentially available mitigation options, LG&E and KU determined that the options were not commercially justifiable.  In June 2012, LG&E and KU terminated the asset purchase agreement for the Bluegrass CTs in accordance with its terms and made applicable filings with the KPSC and FERC.

Cane Run Unit 7 Construction

In September 2011, LG&E and KU filed a CPCN with the KPSC requesting approval to build Cane Run Unit 7.  In May 2012, the KPSC issued an order approving the request.  LG&E will own a 22% undivided interest and KU will own a 78% undivided interest in the new generating unit.  A formal request for recovery of the costs associated with the construction was not included in the CPCN filing with the KPSC but is expected to be included in future rate case proceedings.  LG&E and KU commenced preliminary construction activities in the third quarter of 2012 and project construction is expected to be completed by May 2015.  The project, which includes building a natural gas supply pipeline and related transmission projects, has an estimated cost of approximately $600 million.

In conjunction with this construction and to meet new, more stringent EPA regulations with a 2015 compliance date, LG&E anticipates retiring three older coal-fired electric generating units at the Cane Run plant, which have a combined summer capacity rating of 563 MW.
Future Capacity Needs

In addition to the construction of a combined cycle gas unit at the Cane Run station, LG&E and KU continue to assess future capacity needs.  As a part of the assessment, LG&E and KU issued an RFP in September 2012 for up to 700 MW of capacity beginning as early as 2015.
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Results of Operations

As previously noted, LG&E's results for the periods after October 31, 2010 are on a basis of accounting different from its results for periods prior to November 1, 2010.  See "Overview - Successor and Predecessor Financial Presentation" for further information.

The utility business is affected by seasonal weather.  As a result, operating revenues (and associated operating expenses) are not generated evenly throughout the year.  Revenue and earnings are generally higher during the first and third quarters and lower during the second and fourth quarters due to weather.

The following table summarizes the significant components of net income for 2012, 2011 and 2010 and the changes therein:

Earnings

    Successor  Predecessor
        Two Months  Ten Months
    Year Ended Year Ended Ended  Ended
    December 31, December 31, December 31,  October 31,
    2012  2011  2010   2010 
                
 Net Income $ 123  $ 124  $ 19   $ 109 

The changes in the components of Net Income between these periods were due to the following factors, which reflect reclassifications for items included in Margins and certain items that management considers special.

  2012 vs. 2011 2011 vs. 2010
     
Margins $ 3  $ 39 
Other operation and maintenance   3    (10)
Depreciation   (4)   (13)
Taxes, other than income   (5)   (5)
Other Income (Expense) - net   (1)   (16)
Other   4    (1)
Special items, after-tax   (1)   2 
Total $ (1) $ (4)

The net unrealized gains (losses) on contracts that economically hedge anticipated cash flows are considered special items by management.  There were no unrealized gains (losses) in 2012.

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

·Higher other operation and maintenance in 2011 compared with 2010 primarily due to higher distribution maintenance costs of $8 million due to amortization of storm restoration related costs and a hazardous tree removal project initiated in August 2010.

·Higher depreciation in 2011 compared with 2010 primarily due to TC2 commencing dispatch in January 2011.

·Lower other income (expense) - net in 2011 compared with 2010 primarily due to $19 million of other income from the establishment of a regulatory asset in 2010 for previously recorded losses on interest rate swaps.

2013 Outlook

Excluding special items, LG&E projects higher earnings in 2013 compared with 2012, primarily driven by electric and gas base rate increases effective January 1, 2013, returns on additional environmental capital investments and retail load growth, partially offset by higher operation and maintenance.

Earnings in future periods are subject to various risks and uncertainties.  See "Forward-Looking Information," "Item 1. Business," "Item 1A. Risk Factors," the rest of this Item 7 and Notes 6 and 15 to the Financial Statements for a discussion of the risks, uncertainties and factors that may impact future earnings.
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Statement of Income Analysis --

Margins

Non-GAAP Financial Measure

The following discussion includes financial information prepared in accordance with GAAP, as well as a non-GAAP financial measure, "Margins."  Margins is 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.  Margins is a single financial performance measure of LG&E'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, returns on capital investments primarily associated with environmental regulations and performance incentives.  Certain costs associated with these mechanisms, primarily ECR and DSM, are recorded as "Other operation and maintenance" and "Depreciation."  As a result, this measure represents the net revenues from LG&E's operations.  This performance measure is used, in conjunction with other information, internally by senior management to manage operations and analyze actual results compared with budget.

Reconciliation of Non-GAAP Financial Measures

The following tables reconcile "Operating Income" to "Margins" as defined by LG&E for 2012, 2011 and 2010.

      2012 Successor   2011 Successor
           Operating        Operating
      Margins Other (a) Income (b)   Margins Other (a) Income (b)
                   
Operating Revenues $ 1,324     $ 1,324    $ 1,363  $ 1  $ 1,364 
Operating Expenses                    
 Fuel   374       374      350       350 
 Energy purchases   175       175      245       245 
 Other operation and maintenance   45  $ 318    363      42    321    363 
 Depreciation   3    149    152      2    145    147 
 Taxes, other than income      23    23         18    18 
   Total Operating Expenses   597    490    1,087      639    484    1,123 
Total $ 727  $ (490) $ 237    $ 724  $ (483) $ 241 

      Successor  Predecessor
      Two Months Ended December 31, 2010  Ten Months Ended October 31, 2010
           Operating        Operating
      Margins Other (a) Income (b)  Margins Other (a) Income (b)
                   
Operating Revenues $ 255  $ (1) $ 254   $ 1,057     $ 1,057 
Operating Expenses                   
 Fuel   60       60     306       306 
 Energy purchases   63       63     155       155 
 Other operation and maintenance   9    58    67     28  $ 253    281 
 Depreciation      23    23     6    109    115 
 Taxes, other than income      1    1        12    12 
   Total Operating Expenses   132    82    214     495    374    869 
Total $ 123  $ (83) $ 40   $ 562  $ (374) $ 188 

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

Changes in Non-GAAP Financial Measures

Margins increased by $3 million for 2012 compared with 2011, primarily due to $9 million of higher retail margins as a result of new environmental investments.  This increase was partially offset by lower wholesale margins of $6 million as volumes were impacted by lower market prices.  Retail volumes were consistent with the prior year as increased industrial sales offset declines associated with unseasonably mild weather during the first four months of 2012.  Total heating degree days decreased 13% compared to 2011, partially offset by a 7% increase in cooling degree days.

Margins increased by $39 million for 2011 compared with 2010.  New KPSC rates went into effect on August 1, 2010, contributing to an additional $48 million in operating revenue over the prior year.  Partially offsetting the rate increase were lower retail volumes resulting from weather and economic conditions.
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Other Operation and Maintenance     
       
The increase (decrease) in other operation and maintenance was due to:
   
  2012 vs. 2011 2011 vs. 2010
       
Administrative and general (a)$ (5) $ 4 
Distribution maintenance (b)  (1)   8 
Fuel for generation (c)     5 
Coal plant maintenance (d)  2    (5)
Other  4    3 
Total$  $ 15 

(a)Administrative and general costs decreased in 2012 compared with 2011 primarily due to a decrease in pension expense resulting from pension funding and lower interest cost.
(b)Distribution maintenance costs increased in 2011 compared with 2010 primarily due to amortization of storm restoration-related costs, a hazardous tree removal project initiated in August 2010 and an increase in pipeline integrity work.
(c)Fuel handling costs are included in other operation and maintenance on the Statements of Income for the Successor periods and are in fuel on the Statement of Income for the Predecessor period.
(d)Coal plant maintenance costs increased in 2012 compared with 2011 primarily due to an increased scope of scheduled outages.

Coal plant maintenance costs decreased in 2011 compared with 2010 primarily due to the timing of scheduled maintenance outages and non-outage boiler maintenance.

Depreciation

Depreciation increased by $5 million in 2012 compared with 2011 due to PP&E additions.

Depreciation increased by $9 million in 2011 compared with 2010 primarily due to TC2 commencing dispatch in January 2011.

Taxes, Other Than Income

Taxes, other than income increased by $5 million in 2012 compared with 2011 due in part to a $2 million increase in property taxes resulting from property additions, higher assessed values and changes in property classifications to categories with higher tax rates.

Taxes, other than income increased by $5 million in 2011 compared with 2010 primarily due to a $4 million state coal tax credit that was applied to 2010 property taxes.  The remaining increase was due to higher assessments, primarily from significant property additions.

Other Income (Expense) - net

Other income (expense) - net decreased by $16 million in 2011 compared with 2010 primarily due to $19 million of other income from the establishment of a regulatory asset for previously recorded losses on interest rate swaps in 2010.

Interest Expense

The increase (decrease) in interest expense was due to:

   2012 vs. 2011 2011 vs. 2010
        
Interest rates (a) $ (2) $ (7)
Long-term debt balances (b)      2 
Other      3 
Total $ (2) $ (2)

(a)Interest expense decreased in 2011 compared with 2010 due to lower interest rates on first mortgage bonds issued in November 2010 compared with the rates on the loans from E.ON AG affiliates that were in place through October 2010.
(b)Interest expense increased in 2011 compared with 2010 due to lower long-term debt balances for the first ten months of 2010.
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Financial Condition

Liquidity and Capital Resources

LG&E expects to continue to have adequate liquidity available through operating cash flows, cash and cash equivalents and its credit facilities, including commercial paper issuances. Additionally, subject to market conditions, LG&E currently plans to access capital markets in 2013.

LG&E's cash flows from operations and access to cost-effective bank and capital markets are subject to risks and uncertainties including, but not limited to:

·changes in commodity prices that may increase the cost of producing or purchasing power or decrease the amount LG&E receives from selling power;
·operational and credit risks associated with selling and marketing products in the wholesale power markets;
·unusual or extreme weather that may damage LG&E's transmission and distribution facilities or affect energy sales to customers;
·reliance on transmission facilities that LG&E does not own or control to deliver its electricity and natural gas;
·unavailability of generating units (due to unscheduled or longer-than-anticipated generation outages, weather and natural disasters) and the resulting loss of revenues and additional costs of replacement electricity;
·the ability to recover and the timeliness and adequacy of recovery of costs associated with regulated utility businesses;
·costs of compliance with existing and new environmental laws;
·any adverse outcome of legal proceedings and investigations with respect to LG&E's current and past business activities;
·deterioration in the financial markets that could make obtaining new sources of bank and capital markets funding more difficult and more costly; and
·a downgrade in LG&E's credit ratings that could adversely affect its ability to access capital and increase the cost of credit facilities and any new debt.

See "Item 1A. Risk Factors" for further discussion of risks and uncertainties affecting LG&E's cash flows.

At December 31, LG&E had the following:

     
  2012  2011  2010 
          
Cash and cash equivalents $ 22  $ 25  $ 2 
Short-term investments (a)         163 
  $ 22  $ 25  $ 165 
          
Short-term debt (b) $ 55     $ 163 

(a)Represents tax-exempt bonds issued by Louisville/Jefferson County, Kentucky, on behalf of LG&E that were purchased from the remarketing agent in 2008.  Such bonds were remarketed to unaffiliated investors in January 2011.  See Note 7 to the Financial Statements for additional information.
(b)Borrowings in 2012 were made under LG&E's commercial paper program and borrowings in 2010 were made under LG&E's syndicated credit facility.  See Note 7 to the Financial Statements for additional information.

The changes in LG&E's cash and cash equivalents position resulted from:

     Successor  Predecessor
         Two Months  Ten Months
     Year Ended Year Ended Ended  Ended
     December 31, December 31, December 31,  October 31,
     2012  2011  2010   2010 
              
Net cash provided by (used in) operating activities $ 308  $ 325  $ (8)  $ 189 
Net cash provided by (used in) investing activities   (289)   (42)   (63)    (107)
Net cash provided by (used in) financing activities   (22)   (260)   69     (83)
Net Increase (Decrease) in Cash and Cash Equivalents $ (3) $ 23  $ (2)  $ (1)
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Operating Activities

Net cash provided by operating activities decreased by 5%, or $17 million, in 2012 compared with 2011, primarily as a result of:
·Working capital cash flow changes declined by $65 million driven primarily by changes in receivables and unbilled revenues due to milder December weather in 2011 than in 2012 and 2010, and lower inventory levels in 2011 as compared with 2010 driven by lower gas prices.
·The decline was offset by $44 million increase in other operating cash flows driven by $43 million reduction in pension funding.

Net cash provided by operating activities increased by 80%, or $144 million, in 2011 compared with 2010, primarily as a result of:

·a decrease in working capital related to accounts receivable and unbilled revenues of $86 million primarily due to the timing of cash receipts and colder weather in December 2010 as compared with December 2009 and milder weather in December 2011 as compared with December 2010;
·an increase in net income adjusted for non-cash effects of $34 million (the recording of a regulatory asset for previously recorded losses on interest rate swaps of $22 million, deferred income taxes and investment tax credits of $17 million, depreciation of $9 million, partially offset by unrealized (gains) losses on derivatives of $14 million, defined benefit plans - expense of $3 million and other noncash items of $3 million);
·a decrease in cash outflows of $32 million due to lower inventory levels in 2011 as compared with 2010 driven by $21 million due to lower coal burn as a result of unplanned outages at the Mill Creek plant, $8 million for fuel inventory purchased in 2010 for TC2 that was not used until 2011 when TC2 began dispatch and $6 million for decreases in gas storage volumes;
·a decrease in cash refunded to customers of $25 million due to prior period over-recoveries related to the gas supply clause filings in 2009; and
·a decrease in cash outflows related to accrued taxes of $22 million due to the timing of payments of accrued tax liabilities in 2011 and 2010; partially offset by
·an increase in discretionary defined benefit plan contributions of $44 million made in order to achieve LG&E's long-term funding requirements; and
·an increase in working capital related to accounts payable of $41 million, which was driven primarily by the timing of cash payments and a decrease in natural gas purchases of $18 million in 2011 as compared with 2010 due to a decrease in combustion turbine generation as a result of the dispatch of TC2 beginning in January 2011.

Investing Activities

Net cash used in investing activities increased by $247 million, in 2012 compared with 2011, primarily as a result of:
·a decrease in the proceeds from the sale of other investments of $163 million in 2011; and
·an increase in capital expenditures of $90 million due primarily to construction of Cane Run Unit 7 and Mill Creek environmental air projects.
Net cash used in investing activities decreased by 75%, or $128 million, in 2011 compared with 2010, as a result of:

·proceeds from the sale of other investments of $163 million in 2011; and
·a decrease in capital expenditures of $24 million due primarily to TC2 being dispatched in 2011; partially offset by
·proceeds from the sale of assets of $48 million in 2010; and
·a decrease in restricted cash of $11 million.
See "Forecasted Uses of Cash" for detail regarding projected capital expenditures for the years 2013 through 2017.

Financing Activities

Net cash used in financing activities was $22 million, in 2012 compared with $260 million in 2011, primarily as a result of changes in short-term debt.

In 2012, cash used in financing activities consisted of:
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·the payment of common stock dividends to LKE of $75 million; partially offset by
·the issuance of short-term debt in the form of commercial paper of $55 million.

Net cash used in financing activities was $260 million, in 2011 compared with $14 million in 2010, primarily as a result of changes in short-term debt.

In 2011, cash used in financing activities consisted of:

·a repayment on a revolving line of credit of $163 million;
·the payment of common stock dividends to LKE of $83 million;
·a net decrease in notes payable with affiliates of $12 million; and
·the payment of debt issuance and credit facility costs of $2 million.

In the two months of 2010 following PPL's acquisition of LKE, cash provided by financing activities of the Successor consisted of:
·the issuance of first mortgage bonds of $531 million after discounts;
·the issuance of debt of $485 million to a PPL affiliate to repay debt due to an E.ON AG affiliate upon the closing of PPL's acquisition of LKE; and
·a draw on a revolving line of credit of $163 million; partially offset by
·the repayment of debt to an E.ON AG affiliate of $485 million upon the closing of PPL's acquisition of LKE;
·the repayment of debt to a PPL affiliate of $485 million upon the issuance of first mortgage bonds;
·a net decrease in notes payable with affiliates of $130 million; and
·the payment of debt issuance and credit facility costs of $10 million.

In the ten months of 2010 preceding PPL's acquisition of LKE, cash used in financing activities by the Predecessor consisted of:

·the payment of common stock dividends to LKE of $55 million and
·a net decrease in notes payable with affiliates of $28 million.

See "Forecasted Sources of Cash" for a discussion of LG&E's plans to issue debt securities, as well as a discussion of credit facility capacity available to LG&E.  Also see "Forecasted Uses of Cash" for a discussion of plans to pay dividends on common securities in the future, as well as maturities of long-term debt.

LG&E had no long-term debt securities activity during the year.

See Note 7 to the Financial Statements for additional information about long-term debt securities.

Auction Rate Securities

At December 31, 2012, LG&E's tax-exempt revenue bonds that are in the form of auction rate securities and total $135 million continue to experience failed auctions.  Therefore, the interest rate continues to be set by a formula pursuant to the relevant indentures.  For the period ended December 31, 2012, the weighted-average rate on LG&E's auction rate bonds in total was 0.20%.

Forecasted Sources of Cash

LG&E expects to continue to have sufficient sources of cash available in the near term, including various credit facilities, its commercial paper program, issuance of debt securities and operating cash flow.
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Credit Facilities

At December 31, 2012, LG&E's total committed borrowing capacity under its Syndicated Credit Facility and the use of this borrowing capacity were:

     Commercial Letters of Unused
   Capacity Paper Issued Credit Issued Capacity
          
Syndicated Credit Facility (a) (b) (c) $ 500   55     $ 445 

(a)The commitments under LG&E's Syndicated Credit Facility are provided by a diverse bank group, with no one bank and its affiliates providing an aggregate commitment of more than 6% of the total committed capacity available to LG&E.
(b)In November 2012, LG&E amended the Syndicated Credit Facility to extend the expiration date to November 2017.  In addition, LG&E increased the credit facility capacity to $500 million.
(c)LG&E pays customary fees under its syndicated credit facility, and borrowings generally bear interest at LIBOR-based rates plus an applicable margin.
LG&E participates in an intercompany money pool agreement whereby LKE and/or KU make available to LG&E funds up to $500 million at an interest rate based on a market index of commercial paper issues.  At December 31, 2012, there was no balance outstanding.

See Note 7 to the Financial Statements for further discussion of LG&E's credit facilities.

Operating Leases

LG&E also has available funding sources that are provided through operating leases.  LG&E leases office space, gas storage and certain equipment.  These leasing structures provide LG&E additional operating and financing flexibility.  The operating leases contain covenants that are typical for these agreements, such as maintaining insurance, maintaining corporate existence and timely payment of rent and other fees.

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

Capital Contributions from LKE

From time to time LKE may make capital contributions to LG&E.  LG&E may use these contributions to fund capital expenditures and for other general corporate purposes.
Long-term Debt Securities

LG&E currently plans to issue, subject to market conditions, up to $350 million of first mortgage bond indebtedness in 2013, the proceeds of which will be used to fund capital expenditures and for other general corporate purposes.

Forecasted Uses of Cash

In addition to expenditures required for normal operating activities, such as purchased power, payroll, fuel and taxes, LG&E currently expects to incur future cash outflows for capital expenditures, various contractual obligations, payment of dividends on its common stock and possibly the purchase or redemption of a portion of debt securities.

Capital Expenditures

The table below shows LG&E's current capital expenditure projections for the years 2013 through 2017.

    Projected
    2013  2014  2015  2016  2017 
Capital expenditures (a)               
 Generating facilities $ 138  $ 111  $ 131  $ 225  $ 232 
 Distribution facilities   144    140    166    165    174 
 Transmission facilities   59    31    19    16    16 
 Environmental   324    336    249    186    42 
 Other   22    22    20    23    19 
  Total Capital Expenditures $ 687  $ 640  $ 585  $ 615  $ 483 
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(a)LG&E generally expects to recover these costs over a period equivalent to the related depreciable lives of the assets through rates.  The 2013 total excludes amounts included in accounts payable as of December 31, 2012.

LG&E's capital expenditure projections for the years 2013 through 2017 total approximately $3.0 billion.  Capital expenditure plans are revised periodically to reflect changes in operational, market and regulatory conditions.  This table includes current estimates for LG&E's environmental projects related to existing and proposed EPA compliance standards.  Actual costs may be significantly lower or higher depending on the final requirements and market conditions.  Environmental compliance costs incurred by LG&E in serving KPSC jurisdictional customers are generally eligible for recovery through the ECR mechanism.

LG&E plans to fund its capital expenditures in 2013 with cash on hand, cash from operations, short-term debt and issuance of debt securities.

Contractual Obligations

LG&E has assumed various financial obligations and commitments in the ordinary course of conducting its business.  At December 31, 2012, the estimated contractual cash obligations of LG&E were:

    Total 2013  2014 - 2015 2016 - 2017 After 2017
                  
Long-term Debt (a) $ 1,109     $ 250     $ 859 
Interest on Long-term Debt (b)   839  $ 37    70  $ 66    666 
Operating Leases (c)   35    5    11    5    14 
Coal and Natural Gas Purchase               
  Obligations (d)   1,512    378    697    345    92 
Unconditional Power Purchase               
  Obligations (e)   719    21    42    44    612 
Construction Obligations (f)   735    382    273    80    
Pension Benefit Plan Obligations (g) 42    42          
Other Obligations (h)   8    2    4    2    
Total Contractual Cash Obligations $ 4,999  $ 867  $ 1,347  $ 542  $ 2,243 

(a)Reflects principal maturities only based on stated maturity dates.  See Note 7 to the Financial Statements for a discussion of variable-rate remarketable bonds issued on behalf of LG&E.  LG&E has no capital lease obligations.
(b)Assumes interest payments through stated maturity.  The payments herein are subject to change, as payments for debt that is or becomes variable-rate debt have been estimated.
(c)See Note 11 to the Financial Statements for additional information.
(d)Represents contracts to purchase coal, natural gas and natural gas transportation.  See Note 15 to the Financial Statements for additional information.
(e)Represents future minimum payments under OVEC power purchase agreements through June 2040.  See Note 15 to the Financial Statements for additional information.
(f)Represents construction commitments, including commitments for the Mill Creek environmental air projects, Cane Run Unit 7 and Ohio Falls refurbishment which are also reflected in the Capital Expenditures table presented above.
(g)Based on the current funded status of LG&E's qualified pension plan and LKE's qualified pension plan, which covers LG&E employees, no cash contributions are required.  See Note 13 to the Financial Statements for a discussion of expected contributions.
(h)Represents other contractual obligations.

Dividends

From time to time, as determined by its Board of Directors, LG&E pays dividends to its sole shareholder, LKE.

As discussed in Note 7 to the Financial Statements, LG&E's ability to pay dividends is limited under a covenant in its $500 million revolving line of credit facility.  This covenant restricts the debt to total capital ratio to not more than 70%.  See Note 7 to the Financial Statements for other restrictions related to distributions on capital interests for LG&E.

Purchase or Redemption of Debt Securities

LG&E will continue to evaluate purchasing or redeeming outstanding debt securities and may decide to take action depending upon prevailing market conditions and available cash.

Rating Agency Actions

Moody's, S&P and Fitch periodically review the credit ratings on the debt securities of LG&E.  Based on their respective independent reviews, the rating agencies may make certain ratings revisions or ratings affirmations.

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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 LG&E are based on information provided by LG&E and other sources.  The ratings of Moody's, S&P and Fitch are not a recommendation to buy, sell or hold any securities of LG&E.  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.  The credit ratings of LG&E affect its liquidity, access to capital markets and cost of borrowing under its credit facilities.

The following table sets forth LG&E's security credit ratings as of December 31, 2012.

Senior UnsecuredSenior SecuredCommercial Paper
IssuerMoody'sS&PFitchMoody'sS&PFitchMoody'sS&PFitch
LG&EAA2A-A+P-2A-2F-2

In addition to the credit ratings noted above, the rating agencies took the following actions related to LG&E:

In February 2012, Fitch assigned ratings to LG&E's newly established commercial paper program.

In March 2012, Moody's affirmed the following ratings:
·     the long-term ratings of the First Mortgage Bonds for LG&E;
·     the issuer ratings for LG&E; and
·     the bank loan ratings for LG&E.

Also in March 2012, Moody's and S&P each assigned short-term ratings to LG&E's newly established commercial paper program.
In March and May 2012, Moody's, S&P and Fitch affirmed the long-term ratings for LG&E's 2003 Series A and 2007 Series B pollution control bonds.

In November 2012, Moody's and S&P affirmed the long-term ratings for LG&E's 2007 Series A pollution control bonds.

In December 2012, Fitch affirmed the issuer default ratings, individual security ratings and outlook for LG&E.

Ratings Triggers

LG&E has various derivative and non-derivative contracts, including contracts for the sale and purchase of electricity, fuel, commodity transportation and storage and interest rate instruments, which contain provisions requiring LG&E to post additional collateral, or permitting the counterparty to terminate the contract, if LG&E's credit rating were to fall below investment grade.  See Note 19 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 December 31, 2012.  At December 31, 2012, if LG&E's credit ratings had been below investment grade, the maximum amount that LG&E would have been required to post as additional collateral to counterparties was $57 million for both derivative and non-derivative commodity and commodity-related contracts used in its generation and marketing operations, gas supply and interest rate contracts.

Off-Balance Sheet Arrangements

LG&E has entered into certain agreements that may contingently require payment to a guaranteed or indemnified party.  See Note 15 to the Financial Statements for a discussion of these agreements.

Risk Management

Market Risk

See Notes 1, 18 and 19 to the Financial Statements for information about LG&E's risk management objectives, valuation techniques and accounting designations.
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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)

LG&E's rates are set by regulatory commissions and the fuel costs incurred are directly recoverable from customers.  As a result, LG&E is subject to commodity price risk for only a small portion of on-going business operations.  LG&E sells 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 19 to the Financial Statements for additional disclosures.

The balance and change in net fair value of LG&E's commodity derivative contracts for the periods ended December 31, 2012, 2011 and 2010 are shown in the table below.

     Gains (Losses)
     Successor  Predecessor
         Two Months  Ten Months
     Year Ended Year Ended Ended  Ended
     December 31, December 31, December 31,  October 31,
     2012  2011  2010   2010 
                 
Fair value of contracts outstanding at the beginning of the period    $ (1)       
Contracts realized or otherwise settled during the period      (3)     $ 3 
Fair value of new contracts entered into during the period             (4)
Other changes in fair value (a)      4  $ (1)    1 
Fair value of contracts outstanding at the end of the period    $  $ (1)  $ 

(a)Represents the change in value of outstanding transactions and the value of transactions entered into and settled during the period.

Interest Rate Risk

LG&E issues debt to finance its operations, which exposes it to interest rate risk.  LG&E utilizes various financial derivative instruments to adjust the mix of fixed and floating interest rates in its debt portfolio when appropriate.  Risk limits under LG&E's risk management program are designed to balance risk, exposure to volatility in interest expense and changes in the fair value of LG&E's debt portfolio due to changes in the absolute level of interest rates.

At December 31, 2012 and 2011, LG&E's potential annual exposure to increased interest expense, based on a 10% increase in interest rates, was not significant.

LG&E is also exposed to changes in the fair value of its debt portfolio.  LG&E estimated that a 10% decrease in interest rates at December 31, 2012, would increase the fair value of its debt portfolio by $27 million.  This estimate is unchanged from December 31, 2011.

LG&E had the following interest rate hedges outstanding at:
                    
   December 31, 2012 December 31, 2011
       Effect of a     Effect of a
     Fair Value, 10% Adverse   Fair Value, 10% Adverse
    Exposure Net - Asset Movement  Exposure Net - Asset Movement
   Hedged (Liability) (a) in Rates Hedged (Liability) (a) in Rates
Economic hedges                  
 Interest rate swaps (b) $ 179  $ (58) $ (3) $ 179  $ (60) $ (4)
Cash flow hedges                  
 Interest rate swaps (b)   150    7    (9)         

(a)Includes accrued interest.
(b)LG&E utilizes various risk management instruments to reduce its exposure to the expected future cash flow variability of its debt instruments.  These risks include exposure to adverse interest rate movements for outstanding variable rate debt and for future anticipated financing.  While LG&E is exposed to changes in the fair value of these instruments, any realized changes in the fair value of such economic and cash flow hedges are recoverable through regulated rates and any subsequent changes in fair value of these derivatives are included in regulatory assets or liabilities.  Sensitivities represent a 10% adverse movement in interest rates.  The positions outstanding at December 31, 2012 mature through 2043.
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Credit Risk

LG&E is exposed to potential losses as a result of nonperformance by counterparties of their contractual obligations.  LG&E maintains credit policies and procedures to limit counterparty credit risk including evaluating credit ratings and financial information along with having certain counterparties post margin if the credit exposure exceeds certain thresholds.  LG&E is exposed to potential losses as a result of nonpayment by customers.  LG&E maintains an allowance for doubtful accounts based on a historical charge-off percentage for retail customers.  Allowances for doubtful accounts from wholesale customers and miscellaneous receivables are based on specific identification by management.  Retail and wholesale customer accounts are written-off after four months of no payment activity.  Miscellaneous receivables are written-off as management determines them to be uncollectible.

Certain of LG&E's derivative instruments contain provisions that require it to provide immediate and on-going collateralization of derivative instruments in net liability positions based upon LG&E's credit ratings from each of the major credit rating agencies.  See Notes 18 and 19 to the Financial Statements for information regarding exposure and the risk management activities.

Related Party Transactions

LG&E is not aware of any material ownership interest or operating responsibility by senior management in outside partnerships, including leasing transactions with variable interest entities or other entities doing business with LG&E.  See Note 16 to the Financial Statements for additional information on related party transactions.

Environmental Matters

Protection of the environment is a major priority for LG&E and a significant element of its business activities.  Extensive federal, state and local environmental laws and regulations are applicable to LG&E's air emissions, water discharges and the management of hazardous and solid waste, among other areas, and the costs 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 from prior versions by the relevant agencies.  Costs may take the form of increased capital expenditures or operating and maintenance expenses; monetary fines, penalties or forfeitures or other restrictions.  Many of these environmental law considerations are also applicable to the operations of key suppliers, or customers, such as coal producers, industrial power users, etc.; and may impact the costs for their products or their demand for LG&E's services.

Physical effects associated with climate change could include the impact of changes in weather patterns, such as storm frequency and intensity, and the resultant potential damage to LG&E's generation assets and electricity transmission and distribution systems, as well as impacts on customers.  In addition, changed weather patterns could potentially reduce annual rainfall in areas where LG&E has hydro generating facilities or where river water is used to cool its fossil powered generators.  LG&E cannot currently predict whether its businesses will experience these potential climate change-related risks or estimate the potential cost of their related consequences.

See "Item 1. Business - Environmental Matters" and Note 15 to the Financial Statements for a discussion of environmental matters.

New Accounting Guidance

See Notes 1 and 24 to the Financial Statements for a discussion of new accounting guidance adopted and pending adoption.

Application of Critical Accounting Policies

Financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies.  The following accounting policies are particularly important to the financial condition or results of operations, and require estimates or other judgments of matters inherently uncertain.  Changes in the estimates or other judgments included within these accounting policies could result in a significant change to the information presented in the Financial Statements (these accounting policies are also discussed in Note 1 to the Financial Statements).  LG&E's senior management has reviewed these critical accounting policies, the following disclosures regarding their application and the estimates and assumptions regarding them, with PPL's Audit Committee.
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Revenue Recognition - Unbilled Revenue

Revenues related to the sale of energy are recorded when service is rendered or when energy is delivered to customers.  Because customers of LG&E's retail operations are billed on cycles which vary based on the timing of the actual reading of their electric and gas meters, LG&E records estimates for unbilled revenues at the end of each reporting period.  Such unbilled revenue amounts reflect estimates of the amount of electricity and gas delivered to customers since the date of the last reading of their meters.  The unbilled revenues reflect consideration of estimated usage by customer class, the effect of different rate schedules, changes in weather and where applicable, the impact of weather normalization or other regulatory provisions of rate structures.  In addition to the unbilled revenue accrual resulting from cycle billing, LG&E makes additional accruals resulting from the timing of customer bills.  The accrual of unbilled revenues in this manner properly matches revenues and related costs.  At December 31, 2012 and 2011, LG&E had unbilled revenue balances of $72 million and $65 million.
Defined Benefits

LG&E sponsors and participates in qualified funded defined benefit pension plans and participates in a funded other postretirement benefit plan.  These plans are applicable to the majority of the employees of LG&E.  The plans LG&E participates in are sponsored by LKE.  LKE allocates a portion of the liability and net periodic defined benefit pension and other postretirement costs of certain plans to LG&E based on its participation.  LG&E records an asset or liability to recognize the funded status of all defined benefit plans with an offsetting entry to regulatory assets or liabilities.  Consequently, the funded status of all defined benefit plans is fully recognized on the Balance Sheets.  See Note 13 to the Financial Statements for additional information about the plans and the accounting for defined benefits.

Certain assumptions are made by LKE and LG&E regarding the valuation of benefit obligations and the performance of plan assets.  When accounting for defined benefits, delayed recognition in earnings of differences between actual results and expected or estimated results is a guiding principle.  Annual net periodic defined benefit costs are recorded in current earnings based on estimated results.  Any differences between actual and estimated results are recorded in regulatory assets and liabilities for amounts that are expected to be recovered through regulated customer rates.  These amounts in regulatory assets and liabilities are amortized to income over future periods.  The delayed recognition allows for a smoothed recognition of costs over the working lives of the employees who benefit under the plans.  The primary assumptions are:
·Discount Rate - The discount rate is used in calculating the present value of benefits, which is based on projections of benefit payments to be made in the future.  The objective in selecting the discount rate is to measure the single amount that, if invested at the measurement date in a portfolio of high-quality debt instruments, would provide the necessary future cash flows to pay the accumulated benefits when due.

·Expected Long-term Return on Plan Assets - Management projects the long-term rates of return on plan assets based on historical performance, future expectations and periodic portfolio rebalancing among the diversified asset classes.  These projected returns reduce the net benefit costs LG&E records currently.

·Rate of Compensation Increase - Management projects employees' annual pay increases, which are used to project employees' pension benefits at retirement.

·Health Care Cost Trend Rate - Management projects the expected increases in the cost of health care.

In selecting a discount rate for their defined benefit plans LKE and LG&E start with a cash flow analysis of the expected benefit payment stream for their plans.  The plan-specific cash flows are matched against the coupons and expected maturity values of individually selected bonds.  This bond matching process begins with the full universe of Aa-rated non-callable (or callable with make-whole provisions) bonds, serving as the base from which those with the lowest and highest yields are eliminated to develop an appropriate subset of bonds.  Individual bonds are then selected based on the timing of each plan's cash flows and parameters are established as to the percentage of each individual bond issue that could be hypothetically purchased and the surplus reinvestment rates to be assumed.  At December 31, 2012, LKE decreased the discount rate for its pension plan from 5.12% to 4.26%.  LG&E decreased the discount rate for its pension plan from 5.05% to 4.20%.  LKE decreased the discount rate for its other postretirement benefit plan from 4.78% to 3.99%.
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The expected long-term rates of return for LKE's and LG&E's defined benefit pension plans and LKE's defined other postretirement benefit plan have been developed using a best-estimate of expected returns, volatilities and correlations for each asset class.  LKE and LG&E management corroborates these rates with expected long-term rates of return calculated by its independent actuary, who uses a building block approach that begins with a risk-free rate of return with factors being added such as inflation, duration, credit spreads and equity risk.  Each plan's specific asset allocation is also considered in developing a reasonable return assumption.  At December 31, 2012, LKE's and LG&E's expected return on plan assets decreased from 7.25% to 7.10%.

In selecting a rate of compensation increase, LKE and LG&E consider past experience in light of movements in inflation rates.  At December 31, 2012, LKE's and LG&E's rate of compensation increase remained at 4.00%.

In selecting health care cost trend rates, LKE considers past performance and forecasts of health care costs.  At December 31, 2012, LKE's health care cost trend rates were 8.00% for 2013, gradually declining to 5.50% for 2019.

A variance in the assumptions listed above could have a significant impact on accrued defined benefit liabilities or assets, reported annual net periodic defined benefit costs and regulatory assets and liabilities for LG&E.  While the charts below reflect either an increase or decrease in each assumption, the inverse of the change would impact the accrued defined benefit liabilities or assets, reported annual net periodic defined benefit costs and regulatory assets and liabilities for LG&E by a similar amount in the opposite direction.  The sensitivities below reflect an evaluation of the change based solely on a change in that assumption and does not include income tax effects.

At December 31, 2012, the defined benefit plans were recorded as follows:

Pension liabilities$ 102 
Other postretirement benefit liabilities 81 

The following chart reflects the sensitivities in the December 31, 2012 Balance Sheet associated with a change in certain assumptions based on LG&E's primary defined benefit plans.

  Increase (Decrease)
     Impact on    Impact on
  Change in defined benefit Impact on regulatory
Actuarial assumption assumption liabilities OCI assets
             
Discount Rate  (0.25)% $ 21     $ 21 
Rate of Compensation Increase  0.25%   2       2 
Health Care Cost Trend Rate (a)  1%   1       1 

(a)Only impacts other postretirement benefits.

In 2012, LG&E recognized net periodic defined benefit costs charged to operating expense of $18 million.  This amount represents a $3 million decrease from 2011.  This decrease in expense for 2012 was primarily attributable to the increase in the expected return on plan assets resulting from pension contributions of $21 million, a reduction in the amortization of outstanding losses and lower interest cost.

The following chart reflects the sensitivities in the 2012 Statement of Income (excluding income tax effects) associated with a change in certain assumptions based on LG&E's primary defined benefit plans.

Actuarial assumption  Change in assumption  Impact on defined benefit costs
       
Discount Rate  (0.25)% $ 2 
Expected Return on Plan Assets  (0.25)%   1 
Rate of Compensation Increase  0.25%   
Health Care Cost Trend Rate (a)  1%   

(a)Only impacts other postretirement benefits.
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Asset Impairment (Excluding Investments)

Impairment analyses are performed for long-lived assets that are subject to depreciation or amortization whenever events or changes in circumstances indicate that a long-lived asset's carrying amount may not be recoverable.  For these long-lived assets classified as held and used, such events or changes in circumstances are:
·a significant decrease in the market price of an asset;
·a significant adverse change in the extent or manner in which an asset is being used or in its physical condition;
·a significant adverse change in legal factors or in the business climate;
·an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of an asset;
·a current-period operating or cash flow loss combined with a history of losses or a forecast that demonstrates continuing losses; or
·a current expectation that, more likely than not, an asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.

For a long-lived asset classified as held and used, impairment is recognized when the carrying amount of the asset is not recoverable and exceeds its fair value.  The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset.  If the asset is impaired, an impairment loss is recorded to adjust the asset's carrying amount to its estimated fair value.  Management must make significant judgments to estimate future cash flows including the useful lives of long-lived assets, the fair value of the assets and management's intent to use the assets.  Alternate courses of action are considered to recover the carrying amount of a long-lived asset, and estimated cash flows from the "most likely" alternative are used to assess impairment whenever one alternative is clearly the most likely outcome.  If no alternative is clearly the most likely, then a probability-weighted approach is used taking into consideration estimated cash flows from the alternatives.  For assets tested for impairment as of the balance sheet date, the estimates of future cash flows used in that test consider the likelihood of possible outcomes that existed at the balance sheet date, including the assessment of the likelihood of a future sale of the assets.  That assessment is not revised based on events that occur after the balance sheet date.  Changes in assumptions and estimates could result in significantly different results than those identified and recorded in the financial statements.

For a long-lived asset classified as held for sale, impairment exists when the carrying amount of the asset (disposal group) exceeds its fair value less cost to sell.  If the asset (disposal group) is impaired, an impairment loss is recorded to adjust the carrying amount to its fair value less cost to sell.  A gain is recognized for any subsequent increase in fair value less cost to sell, but not in excess of the cumulative impairment previously recognized.

For determining fair value, quoted market prices in active markets are the best evidence.  However, when market prices are unavailable, LG&E considers all valuation techniques appropriate under the circumstances and for which market participant inputs can be obtained.  Generally discounted cash flows are used to estimate fair value, which incorporates market participant inputs when available.  Discounted cash flows are calculated by estimating future cash flow streams and applying appropriate discount rates to determine the present value of the cash flow streams.

In 2012, LG&E did not recognize an impairment of any long-lived assets.

Goodwill is tested for impairment at the reporting unit level.  LG&E's reporting unit has been determined to be at the operating segment level.  A goodwill impairment test is performed annually or more frequently if events or changes in circumstances indicate that the carrying amount of the reporting unit may be greater than the unit's fair value.  Additionally, goodwill is tested for impairment after a portion of goodwill has been allocated to a business to be disposed of.

Beginning in 2012, LG&E may elect either to initially make a qualitative evaluation about the likelihood of an impairment of goodwill or to bypass the qualitative assessment and directly test goodwill for impairment using a two-step quantitative test.  If the qualitative evaluation (referred to as "step zero") is elected and the assessment results in a determination that it is not more likely than not the fair value of the reporting unit is less than the carrying amount, the two-step quantitative impairment test is not necessary.  However, the quantitative impairment test is required if LG&E concludes it is more likely than not the fair value of the reporting unit is less than the carrying amount based on the step zero assessment.

When the two-step quantitative impairment test is elected or required as a result of the step zero assessment, in step one, LG&E identifies a potential impairment by comparing the estimated fair value of LG&E (the goodwill reporting unit) with its carrying amount, including goodwill, on the measurement date.  If the estimated fair value exceeds its carrying amount, goodwill is not considered impaired.  If the carrying amount exceeds the estimated fair value, the second step is performed to measure the amount of impairment loss, if any.
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The second step of the quantitative test requires a calculation of the implied fair value of goodwill, which is determined in the same manner as the amount of goodwill in a business combination.  That is, the estimated fair value is allocated to all of LG&E's assets and liabilities as if LG&E had been acquired in a business combination and the estimated fair value of LG&E was the price paid.  The excess of the estimated fair value of LG&E over the amounts assigned to its assets and liabilities is the implied fair value of goodwill.  The implied fair value of LG&E's goodwill is then compared with the carrying amount of that goodwill.  If the carrying amount exceeds the implied fair value, an impairment loss is recognized in an amount equal to that excess.  The loss recognized cannot exceed the carrying amount of LG&E's goodwill.

LG&E elected to perform the two-step quantitative impairment test of goodwill in the fourth quarter of 2012 and no impairment was recognized.  Management used both discounted cash flows and market multiples, which required significant assumptions, to estimate the fair value of LG&E.  Applying an appropriate weighting to both the discounted cash flow and market multiple valuations, a decrease in the forecasted cash flows of 10%, an increase in the discount rate by 25 basis points, or a 10% decrease in the multiples would not have resulted in an impairment of goodwill.
Loss Accruals
Losses are accrued for the estimated impacts of various conditions, situations or circumstances involving uncertain or contingent future outcomes.  For loss contingencies, the loss must be accrued if (1) information is available that indicates it is probable that a loss has been incurred, given the likelihood of the uncertain future events and (2) the amount of the loss can be reasonably estimated.  Accounting guidance defines "probable" as cases in which "the future event or events are likely to occur." The accrual of contingencies that might result in gains is not recorded unless recovery is assured.  Potential loss contingencies for environmental remediation, litigation claims, regulatory penalties and other events are continuously assessed.

The accounting aspects of estimated loss accruals include (1) the initial identification and recording of the loss, (2) the determination of triggering events for reducing a recorded loss accrual and (3) the ongoing assessment as to whether a recorded loss accrual is sufficient.  All three of these aspects require significant judgment by management.  Internal expertise and outside experts (such as lawyers and engineers) are used, as necessary to help estimate the probability that a loss has been incurred and the amount (or range) of the loss.

In 2012, no significant adjustments were made to LG&E's existing contingencies.

Certain other events have been identified that could give rise to a loss, but that do not meet the conditions for accrual.  Such events are disclosed, but not recorded, when it is reasonably possible that a loss has been incurred.  Accounting guidance defines "reasonably possible" as cases in which "the future event or events occurring is more than remote, but less than likely to occur."

When an estimated loss is accrued, the triggering events for subsequently adjusting the loss accrual are identified, where applicable.  The triggering events generally occur when the contingency has been resolved and the actual loss is paid or written off, or when the risk of loss has diminished or been eliminated.  The following are some of the triggering events that provide for the adjustment of certain recorded loss accruals:
·Allowances for uncollectible accounts are reduced when accounts are written off after prescribed collection procedures have been exhausted, a better estimate of the allowance is determined or underlying amounts are ultimately collected.

·Environmental and other litigation contingencies are reduced when the contingency is resolved, LG&E makes actual payments, a better estimate of the loss is determined or the loss is no longer considered probable.
Loss accruals are reviewed on a regular basis to assure that the recorded potential loss exposures are appropriate.  This involves ongoing communication and analyses with internal and external legal counsel, engineers, operation management and other parties.

See Note 15 to the Financial Statements for additional information.
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Asset Retirement Obligations
LG&E is required to recognize a liability for legal obligations associated with the retirement of long-lived assets.  The initial obligation is measured at its estimated fair value.  An equivalent amount is recorded as an increase in the value of the capitalized asset and allocated to expense over the useful life of the asset.  Until the obligation is settled, the liability is increased, through the recognition of accretion expense in the Statements of Income, for changes in the obligation due to the passage of time.  Since costs of removal are collected in rates, the accretion and depreciation are offset with a regulatory credit on the income statement, such that there is no earnings impact.  The regulatory asset created by the regulatory credit is relieved when the ARO has been settled.  An ARO must be recognized when incurred if the fair value of the ARO can be reasonably estimated.  See Note 21 to the Financial Statements for related disclosures.

In determining AROs, management must make significant judgments and estimates to calculate fair value.  Fair value is developed using an expected present value technique based on assumptions of market participants that considers estimated retirement costs in current period dollars that are inflated to the anticipated retirement date and then discounted back to the date the ARO was incurred.  Changes in assumptions and estimates included within the calculations of the fair value of AROs could result in significantly different results than those identified and recorded in the financial statements.  Estimated ARO costs and settlement dates, which affect the carrying value of various AROs and the related assets, are reviewed periodically to ensure that any material changes are incorporated into the estimate of the obligations.  Any change to the capitalized asset is amortized over the remaining life of the associated long-lived asset.

At December 31, 2012, LG&E had AROs comprised of current and noncurrent amounts, totaling $62 million recorded on the Balance Sheet.  Of the total amount, $39 million, or 63%, relates to LG&E's ash ponds, landfills and natural gas mains.  The most significant assumptions surrounding AROs are the forecasted retirement costs, the discount rates and the inflation rates.  A variance in the forecasted retirement costs, the discount rates or the inflation rates could have a significant impact on the ARO liabilities.

The following chart reflects the sensitivities related to LG&E's ARO liabilities for ash ponds, landfills and natural gas mains at December 31, 2012:

  Change in Impact on
   Assumption ARO Liability
       
Retirement Cost  10% $5
Discount Rate  (0.25)%  1
Inflation Rate  0.25%  5
Income Taxes

Significant management judgment is required in developing the provision for income taxes, primarily due to the uncertainty related to tax positions taken or expected to be taken in tax returns and the determination of deferred tax assets, liabilities and valuation allowances.

Significant management judgment is required to determine the amount of benefit recognized related to an uncertain tax position.  Tax positions are evaluated following a two-step process.  The first step requires an entity to determine whether, based on the technical merits supporting a particular tax position, it is more likely than not (greater than a 50% chance) that the tax position will be sustained.  This determination assumes that the relevant taxing authority will examine the tax position and is aware of all the relevant facts surrounding the tax position.  The second step requires an entity to recognize in the financial statements the benefit of a tax position that meets the more-likely-than-not recognition criterion.  The benefit recognized is measured at the largest amount of benefit that has a likelihood of realization upon settlement that exceeds 50%.  Management considers a number of factors in assessing the benefit to be recognized, including negotiation of a settlement.

On a quarterly basis, uncertain tax positions are reassessed by considering information known at the reporting date.  Based on management's assessment of new information, a tax benefit may subsequently be recognized for a previously unrecognized tax position, a previously recognized tax position may be derecognized, or the benefit of a previously recognized tax position may be remeasured.  The amounts ultimately paid upon resolution of issues raised by taxing authorities may differ materially from the amounts accrued and may materially impact the financial statements in the future.

At December 31, 2012, LG&E's existing reserve exposure to either increases or decreases in unrecognized tax benefits during the next 12 months is less than $1 million.  This change could result from subsequent recognition, derecognition and/or changes in the measurement of uncertain tax positions.  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.
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The balance sheet classification of unrecognized tax benefits and the need for valuation allowances to reduce deferred tax assets also require significant management judgment.  Unrecognized tax benefits are classified as current to the extent management expects to settle an uncertain tax position by payment or receipt of cash within one year of the reporting date.  Valuation allowances are initially recorded and reevaluated each reporting period by assessing the likelihood of the ultimate realization of a deferred tax asset.  Management considers a number of factors in assessing the realization of a deferred tax asset, including the reversal of temporary differences, future taxable income and ongoing prudent and feasible tax planning strategies.  Any tax planning strategy utilized in this assessment must meet the recognition and measurement criteria utilized to account for an uncertain tax position.  See Note 5 to the Financial Statements for related disclosures.
Regulatory Assets and Liabilities

LG&E is a cost-based rate-regulated utility.  As a result, the effects of regulatory actions are required to be reflected in the financial statements.  Assets and liabilities are recorded that result from the regulated ratemaking process that may not be recorded under GAAP for non-regulated entities.  Regulatory assets generally represent incurred costs that have been deferred because such costs are probable of future recovery in regulated customer rates.  Regulatory liabilities are recognized for amounts expected to be returned through future regulated customer rates.  In certain cases, regulatory liabilities are recorded based on an understanding with the regulator that rates have been set to recover costs that are expected to be incurred in the future, and the regulated entity is accountable for any amounts charged pursuant to such rates and not yet expended for the intended purpose.  The accounting for regulatory assets and liabilities is based on specific ratemaking decisions or precedent for each transaction or event as prescribed by the FERC and the KPSC.

Management continually assesses whether the regulatory assets are probable of future recovery by considering factors such as changes in the applicable regulatory and political environments, the ability to recover costs through regulated rates, recent rate orders to other regulated entities and the status of any pending or potential deregulation legislation.  Based on this continual assessment, management believes the existing regulatory assets are probable of recovery.  This assessment reflects the current political and regulatory climate at the state and federal levels, and is subject to change in the future.  If future recovery of costs ceases to be probable, then asset write-off would be required to be recognized in operating income.  Additionally, the regulatory agencies can provide flexibility in the manner and timing of the depreciation of PP&E and amortization of regulatory assets.

At December 31, 2012, LG&E had regulatory assets of $419 million and regulatory liabilities of $475 million.  All regulatory assets are either currently being recovered under specific rate orders, represent amounts that are expected to be recovered in future rates or benefit future periods based upon established regulatory practices.

See Note 6 to the Financial Statements for additional information on regulatory assets and liabilities.

Other Information

PPL's Audit Committee has approved the independent auditor to provide audit, tax and other services permitted by Sarbanes-Oxley and SEC rules.  The audit services include services in connection with statutory and regulatory filings, reviews of offering documents and registration statements, and internal control reviews.  See "Item 14. Principal Accounting Fees and Services" for more information.

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KENTUCKY UTILITIES COMPANY

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations

The information provided in this Item 7 should be read in conjunction with KU's Financial Statements and the accompanying Notes.  Capitalized terms and abbreviations are defined in the glossary.  Dollars are in millions, unless otherwise noted.

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

·  "Overview" provides a description of KU and its business strategy, a summary of Net Income and a discussion of certain events related to KU's results of operations and financial condition.

·  "Results of Operations" provides a summary of KU's earnings and a description of key factors expected to impact future earnings.  This section ends with explanations of significant changes in principal items on KU's Statements of Income, comparing 2012 with 2011 and 2011 with 2010.

·  "Financial Condition - Liquidity and Capital Resources" provides an analysis of KU's liquidity position and credit profile.  This section also includes a discussion of forecasted sources and uses of cash and rating agency actions.

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

·  "Application of Critical Accounting Policies" provides an overview of the accounting policies that are particularly important to the results of operations and financial condition of KU and that require its management to make significant estimates, assumptions and other judgments of matters inherently uncertain.

Overview

Introduction

KU, headquartered in Lexington, Kentucky, is a regulated utility engaged in the generation, transmission, distribution and sale of electric energy in Kentucky, Virginia and Tennessee.  KU and its affiliate, LG&E, are wholly owned subsidiaries of LKE.  LKE, a holding company, became a wholly owned subsidiary of PPL when PPL acquired all of LKE's interests from E.ON US Investments Corp. on November 1, 2010.  Following the acquisition, both KU and LG&E continue operating as subsidiaries of LKE, which is now an intermediary holding company in PPL's group of companies.  Refer to "Item 1. Business - Background" for a description of KU's business.

Business Strategy

KU's overall strategy is to provide reliable, safe, competitively priced energy to its customers and reasonable returns on regulated investments to its shareowner.

A key objective for KU is to maintain a strong credit profile through managing financing costs and access to credit markets.  KU continually focuses on maintaining an appropriate capital structure and liquidity position.

Successor and Predecessor Financial Presentation

KU's Financial Statements and related financial and operating data include the periods before and after PPL's acquisition of LKE on November 1, 2010 and have been segregated to present pre-acquisition activity as the Predecessor and post-acquisition activity as the Successor.  Certain accounting and presentation methods were changed to acceptable alternatives to conform to PPL's accounting policies, and the cost bases of certain assets and liabilities were changed as of November 1, 2010 as a result of the application of push-down accounting.  Consequently, the financial position, results of operations and cash flows for the Successor periods are not comparable to the Predecessor periods; however, the core operations of KU have not changed as a result of the acquisition.
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Financial and Operational Developments

Net Income

Net Income for 2012, 2011 and 2010 was $137 million, $178 million and $175 million.  Earnings in 2012 decreased 23% from 2011 and earnings in 2011 increased 2% from 2010.

See "Results of Operations" for a discussion and analysis of KU's earnings.

Rate Case Proceedings

In June 2012, KU filed a request with the KPSC for an increase in annual base electric rates of approximately $82 million.  In November 2012, KU along with all of the parties filed a unanimous settlement agreement.  Among other things, the settlement provided for increases in annual base electric rates of $51 million.  The settlement agreement also included revised depreciation rates that result in reduced annual depreciation expense of approximately $10 million. The settlement agreement included an authorized return on equity of 10.25%.  On December 20, 2012, the KPSC issued an order approving the provisions in the settlement agreement.  The new rates became effective on January 1, 2013.

Equity Method Investment

KU owns 20% of the common stock of EEI.  Through a power marketer affiliated with its majority owner, EEI sells its output to third parties.  KU's investment in EEI is accounted for under the equity method of accounting.  KU's direct exposure to loss as a result of its involvement with EEI is generally limited to the value of its investment.  During the fourth quarter of 2012, KU concluded that an other-than-temporary decline in the value of its investment in EEI had occurred.  Accordingly, KU recorded a $15 million impairment charge, net of taxes, related to this investment as of December 31, 2012, bringing the investment balance to zero.  The impairment charge is shown in the line "Other-Than-Temporary Impairments" on the Statement of Income for the year ended December 31, 2012.            

Commercial Paper

In February 2012, KU established a commercial paper program for up to $250 million to provide an additional financing source to fund its short-term liquidity needs, if and when necessary.  Commercial paper issuances are supported by KU's Syndicated Credit Facility.  At December 31, 2012, KU had $70 million of commercial paper outstanding.

Terminated Bluegrass CTs Acquisition

In September 2011, KU and LG&E entered into an asset purchase agreement with Bluegrass Generation for the purchase of the Bluegrass CTs, aggregating approximately 495 MW, plus limited associated contractual arrangements required for operation of the units, for a purchase price of $110 million, pending receipt of applicable regulatory approvals.  In May 2012, the KPSC issued an order approving the request to purchase the Bluegrass CTs.  In November 2011, KU and LG&E filed an application with the FERC under the Federal Power Act requesting approval to purchase the Bluegrass CTs.  In May 2012, the FERC issued an order conditionally authorizing the acquisition of the Bluegrass CTs, subject to approval by the FERC of satisfactory mitigation measures to address market-power concerns.  After a review of potentially available mitigation options, KU and LG&E determined that the options were not commercially justifiable.  In June 2012, KU and LG&E terminated the asset purchase agreement for the Bluegrass CTs in accordance with its terms and made applicable filings with the KPSC and FERC.

Cane Run Unit 7 Construction

In September 2011, KU and LG&E filed a CPCN with the KPSC requesting approval to build Cane Run Unit 7.  In May 2012, the KPSC issued an order approving the request.  KU will own a 78% undivided interest and LG&E will own a 22% undivided interest in the new generating unit.  A formal request for recovery of the costs associated with the construction was not included in the CPCN filing with the KPSC but is expected to be included in future rate case proceedings.  KU and LG&E commenced preliminary construction activities in the third quarter of 2012 and project construction is expected to be completed by May 2015.  The project, which includes building a natural gas supply pipeline and related transmission projects, has an estimated cost of approximately $600 million.

In conjunction with this construction and to meet new, more stringent EPA regulations with a 2015 compliance date, KU anticipates retiring two older coal-fired electric generating units at the Green River plant, which have a combined summer capacity rating of 163 MW.  In addition, KU retired the remaining 71 MW unit at the Tyrone plant in February 2013.

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Future Capacity Needs

In addition to the construction of a combined cycle gas unit at the Cane Run station, KU and LG&E continue to assess future capacity needs.  As a part of the assessment, KU and LG&E issued an RFP in September 2012 for up to 700 MW of capacity beginning as early as 2015.


Results of Operations

As previously noted, KU's results for the periods after October 31, 2010 are on a basis of accounting different from its results for periods prior to November 1, 2010.  See "Overview - Successor and Predecessor Financial Presentation" for further information.

The utility business is affected by seasonal weather.  As a result, operating revenues (and associated operating expenses) are not generated evenly throughout the year.  Revenue and earnings are generally higher during the first and third quarters and lower during the second and fourth quarters due to weather.

The following table summarizes the significant components of net income for 2012, 2011 and 2010 and the changes therein:

Earnings             
   Successor  Predecessor
        Two Months  Ten Months
  Year Ended Year Ended Ended  Ended
  December 31, December 31, December 31,  October 31,
   2012  2011  2010   2010 
               
Net Income $ 137  $ 178  $ 35   $ 140 

The changes in the components of Net Income between these periods were due to the following factors, which reflect reclassifications for items included in Margins and certain items that management considers special.

  2012 vs. 2011 2011 vs. 2010
     
Margins $ (10) $ 52 
Other operation and maintenance   (16)   (12)
Depreciation   (6)   (28)
Taxes, other than income   (4)   (9)
Other Income (Expense) - net   (7)   (2)
Interest Expense   1    8 
Income Taxes   16    (6)
Special items, after-tax   (15)   
Total $ (41) $ 3 

As a result of low energy prices and environmental regulations, KU assessed the recoverability of its equity method investment in EEI.  KU determined it was impaired, and recorded a $15 million impairment charge, net of taxes, as of December 31, 2012.  This impairment is considered a special item by management.

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

·Higher other operation and maintenance in 2012 compared with 2011 primarily due to $8 million of higher coal plant maintenance costs related to an increased scope of scheduled outages and a $6 million credit to establish a regulatory asset recorded when approved in 2011 related to 2009 storm costs.

Higher other operation and maintenance in 2011 compared with 2010 primarily due to $19 million of higher coal plant maintenance costs related to an increased scope of scheduled outages and higher variable costs from increased generation due to TC2 commencing dispatch in January 2011.  This increase was partially offset by a $6 million credit to establish a regulatory asset recorded when approved in 2011 related to 2009 storm costs.

·Higher depreciation in 2011 compared with 2010 primarily due to TC2 commencing dispatch in January 2011.

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·Lower interest expense in 2011 compared with 2010 primarily due to $18 million less expense primarily related to lower interest rates on the first mortgage bonds issued in November 2010 compared with the rates on the loans from E.ON AG affiliates in place through October 2010.  This decrease was partially offset by $8 million of higher expense resulting from higher long-term debt balances.

·Lower income taxes in 2012 compared with 2011 primarily due to lower pre-tax income.

2013 Outlook

Excluding special items, KU projects higher earnings in 2013 compared with 2012, primarily driven by electric base rate increases effective January 1, 2013, returns on additional environmental capital investments and retail load growth, partially offset by higher operation and maintenance.

Earnings in future periods are subject to various risks and uncertainties.  See "Forward-Looking Information," "Item 1. Business," "Item 1A. Risk Factors," the rest of this Item 7 and Notes 6 and 15 to the Financial Statements for a discussion of the risks, uncertainties and factors that may impact future earnings.

Statement of Income Analysis --

Margins

Non-GAAP Financial Measure

The following discussion includes financial information prepared in accordance with GAAP, as well as a non-GAAP financial measure, "Margins." Margins is 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.  Margins is a single financial performance measure of KU's electricity generation, transmission and distribution operations.  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, returns on capital investments primarily associated with environmental regulations and performance incentives.  Certain costs associated with these mechanisms, primarily ECR and DSM, are recorded as "Other operation and maintenance" and "Depreciation."  As a result, this measure represents the net revenues from KU's operations.  This performance measure is used, in conjunction with other information, internally by senior management to manage operations and analyze actual results compared with budget.

Reconciliation of Non-GAAP Financial Measures

The following tables reconcile "Operating Income" to "Margins" as defined by KU for 2012, 2011 and 2010.

      2012 Successor   2011 Successor
           Operating        Operating
      Margins Other (a) Income (b)   Margins Other (a) Income (b)
                   
Operating Revenues $ 1,524     $ 1,524    $ 1,548     $ 1,548 
Operating Expenses                    
 Fuel   498       498      516       516 
 Energy purchases   109       109      112       112 
 Other operation and maintenance   55  $ 329    384      49  $ 313    362 
 Depreciation   49    144    193      48    138    186 
 Taxes, other than income      23    23         19    19 
   Total Operating Expenses   711    496    1,207      725    470    1,195 
Total $ 813  $ (496) $ 317    $ 823  $ (470) $ 353 
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      Successor  Predecessor
      Two Months Ended December 31, 2010  Ten Months Ended October 31, 2010
           Operating        Operating
      Margins Other (a) Income (b)  Margins Other (a) Income (b)
                   
Operating Revenues $ 263     $ 263   $ 1,248     $ 1,248 
Operating Expenses                   
 Fuel   78       78     417       417 
 Energy purchases   28       28     147       147 
 Other operation and maintenance   6  $ 59    65     29  $ 242    271 
 Depreciation   6    20    26     29    90    119 
 Taxes, other than income      1    1        9    9 
   Total Operating Expenses   118    80    198     622    341    963 
Total $ 145  $ (80) $ 65   $ 626  $ (341) $ 285 

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

Changes in Non-GAAP Financial Measures

Margins decreased by $10 million for 2012 compared with 2011, primarily due to $10 million of lower retail margins, as volumes were impacted by unseasonably mild weather during the first four months of 2012.  Total heating degree days decreased 9% compared to 2011, partially offset by a 4% increase in cooling degree days.

Margins increased by $52 million for 2011 compared with 2010.  New KPSC rates went into effect on August 1, 2010, contributing to an additional $64 million in operating revenue over the prior year.  Partially offsetting the rate increase were lower retail volumes resulting from weather and economic conditions.

Other Operation and Maintenance     
       
The increase (decrease) in other operation and maintenance was due to:
   
 2012 vs. 2011 2011 vs. 2010
       
Coal plant maintenance (a)$ 17  $ 9 
Distribution maintenance (b)  8    
Administrative and general (c)  (5)   7 
Fuel for generation (d)     6 
Steam operation (e)     10 
Other generation maintenance     (2)
Other  2    (4)
Total$ 22  $ 26 

(a)Coal plant maintenance costs increased in 2012 compared with 2011 primarily due to $8 million of expenses related to an increased scope of scheduled outages, as well as $5 million of increased maintenance on the scrubber system and primary fuel combustion system at the Ghent plant.

Coal plant maintenance costs increased in 2011 compared with 2010 primarily due to $8 million of expenses related to an increased scope of scheduled outages.
(b)Distribution maintenance increased in 2012 compared with 2011 primarily due to a $6 million credit to establish a regulatory asset recorded when approved in 2011 related to 2009 storm costs.
(c)Administrative and general costs decreased in 2012 compared with 2011 primarily due to a decrease in pension expense resulting from pension funding and lower interest cost.

Administrative and general costs increased in 2011 compared with 2010 due to higher outside services costs of $2 million, higher labor costs of $1 million and higher pension costs of $1 million.
(d)Fuel handling costs are included in other operation and maintenance on the Statements of Income for the Successor periods and are in fuel on the Statement of Income for the Predecessor period.
(e)Steam operation costs increased in 2011 compared with 2010 due to increased generation as a result of TC2 commencing dispatch in 2011.
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Depreciation

The increase (decrease) in depreciation was due to:

  2012 vs. 2011 2011 vs. 2010
       
TC2 (dispatch began in January 2011)   $ 25 
E.W. Brown sulfur dioxide scrubber equipment (placed in-service in June 2010)     8 
Other additions to PP&E$ 7    8 
Total$ 7  $ 41 

Taxes, Other Than Income

Taxes, other than income increased by $9 million in 2011 compared with 2010, primarily due to a $5 million state coal tax credit that was applied to 2010 property taxes.  The remaining increase was due to higher assessments, primarily from significant property additions.

Other Income (Expense) - net

Other income (expense) - net decreased by $7 million in 2012 compared with 2011 primarily due to $8 million losses from the EEI investment recorded in 2012.

Other-Than-Temporary Impairments

Other-than-temporary impairments increased by $25 million in 2012 compared with 2011 due to the $25 million pre-tax impairment of the EEI investment.  See Notes 1 and 18 to the Financial Statements for additional information.

Interest Expense

Interest expense decreased by $8 million in 2011 compared with 2010, primarily due to $18 million less expense primarily related to lower interest rates on the first mortgage bonds issued in November 2010 compared with the rates on the loans from E.ON AG affiliates in place through October 2010.  This decrease was partially offset by $8 million of higher expense resulting from higher long-term debt balances.

Income Taxes

Income taxes decreased by $26 million in 2012 compared with 2011, primarily due to the decrease in pre-tax income.

Income taxes increased by $6 million in 2011 compared with 2010, primarily due to the increase in pre-tax income.

Financial Condition

Liquidity and Capital Resources

KU expects to continue to have adequate liquidity available through operating cash flows, cash and cash equivalents, its credit facilities and commercial paper issuances.  Additionally, subject to market conditions, KU currently plans to access capital markets in 2013.

KU's cash flows from operations and access to cost-effective bank and capital markets are subject to risks and uncertainties including, but not limited to:

·changes in commodity prices that may increase the cost of producing or purchasing power or decrease the amount KU receives from selling power;
·operational and credit risks associated with selling and marketing products in the wholesale power markets;
·unusual or extreme weather that may damage KU's transmission and distribution facilities or affect energy sales to customers;
·reliance on transmission facilities that KU does not own or control to deliver its electricity;
·unavailability of generating units (due to unscheduled or longer-than-anticipated generation outages, weather and natural disasters) and the resulting loss of revenues and additional costs of replacement electricity;
·the ability to recover and the timeliness and adequacy of recovery of costs associated with regulated utility businesses;
·costs of compliance with existing and new environmental laws;

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·any adverse outcome of legal proceedings and investigations with respect to KU's current and past business activities;
·deterioration in the financial markets that could make obtaining new sources of bank and capital markets funding more difficult and more costly; and
·a downgrade in KU's credit ratings that could adversely affect its ability to access capital and increase the cost of credit facilities and any new debt.

See "Item 1A. Risk Factors" for further discussion of risks and uncertainties affecting KU's cash flows.

At December 31, KU had the following:

  2012  2011  2010 
          
Cash and cash equivalents $ 21  $ 31  $ 3 
          
Short-term debt (a) $ 70       

(a)Represents borrowings made under KU's commercial paper program.  See Note 7 to the Financial Statements for additional information.

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

     Successor  Predecessor
         Two Months  Ten Months
     Year Ended Year Ended Ended  Ended
     December 31, December 31, December 31,  October 31,
     2012  2011  2010   2010 
              
Net cash provided by operating activities $ 500  $ 444  $ 30   $ 344 
Net cash provided by (used in) investing activities   (480)   (279)   (89)    (340)
Net cash provided by (used in) financing activities   (30)   (137)   58     (2)
Net Increase (Decrease) in Cash and Cash Equivalents $ (10) $ 28  $ (1)  $ 2 

Operating Activities

Net cash provided by operating activities increased by 13%, or $56 million, in 2012 compared with 2011, primarily as a result of:
·Other operating cash flows increased by $45 million driven by a $29 million reduction in pension funding.
·Working capital cash flows increased by $11 million driven by lower income tax payments as a result of lower taxable income in 2012, offset by changes in receivables and unbilled revenues due to milder December weather in 2011 than in 2012 and 2010.
Net cash provided by operating activities increased by 19%, or $70 million, in 2011 compared with 2010, primarily as a result of:

·an increase in net income adjusted for non-cash effects of $115 million (deferred income taxes and investment tax credits of $81 million and depreciation of $41 million, partially offset by defined benefit plans - expense of $2 million and other noncash items of $19 million);
·a net decrease in working capital related to unbilled revenues of $21 million due to colder weather in December 2010 as compared with December 2009, and milder weather in December 2011 as compared with December 2010; partially offset by
·an increase in discretionary defined benefit plan contributions of $30 million made in order to achieve KU's long-term funding requirements;
·the timing of ECR collections of $28 million; and
·an increase in cash outflows related to accrued taxes of $28 million due to an accrual in excess of payments made in 2010 for the 2010 tax year and the payment of the 2010 tax liability in 2011, along with payments made in 2011 over the accrual for the 2011 tax year.
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Investing Activities

Net cash used in investing activities increased by 72%, or $201 million, in 2012 compared with 2011, as a result of an increase in capital expenditures of $201 million, primarily due to coal combustion residuals projects at Ghent and E.W. Brown, construction of Cane Run Unit 7 and Ghent environmental air projects.

See "Forecasted Uses of Cash" for detail regarding projected capital expenditures for the years 2013 through 2017.

Net cash used in investing activities decreased by 35%, or $150 million, in 2011 compared with 2010, as a result of a decrease in capital expenditures of $150 million primarily due to the completion of KU's scrubber program in 2010 and TC2 being dispatched in 2011.

Financing Activities

Net cash used in financing activities was $30 million in 2012 compared with net cash provided by financing activities of $137 million in 2011, primarily as a result of less long-term debt issuances and higher dividends to LKE.

In 2012, cash used in financing activities consisted of:

·the payment of common stock dividends to LKE of $100 million; partially offset by
·the issuance of short-term debt in the form of commercial paper $70 million.

Net cash used in financing activities was $137 million in 2011 compared with net cash provided by financing activities of $56 million in 2010, primarily as a result of less long-term debt issuances and higher dividends to LKE.

In 2011, cash used in financing activities consisted of:

·the payment of common stock dividends to LKE of $124 million;
·a net decrease in notes payable with affiliates of $10 million; and
·the payment of debt issuance and credit facility costs of $3 million.

In the two months of 2010 following the acquisition, cash provided by financing activities of the Successor consisted of:

·the issuance of first mortgage bonds of $1,489 million after discounts; and
·the issuance of debt of $1,331 million to a PPL affiliate to repay debt due to an E.ON AG affiliate upon the closing of PPL's acquisition of LKE; partially offset by
·the repayment of debt to an E.ON AG affiliate of $1,331 million upon the closing of PPL's acquisition of LKE;
·the repayment of debt to a PPL affiliate of $1,331 million upon the issuance of first mortgage bonds;
·a net decrease in notes payable with affiliates of $83 million; and
·the payment of debt issuance and credit facility costs of $17 million.

In the ten months of 2010 preceding PPL's acquisition of LKE, cash used in financing activities by the Predecessor consisted of:

·the payment of common stock dividends to LKE of $50 million; partially offset by
·a net increase in notes payable with affiliates of $48 million.

See "Forecasted Sources of Cash" for a discussion of KU's plans to issue debt securities, as well as a discussion of credit facility capacity available to KU.  Also see "Forecasted Uses of Cash" for a discussion of plans to pay dividends on common securities in the future, as well as maturities of long-term debt.

KU had no long-term debt securities activity during the year.

See Note 7 to the Financial Statements for additional information about long-term debt securities.
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Auction Rate Securities

At December 31, 2012, KU's tax-exempt revenue bonds that are in the form of auction rate securities and total $96 million continue to experience failed auctions.  Therefore, the interest rate continues to be set by a formula pursuant to the relevant indentures.  For the period ended December 31, 2012, the weighted-average rate on KU's auction rate bonds in total was 0.25%.

Forecasted Sources of Cash

KU expects to continue to have sufficient sources of cash available in the near term, including various credit facilities, its commercial paper program, issuance of debt securities and operating cash flow.

Credit Facilities

At December 31, 2012, KU's total committed borrowing capacity under its credit facilities and the use of this borrowing capacity were:

     Commercial Letters of Unused
   Capacity Paper Issued Credit Issued Capacity
          
Syndicated Credit Facility (a) (d) $ 400   70     $ 330 
Letter of Credit Facility (b) (d)   198     $ 198    
 Total Credit Facilities (c) $ 598   70  $ 198  $ 330 

(a)In November 2012, KU amended its Syndicated Credit Facility to extend the expiration date to November 2017.
(b)In August 2012, the KU letter of credit facility agreement was amended and restated to allow for certain payments under the letter of credit facility to be converted to loans rather than requiring immediate payment.
(c)The commitments under KU's credit facilities are provided by a diverse bank group, with no one bank and its affiliates providing an aggregate commitment of more than 19% of the total committed capacity available to KU.
(d)KU pays customary fees under its syndicated credit facility as well as its letter of credit facility, and borrowings generally bear interest at LIBOR-based rates plus an applicable margin.

KU participates in an intercompany money pool agreement whereby LKE and/or LG&E make available to KU funds up to $500 million at an interest rate based on a market index of commercial paper issues.  At December 31, 2012 there was no balance outstanding.

See Note 7 to the Financial Statements for further discussion of KU's credit facilities.

Operating Leases

KU also has available funding sources that are provided through operating leases.  KU leases office space and certain equipment.  These leasing structures provide KU additional operating and financing flexibility.  The operating leases contain covenants that are typical for these agreements, such as maintaining insurance, maintaining corporate existence and timely payment of rent and other fees.

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

Capital Contributions from LKE

From time to time LKE may make capital contributions to KU.  KU may use these contributions to fund capital expenditures and for other general corporate purposes.

Long-term Debt Securities

KU currently plans to issue, subject to market conditions, up to $300 million of first mortgage bond indebtedness in 2013, the proceeds of which will be used to fund capital expenditures and for other general corporate purposes.

Forecasted Uses of Cash

In addition to expenditures required for normal operating activities, such as purchased power, payroll, fuel and taxes, KU currently expects to incur future cash outflows for capital expenditures, various contractual obligations, payment of dividends on its common stock and possibly the purchase or redemption of a portion of debt securities.

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Capital Expenditures

The table below shows KU's current capital expenditure projections for the years 2013 through 2017.

    Projected
    2013  2014  2015  2016  2017 
Capital expenditures (a)               
 Generating facilities $ 289  $ 140  $ 136  $ 251  $ 308 
 Distribution facilities   89    87    97    92    107 
 Transmission facilities   48    37    40    40    61 
 Environmental   331    386    264    106    65 
 Other   27    24    25    27    22 
  Total Capital Expenditures $ 784  $ 674  $ 562  $ 516  $ 563 

(a)KU generally expects to recover these costs over a period equivalent to the related depreciable lives of the assets through rates.  The 2013 total excludes amounts included in accounts payable as of December 31, 2012.

KU's capital expenditure projections for the years 2013 through 2017 total approximately $3.1 billion.  Capital expenditure plans are revised periodically to reflect changes in operational, market and regulatory conditions.  This table includes current estimates for KU's environmental projects related to existing and proposed EPA compliance standards.  Actual costs may be significantly lower or higher depending on the final requirements and market conditions.  Environmental compliance costs incurred by KU in serving KPSC jurisdictional customers are generally eligible for recovery through the ECR mechanism.

KU plans to fund its capital expenditures in 2013 with cash on hand, cash from operations, short-term debt and issuance of debt securities.

Contractual Obligations

KU has assumed various financial obligations and commitments in the ordinary course of conducting its business.  At December 31, 2012, the estimated contractual cash obligations of KU were:

    Total 2013  2014 - 2015 2016 - 2017 After 2017
                  
Long-term Debt (a) $ 1,851     $ 250     $ 1,601 
Interest on Long-term Debt (b)   1,481  $ 64    130  $ 126    1,161 
Operating Leases (c)   51    9    15    9    18 
Coal and Natural Gas Purchase               
  Obligations (d)   1,046    411    479    156   
Unconditional Power Purchase               
  Obligations (e)   319    9    18    20    272 
Construction Obligations (f)   1,023    455    366    202    
Pension Benefit Plan Obligations (g) 59    59          
Other Obligations (h)   21    5    9    6    1 
Total Contractual Cash Obligations $ 5,851  $ 1,012  $ 1,267  $ 519  $ 3,053 

(a)Reflects principal maturities only based on stated maturity dates.  See Note 7 to the Financial Statements for a discussion of variable-rate remarketable bonds issued on behalf of KU.  KU has no capital lease obligations.
(b)Assumes interest payments through stated maturity.  The payments herein are subject to change, as payments for debt that is or becomes variable-rate debt have been estimated.
(c)See Note 11 to the Financial Statements for additional information.
(d)Represents contracts to purchase coal, natural gas and natural gas transportation.  See Note 15 to the Financial Statements for additional information.
(e)Represents future minimum payments under OVEC power purchase agreements through June 2040.  See Note 15 to the Financial Statements for additional information.
(f)Represents construction commitments, including commitments for the Ghent environmental air projects, Cane Run Unit 7 and Ghent landfill which are also reflected in the Capital Expenditures table presented above.
(g)Based on the current funded status of LKE's qualified pension plan, which covers KU employees, no cash contributions are required.  See Note 13 to the Financial Statements for a discussion of expected contributions.
(h)Represents other contractual obligations.

Dividends

From time to time, as determined by its Board of Directors, KU pays dividends to its sole shareholder, LKE.

As discussed in Note 7 to the Financial Statements, KU's ability to pay dividends is limited under a covenant in its $400 million revolving line of credit facility.  This covenant restricts the debt to total capital ratio to not more than 70%.  See Note 7 to the Financial Statements for other restrictions related to distributions on capital interests for KU.

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Purchase or Redemption of Debt Securities

KU will continue to evaluate purchasing or redeeming outstanding debt securities and may decide to take action depending upon prevailing market conditions and available cash.

Rating Agency Actions

Moody's, S&P and Fitch periodically review the credit ratings on the debt securities of KU.  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 KU are based on information provided by KU and other sources.  The ratings of Moody's, S&P and Fitch are not a recommendation to buy, sell or hold any securities of KU.  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.  The credit ratings of KU affect its liquidity, access to capital markets and cost of borrowing under its credit facilities.

The following table sets forth KU's security credit ratings as of December 31, 2012.

Senior UnsecuredSenior SecuredCommercial Paper
IssuerMoody'sS&PFitchMoody'sS&PFitchMoody'sS&PFitch
Kentucky UtilitiesAA2A-A+P-2A-2F-2

In addition to the credit ratings noted above, the rating agencies took the following actions related to KU:

In February 2012, Fitch assigned ratings to KU's newly established commercial paper program.

In March 2012, Moody's affirmed the following ratings:
·     the long-term ratings of the First Mortgage Bonds for KU;
·     the issuer ratings for KU; and
·     the bank loan ratings for KU.

Also in March 2012, Moody's and S&P each assigned short-term ratings to KU's newly established commercial paper program.

In December 2012, Fitch affirmed the issuer default ratings, individual security ratings and outlook for KU.

Ratings Triggers

KU has various derivative and non-derivative contracts, including contracts for the sale and purchase of electricity, fuel, and commodity transportation and storage, which contain provisions requiring KU to post additional collateral, or permitting the counterparty to terminate the contract, if KU's credit rating were to fall below investment grade.  See Note 19 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 December 31, 2012.  At December 31, 2012, if KU's credit ratings had been below investment grade, the maximum amount that KU would have been required to post as additional collateral to counterparties was $21 million for both derivative and non-derivative commodity and commodity-related contracts used in its generation and marketing operations.

Off-Balance Sheet Arrangements

KU has entered into certain agreements that may contingently require payment to a guaranteed or indemnified party.  See Note 15 to the Financial Statements for a discussion of these agreements.

Risk Management

Market Risk

See Notes 1, 18 and 19 to the Financial Statements for information about KU's risk management objectives, valuation techniques and accounting designations.

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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)

KU's rates are set by regulatory commissions and the fuel costs incurred are directly recoverable from customers.  As a result, KU is subject to commodity price risk for only a small portion of on-going business operations.  KU sells excess economic generation to maximize the value of the physical assets at times when the assets are not required to serve KU's or LG&E's customers.  See Note 19 to the Financial Statements for additional disclosures.

The balance and change in net fair value of KU's commodity derivative contracts for the periods ended December 31, 2012, 2011 and 2010 were not significant.

Interest Rate Risk

KU issues debt to finance its operations, which exposes it to interest rate risk.  KU utilizes various financial derivative instruments to adjust the mix of fixed and floating interest rates in its debt portfolio when appropriate.  Risk limits under KU's risk management program are designed to balance risk, exposure to volatility in interest expense and changes in the fair value of KU's debt portfolio due to changes in the absolute level of interest rates.

At December 31, 2012 and 2011, KU's potential annual exposure to increased interest expense, based on a 10% increase in interest rates, was not significant.

KU is also exposed to changes in the fair value of its debt portfolio.  KU estimated that a 10% decrease in interest rates at December 31, 2012, would increase the fair value of its debt portfolio by $67 million compared with $72 million at December 31, 2011.

At December 31, 2012, KU had the following interest rate hedges outstanding:
           
       Effect of a
     Fair Value, 10% Adverse
    Exposure Net - Asset Movement
   Hedged (Liability) in Rates
Cash flow hedges         
 Interest rate swaps (a) $ 150  $ 7  $ (9)

(a)KU utilizes various risk management instruments to reduce its exposure to the expected future cash flow variability of its debt instruments.  These risks include exposure to adverse interest rate movements for outstanding variable rate debt and for future anticipated financing.  While KU is exposed to changes in the fair value of these instruments, any realized changes in the fair value of such cash flow hedges are recoverable through regulated rates and any subsequent changes in fair value of these derivatives are included in regulatory assets or liabilities.  Sensitivities represent a 10% adverse movement in interest rates.  The positions outstanding at December 31, 2012 mature through 2043.

Credit Risk

KU is exposed to potential losses as a result of nonperformance by counterparties of their contractual obligations.  KU maintains credit policies and procedures to limit counterparty credit risk including evaluating credit ratings and financial information along with having certain counterparties post margin if the credit exposure exceeds certain thresholds.  KU is exposed to potential losses as a result of nonpayment by customers.  KU maintains an allowance for doubtful accounts based on a historical charge-off percentage for retail customers.  Allowances for doubtful accounts from wholesale and municipal customers and miscellaneous receivables are based on specific identification by management.  Retail, wholesale and municipal customer accounts are written-off after four months of no payment activity.  Miscellaneous receivables are written-off as management determines them to be uncollectible.

Certain of KU's derivative instruments contain provisions that require it to provide immediate and on-going collateralization of derivative instruments in net liability positions based upon KU's credit ratings from each of the major credit rating agencies.  See Notes 18 and 19 to the Financial Statements for information regarding exposure and the risk management activities.
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Related Party Transactions

KU is not aware of any material ownership interest or operating responsibility by senior management in outside partnerships, including leasing transactions with variable interest entities or other entities doing business with KU.  See Note 16 to the Financial Statements for additional information on related party transactions.

Environmental Matters

Protection of the environment is a major priority for KU and a significant element of its business activities.  Extensive federal, state and local environmental laws and regulations are applicable to KU's air emissions, water discharges and the management of hazardous and solid waste, among other areas, and the costs 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 from prior versions by the relevant agencies.  Costs may take the form of increased capital expenditures or operating and maintenance expenses; monetary fines, penalties or forfeitures or other restrictions.  Many of these environmental law considerations are also applicable to the operations of key suppliers, or customers, such as coal producers, industrial power users, etc.; and may impact the costs for their products or their demand for KU's services.

Physical effects associated with climate change could include the impact of changes in weather patterns, such as storm frequency and intensity, and the resultant potential damage to KU's generation assets and electricity transmission and distribution systems, as well as impacts on customers.  In addition, changed weather patterns could potentially reduce annual rainfall in areas where KU has hydro generating facilities or where river water is used to cool its fossil powered generators.  KU cannot currently predict whether its businesses will experience these potential climate change-related risks or estimate the potential cost of their related consequences.

See "Item 1. Business - Environmental Matters" and Note 15 to the Financial Statements for a discussion of environmental matters.

New Accounting Guidance

See Notes 1 and 24 to the Financial Statements for a discussion of new accounting guidance adopted and pending adoption.

Application of Critical Accounting Policies

Financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies.  The following accounting policies are particularly important to the financial condition or results of operations, and require estimates or other judgments of matters inherently uncertain.  Changes in the estimates or other judgments included within these accounting policies could result in a significant change to the information presented in the Financial Statements (these accounting policies are also discussed in Note 1 to the Financial Statements).  KU's senior management has reviewed these critical accounting policies, the following disclosures regarding their application and the estimates and assumptions regarding them, with PPL's Audit Committee.

Revenue Recognition - Unbilled Revenue

Revenues related to the sale of energy are recorded when service is rendered or when energy is delivered to customers.  Because customers of KU's retail operations are billed on cycles which vary based on the timing of the actual reading of their electric meters, KU records estimates for unbilled revenues at the end of each reporting period.  Such unbilled revenue amounts reflect estimates of the amount of electricity delivered to customers since the date of the last reading of their meters.  The unbilled revenues reflect consideration of estimated usage by customer class, the effect of different rate schedules, changes in weather, and where applicable, the impact of weather normalization or other regulatory provisions of rate structures.  In addition to the unbilled revenue accrual resulting from cycle billing, KU makes additional accruals resulting from the timing of customer bills.  The accrual of unbilled revenues in this manner properly matches revenues and related costs.  At December 31, 2012 and 2011, KU had unbilled revenue balances of $84 million and $81 million.
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Defined Benefits

KU participates in a qualified funded defined benefit pension plan and a funded other postretirement benefit plan.  These plans are applicable to the majority of the employees of KU and are sponsored by LKE.  LKE allocates a portion of the liability and net periodic defined benefit pension and other postretirement costs of the plans to KU based on its participation.  KU records an asset or liability to recognize the funded status of all defined benefit plans with an offsetting entry to regulatory assets or liabilities.  Consequently, the funded status of all defined benefit plans is fully recognized on the Balance Sheets.  See Note 13 to the Financial Statements for additional information about the plans and the accounting for defined benefits.

Certain assumptions are made by LKE regarding the valuation of benefit obligations and the performance of plan assets.  When accounting for defined benefits, delayed recognition in earnings of differences between actual results and expected or estimated results is a guiding principle.  Annual net periodic defined benefit costs are recorded in current earnings based on estimated results.  Any differences between actual and estimated results are recorded in regulatory assets and liabilities for amounts that are expected to be recovered through regulated customer rates.  These amounts in regulatory assets and liabilities are amortized to income over future periods.  The delayed recognition allows for a smoothed recognition of costs over the working lives of the employees who benefit under the plans.  The primary assumptions are:

·Discount Rate - The discount rate is used in calculating the present value of benefits, which is based on projections of benefit payments to be made in the future.  The objective in selecting the discount rate is to measure the single amount that, if invested at the measurement date in a portfolio of high-quality debt instruments, would provide the necessary future cash flows to pay the accumulated benefits when due.

·Expected Long-term Return on Plan Assets - Management projects the long-term rates of return on plan assets based on historical performance, future expectations and periodic portfolio rebalancing among the diversified asset classes.  These projected returns reduce the net benefit costs KU records currently.

·Rate of Compensation Increase - Management projects employees' annual pay increases, which are used to project employees' pension benefits at retirement.

·Health Care Cost Trend Rate - Management projects the expected increases in the cost of health care.

In selecting a discount rate for its defined benefit plans, LKE starts with a cash flow analysis of the expected benefit payment stream for its plans.  The plan-specific cash flows are matched against the coupons and expected maturity values of individually selected bonds.  This bond matching process begins with the full universe of Aa-rated non-callable (or callable with make-whole provisions) bonds, serving as the base from which those with the lowest and highest yields are eliminated to develop an appropriate subset of bonds.  Individual bonds are then selected based on the timing of each plan's cash flows and parameters are established as to the percentage of each individual bond issue that could be hypothetically purchased and the surplus reinvestment rates to be assumed.  At December 31, 2012, LKE decreased the discount rate for its pension plan from 5.12% to 4.26% and decreased the discount rate for its other postretirement benefit plan from 4.78% to 3.99%.

The expected long-term rates of return for LKE's defined benefit pension and other postretirement benefit plans have been developed using a best-estimate of expected returns, volatilities and correlations for each asset class.  LKE management corroborates these rates with expected long-term rates of return calculated by its independent actuary, who uses a building block approach that begins with a risk-free rate of return with factors being added such as inflation, duration, credit spreads and equity risk.  Each plan's specific asset allocation is also considered in developing a reasonable return assumption.  At December 31, 2012, LKE's expected return on plan assets decreased from 7.25% to 7.10%.

In selecting a rate of compensation increase, LKE considers past experience in light of movements in inflation rates.  At December 31, 2012, LKE's rate of compensation increase remained at 4.00%.

In selecting health care cost trend rates LKE considers past performance and forecasts of health care costs.  At December 31, 2012, LKE's health care cost trend rates were 8.00% for 2013, gradually declining to 5.50% for 2019.
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A variance in the assumptions listed above could have a significant impact on accrued defined benefit liabilities or assets, reported annual net periodic defined benefit costs and regulatory assets and liabilities allocated to KU.  While the charts below reflect either an increase or decrease in each assumption, the inverse of the change would impact the accrued defined benefit liabilities or assets, reported annual net periodic defined benefit costs and regulatory assets and liabilities for KU by a similar amount in the opposite direction.  The sensitivities below reflect an evaluation of the change based solely on a change in that assumption and does not include income tax effects.

At December 31, 2012, the defined benefit plans were recorded as follows:

Pension liabilities$ 104 
Other postretirement benefit liabilities 53 

The following chart reflects the sensitivities in the December 31, 2012 Balance Sheet associated with a change in certain assumptions based on KU's primary defined benefit plans.

  Increase (Decrease)
     Impact on    Impact on
  Change in defined benefit Impact on regulatory
Actuarial assumption assumption liabilities OCI assets
             
Discount Rate  (0.25)% $ 17     $ 17 
Rate of Compensation Increase  0.25%   3       3 
Health Care Cost Trend Rate (a)  1%   3       3 

(a)Only impacts other postretirement benefits.

In 2012 KU recognized net periodic defined benefit costs charged to operating expense of $11 million.  This amount represents a $3 million decrease from 2011.  This decrease in expense for 2012 was primarily attributable to the increase in the expected return on plan assets resulting from pension contributions of $15 million, a reduction in the amortization of outstanding losses and lower interest cost.

The following chart reflects the sensitivities in the 2012 Statement of Income (excluding income tax effects) associated with a change in certain assumptions based on KU's primary defined benefit plans.

Actuarial assumption  Change in assumption  Impact on defined benefit costs
       
Discount Rate  (0.25)% $ 2 
Expected Return on Plan Assets  (0.25)%   1 
Rate of Compensation Increase  0.25%   1 
Health Care Cost Trend Rate (a)  1%   

(a)Only impacts other postretirement benefits.

Asset Impairment (Excluding Investments)

Impairment analyses are performed for long-lived assets that are subject to depreciation or amortization whenever events or changes in circumstances indicate that a long-lived asset's carrying amount may not be recoverable.  For these long-lived assets classified as held and used, such events or changes in circumstances are:

·a significant decrease in the market price of an asset;
·a significant adverse change in the extent or manner in which an asset is being used or in its physical condition;
·a significant adverse change in legal factors or in the business climate;
·an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of an asset;
·a current-period operating or cash flow loss combined with a history of losses or a forecast that demonstrates continuing losses; or
·a current expectation that, more likely than not, an asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.
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For a long-lived asset classified as held and used, impairment is recognized when the carrying amount of the asset is not recoverable and exceeds its fair value.  The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset.  If the asset is impaired, an impairment loss is recorded to adjust the asset's carrying amount to its estimated fair value.  Management must make significant judgments to estimate future cash flows including the useful lives of long-lived assets, the fair value of the assets and management's intent to use the assets.  Alternate courses of action are considered to recover the carrying amount of a long-lived asset, and estimated cash flows from the "most likely" alternative are used to assess impairment whenever one alternative is clearly the most likely outcome.  If no alternative is clearly the most likely, then a probability-weighted approach is used taking into consideration estimated cash flows from the alternatives.  For assets tested for impairment as of the balance sheet date, the estimates of future cash flows used in that test consider the likelihood of possible outcomes that existed at the balance sheet date, including the assessment of the likelihood of a future sale of the assets.  That assessment is not revised based on events that occur after the balance sheet date.  Changes in assumptions and estimates could result in significantly different results than those identified and recorded in the financial statements.

For a long-lived asset classified as held for sale, impairment exists when the carrying amount of the asset (disposal group) exceeds its fair value less cost to sell.  If the asset (disposal group) is impaired, an impairment loss is recorded to adjust the carrying amount to its fair value less cost to sell.  A gain is recognized for any subsequent increase in fair value less cost to sell, but not in excess of the cumulative impairment previously recognized.

For determining fair value, quoted market prices in active markets are the best evidence.  However, when market prices are unavailable, KU considers all valuation techniques appropriate under the circumstances and for which market participant inputs can be obtained.  Generally discounted cash flows are used to estimate fair value, which incorporates market participant inputs when available.  Discounted cash flows are calculated by estimating future cash flow streams and applying appropriate discount rates to determine the present value of the cash flow streams.

Goodwill is tested for impairment at the reporting unit level.  KU's reporting unit has been determined to be at the operating segment level.  A goodwill impairment test is performed annually or more frequently if events or changes in circumstances indicate that the carrying amount of the reporting unit may be greater than the unit's fair value.  Additionally, goodwill is tested for impairment after a portion of goodwill has been allocated to a business to be disposed of.

Beginning in 2012, KU may elect either to initially make a qualitative evaluation about the likelihood of an impairment of goodwill or to bypass the qualitative assessment and directly test goodwill for impairment using a two-step quantitative test.  If the qualitative evaluation (referred to as "step zero") is elected and the assessment results in a determination that it is not more likely than not the fair value of the reporting unit is less than the carrying amount, the two-step quantitative impairment test is not necessary.  However, the quantitative impairment test is required if KU concludes it is more likely than not the fair value of the reporting unit is less than the carrying amount based on the step zero assessment.

When the two-step quantitative impairment test is elected or required as a result of the step zero assessment, in step one, KU identifies a potential impairment by comparing the estimated fair value of KU (the goodwill reporting unit) with its carrying amount, including goodwill, on the measurement date.  If the estimated fair value exceeds its carrying amount, goodwill is not considered impaired.  If the carrying amount exceeds the estimated fair value, the second step is performed to measure the amount of impairment loss, if any.

The second step of the quantitative test requires a calculation of the implied fair value of goodwill, which is determined in the same manner as the amount of goodwill in a business combination.  That is, the estimated fair value is allocated to all of KU's assets and liabilities as if KU had been acquired in a business combination and the estimated fair value of KU was the price paid.  The excess of the estimated fair value of KU over the amounts assigned to its assets and liabilities is the implied fair value of goodwill.  The implied fair value of KU's goodwill is then compared with the carrying amount of that goodwill.  If the carrying amount exceeds the implied fair value, an impairment loss is recognized in an amount equal to that excess.  The loss recognized cannot exceed the carrying amount of KU's goodwill.

KU elected to perform the two-step quantitative impairment test of goodwill in the fourth quarter of 2012 and no impairment was recognized.  Management used both discounted cash flows and market multiples, which required significant assumptions, to estimate the fair value of KU.  Applying an appropriate weighting to both the discounted cash flow and market multiple valuations, a decrease in the forecasted cash flows of 10%, an increase in the discount rate by 25 basis points, or a 10% decrease in the multiples would not have resulted in an impairment of goodwill.
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Loss Accruals

Losses are accrued for the estimated impacts of various conditions, situations or circumstances involving uncertain or contingent future outcomes.  For loss contingencies, the loss must be accrued if (1) information is available that indicates it is probable that a loss has been incurred, given the likelihood of the uncertain future events and (2) the amount of the loss can be reasonably estimated.  Accounting guidance defines "probable" as cases in which "the future event or events are likely to occur." The accrual of contingencies that might result in gains is not recorded unless recovery is assured.  Potential loss contingencies for environmental remediation, litigation claims, regulatory penalties and other events are continuously assessed.

The accounting aspects of estimated loss accruals include (1) the initial identification and recording of the loss, (2) the determination of triggering events for reducing a recorded loss accrual and (3) the ongoing assessment as to whether a recorded loss accrual is sufficient.  All three of these aspects require significant judgment by management.  Internal expertise and outside experts (such as lawyers and engineers) are used, as necessary to help estimate the probability that a loss has been incurred and the amount (or range) of the loss.

In 2012, no significant adjustments were made to KU's existing contingencies.

Certain other events have been identified that could give rise to a loss, but that do not meet the conditions for accrual.  Such events are disclosed, but not recorded, when it is reasonably possible that a loss has been incurred.  Accounting guidance defines "reasonably possible" as cases in which "the future event or events occurring is more than remote, but less than likely to occur."

When an estimated loss is accrued, the triggering events for subsequently adjusting the loss accrual are identified, where applicable.  The triggering events generally occur when the contingency has been resolved and the actual loss is paid or written off, or when the risk of loss has diminished or been eliminated.  The following are some of the triggering events that provide for the adjustment of certain recorded loss accruals:

·Allowances for uncollectible accounts are reduced when accounts are written off after prescribed collection procedures have been exhausted, a better estimate of the allowance is determined or underlying amounts are ultimately collected.

·Environmental and other litigation contingencies are reduced when the contingency is resolved, KU makes actual payments, a better estimate of the loss is determined or the loss is no longer considered probable.

Loss accruals are reviewed on a regular basis to assure that the recorded potential loss exposures are appropriate.  This involves ongoing communication and analyses with internal and external legal counsel, engineers, operation management and other parties.

See Note 15 to the Financial Statements for additional information.

Asset Retirement Obligations

KU is required to recognize a liability for legal obligations associated with the retirement of long-lived assets.  The initial obligation is measured at its estimated fair value.  An equivalent amount is recorded as an increase in the value of the capitalized asset and allocated to expense over the useful life of the asset.  Until the obligation is settled, the liability is increased, through the recognition of accretion expense in the Statements of Income, for changes in the obligation due to the passage of time.  Since costs of removal are collected in rates, the accretion and depreciation are offset with a regulatory credit on the income statement, such that there is no earnings impact.  The regulatory asset created by the regulatory credit is relieved when the ARO has been settled.  An ARO must be recognized when incurred if the fair value of the ARO can be reasonably estimated.  See Note 21 to the Financial Statements for related disclosures.

In determining AROs, management must make significant judgments and estimates to calculate fair value.  Fair value is developed using an expected present value technique based on assumptions of market participants that considers estimated retirement costs in current period dollars that are inflated to the anticipated retirement date and then discounted back to the date the ARO was incurred.  Changes in assumptions and estimates included within the calculations of the fair value of AROs could result in significantly different results than those identified and recorded in the financial statements.  Estimated ARO costs and settlement dates, which affect the carrying value of various AROs and the related assets, are reviewed periodically to ensure that any material changes are incorporated into the estimate of the obligations.  Any change to the capitalized asset is amortized over the remaining life of the associated long-lived asset.

At December 31, 2012, KU had AROs totaling $69 million recorded on the Balance Sheet.  Of the total amount, $51 million, or 74%, relates to KU's ash ponds and landfill.  The most significant assumptions surrounding AROs are the forecasted retirement costs, the discount rates and the inflation rates.  A variance in the forecasted retirement costs, the discount rates or the inflation rates could have a significant impact on the ARO liabilities.

191

The following chart reflects the sensitivities related to KU's ARO liabilities for ash ponds and landfill at December 31, 2012:

  Change in Impact on
  Assumption ARO Liability
       
Retirement Cost  10% $6
Discount Rate  (0.25)%  2
Inflation Rate  0.25%  3

Income Taxes

Significant management judgment is required in developing the provision for income taxes, primarily due to the uncertainty related to tax positions taken or expected to be taken in tax returns and the determination of deferred tax assets, liabilities and valuation allowances.

Significant management judgment is required to determine the amount of benefit recognized related to an uncertain tax position.  Tax positions are evaluated following a two-step process.  The first step requires an entity to determine whether, based on the technical merits supporting a particular tax position, it is more likely than not (greater than a 50% chance) that the tax position will be sustained.  This determination assumes that the relevant taxing authority will examine the tax position and is aware of all the relevant facts surrounding the tax position.  The second step requires an entity to recognize in the financial statements the benefit of a tax position that meets the more-likely-than-not recognition criterion.  The benefit recognized is measured at the largest amount of benefit that has a likelihood of realization, upon settlement, that exceeds 50%.  Management considers a number of factors in assessing the benefit to be recognized, including negotiation of a settlement.

On a quarterly basis, uncertain tax positions are reassessed by considering information known at the reporting date.  Based on management's assessment of new information, a tax benefit may subsequently be recognized for a previously unrecognized tax position, a previously recognized tax position may be derecognized, or the benefit of a previously recognized tax position may be remeasured.  The amounts ultimately paid upon resolution of issues raised by taxing authorities may differ materially from the amounts accrued and may materially impact the financial statements in the future.

At December 31, 2012, KU's existing reserve exposure to either increases or decreases in unrecognized tax benefits during the next 12 months is less than $1 million.  This change could result from subsequent recognition, derecognition and/or changes in the measurement of uncertain tax positions.  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.

The balance sheet classification of unrecognized tax benefits and the need for valuation allowances to reduce deferred tax assets also require significant management judgment.  Unrecognized tax benefits are classified as current to the extent management expects to settle an uncertain tax position by payment or receipt of cash within one year of the reporting date.  Valuation allowances are initially recorded and reevaluated each reporting period by assessing the likelihood of the ultimate realization of a deferred tax asset.  Management considers a number of factors in assessing the realization of a deferred tax asset, including the reversal of temporary differences, future taxable income and ongoing prudent and feasible tax planning strategies.  Any tax planning strategy utilized in this assessment must meet the recognition and measurement criteria utilized to account for an uncertain tax position.  See Note 5 to the Financial Statements for related disclosures.

Regulatory Assets and Liabilities

KU is a cost-based rate-regulated utility.  As a result, the effects of regulatory actions are required to be reflected in the financial statements.  Assets and liabilities are recorded that result from the regulated ratemaking process that may not be recorded under GAAP for non-regulated entities.  Regulatory assets generally represent incurred costs that have been deferred because such costs are probable of future recovery in regulated customer rates.  Regulatory liabilities are recognized for amounts expected to be returned through future regulated customer rates.  In certain cases, regulatory liabilities are recorded based on an understanding with the regulator that rates have been set to recover costs that are expected to be incurred in the future, and the regulated entity is accountable for any amounts charged pursuant to such rates and not yet expended for the intended purpose.  The accounting for regulatory assets and liabilities is based on specific ratemaking decisions or precedent for each transaction or event as prescribed by the FERC, the KPSC, the VSCC or the TRA.
192

Management continually assesses whether the regulatory assets are probable of future recovery by considering factors such as changes in the applicable regulatory and political environments, the ability to recover costs through regulated rates, recent rate orders to other regulated entities and the status of any pending or potential deregulation legislation.  Based on this continual assessment, management believes the existing regulatory assets are probable of recovery.  This assessment reflects the current political and regulatory climate at the state and federal levels, and is subject to change in the future.  If future recovery of costs ceases to be probable, then asset write-off would be required to be recognized in operating income.  Additionally, the regulatory agencies can provide flexibility in the manner and timing of the depreciation of PP&E and amortization of regulatory assets.

At December 31, 2012, KU had regulatory assets of $230 million and regulatory liabilities of $536 million.  All regulatory assets are either currently being recovered under specific rate orders, represent amounts that are expected to be recovered in future rates or benefit future periods based upon established regulatory practices.

See Note 6 to the Financial Statements for additional information on regulatory assets and liabilities.

Other Information

PPL's Audit Committee has approved the independent auditor to provide audit, tax and other services permitted by Sarbanes-Oxley and SEC rules.  The audit services include services in connection with statutory and regulatory filings, reviews of offering documents and registration statements, and internal control reviews.  See "Item 14. Principal Accounting Fees and Services" for more information.

193


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

PPL Corporation, PPL Energy Supply, LLC, and PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company

Reference is made to "Risk Management - Energy Marketing & Trading and Other" for PPL and PPL Energy Supply and "Risk Management" for PPL Electric, LKE, LG&E and KU in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations."

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195



Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareowners of PPL Corporation

We have audited the accompanying consolidated balance sheets of PPL Corporation and subsidiaries as of December 31, 20092012 and 2008,2011, and the related consolidated statements of income, equity, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2009.2012. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the 2010 financial statements of LG&E and KU Energy LLC (LKE), a wholly owned subsidiary, which statements reflect total revenues of $494 million for the period November 1, 2010 (date of acquisition) to December 31, 2010. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for LKE, is based solely on the report of the other auditors.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and, for 2010, the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PPL Corporation and subsidiaries at December 31, 20092012 and 2008,2011, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2009,2012, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), PPL Corporation's internal control over financial reporting as of December 31, 2009,2012, based on criteria established in Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 201028, 2013 expressed an unqualified opinion thereon.


    /s//s/ Ernst & Young LLP


Philadelphia, Pennsylvania
February 25, 201028, 2013

196

 

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareowners of PPL Corporation

We have audited PPL Corporation's internal control over financial reporting as of December 31, 2009,2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). PPL Corporation's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in Management's Report on Internal Control over Financial Reporting at Item 9A. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, PPL Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009,2012 based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of PPL Corporation and subsidiaries as of December 31, 20092012 and 2008,2011, and the related consolidated statements of income, equity, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 20092012 and our report dated February 25, 201028, 2013 expressed an unqualified opinion thereon.


    /s//s/ Ernst & Young LLP


Philadelphia, Pennsylvania
February 25, 201028, 2013

197



Report of Independent Registered Public Accounting Firm

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

We have audited the accompanying consolidated balance sheets of PPL Energy Supply, LLC and subsidiaries as of December 31, 20092012 and 2008,2011, and the related consolidated statements of income, equity, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2009.2012. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PPL Energy Supply, LLC and subsidiaries at December 31, 20092012 and 2008,2011, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2009,2012, in conformity with U.S. generally accepted accounting principles.


    /s//s/ Ernst & Young LLP


Philadelphia, Pennsylvania
February 25, 201028, 2013

198



Report of Independent Registered Public Accounting Firm

To the Board of Directors and ShareownerShareowners of PPL Electric Utilities Corporation

We have audited the accompanying consolidated balance sheets of PPL Electric Utilities Corporation and subsidiaries as of December 31, 20092012 and 2008,2011, and the related consolidated statements of income, shareowners' equity, and cash flows for each of the three years in the period ended December 31, 2009.2012. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PPL Electric Utilities Corporation and subsidiaries at December 31, 20092012 and 2008,2011, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2009,2012, in conformity with U.S. generally accepted accounting principles.


    /s//s/ Ernst & Young LLP


Philadelphia, Pennsylvania
February 25, 201028, 2013

199

INDEX TO ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
FINANCIAL STATEMENTS
PPL Corporation
94
95
96
98
99
PPL Energy Supply, LLC
100
101
102
104
105
PPL Electric Utilities Corporation
106
107
108
110
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
111
123
125
125
126
131
132
138
139
142
143
146
156
156
170
171
172
177
185
187
188
190
SUPPLEMENTARY DATA
192
193
194


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31,
PPL Corporation and Subsidiaries
(Millions of Dollars, except share data)
  2009 2008 2007
Operating Revenues         
Utility $3,902  $4,114  $4,114 
Unregulated retail electric and gas  152   151   102 
Wholesale energy marketing            
Realized  3,291   2,288   1,581 
Unrealized economic activity (Note 18)  (229)  1,056   (145)
Net energy trading margins  17   (121)  41 
Energy-related businesses  423   519   769 
Total Operating Revenues  7,556   8,007   6,462 
             
Operating Expenses            
Operation            
Fuel  931   1,084   890 
Energy purchases            
Realized  2,636   1,634   918 
Unrealized economic activity (Note 18)  155   553   (182)
Other operation and maintenance  1,424   1,423   1,365 
Amortization of recoverable transition costs  304   293   310 
Depreciation (Note 1)  469   458   442 
Taxes, other than income (Note 5)  280   288   298 
Energy-related businesses (Note 8)  396   481   762 
Total Operating Expenses  6,595   6,214   4,803 
             
Operating Income  961   1,793   1,659 
             
Other Income - net (Note 16)  49   55   97 
             
Other-Than-Temporary Impairments  18   36   3 
             
Interest Expense  396   455   472 
             
Income from Continuing Operations Before Income Taxes  596   1,357   1,281 
             
Income Taxes (Note 5)  130   430   259 
             
Income from Continuing Operations After Income Taxes  466   927   1,022 
             
Income (Loss) from Discontinued Operations (net of income taxes) (Note 9)  (40)  23   293 
             
Net Income  426   950   1,315 
             
Net Income Attributable to Noncontrolling Interests  19   20   27 
             
Net Income Attributable to PPL Corporation $407  $930  $1,288 
             
Amounts Attributable to PPL Corporation:            
Income from Continuing Operations After Income Taxes $447  $907  $1,001 
Income (Loss) from Discontinued Operations (net of income taxes)  (40)  23   287 
Net Income $407  $930  $1,288 
             
Earnings Per Share of Common Stock:            
Income from Continuing Operations After Income Taxes Available to PPL Corporation Common Shareowners:            
Basic $1.18  $2.42  $2.62 
Diluted $1.18  $2.41  $2.60 
Net Income Available to PPL Corporation Common Shareowners:            
Basic $1.08  $2.48  $3.37 
Diluted $1.08  $2.47  $3.34 
             
Dividends Declared Per Share of Common Stock $1.38  $1.34  $1.22 
             
Weighted-Average Shares of Common Stock Outstanding (in thousands)
            
Basic  376,082   373,626   380,563 
Diluted  376,406   374,901   383,492 

Report of Independent Registered Public Accounting Firm

The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
To the Board of Directors and Sole Member of LG&E and KU Energy LLC

We have audited the accompanying consolidated balance sheets of LG&E and KU Energy LLC and subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of income and comprehensive income, cash flows, and equity for each of the two years in the period ended December 31, 2012. Our audits also included the financial statement schedule listed in the index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of LG&E and KU Energy LLC and subsidiaries at December 31, 2012 and 2011, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ Ernst & Young LLP


Louisville, Kentucky
February 28, 2013

200



CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
PPL Corporation and Subsidiaries
(Millions of Dollars)
  2009 2008 2007
Cash Flows from Operating Activities         
Net income $426  $950  $1,315 
Adjustments to reconcile net income to net cash provided by operating activities            
Pre-tax gain from the sale of the Latin American businesses          (400)
Pre-tax gain from the sale of the majority of Maine hydroelectric generation business  (38)        
Depreciation  471   461   458 
Amortization of recoverable transition costs and other  389   383   433 
Defined benefits  (115)  (100)  (39)
Impairment of assets  127   105   124 
Gain on the sale of emission allowances  (2)  (6)  (109)
Deferred income taxes and investment tax credits  104   43   42 
Unrealized (gains) losses on derivatives, and other hedging activities  329   (279)  (22)
Other  23   71   38 
Change in current assets and current liabilities            
Accounts receivable  76   118   (186)
Accounts payable  (150)  85   119 
Unbilled revenues  2   (85)  (99)
Fuel, materials and supplies  (21)  (35)  25 
Counterparty collateral  334   1   12 
Price risk management assets and liabilities  (231)  (77)  (45)
Other  96   (16)  (4
Other operating activities            
Other assets  12   21   (12)
Other liabilities  20   (51)  (79)
             
Net cash provided by operating activities  1,852   1,589   1,571 
             
Cash Flows from Investing Activities            
Expenditures for property, plant and equipment  (1,225)  (1,418)  (1,657)
Proceeds from the sale of the majority of Maine hydroelectric generation business  81         
Proceeds from the sale of the gas and propane businesses      303     
Proceeds from the sale of the Latin American businesses          851 
Proceeds from the sale of the telecommunication operations          47 
Expenditures for intangible assets  (88)  (332)  (65)
Proceeds from the sale of intangible assets  16   19   111 
Purchases of nuclear plant decommissioning trust investments  (227)  (224)  (190)
Proceeds from the sale of nuclear plant decommissioning trust investments  201   197   175 
Purchases of other investments      (290)  (601)
Proceeds from the sale of other investments  154   195   860 
Net (increase) decrease in restricted cash and cash equivalents  218   (71)  (125)
Other investing activities  (10)  (6)  (20)
             
Net cash used in investing activities  (880)  (1,627)  (614)
             
Cash Flows from Financing Activities            
Issuance of long-term debt  298   1,338   985 
Retirement of long-term debt  (1,016)  (671)  (1,216)
Repurchase of common stock      (38)  (712)
Issuance of common stock  60   19   32 
Payment of common stock dividends  (517)  (491)  (459)
Net increase (decrease) in short-term debt  (52)  588   61 
Other financing activities  (44)  (24)  (17)
             
Net cash provided by (used in) financing activities  (1,271)  721   (1,326)
             
Effect of Exchange Rates on Cash and Cash Equivalents      (13)  5 
             
Net Increase (Decrease) in Cash and Cash Equivalents  (299)  670   (364)
Cash and Cash Equivalents at Beginning of Period  1,100   430   794 
Cash and Cash Equivalents at End of Period $801  $1,100  $430 
             
Supplemental Disclosures of Cash Flow Information            
Cash paid during the period for:            
Interest - net of amount capitalized $460  $423  $389 
Income taxes - net $16  $300  $376 
 
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
Report of Independent Registered Public Accounting Firm

To the Member of LG&E and KU Energy LLC

In our opinion, the accompanying consolidated statements of income, comprehensive income, cash flows, and equity present fairly, in all material respects, the results of operations and cash flows of LG&E and KU Energy LLC and its subsidiaries (Successor Company) for the period from November 1, 2010 to December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.  In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.  These financial statements and financial statement schedule are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit.  We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

As discussed in Note 10 to the consolidated financial statements, on November 1, 2010, PPL Corporation completed its acquisition of LG&E and KU Energy LLC and its subsidiaries.  The push-down basis of accounting was used at the acquisition date.


/s/ PricewaterhouseCoopers LLP


Louisville, Kentucky
February 25, 2011

201



CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
PPL Corporation and Subsidiaries
(Millions of Dollars, shares in thousands)
  2009 2008
Assets        
         
Current Assets        
Cash and cash equivalents $801  $1,100 
Short-term investments      150 
Restricted cash and cash equivalents  105   320 
Accounts receivable (less reserve:  2009, $37; 2008, $36)        
Customer  409   456 
Other  59   77 
Unbilled revenues  600   599 
Fuel, materials and supplies (Note 1)  357   337 
Prepayments  102   84 
Price risk management assets (Notes 17 and 18)  2,157   1,224 
Other intangibles (Note 19)  25   17 
Assets held for sale (Note 9)  127     
Other current assets  10   19 
Total Current Assets  4,752   4,383 
         
Investments        
Nuclear plant decommissioning trust funds (Notes 17 and 21)  548   446 
Other investments  65   76 
Total Investments  613   522 
         
Property, Plant and Equipment (Note 1)        
Electric plant        
Transmission and distribution  8,686   8,046 
Generation  10,493   9,588 
General  899   840 
Electric plant in service  20,078   18,474 
Construction work in progress  567   1,131 
Nuclear fuel  506   428 
Electric plant  21,151   20,033 
Gas and oil plant  68   68 
Other property  166   156 
Property, plant and equipment, gross  21,385   20,257 
Less:  accumulated depreciation  8,211   7,882 
Property, Plant and Equipment, net  13,174   12,375 
         
Regulatory and Other Noncurrent Assets        
Regulatory assets (Note 1)  531   763 
Goodwill (Note 19)  806   763 
Other intangibles (Note 19)  615   637 
Price risk management assets (Notes 17 and 18)  1,274   1,392 
Other noncurrent assets  400   570 
Total Regulatory and Other Noncurrent Assets  3,626   4,125 
         
Total Assets $22,165  $21,405 
 
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
Report of Independent Registered Public Accounting Firm

To the Member of LG&E and KU Energy LLC

In our opinion, the accompanying consolidated statements of income, comprehensive income, cash flows, and equity present fairly, in all material respects, the results of operations and cash flows of LG&E and KU Energy LLC and its subsidiaries (formerly E.ON U.S. LLC, Predecessor Company) for the period from January 1, 2010 to October 31, 2010 in conformity with accounting principles generally accepted in the United States of America.  In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.  These financial statements and financial statement schedule are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit.  We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

As discussed in Note 10 to the consolidated financial statements, on November 1, 2010, PPL Corporation completed its acquisition of LG&E and KU Energy LLC and its subsidiaries.  The push-down basis of accounting was used at the acquisition date.


/s/ PricewaterhouseCoopers LLP


Louisville, Kentucky
February 25, 2011

202



CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
PPL Corporation and Subsidiaries
(Millions of Dollars, shares in thousands)
  2009 2008
Liabilities and Equity        
         
Current Liabilities        
Short-term debt (Note 7) $639  $679 
Long-term debt      696 
Accounts payable  619   766 
Taxes  92   77 
Interest  113   130 
Dividends  135   131 
Price risk management liabilities (Notes 17 and 18)  1,502   1,324 
Counterparty collateral  356   22 
Other current liabilities  726   499 
Total Current Liabilities  4,182   4,324 
         
Long-term Debt (Note 7)  7,143   7,142 
         
Deferred Credits and Other Noncurrent Liabilities        
Deferred income taxes and investment tax credits (Note 5)  2,153   1,761 
Price risk management liabilities (Notes 17 and 18)  582   836 
Accrued pension obligations (Note 12)  1,283   899 
Asset retirement obligations (Note 20)  416   370 
Other deferred credits and noncurrent liabilities  591   677 
Total Deferred Credits and Other Noncurrent Liabilities  5,025   4,543 
         
Commitments and Contingent Liabilities (Note 14)        
         
Equity        
PPL Corporation Shareowners' Common Equity        
Common stock - $0.01 par value (a)  4   4 
Capital in excess of par value  2,280   2,196 
Earnings reinvested  3,749   3,862 
Accumulated other comprehensive loss (Note 1)  (537)  (985)
Total PPL Corporation Shareowners' Common Equity  5,496   5,077 
Noncontrolling Interests (Notes 3 and 6)  319   319 
Total Equity  5,815   5,396 
         
Total Liabilities and Equity $22,165  $21,405 
Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholder of Louisville Gas and Electric Company

We have audited the accompanying balance sheets of Louisville Gas and Electric Company as of December 31, 2012 and 2011, and the related statements of income and comprehensive income, cash flows, and equity for each of the two years in the period ended December 31, 2012. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Louisville Gas and Electric Company at December 31, 2012 and 2011, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP


Louisville, Kentucky
February 28, 2013

203



Report of Independent Registered Public Accounting Firm

To the Stockholder of Louisville Gas and Electric Company

In our opinion, the accompanying statements of income, comprehensive income, cash flows, and equity present fairly, in all material respects, the results of operations and cash flows of Louisville Gas and Electric Company (Successor Company) for the period from November 1, 2010 to December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audit.  We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

As discussed in Note 10 to the financial statements, on November 1, 2010, PPL Corporation completed its acquisition of LG&E and KU Energy LLC and its subsidiaries.  The push-down basis of accounting was used at the acquisition date.


/s/ PricewaterhouseCoopers LLP


Louisville, Kentucky
February 25, 2011

204



Report of Independent Registered Public Accounting Firm

To the Stockholder of Louisville Gas and Electric Company

In our opinion, the accompanying statements of income, comprehensive income, cash flows, and equity present fairly, in all material respects, the results of operations and cash flows of Louisville Gas and Electric Company (Predecessor Company) for the period from January 1, 2010 to October 31, 2010 in conformity with accounting principles generally accepted in the United States of America.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audit.  We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

As discussed in Note 10 to the financial statements, on November 1, 2010, PPL Corporation completed its acquisition of LG&E and KU Energy LLC and its subsidiaries.  The push-down basis of accounting was used at the acquisition date.


/s/ PricewaterhouseCoopers LLP


Louisville, Kentucky
February 25, 2011

205



Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholder of Kentucky Utilities Company

We have audited the accompanying balance sheets of Kentucky Utilities Company as of December 31, 2012 and 2011, and the related statements of income and comprehensive income, cash flows, and equity for each of the two years in the period ended December 31, 2012. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Kentucky Utilities Company at December 31, 2012 and 2011, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP


Louisville, Kentucky
February 28, 2013

206



Report of Independent Registered Public Accounting Firm

To the Stockholder of Kentucky Utilities Company

In our opinion, the accompanying statements of income, comprehensive income, cash flows, and equity present fairly, in all material respects, the results of operations and cash flows of Kentucky Utilities Company (Successor Company) for the period from November 1, 2010 to December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.  These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.  We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

As discussed in Note 10 to the financial statements, on November 1, 2010, PPL Corporation completed its acquisition of LG&E and KU Energy LLC and its subsidiaries.  The push-down basis of accounting was used at the acquisition date.


/s/ PricewaterhouseCoopers LLP


Louisville, Kentucky
February 25, 2011

207



Report of Independent Registered Public Accounting Firm

To the Stockholder of Kentucky Utilities Company

In our opinion, the accompanying statements of income, comprehensive income, cash flows, and equity present fairly, in all material respects, the results of operations and cash flows of Kentucky Utilities Company (Predecessor Company) for the period from January 1, 2010 to October 31, 2010 in conformity with accounting principles generally accepted in the United States of America.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audit.  We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

As discussed in Note 10 to the financial statements, on November 1, 2010, PPL Corporation completed its acquisition of LG&E and KU Energy LLC and its subsidiaries.  The push-down basis of accounting was used at the acquisition date.


/s/ PricewaterhouseCoopers LLP


Louisville, Kentucky
February 25, 2011

208

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31,
PPL Corporation and Subsidiaries
(Millions of Dollars, except share data)
            
     2012  2011  2010 
Operating Revenues      
 
Utility
 $ 6,808  $ 6,292  $ 3,668 
 
Unregulated retail electric and gas
   844    726    415 
 Wholesale energy marketing         
  
Realized
   4,433    3,807    4,832 
  
Unrealized economic activity (Note 19)
   (311)   1,407    (805)
 
Net energy trading margins
   4    (2)   2 
 
Energy-related businesses
   508    507    409 
 
Total Operating Revenues
   12,286    12,737    8,521 
          
Operating Expenses         
 Operation         
  
Fuel
   1,837    1,946    1,235 
  Energy purchases         
   
Realized
   2,997    2,130    2,773 
   
Unrealized economic activity (Note 19)
   (442)   1,123    (286)
  
Other operation and maintenance
   2,835    2,667    1,756 
 
Depreciation
   1,100    960    556 
 
Taxes, other than income
   366    326    238 
 
Energy-related businesses
   484    484    383 
 
Total Operating Expenses
   9,177    9,636    6,655 
             
Operating Income
   3,109    3,101    1,866 
             
Other Income (Expense) - net
   (39)   4    (31)
          
Other-Than-Temporary Impairments
   27    6    3 
             
Interest Expense
   961    898    593 
             
Income from Continuing Operations Before Income Taxes
   2,082    2,201    1,239 
             
Income Taxes
   545    691    263 
             
Income from Continuing Operations After Income Taxes
   1,537    1,510    976 
             
Income (Loss) from Discontinued Operations (net of income taxes)
   (6)   2    (17)
             
Net Income
   1,531    1,512    959 
             
Net Income Attributable to Noncontrolling Interests
   5    17    21 
             
Net Income Attributable to PPL Shareowners
 $ 1,526  $ 1,495  $ 938 
             
Amounts Attributable to PPL Shareowners:         
 
Income from Continuing Operations After Income Taxes
 $ 1,532  $ 1,493  $ 955 
 
Income (Loss) from Discontinued Operations (net of income taxes)
   (6)   2    (17)
 
Net Income
 $ 1,526  $ 1,495  $ 938 
             
Earnings Per Share of Common Stock:   
 Income from Continuing Operations After Income Taxes Available to PPL   
 Common Shareowners:         
  
Basic
 $ 2.62  $ 2.70  $ 2.21 
  
Diluted
 $ 2.61  $ 2.70  $ 2.20 
 Net Income Available to PPL Common Shareowners:         
  
Basic
 $ 2.61  $ 2.71  $ 2.17 
  
Diluted
 $ 2.60  $ 2.70  $ 2.17 
             
Dividends Declared Per Share of Common Stock
 $ 1.44  $ 1.40  $ 1.40 
             
Weighted-Average Shares of Common Stock Outstanding (in thousands)
         
  
Basic
   580,276    550,395    431,345 
  
Diluted
   581,626    550,952    431,569 
             
The accompanying Notes to Financial Statements are an integral part of the financial statements.
209

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31,
PPL Corporation and Subsidiaries
(Millions of Dollars)
            
    2012  2011  2010 
            
Net income
 $ 1,531  $ 1,512  $ 959 
            
Other comprehensive income (loss):         
Amounts arising during the period - gains (losses), net of tax (expense) benefit:         
 
Foreign currency translation adjustments, net of tax of $2, ($2), ($1)
   94    (48)   (59)
 
Available-for-sale securities, net of tax of ($31), ($6), ($31)
   29    9    29 
 
Qualifying derivatives, net of tax of ($32), ($139), ($148)
   39    202    219 
 
Equity investees' other comprehensive income (loss), net of tax of ($1), $0, $0
   2       
 Defined benefit plans:         
  
Prior service costs, net of tax of $0, ($1), ($14)
   1    (3)   17 
  
Net actuarial gain (loss), net of tax of $343, $58, $50
   (965)   (152)   (80)
  
Transition obligation, net of tax of $0, $0, ($4)
         8 
Reclassifications to net income - (gains) losses, net of tax expense (benefit):         
 
Available-for-sale securities, net of tax of $1, $5, $3
   (7)   (7)   (5)
 
Qualifying derivatives, net of tax of $278, $246, $84
   (434)   (370)   (126)
 
Equity investees' other comprehensive (income) loss, net of tax of $0, $0, $0
      3    
 Defined benefit plans:         
  
Prior service costs, net of tax of ($5), ($5), ($7)
   10    10    12 
  
Net actuarial loss, net of tax of ($29), ($19), ($14)
   79    47    41 
  
Transition obligation, net of tax of $0, $0, ($1)
         2 
Total other comprehensive income (loss) attributable to PPL Shareowners
   (1,152)   (309)   58 
            
Comprehensive income (loss)
   379    1,203    1,017 
 
Comprehensive income attributable to noncontrolling interests
   5    17    21 
            
Comprehensive income (loss) attributable to PPL Shareowners
 $ 374  $ 1,186  $ 996 
            
The accompanying Notes to Financial Statements are an integral part of the financial statements.
210

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
PPL Corporation and Subsidiaries
(Millions of Dollars)
     2012  2011  2010 
Cash Flows from Operating Activities         
 
Net income
 $ 1,531  $ 1,512  $ 959 
 Adjustments to reconcile net income to net cash provided by (used in) operating activities         
  
Depreciation
   1,100    961    567 
  
Amortization
   186    254    213 
  
Defined benefit plans - expense
   166    205    102 
  
Deferred income taxes and investment tax credits
   424    582    241 
  
Impairment of assets
   28    13    120 
  
Unrealized (gains) losses on derivatives, and other hedging activities
   27    (314)   542 
  
Provision for Montana hydroelectric litigation
      (74)   66 
  
Other
   52    36    32 
 Change in current assets and current liabilities         
  
Accounts receivable
   7    (89)   (106)
  
Accounts payable
   (29)   (36)   216 
  
Unbilled revenues
   (19)   64    (99)
  
Prepayments
   (5)   294    (318)
  
Counterparty collateral
   (34)   (190)   (18)
  
Taxes
   24    (104)   20 
  
Regulatory assets and liabilities, net
   (2)   106    (110)
  
Accrued interest
   32    109    50 
  
Other
   8    6    9 
 Other operating activities         
  
Defined benefit plans - funding
   (607)   (667)   (396)
  
Other assets
   (33)   (62)   (45)
  
Other liabilities
   (92)   (99)   (12)
   
Net cash provided by (used in) operating activities
   2,764    2,507    2,033 
Cash Flows from Investing Activities         
 
Expenditures for property, plant and equipment
   (3,105)   (2,487)   (1,597)
 
Proceeds from the sale of certain non-core generation facilities
      381    
 
Proceeds from the sale of the Long Island generation business
         124 
 
Proceeds from the sale of the Maine hydroelectric generation business
         38 
 
Ironwood Acquisition, net of cash acquired
   (84)      
 
Acquisition of WPD Midlands
      (5,763)   
 
Acquisition of LKE, net of cash acquired
         (6,812)
 
Purchases of nuclear plant decommissioning trust investments
   (154)   (169)   (128)
 
Proceeds from the sale of nuclear plant decommissioning trust investments
   139    156    114 
 
Proceeds from the sale of other investments
   20    163    
 
Net (increase) decrease in restricted cash and cash equivalents
   96    (143)   85 
 
Other investing activities
   (35)   (90)   (53)
   
Net cash provided by (used in) investing activities
   (3,123)   (7,952)   (8,229)
Cash Flows from Financing Activities         
 
Issuance of long-term debt
   1,223    5,745    4,642 
 
Retirement of long-term debt
   (108)   (1,210)   (20)
 
Issuance of common stock
   72    2,297    2,441 
 
Payment of common stock dividends
   (833)   (746)   (566)
 
Redemption of preference stock of a subsidiary
   (250)      (54)
 
Debt issuance and credit facility costs
   (17)   (102)   (175)
 
Contract adjustment payments on Equity Units
   (94)   (72)   (13)
 
Net increase (decrease) in short-term debt
   74    (125)   70 
 
Other financing activities
   (19)   (20)   (18)
   
Net cash provided by (used in) financing activities
   48    5,767    6,307 
Effect of Exchange Rates on Cash and Cash Equivalents
   10    (45)   13 
Net Increase (Decrease) in Cash and Cash Equivalents
   (301)   277    124 
Cash and Cash Equivalents at Beginning of Period
   1,202    925    801 
Cash and Cash Equivalents at End of Period
 $ 901  $ 1,202  $ 925 
             
Supplemental Disclosures of Cash Flow Information         
 Cash paid (received) during the period for:         
  
Interest - net of amount capitalized
 $ 847  $ 696  $ 458 
  
Income taxes - net
 $ 73  $ (76) $ 313 
             
The accompanying Notes to Financial Statements are an integral part of the financial statements.
211

CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
PPL Corporation and Subsidiaries
(Millions of Dollars, shares in thousands)
     2012  2011 
Assets      
          
Current Assets      
 
Cash and cash equivalents
 $ 901  $ 1,202 
 
Short-term investments
      16 
 
Restricted cash and cash equivalents
   54    152 
 Accounts receivable (less reserve:  2012, $64; 2011, $54)      
  
Customer
   745    732 
  
Other
   79    91 
 
Unbilled revenues
   857    834 
 
Fuel, materials and supplies
   673    654 
 
Prepayments
   166    160 
 
Price risk management assets
   1,525    2,548 
 
Regulatory assets
   19    9 
 
Other current assets
   49    28 
 
Total Current Assets
   5,068    6,426 
          
Investments      
 
Nuclear plant decommissioning trust funds
   712    640 
 
Other investments
   47    78 
 
Total Investments
   759    718 
          
Property, Plant and Equipment      
 
Regulated utility plant
   25,196    22,994 
 
Less:  accumulated depreciation - regulated utility plant
   4,164    3,534 
  
Regulated utility plant, net
   21,032    19,460 
 Non-regulated property, plant and equipment      
  
Generation
   11,295    10,514 
  
Nuclear fuel
   524    457 
  
Other
   726    637 
 
Less:  accumulated depreciation - non-regulated property, plant and equipment
   5,942    5,676 
  
Non-regulated property, plant and equipment, net
   6,603    5,932 
 
Construction work in progress
   2,397    1,874 
 
Property, Plant and Equipment, net (a)
   30,032    27,266 
          
Other Noncurrent Assets      
 
Regulatory assets
   1,483    1,349 
 
Goodwill
   4,158    4,114 
 
Other intangibles (a)
   925    1,065 
 
Price risk management assets
   572    920 
 
Other noncurrent assets
   637    790 
 
Total Other Noncurrent Assets
   7,775    8,238 
       
Total Assets
 $ 43,634  $ 42,648 

(a)At December 31, 2012 and December 31, 2011, includes $428 million and $416 million of PP&E, consisting primarily of "Generation," including leasehold improvements, and $10 million and $11 million of "Other intangibles" from the consolidation of a VIE that is the owner/lessor of the Lower Mt. Bethel plant.  See Note 22 for additional information.

The accompanying Notes to Financial Statements are an integral part of the financial statements.
212

CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
PPL Corporation and Subsidiaries
(Millions of Dollars, shares in thousands)
     2012  2011 
Liabilities and Equity      
          
Current Liabilities      
 
Short-term debt
 $ 652  $ 578 
 
Long-term debt due within one year
   751    
 
Accounts payable
   1,252    1,150 
 
Taxes
   90    65 
 
Interest
   325    287 
 
Dividends
   210    207 
 
Price risk management liabilities
   1,065    1,570 
 
Regulatory liabilities
   61    73 
 
Other current liabilities
   1,219    1,325 
 
Total Current Liabilities
   5,625    5,255 
          
Long-term Debt
   18,725    17,993 
          
Deferred Credits and Other Noncurrent Liabilities      
 
Deferred income taxes
   3,387    3,326 
 
Investment tax credits
   328    285 
 
Price risk management liabilities
   629    840 
 
Accrued pension obligations
   2,076    1,313 
 
Asset retirement obligations
   536    484 
 
Regulatory liabilities
   1,010    1,010 
 
Other deferred credits and noncurrent liabilities
   820    1,046 
 
Total Deferred Credits and Other Noncurrent Liabilities
   8,786    8,304 
          
Commitments and Contingent Liabilities (Notes 6 and 15)      
          
Equity      
 PPL Shareowners' Common Equity      
  
Common stock - $0.01 par value (a)
   6    6 
  
Additional paid-in capital
   6,936    6,813 
  
Earnings reinvested
   5,478    4,797 
  
Accumulated other comprehensive loss
   (1,940)   (788)
  
Total PPL Shareowners' Common Equity
   10,480    10,828 
 
Noncontrolling Interests
   18    268 
 
Total Equity
   10,498    11,096 
          
Total Liabilities and Equity
 $ 43,634  $ 42,648 

(a)780,000 shares authorized; 377,183 shares581,944 and 374,581578,405 shares issued and outstanding at December 31, 20092012 and 2008.
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.December 31, 2011.

The accompanying Notes to Financial Statements are an integral part of the financial statements.
213

CONSOLIDATED STATEMENTS OF EQUITY
PPL Corporation and Subsidiaries
(Millions of Dollars)
  PPL Corporation Shareowners    
  Common stock shares outstanding (a) Common stock Capital in excess of par value Earnings reinvested 
Accumulated other comprehensive loss
 Non-controlling interests Total
                            
December 31, 2006 (b) 385,039  $4  $2,823  $2,613  $(318) $361  $5,483 
Common stock issued (c) 3,177       48               48 
Common stock repurchased (d) (14,945)      (712)              (712)
Stock-based compensation         26               26 
Net income             1,288       27   1,315 
Dividends, dividend equivalents and distributions (e)             (466)      (25)  (491)
Divestitures                     (35)  (35)
Acquisitions                     (8)  (8)
Other comprehensive income                 250       250 
December 31, 2007 373,271  $4  $2,185  $3,435  $(68) $320  $5,876 
                            
Common stock issued (c) 2,158      $29              $29 
Common stock repurchased (d) (848)      (38)              (38)
Stock-based compensation         20               20 
Net income            $930      $20   950 
Dividends, dividend equivalents and distributions (e)             (503)      (20)  (523)
Divestitures                     (1)  (1)
Other comprehensive income                $(917)      (917)
December 31, 2008 (f) 374,581  $4  $2,196  $3,862  $(985) $319  $5,396 
                            
Common stock issued (c) 2,649      $83              $83 
Common stock repurchased (47)      (1)              (1)
Stock-based compensation         2               2 
Net income            $407      $19   426 
Dividends, dividend equivalents and distributions (e)             (521)      (19)  (540)
Other comprehensive income                $449       449 
Cumulative effect adjustment (g)             1   (1)        
December 31, 2009 (f) 377,183  $4  $2,280  $3,749  $(537) $319  $5,815 
CONSOLIDATED STATEMENTS OF EQUITY
PPL Corporation and Subsidiaries
(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
                       
December 31, 2009 (b)
  377,183  $ 4  $ 2,280  $ 3,749  $ (537) $ 319  $ 5,815 
Common stock issued (c)
  106,208    1    2,490             2,491 
Purchase Contracts (d)
        (176)            (176)
Stock-based compensation (e)
        8             8 
Net income
           938       21    959 
Dividends, dividend equivalents,                    
 redemptions and distributions (f)
           (605)      (72)   (677)
Other comprehensive income (loss)
              58       58 
December 31, 2010 (b)
  483,391  $ 5  $ 4,602  $ 4,082  $ (479) $ 268  $ 8,478 
                       
Common stock issued (c)
  95,014  $ 1  $ 2,344           $ 2,345 
Purchase Contracts (d)
        (143)            (143)
Stock-based compensation (e)
        10             10 
Net income
         $ 1,495     $ 17    1,512 
Dividends, dividend equivalents,                    
 redemptions and distributions (f)
           (780)      (17)   (797)
Other comprehensive income (loss)
            $ (309)      (309)
December 31, 2011 (b)
  578,405  $ 6  $ 6,813  $ 4,797  $ (788) $ 268  $ 11,096 
                       
Common stock issued (c)
  3,543     $ 99           $ 99 
Common stock repurchased
  (4)                  
Stock-based compensation (e)
        18             18 
Net income
         $ 1,526     $ 5    1,531 
Dividends, dividend equivalents,                    
 redemptions and distributions (f)
        6    (845)      (255)   (1,094)
Other comprehensive income (loss)
            $ (1,152)      (1,152)
December 31, 2012 (b)
  581,944  $ 6  $ 6,936  $ 5,478  $ (1,940) $ 18  $ 10,498 

(a)Shares in thousands.  Each share entitles the holder to one vote on any question presented toat any shareowners' meeting.
(b)"Capital in excess of par value" and "Earnings reinvested" have been adjusted by $13 million to reflect the adoption of new accounting guidance.  See "New Accounting Guidance Adopted - Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)" in Note 1 for additional information.
(c)2009 includes common stock shares issued through the ICP, ICPKE, DRIP, ESOP and DDCP.  2008 and 2007 include common stock shares issued through the ICP, ICPKE, DDCP and the 2-5/8% Convertible Senior Notes, net of forfeitures.  "Capital in excess of par value" for 2009 includes $7 million for a company contribution to the ESOP.
(d)In 2007, PPL's Board of Directors authorized the repurchase by PPL of up to $750 million of its common stock.  During 2007, PPL repurchased 14,929,892 shares of PPL common stock for $712 million.  During 2008, PPL repurchased 802,816 shares of PPL common stock for $38 million.
(e)"Earnings reinvested" includes dividends and dividend equivalents on PPL Corporation common stock and restricted stock units.  "Noncontrolling interests" includes dividends and distributions to noncontrolling interests.
(f)See "General - Comprehensive Income" in Note 1 for disclosure of balances of each component of AOCI.
(g)See "New Accounting Guidance Adopted - Recognition and Presentation of Other-Than-Temporary Impairments" in Note 1 regarding this cumulative effect adjustment.
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31,
PPL Corporation and Subsidiaries
(Millions of Dollars)
  2009 2008 2007
             
Net income $426  $950  $1,315 
Other comprehensive income (loss):            
Amounts arising during the period - gains (losses), net of tax (expense) benefit:            
Foreign currency translation adjustments, net of tax of $4, $(11), $7  101   (500)  29 
Available-for-sale securities, net of tax of $(44), $55, $(8)  41   (50)  11 
Qualifying derivatives, net of tax of $(356), $(120), $131  492   240   (190)
Equity investee's other comprehensive income (loss)  1   (3)    
Defined benefit plans:            
Prior service costs, net of tax of $(1), $0  1       2 
Net actuarial gain (loss), net of tax of $147, $294, $(104)  (340)  (577)  233 
Reclassifications to net income - (gains) losses, net of tax expense (benefit):            
Foreign currency translation adjustments, net of tax of $(8)          64 
Available-for-sale securities, net of tax of $(3), $(2), $2  4   2   (3)
Qualifying derivatives, net of tax of $(92), $17, $(26)  131   (69)  49 
Defined benefit plans:            
Prior service costs, net of tax of $(8), $(9), $6  13   18   14 
Net actuarial loss, net of tax of $(4), $(11), $(19)  4   20   40 
Transition obligation, net of tax of $(1), $(1), $(1)  1   2   1 
Total other comprehensive income (loss) attributable to PPL Corporation  449   (917)  250 
Comprehensive income  875   33   1,565 
Comprehensive income attributable to noncontrolling interests  19   20   27 
Comprehensive income attributable to PPL Corporation $856  $13  $1,538 

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

CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31,
PPL Energy Supply, LLC and Subsidiaries
(Millions of Dollars)
  2009 2008 2007
Operating Revenues            
Wholesale energy marketing            
Realized $3,291  $2,288  $1,581 
Unrealized economic activity (Note 18)  (229)  1,056   (145)
Wholesale energy marketing to affiliate (Note 15)  1,806   1,826   1,810 
Utility  684   824   863 
Unregulated retail electric and gas  152   151   102 
Net energy trading margins  17   (121)  41 
Energy-related businesses  411   511   760 
Total Operating Revenues  6,132   6,535   5,012 
             
Operating Expenses            
Operation            
Fuel  931   1,084   890 
Energy purchases            
Realized  2,523   1,470   711 
Unrealized economic activity (Note 18)  155   553   (182)
Energy purchases from affiliate (Note 15)  70   108   156 
Other operation and maintenance  1,067   1,070   1,005 
Depreciation (Note 1)  325   314   299 
Taxes, other than income (Note 5)  86   86   98 
Energy-related businesses (Note 8)  388   478   757 
Total Operating Expenses  5,545   5,163   3,734 
             
Operating Income  587   1,372   1,278 
             
Other Income - net (Note 16)  35   48   80 
             
Other-Than-Temporary Impairments  18   36   3 
             
Interest Income from Affiliates (Note 15)  2   14   29 
             
Interest Expense  272   313   289 
             
Income from Continuing Operations Before Income Taxes  334   1,085   1,095 
             
Income Taxes (Note 5)  47   335   206 
             
Income from Continuing Operations After Income Taxes  287   750   889 
             
Income (Loss) from Discontinued Operations (net of income taxes) (Note 9)  (40)  20   325 
             
Net Income  247   770   1,214 
             
Net Income Attributable to Noncontrolling Interests  1   2   9 
             
Net Income Attributable to PPL Energy Supply $246  $768  $1,205 
             
Amounts Attributable to PPL Energy Supply:            
Income from Continuing Operations After Income Taxes $286  $748  $886 
Income (Loss) from Discontinued Operations (net of income taxes)  (40)  20   319 
Net Income $246  $768  $1,205 
             
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
PPL Energy Supply, LLC and Subsidiaries
(Millions of Dollars)
  2009 2008 2007
Cash Flows from Operating Activities            
Net income $247  $770  $1,214 
Adjustments to reconcile net income to net cash provided by operating activities            
Pre-tax gain from the sale of the Latin American businesses          (400)
Pre-tax gain from the sale of the majority of Maine hydroelectric generation business  (38)        
Depreciation  327   317   309 
Amortization of energy commitments and other  75   66   104 
Defined benefits  (113)  (97)  (34)
Impairment of assets  123   93   102 
Gain on the sale of emission allowances  (2)  (6)  (109)
Deferred income taxes and investment tax credits  141   165   112 
Unrealized (gains) losses on derivatives, and other hedging activities  330   (285)  (27)
Other  24   69   39 
Change in current assets and current liabilities            
Accounts receivable  77   141   (217)
Accounts payable  (178)  72   104 
Collateral on PLR energy supply from affiliate  300         
Unbilled revenues  9   (89)  (69)
Fuels, materials and supplies  (25)  (26)  29 
Counterparty collateral  334   1     12 
Price risk management assets and liabilities  (223)  (88)  (50)
Other  16   (21)  67 
Other operating activities            
Other assets  15   15   (6)
Other liabilities  (26)  (58)  (86)
             
Net cash provided by operating activities  1,413   1,039   1,094 
             
Cash Flows from Investing Activities            
Expenditures for property, plant and equipment  (907)  (1,114)  (1,331)
Proceeds from the sale of the majority of Maine hydroelectric generation business  81         
Proceeds from the sale of the Latin American businesses          851 
Proceeds from the sale of the telecommunication operations          47 
Expenditures for intangible assets  (78)  (325)  (65)
Proceeds from the sale of intangible assets  16   19   111 
Purchases of nuclear plant decommissioning trust investments  (227)  (224)  (190)
Proceeds from the sale of nuclear plant decommissioning trust investments  201   197   175 
Purchases of other investments      (197)  (561)
Proceeds from the sale of other investments  154   102   795 
Net (increase) decrease in restricted cash and cash equivalents  219   (152)  (110)
Other investing activities  (10)  (2)  (27)
             
Net cash used in investing activities  (551)  (1,696)  (305)
             
Cash Flows from Financing Activities            
Issuance of long-term debt      849   136 
Retirement of long-term debt  (220)  (266)  (378)
Contributions from Member  50   421   700 
Distributions to Member  (943)  (750)  (1,471)
Net increase in short-term debt  43   534   62 
Other financing activities  (11)  (9)  (12)
             
Net cash provided by (used in) financing activities  (1,081)  779   (963)
             
Effect of Exchange Rates on Cash and Cash Equivalents      (13)  5 
             
Net Increase (Decrease) in Cash and Cash Equivalents  (219)  109   (169)
Cash and Cash Equivalents at Beginning of Period  464   355   524 
Cash and Cash Equivalents at End of Period $245  $464  $355 
             
Supplemental Disclosures of Cash Flow Information            
Cash paid (received) during the period for:            
Interest - net of amount capitalized $274  $271  $228 
Income taxes - net $(91) $149  $196 
             
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.

CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
PPL Energy Supply, LLC and Subsidiaries
(Millions of Dollars)
  2009 2008
Assets        
         
Current Assets        
Cash and cash equivalents $245  $464 
Short-term investments      150 
Restricted cash and cash equivalents  99   315 
Accounts receivable (less reserve:  2009, $21; 2008, $21)        
Customer  168   220 
Other  31   66 
Unbilled revenues  402   408 
Accounts receivable from affiliates  165   159 
Collateral on PLR energy supply to affiliate (Note 15)      300 
Fuel, materials and supplies (Note 1)  325   301 
Prepayments  56   71 
Price risk management assets (Notes 17 and 18)  2,147   1,221 
Other intangibles (Note 19)  25   17 
Assets held for sale (Note 9)  127     
Other current assets  1   6 
Total Current Assets  3,791   3,698 
         
Investments        
Nuclear plant decommissioning trust funds (Notes 17 and 21)  548   446 
Other investments  58   68 
Total Investments  606   514 
         
Property, Plant and Equipment (Note 1)        
Electric plant        
Transmission and distribution  4,024   3,540 
Generation  10,493   9,588 
General  285   286 
Electric plant in service  14,802   13,414 
Construction work in progress  422   1,031 
Nuclear fuel  506   428 
Electric plant  15,730   14,873 
Gas and oil plant  68   68 
Other property  164   154 
Property, plant and equipment, gross  15,962   15,095 
Less:  accumulated depreciation  6,169   5,935 
Property, Plant and Equipment, net  9,793   9,160 
         
Other Noncurrent Assets        
Goodwill (Note 19)  806   763 
Other intangibles (Note 19)  477   507 
Price risk management assets (Notes 17 and 18)  1,234   1,346 
Other noncurrent assets  317   481 
Total Other Noncurrent Assets  2,834   3,097 
         
Total Assets $17,024  $16,469 
         
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.

CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
PPL Energy Supply, LLC and Subsidiaries
(Millions of Dollars)
  2009 2008
Liabilities and Equity        
         
Current Liabilities        
Short-term debt (Note 7) $639  $584 
Accounts payable  537   684 
Accounts payable to affiliates  51   62 
Taxes  33   31 
Interest  86   88 
Deferred revenue on PLR energy supply to affiliate      12 
Price risk management liabilities (Notes 17 and 18)  1,502   1,313 
Counterparty collateral  356   22 
Other current liabilities  481   371 
Total Current Liabilities  3,685   3,167 
         
Long-term Debt (Note 7)  5,031   5,196 
         
Deferred Credits and Other Noncurrent Liabilities        
Deferred income taxes and investment tax credits (Note 5)  1,511   1,118 
Price risk management liabilities (Notes 17 and 18)  582   836 
Accrued pension obligations (Note 12)  883   556 
Asset retirement obligations (Note 20)  416   370 
Other deferred credits and noncurrent liabilities  330   414 
Total Deferred Credits and Other Noncurrent Liabilities  3,722   3,294 
         
Commitments and Contingent Liabilities (Note 14)        
         
Equity        
Member's equity  4,568   4,794 
Noncontrolling interests  18   18 
Total Equity  4,586   4,812 
         
Total Liabilities and Equity $17,024  $16,469 
         
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.

CONSOLIDATED STATEMENTS OF EQUITY
PPL Energy Supply, LLC and Subsidiaries
(Millions of Dollars)
  Member's equity Non-controlling interests Total
             
December 31, 2006 $4,534  $60  $4,594 
Net income  1,205   9   1,214 
Other comprehensive income  240       240 
Cumulative effect adjustment (a)  (1)      (1)
Contributions from member  700       700 
Distributions  (1,471)  (7)  (1,478)
Divestitures      (35)  (35)
Acquisitions      (8)  (8)
Other  (2)      (2)
December 31, 2007 $5,205  $19  $5,224 
             
Net income $768  $2  $770 
Other comprehensive loss  (850)      (850)
Contributions from member  421       421 
Distributions  (750)  (2)  (752)
Divestitures      (1)  (1)
December 31, 2008 (b) $4,794  $18  $4,812 
             
Net income $246  $1  $247 
Other comprehensive income  421       421 
Contributions from member  50       50 
Distributions  (943)  (1)  (944)
December 31, 2009 (b) $4,568  $18  $4,586 

(a)Relates to the adoption of accounting guidance regarding uncertain tax positions.
(b)See "General - Comprehensive Income" in Note 1 for disclosure of balances of each component of AOCI.

(c)2011 includes the April issuance of 92 million shares of common stock, and 2010 includes the June issuance of 103.5 million shares of common stock.  See Note 7 for additional information.  All years presented include shares of common stock issued through various stock and incentive compensation plans.
The accompanying Notes(d)2011 includes $123 million for the 2011 Purchase Contracts and $20 million of related fees and expenses, net of tax.  2010 includes $157 million for the 2010 Purchase Contracts and $19 million of related fees and expenses, net of tax.  See Note 7 for additional information.
(e)2012, 2011 and 2010 include $47 million, $33 million and $26 million of stock-based compensation expense related to Consolidated Financial Statements are an integral partnew and existing unvested equity awards, and $(29) million, $(23) million and $(18) million related primarily to the reclassification from "Stock-based compensation" to "Common stock issued" for the issuance of the financial statements.common stock after applicable equity award vesting periods and tax adjustments related to stock-based compensation.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31,
PPL Energy Supply, LLC and Subsidiaries
(Millions of Dollars)
  2009 2008 2007
             
Net income $247  $770  $1,214 
Other comprehensive income (loss):            
Amounts arising during the period - gains (losses), net of tax (expense) benefit:            
Foreign currency translation adjustments, net of tax of $4, $(11), $7  101   (500)  29 
Available-for-sale securities, net of tax of $(44), $55, $(8)  41   (50)  11 
Qualifying derivatives, net of tax of $(330), $(125), $124  454   249   (182)
Equity investee's other comprehensive income (loss)  1   (3)    
Defined benefit plans:            
Prior service costs  1   (1)  2 
Net actuarial gain (loss), net of tax of $136, 243, $(98)  (326)  (500)  222 
Reclassifications to net income - (gains) losses, net of tax expense (benefit):            
Foreign currency translation adjustments, net of tax of $(8)          64 
Available-for-sale securities, net of tax of $(3), $(2), $2  4   2   (3)
Qualifying derivatives, net of tax of $(91), $19, $(22)  131   (73)  46 
Defined benefit plans:            
Prior service costs, net of tax of $(6), $(5), $3  9   12   10 
Net actuarial loss, net of tax of $(3), $(5), $(18)  4   12   40 
Transition obligation, net of tax of $(1), $(1), $(1)  1   2   1 
Total other comprehensive income (loss) attributable to PPL Energy Supply  421   (850)  240 
Comprehensive income (loss)  668   (80)  1,454 
Comprehensive income attributable to noncontrolling interests  1   2   9 
Comprehensive income (loss) attributable to PPL Energy Supply $667  $(82) $1,445 
(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 April 2010 and June 2012, collectively, PPL Electric redeemed all of its outstanding preferred securities.  See Note 3 for additional information on both redemptions.

The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements
The accompanying Notes to Financial Statements are an integral part of the financial statements.
214

CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31,
PPL Electric Utilities Corporation and Subsidiaries
(Millions of Dollars)
  2009 2008 2007
Operating Revenues            
Retail electric $3,222  $3,293  $3,254 
Wholesale electric to affiliate (Note 15)  70   108   156 
Total Operating Revenues  3,292   3,401   3,410 
             
Operating Expenses            
Operation            
Energy purchases  114   163   206 
Energy purchases from affiliate (Note 15)  1,806   1,826   1,810 
Other operation and maintenance  417   410   402 
Amortization of recoverable transition costs  304   293   310 
Depreciation (Note 1)  128   131   132 
Taxes, other than income (Note 5)  194   203   200 
Total Operating Expenses  2,963   3,026   3,060 
             
Operating Income  329   375   350 
             
Other Income - net (Note 16)  6   5   12 
             
Interest Income from Affiliate (Note 15)  4   9   19 
             
Interest Expense  116   101   118 
             
Interest Expense with Affiliate (Note 15)  2   10   17 
             
Income Before Income Taxes  221   278   246 
             
Income Taxes (Note 5)  79   102   83 
             
Net Income  142   176   163 
             
Dividends on Preferred Securities (Notes 6 and 7)  18   18   18 
             
Income Available to PPL $124  $158  $145 
             
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31,
PPL Energy Supply, LLC and Subsidiaries
(Millions of Dollars)
             
     2012  2011  2010 
Operating Revenues         
 Wholesale energy marketing         
  
Realized
 $ 4,433  $ 3,807  $ 4,832 
  
Unrealized economic activity (Note 19)
   (311)   1,407    (805)
 
Wholesale energy marketing to affiliate
   78    26    320 
 
Unregulated retail electric and gas
   848    727    415 
 
Net energy trading margins
   4    (2)   2 
 
Energy-related businesses
   448    464    364 
 
Total Operating Revenues
   5,500    6,429    5,128 
             
Operating Expenses         
 Operation         
  
Fuel
   965    1,080    1,096 
  Energy purchases         
   
Realized
   2,260    1,160    1,636 
   
Unrealized economic activity (Note 19)
   (442)   1,123    (286)
  
Energy purchases from affiliate
   3    3    3 
  
Other operation and maintenance
   1,041    929    979 
 
Depreciation
   285    244    236 
 
Taxes, other than income
   69    71    46 
 
Energy-related businesses
   432    458    357 
 
Total Operating Expenses
   4,613    5,068    4,067 
             
Operating Income
   887    1,361    1,061 
             
Other Income (Expense) - net
   18    23    22 
             
Other-Than-Temporary Impairments
   1    6    3 
             
Interest Income from Affiliates
   2    8    9 
             
Interest Expense
   168    174    208 
             
Income (Loss) from Continuing Operations Before Income Taxes
   738    1,212    881 
             
Income Taxes
   263    445    261 
             
Income (Loss) from Continuing Operations After Income Taxes
   475    767    620 
             
Income (Loss) from Discontinued Operations (net of income taxes)
      2    242 
             
Net Income
   475    769    862 
             
Net Income Attributable to Noncontrolling Interests
   1    1    1 
             
Net Income Attributable to PPL Energy Supply Member
 $ 474  $ 768  $ 861 
             
Amounts Attributable to PPL Energy Supply Member:         
 
Income (Loss) from Continuing Operations After Income Taxes
 $ 474  $ 766  $ 619 
 
Income (Loss) from Discontinued Operations (net of income taxes)
      2    242 
 
Net Income
 $ 474  $ 768  $ 861 
             
The accompanying Notes to Financial Statements are an integral part of the financial statements.

215

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
PPL Electric Utilities Corporation and Subsidiaries
(Millions of Dollars)
  2009 2008 2007
Cash Flows from Operating Activities            
Net income $142  $176  $163 
Adjustments to reconcile net income to net cash provided by operating activities            
Depreciation  128   131   132 
Amortization of recoverable transition costs and other  324   313   326 
Deferred income taxes and investment tax credits  (22)  1   17 
Other  (4)  3   5 
Change in current assets and current liabilities            
Accounts receivable  1   (22)  (5)
Accounts payable  (9)  (1)  26 
Prepayments  (17)  9   (13)
Collateral on PLR energy supply from affiliate  (300)        
Other  50   27   (84)
Other operating activities            
Other assets  (3)  23   19 
Other liabilities  4   (12)  (18)
Net cash provided by operating activities  294   648   568 
             
Cash Flows from Investing Activities            
Expenditures for property, plant and equipment  (288)  (268)  (286)
Expenditures for intangible assets  (10)  (7)    
Purchases of investments      (90)  (32)
Proceeds from the sale of investments      90   57 
Net (increase) decrease in notes receivable from affiliate  300   (23)  23 
Net (increase) decrease in restricted cash and cash equivalents  1   69   (8)
Other investing activities  3   3   7 
Net cash provided by (used in) investing activities  6   (226)  (239)
             
Cash Flows from Financing Activities            
Issuance of long-term debt  298   489   250 
Retirement of long-term debt  (595)  (395)  (555)
Contribution from PPL  400         
Payment of common stock dividends to PPL  (274)  (98)  (119)
Payment of dividends on preferred securities  (18)  (18)  (18)
Net increase (decrease) in short-term debt  (95)  54   (1)
Other financing activities  (14)  (4)  (3)
Net cash provided by (used in) financing activities  (298)  28   (446)
             
Net Increase (Decrease) in Cash and Cash Equivalents  2   450   (117)
Cash and Cash Equivalents at Beginning of Period  483   33   150 
Cash and Cash Equivalents at End of Period $485  $483  $33 
             
Supplemental Disclosures of Cash Flow Information            
Cash paid during the period for:            
Interest - net of amount capitalized $116  $88  $110 
Income taxes - net $106  $59  $87 
 
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31,
PPL Energy Supply, LLC and Subsidiaries
(Millions of Dollars)
           
    2012  2011  2010 
            
Net income
 $ 475  $ 769  $ 862 
            
Other comprehensive income (loss):         
Amounts arising during the period - gains (losses), net of tax (expense) benefit:         
 
Foreign currency translation adjustments, net of tax of $0, $0, ($1)
         (59)
 
Available-for-sale securities, net of tax of ($31), ($6), ($31)
   29    9    29 
 
Qualifying derivatives, net of tax of ($46), ($164), ($207)
   68    267    305 
 Defined benefit plans:         
  
Prior service costs, net of tax of $0, ($2), ($8)
   1    (2)   12 
  
Net actuarial gain (loss), net of tax of $56, $13, $36
   (82)   (22)   (63)
  
Transition obligation, net of tax of $0, $0, ($3)
         6 
Reclassifications to net income - (gains) losses, net of tax expense (benefit):         
 
Available-for-sale securities, net of tax of $1, $5, $3
   (7)   (7)   (5)
 
Qualifying derivatives, net of tax of $291, $242, $99
   (463)   (353)   (145)
 
Equity investees' other comprehensive (income) loss, net of tax of $0, $0, $0
      3    
 Defined benefit plans:         
  
Prior service costs, net of tax of ($2), ($3), ($5)
   5    4    9 
  
Net actuarial loss, net of tax of ($2), ($2), ($14)
   10    4    39 
  
Transition obligation, net of tax of $0, $0, ($1)
         1 
Total other comprehensive income (loss) attributable to         
 
PPL Energy Supply Member
   (439)   (97)   129 
            
Comprehensive income (loss)
   36    672    991 
 
Comprehensive income attributable to noncontrolling interests
   1    1    1 
            
Comprehensive income (loss) attributable to PPL Energy Supply Member
 $ 35  $ 671  $ 990 
            
The accompanying Notes to Financial Statements are an integral part of the financial statements.

216


CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
PPL Energy Supply, LLC and Subsidiaries   
(Millions of Dollars)   
     2012  2011  2010 
Cash Flows from Operating Activities         
 
Net income
 $ 475  $ 769  $ 862 
 Adjustments to reconcile net income to net cash provided by (used in) operating activities         
  
Pre-tax gain from the sale of the Maine hydroelectric generation business
         (25)
  
Depreciation
   285    245    365 
  
Amortization
   119    137    160 
  
Defined benefit plans - expense
   43    36    52 
  
Deferred income taxes and investment tax credits
   152    317    (31)
  
Impairment of assets
   3    13    120 
  
Unrealized (gains) losses on derivatives, and other hedging activities
   (41)   (283)   536 
  
Provision for Montana hydroelectric litigation
      (74)   66 
  
Other
   42    25    41 
 Change in current assets and current liabilities         
  
Accounts receivable
   (54)   38    (18)
  
Accounts payable
   (45)   (89)   20 
  
Unbilled revenues
   33    14    (88)
  
Counterparty collateral
   (34)   (190)   (18)
  
Taxes
   (27)   27    87 
  
Other
   (68)   (18)   8 
 Other operating activities         
  
Defined benefit plans - funding
   (75)   (152)   (302)
  
Other assets
   (41)   (30)   (71)
  
Other liabilities
   17    (9)   76 
   
Net cash provided by (used in) operating activities
   784    776    1,840 
Cash Flows from Investing Activities         
 
Expenditures for property, plant and equipment
   (648)   (661)   (1,009)
 
Proceeds from the sale of certain non-core generation facilities
      381    
 
Proceeds from the sale of the Long Island generation business
         124 
 
Proceeds from the sale of the Maine hydroelectric generation business
         38 
 
Ironwood Acquisition, net of cash acquired
   (84)      
 
Expenditures for intangible assets
   (45)   (57)   (82)
 
Purchases of nuclear plant decommissioning trust investments
   (154)   (169)   (128)
 
Proceeds from the sale of nuclear plant decommissioning trust investments
   139    156    114 
 
Issuance of long-term notes receivable to affiliates
         (1,816)
 
Repayment of long-term notes receivable from affiliates
         1,816 
 
Net (increase) decrease in notes receivable from affiliates
   198    (198)   
 
Net (increase) decrease in restricted cash and cash equivalents
   104    (128)   84 
 
Other investing activities
   21    8    34 
   
Net cash provided by (used in) investing activities
   (469)   (668)   (825)
Cash Flows from Financing Activities         
 
Issuance of long-term debt
      500    602 
 
Retirement of long-term debt
   (9)   (750)   
 
Contributions from member
   563    461    3,625 
 
Distributions to member
   (787)   (316)   (4,692)
 
Cash included in net assets of subsidiary distributed to member
      (325)   
 
Debt issuance and credit facility costs
   (3)   (9)   (53)
 
Net increase (decrease) in short-term debt
   (44)   50    (93)
 
Other financing activities
   (1)   (1)   (1)
   
Net cash provided by (used in) financing activities
   (281)   (390)   (612)
Effect of Exchange Rates on Cash and Cash Equivalents
         13 
Net Increase (Decrease) in Cash and Cash Equivalents
   34    (282)   416 
 
Cash and Cash Equivalents at Beginning of Period
   379    661    245 
 
Cash and Cash Equivalents at End of Period
 $ 413  $ 379  $ 661 
             
Supplemental Disclosures of Cash Flow Information         
 Cash paid (received) during the period for:         
   
Interest - net of amount capitalized
 $ 150  $ 165  $ 275 
   
Income taxes - net
 $ 128  $ 69  $ 278 
             
The accompanying Notes to Financial Statements are an integral part of the financial statements.   
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
PPL Electric Utilities Corporation and Subsidiaries
(Millions of Dollars, shares in thousands)
  2009 2008
Assets        
         
Current Assets        
Cash and cash equivalents $485  $483 
Restricted cash and cash equivalents  1   1 
Accounts receivable (less reserve:  2009, $16; 2008, $14)        
Customer  240   233 
Other  19   11 
Unbilled revenues  198   190 
Materials and supplies  33   37 
Accounts receivable from affiliates  7   8 
Note receivable from affiliate (Note 15)      300 
Prepayments  24   7 
Prepayment on PLR energy supply from affiliate      12 
Other current assets  29   13 
Total Current Assets  1,036   1,295 
         
Property, Plant and Equipment (Note 1)        
Electric plant        
Transmission and distribution  4,662   4,506 
General  535   489 
Electric plant in service  5,197   4,995 
Construction work in progress  118   79 
Electric plant  5,315   5,074 
Other property  2   2 
Property, plant and equipment, gross  5,317   5,076 
Less:  accumulated depreciation  2,008   1,924 
Property, Plant and Equipment, net  3,309   3,152 
         
Regulatory and Other Noncurrent Assets        
Recoverable transition costs (Note 1)      281 
Intangibles (Note 19)  139   130 
Taxes recoverable through future rates (Note 1)  253   250 
Recoverable costs of defined benefit plans (Note 1)  229   192 
Other regulatory and noncurrent assets  126   116 
Total Regulatory and Other Noncurrent Assets  747   969 
         
Total Assets $5,092  $5,416 
         
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
217

CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
PPL Electric Utilities Corporation and Subsidiaries
(Millions of Dollars, shares in thousands)
  2009 2008
Liabilities and Equity        
         
Current Liabilities        
Short-term debt (Note 7)     $95 
Long-term debt      495 
Accounts payable $53   57 
Accounts payable to affiliates  186   186 
Taxes  61   65 
Collateral on PLR energy supply from affiliate (Note 15)      300 
Overcollected transmission costs  39     
Customer rate mitigation prepayments  36   5 
Overcollected transition costs  33     
Other current liabilities  110   119 
Total Current Liabilities  518   1,322 
         
Long-term Debt (Note 7)  1,472   1,274 
         
Deferred Credits and Other Noncurrent Liabilities        
Deferred income taxes and investment tax credits (Note 5)  769   767 
Accrued pension obligations (Note 12)  245   209 
Other deferred credits and noncurrent liabilities  192   198 
Total Deferred Credits and Other Noncurrent Liabilities  1,206   1,174 
         
Commitments and Contingent Liabilities (Note 14)        
         
Shareowners' Equity        
Preferred securities (Note 6)  301   301 
Common stock - no par value (a)  364   364 
Additional paid-in capital  824   424 
Earnings reinvested  407   557 
Total Shareowners' Equity  1,896   1,646 
         
Total Liabilities and Equity $5,092  $5,416 
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
PPL Energy Supply, LLC and Subsidiaries
(Millions of Dollars)
     2012  2011 
Assets      
          
Current Assets      
 
Cash and cash equivalents
 $ 413  $ 379 
 
Restricted cash and cash equivalents
   46    145 
 Accounts receivable (less reserve:  2012, $23; 2011, $15)      
  
Customer
   183    169 
  
Other
   31    31 
 
Accounts receivable from affiliates
   125    89 
 
Unbilled revenues
   369    402 
 
Note receivable from affiliates
      198 
 
Fuel, materials and supplies
   327    298 
 
Prepayments
   15    14 
 
Price risk management assets
   1,511    2,527 
 
Other current assets
   10    11 
 
Total Current Assets
   3,030    4,263 
        
Investments      
 
Nuclear plant decommissioning trust funds
   712    640 
 
Other investments
   41    40 
 
Total Investments
   753    680 
        
Property, Plant and Equipment      
 Non-regulated property, plant and equipment      
  
Generation
   11,305    10,517 
  
Nuclear fuel
   524    457 
  
Other
   294    245 
 
Less:  accumulated depreciation - non-regulated property, plant and equipment
   5,817    5,573 
  
Non-regulated property, plant and equipment, net
   6,306    5,646 
 
Construction work in progress
   987    840 
 
Property, Plant and Equipment, net (a)
   7,293    6,486 
        
Other Noncurrent Assets      
 
Goodwill
   86    86 
 
Other intangibles (a)
   252    386 
 
Price risk management assets
   557    896 
 
Other noncurrent assets
   404    382 
 
Total Other Noncurrent Assets
   1,299    1,750 
        
Total Assets
 $ 12,375  $ 13,179 

(a)At December 31, 2012 and December 31, 2011, includes $428 million and $416 million of PP&E, consisting primarily of "Generation," including leasehold improvements, and $10 million and $11 million of "Other intangibles" from the consolidation of a VIE that is the owner/lessor of the Lower Mt. Bethel plant.  See Note 22 for additional information.   

The accompanying Notes to Financial Statements are an integral part of the financial statements.
218

CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
PPL Energy Supply, LLC and Subsidiaries
(Millions of Dollars)
      2012   2011 
Liabilities and Equity      
          
Current Liabilities      
 
Short-term debt
 $ 356  $ 400 
 
Long-term debt due within one year
   751    
 
Accounts payable
   438    472 
 
Accounts payable to affiliates
   31    14 
 
Taxes
   62    90 
 
Interest
   31    30 
 
Price risk management liabilities
   1,010    1,560 
 
Deferred income taxes
   158    315 
 
Other current liabilities
   319    344 
 
Total Current Liabilities
   3,156    3,225 
          
Long-term Debt
   2,521    3,024 
       
Deferred Credits and Other Noncurrent Liabilities      
 
Deferred income taxes
   1,232    1,223 
 
Investment tax credits
   186    136 
 
Price risk management liabilities
   556    785 
 
Accrued pension obligations
   293    214 
 
Asset retirement obligations
   365    349 
 
Other deferred credits and noncurrent liabilities
   218    186 
 
Total Deferred Credits and Other Noncurrent Liabilities
   2,850    2,893 
          
Commitments and Contingent Liabilities (Note 15)      
       
Equity      
 
Member's equity
   3,830    4,019 
 
Noncontrolling interests
   18    18 
 
Total Equity
   3,848    4,037 
          
Total Liabilities and Equity
 $ 12,375  $ 13,179 
          
The accompanying Notes to Financial Statements are an integral part of the financial statements.
219

CONSOLIDATED STATEMENTS OF EQUITY
PPL Energy Supply, LLC and Subsidiaries
(Millions of Dollars)
          
     Non-   
  Member's controlling   
  equity interests Total
          
December 31, 2009 (a)
 $ 4,568  $ 18  $ 4,586 
Net income
   861    1    862 
Other comprehensive income (loss)
   129       129 
Contributions from member
   3,625       3,625 
Distributions
   (4,692)   (1)   (4,693)
December 31, 2010 (a)
 $ 4,491  $ 18  $ 4,509 
          
Net income
 $ 768  $ 1  $ 769 
Other comprehensive income (loss)
   (97)      (97)
Contributions from member
   461       461 
Distributions
   (316)   (1)   (317)
Distribution of membership interest in PPL Global (b)
   (1,288)      (1,288)
December 31, 2011 (a)
 $ 4,019  $ 18  $ 4,037 
          
Net income
 $ 474  $ 1  $ 475 
Other comprehensive income (loss)
   (439)      (439)
Contributions from member
   563       563 
Distributions
   (787)   (1)   (788)
December 31, 2012 (a)
 $ 3,830  $ 18  $ 3,848 

(a)See "General - Comprehensive Income" in Note 1 for disclosure of balances of each component of AOCI.
(b)See Note 9 for additional information.

The accompanying Notes to Financial Statements are an integral part of the financial statements.
220



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221

CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31,
PPL Electric Utilities Corporation and Subsidiaries
(Millions of Dollars)
            
    2012  2011  2010 
Operating Revenues         
 
Retail electric
 $ 1,760  $ 1,881  $ 2,448 
 
Electric revenue from affiliate
   3    11    7 
 
Total Operating Revenues
   1,763    1,892    2,455 
            
Operating Expenses         
 Operation         
  
Energy purchases
   550    738    1,075 
  
Energy purchases from affiliate
   78    26    320 
  
Other operation and maintenance
   576    530    502 
 
Depreciation
   160    146    136 
 
Taxes, other than income
   105    104    138 
 
Total Operating Expenses
   1,469    1,544    2,171 
            
Operating Income
   294    348    284 
            
Other Income (Expense) - net
   9    7    7 
            
Interest Expense
   99    98    99 
            
Income Before Income Taxes
   204    257    192 
            
Income Taxes
   68    68    57 
            
Net Income (a)
   136    189    135 
            
Distributions on Preferred Securities
   4    16    20 
            
Net Income Available to PPL
 $ 132  $ 173  $ 115 

(a)Net income approximates comprehensive income.

The accompanying Notes to Financial Statements are an integral part of the financial statements.
222

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
PPL Electric Utilities Corporation and Subsidiaries
(Millions of Dollars)
     2012  2011  2010 
Cash Flows from Operating Activities         
 
Net income
 $ 136  $ 189  $ 135 
 Adjustments to reconcile net income to net cash provided by (used in) operating activities         
  
Depreciation
   160    146    136 
  
Amortization
   18    8    (23)
  
Defined benefit plans - expense
   22    18    20 
  
Deferred income taxes and investment tax credits
   114    106    198 
  
Other
   2    1    4 
 Change in current assets and current liabilities         
  
Accounts receivable
   3    (5)   (38)
  
Accounts payable
   27    (68)   31 
  
Unbilled revenues
   (8)   36    59 
  
Prepayments
   2    58    (112)
  
Regulatory assets and liabilities
   (1)   107    (85)
  
Taxes
   12    (23)   (38)
  
Other
   (5)   7    (27)
 Other operating activities         
  
Defined benefit plans - funding
   (59)   (113)   (55)
  
Other assets
   (3)   (28)   5 
  
Other liabilities
   (31)   (19)   2 
   
Net cash provided by (used in) operating activities
   389    420    212 
             
Cash Flows from Investing Activities         
 
Expenditures for property, plant and equipment
   (624)   (481)   (401)
 
Other investing activities
   11    4    (2)
   
Net cash provided by (used in) investing activities
   (613)   (477)   (403)
             
Cash Flows from Financing Activities         
 
Issuance of long-term debt
   249    645    
 
Retirement of long-term debt
      (458)   
 
Contributions from PPL
   150    100    55 
 
Redemption of preference stock
   (250)      (54)
 
Payment of common stock dividends to parent
   (95)   (92)   (71)
 
Other financing activities
   (10)   (22)   (20)
   
Net cash provided by (used in) financing activities
   44    173    (90)
             
Net Increase (Decrease) in Cash and Cash Equivalents
   (180)   116    (281)
Cash and Cash Equivalents at Beginning of Period
   320    204    485 
Cash and Cash Equivalents at End of Period
 $ 140  $ 320  $ 204 
             
Supplemental Disclosures of Cash Flow Information         
 Cash paid (received) during the period for:         
   
Interest - net of amount capitalized
 $ 81  $ 75  $ 87 
   
Income taxes - net
 $ (42) $ (44) $ (33)
             
The accompanying Notes to Financial Statements are an integral part of the financial statements.
223

CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
PPL Electric Utilities Corporation and Subsidiaries
(Millions of Dollars, shares in thousands)
     2012  2011 
Assets      
          
Current Assets      
 
Cash and cash equivalents
 $ 140  $ 320 
 Accounts receivable (less reserve: 2012, $18; 2011, $17)      
  
Customer
   249    267 
  
Other
   5    9 
 
Accounts receivable from affiliates
   29    35 
 
Unbilled revenues
   110    102 
 
Materials and supplies
   39    42 
 
Prepayments
   76    78 
 
Deferred income taxes
   45    25 
 
Other current assets
   4    5 
 
Total Current Assets
   697    883 
          
Property, Plant and Equipment      
 
Regulated utility plant
   6,286    5,830 
 
Less: accumulated depreciation - regulated utility plant
   2,316    2,217 
  
Regulated utility plant, net
   3,970    3,613 
 
Other, net
   2    2 
 
Construction work in progress
   370    242 
 
Property, Plant and Equipment, net
   4,342    3,857 
          
Other Noncurrent Assets      
 
Regulatory assets
   853    729 
 
Intangibles
   171    155 
 
Other noncurrent assets
   55    81 
 
Total Other Noncurrent Assets
   1,079    965 
          
Total Assets
 $ 6,118  $ 5,705 
          
The accompanying Notes to Financial Statements are an integral part of the financial statements.
224

CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
PPL Electric Utilities Corporation and Subsidiaries
(Millions of Dollars, shares in thousands)
     2012  2011 
Liabilities and Equity      
          
Current Liabilities      
 
Accounts payable
 $ 259  $ 171 
 
Accounts payable to affiliates
   63    64 
 
Taxes
   12    
 
Interest
   26    24 
 
Regulatory liabilities
   52    53 
 
Customer deposits and prepayments
   21    39 
 
Vacation
   23    22 
 
Other current liabilities
   49    47 
 
Total Current Liabilities
   505    420 
          
Long-term Debt
   1,967    1,718 
          
Deferred Credits and Other Noncurrent Liabilities      
 
Deferred income taxes
   1,233    1,115 
 
Investment tax credits
   3    5 
 
Accrued pension obligations
   237    186 
 
Regulatory liabilities
   8    7 
 
Other deferred credits and noncurrent liabilities
   103    129 
 
Total Deferred Credits and Other Noncurrent Liabilities
   1,584    1,442 
          
Commitments and Contingent Liabilities (Notes 6 and 15)      
          
Shareowners' Equity      
 
Preferred securities
      250 
 
Common stock - no par value (a)
   364    364 
 
Additional paid-in capital
   1,135    979 
 
Earnings reinvested
   563    532 
 
Total Equity
   2,062    2,125 
          
Total Liabilities and Equity
 $ 6,118  $ 5,705 

(a)170,000 shares authorized; 66,368 shares issued and outstanding at December 31, 20092012 and 2008.
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.December 31, 2011.

The accompanying Notes to Financial Statements are an integral part of the financial statements.
225

CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
PPL Electric Utilities Corporation and Subsidiaries
(Millions of Dollars, shares in thousands)
  Common stock shares outstanding (a) Preferred securities Common stock Additional paid-in capital Earnings reinvested Total
                        
December 31, 2006 66,368  $301  $364  $424  $470  $1,559 
Net income (b)                 163   163 
Cumulative effect adjustment (c)                 1   1 
Cash dividends declared on preferred securities                 (18)  (18)
Cash dividends declared on common stock                 (119)  (119)
December 31, 2007 66,368  $301  $364  $424  $497  $1,586 
                        
Net income (b)                $176  $176 
Cash dividends declared on preferred securities                 (18)  (18)
Cash dividends declared on common stock                 (98)  (98)
December 31, 2008 66,368  $301  $364  $424  $557  $1,646 
                        
Net income (b)                $142  $142 
Capital contribution from PPL            $400       400 
Cash dividends declared on preferred securities                 (18)  (18)
Cash dividends declared on common stock                 (274)  (274)
December 31, 2009 66,368  $301  $364  $824  $407  $1,896 
 
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
PPL Electric Utilities Corporation and Subsidiaries
(Millions of Dollars)
               
    Common          
    stock          
    shares     Additional    
    outstanding Preferred Common  paid-in Earnings  
     (a) securities  stock  capital  reinvested Total
                    
December 31, 2009
  66,368  $ 301  $ 364  $ 824  $ 407  $ 1,896 
Net income
              135    135 
Redemption of preferred securities (b)
     (51)         (3)   (54)
Capital contributions from PPL
           55       55 
Cash dividends declared on preferred securities
              (17)   (17)
Cash dividends declared on common stock
              (71)   (71)
December 31, 2010
  66,368  $ 250  $ 364  $ 879  $ 451  $ 1,944 
                    
Net income
            $ 189  $ 189 
Capital contributions from PPL
         $ 100       100 
Cash dividends declared on preferred securities
              (16)   (16)
Cash dividends declared on common stock
              (92)   (92)
December 31, 2011
  66,368  $ 250  $ 364  $ 979  $ 532  $ 2,125 
                    
Net income
            $ 136  $ 136 
Redemption of preferred securities (b)
   $ (250)    $ 6    (6)   (250)
Capital contributions from PPL
           150       150 
Cash dividends declared on preferred securities
              (4)   (4)
Cash dividends declared on common stock
              (95)   (95)
December 31, 2012
  66,368  $  $ 364  $ 1,135  $ 563  $ 2,062 

(a)Shares in thousands.  All common shares of PPL Electric stock are owned by PPL.
(b)In April 2010 and June 2012, collectively, PPL Electric's net income approximates comprehensive income.Electric redeemed all of its outstanding preferred securities.  See Note 3 for additional information on both redemptions.
(c)Relates to the adoption of accounting guidance regarding uncertain tax positions.

 
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
226

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
LG&E and KU Energy LLC and Subsidiaries
(Millions of Dollars)       
                  
     Successor  Predecessor
          Two Months  Ten Months
     Year Ended  Year Ended Ended  Ended
     December 31,  December 31, December 31,  October 31,
     2012   2011  2010   2010
               
Operating Revenues
 $ 2,759   $ 2,793  $ 494   $ 2,214 
               
Operating Expenses              
 Operation              
  
Fuel
   872     866    138     723 
  
Energy purchases
   195     238    68     211 
  
Other operation and maintenance
   778     751    141     586 
 
Depreciation
   346     334    49     235 
 
Taxes, other than income
   46     37    2     21 
 
Total Operating Expenses
   2,237     2,226    398     1,776 
                  
Operating Income
   522     567    96     438 
                  
Other Income (Expense) - net
   (15)    (1)   (2)    14 
               
Other-Than-Temporary Impairments
   25            
                  
Interest Expense
   150     146    20     21 
                  
Interest Expense with Affiliate
   1     1    4     131 
                  
Income (Loss) from Continuing Operations Before Income              
 
Taxes
   331     419    70     300 
                  
Income Taxes
   106     153    25     109 
                  
Income (Loss) from Continuing Operations After Income              
 
Taxes
   225     266    45     191 
                  
Income (Loss) from Discontinued Operations (net of income              
 
taxes)
   (6)    (1)   2     (1)
                  
Net Income (Loss)
 $ 219   $ 265  $ 47   $ 190 
                  
                  
The accompanying Notes to Financial Statements are an integral part of the financial statements.
227

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
LG&E and KU Energy LLC and Subsidiaries
(Millions of Dollars)
                  
      Successor  Predecessor
          Two Months  Ten Months
      Year Ended Year Ended Ended  Ended
      December 31, 
December 31,
 December 31,  October 31,
      2012  2011  2010   2010
                  
Net income (loss)
 $ 219  $ 265  $ 47   $ 190 
                  
Other comprehensive income (loss):             
 Amounts arising during the period - gains (losses), net of tax             
  (expense) benefit:             
   
Qualifying derivatives, net of tax of $0, $0, $0, ($7)
             10 
   Equity investee's other comprehensive income (loss), net             
    
of tax of  ($1), $0, $0, $1
   1           (2)
   Defined benefit plans:             
    
Prior service costs, net of tax of $0, $1, $0, $0
      (2)       
    
Net actuarial loss, net of tax of $13, ($1), ($3), $15
   (21)      6     (20)
 Reclassification to net income - (gains) losses, net of tax             
  expense (benefit):             
   Defined benefit plans:             
    
Prior service costs, net of tax of $0, $0, $0, ($1)
             1 
    
Net actuarial loss, net of tax of $0, $1, $0, ($1)
   1           1 
Total other comprehensive income (loss)
   (19)   (2)   6     (10)
                  
Comprehensive income (loss) attributable to member
 $ 200  $ 263  $ 53   $ 180 
                  
The accompanying Notes to Financial Statements are an integral part of the financial statements.
228

CONSOLIDATED STATEMENTS OF CASH FLOWS
    
LG&E and KU Energy LLC and Subsidiaries    
(Millions of Dollars)    
      Successor  Predecessor
          Two Months  Ten Months
      
Year Ended
 Year Ended Ended  Ended
      December 31, December 31, December 31,  October 31,
      2012  2011  2010   2010 
Cash Flows from Operating Activities             
 
Net income (loss)
 $ 219  $ 265  $ 47   $ 190 
 Adjustments to reconcile net income (loss) to net cash             
  provided by (used in) operating activities             
   
Depreciation
   346    334    49     235 
   
Amortization of regulatory assets
   27    27    3     
   
Defined benefit plans - expense
   40    51    12     52 
   
Deferred income taxes and investment tax credits
   133    218    52     65 
   
Unrealized (gains) losses on derivatives
             14 
   
Loss from discontinued operations - net of tax
             1 
   
Impairment of assets
   25           
   
Other
   2    (9)   11     (23)
 Change in current assets and current liabilities             
  
Accounts receivable
   (9)   17    (17)    12 
  
Accounts payable
   1    (32)   (14)    (34)
  
Accounts payable to affiliates
   (1)      4     (7)
  
Unbilled revenues
   (10)   24    (70)    41 
  
Fuel, materials and supplies
   8    15    15     (28)
  
Income tax receivable
   2    37    (40)    (2)
  
Taxes
   1    (2)   4     18 
  
Other
      (1)   (27)    47 
 Other operating activities             
  
Defined benefit plans - funding
   (70)   (170)   (8)    (57)
  
Discontinued operations
             13 
  
Other assets
   (5)   (11)   12     14 
  
Other liabilities
   38    18    (7)    (63)
   
Net cash provided by (used in) operating activities
   747    781    26     488 
Cash Flows from Investing Activities             
 
Expenditures for property, plant and equipment
   (768)   (477)   (152)    (447)
 
Proceeds from sales of discontinued operations
             21 
 
Proceeds from the sale of other investments
      163        
 
Net (increase) decrease in notes receivable from affiliates
   15    46    (61)    
 
Net (increase) decrease in restricted cash and cash equivalents
   (3)   (9)   2     
   
Net cash provided by (used in) investing activities
   (756)   (277)   (211)    (426)
Cash Flows from Financing Activities             
 
Issuance of short-term debt with affiliate
         1,001     900 
 
Retirement of short-term debt with affiliate
         (1,001)    (575)
 
Net increase (decrease) in notes payable with affiliates
   25           (3)
 
Issuance of long-term debt with affiliate
         1,783     50 
 
Retirement of long-term debt with affiliate
         (1,783)    (325)
 
Issuance of long-term debt
      250    2,890     
 
Retirement of long-term debt
      (2)       
 
Net increase (decrease) in short-term debt
   125    (163)   163     
 
Repayment to E.ON AG affiliates
         (4,319)    
 
Debt issuance and credit facility costs
   (2)   (8)   (32)    
 
Distributions to member
   (155)   (533)   (100)    (87)
 
Contributions from member
         1,565     
   
Net cash provided by (used in) financing activities
   (7)   (456)   167     (40)
Net Increase (Decrease) in Cash and Cash Equivalents
   (16)   48    (18)    22 
Cash and Cash Equivalents at Beginning of Period
   59    11    29     7 
Cash and Cash Equivalents at End of Period
 $ 43  $ 59  $ 11   $ 29 
                  
Supplemental Disclosures of Cash Flow Information             
 Cash paid (received) during the period for:             
  
Interest - net of amount capitalized
 $ 139  $ 126  $ 41   $ 153 
  
Income taxes - net
 $ (45) $ (98) $ (1)  $ 9 
                  
The accompanying Notes to Financial Statements are an integral part of the financial statements.
229


CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
LG&E and KU Energy LLC and Subsidiaries
(Millions of Dollars)
          
     2012  2011 
Assets      
          
Current Assets      
 
Cash and cash equivalents
 $ 43  $ 59 
 Accounts receivable (less reserve: 2012, $19; 2011, $17)      
  
Customer
   133    129 
  
Other
   19    20 
 
Unbilled revenues
   156    146 
 
Accounts receivable from affiliates
   1    
 
Notes receivable from affiliates
      15 
 
Fuel, materials and supplies
   276    283 
 
Prepayments
   28    22 
 
Price risk management assets from affiliates
   14    
 
Income taxes receivable
   1    3 
 
Deferred income taxes
   13    17 
 
Regulatory assets
   19    9 
 
Other current assets
   4    3 
 
Total Current Assets
   707    706 
          
Investments
   1    31 
          
Property, Plant and Equipment      
 
Regulated utility plant
   8,073    7,519 
 
Less: accumulated depreciation - regulated utility plant
   519    277 
  
Regulated utility plant, net
   7,554    7,242 
 
Other, net
   3    2 
 
Construction work in progress
   750    557 
 
Property, Plant and Equipment, net
   8,307    7,801 
          
Other Noncurrent Assets      
 
Regulatory assets
   630    620 
 
Goodwill
   996    996 
 
Other intangibles
   271    314 
 
Other noncurrent assets
   107    108 
 
Total Other Noncurrent Assets
   2,004    2,038 
          
Total Assets
 $ 11,019  $ 10,576 
          
The accompanying Notes to Financial Statements are an integral part of the financial statements.
230

CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
LG&E and KU Energy LLC and Subsidiaries
(Millions of Dollars)
     2012  2011 
Liabilities and Equity      
          
Current Liabilities      
 
Short-term debt
 $ 125    
 
Notes payable with affiliates
   25    
 
Accounts payable
   283  $ 224 
 
Accounts payable to affiliates
   1    2 
 
Customer deposits
   48    45 
 
Taxes
   26    25 
 
Regulatory liabilities
   9    20 
 
Interest
   21    23 
 
Salaries and benefits
   69    59 
 
Other current liabilities
   36    35 
 
Total Current Liabilities
   643    433 
          
Long-term Debt
   4,075    4,073 
       
Deferred Credits and Other Noncurrent Liabilities      
 
Deferred income taxes
   541    413 
 
Investment tax credits
   138    144 
 
Price risk management liabilities
   53    55 
 
Accrued pension obligations
   414    359 
 
Asset retirement obligations
   125    116 
 
Regulatory liabilities
   1,002    1,003 
 
Other deferred credits and noncurrent liabilities
   242    239 
 
Total Deferred Credits and Other Noncurrent Liabilities
   2,515    2,329 
          
Commitments and Contingent Liabilities (Notes 6 and 15)      
          
Member's equity
   3,786    3,741 
          
Total Liabilities and Equity
 $ 11,019  $ 10,576 
          
The accompanying Notes to Financial Statements are an integral part of the financial statements.
231

CONSOLIDATED STATEMENTS OF EQUITY
LG&E and KU Energy LLC and Subsidiaries
(Millions of Dollars)
          
      Non-   
   Member's  controlling   
   Equity  interests  Total
          
December 31, 2009 - Predecessor (a)
 $ 2,192  $ 32  $ 2,224 
Net income
   190       190 
Distributions to member
   (81)      (81)
Other comprehensive income (loss)
   (10)      (10)
Noncontrolling interest - income (loss) from discontinued operations
   (11)   (32)   (43)
October 31, 2010 - Predecessor (a)
 $ 2,280  $  $ 2,280 
          
          
Effect of PPL acquisition
 $ 213     $ 213 
Net income
   47       47 
Contributions from member
   1,565       1,565 
Distributions to member
   (100)      (100)
Other comprehensive income (loss)
   6       6 
December 31, 2010 - Successor (a)
 $ 4,011     $ 4,011 
          
          
Net income
 $ 265     $ 265 
Distributions to member
   (533)      (533)
Other comprehensive income (loss)
   (2)      (2)
December 31, 2011 - Successor (a)
 $ 3,741     $ 3,741 
          
          
Net income
 $ 219     $ 219 
Distributions to member
   (155)      (155)
Other comprehensive income (loss)
   (19)      (19)
December 31, 2012 - Successor (a)
 $ 3,786     $ 3,786 

(a)      See "General - Comprehensive Income" in Note 1 for disclosure of balances of each component of AOCI.

The accompanying Notes to Financial Statements are an integral part of the financial statements.
232

STATEMENTS OF INCOME
Louisville Gas and Electric Company
(Millions of Dollars)       
                 
     Successor  Predecessor
         Two Months  Ten Months
     Year Ended Year Ended Ended  Ended
     December 31, December 31, December 31,  December 31,
     2012  2011  2010   2010 
Operating Revenues             
 
Retail and wholesale
 $ 1,247  $ 1,281  $ 233   $ 978 
 
Electric revenue from affiliate
   77    83    21     79 
 
Total Operating Revenues
   1,324    1,364    254     1,057 
                 
Operating Expenses             
 Operation             
  
Fuel
   374    350    60     306 
  
Energy purchases
   163    209    61     142 
  
Energy purchases from affiliate
   12    36    2     13 
  
Other operation and maintenance
   363    363    67     281 
 
Depreciation
   152    147    23     115 
 
Taxes, other than income
   23    18    1     12 
 
Total Operating Expenses
   1,087    1,123    214     869 
                 
Operating Income
   237    241    40     188 
                 
Other Income (Expense) - net
   (3)   (2)   (3)    17 
                 
Interest Expense
   42    44    7     16 
                 
Interest Expense with Affiliate
         1     22 
                 
Income Before Income Taxes
   192    195    29     167 
                 
Income Taxes
   69    71    10     58 
                 
Net Income
 $ 123  $ 124  $ 19   $ 109 

The accompanying Notes to Financial Statements are an integral part of the financial statements.
233

STATEMENTS OF COMPREHENSIVE INCOME
Louisville Gas and Electric Company
(Millions of Dollars)
                 
     Successor  Predecessor
         Two Months  Ten Months
     Year Ended Year Ended Ended  Ended
     December 31, December 31, December 31,  October 31,
     2012  2011  2010   2010
                 
Net income
 $ 123  $ 124  $ 19   $ 109 
                 
Other comprehensive income (loss):             
Amounts arising during the period - gains (losses), net of tax             
 (expense) benefit:             
  Qualifying derivatives, net of tax of $0, $0, $0, ($7)             10 
Total other comprehensive income (loss)
             10 
                 
Comprehensive income
 $ 123  $ 124  $ 19   $ 119 
                 
The accompanying Notes to the Financial Statements are an integral part of the financial statements.

234

STATEMENTS OF CASH FLOWS
   
Louisville Gas and Electric Company   
(Millions of Dollars)   
      Successor  Predecessor
          Two Months  Ten Months
      Year Ended Year Ended Ended  Ended
      December 31, December 31, December 31,  October 31,
      2012  2011  2010   2010 
Cash Flows from Operating Activities             
 
Net income
 $ 123  $ 124  $ 19   $ 109 
 Adjustments to reconcile net income to net cash provided             
  by (used in) operating activities             
   
Depreciation
   152    147    23     115 
   
Amortization
   11    12    2     
   
Defined benefit plans - expense
   18    21    4     20 
   
Deferred income taxes and investment tax credits
   69    51    13     21 
   
Unrealized (gains) losses on derivatives
             14 
   Regulatory asset for previously recorded losses on             
    
interest rate swaps
             (22)
   
Other
   (13)   1    2     2 
 Change in current assets and current liabilities             
  
Accounts receivable
   (2)   25    (27)    (2)
  
Accounts payable
      (24)   17     
  
Accounts payable to affiliates
   (3)   6    (31)    23 
  
Unbilled revenues
   (7)   16    (38)    22 
  
Fuel, materials and supplies
      20    10     (22)
  
Taxes
   (7)   3        
  
Other
   (7)   (7)   (2)    (47)
 Other operating activities             
  
Defined benefit plans - funding
   (27)   (70)   (1)    (25)
  
Other assets
   (21)   (7)       (5)
  
Other liabilities
   22    7    1     (14)
   
Net cash provided by (used in) operating activities
   308    325    (8)    189 
Cash Flows from Investing Activities             
 
Expenditures for property, plant and equipment
   (286)   (196)   (65)    (155)
 
Proceeds from the sale of assets to affiliate
             48 
 
Proceeds from the sale of other investments
      163        
 Net (increase) decrease in restricted cash and cash             
  
equivalents
   (3)   (9)   2     
   
Net cash provided by (used in) investing activities
   (289)   (42)   (63)    (107)
Cash Flows from Financing Activities             
 
Net increase (decrease) in notes payable with affiliates
      (12)   (130)    (28)
 
Issuance of long-term debt with affiliate
         485     
 
Retirement of long-term debt with affiliate
         (485)    
 
Issuance of long-term debt
         531     
 
Net increase (decrease) in short-term debt
   55    (163)   163     
 
Repayment to E.ON AG affiliates
         (485)    
 
Debt issuance and credit facility costs
   (2)   (2)   (10)    
 
Payment of common stock dividends to parent
   (75)   (83)       (55)
   
Net cash provided by (used in) financing activities
   (22)   (260)   69     (83)
Net Increase (Decrease) in Cash and Cash Equivalents
   (3)   23    (2)    (1)
Cash and Cash Equivalents at Beginning of Period
   25    2    4     5 
Cash and Cash Equivalents at End of Period
 $ 22  $ 25  $ 2   $ 4 
                  
Supplemental Disclosures of Cash Flow Information             
 Cash paid (received) during the period for:             
  
Interest - net of amount capitalized
 $ 39  $ 40  $ 11   $ 39 
  
Income taxes - net
 $ 5  $ 20  $ (8)  $ 60 
                  
The accompanying Notes to Financial Statements are an integral part of the financial statements.
235

BALANCE SHEETS AT DECEMBER 31,
Louisville Gas and Electric Company
(Millions of Dollars, shares in thousands)
          
     2012  2011 
Assets      
          
Current Assets      
 
Cash and cash equivalents
 $ 22  $ 25 
 Accounts receivable (less reserve: 2012, $1; 2011, $2)      
  
Customer
   59    60 
  
Other
   8    9 
 
Unbilled revenues
   72    65 
 
Accounts receivable from affiliates
   14    11 
 
Fuel, materials and supplies
   142    142 
 
Prepayments
   7    7 
 
Price risk management from affiliates
   7    
 
Income taxes receivable
   8    4 
 
Deferred income taxes
      2 
 
Regulatory assets
   19    9 
 
Other current assets
   1    
 
Total Current Assets
   359    334 
          
Property, Plant and Equipment      
 
Regulated utility plant
   3,187    2,956 
 
Less: accumulated depreciation - regulated utility plant
   220    116 
  
Regulated utility plant, net
   2,967    2,840 
 
Construction work in progress
   259    215 
 
Property, Plant and Equipment, net
   3,226    3,055 
          
Other Noncurrent Assets      
 
Regulatory assets
   400    403 
 
Goodwill
   389    389 
 
Other intangibles
   144    166 
 
Other noncurrent assets
   44    40 
 
Total Other Noncurrent Assets
   977    998 
          
Total Assets
 $ 4,562  $ 4,387 
          
The accompanying Notes to Financial Statements are an integral part of the financial statements.
236

BALANCE SHEETS AT DECEMBER 31,
Louisville Gas and Electric Company
(Millions of Dollars, shares in thousands)
     2012  2011 
Liabilities and Equity      
          
Current Liabilities      
 
Short-term debt
 $ 55    
 
Accounts payable
   117  $ 94 
 
Accounts payable to affiliates
   23    26 
 
Customer deposits
   23    22 
 
Taxes
   2    13 
 
Regulatory liabilities
   4    10 
 
Interest
   5    6 
 
Salaries and benefits
   18    14 
 
Deferred income taxes
   4    
 
Other current liabilities
   17    14 
 
Total Current Liabilities
   268    199 
          
Long-term Debt
   1,112    1,112 
       
Deferred Credits and Other Noncurrent Liabilities      
 
Deferred income taxes
   544    475 
 
Investment tax credits
   40    43 
 
Accrued pension obligations
   102    95 
 
Asset retirement obligations
   56    55 
 
Regulatory liabilities
   471    478 
 
Price risk management liabilities
   53    55 
 
Other deferred credits and noncurrent liabilities
   106    113 
 
Total Deferred Credits and Other Noncurrent Liabilities
   1,372    1,314 
          
Commitments and Contingent Liabilities (Notes 6 and 15)      
          
Stockholder's Equity      
 
Common stock - no par value (a)
   424    424 
 
Additional paid-in capital
   1,278    1,278 
 
Earnings reinvested
   108    60 
Total Equity
   1,810    1,762 
          
Total Liabilities and Equity
 $ 4,562  $ 4,387 

1.  (a)
Summary of Significant Accounting Policies
75,000 shares authorized; 21,294 shares issued and outstanding at December 31, 2012 and December 31, 2011.

The accompanying Notes to Financial Statements are an integral part of the financial statements.
237

STATEMENTS OF EQUITY
Louisville Gas and Electric Company               
(Millions of Dollars)               
              
   Common           Accumulated   
  ��stock           other   
   shares     Additional     comprehensive   
   outstanding  Common  paid-in  Earnings  income   
   (a)  stock  capital  reinvested  (loss)  Total
                   
December 31, 2009 - Predecessor (b)
  21,294  $424  $84  $755  $ (10) $1,253 
Net income
           109       109 
Cash dividends declared on common stock
           (55)      (55)
Other comprehensive income (loss)
              10    10 
October 31, 2010 - Predecessor
 21,294  $ 424  $ 84  $ 809  $  $ 1,317 
                   
                   
Effect of PPL acquisition
      $ 1,194  $ (809)    $ 385 
Net income
           19       19 
December 31, 2010 - Successor
 21,294  $ 424  $ 1,278  $ 19     $ 1,721 
                   
                   
Net income
         $ 124     $ 124 
Cash dividends declared on common stock
           (83)      (83)
December 31, 2011 - Successor
  21,294  $ 424  $ 1,278  $ 60     $ 1,762 
                   
                   
Net income
         $ 123     $ 123 
Cash dividends declared on common stock
           (75)      (75)
December 31, 2012 - Successor
  21,294  $ 424  $ 1,278  $ 108     $ 1,810 

(a)      Shares in thousands.  All common shares of LG&E stock are owned by LKE.
(b)      See "General - Comprehensive Income" in Note 1 for disclosure of balances of each component of AOCI.
The accompanying Notes to Financial Statements are an integral part of the financial statements.
238

STATEMENTS OF INCOME
Kentucky Utilities Company
(Millions of Dollars)       
                 
     Successor  Predecessor
         Two Months  Ten Months
     Year Ended Year Ended Ended  Ended
     December 31, December 31, December 31,  October 31,
     2012  2011  2010   2010 
Operating Revenues             
 
Retail and wholesale
 $ 1,512  $ 1,512  $ 261   $ 1,235 
 
Electric revenue from affiliate
   12    36    2     13 
 
Total Operating Revenues
   1,524    1,548    263     1,248 
                 
Operating Expenses             
 Operation             
  
Fuel
   498    516    78     417 
  
Energy purchases
   32    29    7     68 
  
Energy purchases from affiliate
   77    83    21     79 
  
Other operation and maintenance
   384    362    65     271 
 
Depreciation
   193    186    26     119 
 
Taxes, other than income
   23    19    1     9 
 
Total Operating Expenses
   1,207    1,195    198     963 
                 
Operating Income
   317    353    65     285 
                 
Other Income (Expense) - net
   (8)   (1)       1 
                 
Other-Than-Temporary Impairments
   25           
                 
Interest Expense
   69    70    8     6 
                 
Interest Expense with Affiliate
         2     62 
                 
Income Before Income Taxes
   215    282    55     218 
                 
Income Taxes
   78    104    20     78 
                 
Net Income
 $ 137  $ 178  $ 35   $ 140 

The accompanying Notes to Financial Statements are an integral part of the financial statements.
239

STATEMENTS OF COMPREHENSIVE INCOME
Kentucky Utilities Company
(Millions of Dollars)
                 
     Successor  Predecessor
         Two Months  Ten Months
     Year Ended Year Ended Ended  Ended
     December 31, December 31, December 31,  October 31,
     2012  2011  2010   2010 
                 
Net income
 $ 137  $ 178  $ 35   $ 140 
                 
Other comprehensive income (loss):             
Amounts arising during the period - gains (losses), net of tax             
 (expense) benefit:             
  Equity investees' other comprehensive income (loss), net of             
   
tax of ($1), $0, $0, $1
   1           (2)
Total other comprehensive income (loss)
   1           (2)
                 
Comprehensive income
 $ 138  $ 178  $ 35   $ 138 
                 
The accompanying Notes to Financial Statements are an integral part of the financial statements.
240

STATEMENTS OF CASH FLOWS
   
Kentucky Utilities Company   
(Millions of Dollars)   
      Successor  Predecessor
          Two Months  Ten Months
      Year Ended Year Ended Ended  Ended
      December 31, December 31, December 31,  October 31,
      2012  2011  2010   2010 
Cash Flows from Operating Activities             
 
Net income
 $ 137  $ 178  $ 35   $ 140 
 Adjustments to reconcile net income to net cash provided             
  by (used in) operating activities             
   
Depreciation
   193    186    26     119 
   
Amortization
   14    13    2     
   
Defined benefit plans - expense
   11    14    3     13 
   
Deferred income taxes and investment tax credits
   99    108    4     23 
   
Impairment of assets
   25           
   
Other
   10    (10)   12     (3)
 Change in current assets and current liabilities             
  
Accounts receivable
   (17)   22    (12)    13 
  
Accounts payable
   1    2    9     (17)
  
Accounts payable to affiliates
      (12)   (41)    46 
  
Unbilled revenues
   (3)   8    (32)    19 
  
Fuel, materials and supplies
   7    (5)   5     (6)
  
Taxes
   15    (14)   14     
  
Other
   6    (3)   6     10 
 Other operating activities             
  
Defined benefit plans - funding
   (21)   (50)   (2)    (18)
  
Other assets
   (3)   (2)       15 
  
Other liabilities
   26    9    1     (10)
   
Net cash provided by (used in) operating activities
   500    444    30     344 
Cash Flows from Investing Activities             
 
Expenditures for property, plant and equipment
   (480)   (279)   (89)    (292)
 
Purchases of assets from affiliate
             (48)
   
Net cash provided by (used in) investing activities
   (480)   (279)   (89)    (340)
Cash Flows from Financing Activities             
 
Issuance of short-term debt with affiliate
         33     
 
Retirement of short-term debt with affiliate
         (33)    
 
Net increase (decrease) in notes payable with affiliates
      (10)   (83)    48 
 
Issuance of long-term debt with affiliate
         1,298     
 
Retirement of long-term debt with affiliate
         (1,298)    
 
Issuance of long-term debt
         1,489     
 
Net increase (decrease) in short-term debt
   70           
 
Repayment to E.ON AG affiliates
         (1,331)    
 
Debt issuance and credit facility costs
      (3)   (17)    
 
Payment of common stock dividends to parent
   (100)   (124)       (50)
   
Net cash provided by (used in) financing activities
   (30)   (137)   58     (2)
Net Increase (Decrease) in Cash and Cash Equivalents
   (10)   28    (1)    2 
Cash and Cash Equivalents at Beginning of Period
   31    3    4     2 
Cash and Cash Equivalents at End of Period
 $ 21  $ 31  $ 3   $ 4 
                  
Supplemental Disclosures of Cash Flow Information             
 Cash paid (received) during the period for:             
  
Interest - net of amount capitalized
 $ 62  $ 60  $ 22   $ 62 
  
Income taxes - net
 $ (39) $ 16  $ (12)  $ 74 
                  
The accompanying Notes to Financial Statements are an integral part of the financial statements.
241

BALANCE SHEETS AT DECEMBER 31,
Kentucky Utilities Company
(Millions of Dollars, shares in thousands)
          
     2012  2011 
Assets      
          
Current Assets      
 
Cash and cash equivalents
 $ 21  $ 31 
 Accounts receivable (less reserve: 2012, $2; 2011, $2)      
  
Customer
   74    69 
  
Other
   11    9 
 
Unbilled revenues
   84    81 
 
Accounts receivable from affiliates
   7    
 
Fuel, materials and supplies
   134    141 
 
Prepayments
   10    7 
 
Price risk management assets from affiliates
   7    
 
Income taxes receivable
   2    5 
 
Deferred income taxes
   3    5 
 
Other current assets
   3    3 
 
Total Current Assets
   356    351 
          
Investments
      31 
          
Property, Plant and Equipment      
 
Regulated utility plant
   4,886    4,563 
 
Less: accumulated depreciation - regulated utility plant
   299    161 
  
Regulated utility plant, net
   4,587    4,402 
 
Other, net
   1    
 
Construction work in progress
   490    340 
 
Property, Plant and Equipment, net
   5,078    4,742 
          
Other Noncurrent Assets      
 
Regulatory assets
   230    217 
 
Goodwill
   607    607 
 
Other intangibles
   127    148 
 
Other noncurrent assets
   57    60 
 
Total Other Noncurrent Assets
   1,021    1,032 
          
Total Assets
 $ 6,455  $ 6,156 
          
The accompanying Notes to Financial Statements are an integral part of the financial statements.
242

BALANCE SHEETS AT DECEMBER 31,
Kentucky Utilities Company
(Millions of Dollars, shares in thousands)
     2012  2011 
Liabilities and Equity      
          
Current Liabilities      
 
Short-term debt
 $ 70    
 
Accounts payable
   147  $ 112 
 
Accounts payable to affiliates
   33    33 
 
Customer deposits
   25    23 
 
Taxes
   26    11 
 
Regulatory liabilities
   5    10 
 
Interest
   10    11 
 
Salaries and benefits
   17    15 
 
Other current liabilities
   16    13 
 
Total Current Liabilities
   349    228 
          
Long-term Debt
   1,842    1,842 
       
Deferred Credits and Other Noncurrent Liabilities      
 
Deferred income taxes
   587    484 
 
Investment tax credits
   98    101 
 
Accrued pension obligations
   104    83 
 
Asset retirement obligations
   69    61 
 
Regulatory liabilities
   531    525 
 
Other deferred credits and noncurrent liabilities
   92    87 
 
Total Deferred Credits and Other Noncurrent Liabilities
   1,481    1,341 
          
Commitments and Contingent Liabilities (Notes 6 and 15)      
          
Stockholder's Equity      
 
Common stock - no par value (a)
   308    308 
 
Additional paid-in capital
   2,348    2,348 
 
Accumulated other comprehensive income (loss)
   1    
 
Earnings reinvested
   126    89 
 
Total Equity
   2,783    2,745 
          
Total Liabilities and Equity
 $ 6,455  $ 6,156 

(a)      80,000 shares authorized; 37,818 shares issued and outstanding at December 31, 2012 and December 31, 2011.
The accompanying Notes to Financial Statements are an integral part of the financial statements.
243

STATEMENTS OF EQUITY
Kentucky Utilities Company            
(Millions of Dollars)            
             
  Common           Accumulated   
  stock           other   
  shares     Additional     comprehensive   
  outstanding  Common  paid-in  Earnings  income   
  (a)  stock  capital  reinvested  (loss)  Total
                  
December 31, 2009 - Predecessor
  37,818  $308  $316  $1,328     $ 1,952 
Net income
           140       140 
Cash dividends declared on common stock
           (50)      (50)
Other comprehensive income (loss)
            $ (2)   (2)
October 31, 2010 - Predecessor (b) 37,818  $ 308  $ 316  $ 1,418  $ (2) $ 2,040 
                  
                  
Effect of PPL acquisition
      $ 2,032  $ (1,418) $ 2  $ 616 
Net income
           35       35 
December 31, 2010 - Successor 37,818  $ 308  $ 2,348  $ 35  $  $ 2,691 
                  
                  
Net income
         $ 178     $ 178 
Cash dividends declared on common stock
           (124)      (124)
December 31, 2011 - Successor
 37,818  $ 308  $ 2,348  $ 89     $ 2,745 
                  
                  
Net income
         $ 137     $ 137 
Cash dividends declared on common stock
           (100)      (100)
Other comprehensive income (loss)
            $ 1    1 
December 31, 2012 - Successor (b)
 37,818  $ 308  $ 2,348  $ 126  $ 1  $ 2,783 

(a)      Shares in thousands.  All common shares of KU stock are owned by LKE.
(b)      See "General - Comprehensive Income" in Note 1 for disclosure of balances of each component of AOCI.
The accompanying Notes to Financial Statements are an integral part of the financial statements.
244


COMBINED NOTES TO FINANCIAL STATEMENTS

1.  Summary of Significant Accounting Policies

(PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and KU)

General

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

Business and Consolidation

(PPL)

PPL is an energy and utility holding company that, through its subsidiaries, is primarily engaged in:  1) the regulated generation, transmission, distribution and sale of electricity and the regulated distribution and sale of natural gas, primarily in Kentucky; 2) the regulated distribution of electricity in the U.K.; 3) the regulated transmission, distribution and sale of electricity in Pennsylvania; and 4) the competitive generation and marketing of electricity in portions of the northeastern and westernnorthwestern U.S. and in the delivery of electricity in Pennsylvania and the U.K.  Headquartered in Allentown, PA, PPL's principal direct subsidiaries are LKE (including its principal subsidiaries, LG&E and KU), PPL Global, PPL Electric and PPL Energy Funding,Supply (including its principal subsidiaries, PPL Electric,EnergyPlus and PPL Services andGeneration).  PPL's corporate level financing subsidiary is PPL Capital Funding.

On April 1, 2011, PPL, through its indirect, wholly owned subsidiary PPL WEM, completed its acquisition of all of the outstanding ordinary share capital of Central Networks East plc and Central Networks Limited, the sole owner of Central Networks West plc, together with certain other related assets and liabilities (collectively referred to as Central Networks and subsequently referred to as WPD Midlands), from subsidiaries of E.ON AG.  WPD Midlands' operating results are included in PPL's results of operations for the full year of 2012, but as PPL is consolidating WPD Midlands on a one-month lag, eight months of operating results are included in PPL's results of operations for 2011 with no comparable amounts for 2010.

On November 1, 2010, PPL acquired all of the limited liability company interests of E.ON U.S. LLC from a wholly owned subsidiary of E.ON AG.  Upon completion of the acquisition, E.ON U.S. LLC was renamed LG&E and KU Energy LLC.  LKE's operating results are included in PPL's results of operations for the full years of 2012 and 2011, while 2010 includes LKE's operating results for the two months ended December 31, 2010.

See Note 10 for additional information regarding the acquisitions of WPD Midlands and LKE.

(PPL and PPL Energy Supply)

PPL Energy Funding is the parentIn April 2012, an indirect, wholly owned subsidiary of PPL Energy Supply whichcompleted the Ironwood Acquisition.  See Note 10 for additional information.

(PPL, LKE, LG&E and KU)

LKE is a holding company with cost-based rate-regulated utility operations through its subsidiaries, LG&E and KU, and is subject to PUHCA.  LG&E and KU are engaged in the regulated generation, transmission, distribution and sale of electricity.  LG&E also engages in the regulated 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.

(LKE, LG&E and KU)

LKE's, LG&E's and KU's Financial Statements and related financial and operating data include the periods before and after PPL's acquisition of LKE on November 1, 2010 and have been segregated to present pre-acquisition activity as the holding companyPredecessor and post-acquisition activity as the Successor.  Certain accounting and presentation methods were changed to acceptable alternatives to conform to PPL's accounting policies, and the cost bases of certain assets and liabilities were changed as of November 1, 2010 as a result of the application of push-down accounting.  Consequently, the financial position, results of operations and cash flows for PPL's principal unregulated subsidiaries.the Successor periods are not comparable to the Predecessor periods; however, the core operations of LKE, LG&E and KU have not changed as a result of the acquisition.
245

(PPL and PPL Energy Supply is the parent of PPL Generation, PPL EnergyPlus and PPL Global.Supply)

PPL Generation owns and operates a portfolio of competitive domestic power generating assets.  These power plants are primarily located in Pennsylvania Montana, Illinois, Connecticut and New YorkMontana and use well-diversified fuel sources including coal, uranium, natural gas, oil and water.  PPL EnergyPlus sells electricity produced by PPL Generation subsidiaries, participates in wholesale market load-following auctions, and markets various energy products and commodities such as:  capacity, transmission, FTRs, coal, natural gas, oil, uranium, emission allowances, RECs and other commodities in competitive wholesale and deregulatedcompetitive retail markets, primarily in the northeastern and westernnorthwestern U.S.

(PPL Energy Supply)

In May 2009,January 2011, PPL Generation signed a definitive agreement to sellEnergy Supply distributed its Long Island generation business and related tolling agreements.  In the fourth quarter of 2009,membership interest in PPL Maine completed the salesGlobal, representing all of the majorityoutstanding membership interest of its hydroelectric generation businessPPL Global, to PPL Energy Supply's parent, PPL Energy Funding.  The distribution was made based on the book value of the assets and its 8.33% ownership interest in Wyman Unit 4.

liabilities of PPL Global with financial effect as of January 1, 2011.  See Note 9 for additional information on both the anticipated and completed sales.information.

(PPL, Global owns and operates WPD's electricity delivery businesses in the U.K.  In 2007, PPL Global completed the sale of its Latin American businesses.

It is the policy of PPL and PPL Energy Supply to consolidate foreign subsidiaries on a one-month lag.  Material intervening events, such as debt issuances and retirements, acquisitions or divestitures that occur in the lag period are recognized in the current Financial Statements.  Events that are significant but not material are disclosed.LKE)

"Income (Loss) from Discontinued Operations (net of income taxes)" on the Statements of Income includes the activities of various businesses that were sold or distributed.  See Note 9 for additional information.  The consolidated financial statementsStatements of PPL and PPL Energy Supply include their share of undivided interests in jointly owned facilities, as well as their shareCash Flows do not separately report the cash flows of the relatedDiscontinued Operations, except for the LKE Predecessor period, which separately discloses these cash flows within operating, costs of those facilities.  See Note 13 for additional information.investing and financing activities, consistent with LKE's pre-acquisition accounting policy.

(PPL and PPL Electric)

PPL Electric is a cost-based rate-regulated subsidiary of PPL.  PPL Electric's principal business is the regulated transmission and distribution of electricity to serve retail customers in its franchised territory in eastern and central Pennsylvania and the regulated supply of electricity to retail customers in that territory as a PLR.

(PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and PPL Electric)KU)

The consolidated financial statements of PPL, PPL Energy Supply and PPL Electricthe Registrants include each company's own accounts as well as the accounts of all entities in which the company has a controlling financial interest.  Consolidation generally has been applied to subsidiaries inEntities for which PPL, PPL Energy Supply and PPL Electric have a majority voting interest.  However, the votingcontrolling financial interest approach is not effective in identifying controlling financial interests in entities that are not controllabledemonstrated through voting interests or in which the equity investors do not bear the residual economic risks.  These types of entities are referred to as variable interest entities.  PPL, PPL Energy Supply and PPL Electricevaluated based on accounting guidance for VIEs.  The Registrants consolidate a variable interest entityVIE when they are determined to behave a controlling interest in the VIE, and thus are the primary beneficiary of the entity.  The primary beneficiary of a variable interest entity is the party that absorbs a majority of the entity's expected losses, receives a majority of its expected residual returns, or both, as a result of holding variable interests.  SeeFor PPL and PPL Energy Supply, see Note 322 for additional information regarding variable interest entities.a consolidated VIE.  Investments in entities in which a company has the ability to exercise significant influence but does not have a controlling financial interest are accounted for under the equity method.  All other investments are carried at cost or fair value.  All significant intercompany transactions have been eliminated.  Any noncontrolling interests are reflected in the consolidated financial statements.

The financial statements of PPL, PPL Energy Supply, LKE, LG&E and KU include their share of any undivided interests in jointly owned facilities, as well as their share of the related operating costs of those facilities.  See Note 14 for additional information.

(PPL)

PPL consolidates WPD, including WPD Midlands, on a one-month lag.  Material intervening events, such as debt issuances that occur in the lag period, are recognized in the current period financial statements.  Events that are significant but not material are disclosed.
246

Regulation

(PPL, PPL Electric, LKE, LG&E and PPL Electric)KU)

ThePPL Electric, LG&E and KU are cost-based rate-regulated utility operationsutilities for which rates are set by regulators to enable PPL Electric, LG&E and KU to recover the costs of PPLproviding electric or gas service, as applicable, and PPL Electricto provide a reasonable return to shareholders.  Rates are generally established based on a historical test period adjusted to exclude unusual or nonrecurring items.  As a result, the financial statements are subject to the accounting for certain types of regulation as prescribed by GAAP and reflect the effects of regulatory actions in their financial statements.  The regulatoryactions.  Regulatory assets below are included in "Regulatory and Other Noncurrent Assets" onrecognized for the Balance Sheetseffect of PPL and PPL Electric at December 31 and are probable oftransactions or events where future recovery of underlying costs is probable in regulated customer rates.

  2009 2008
         
Recoverable transition costs (a)     $281 
Taxes recoverable through future rates $253   250 
Recoverable costs of defined benefit plans  229   192 
Unamortized loss on reacquired debt  33   26 
Costs associated with severe ice storms - January 2005  9   11 
Other  7   3 
  $531  $763 

(a)A return on these assets is included in regulated rates.

The recoverable transitioneffect of such accounting is to defer certain or qualifying costs that would otherwise currently be charged to expense.  Regulatory liabilities are the result of the PUC Final Order, which allowed PPL Electricrecognized for amounts expected to begin amortizing its competitive transition (or stranded) costs of $2.97 billion, over an 11-year transition period effective January 1, 1999.be returned through future regulated customer rates.  In August 1999, competitive transition costs of $2.4 billion were converted to intangible transition costs when they were securitized by the issuance of transition bonds.  The intangible transition costs were amortized over the life of the transition bonds, through December 2008, in accordance with an amortization schedule filed with the PUC.  The assets of PPL Transition Bond Company, including the intangible transition property, were not available to creditors of PPL or PPL Electric.  The remaining competitive transition costs were also amortizedcertain cases, regulatory liabilities are recorded based on an amortization schedule previously filedunderstanding or agreement with the PUC, adjusted for those competitive transitionregulator that rates have been set to recover costs that were converted to intangible transition costs.  These costs were fully amortized in 2009.

Taxes recoverable through future rates represent the portion of future income taxes that will be recovered through future rates based upon established regulatory practices.  Accordingly, this regulatory asset is recognized when the offsetting deferred tax liability is recognized.  For general-purpose financial reporting, this regulatory asset and the deferred tax liability are not offset; rather, each is displayed separately.  Because this regulatory asset does not represent cash tax expenditures already incurred by PPL, this regulatory asset is not earning a current return.  This regulatory asset is expected to be recovered over the period that the underlying book-tax timing differences reverse and the actual cash taxes are incurred.

Recoverable costs of defined benefit plans represent the portion of unrecognized transition obligation, prior service cost, and net actuarial loss that will be recovered through future rates based upon established regulatory practices.  These regulatory assets are adjusted at least annually or whenever the funded status of PPL's defined benefit plans is remeasured.  These regulatory assets for PPL and PPL Electric do not represent cash expenditures already incurred; consequently, these assets are not earning a current return.

  2009 2008
         
Transition obligation $10  $10 
Prior service cost  55   69 
Net actuarial loss  164   113 
Recoverable costs of defined benefit plans $229  $192 

Of these costs, $15 million for PPL and PPL Electric are expected to be amortized into net periodic defined benefit costsincurred in 2010.  All costs will be amortized over the average service lives of plan participants.future, and the regulated entity is accountable for any amounts charged pursuant to such rates and not yet expended for the intended purpose.  The accounting for regulatory assets and liabilities is based on specific ratemaking decisions or precedent for each transaction or event as prescribed by the FERC or the applicable state regulatory commissions.  See Note 6 for additional details regarding regulatory matters.

Unamortized loss on reacquired debt represents losses on long-term debt reacquired or redeemed that have been deferred and will be amortized and recovered through 2029.

In December 2007, the PUC approved recovery of $12 million of costs associated with severe ice storms that occurred in January 2005.  Monthly amortization began in January 2008 and will continue through August 2015.

The remainder of the regulatory assets included in "Other" will be recovered through 2013.

PPL and PPL Electric had the following regulatory liabilities at December 31, 2009.  No significant regulatory liabilities existed at December 31, 2008.

  2009
     
Overcollected transition costs $33 
PURTA tax refund  10 
  $43 

The overcollected transition costs will be refunded to customers in 2010 and are reflected on the Balance Sheet in "Other current liabilities" for PPL and in "Overcollected transition costs" for PPL Electric.

In December 2009, PPL Electric reached a settlement with the Pennsylvania Department of Revenue related to the appeal of its 1997 PURTA tax assessments that resulted in a $10 million reduction in PURTA tax.  The $10 million is expected to be refunded to customers in 2011 and is reflected in "Other deferred credits and noncurrent liabilities" on PPL's and PPL Electric's Balance Sheet.

(PPL and PPL Energy Supply)(PPL)

WPD operates in an incentive-based regulatory structure under distribution licenses granted and price controlsby Ofgem.  Electricity distribution revenues are set by Ofgem.Ofgem every five years through price control reviews that are not directly based on cost recovery.  The price control formula that governs WPD's allowed revenue is normally determined every five years. Ofgem completeddesigned to provide economic incentives to minimize operating, capital and financing costs.  As a review in December 2009.

result, WPD is not subject to accounting for the effects of certain types of regulation as prescribed by GAAP.GAAP and does not record regulatory assets and liabilities.

Accounting Records (PPL, PPL Electric, LKE, LG&E and PPL Electric)KU)

The system of accounts for PPL Electricdomestic regulated entities is maintained in accordance with the Uniform System of Accounts prescribed by the FERC and adopted by the PUC.applicable state regulatory commissions.

Use of Estimates(PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and PPL Electric)KU)

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Loss Accruals(PPL, PPL Energy Supply and PPL Electric)

Potential losses are accrued when (1) information is available that indicates it is "probable" that a loss has been incurred, given the likelihood of the uncertain future events and (2) the amount of the loss can be reasonably estimated.  Accounting guidance defines "probable" as cases in which "the future event or events are likely to occur."  PPL and its subsidiariesThe Registrants continuously assess potential loss contingencies for environmental remediation, litigation claims, regulatory penalties and other events.  PPL and its subsidiaries discount lossLoss accruals for environmental remediation are discounted when appropriate.

PPL and its subsidiaries do not record theThe accrual of contingencies that might result in gains is not recorded, unless recoveryrealization is assured.

Changes in Classification(PPL, PPL Energy Supply and PPL Electric)

The classification of certain amounts in the 20082011 and 20072010 financial statements have been changed to conform to the current presentation.  The changes in classification did not affect "Net Income Attributable to PPL Corporation"the Registrants' net income or "PPL Corporation Shareowners' Common Equity," "Net Income Attributable to PPL Energy Supply" or PPL Energy Supply's "Member's equity" or "Income Available to PPL" or PPL Electric's "Shareowners' Equity".equity.

The classification on the Statements of Cash Flows has not been changed for the classification of amounts to Discontinued Operations.
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Comprehensive Income (PPL, and PPL Energy Supply)Supply, LKE, LG&E and KU)

Comprehensive income, which includes net income and OCI, consists of changes in equity from transactions not related to shareowners.  Comprehensive income is shown on PPL's and PPL Energy Supply'sthe Statements of Comprehensive Income.

AOCI, which is presented on the Balance Sheets of PPL and included in Member's Equityequity on the Balance Sheets of PPL Energy Supply and LKE, consisted of thesethe following after-tax amounts at December 31.gains (losses).

  2009  2008 
PPL        
Foreign currency translation adjustments $(136) $(237)
Unrealized gains on available-for-sale securities  62   18 
Net unrealized gains (losses) on qualifying derivatives  602   (21)
Equity investee's AOCI  (2)  (3)
Defined benefit plans:        
Prior service cost  (61)  (75)
Actuarial loss  (993)  (657)
Transition obligation  (9)  (10)
  $(537) $(985)
PPL Energy Supply        
Foreign currency translation adjustments $(136) $(237)
Unrealized gains on available-for-sale securities  62   18 
Net unrealized gains (losses) on qualifying derivatives  573   (12)
Equity investee's AOCI  (2)  (3)
Defined benefit plans:        
Prior service cost  (44)  (54)
Actuarial loss  (930)  (608)
Transition obligation  (7)  (8)
  $(484) $(904)
     Unrealized gains (losses)    Defined benefit plans   
  Foreign                  
  currency Available-    Equity Prior Actuarial Transition   
  translation for-sale Qualifying investees' service gain asset   
  adjustments securities derivatives AOCI costs (loss) (obligation) Total
PPL                       
                         
December 31, 2009$ (136) $ 62  $ 602  $ (2) $ (61) $ (993) $ (9) $ (537)
OCI  (59)   24    93       29    (39)   10    58 
December 31, 2010$ (195) $ 86  $ 695  $ (2) $ (32) $ (1,032) $ 1  $ (479)
                         
OCI  (48)   2    (168)   3    7    (105)      (309)
December 31, 2011$ (243) $ 88  $ 527  $ 1  $ (25) $ (1,137) $ 1  $ (788)
                         
OCI  94    22    (395)   2    11    (886)      (1,152)
December 31, 2012$ (149) $ 110  $ 132  $ 3  $ (14) $ (2,023) $ 1  $ (1,940)
                         
PPL Energy Supply                       
                         
December 31, 2009$ (136) $ 62  $ 573  $ (2) $ (44) $ (930) $ (7) $ (484)
OCI  (59)   24    159       21    (23)   7    129 
December 31, 2010$ (195) $ 86  $ 732  $ (2) $ (23) $ (953) $  $ (355)
                         
OCI     2    (86)   3    2    (18)      (97)
Distribution of membership                       
 interest in PPL Global (a)  195       (41)      5    780       939 
December 31, 2011$  $ 88  $ 605  $ 1  $ (16) $ (191)    $ 487 
                         
OCI     22    (395)      6    (72)      (439)
December 31, 2012   $ 110  $ 210  $ 1  $ (10) $ (263)    $ 48 

(a)
See Note 9 for additional information.                  

          Defined benefit plans   
  Foreign Unrealized          
  currency gains (losses) Equity Prior      
  translation on qualifying investees' service Actuarial   
  adjustments derivatives AOCI costs gain (loss) Total
LKE                 
                   
December 31, 2009 - Predecessor$ 11  $ (6)    $ (12) $ (36) $ (43)
Disposal of discontinued operations  (11)               (11)
OCI     10  $ (2)   1    (19)   (10)
October 31, 2010 - Predecessor$  $ 4  $ (2) $ (11) $ (55) $ (64)
                   
Effect of PPL acquisition     (4)   2    11    55    64 
OCI              6    6 
December 31, 2010 - Successor   $  $  $  $ 6  $ 6 
                   
OCI           (2)      (2)
December 31, 2011 - Successor         $ (2) $ 6  $ 4 
                   
OCI        1       (20)   (19)
December 31, 2012 - Successor      $ 1  $ (2) $ (14) $ (15)

LG&E had an AOCI balance that was a loss of $10 million at December 31, 2009 (a Predecessor period).  LG&E had no AOCI balances at December 31, 2010, 2011 or 2012 (Successor periods).  During the ten months ended October 31, 2010 (a Predecessor period), LG&E had $10 million of gains on qualifying derivatives that were recorded in OCI.

KU had no AOCI balances at December 31, 2009 (a Predecessor period), 2010 or 2011 (Successor periods). KU had an AOCI balance that was a gain of $1 million at December 31, 2012 (a Successor period) related to an equity investee's AOCI.  KU recorded $2 million of losses related to an equity investee's OCI during the ten months ended October 31, 2010 (a Predecessor period), which were eliminated with the effect of the PPL acquisition.
248

Earnings Per Share (PPL)

EPS is computed using the two-class method, which is an earnings allocation method for computing EPS that treats a participating security as having rights to earnings that would otherwise have been available to common shareowners.  Share-based payment awards that provide recipients a non-forfeitable right to dividends or dividend equivalents are considered participating securities.

Basic EPS is computed by dividing income available to PPL common shareowners by the weighted-average number of common shares outstanding during the period.  Diluted EPS is computed by dividing income available to PPL common shareowners by the weighted-average number of shares outstanding that are increased for additional shares that would be outstanding if potentially dilutive non-participating securities were converted to common shares.  In 2009, these securities consisted of stock options and performance units granted under the incentive compensation plans.  In 2008, these securities consisted of stock options, performance units and PPL Energy Supply's 2-5/8% Convertible Senior Notes.  In 2007, these securities consisted of stock options and PPL Energy Supply's 2-5/8% Convertible Senior Notes.

Price Risk Management

(PPL, and PPL Energy Supply)

PPL and PPL Energy Supply, enter into energyLKE, LG&E and KU)

Energy and energy-related contracts are used to hedge the variability of expected cash flows associated with theirthe generating units and marketing activities, as well as for trading purposes.  PPL and PPL Energy Supply enter into interestInterest rate derivative contracts are used to hedge their exposureexposures to changes in the fair value of their debt instruments and to hedge their exposureexposures to variability in expected cash flows associated with existing floating-rate debt instruments or forecasted fixed-rate issuances of debt.  PPL and PPL Energy Supply also enter into foreignForeign currency derivativeexchange contracts are used to hedge foreign currency exchange exposures, related to firm commitments, recognized assets or liabilities, forecasted transactions, netprimarily associated with PPL's investments in U.K. subsidiaries.  Similar derivatives may receive different accounting treatment, depending on management's intended use and foreign earnings translation.documentation.

PPLCertain energy and PPL Energy Supply haveenergy-related contracts that meet the definition of a derivative.derivative, while others do not meet the definition of a derivative because they lack a notional amount or a net settlement provision.  In cases where there is no net settlement provision, markets are periodically assessed to determine whether market mechanisms have evolved that would facilitate net settlement.  Certain derivative energy contracts have been excluded from the requirements of derivative accounting treatment because they meet the definition of a NPNS.  These contracts are accounted for using accrual accounting.  All other contracts that have been classified as derivative contracts are reflected on the balance sheet at their fair value.  These contracts are recorded as "Price risk management assets" and "Price risk management liabilities" on the Balance Sheets.  Short-termThe portion of derivative positions that deliver within a year are included in "Current Assets" and "Current Liabilities.Liabilities," PPL records long-termwhile the portion of derivative positions in "Regulatory and Other Noncurrent Assets" and "Deferred Credits and Other Noncurrent Liabilities" and PPL Energy Supply records long-term derivative positionsthat deliver beyond a year are recorded in "Other Noncurrent Assets" and "Deferred Credits and Other Noncurrent Liabilities."  On the date the derivative contract is executed, PPL may designate the derivative as

Energy and energy-related contracts are assigned a hedgestrategy and accounting classification.  Processes exist that allow for subsequent review and validation of the fair valuecontract information.  These strategies are discussed in more detail in Note 19.  The accounting department provides the traders and the risk management department with guidelines on appropriate accounting classifications for various contract types and strategies.  Some examples of a recognized asset or liability or of an unrecognized firm commitment ("fair value hedge"), a hedge of a forecasted transaction orthese guidelines include, but are not limited to:
·  Physical coal, limestone, lime, uranium, electric transmission, gas transportation, gas storage and renewable energy credit contracts are not derivatives due to the lack of net settlement provisions.
·  Only contracts where physical delivery is deemed probable throughout the entire term of the contract can qualify for NPNS.
·  Physical transactions that permit cash settlement and financial transactions do not qualify for NPNS because physical delivery cannot be asserted; however, these transactions can receive cash flow hedge treatment if they lock in the future cash flows for energy-related commodities.
·  Certain purchased option contracts or net purchased option collars may receive hedge accounting treatment.  Those that are not eligible are recorded at fair value through earnings.
·  Derivative transactions that do not qualify for NPNS or hedge accounting treatment are recorded at fair value through earnings.

A similar process is also followed by the variability of cash flowstreasury department as it relates to be received or paid related to a recognized asset or liability ("cash flow hedge"), ainterest rate and foreign currency fair value or cash flow hedge ("foreign currency hedge") or a hedgederivatives.  Examples of a net investment in a foreign operation ("net investment hedge").  Changes inaccounting guidelines provided to the fair value of derivativestreasury department staff include, but are recorded in either OCI or in current-periodnot limited to:
·  Transactions to lock in an interest rate prior to a debt issuance can be designated as cash flow hedges, to the extent the forecasted debt issuances remain probable of occurring.
·  Cross-currency transactions to hedge interest and principal repayments can be designated as cash flow hedges.
·  Transactions entered into to hedge fluctuations in the fair value of existing debt can be designated as fair value hedges.
·  Transactions entered into to hedge the value of a net investment of foreign operations can be designated as net investment hedges.

249

·  Derivative transactions that do not qualify for hedge accounting treatment are marked to fair value through earnings.  These transactions generally include foreign currency swaps and options to hedge GBP earnings translation risk associated with PPL's U.K. subsidiaries that report their financial statements in GBP.  As such, these transactions reduce earnings volatility due solely to changes in foreign currency exchange rates.
·  Derivative transactions may be marked to fair value through regulatory assets/liabilities if approved by the appropriate regulatory body.  These transactions generally include the effect of interest rate swaps that are included in customer rates.

Cash inflows and outflows related to derivative instruments are included as a component of operating, investing or financing activities on the Statements of Cash Flows, depending on the underlying nature of the hedged items.

PPL and its subsidiaries have elected not to offset net derivative positions against the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) under master netting arrangements.

PPL Energy Supply reflects its net realized and unrealized gains and losses associated with all derivatives that are held for trading purposes in "Net energy trading margins" on the Statements of Income.

See NoteNotes 18 and 19 for additional information on derivatives.

(PPL and PPL Electric)

To meet its obligation as a PLR to its customers, PPL Electric has entered into certain contracts that meet the definition of a derivative.  TheseHowever, these contracts have been excluded from the requirements of derivative accounting treatment because they meet the definition of a NPNS and are accountedqualify for using accrual accounting.NPNS.  See Notes 1718 and 1819 for additional information.

Revenue

Utility Revenue(PPL)

(PPL)

TheFor the years ended December 31, the Statements of Income "Utility" line item contains revenuesrate-regulated revenue from domestic and U.K. rate-regulated delivery operations.the following:    

(PPL Energy Supply)
    2012   2011   2010 
          
Domestic electric and gas revenue (a) $ 4,519  $ 4,674  $ 2,941 
U.K. electric revenue (b)   2,289    1,618    727 
 Total $ 6,808  $ 6,292  $ 3,668 

The Statements of Income "Utility" line item contains revenues from the U.K. rate-regulated delivery operations.
(a)Represents revenue from regulated generation, transmission and/or distribution in Pennsylvania, Kentucky, Virginia and Tennessee, including regulated wholesale revenue.  2010 includes two months of revenue for LKE.
(b)Represents electric distribution revenue from the operation of WPD's distribution networks.  2011 includes eight months of revenue for WPD Midlands.

(PPL Electric)

Since most of PPL Electric's operations are regulated, it is not meaningful to use a "Utility" caption.  Therefore, the revenues of PPL Electric are presented according to specific types of revenue.

Revenue Recognition

(PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and PPL Electric)KU)

Operating revenues, except for certain energy and energy-related contracts that meet the definition of derivative instruments and "Energy-related businesses," are recorded based on energy deliveries through the end of the calendar month.  Unbilled retail revenues result because customers' meters are read and bills are rendered throughout the month, rather than all being read at the end of the month.  Unbilled revenues for a month are calculated by multiplying an estimate of unbilled kWh by the estimated average cents per kWh.  Unbilled wholesale energy revenues are recorded at month-end to reflect estimated amounts until actual dollars and MWhs are confirmed and invoiced.  At that time, unbilled revenue is reversedAny difference between estimated and actual revenuerevenues is recorded.adjusted the following month.

PPL Energy Supply records energy marketing activity in the period when the energy is delivered.  Generally, the wholesale sales and purchases that qualify as derivative instruments held for non-trading purposes are reported gross on the Statements of Income within "Wholesale energy marketing" and "Energy purchases."  Additionally, the bilateral sales and purchases that are designated as speculative trading activities and qualify as derivative instruments for accounting purposes are reported net on the Statements of Income within "Net energy trading margins."  Spot market activity that balances PPL Energy Supply's physical trading positions is included on the Statements of Income in "Net energy trading margins."
250


Certain PPL subsidiaries participate in RTOs, primarily in the PJM but alsoRTO, as well as in the surrounding regions of New York (NYISO), New England (ISO-NE)other RTOs and the Midwest (MISO).ISOs.  In PJM, PPL EnergyPlus is a marketer, a load-serving entity to its customers who have selected it as a supplier and a seller for PPL's generation subsidiaries.  PPL Electric is a transmission owner and PLR in PJM.  In ISO-NE, PPL EnergyPlus is a marketer, a load-serving entity and a seller for PPL's New England generating assets.  In the NYISO and MISO regions, PPL EnergyPlus acts as a marketer.  PPL Electric does not participate in ISO-NE, NYISO or MISO.Energy Supply's generation subsidiaries.  A function of interchange accounting is to match participants' MWh entitlements (generation plus scheduled bilateral purchases) against their MWh obligations (load plus scheduled bilateral sales) during every hour of every day.  If the net result during any given hour is an entitlement, the participant is credited with a spot-market sale to the ISORTO at the respective market price for that hour; if the net result is an obligation, the participant is charged with a spot-market purchase from the ISO at the respective market price for that hour.  ISO purchases and sales are not allocated to individual customers.  PPL Energy Supply records the hourly net sales in its Statements of Income as "Wholesale energy marketing" if in a net sales position and "Energy purchases" if in a net purchase position.

(PPL)

WPD's revenue is primarily from charges to suppliers to use its distribution system to deliver electricity to the end-user.  WPD's allowed revenue is not dependent on volume delivered over the five-year price control period.  However, in any fiscal period, WPD's revenue could be negatively affected if its tariffs and the volume delivered do not fully recover the allowed revenue for a given period.  Under recoveries are recovered and recorded in the next regulatory year.  Over recoveries are reflected in the current period as a liability and are not included in revenue.

(PPL and PPL Energy Supply)

PPL Energy Supply records non-derivative energy marketing activity in the period when the energy is delivered.  Generally, sales contracts held for non-trading purposes are reported gross on the Statements of Income within "Wholesale energy marketing" and "Unregulated retail electric and gas."  However, non-trading physical sales and purchases of electricity at major market delivery points (which is any delivery point with liquid pricing available, such as the pricing hub for PJM West), are netted and reported in its financial statementsthe Statements of Income within "Wholesale energy marketing" or "Energy purchases," depending on the net hourly position.  Certain energy and energy-related contracts that meet the definition of derivative instruments are recorded at fair value with subsequent changes in fair value recognized as wholesalerevenue or expense (see Note 19), unless hedge accounting is applied.  If derivatives meet cash flow hedging criteria, changes in fair value are recorded in AOCI.  Derivative and non-derivative contracts that are designated as proprietary trading activities are reported net on the Statements of Income within "Net energy marketing and energy purchases.trading margins."

"Energy-related businesses" revenue primarily includes revenuesrevenue from the mechanical contracting and engineering subsidiaries, as well as, WPD's telecommunications and property subsidiaries.  The mechanical contracting and engineering subsidiaries record revenuesrevenue from construction contracts on the percentage-of-completion method of accounting, measured by the actual cost incurred to date as a percentage of the estimated total cost for each contract.  Accordingly, costs and estimated earnings in excess of billings on uncompleted contracts are recorded as a current assetwithin "Unbilled revenues" on the Balance Sheets, and billings in excess of costs and estimated earnings on uncompleted contracts are recorded as awithin "Other current liabilityliabilities" on the Balance Sheets.  The amount of costs and estimated earnings in excess of billings was $5$12 million and $10$15 million at December 31, 20092012 and 2008,2011, and the amount of billings in excess of costs and estimated earnings was $69$70 million and $80$59 million at December 31, 20092012 and 2008.2011.

(PPL and PPL Energy Supply)

During 2007, PPL recognized $55 million of revenue related to a settlement agreement for cost-based payments based upon the RMR status of units at its Wallingford, Connecticut generating facility.

(PPL and PPL Electric)

Beginning November 1, 2008, PPL Electric's transmission revenues were billed in accordance with a FERC tariff that utilizes a formula-based rate recovery mechanism.  The tariff allows for recovery of actual transmission costs incurred, a return on transmission plant placed in service and an incentive return, including a return on construction work in progress, on the Susquehanna-Roseland transmission line project.  The tariff utilizes estimated costs for the current year billing to customers and requires a true-up to adjust for actual costs in the subsequent year's rate.  In August 2009, the FERC approved this formula-based rate recovery mechanism.  As a result, the annual update of the rate is now implemented automatically without requiring specific approval by the FERC before going into effect.  PPL Electric accrues or defers revenues applicable to any estimated true-up of this formula-based rate.  At December 31, 2009 a net asset of $5 million was accrued, which will be reflected in future billings.

In 2009, PPL Electric recorded a $3 million pre-tax true-up ($2 million after-tax) related to the 2008 portion of the FERC formula-based transmission revenues.  The true-up, reflected in the Pennsylvania Delivery segment for PPL, is not considered by management as material to the financial statements of PPL and PPL Electric for the years 2009 and 2008.

PPL Electric is charged transmission related costs by PJM applicable to PLR customers.  PPL Electric passes these costs on to customers through an estimated transmission service charge and records a true-up to adjust for actual cost.  Any over- or undercollections from customers are refunded or collected through a transmission service charge adjustment.  At December 31, 2009, a liability of $39 million was accrued on the Balance Sheet in "Other current liabilities" for PPL and as "Overcollected transmission costs" for PPL Electric.

Allowance for Doubtful Accounts Receivable

(PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and PPL Electric)KU)

Accounts receivable are reported inon the Balance Sheets at the gross outstanding amount adjusted for an allowance for doubtful accounts.  Accounts receivable that are acquired are initially recorded at fair value on the date of acquisition.  See Note 10 for information related to the acquisitions of WPD Midlands and LKE.

(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 nominal 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.  PPL Electric receives a nominal fee for administering its program.  During 2012, 2011 and 2010, PPL Electric purchased $848 million, $875 million and $617 million of accounts receivable from unaffiliated third parties.  During 2012, 2011 and 2010, PPL Electric purchased $313 million, $264 million and $215 million of accounts receivable from PPL EnergyPlus.
251

Allowance for Doubtful Accounts(PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and KU)

Accounts receivable collectability is evaluated using a combination of factors, including past due status based on contractual terms.  Reserve balances are analyzed to assessterms, trends in write-offs, the reasonablenessage of the balances in comparisonreceivable, counterparty creditworthiness and economic conditions.  Specific events, such as bankruptcies, are also considered.  Adjustments to the actualallowance for doubtful accounts receivable balances and write-offs.  Adjustments are made to reserve balanceswhen necessary based on the results of analysis, the aging of receivables and historical and industry trends.

Additional specific reserves for uncollectible accounts receivable, such as bankruptcies, are recorded on a case-by-case basis after having been researched and reviewed by management.  The nature of the item, trends in write-offs, the age of the receivable, counterparty creditworthiness and economic conditions are considered as a basis for determining the adequacy of the reserve for uncollectible account balances.

Accounts receivable are charged-offwritten off in the period in which the receivable is deemed uncollectible.  Recoveries of accounts receivable previously charged-offwritten off are recorded when it is known they will be received.

The changes in the allowance for doubtful accounts including unbilled revenues, were:

    Additions    
  Balance at Beginning of Period Charged to Income Charged to Other Accounts Deductions (a) Balance at End of Period
PPL
2009 $40  $30      $33  $37 
2008  40   29       29   40 
2007  52   31       43   40 
                     
PPL Energy Supply
2009 $26  $1      $6  $21 
2008  22   5       1   26 
2007  31           9   22 
                     
PPL Electric
2009 $14  $29      $27  $16 
2008  18   24       28   14 
2007  19   29       30   18 
      Additions         
  Balance at   Charged to     Balance at
  Beginning of Period Charged to Income Other Accounts Deductions (a) End of Period
PPL                    
2012  $ 54   $ 55 (c)     $ 45   $ 64  
2011    55     65 (c)       66 (d)   54  
2010    37     42 (b) $ 7 (b) (e)   31     55 (b)
                     
PPL Energy Supply                    
2012  $ 15   $ 12 (c)     $ 4   $ 23  
2011    20     14 (c)       19 (d)   15  
2010    21     1         2     20  
                     
PPL Electric                    
2012  $ 17   $ 32       $ 31   $ 18  
2011    17     33         33     17  
2010    16     30         29     17  
                     
LKE                    
2012 - Successor $ 17   $ 9       $ 7   $ 19  
2011 - Successor   17     15         15     17  
2010 - Successor       10   $ 7 (e)       17  
2010 - Predecessor   4     10         10     4  
                     
LG&E                    
2012 - Successor $ 2   $ 2       $ 3   $ 1  
2011 - Successor   2     5         5     2  
2010 - Successor       1   $ 2 (e)   1     2  
2010 - Predecessor   2     4         4     2  
                     
KU                    
2012 - Successor $ 2   $ 4       $ 4   $ 2  
2011 - Successor   6     6         10     2  
2010 - Successor       1   $ 6 (e)   1     6  
2010 - Predecessor   3     6         6     3  

(a)Primarily related to uncollectible accounts written off.

(b)Includes amounts associated with LKE activity since the November 1, 2010 acquisition date.  See Note 10 for additional information related to the acquisition of LKE.

(PPL and PPL Energy Supply)

The California ISO reserves of $17 million accounted for 46% and 47% of the total allowance for doubtful accounts of PPL and 81% of the total allowance of PPL Energy Supply at December 31, 2009 and 2008.  See Note 14
(c)Includes amounts related to the SMGT bankruptcy.  See Note 15 for additional information.
(d)Includes amounts related to the June 2011, FERC approved settlement agreement between PPL and the California ISO related to the sales made to the California ISO during the period October 2000 through June 2001 that were not paid to PPL subsidiaries.  Therefore, the receivable and the related allowance for doubtful accounts were reversed and the settlement recorded.
(e)Primarily related to capital projects, thus the provision was recorded as an adjustment to construction work in progress.

Cash (PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and PPL Electric)KU)

Cash Equivalents

All highly liquid debt instruments purchased with original maturities of three months or less are considered to be cash equivalents.

252

Restricted Cash and Cash Equivalents

Bank deposits and other cash equivalents that are restricted by agreement or that have been clearly designated for a specific purpose are classified as restricted cash and cash equivalents.  The change in restricted cash and cash equivalents is reported as an investing activity on the Statements of Cash Flows.  On the Balance Sheets, the current portion of restricted cash and cash equivalents is shown as "Restricted cash and cash equivalents" for PPL and PPL Energy Supply and included in "Other current assets" for PPL Electric, LKE, LG&E and KU while the noncurrent portion is included in "Other noncurrent assets" for PPL and PPL Energy Supply and in "Other regulatory and noncurrent assets" for PPL Electric.  For PPL and PPL Energy Supply, theall Registrants.  At December 31, 2009 balance of restricted cash and cash equivalents consisted primarily of margin deposits posted by counterparties to PPL Energy Supply in connection with trading activities and the December 31, 2008 balance consisted primarily of margin deposits posted by PPL Energy Supply to counterparties in connection with trading activities.  For PPL Electric, the December 31, 2009 and 2008 balances of restricted cash and cash equivalents includingincluded the noncurrent portion, consisted primarily of funds deposited with a trustee to defease the First Mortgage Bonds.  See Note 17 for the amounts recorded at December 31, 2009 and 2008.following.

     PPL PPL Energy Supply PPL Electric LKE LG&E
     2012  2011  2012  2011  2012  2011  2012  2011  2012  2011 
                                  
Margin deposits posted to                              
 counterparties $ 43  $ 137  $ 43  $ 137                   
Cash collateral posted to                              
 counterparties   32    29              $ 32  $ 29  $ 32  $ 29 
Low carbon network fund (a)   14    9                         
Captive insurance reserves (b)   6    6                         
Funds deposited with a trustee (c)   13    12        $ 13  $ 12             
Ironwood debt service reserves   17       17                      
Other   10    16    3    8       1             
  Total $ 135  $ 209  $ 63  $ 145  $ 13  $ 13  $ 32  $ 29  $ 32  $ 29 

(a)Funds received by WPD, which are to be spent on approved initiatives to support a low carbon environment.
(b)Funds required by law to be held by WPD's captive insurance company to meet claims.
(c)Funds deposited with a trustee to defease PPL Electric's 1945 First Mortgage Bonds.

Fair Value Measurements (PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and PPL Electric)KU)

PPL and its subsidiariesThe Registrants value certain financial and nonfinancial assets and liabilities at fair value.  Generally, the most significant fair value measurements relate to price risk management assets and liabilities, investments in securities including investments in the NDT funds and defined benefit plans, and cash and cash equivalents.  PPL and its subsidiaries use, as appropriate, 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) to measure the fair value of an asset or liability.  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.

PPL and its subsidiaries prioritizeThe Registrants classify fair value measurements for disclosure by grouping them intowithin one of three levels in the fair value hierarchy.  The highest priority is given to measurements using Level 1 inputs.  The appropriate level assigned to a fair value measurement is based on the lowest level input that is significant to the fair value measurement in its entirety.  The three levels of the fair value hierarchy are as follows:

·
Level 1 - quoted prices (unadjusted) in active markets for identical assets or liabilities that are accessible at the measurement date.  Active markets are those in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

·
Level 2 - inputs other than quoted prices included within Level 1 that are either directly or indirectly observable for substantially the full term of the asset or liability.

·
Level 3 - unobservable inputs that management believes are predicated on the assumptions market participants would use to measure the asset or liability at fair value.

Assessing the significance of a particular input requires judgment that considers factors specific to the asset or liability.  As such, PPL and its subsidiaries'the Registrants' assessment of the significance of a particular input may affect how the assets and liabilities are classified within the fair value hierarchy.  See Notes 17 and 18 for additional information on fair value measurements.
253

Investments

Investments (PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and PPL Electric)KU)

Generally, the original maturity date of an investment and management's intent and ability to sell an investment prior to its original maturity determine the classification of investments as either short-term or long-term.  Investments that would otherwise be classified as short-term, but are restricted as to withdrawal or use for other than current operations or are clearly designated for expenditure in the acquisition or construction of noncurrent assets or for the liquidation of long-term debts, are classified as long-term.

Short-term Investments

Short-term investments generally include certain deposits as well as securities that are considered highly liquid or provide for periodic reset of interest rates.  Short-term investments haveInvestments with original maturities greater than three months and less than a year, as well as investments with original maturities of greater than a year that management has the ability and intent to sell within a year, are included in "Short-term investments" or "Other current assets" on the Balance Sheets of PPL and PPL Energy Supply and in "Current Assets-Other" on the Balance Sheets of PPL Electric.Sheets.

Investments in Debt and Equity Securities

Investments in debt securities are classified as held-to-maturity and measured at amortized cost when there is an intent and ability to hold the securities to maturity.  Debt and equity securities that are acquired and held principally forto capitalize on fluctuations in their value with the purposeintention of selling them in the near-term are classified as trading.  Trading securities are generally held to capitalize on fluctuations in their value.  All other investments in debt and equity securities are classified as available-for-sale.  Both trading and available-for-sale securities are carried at fair value.  The specific identification method is used to calculate realized gains and losses on debt and equity securities.  Any unrealized gains and losses on trading securities are included in earnings.  Through March 31, 2009, unrealized gains and losses on all available-for-sale securities were reported, net of tax, in OCI or recognized in earnings when the decline in fair value below amortized cost was determined to be an other-than-temporary impairment.

As described in "Recognition and Presentation of Other-Than-Temporary Impairments" within "New Accounting Guidance Adopted," new accounting guidance has modified theThe criteria for determining whether a decline in fair value of a debt security is other than temporary and whether the other-than-temporary impairment is recognized in earnings or reported in OCI.  Beginning April 1, 2009,OCI require that when a debt security is in an unrealized loss position:position and:

·if there is an intent to sell the security or a requirement to sell the security before recovery, the other-than-temporary impairment is recognized currently in earnings; or
·if there is no intent to sell the security or requirement to sell the security before recovery, the portion of the other-than-temporary impairment that is considered a credit loss is recognized currently in earnings and the remainder of the other-than-temporary impairment is reported in OCI, net of tax; or
·if there is no intent to sell the security or requirement to sell the security before recovery and there is no credit loss, the unrealized loss is reported in OCI, net of tax.

Equity securities were not impacted by this new accounting guidance; therefore, unrealizedUnrealized gains and losses on available-for-sale equity securities continue to beare reported, net of tax, in OCI.  Earnings continue to be charged whenWhen an equity security's decline in fair value below amortized cost is determined to be an other-than-temporary impairment.impairment, the unrealized loss is recognized currently in earnings.  See Notes 1718 and 2123 for additional information on investments in debt and equity securities.

Equity Method Investment(PPL, LKE and KU)

Investments in entities over which PPL, LKE and KU have the ability to exercise significant influence, but not control, are accounted for using the equity method of accounting and are reported in "Other Investments" on PPL's Balance Sheet and in "Investments" on LKE's and KU's Balance Sheets.  In accordance with the accounting guidance for equity method investments, the recoverability of the investment is periodically assessed.  If an identified event or change in circumstances requires an impairment evaluation, the fair value of the investment is assessed.  The difference between the carrying amount of the investment and its estimated fair value is recognized as an impairment loss when the loss in value is deemed other-than-temporary and such loss is included in "Other-Than-Temporary Impairments" on the Statements of Income.

KU owns 20% of the common stock of EEI, which is accounted for as an equity method investment.  KU's direct exposure to loss as a result of its involvement with EEI is generally limited to the value of its investment.  During 2012, KU recorded gains (losses) of $(8) million from its share of EEI's operating results.  In December 2012, KU concluded that an other-than-temporary decline in the value of its investment in EEI had occurred.  KU recorded an impairment charge of $25 million ($15 million, after-tax) which reduced the investment balance to zero, the estimated fair value at December 31, 2012.  See Note 18 for additional information.           
254

Cost Method Investment(LKE, LG&E and KU)

LG&E and KU each have an investment in OVEC, which is accounted for using the cost method.  The investment is recorded in "Investments" on the LKE and KU Balance Sheets, in "Other noncurrent assets" on the LG&E Balance Sheets and in "Other investments" on the PPL Balance Sheets.  LG&E and KU and ten other electric utilities are equity owners of OVEC.  OVEC's power is currently supplied to LG&E and KU and 11 other companies affiliated with the various owners.  LG&E and KU own 5.63% and 2.5% of OVEC's common stock.  Pursuant to a power purchase agreement, LG&E and KU are contractually entitled to their ownership percentage of OVEC's output, which is approximately 134 MW for LG&E and approximately 60 MW for KU.

LG&E's and KU's combined investment in OVEC is not significant.  The direct exposure to loss as a result of LG&E's and KU's involvement with OVEC is generally limited to the value of their investments; however, LG&E and KU may be conditionally responsible for a pro-rata share of certain OVEC obligations.  As part of PPL's acquisition of LKE, the value of the power purchase contract was recorded as an intangible asset with an offsetting regulatory liability, both of which are being amortized using the units-of-production method until March 2026, the expiration date of the agreement.  See Notes 15 and 20 for additional discussion on the power purchase agreement.          

Long-Lived and Intangible Assets

Property, Plant and Equipment

(PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and PPL Electric)KU)

PP&E is recorded at original cost, unless impaired.  PP&E acquired in a business combination is recorded at fair value at the time of acquisition.  If impaired, the asset is written down to fair value at that time, which becomes the new cost basis of the asset.  Original cost includes material, labor, contractor costs, certain overheads and financing costs, where applicable.  The cost of repairs and minor replacements are charged to expense as incurred.  PPL recordsThe Registrants record costs associated with planned major maintenance projects in the period in which the costs are incurred.  No costs associated with planned major maintenance projects are accrued in advance of the period in which the work is performed.  LG&E and KU accrue costs of removal net of estimated salvage value through depreciation, which is included in the calculation of customer rates over the assets' depreciable lives in accordance with regulatory practices.  Cost of removal amounts accrued through depreciation rates are accumulated as a regulatory liability until the removal costs are incurred.  See "Asset Retirement Obligations" below and Note 6 for additional information.

(PPL and PPL Electric)Energy Supply)

The original cost for the PP&E acquired in the Ironwood Acquisition is its fair value on April 13, 2012.  See Note 10 for additional information on the acquisition.

(PPL)

The original cost for the PP&E acquired in the WPD Midlands acquisition is its fair value on April 1, 2011, which approximated RAV as of the acquisition date.  See Note 10 for additional information on the acquisition.

(PPL, PPL Electric, LKE and KU)

AFUDC is capitalized as part of the construction costs for regulated projects.cost-based rate-regulated projects for which a return on such costs is recovered after the project is placed in service.  The debt component of AFUDC is credited to "Interest Expense" and the equity component is credited to "Other Income (Expense) - net" on the Statements of Income.  LKE and KU have not recorded significant AFUDC as a return has been provided during the construction period for most projects.

(PPL and PPL Energy Supply)

Nuclear fuel-related costs, including fuel, conversion, enrichment, fabrication and assemblies, are capitalized as PP&E.  Such costs are amortized over the periodas the fuel is spent using the unit-of-productionunits-of-production method and included in "Fuel" on the Statements of Income.

PPL's unregulated entities and  PPL Energy Supply capitalizecapitalizes interest costs as part of construction costs for non-regulated projects.costs.

The following capitalizedCapitalized interest, was excluded from "Interest Expense" on the Statements of Income.excluding AFUDC for PPL, is as follows.
255

     PPL
  PPL Energy Supply
       
2012  $ 53  $ 47 
2011    51    47 
2010    30    33 

  PPL PPL Energy Supply
         
2009 $44  $45 
2008  57   56 
2007  54   54 
Depreciation

(PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and PPL Electric)

Included in PP&E on the balance sheet are capitalized costs of software projects that were developed or obtained for internal use.  These capitalized costs are amortized ratably over the expected lives of the projects when they become operational, generally not to exceed five years.  Following are capitalized software costs and the accumulated amortization.

  December 31, 2009  December 31, 2008 
  Carrying Amount  Accumulated Amortization  Carrying Amount  Accumulated Amortization 
                 
PPL $97  $52  $62  $39 
PPL Energy Supply  24   19   24   18 
PPL Electric  37   15   17   10 

Amortization expense of capitalized software costs was as follows:

  PPL PPL Energy Supply PPL Electric 
        
2009 $13 $2 $5 
2008  8  2  3 
2007  10  2  4 

The amortization of capitalized software is included in "Depreciation" on the Statements of Income.

Depreciation(PPL, PPL Energy Supply and PPL Electric)KU)

Depreciation is computedrecorded over the estimated useful lives of property using various methods including the straight-line, composite and group methods.  When a component of PP&E is retired that was depreciated under the composite or group method is retired, the original cost is charged to accumulated depreciation.  When all or a significant portion of an operating unit that was depreciated under the composite or group method is retired or sold, the property and the related accumulated depreciation account is reduced and any gain or loss is included in income, unless otherwise required by regulators.

In 2007, WPD reviewed the useful lives of its distribution network assets.  Effective April 1, 2007, after considering information from Ofgem and other internal and external surveys, the weighted average useful lives were extended to 54 years from 40 years.  The effect of this change in useful lives for 2007 was to increase income from continuing operations after income taxes attributable to PPL/PPL Energy Supply and net income attributable to PPL/PPL Energy Supply, as a result of lower depreciation, by $13 million (or $0.03 per share, basic and diluted, for PPL).

Following are the weighted-average rates of depreciation at December 31.

  2009 
  PPL  PPL Energy Supply  PPL Electric 
             
Generation  2.48%   2.48%     
Transmission and distribution  2.17%   2.33%   2.04% 
General  7.32%   10.19%   4.00% 
  2012 
     PPL            
     Energy PPL        
  PPL Supply Electric LKE LG&E KU
                    
Regulated utility plant   3.12       2.57     4.39    4.91    4.06 
Non-regulated PP&E - Generation   3.05    3.05              
  2011 
     PPL            
     Energy PPL        
  PPL Supply Electric LKE LG&E KU
                    
Regulated utility plant   3.03       2.49     4.54    5.11    4.17 
Non-regulated PP&E - Generation   2.88    2.88              


  2008 
  PPL  PPL Energy Supply  PPL Electric 
             
Generation  2.39%   2.39%     
Transmission and distribution  2.58%   3.07%   2.20% 
General  8.09%   11.6%   4.33% 
(PPL, LKE, LG&E and KU)

The annual provisionsKPSC approved new lower depreciation rates for LG&E and KU as part of the rate-case settlement agreement reached in November 2012.  The new rates became effective January 1, 2013 and will result in lower depreciation have been computed principallyof approximately $19 million ($9 million for LG&E and $10 million for KU) in accordance with the following ranges, in years,2013, exclusive of assets lives.
net additions to PP&E.

PPLPPL Energy SupplyPPL Electric
Generation40-5040-50
Transmission and distribution5-705-6015-70
General3-603-605-55
(PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and KU)

Goodwill and Other Intangible Assets(PPL, PPL Energy Supply and PPL Electric)

Goodwill represents the excess of the purchase price paid over the estimated fair value of the identifiable net assets acquired and liabilities assumed in the acquisition of a business.  PPL's reporting units are significant businesses that have discrete financial information and the operating results are regularly reviewed by segment management.business combination.

Other acquired intangible assets are initially measured based on their fair value.  Intangibles that have finite useful lives are amortized over their useful lives based upon the pattern in which the economic benefits of the intangible assets are consumed or otherwise used.  Costs incurred to obtain an initial license and renew or extend terms of licenses are capitalized as intangible assets.

When determining the useful life of an intangible asset, including intangible assets that are renewed or extended, PPL and its subsidiaries consider:consider the expected use of the asset; the expected useful life of other assets to which the useful life of the intangible asset may relate; legal, regulatory, or contractual provisions that may limit the useful life; the company's historical experience as evidence of its ability to support renewal or extension; the effects of obsolescence, demand, competition, and other economic factors; and the level of maintenance expenditures required to obtain the expected future cash flows from the asset.

256

PPL and its subsidiariesPPL Energy Supply account for RECs as intangible assets.  PPL and PPL Energy Supply buy and/or sell RECs and also create RECs through owned renewable energy generation facilities.  In any period, PPL and PPL Energy Supply can be a net purchaser or seller of RECs depending on their contractual obligations to purchase or deliver RECs and the production of RECs from their renewable energy generation facilities.  The carrying value of RECs created from their renewable energy generation facilities is initially recorded at zero value and purchased RECs are initially recorded based on their purchase price.  When RECs are consumed to satisfy an obligation to deliver RECs to meet a state's Renewable Portfolio Standard Obligation or when RECs are sold to third parties, they are removed from the Balance Sheet at their weighted-average carrying value.  Since the economic benefits of RECs are not diminished until they are consumed, RECs are not amortized; rather, they are expensed when consumed or a gain or loss is recognized when sold.  Such expense is included in "Energy purchases" on the Statements of Income.  Gains and losses on the sale of RECs are included in "Other operation and maintenance" on the Statements of Income.

PPL, PPL Energy Supply, LKE, LG&E and KU account for emission allowances as intangible assets.  PPL, PPL Energy Supply, LKE, LG&E and KU are allocated emission allowances by states based on their generation facilities' historical emissions experience, and have purchased emission allowances generally when it is expected that additional allowances will be needed.  The carrying value of allocated emission allowances is initially recorded at zero value and purchased allowances are initially recorded based on their purchase price.  When consumed or sold, emission allowances are removed from the Balance Sheet at their weighted-average carrying value.  Since the economic benefits of emission allowances are not diminished until they are consumed, emission allowances are not amortized; rather, they are expensed when consumed.consumed or a gain or loss is recognized when sold.  Such expense is included in "Fuel" on the Statements of Income.  Gains and losses on the sale of emission allowances are included in "Other operation and maintenance" on the Statements of Income.  In addition, "vintage year" swaps are accounted for as nonmonetary transactions that are required to be measured at fair value.  Certain emission allowances are expected to be sold rather than consumed.  These emission allowances are tested for impairment when events or changes in circumstances, such as a decline in market prices, indicate that their carrying value might be impaired.

PPL and its subsidiaries also account for RECs as intangible assets and the associated costs are not expensed until the credits are consumed.  Such expense is included in "Energy purchases" on the Statements of Income.  Gains and losses on the sale of RECs are included in "Other operating and maintenance" on the Statements of Income.
Asset Impairment (Excluding Investments)

See Note 19 for additional information on goodwill and other intangible assets.

Asset Impairment(PPL, PPL Energy Supply and PPL Electric)

PPL and its subsidiariesThe Registrants review long-lived assets that are subject to depreciation or amortization, including finite-lived intangibles, for impairment when events or circumstances indicate carrying amounts may not be recoverable.  See Note 18 for a discussion of impairments related to certain intangible assets.

For aA long-lived asset to beclassified as held and used an impairment existsis impaired when the carrying amount of the asset exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset.  If the asset is impaired, an impairment loss is recorded to adjust the asset's carrying amountvalue is written down to its fair value.  See Notes 8 and 17Note 15 for a discussion of impairment charges recorded associated with long-lived assetsthe Corette coal-fired plant in Montana which was determined to not be held and used.impaired.

For aA long-lived asset classified as held for sale an impairment existsis impaired when the carrying amount of the asset (disposal group) exceeds its fair value less cost to sell.  If impaired, the assetasset's (disposal group)group's) carrying value is impaired, an impairment loss is recorded to adjust the carrying amount of the asset (disposal group)written down to its fair value less cost to sell.  See Notes 9 and 1718 for a discussion of impairment charges recorded associated with long-lived assets classified as held for sale.

Goodwill is reviewedPPL, PPL Energy Supply, LKE, LG&E and KU review goodwill for impairment at the reporting unit level annually or more frequently when events or circumstances indicate that the carrying amount of a reporting unit may be greater than the unit's fair value.  Additionally, goodwill must be tested for impairment afterin circumstances when a portion of goodwill has been allocated to a business to be disposed of.  PPL's, PPL Energy Supply's, LKE's, LG&E's and KU's reporting units are at or one level below itsthe operating segments.segment level.  If the carrying amount of the reporting unit, including goodwill, exceeds its fair value, the implied fair value of goodwill must be calculated.  The implied fair value of goodwill is determinedcalculated in the same manner as the amount of goodwill in a business combination.  That is, theThe fair value of a reporting unit is allocated to all assets and liabilities of that unit as if the reporting unit had been acquired in a business combination.  The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill.  If the implied fair value of goodwill is less than the carrying amount, an impairment lossgoodwill is recognized for an amount equalwritten down to that difference.its implied fair value.

Asset Retirement Obligations(The goodwill recognized upon the acquisition of LKE, although entirely recorded at LG&E and KU, was assigned for impairment testing by PPL to its reporting units expected to benefit from the acquisition, which were the Kentucky Regulated segment and the Supply segment.  The goodwill recognized upon the acquisition of WPD Midlands was assigned for impairment testing by PPL to its U.K. Regulated segment.  See Note 10 for additional information regarding the acquisition.

PPL, PPL Energy Supply, LKE, LG&E and PPL Electric)KU tested the goodwill of all of their reporting units for impairment in the fourth quarter of 2012 and no impairment was recognized.
257

Asset Retirement Obligations

PPL and its subsidiaries recognizerecord liabilities to reflect various legal obligations associated with the retirement of long-lived assets as liabilities in the financial statements.assets.  Initially, this obligation is measured at fair value.  An equivalent amount is recorded asvalue and offset with an increase in the value of the capitalized asset, and allocated to expensewhich is depreciated over the asset's useful life of the asset.life.  Until the obligation is settled, the liability is increased through the recognition of accretion expense in the income statement, forto reflect changes in the obligation due to the passage of time.  time through the recognition of accretion expense classified within "Other operation and maintenance" on the Statements of Income.  The accretion and depreciation related to LG&E's and KU's AROs are offset with a regulatory credit on the income statement, such that there is no earnings impact.  The regulatory asset created by the regulatory credit is relieved when the ARO is settled.

Estimated ARO costs and settlement dates, which affect the carrying value of various AROsthe ARO and the related assets,capitalized asset, are reviewed periodically to ensure that any material changes are incorporated into the latest estimate of the obligations.

ARO.  Any change to the capitalized asset, positive or negative, is amortized over the remaining life of the associated long-lived asset.  See Note 2021 for a discussion of accounting foradditional information on AROs.

Compensation and Benefits

Defined Benefits (PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and PPL Electric)KU)

Certain PPL and certain of its subsidiaries sponsor various defined benefit pension and other postretirement plans.  An asset or liability is recorded to recognize the funded status of all defined benefit plans with an offsetting entry to OCI or, for LG&E, KU and PPL Electric, to regulatory assets for PPL Electric.or liabilities.  Consequently, the funded status of all defined benefit plans is fully recognized on the Balance Sheets.

The expected return on plan assets is determined based on a market-related value of plan assets, which is calculated by rolling forward the prior year market-related value with contributions, disbursements and long-term expected return on investments.  One-fifth of the difference between the actual value and the expected value is added (or subtracted if negative) to the expected value to determine the new market-related value.

PPL uses an accelerated amortization method for the recognition of gains and losses for its defined benefit pension plans.  Under the accelerated method, actuarial gains and losses in excess of 10% but less than 30% of the greater of the plan's projected benefit obligation or the market-related value of plan assets are amortized on a straight-line basis over the estimated average future service period of plan participants.  Gains and losses in excess of 30% of the plan's projected benefit obligation are amortized on a straight-line basis over a period equal to one-half of the expected average futureremaining service of active plan participants.  Actuarial gains and losses in excess of 10% of the greater of the plan's projected benefit obligation or the market-related value of plan assets and less than 30% of the plan's projected benefit obligation are amortized on a straight-line basis over the expected average remaining service period of theactive plan participants.

See Note 1213 for a discussion of defined benefits.

Stock-Based Compensation

(PPL, PPL Energy Supply, PPL Electric and PPL Electric)LKE)

PPL grantshas several stock-based compensation plans for purposes of granting stock options, restricted stock, restricted stock units and performance units to certain employees andas well as stock units and restricted stock units to directors, under severaldirectors.  PPL grants most stock-based compensation plans.awards in the first quarter of each year.  PPL and its subsidiaries recognize compensation expense for stock-based awards based on the fair value method.  Stock options with graded vesting (i.e., that vest in installments)installments are valued as a single award.  PPL grants stock options with an exercise price that is not less than the fair value of PPL's common stock on the date of grant.  See Note 1112 for a discussion of stock-based compensation.  All awards are recorded as equity or a liability on the Balance Sheets.  Stock-based compensation is primarily included in "Other operation and maintenance" expense on the Statements of Income.

(  Stock-based compensation expense for PPL Energy Supply, PPL Electric and PPL Electric)

PPL Energy Supply's and PPL Electric's stock-based compensation expenseLKE includes an allocation of PPL Services' expense.

Other

Debt Issuance Costs(PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and KU)

Debt issuance costs are deferred and amortized over the term of the related debt using the interest method or another method, generally straight-line, if the results obtained are not materially different than those that would result from the interest method.
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Income Taxes

(PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and PPL Electric)KU)

PPL and its domestic subsidiaries file a consolidated U.S. federal income tax return.  Prior to PPL's acquisition of LKE, LKE and its subsidiaries were included in E.ON US Investments Corp.'s consolidated U.S. federal income tax return.

Significant management judgment is required in developing PPL and its subsidiaries'the Registrants' provision for income taxes, primarily due to the uncertainty related to tax positions taken or expected to be taken in tax returns and the determination of deferred tax assets, liabilities and valuation allowances.

Significant management judgment is also required to determine the amount of benefit to be recognized in relation to an uncertain tax position.  PPL and its subsidiariesThe Registrants use a two-step process to evaluate tax positions following a two-step process.positions.  The first step requires an entity to determine whether, based on the technical merits supporting a particular tax position, it is more likely than not (greater than a 50% chance) that the tax position will be sustained.  This determination assumes that the relevant taxing authority will examine the tax position and is aware of all the relevant facts surrounding the tax position.  The second step requires an entity to recognize in the financial statements the benefit of a tax position that meets the more-likely-than-not recognition criterion.  The benefit recognized is measured at the largest amount of benefit that has a likelihood of realization, upon settlement, that exceeds 50%.  The amounts ultimately paid upon resolution of issues raised by taxing authorities may differ materially from the amounts accrued and may materially impact the financial statements of PPL and its subsidiariesthe Registrants in the future.future periods.

Deferred income taxes reflect the net future tax effects of temporary differences between the carrying amounts of assets and liabilities for accounting purposes and their basis for income tax purposes, as well as the tax effects of net operating losses and tax credit carryforwards.

PPL and its subsidiariesThe Registrants record valuation allowances to reduce deferred tax assets to the amounts that are more likely than not to be realized.  PPL and its subsidiariesThe Registrants consider the reversal of temporary differences, future taxable income and ongoing prudent and feasible tax planning strategies in initially recording and subsequently reevaluating the need for valuation allowances.  If PPL and its subsidiariesthe Registrants determine that they are able to realize deferred tax assets in the future in excess of recorded net deferred tax assets, adjustments to the valuation allowances increase income by reducing tax expense in the period that such determination is made.  Likewise, if PPL and its subsidiariesthe Registrants determine that they are not able to realize all or part of net deferred tax assets in the future, adjustments to the valuation allowances would decrease income by increasing tax expense in the period that such determination is made.

PPL Energy Supply and PPL ElectricThe Registrants defer investment tax credits when the credits are utilized and are amortizingamortize the deferred amounts over the average lives of the related assets.

The Registrants recognize interest and penalties in "Income Taxes" on their Statements of Income.

See Note 5 for additional discussion regarding income taxes.

(PPL, Energy Supply and PPL Electric)

The income tax provision for PPL Energy Supply and PPL Electric, is calculated in accordance with an intercompany tax sharing policy which provides that taxable income be calculated as if PPL Energy Supply, PPL ElectricLKE, LG&E and any domestic subsidiaries each filed a separate consolidated return.  PPL Energy Supply's intercompany tax receivable was $21 million and $15 million at December 31, 2009 and 2008.  PPL Electric's intercompany tax receivable was $19 million and $15 million at December 31, 2009 and 2008.

(PPL and PPL Electric)KU)

The provision for PPL, Electric'sPPL Electric, LKE, LG&E and KU's deferred income taxes for regulated assets is based upon the ratemaking principles reflected in rates established by the PUC and the FERC.regulators.  The difference in the provision for deferred income taxes for regulated assets and the amount that otherwise would be recorded under GAAP is deferred and included on the Balance Sheet in taxes recoverable through future rates innoncurrent "Regulatory assets" or "Regulatory liabilities."

(PPL Energy Supply, PPL Electric, LKE, LG&E and KU)

The income tax provision for PPL Energy Supply, PPL Electric, LKE, LG&E and KU is calculated in "Taxes recoverable through future rates" foraccordance with an intercompany tax sharing agreement which provides that taxable income be calculated as if PPL Electric.Energy Supply, PPL Electric, LKE, LG&E, KU and any domestic subsidiaries each filed a separate return.  Tax benefits are not shared between companies.  The entity that generates a tax benefit is the entity that is entitled to the tax benefit.  The effect of PPL filing a consolidated tax return is taken into account in the settlement of current taxes and the recognition of deferred taxes.  At December 31, the following intercompany tax receivables (payables) were recorded.         
259

  2012  2011 
       
PPL Energy Supply $ (38) $ (50)
PPL Electric   22    22 
LKE   (12)   3 
LG&E   5    4 
KU   (15)   5 

Taxes, Other Than Income (PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and PPL Electric)KU)

PPL and its subsidiariesThe Registrants present sales taxes in "Accounts Payable""Other current liabilities" and PPL presents value-added taxes in "Taxes" on theirthe Balance Sheets.  These taxes are not reflected on the Statements of Income.  See Note 5 for details on taxes included in "Taxes, other than income" on the Statements of Income.

Leases

(PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and PPL Electric)KU)

PPL and its subsidiariesThe Registrants evaluate whether arrangements entered into contain leases for accounting purposes.

(PPL and PPL Energy Supply)
See Note 1011 for a discussion of arrangements under which PPL and PPL Energy Supply, LG&E and KU are lessees for accounting purposes.
PPL EnergyPlus has entered into several arrangements whereby PPL EnergyPlus is considered the lessor for accounting purposes.  See Note 10 for additional information on these leases and Note 9 for information regarding the anticipated sale of the Long Island generation business, which includes certain of these leases.

Fuel, Materials and Supplies

(PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and PPL Electric)KU)

Fuel, natural gas stored underground and materials and supplies are valued at the lower of cost or market using the average cost method.
  Fuel costs for electric generation are charged to expense as used.  For LG&E, natural gas supply costs are charged to expense as delivered to the distribution system.  See Note 6 for further discussion of the fuel adjustment clause and gas supply clause.
(PPL, PPL Energy Supply, LKE, LG&E and KU)

(PPL and PPL Energy Supply)

"Fuel, materials and suppliessupplies" on the Balance Sheets consisted of the following at December 31:31.         

 PPL PPL Energy Supply   PPL PPL Energy Supply LKE LG&E KU
 2009 2008 2009 2008   2012  2011  2012  2011  2012  2011  2012  2011  2012  2011 
                               
Fuel $151 $140 $151 $140 Fuel $ 284  $ 246  $ 135  $ 96  $ 149  $ 150  $ 61  $ 53  $ 88  $ 97 
Natural gas stored underground (a)Natural gas stored underground (a)  50   73   8   20   42   53   42   53     
Materials and supplies  206   197   174   161 Materials and supplies   339    335    184    182    85    80    39    36    46    44 
 $357  $337  $325  $301    $ 673  $ 654  $ 327  $ 298  $ 276  $ 283  $ 142  $ 142  $ 134  $ 141 

(a)  The majority of LKE's and LG&E's natural gas stored underground is held to serve native load.  The majority of PPL Energy Supply's natural gas stored underground is available for resale.

Guarantees (PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and PPL Electric)KU)

Generally, the initial measurement of a guarantee liability is the fair value of the guarantee at its inception.  However, there are certain guarantees excluded from the scope of accounting guidance and other guarantees that are not subject to the initial recognition and measurement provisions of accounting guidance.guidance that only require disclosure.  See Note 1415 for further discussion of recorded and unrecorded guarantees.

Treasury Stock (PPL(PPL and PPL Electric)

PPL and PPL Electric restore all shares of common stock acquired to authorized but unissued shares of common stock upon acquisition.

Foreign Currency Translation and Transactions (PPL and PPL Energy Supply)(PPL)

Assets and liabilities of international subsidiaries, whereWPD's functional currency is the GBP, which is the local currency isin the functional currency,U.K.  As such, assets and liabilities are translated to U.S. dollars at the exchange rates on the date of consolidation and related revenues and expenses are translated at average exchange rates prevailing during the year.  See "Business and Consolidation" above for a discussion regarding the useperiod included in PPL's results of a lag period.operations.  Adjustments resulting from foreign currency translation are recorded in AOCI.  The effect of translation is removed from AOCI upon the sale or substantial liquidation of the international subsidiary that gave rise to the translation adjustment.  The local currency is the functional currency for PPL's U.K. operating company.OCI.

At December 31, 2009, the British pound sterling had strengthened in relation to the U.S. dollar as compared with the prior year end.  Changes in exchange rates resulted in a foreign currency translation gain of $106 million for 2009, which primarily reflected a $225 million increase in PP&E offset by an increase of $119 million to other net liabilities.  At December 31, 2008, the British pound sterling had weakened in relation to the U.S. dollar compared with the prior year end.  Changes in these exchange rates resulted in a foreign currency translation loss of $520 million for 2008, which primarily reflected a $1.1 billion reduction to PP&E offset by a reduction of $580 million to other net liabilities.  Changes in exchange rates resulted in a foreign currency translation gain of $65 million for 2007, which primarily reflected a $173 million increase in PP&E offset by an increase of $108 million to other net liabilities.
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Gains or losses relating to foreign currency transactions are recognized currently in income.  The net transaction losses were insignificant in 2009 and 2007, and $2 million in 2008."Other Income (Expense) - net" on the Statements of Income.  See Note 17 for additional information.

New Accounting Guidance Adopted (PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and PPL Electric)KU)

Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)

Effective January 1, 2009, PPL and its subsidiaries retrospectively adopted accounting guidance that requires an issuer to separately account for the liability and equity components of convertible debt instruments that may be settled in cash (or other assets) upon conversion in a manner that reflects the issuer's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods.  The discount that results from separating the liability and equity components will be amortized over the life of the debt and recognized as interest expense.

This guidance was applicable to PPL Energy Supply's 2-5/8% Convertible Senior Notes due 2023 (Convertible Senior Notes), which upon conversion required cash settlement of the principal amount and permitted settlement of any conversion premium in cash or PPL common stock.  During 2008, all of the Convertible Senior Notes were either converted at the election of the holders or redeemed at par as a result of PPL Energy Supply calling the notes for redemption.  This guidance required only retrospective application with regard to the Convertible Senior Notes, as none of these notes were outstanding at the effective date.  The retrospective application impacted PPL in periods prior to 2006.  As such, PPL reduced the opening balance of "Earnings reinvested" by $13 million with a corresponding increase to "Capital in excess of par value."

Business Combinations

Effective January 1, 2009, PPL and its subsidiaries prospectively adopted accounting guidance that changes the accounting and reporting for business combinations occurring after its adoption.  In addition, this guidance requires entities to recognize changes in unrecognized tax benefits acquired in a business combination, including business combinations that occurred prior to January 1, 2009, in income tax expense rather than in goodwill.  The January 1, 2009 adoption did not have a significant impact on PPL and its subsidiaries; however, the impact in future periods could be material.

In the first quarter of 2009, PPL and PPL Energy Supply recorded an income tax benefit of $14 million as a result of settling an income tax dispute.  Prior to the adoption of this guidance, $7 million of this income tax benefit would have been recorded as a reduction to goodwill.

Noncontrolling Interests in Consolidated Financial Statements

Effective January 1, 2009, PPL and its subsidiaries adopted accounting guidance that was issued to improve the relevancy, comparability, and transparency of the financial information an entity provides when it has a noncontrolling interest in a subsidiary and when it changes its ownership interest in a subsidiary.  This guidance:

·requires ownership interests in subsidiaries held by parties other than the parent to be presented in the consolidated statement of financial position within equity, but separate from the parent's equity;
·requires the amount of consolidated net income attributable to the parent and to the noncontrolling interest to be presented on the face of the consolidated statement of income;
·addresses the accounting for changes in a parent's ownership interest while the parent retains its controlling financial interest in its subsidiary and for the deconsolidation of a subsidiary; and
·requires enhanced disclosures relating to noncontrolling interests.

PPL and its subsidiaries adopted this guidance prospectively except for the presentation and disclosure requirements, which required retrospective application.

At December 31, 2009 and 2008, PPL reflected PPL Electric's preferred securities of $301 million within "Noncontrolling Interests" on the Balance Sheets.  In addition, at December 31, 2009 and 2008, PPL and PPL Energy Supply reflected previously recorded minority interests of $18 million within "Noncontrolling Interests" on the Balance Sheets.

Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities

Effective January 1, 2009, PPL and its subsidiaries retrospectively adopted accounting guidance that requires unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents to be considered participating securities and to be included in the computation of EPS under the two-class method.  The two-class method treats share-based payment awards that pay nonforfeitable dividends as a separate class of stock for purposes of computing EPS.

The adoption did not have a material impact on PPL and its subsidiaries.  As a result of its application, PPL's restricted stock, restricted stock units, and stock units granted to directors are now considered participating securities; therefore, PPL is required to compute EPS under the two-class method.  For the years ended December 31, 2008, the retrospective application caused PPL's basic EPS for income from continuing operations after income taxes available to PPL Corporation common shareholders to decrease by $0.01 and basic EPS for net income available to PPL Corporation common shareowners to decrease by $0.01.  For the year ended December 31, 2007, the retrospective application caused PPL's basic EPS for income from continuing operations after income taxes available to PPL Corporation common shareholders to decrease by $0.01 and basic EPS for net income available to PPL Corporation common shareowners to decrease by $0.02.  Additionally, PPL's diluted EPS for net income available to PPL Corporation common shareowners decreased by $0.01 for the year ended December 31, 2007.  See Note 4 for additional information.

Disclosures about Derivative Instruments and Hedging Activities

Effective January 1, 2009, PPL and its subsidiaries prospectively adopted accounting guidance that applies to all derivative instruments, including bifurcated derivative instruments and nonderivative instruments that are designated and qualify as hedging instruments, as well as related hedged items. This guidance requires an entity to expand disclosures to provide greater transparency about:

·how and why it uses derivative instruments;
·how derivative instruments and related hedged items are accounted for; and
·how derivative instruments and related hedged items affect its financial position, results of operations and cash flows.

The guidance was issued to provide greater transparency by enhancing existing disclosures; therefore, the adoption did not have a material impact on PPL and its subsidiaries' financial statements.  The enhanced disclosures are presented in Note 18.

Fair Value Measurements

Effective January 1, 2008, PPL and its subsidiaries2012, the Registrants prospectively adopted accounting guidance that provides a framework for measuring fair value, but electedwas issued to defer, until 2009, applying this guidance to nonfinancial assets and nonfinancial liabilities that are not recognized or disclosed at fair value in the financial statements on a recurring basis.  Effective January 1, 2009, PPL and its subsidiaries fully applied this guidance toclarify existing fair value measurement conceptsguidance and to enhance fair value disclosures.  The additional disclosures required by this guidance include quantitative information about significant unobservable inputs used within theirfor Level 3 measurements, qualitative information about the sensitivity of recurring Level 3 measurements, information about any transfers between Levels 1 and 2 of the fair value hierarchy, information about when the current use of a non-financial asset is different from the highest and best use, and the fair value hierarchy classification for assets and liabilities whose fair value is disclosed only in the notes to the financial statements where applicable.statements.

Issuer's AccountingThe adoption of this standard resulted in additional disclosures but did not have a significant impact on the Registrants.  See Note 18 for Liabilities Measured at Fair Value with a Third-Party Credit Enhancementadditional disclosures required by this guidance.

Testing Goodwill for Impairment

Effective January 1, 2009, PPL and its subsidiaries2012, the Registrants prospectively adopted accounting guidance that applies to liabilities issued with an inseparable third-party credit enhancement when the liability is measured or disclosed at fair value on a recurring basis.  This guidance indicates that an issuer shall disclose the existence of a third-party credit enhancement, and the fair value measurement of the liability shall not include the effect of this third-party credit enhancement.

The initial adoption did not have a material impact on PPL and its subsidiaries' financial statements, as this guidance only impacts the fair value disclosure of certain credit-enhanced debt instruments.  See "Financial Instruments Not Recorded at Fair Value" within Note 17 for these disclosures.

Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly

Effective April 1, 2009, PPL and its subsidiaries prospectively adopted accounting guidance that:

·provides additional direction for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased;
·includes guidance on identifying circumstances that indicate a transaction is not orderly; and
·emphasizes that the objective of a fair value measurement remains the same; that is, 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 under current market conditions.

Comparative disclosures are required only for periods ending after initial adoption.  The adoption did not have a material impact on PPL and its subsidiaries' financial statements.

Recognition and Presentation of Other-Than-Temporary Impairments

Effective April 1, 2009, PPL and its subsidiaries retrospectively adopted accounting guidance that modified the requirement thatwhich allows an entity haveto elect the intent and abilityoption to hold an impaired debt security to recovery in order to conclude an impairment was temporary.  Under this guidance,first make a qualitative evaluation about the likelihood of an impairment of a debt security is other than temporary if (1) angoodwill.  If, based on this assessment, the entity has the intent to sell the security, (2) it is more likely than not that an entity will be required to sell the security before recovery, or (3) an entity does not expect to recover the entire amortized cost basis of the security, referred to as a credit loss.

In addition, this guidance changes the recording of an other-than-temporary impairment on a debt security if the reason for the other-than-temporary impairment is the recognition of a credit loss.  In this situation, the other-than-temporary impairment will be separated into the credit loss component, which is recognized in earnings, and the remainder of the other-than-temporary impairment, which is recorded in OCI.

For a debt security held at the beginning of the period of adoption for which an other-than-temporary impairment was previously recognized, if an entity does not intend to sell the debt security anddetermines it is not more likely than not that the fair value of a reporting unit is less than the carrying amount, the two-step goodwill impairment test is not necessary.  However, the first step of the impairment test is required if an entity will be required to sellconcludes it is more likely than not that the debt security before recoveryfair value of its amortized cost basis,a reporting unit is less than the cumulative effect of applying this guidance was recognized as an adjustment to the opening balance of retained earnings with a corresponding adjustment to AOCI.

This guidance affects the accounting for PPL's and PPL Energy Supply's investments in debt securities in the NDT funds.  Prior to its application, PPL and PPL Energy Supply were unable to demonstrate the ability to hold an impaired debt security in the NDT funds until recovery; therefore, an unrealized loss on a debt security always represented an other-than-temporary impairment that required a current period charge to earnings.  Basedcarrying amount based on the application of this guidance, certain unrealized losses on investments in debt securities are no longer considered other-than-temporary impairments and will be recorded to OCI.

Related SEC guidance was also amended to no longer apply to debt securities.  As a result of the adoption, PPL and PPL Energy Supply recorded an immaterial cumulative effect adjustment to the opening balance of retained earnings with a corresponding reduction to AOCI.qualitative assessment.

The FASB Accounting Standards Codification™ and the Hierarchyadoption of Generally Accepted Accounting Principles

Beginning with the period ended September 30, 2009, PPL and its subsidiaries adopted accounting guidance that establishes the FASB Accounting Standards CodificationTM (ASC) as the primary source of authoritative GAAP, other than guidance issued by the SEC.  This guidance eliminates the previous GAAP hierarchy of accounting and reporting guidance and replaces it with two levels of literature: authoritative and non-authoritative, and organizes GAAP pronouncements in a consistent manner by accounting topic.  The adoption did not impact PPL and its subsidiaries' results of operations, cash flows or financial positions since the ASC did not change existing GAAP.

Employers' Disclosures about Pensions and Other Postretirement Benefits

Effective December 31, 2009, PPL and its subsidiaries prospectively adopted accounting guidance that requires an employer to enhance its disclosures about plan assets of defined benefit plans to provide users of financial statements with an understanding of:

·how investment allocation decisions are made, including the factors that are pertinent to an understanding of investment policies and strategies;
·the major classes of plan assets;
·the inputs and valuation techniques used to measure the fair value of plan assets;
·the effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets for the period; and
·significant concentrations of risk within plan assets.

This guidance was issued to provide greater transparency within disclosures; therefore, the adoptionthis standard did not have a materialsignificant impact on PPL and its subsidiaries' financial statements.  The enhanced disclosures are presented in Note 12.

New Accounting Guidance Pending Adoptionthe Registrants.

See Note 22 for a discussion of new accounting guidance pending adoption.2.  Segment and Related Information

2.  
Segment and Related Information
(PPL)

(Since the acquisition of LKE on November 1, 2010, PPL is organized into four segments:  Kentucky Regulated, U.K. Regulated (name change in 2012 from International Regulated to more specifically reflect the focus of the segment), Pennsylvania Regulated and PPL Energy Supply)Supply.  Other than the name change for the U.K. Regulated segment, there were no other changes to this segment.  PPL's segments are split between its regulated and competitive businesses with its regulated businesses further segmented by geographic location.

PPL's reportable segments are Supply, International DeliveryThe Kentucky Regulated segment consists primarily of LKE's regulated electric generation, transmission and distribution operations, primarily in Kentucky.  This segment also includes LKE's regulated distribution and sale of natural gas in Kentucky.  In addition, the Kentucky Regulated segment is allocated certain financing costs.  See Note 10 for additional information regarding the acquisition.

The U.K. Regulated segment primarily consists of the regulated electric distribution operations in the U.K.  This includes the operating results and assets of WPD Midlands since the April 1, 2011 acquisition date, recorded on a one-month lag.  The U.K. Regulated segment is also allocated certain WPD Midlands acquisition-related costs and financing costs.  See Note 10 for additional information regarding the acquisition.

The Pennsylvania Delivery.  Regulated segment includes the regulated electric transmission and distribution operations of PPL Electric.

The Supply segment primarily consists of the domestic energy marketing and trading activities, as well as the competitive generation and development operations of PPL Energy Supply.  In 2009 and 2007, PPL Energy Supply sold or agreed to sell certain Supply segment businesses.  See Notes 8 and 9 for additional information.

The International Delivery segment consists primarilyresults of the electricity distribution operations in the U.K. In 2007, PPL completed the sale of its Latin American businesses.  In 2008, the International Delivery segment recognized income tax benefits and miscellaneous expenses in Discontinued Operations in connection with the dissolution of certain Latin American holding companies.  In 2009, the International Delivery segment recognized $24 million of income tax expense in Discontinued Operations related to a correction of the calculation of tax bases of the Latin American businesses sold in 2007.  See Note 9 for additional information.

The Pennsylvania Delivery segment includes the regulated electric delivery operations of PPL Electric.  This segment also included the gas delivery operations of PPL Gas Utilities prior to its sale in October 2008.  See Note 9 for additional information.

The operating results of the Long Island generation business, the majority of the Maine hydroelectric generation business, the Latin American businessesseveral facilities and the natural gas distribution and propane businesses have been classified as Discontinued Operations on the Statements of Income.  See Note 9 for additional information on these discontinued operations.  Therefore, with the exception of net income attributable"Net Income Attributable to PPL/PPL Energy Supply,Shareowners" the operating results from these facilities and businesses have been excluded from the income statement data tables below.

PPL Energy Supply's reportable segments are Supply
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"Corporate and International Delivery.  The International Delivery segmentOther" represents costs incurred at the PPL Energy Supplycorporate level is consistent with the International Delivery segment at the PPL level.  The Supply segment information reported at the PPL Energy Supply level willthat have not agree with the Supply segment information reported at the PPL level because additional Supply segment functions exist at PPL that are outside of PPL Energy Supply.  Furthermore, certain income items, including PLR revenue and certain interest income, exist at the PPL Energy Supply level but are eliminated in consolidation at the PPL level.  Finally, certain expense items are fullybeen allocated or assigned to the segments, at the PPL level only.which is presented to reconcile segment information to PPL's consolidated results.  For 2012 and 2011, there were no significant costs in this category.  For 2010, these costs represent LKE acquisition-related costs including advisory, accounting and legal fees, certain internal costs and 2010 Bridge Facility costs.

Segments includeBeginning in 2013, PPL anticipates more costs to be included in the Corporate and Other category primarily due to an anticipated increase in the use of financing issued by PPL Capital Funding not directly attributable to a particular segment.  PPL's recent growth in rate-regulated businesses provides the organization with an enhanced corporate level financing alternative, through PPL Capital Funding, that further enables PPL to support targeted credit profiles cost effectively across all of PPL's rated companies.  As a result, PPL plans to further utilize PPL Capital Funding in addition to continued direct charges,financing by the operating companies, as well as an allocation of indirect corporate serviceappropriate.  The financing costs fromassociated primarily with PPL Services.  These service costs include functions such as financial, legal, human resourcesCapital Funding's future securities issuances are not expected to be directly assignable or allocable to any segment and information services.  See Note 15 for additional information.generally will be reflected in Corporate and Other beginning in 2013.

Financial data for the segments are:

  PPL PPL Energy Supply
  2009 2008 2007 2009 2008 2007
Income Statement Data                        
Revenues from external customers                        
Supply (a) $3,618  $3,857  $2,308  $5,416  $5,678  $4,112 
International Delivery  716   857   900   716   857   900 
Pennsylvania Delivery  3,222   3,293   3,254             
   7,556   8,007   6,462   6,132   6,535   5,012 
Intersegment revenues (b)                        
Supply  1,806   1,826   1,810             
Pennsylvania Delivery  70   108   156             
                         
Depreciation                        
Supply  226   193   163   210   180   152 
International Delivery  115   134   147   115   134   147 
Pennsylvania Delivery  128   131   132             
   469   458   442   325   314   299 
Amortization - recoverable transition costs and other                        
Supply  90   66   106   88   51   94 
International Delivery  (13)  15   10   (13)  15   10 
Pennsylvania Delivery  312   302   317             
   389   383   433   75   66   104 
Unrealized (gains) losses on derivatives and other hedging activities                        
Supply  329   (279)  (22)  330   (285)  (27)
                         
Interest income (c)                        
Supply  2   7   11   7   27   55 
International Delivery  1   10   22   1   10   22 
Pennsylvania Delivery  11   16   28             
   14   33   61   8   37   77 
Interest Expense (d)                        
Supply  191   200   154   185   169   106 
International Delivery  87   144   183   87   144   183 
Pennsylvania Delivery  118   111   135             
   396   455   472   272   313   289 
Income Statement Data 2012  2011  2010 
Revenues from external customers by product         
  Kentucky Regulated         
   Utility service (a) $ 2,759  $ 2,793  $ 493 
  U.K. Regulated         
   Utility service (a)   2,289    1,618    727 
   Energy-related businesses   47    35    34 
    Total   2,336    1,653    761 
  Pennsylvania Regulated         
   Utility service (a)   1,760    1,881    2,448 
  Supply         
   Energy (b)   4,970    5,938    4,444 
   Energy-related businesses   461    472    375 
    Total   5,431    6,410    4,819 
Total   12,286    12,737    8,521 
              
Intersegment electric revenues         
  Pennsylvania Regulated   3    11    7 
  Supply (c)   79    26    320 
              
Depreciation         
  Kentucky Regulated   346    334    49 
  U.K. Regulated   279    218    117 
  Pennsylvania Regulated   160    146    136 
  Supply   315    262    254 
Total   1,100    960    556 
              
Amortization (d)         
  Kentucky Regulated   27    27    
  U.K. Regulated   15    83    13 
  Pennsylvania Regulated   18    7    (22)
  Supply   126    137    148 
  Corporate and Other         74 
Total   186    254    213 
              
Unrealized (gains) losses on derivatives and other hedging activities (b)         
  Kentucky Regulated      (2)   1 
  Supply   27    (312)   541 
Total   27    (314)   542 
              
Interest income         
  U.K. Regulated   3    4    2 
  Pennsylvania Regulated   1    1    4 
  Supply   1    2    2 
Total   5    7    8 
              
Interest Expense         
  Kentucky Regulated   219    217    55 
  U.K. Regulated   421    391    135 
  Pennsylvania Regulated   99    98    99 
  Supply   222    192    224 
  Corporate and Other         80 
Total   961    898    593 
Income from Continuing Operations Before Income Taxes                        
Supply  85   749   780   44   755   835 
International Delivery  290   330   260   290   330   260 
Pennsylvania Delivery  221   278   241             
   596   1,357   1,281   334   1,085   1,095 
Income Taxes                        
Supply  31   283   221   27   290   249 
International Delivery  20   45   (43)  20   45   (43)
Pennsylvania Delivery  79   102   81             
   130   430   259   47   335   206 
Deferred income taxes and investment tax credits                        
Supply  138   112   6   152   193   120 
International Delivery  12   1   (38)  12   1   (38)
Pennsylvania Delivery  (23)  1   18             
   127   114   (14)  164   194   82 
Net Income Attributable to PPL/PPL Energy Supply                        
Supply (a) (e)  40   479   568   3   478   595 
International Delivery (f)  243   290   610   243   290   610 
Pennsylvania Delivery (g)  124   161   110             
  $407  $930  $1,288  $246  $768  $1,205 
Cash Flow Data                        
Expenditures for long-lived assets                        
Supply $723  $1,142  $1,043  $694  $1,117  $1,019 
International Delivery  240   267   340   240   267   340 
Pennsylvania Delivery  298   286   302             
  $1,261  $1,695  $1,685  $934  $1,384  $1,359 
262

  2012  2011  2010 
Income from Continuing Operations Before Income Taxes         
  Kentucky Regulated   263    349    40 
  U.K. Regulated   953    358    261 
  Pennsylvania Regulated   204    257    192 
  Supply (b)   662    1,237    860 
  Corporate and Other         (114)
Total   2,082    2,201    1,239 
              
Income Taxes (e)         
  Kentucky Regulated   80    127    16 
  U.K. Regulated   150    33    
  Pennsylvania Regulated   68    68    57 
  Supply   247    463    228 
  Corporate and Other         (38)
Total   545    691    263 
              
Deferred income taxes and investment tax credits (f)         
  Kentucky Regulated   136    218    51 
  U.K. Regulated   26    (39)   17 
  Pennsylvania Regulated   114    106    198 
  Supply   150    299    (15)
Total   426    584    251 
              
Net Income Attributable to PPL Shareowners         
  Kentucky Regulated   177    221    26 
  U.K. Regulated   803    325    261 
  Pennsylvania Regulated   132    173    115 
  Supply (b)   414    776    612 
  Corporate and Other         (76)
 Total $ 1,526  $ 1,495  $ 938 
              
Cash Flow Data  2012   2011   2010 
Expenditures for long-lived assets         
  Kentucky Regulated $ 768  $ 465  $ 152 
  U.K. Regulated   1,016    862    281 
  Pennsylvania Regulated   633    490    411 
  Supply   736    739    795 
Total $ 3,153  $ 2,556  $ 1,639 


  PPL PPL Energy Supply
  As of December 31, As of December 31,
  2009 2008 2009 2008
Balance Sheet Data                
Total assets                
Supply $12,766  $11,993  $12,508  $12,270 
International Delivery  4,516   4,199   4,516   4,199 
Pennsylvania Delivery  4,883   5,213         
  $22,165  $21,405  $17,024  $16,469 
  PPL PPL Energy Supply
  2009 2008 2007 2009 2008 2007
Geographic Data                        
Revenues from external customers                        
U.S. $6,840  $7,150  $5,562  $5,416  $5,678  $4,112 
U.K.  716   857   900   716   857   900 
  $7,556  $8,007  $6,462  $6,132  $6,535  $5,012 
   As of December 31,
   2012  2011 
Balance Sheet Data      
Total Assets      
 Kentucky Regulated $ 10,670  $ 10,229 
 U.K. Regulated   14,073    13,364 
 Pennsylvania Regulated   6,023    5,610 
 Supply   12,868    13,445 
Total $ 43,634  $ 42,648 

  2012  2011  2010 
Geographic Data         
Revenues from external customers         
  U.S. $ 9,950  $ 11,084  $ 7,760 
  U.K.   2,336    1,653    761 
Total $ 12,286  $ 12,737  $ 8,521 

  PPL PPL Energy Supply
  As of December 31, As of December 31,
  2009 2008 2009 2008
Long-Lived Assets                
U.S. $10,181  $9,762  $6,676  $6,433 
U.K.  3,517   3,167   3,517   3,167 
  $13,698  $12,929  $10,193  $9,600 
   As of December 31,
   2012  2011 
Long-Lived Assets      
 U.S. $ 20,776  $ 19,129 
 U.K.   9,951    8,996 
Total $ 30,727  $ 28,125 

(a)
See Note 1 for additional information on Utility Revenue.
(b)Includes unrealized gains and losses from economic activity.  See Note 1819 for additional information.
(b)(c)See "PLR Contracts"Contracts/Purchase of Accounts Receivable" and "NUG Purchases" in Note 1516 for a discussion of the basis of accounting between reportable segments.
(c)Includes interest income from affiliate(s).
(d)Includes interestRepresents non-cash expense with affiliate.items that include amortization of nuclear fuel, regulatory assets, debt discounts and premiums, debt issuance costs, emission allowances and RECs.
(e)Includes the results of Discontinued Operations of the Long Island generation businessRepresents both current and the majority of the Maine hydroelectric generation business.  Also includes the loss on the sale of PPL Energy Supply's interest in Wyman Unit 4.  See Note 9 for additional information.deferred income taxes, including investment tax credits.
(f)Includes the results of Discontinued Operations of the Latin American businesses.  See Note 9 for additional information.
(g)Includes the results of Discontinued Operations of the natural gas and propane businesses.  See Note 9 for additional information.Represents a non-cash expense item that is also included in "Income Taxes."

3.  
Variable Interest Entities
263


(PPL and PPL Energy Supply)

In December 2001, a subsidiary of PPL Energy Supply, entered into a $455 million operating lease arrangement, as lessee, for the development, constructionPPL Electric, LKE, LG&E and operation of a gas-fired combined-cycle generation facility located in Lower Mt. Bethel Township, Northampton County, Pennsylvania.  This generation facility has a total capacity (winter rating) of 624 MW at December 31, 2009.  The owner/lessor of this generation facility, LMB Funding, LP, was created to own/lease the facility and incur the related financing costs.  The initial lease term commenced on the date of commercial operation, which occurred in May 2004, and ends in December 2013.  Under a residual value guarantee, if the generation facility is sold at the end of the lease term and the cash proceeds from the sale are less than the original acquisition cost, the subsidiary of KU)

PPL Energy Supply, is obligated to pay up to 70.52% of the original acquisition cost.  This residual value guarantee protects the other variable interest holders from losses related to their investments.  LMB Funding, LP cannot extend or cancel the lease or sell the facility without the prior consent of the PPL Energy Supply subsidiary.  AsElectric, LKE, LG&E and KU each operate within a result, LMB Funding, LP was determined to be a variable interest entity and the subsidiary of PPL Energy Supply was considered the primary beneficiary that consolidates this variable interest entity.single reportable segment.

The lease financing, which includes $437 million of "Long-term Debt" and $18 million of "Noncontrolling Interests," at December 31, 2009, is secured by, among other things, the generation facility.  The debt matures at the end of the lease.  At December 31, 2009 and 2008, the facility, which was included in "Property, Plant and Equipment" and "Other intangibles" on the Balance Sheets, had a carrying value of $435 million and $441 million, net of accumulated depreciation and amortization of $48 million and $51 million.3.  Preferred Securities

4.  
Earnings Per Share

(PPL)

The basic and diluted EPS computations and reconciliationsPPL classifies preferred securities of the amounts of income and shares (in thousands) of common stock used in the calculations are:

  2009 2008 2007
Income (Numerator)            
Income from continuing operations after income taxes attributable to PPL $447  $907  $1,001 
Less amounts allocated to participating securities  2   5   5 
Income from continuing operations after income taxes available to PPL common shareowners $445  $902  $996 
             
Income (loss) from discontinued operations (net of income taxes) attributable to PPL $(40) $23  $287 
Less amounts allocated to participating securities          1 
Income (loss) from discontinued operations (net of income taxes) available to PPL common shareowners $(40) $23  $286 
             
Net income attributable to PPL $407  $930  $1,288 
Less amounts allocated to participating securities  2   5   6 
Net income available to PPL common shareowners $405  $925  $1,282 
             
Shares of Common Stock (Denominator)            
Weighted-average shares - Basic EPS  376,082   373,626   380,563 
Add incremental non-participating securities:            
Stock options and performance units  324   836   1,328 
Convertible Senior Notes      439   1,601 
Weighted-average shares - Diluted EPS  376,406   374,901   383,492 
             
Basic EPS            
Available to PPL common shareowners:            
Income from continuing operations after income taxes $1.18  $2.42  $2.62 
Income (loss) from discontinued operations (net of income taxes)  (0.10)  0.06   0.75 
Net Income $1.08  $2.48  $3.37 
             
Diluted EPS            
Available to PPL common shareowners:            
Income from continuing operations after income taxes $1.18  $2.41  $2.60 
Income (loss) from discontinued operations (net of income taxes)  (0.10)  0.06   0.74 
Net Income $1.08  $2.47  $3.34 

While they were outstanding, PPL Energy Supply's 2-5/8% Convertible Senior Notes due 2023 (Convertible Senior Notes), which were issued in May 2003, could be converted into shares of PPL common stock under certain circumstances, including if during a fiscal quarter the market price of PPL's common stock exceeded $29.83 per share over a certain period during the preceding fiscal quarter or if PPL Energy Supply called the debt.

During 2008, all then-outstanding Convertible Senior Notes were either converted at the election of the holders or redeemed at par by PPL Energy Supply.

The terms of the Convertible Senior Notes required cash settlement of the principal amount and permitted settlement of any conversion premium in cash or PPL common stock.  Based upon the conversion rate of 40.2212 shares per $1,000 principal amount of notes (or $24.8625 per share), the Convertible Senior Notes had a dilutive impact when the average market price of PPL common stock equaled or exceeded $24.87.

During 2009, PPL issued 559,744 shares of common stock related to the exercise of stock options, vesting of restricted stock and restricted stock units and conversion of stock units granted to directors under its stock-based compensation plans.  In addition, PPL issued 235,013 and 1,854,559 shares of common stock related to its ESOP and its DRIP.  See Note 11 for a discussion of PPL's stock-based compensation plans.

The following stock options to purchase PPL common stock and performance units were excluded in the periods' computations of diluted EPS because the effect would have been antidilutive.

(Thousands of Shares) 2009  2008  2007
         
Stock options and performance units  2,395   606    

5.  
Income and Other Taxes

(PPL)

"Income from Continuing Operations Before Income Taxes" included the following components:

  2009  2008  2007
            
Domestic income $306  $1,027  $1,021
Foreign income  290   330   260
  $596  $1,357  $1,281

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for accounting purposes and their basis for income tax purposes and the tax effects of net operating loss and tax credit carryforwards.

Net deferred tax assets have been recognized based on management's estimates of future taxable income for U.S. and certain foreign jurisdictions in which PPL's operations have historically been profitable.

Significant components of PPL's deferred income tax assets and liabilities from continuing operations weresubsidiaries as follows:

  2009 2008
Deferred Tax Assets        
Deferred investment tax credits $16  $20 
NUG contracts and buybacks  6   22 
Regulatory liabilities  28     
Accrued pension costs  265   241 
State loss carryforwards  184   159 
Federal tax credit carryforwards  23   23 
Foreign capital loss carryforwards  144   126 
Foreign - pensions  168   87 
Foreign - other  6   9 
Contributions in aid of construction  98   79 
Domestic - other  189   192 
Valuation allowances  (312)  (285)
   815   673 
         
Deferred Tax Liabilities        
Plant - net  1,855   1,467 
Recoverable transition costs      116 
Taxes recoverable through future rates  104   103 
Unrealized gains on qualifying derivatives  437   72 
Foreign investments  5   6 
Reacquired debt costs  14   12 
Foreign - plant  546   519 
Foreign - other  35   67 
Domestic - other  67   55 
   3,063   2,417 
Net deferred tax liability $2,248  $1,744 

PPL had federal foreign tax credit carryforwards that expire by 2019 of $23 million at December 31, 2009 and 2008.  PPL also had state net operating loss carryforwards that expire between 2010 and 2029 of $2.8 billion and $2.5 billion at December 31, 2009 and 2008.  Valuation allowances have been established for the amount that, more likely than not, will not be realized.

PPL Global had no foreign net operating loss carryforwards at December 31, 2009 and 2008.  PPL Global had foreign capital loss carryforwards of $514 million and $451 million at December 31, 2009 and 2008.  All of these losses have an indefinite carryforward period.  Valuation allowances have been established for the amount that, more likely than not, will not be realized.  Of the total valuation allowances related to foreign capital loss carryforwards, $63 million was previously allocable to goodwill; however, upon adoption of new business combination guidance, effective January 1, 2009, all changes in valuation allowances associated with business combinations are now recognized in tax expense rather than in goodwill.  See Note 1 for additional information.

The changes in deferred tax valuation allowances were:

    Additions    
  Balance at Beginning of Period Charged to Income Charged to Other Accounts Deductions Balance at End of Period
                     
2009 $285  $  24  $17 (a) 14 (b) $312 
2008 (c)  323   9       47 (a)  285 
2007 (c)  352     2       31 (d)  323 

(a)Related to the change in foreign net operating loss carryforwards, including the change in foreign currency exchange rates.
(b)Resulting from the projected revenue increase in connection with the expiration of the generation rate caps in 2010, the valuation allowance related to state net operating loss carryforwards was reduced by $13 million.
(c)Pennsylvania state legislation, enacted in 2007 and 2009, increased the net operating loss limitation.  As a result, the deferred tax asset (and related valuation allowance) associated with certain of its Pennsylvania net operating loss carryforwards for all periods presented were increased to reflect the higher limitation.  There was no impact on the net deferred tax asset position as a result of the legislation and related adjustments.
(d)Primarily related to the change in domestic net operating loss carryforwards.

PPL Global does not pay or record U.S. income taxes on the undistributed earnings of WPD as management has determined that the earnings are permanently reinvested. Historically, dividends paid by WPD have been distributions of the current year's earnings.  WPD's long-term working capital forecasts and capital expenditure projections for the foreseeable future require reinvestment of WPD's undistributed earnings and WPD would have to issue debt or access credit facilities to fund any distributions in excess of current earnings.  Additionally, U.S. long-term working capital forecasts and capital expenditure projections for the foreseeable future do not require or anticipate WPD distributing any more than future earnings to its parent in the U.S.  The cumulative undistributed earnings are included in "Earnings reinvested""Noncontrolling interests" on the Balance Sheets.  The amounts considered permanently reinvested at December 31, 2009Sheets and 2008 were $622related dividend requirements of $4 million for 2012, $16 million for 2011 and $1.2 billion.  If the earnings are remitted as dividends, PPL Global may be subject to additional U.S. taxes, net of allowable foreign tax credits.  It is not practicable to estimate the amount of additional taxes that might be payable on these foreign earnings.

Details of the components of income tax expense, a reconciliation of federal income taxes derived from statutory tax rates applied to "Income from Continuing Operations Before Income Taxes" to income taxes$17 million for reporting purposes, and details of "Taxes, other than income" were:

  2009 2008 2007
Income Tax Expense            
Current - Federal $(59) $237  $181 
Current - State  21   9   9 
Current - Foreign  41   70   83 
   3   316   273 
Deferred - Federal  135   72   32 
Deferred - State (a)  (10)  43   20 
Deferred - Foreign (b)  16   13   (52)
   141   128     
Investment tax credit, net - Federal  (14)  (14)  (14)
Total income tax expense from continuing operations (c) $130  $430  $259 
             
Total income tax expense - Federal $62  $295  $199 
Total income tax expense - State  11   52   29 
Total income tax expense - Foreign  57   83   31 
Total income tax expense from continuing operations (c) $130  $430  $259 

(a)Includes a $13 million reduction to state deferred tax expense related to the reversal of deferred tax valuation allowances.  See "Reconciliation of Income Tax Expense" for additional information.
(b)Includes a $54 million deferred tax benefit recorded in 2007 related to the U.K. tax rate reduction effective April 1, 2008.  See "Reconciliation of Income Tax Expense" for additional information.
(c)Excludes current and deferred federal, state and foreign tax expense (benefit) recorded to Discontinued Operations of $21 million in 2009 and $154 million in 2007.  Excludes realized tax benefits related to stock-based compensation, recorded as an increase to capital in excess of par value of $1 million in 2009, $7 million in 2008 and $25 million in 2007.  Also, excludes federal, state, and foreign tax expense (benefit) recorded to OCI of $358 million in 2009, $(212) million in 2008 and $20 million in 2007.

  2009 2008 2007
Reconciliation of Income Tax Expense            
Federal income tax on Income from Continuing Operations Before Income Taxes at statutory tax rate - 35% $209  $475  $448 
Increase (decrease) due to:            
State income taxes  (a) (b)  40   47   29 
State net operating loss valuation allowance (c)  (13)        
Amortization of investment tax credits  (10)  (10)  (10)
Difference related to income recognition of foreign affiliates (net of foreign income taxes) (d)  (93)  (48)  (39)
Enactment of the U.K.'s Finance Act 2008 and 2007 (e)      (8)  (54)
Change in federal tax reserves (a)  6   10   (27)
Change in foreign tax reserves (a) (d)  17   5     
Stranded cost securitization (a)  (6)  (7)  (7)
Federal income tax return adjustments (b)  (10)  (6)  (8)
Foreign income tax return adjustments (b)      (17)  (2)
Federal income tax credits (b)  (2)  15   (57)
Domestic manufacturing deduction  (3)  (17)  (15)
Other  (5)  (9)  1 
   (79)  (45)  (189)
Total income tax expense $130  $430  $259 
Effective income tax rate  21.8%   31.7%   20.2% 

(a) Changes in income tax reserves impacted the following components of income tax expense, which are presented in the "Reconciliation of Income Tax Expense" table.
    2009 2008 2007
               
  Change in foreign tax reserves $17  $5     
  Change in federal tax reserves (f)  6   10  $(27)
  Stranded cost securitization  (6)  (7)  (7)
  State income taxes (f)  (5)  3   1 
    $12  $11  $(33)
   
(b) Adjustments from filing prior year tax returns impacted the following components of income tax expense, which are presented in the "Reconciliation of Income Tax Expense" table.
    2009 2008 2007
               
  State income taxes (f) $31  $4  $(1)
  Federal income tax return adjustments (f)  (10)  (6)  (8)
  Foreign income tax return adjustments      (17)  (2)
  Federal income tax credits (g)      16     
    $21  $(3) $(11)
   
(c) Pennsylvania H.B. 1531, enacted in October 2009, increased the net operating loss limitation to 20% of taxable income for tax years beginning in 2010.  In conjunction with the projected revenue increase related to the expiration of the generation rate caps in 2010, PPL recorded a $13 million reduction to state deferred income tax expense related to the reversal of deferred tax valuation allowances for a portion of its Pennsylvania net operating losses.
   
(d) Income tax (benefits) related to foreign income, which are presented in the "Reconciliation of Income Tax Expense" table.
    2009 2008 2007
               
  Losses generated through restructuring and fully reserved (reflected in "Change in foreign tax reserves") $(46)        
  Impact of lower U.K. income tax rates  (23) $(22) $(16)
  U.S. income tax on foreign earnings - net of foreign tax credit  (16)  (21)  (14)
  Other  (8)  (5)  (9)
    $(93) $(48) $(39)
   
(e) The U.K.'s Finance Act 2008, enacted in July 2008, included a phase-out of tax depreciation on certain buildings.  As a result, PPL recorded an $8 million deferred tax benefit during 2008 related to the reduction in its deferred tax liabilities.
   
  The U.K.'s Finance Act of 2007, enacted in July 2007, included a reduction in the U.K.'s statutory income tax rate.  Effective April 1, 2008, the statutory income tax rate was reduced from 30% to 28%.  As a result, PPL recorded a $54 million deferred tax benefit during 2007 related to the reduction in its deferred tax liabilities.
   
(f) During 2009, PPL received consent from the IRS to change its method of accounting for certain expenditures for tax purposes.  PPL deducted the resulting IRC Sec. 481 adjustment on its 2008 federal income tax return and recorded a $24 million adjustment to federal and state income tax expense resulting from the reduction of federal income tax benefits related to the domestic manufacturing deduction and reduction of certain state tax benefits related to state net operating losses and regulated depreciation.  The $24 million of income tax expense consisted of $29 million expense reflected in "State income taxes," offset by $4 million benefit reflected in "Federal income tax return adjustments" and a $1 million benefit reflected in "Change in federal tax reserves."
   
(g) During March 2008, PPL Energy Supply recorded a $13 million expense to adjust the amount of synthetic fuel tax credits recorded during 2007.  See Note 14 for additional information.

  2009 2008 2007
Taxes, other than income            
State gross receipts $187  $199  $193 
State utility realty  5   4   5 
State capital stock  6   5   8 
Property - foreign  57   66   67 
Domestic property and other  25   14   25 
  $280  $288  $298 

See Note 1 for information on a settlement related to PURTA tax that will be returned to PPL Electric customers.

For tax years 2000 through 2007, PPL Montana protested certain property tax assessments by the Montana Department of Revenue on its generation facilities.  The tax liabilities in dispute for 2000 through 2007, which had been paid and expensed by PPL Montana, totaled $45 million.  In January 2008, both parties reached a settlement for all years outstanding.  The settlement resulted in PPL Montana receiving a refund of taxes paid and interest totaling $8 million.  This settlement was recorded in 2008, of which $7 million was reflected in "Taxes, other than income" and $1 million was reflected in "Other Income - net" on the Statement of Income.

(PPL Energy Supply)

"Income from Continuing Operations Before Income Taxes" included the following components:

  2009 2008 2007
         
Domestic income $44  $755  $835
Foreign income  290   330   260
  $334  $1,085  $1,095

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for accounting purposes and their basis for income tax purposes and the tax effects of net operating loss and tax credit carryforwards.

Net deferred tax assets2010 have been recognized based on management's estimates of future taxable income for U.S. and certain foreign jurisdictions in which PPL's operations have historically been profitable.

Significant components of PPL Energy Supply's deferred income tax assets and liabilities from continuing operations were as follows:

  2009 2008
Deferred Tax Assets        
Deferred investment tax credits $12  $16 
NUG contracts and buybacks  6   22 
Accrued pension costs  149   135 
Federal tax credit carryforwards  23   23 
Foreign capital loss carryforwards  144   126 
Foreign - pensions  168   87 
Foreign - other  6   9 
Other domestic  100   98 
Valuation allowances  (144)  (127)
   464   389 
         
Deferred Tax Liabilities        
Plant - net  1,046   796 
Unrealized gain on qualifying derivatives  417   81 
Foreign investments  5   6 
Foreign - plant  546   519 
Foreign - other  35   67 
Other domestic  41   33 
   2,090   1,502 
Net deferred tax liability $1,626  $1,113 

PPL Energy Supply had federal foreign tax credit carryforwards that expire by 2019 of $23 million at December 31, 2009 and 2008.  PPL Energy Supply also had state net operating loss carryforwards that expire between 2010 and 2029 of $9 million at December 31, 2009 and 2008.  Valuation allowances have been established for the amount that, more likely than not, will not be realized.

PPL Global had no foreign net operating loss carryforwards at December 31, 2009 and December 31, 2008.  PPL Global had foreign capital loss carryforwards of $514 million and $451 million at December 31, 2009 and 2008.  All of these losses have an indefinite carryforward period.  Valuation allowances have been established for the amount that, more likely than not, will not be realized.  Of the total valuation allowances related to foreign capital loss carryforwards, $63 million was allocable to goodwill; however, upon adoption of new business combination guidance, effective January 1, 2009, all changes in valuation allowances associated with business combinations will be recognized in tax expense rather than in goodwill.  See Note 1 for additional information.

Changes in deferred tax valuation allowances were:

    Additions    
  Balance at Beginning of Period Charged to Income Charged to Other Accounts Deductions Balance at End of Period
                     
2009 $127      $17(a)     $144 
2008  174          $47 (a)  127 
2007  178  $ 2       6   174 

(a)Primarily related to the change in foreign net operating loss carryforwards including the change in foreign currency exchange rates.

PPL Global does not pay or record U.S. income taxes on the undistributed earnings of WPD as management has determined that the earnings are permanently reinvested.  Historically, dividends paid by WPD have been distributions of the current year's earnings.  WPD's long-term working capital forecasts and capital expenditure projections for the foreseeable future require reinvestment of WPD's undistributed earnings and WPD would have to issue debt or access credit facilities to fund any distributions in excess of current earnings.  Additionally, U.S. long-term working capital forecasts and capital expenditure projections for the foreseeable future do not require or anticipate WPD distributing any more than future earnings to its parent in the U.S.  The cumulative undistributed earnings are included in "Members Equity""Net Income Attributable to Noncontrolling Interests" on the Balance Sheets.  The amounts considered permanently reinvested at December 31, 2009 and 2008 were $622 million and $1.2 billion.  If the earnings are remitted as dividends, PPL Global may be subject to additional U.S. taxes, net of allowable foreign tax credits.  It is not practicable to estimate the amount of additional taxes that might be payable on these foreign earnings.

Details of the components of income tax expense, a reconciliation of federal income taxes derived from statutory tax rates applied to "Income from Continuing Operations Before Income Taxes" to income taxes for reporting purposes, and details of "Taxes, other than income" were:

  2009 2008 2007
Income Tax Expense            
Current - Federal $(155) $61  $13 
Current - State  (3)  10   28 
Current - Foreign  41   70   83 
   (117)  141   124 
Deferred - Federal  128   144   121 
Deferred - State  32   49   25 
Deferred - Foreign (a)  16   13   (52)
   176   206   94 
Investment tax credit, net - Federal  (12)  (12)  (12)
Total income tax expense from continuing operations (b) $47  $335  $206 
             
Total income tax expense - Federal $(39) $193  $122 
Total income tax expense - State  29   59   53 
Total income tax expense - Foreign  57   83   31 
Total income tax expense from continuing operations (b) $47  $335  $206 

(a)Includes a $54 million deferred tax benefit recorded in 2007 related to the U.K. tax rate reduction effective April 1, 2008.  See "Reconciliation of Income Tax Expense" for additional information.
(b)Excludes current and deferred federal, state and foreign tax expense recorded to Discontinued Operations of $22 million in 2009, $1 million in 2008 and $121 million in 2007.  Also, excludes federal, state and foreign tax expense (benefit) recorded to OCI of $338 million in 2009, $(168) million in 2008 and $19 million in 2007.

  2009 2008 2007
Reconciliation of Income Tax Expense            
Federal income tax on Income from Continuing Operations Before Income Taxes at statutory tax rate - 35% $117  $380  $383 
Increase (decrease) due to:            
State income taxes (a) (b)  27   40   36 
Amortization of investment tax credits  (8)  (8)  (8)
Difference related to income recognition of foreign affiliates (net of foreign income taxes) (c)  (93)  (48)  (39)
Enactment of the U.K.'s Finance Act 2008 and 2007 (d)      (8)  (54)
Change in federal tax reserves (a)      11   (28)
Change in foreign tax reserves (a) (c)  17   5     
Federal income tax return adjustments (b)  (7)  (11)  (10)
Foreign income tax return adjustments (b)      (17)  (2)
Federal income tax credits (b)  (2)  15   (57)
Domestic manufacturing deduction  (3)  (17)  (15)
Other  (1)  (7)    
   (70)  (45)  (177)
Total income tax expense $47  $335  $206 
Effective income tax rate  14.1%   30.9%   18.8% 

(a) Changes in income tax reserves impacted the following components of income tax expense, which are presented in the "Reconciliation of Income Tax Expense" table.
    2009 2008 2007
               
  Change in foreign tax reserves $17  $5     
  State income taxes  (3)        
  Change in federal tax reserves      11  $(28)
    $14  $16  $(28)
   
(b) Adjustments from filing prior year tax returns impacted the following components of income tax expense, which are presented in the "Reconciliation of Income Tax Expense" table.
    2009 2008 2007
               
  State income taxes (e) $25  $2  $2 
  
Federal income tax return
adjustments (e)
  (7)  (11)  (10)
  Foreign income tax return adjustments      (17)  (2)
  Federal income tax credits (f)      16     
    $18  $(10) $(10)
   
(c) Income tax (benefits) related to foreign income, which are presented in the "Reconciliation of Income Tax Expense" table.
    2009 2008 2007
               
  Losses generated through restructuring and fully reserved (reflected in "Change in foreign tax reserves") $(46)        
  Impact of lower U.K. income tax rates  (23) $(22) $(16)
  U.S. income tax on foreign earnings - net of foreign tax credit  (16)  (21)  (14)
  Other  (8)  (5)  (9)
    $(93) $(48) $(39)
   
(d) The U.K.'s Finance Act 2008, enacted in July 2008, included a phase-out of tax depreciation on certain buildings.  As a result, PPL Energy Supply recorded an $8 million deferred tax benefit during 2008 related to the reduction in its deferred tax liabilities.
   
  The U.K.'s Finance Act of 2007, enacted in July 2007, included a reduction in the U.K.'s statutory income tax rate.  Effective April 1, 2008, the statutory income tax rate was reduced from 30% to 28%.  As a result, PPL recorded a $54 million deferred tax benefit during 2007 related to the reduction in its deferred tax liabilities.
   
(e) During 2009, PPL Energy Supply received consent from the IRS to change its method of accounting for certain expenditures for tax purposes.  PPL Energy Supply deducted the resulting IRC Sec. 481 adjustment on its 2008 federal income tax return and recorded a $21 million reduction in federal income tax benefits related to the domestic manufacturing deduction and certain state tax benefits related to state net operating losses.  The $21 million income tax expense consisted of $24 million expense reflected in "State income taxes," offset by $2 million benefit reflected in "Federal income tax return adjustments" and a $1 million benefit reflected in "Change in federal tax reserves."
   
(f) During March 2008, PPL Energy Supply recorded a $13 million expense to adjust the amount of synthetic fuel tax credits recorded during 2007.  See Note 14 for additional information.

  2009 2008 2007
Taxes, other than income            
State capital stock $3  $3  $5 
Property - foreign  57   66   67 
Domestic property and other  26   17   26 
  $86  $86  $98 

For tax years 2000 through 2007, PPL Montana protested certain property tax assessments by the Montana Department of Revenue on its generation facilities.  The tax liabilities in dispute for 2000 through 2007, which had been paid and expensed by PPL Montana, totaled $45 million.  In January 2008, both parties reached a settlement for all years outstanding.  The settlement resulted in PPL Montana receiving a refund of taxes paid and interest totaling $8 million.  This settlement was recorded in 2008, of which $7 million was reflected in "Taxes, other than income" and $1 million was reflected in "Other Income - net" on the Statement of Income.

(PPL Electric)

The provision for PPL Electric's deferred income taxes for regulated assets is based upon the ratemaking principles reflected in rates established by the PUC and the FERC.  The difference in the provision for deferred income taxes for regulated assets and the amount that otherwise would be recorded under GAAP is deferred and included in "Taxes recoverable through future rates" on the Balance Sheets.

The tax effects of significant temporary differences comprising PPL Electric's net deferred income tax liability were as follows:

  2009 2008
Deferred Tax Assets        
Deferred investment tax credits $3  $4 
Accrued pension costs  36   37 
Contributions in aid of construction  99   79 
Regulatory liabilities  28     
Other  39   43 
   205   163 
         
Deferred Tax Liabilities        
Electric utility plant - net  802   667 
Recoverable transition costs      116 
Taxes recoverable through future rates  105   104 
Reacquired debt costs  14   11 
Other  23   20 
   944   918 
Net deferred tax liability $739  $755 

Details of the components of income tax expense, a reconciliation of federal income taxes derived from statutory tax rates applied to "Income Before Income Taxes" to income taxes for reporting purposes, and details of "Taxes, other than income" were:

  2009 2008 2007
Income Tax Expense            
Current - Federal $80  $93  $72 
Current - State  22   8   (7)
   102   101   65 
Deferred - Federal  (4)  10   24 
Deferred - State  (17)  (7)  (4)
   (21)  3   20 
Investment tax credit, net - Federal  (2)  (2)  (2)
Total income tax expense $79  $102  $83 
             
Total income tax expense - Federal $74  $101  $94 
Total income tax expense - State  5   1   (11)
Total income tax expense $79  $102  $83 
             
Reconciliation of Income Tax Expense            
Federal income tax on Income Before Income Taxes at statutory tax rate - 35% $77  $97  $86 
Increase (decrease) due to:            
State income taxes (a) (b)  15   13   2 
Amortization of investment tax credit  (2)  (2)  (2)
Stranded cost securitization (a)  (6)  (7)  (7)
Other (a) (b)  (5)  1   4 
   2   5   (3)
Total income tax expense $79  $102  $83 
Effective income tax rate  35.7%   36.7%   33.7% 


(a) Changes in income tax reserves impacted the following components of income tax expense, which are presented in the "Reconciliation of Income Tax Expense" table.
    2009 2008 2007
               
  Stranded cost securitization $(6) $(7) $(7)
  State income taxes      2   1 
  Other  (1)      2 
    $(7) $(5) $(4)
   
(b) Adjustments from filing prior year tax returns impacted the following components of income tax expense, which are presented in the "Reconciliation of Income Tax Expense" table.
    2009 2008 2007
               
  State income taxes (c) $5  $2  $(4)
  Other (c)  (1)  4   3 
    $4  $6  $(1)
   
(c) During 2009, PPL Electric received consent from the IRS to change its method of accounting for certain expenditures for tax purposes.  PPL Electric deducted the resulting IRC Sec. 481 amount on its 2008 federal income tax return and recorded a $3 million adjustment to federal and state income tax expense resulting from the reversal of prior years' state income tax benefits related to regulated depreciation.  The $3 million income tax expense consisted of $5 million expense reflected in "State income taxes" offset by a $2 million federal benefit reflected in "Other".

  2009 2008 2007
Taxes, other than income            
State gross receipts $187  $199  $193 
State utility realty  5   4   5 
State capital stock  2   2   3 
Property and other      (2)  (1)
  $194  $203  $200 

See Note 1 for information on a settlement related to PURTA tax that will be returned to PPL Electric customers.

Unrecognized Tax Benefits (PPL, PPL Energy Supply and PPL Electric)

Changes to unrecognized tax benefits were as follows:

  2009 2008
PPL        
Beginning of period $202  $204 
Additions based on tax positions of prior years  36   38 
Reduction based on tax positions of prior years  (11)  (13)
Additions based on tax positions related to the current year  50   12 
Settlements  (55)  (12)
Lapse of applicable statutes of limitations  (8)  (8)
Effects of foreign currency translation  (2)  (19)
End of period $212  $202 
         
PPL Energy Supply        
Beginning of period $119  $130 
Additions based on tax positions of prior years  17   21 
Reduction based on tax positions of prior years  (5)  (10)
Additions based on tax positions related to the current year  50   9 
Settlements  (55)  (12)
Lapse of applicable statutes of limitations        
Effects of foreign currency translation  (2)  (19)
End of period $124  $119 
         
PPL Electric        
Beginning of period $77  $68 
Additions based on tax positions of prior years  11   17 
Reduction based on tax positions of prior years  (6)  (3)
Additions based on tax positions related to the current year      3 
Lapse of applicable statutes of limitations  (8)  (8)
End of period $74  $77 

At December 31, 2009, it was reasonably possible that during the next 12 months the total amount of unrecognized tax benefits could increase by as much as $34 million or decrease by up to $179 million for PPL, increase by as much as $11 million or decrease by up to $123 million for PPL Energy Supply and increase by as much as $23 million or decrease by up to $22 million for PPL Electric.  These 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.

At December 31, the total unrecognized tax benefits and related indirect effects that, if recognized, would decrease the effective tax rate were:

  2009 2008
       
PPL $119  $129 
PPL Energy Supply  95   103 
PPL Electric  15   21 

At December 31, 2009, PPL, PPL Energy Supply and PPL Electric had accrued interest related to tax positions of $36 million, $27 million and $5 million.  At December 31, 2008, PPL, PPL Energy Supply and PPL Electric had accrued interest of $35 million, $28 million and $7 million.

PPL and its subsidiaries recognize interest and penalties in "Income Taxes" on their Statements of Income.  The following expenses (benefits) were recognizedIn June 2012, PPL Electric redeemed all of its Preference Stock at December 31:par value, without premium ($250 million in the aggregate).

  2009 2008 2007
             
PPL $1  $4  $(1)
PPL Energy Supply  (1)  2   (4)
PPL Electric  (2)  2   3 

The amounts recognized during 2009, 2008 and 2007 for PPL, PPL Energy Supply and PPL Electric were primarily the result of additional interest accrued or reversed related to tax positions of prior years and the lapse of applicable statutes of limitations, with respect to certain issues.

PPL or its subsidiaries file tax returns in five major tax jurisdictions.  PPL Energy Supply and PPL Electric's U.S. federal and state tax provision are calculated in accordance with an intercompany tax sharing policy with PPL, which provides that their taxable income be calculated as if PPL Energy Supply and its domestic subsidiaries and PPL Electric and its subsidiaries each filed a separate consolidated tax return.  Based on this tax sharing policy, PPL Energy Supply or its subsidiaries indirectly or directly file tax returns in five major tax jurisdictions and PPL Electric or its subsidiaries indirectly or directly file tax returns in two major tax jurisdictions.  With few exceptions, at December 31, 2009, these jurisdictions, as well as the tax years that are no longer subject to examination, were as follows:

PPL and PPL Energy SupplyPPL Electric
U.S. (federal)1997 and prior1997 and prior
Pennsylvania (state)2004 and prior2004 and prior
Montana (state)2005 and prior
U.K. (foreign)2006 and prior
Chile (foreign)2006 and prior

6.  
Preferred Securities

(PPL)Preferred Stock

PPL is authorized to issue up to 10 million shares of preferred stock.  No PPL preferred stock was issued or outstanding in 2009, 20082012, 2011, or 2007.2010.

(PPL and PPL Electric)

Details of PPL Electric's preferred securities (with no stated maturity date and no sinking fund requirements), which are reflected on PPL's Balance Sheets in "Noncontrolling Interests," as of December 31, 2009 and 2008, were:

  Amount  
Issued and Outstanding
Shares
 Shares Authorized Optional Redemption Price Per Share at 12/31/09
            
4-1/2% Preferred Stock (a) $25  247,524 629,936 $110.00
            
Series Preferred Stock (a)           
3.35%  2  20,605    103.50
4.40%  12  117,676    102.00
4.60%  3  28,614    103.00
6.75%  9  90,770    101.35
            
Total Series Preferred Stock  26  257,665 10,000,000   
            
6.25% Series Preference Stock (a) (b)  250  2,500,000 10,000,000  (c)
            
Total Preferred Securities $301  3,005,189     

(a)In 2009, 2008 and 2007, there were no changes in the number ofElectric is authorized to issue up to 629,936 shares of Preferred Stock or Preference Stock outstanding.
(b)These shares were issued to a bank that acts as depositary in connection with the 2006 sale of 10 million depositary shares, each representing a quarter interest in a share of PPL Electric's 6.25% Series Preference Stock (Preference Shares).
(c)Redeemable by PPL Electric on or after April 6, 2011, for $100 per share (equivalent to $25 per depositary share).

Dividend requirements of $18 million were included in "Net Income Attributable to Noncontrolling Interests" on PPL's Statements of Income for 2009, 2008 and 2007.

Preferred Stock

The involuntary liquidation price of the preferred stock is $100 per share.  The optional voluntary liquidation price is the optional redemption price per share in effect, except for the 4-1/2% Preferred Stock and the 6.75% Series Preferred Stock for which such price is $100 per share (plus, in each case, any unpaid dividends in arrears).

Dividends on the10 million shares of series preferred stock are cumulative.  Preferred stock ranks senior tostock.  In April 2010, PPL Electric's common stock andElectric redeemed all of its Preference Shares.

Holders of the outstanding preferred stock are entitled(247,524 shares of 4-1/2% Preferred Stock and 257,665 shares of four series of preferred stock), with a par value in the aggregate of $51 million, for $54 million including accumulated dividends.      

(LG&E)

LG&E is authorized to one vote per share on matters on which PPL Electric's shareowners are entitledissue up to vote.  However, if dividends on any1,720,000 shares of preferred stock are in arrears in an amount equal to or greater than the annual dividend rate, the holdersat a $25 par value and 6,750,000 shares of the preferred stock are entitled to elect a majority of the Board of Directors of PPL Electric.without par value.  LG&E had no preferred stock issued or outstanding in 2012, 2011 or 2010.

(KU)

KU is authorized to issue up to 5,300,000 shares of preferred stock without par value.  KU had no preferred stock issued or outstanding in 2012, 2011 or 2010.          

Preference Stock

(PPL Electric)

PPL Electric is authorized to issue up to 10 million shares of Preference Stock and had 2.5 million shares of 6.25% Series Preference Stock (Preference Shares) issued and outstanding at December 31, 2011 and 2010.  In June 2012, PPL Electric redeemed all 2.5 million shares of its outstanding Preference Shares, par value of $100 per share.  The price paid for the redemption was the par value, without premium ($250 million in the aggregate).

The Preference Shares were held by a bank that acted as depositary for 10 million depositary shares, each of which represented a one-quarter interest in a Preference Share.  Holders of the depositary shares each of which represents a quarter interest in a share of Preference Shares, arewere entitled to all proportional rights and preferences of the Preference Shares, including dividend, voting, redemption and liquidation rights, exercised through the bank acting as a depositary.  The Preference Shares rankranked senior to PPL Electric's common stock and junior to its preferred stock; they havebut had no voting rights, except as provided by law, and they havehad a liquidation preference of $100 per share.share (equivalent to $25 per depositary share).
(KU)

KU is authorized to issue up to 2,000,000 shares of preference stock without par value.  KU had no preference stock issued or outstanding in 2012, 2011 or 2010.

264

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 period.  Diluted EPS is computed by dividing income available to PPL common shareowners by the weighted-average number of shares outstanding that are increased for additional shares that would be outstanding if potentially dilutive non-participating securities were converted to common shares as calculated using the treasury stock method.  In 2012, 2011 and 2010, these securities included stock options and performance units granted under incentive compensation plans and the Purchase Contracts associated with the 2011 and 2010 Equity Units.  For 2012, these securities also included the PPL common stock forward sale agreements.  See Note 7 for additional information on the forward sale agreements.  The forward sale agreements were dilutive under the treasury stock method for 2012 because the average stock price of PPL's common shares exceeded the forward sale price indicated in the forward sale agreements.

The Purchase Contracts are dilutive under the treasury stock method if the average VWAP of PPL common stock for a certain period exceeds approximately $30.99 and $28.80 for the 2011 and 2010 Purchase Contracts.  The 2010 Purchase Contracts were dilutive for 2012 and 2011.  Subject to antidilution adjustments at December 31, 2012, the maximum number of shares issuable to settle the Purchase Contracts was 93.8 million shares, including 86.6 million shares that could be issued under standard provisions of the Purchase Contracts and 7.2 million shares that could be issued under make-whole provisions in the event of early settlement upon a Fundamental Change.  See Note 7 for additional information on the 2011 and 2010 Equity Units.

Reconciliations of the amounts of income and shares of PPL common stock (in thousands) for the periods ended December 31 used in the EPS calculation are:

     2012  2011  2010 
Income (Numerator)         
Income from continuing operations after income taxes attributable to PPL shareowners $ 1,532  $ 1,493  $ 955 
Less amounts allocated to participating securities   8    6    4 
Less issuance costs on subsidiary's preferred securities redeemed   6       
Income from continuing operations after income taxes available to PPL common shareowners $ 1,518  $ 1,487  $ 951 
             
Income (loss) from discontinued operations (net of income taxes) available to PPL         
 common shareowners $ (6) $ 2  $ (17)
             
Net income attributable to PPL shareowners $ 1,526  $ 1,495  $ 938 
Less amounts allocated to participating securities   8    6    4 
Less issuance costs on subsidiary's preferred securities redeemed   6       
Net income available to PPL common shareowners $ 1,512  $ 1,489  $ 934 
             
Shares of Common Stock (Denominator)         
Weighted-average shares - Basic EPS   580,276    550,395    431,345 
Add incremental non-participating securities:         
  Stock options and performance units   563    400    224 
  2010 Purchase Contracts   195    157    
  Forward sale agreements   592       
Weighted-average shares - Diluted EPS   581,626    550,952    431,569 
             
Basic EPS         
Available to PPL common shareowners:         
  Income from continuing operations after income taxes $ 2.62  $ 2.70  $ 2.21 
  Income (loss) from discontinued operations (net of income taxes)   (0.01)   0.01    (0.04)
  Net Income $ 2.61  $ 2.71  $ 2.17 
             
Diluted EPS         
Available to PPL common shareowners:         
  Income from continuing operations after income taxes $ 2.61  $ 2.70  $ 2.20 
  Income (loss) from discontinued operations (net of income taxes)   (0.01)      (0.03)
  Net Income $ 2.60  $ 2.70  $ 2.17 
265

During 2012, PPL issued 936,218 shares of common stock related to the exercise of stock options, vesting of restricted stock and restricted stock units and conversion of stock units granted to directors under its stock-based compensation plans.  In addition, PPL issued 279,945 and 2,326,917 shares of common stock related to its ESOP and DRIP during 2012.  See Note 12 for a discussion of PPL's stock-based compensation plans.

Dividends on the Preference Shares will be paid when, as and if declared by the Board of Directors at a fixed annual rate of 6.25%, or $1.5625 per depositary share per year, and are not cumulative.The following stock options to purchase PPL Electric may not pay dividends on, or redeem, purchase or make a liquidation payment with respect to any of its common stock except in certain circumstances, unless full dividends onand performance units were excluded from the Preference Sharescomputations of diluted EPS for the years ended December 31 because the effect would have been paidantidilutive.   

(Shares in thousands) 2012  2011  2010 
          
Stock options   5,293    5,084    4,936 
Performance units   58    2    45 

5.  Income and Other Taxes

(PPL)

"Income from Continuing Operations Before Income Taxes" included the following components:

   2012  2011  2010 
           
Domestic income $ 994  $ 1,715  $ 952 
Foreign income   1,088    486    287 
 Total $ 2,082  $ 2,201  $ 1,239 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for accounting purposes and their basis for income tax purposes and the tax effects of net operating loss and tax credit carryforwards.  The provision for PPL's deferred income taxes for regulated assets and liabilities is based upon the ratemaking principles of the applicable jurisdiction.  See Notes 1 and 6 for additional information.

Net deferred tax assets have been recognized based on management's estimates of future taxable income for the then-current dividend period.U.S. and certain foreign jurisdictions in which PPL's operations have historically been profitable.

Significant components of PPL's deferred income tax assets and liabilities were as follows:     

    2012  2011 
Deferred Tax Assets      
 Deferred investment tax credits $130  $113 
 Regulatory obligations  124   149 
 Accrued pension costs  276   325 
 Federal loss carryforwards  524   305 
 State loss carryforwards  305   272 
 Federal and state tax credit carryforwards  287   240 
 Foreign capital loss carryforwards  525   578 
 Foreign loss carryforwards    
 Foreign - pensions  254   74 
 Foreign - regulatory obligations  27   67 
 Foreign - other  16   21 
 Contributions in aid of construction  134   133 
 Domestic - other  239   229 
 Valuation allowances  (706)  (724)
  Total deferred tax assets  2,141   1,789 
         
Deferred Tax Liabilities      
 Domestic plant - net   3,967    3,465 
 Taxes recoverable through future rates   141    137 
 Unrealized gain on qualifying derivatives   122    331 
 Other regulatory assets   319    234 
 Reacquired debt costs   40    93 
 Foreign plant - net   937    975 
 Foreign - other      22 
 Domestic - other   66    103 
  Total deferred tax liabilities   5,592    5,360 
Net deferred tax liability $ 3,451  $ 3,571 
266

At December 31, PPL had the following loss and tax credit carryforwards.

   2012   Expiration
        
Loss carryforwards      
 Federal net operating losses $ 1,481   2028-2032
 Federal charitable contributions   19   2016-2017
 State net operating losses   5,099   2013-2032
 State capital losses   138   2013-2016
 Foreign net operating losses   27   Indefinite
 Foreign capital losses   2,282   Indefinite
        
Credit carryforwards      
 Federal investment tax credit   233   2025-2032
 Federal alternative minimum tax credit   20   Indefinite
 Federal foreign tax credit   1   2017-2022
 Federal - other   30   2016-2032
 State - other   4   2022 

Valuation allowances have been established for the amount that, more likely than not, will not be realized.  The changes in deferred tax valuation allowances were:

     Additions       
  Balance at    Charged to     Balance
  Beginning Charged Other    at End
  of Period to Income Accounts Deductions of Period
                  
2012  $ 724  $ 18  $ 10   $ 46 (a) $ 706 
2011    464    190    112 (b)   42 (c)   724 
2010    312    221    6     75 (d)   464 

7.  
(a)
The reduction of the U.K. statutory income tax rate resulted in a reduction in deferred tax assets and the corresponding valuation allowances.  See "Reconciliation of Income Tax Expense" below for more information on the impact of the U.K. Finance Act of 2012.
(b)Primarily related to a $101 million valuation allowance that was recorded against certain deferred tax assets as a result of the 2011 acquisition of WPD Midlands.  See Note 10 for additional information on the acquisition.
(c)The reduction of the U.K. statutory income tax rate resulted in a $35 million reduction in deferred tax assets and the corresponding valuation allowances.  See "Reconciliation of Income Tax Expense" below for more information on the impact of the U.K. Finance Act of 2011.
(d)Resulting from the projected revenue increase in connection with the expiration of the Pennsylvania generation rate caps in 2010, the valuation allowance related to state net operating loss carryforwards over the remaining carryforward period was reduced by $72 million.         

PPL Global does not pay or record U.S. income taxes on the undistributed earnings of WPD, with the exception of certain financing entities, as management has determined that the earnings are indefinitely reinvested.  Historically, dividends paid by WPD have been distributions from current year's earnings.  WPD's long-term working capital forecasts and capital expenditure projections for the foreseeable future require reinvestment of WPD's undistributed earnings, and WPD would have to issue debt or access credit facilities to fund any distributions in excess of current earnings.  Additionally, U.S. long-term working capital forecasts and capital expenditure projections for the foreseeable future do not require or contemplate distributions from WPD in excess of some portion of future WPD earnings.  The cumulative undistributed earnings are included in "Earnings Reinvested" on the Balance Sheets.  The amounts considered indefinitely reinvested at December 31, 2012 and 2011 were $2.0 billion and $1.2 billion.  If the WPD undistributed earnings were remitted as dividends, PPL Global could be subject to additional U.S. taxes, net of allowable foreign tax credits.  It is not practicable to estimate the amount of additional taxes that could be payable on these foreign earnings.

Details of the components of income tax expense, a reconciliation of federal income taxes derived from statutory tax rates applied to "Income from Continuing Operations Before Income Taxes" to income taxes for reporting purposes, and details of "Taxes, other than income" were:           
267

     2012  2011  2010 
Income Tax Expense (Benefit)         
 Current - Federal    $ 54  $ (51)
 Current - State $ (2)   (20)   43 
 Current - Foreign   121    73    20 
   Total Current Expense (Benefit)   119    107    12 
 Deferred - Federal   553    558    358 
 Deferred - State   103    127    (82)
 Deferred - Foreign   35    (23)   (9)
   Total Deferred Expense (Benefit), excluding operating loss carryforwards   691    662    267 
             
 Investment tax credit, net - Federal   (10)   (10)   (5)
 Tax benefit of operating loss carryforwards         
  Deferred - Federal   (195)   (30)   6 
  Deferred - State   (60)   (38)   (17)
   Total Tax Benefit of Operating Loss Carryforwards   (255)   (68)   (11)
 Total income taxes from continuing operations (a) $ 545  $ 691  $ 263 
             
 Total income tax expense - Federal $ 348  $ 572  $ 308 
 Total income tax expense (benefit) - State  41    69    (56)
 Total income tax expense - Foreign   156    50    11 
   Total income taxes from continuing operations (a) $ 545  $ 691  $ 263 

(a)Excludes current and deferred federal and state tax expense (benefit) recorded to Discontinued Operations of $(4) million in 2012, $2 million in 2011 and $(6) million in 2010.  Excludes realized tax expense (benefits) related to stock-based compensation, recorded as a decrease (increase) to additional paid-in capital of $(1) million in 2012, $3 million in 2011 and an insignificant amount in 2010.  Excludes tax benefits related to the issuance costs of the Purchase Contracts, recorded as an increase to additional paid-in capital of an insignificant amount in 2012, $5 million in 2011 and $10 million in 2010, offset by an insignificant amount of related valuation allowances for state deferred taxes in 2012 and 2011.  Also excludes federal, state, and foreign tax expense (benefit) recorded to OCI of $(526) million in 2012, $(137) million in 2011 and $83 million in 2010, and related valuation allowances for state deferred taxes of an insignificant amount in 2012 and $3 million in 2011.

     2012  2011  2010 
Reconciliation of Income Tax Expense         
 Federal income tax on Income from Continuing Operations Before Income Taxes at         
  statutory tax rate - 35% $ 729  $ 770  $ 434 
Increase (decrease) due to:         
 State income taxes, net of federal income tax benefit   27    63    36 
 State valuation allowance adjustments (a)   13    36    (65)
 Impact of lower U.K. income tax rates (b)   (123)   (41)   (20)
 U.S. income tax on foreign earnings - net of foreign tax credit (c)   43    (14)   34 
 Federal and state tax reserves adjustments (d)   (1)   39    (60)
 Foreign tax reserves adjustments (e)   (5)   (141)   
 Federal and state income tax return adjustments (a) (f)   16    (17)   (3)
 Foreign income tax return adjustments   (6)      
 Domestic manufacturing deduction (f) (g)         (11)
 Health Care Reform (h)         8 
 Foreign losses resulting from restructuring (e)         (261)
 Enactment of the U.K.'s Finance Acts (b)   (75)   (69)   (18)
 Federal income tax credits (i)   (12)   (13)   (12)
 Depreciation not normalized (a)   (11)   (20)   (3)
 Foreign valuation allowance adjustments (e)      147    215 
 State deferred tax rate change (j)   (19)   (26)   
 Net operating loss carryforward adjustments (k)   (9)      
 Intercompany interest on U.K. financing entities (l)   (13)   (12)   
 Other   (9)   (11)   (11)
   Total increase (decrease)   (184)   (79)   (171)
Total income taxes from continuing operations $ 545  $ 691  $ 263 
Effective income tax rate  26.2%  31.4%  21.2%

(a)During 2011, the Pennsylvania Department of Revenue issued interpretive guidance on the treatment of bonus depreciation for Pennsylvania income tax purposes.  The guidance allows 100% bonus depreciation for qualifying assets in the same year bonus depreciation is allowed for federal income tax purposes.  Due to the decrease in projected taxable income related to bonus depreciation and a decrease in projected future taxable income, PPL recorded $43 million in state deferred income tax expense related to deferred tax valuation allowances during 2011.

Additionally, the 100% Pennsylvania bonus depreciation deduction created a current state income tax benefit for the flow-through impact of Pennsylvania regulated state tax depreciation.  The federal provision for 100% bonus depreciation generally applies to property placed into service before January 1, 2012.  The placed in-service deadline is extended to January 1, 2013 for property that has a cost in excess of $1 million, has a production period longer than one year and has a tax life of at least ten years.  PPL's tax deduction for 100% bonus regulated tax depreciation was significantly lower in 2012 than in 2011.
268

Pennsylvania H.B. 1531, enacted in October 2009, increased the net operating loss limitation to 20% of taxable income for tax years beginning in 2010.  Based on the projected revenue increase related to the expiration of the generation rate caps in 2010, PPL recorded a $72 million state deferred income tax benefit related to the reversal of deferred tax valuation allowances related to the future projections of taxable income over the remaining carryforward period of the net operating losses.
(b)The U.K.'s 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 liabilities and recognized a deferred tax benefit during 2012 related to both rate decreases.

The U.K.'s Finance Act of 2011, enacted in July 2011, reduced the U.K. statutory income tax rate from 27% to 26% retroactive to April 1, 2011 and from 26% to 25% effective April 1, 2012.  As a result, PPL reduced its net deferred tax liabilities and recognized a deferred tax benefit during 2011 related to both rate decreases.

The U.K.'s Finance Act of 2010, enacted in July 2010, reduced the U.K. statutory income tax rate from 28% to 27% effective April 1, 2011.  As a result, PPL reduced its net deferred tax liabilities and recognized a deferred tax benefit during 2010.
(c)During 2012, PPL recorded a $23 million adjustment to federal income tax expense related to the recalculation of 2010 U.K. earnings and profits and $19 million of U.S. income tax expense on foreign earnings of certain U.K. financing entities not indefinitely reinvested.

During 2011, PPL recorded a $28 million federal income tax benefit related to U.K. pension contributions.

During 2010, PPL recorded additional U.S. income tax expense primarily resulting from increased taxable dividends.
(d)In 1997, the U.K. imposed a Windfall Profits Tax (WPT) on privatized utilities, including WPD.  PPL filed its federal income 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.  As a result, and with the finalization of other issues, PPL recorded a $42 million tax benefit in 2010.  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 2011.  In February 2012, PPL filed a petition for rehearing of the Third Circuit's opinion.  In March 2012, the Third Circuit denied PPL's petition.  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 on October 29, 2012, and oral argument was held on February 20, 2013.  PPL expects the case to be decided before the end of the Supreme Court's current term in June 2013 and cannot predict the outcome of this matter.

In July 2010, the Tax Court ruled in PPL's favor in a dispute with the IRS, concluding that street lighting assets are depreciable for tax purposes over seven years.  As a result, PPL recorded a $7 million tax benefit to federal and state income tax reserves and related deferred income taxes.  The IRS did not appeal this decision.

PPL recorded a tax benefit of $6 million during 2012 and 2011 and $7 million during 2010 to federal and state income tax reserves related to stranded cost securitization.
(e)During 2012, PPL recorded a foreign tax benefit following resolution of a U.K. tax issue related to interest expense.

During 2011, WPD reached an agreement with HMRC related to the amount of the capital losses that resulted from prior years' restructuring in the U.K. and recorded a $147 million foreign tax benefit for the reversal of tax reserves related to the capital losses.  Additionally, WPD recorded a $147 million valuation allowance for the amount of capital losses that, more likely than not, will not be utilized.

During 2010, PPL recorded a $261 million foreign tax benefit in conjunction with losses resulting from restructuring in the U.K.  A portion of these losses offset tax on a deferred gain from a prior year sale of WPD's supply business.  WPD recorded a $215 million valuation allowance for the amount of capital losses that, more likely than not, will not be utilized.
(f)During 2012, PPL recorded federal and state income tax expense related to the filing of the 2011 federal and state income tax returns.  Of this amount, $5 million relates to the reversal of prior years' state income tax benefits related to regulated depreciation.  PPL changed its method of accounting for repair expenditures for tax purposes effective for its 2008 tax year.  In August 2011, the IRS issued guidance regarding the use and evaluation of statistical samples and sampling estimates for network assets.  The IRS guidance provided a safe harbor method of determining whether the repair expenditures for electric transmission and distribution property can be currently deducted for tax purposes.  PPL adopted the safe harbor method with the filing of its 2011 federal income tax return.

During 2011, PPL recorded federal and state tax benefits related to the filing of the 2010 federal and state income tax returns.  Of this amount, $7 million in tax benefits related to an additional domestic manufacturing deduction resulting from revised bonus depreciation amounts and $3 million in tax benefits related to the flow-through impact of Pennsylvania regulated state tax depreciation.
(g)In December 2010, Congress enacted legislation allowing for 100% bonus depreciation on qualified property.  The increased tax depreciation eliminated the tax benefits related to domestic manufacturing deductions in 2012 and 2011.
(h)Beginning in 2013, provisions within Health Care Reform eliminated the tax deductibility of retiree health care costs to the extent of federal subsidies received by plan sponsors that provide retiree prescription drug benefits equivalent to Medicare Part D Coverage.  As a result, PPL recorded deferred income tax expense during 2010.  See Note 13 for additional information.
(i)During 2012, 2011 and 2010, PPL recorded a deferred tax benefit related to investment tax credits on progress expenditures related to hydroelectric plant expansions.  See Note 8 for additional information.
(j)In 2011, PPL completed the sale of certain non-core generation facilities.  See Note 9 for additional information.  Due to changes in state apportionment resulting in reductions in the future estimated state tax rate, PPL recorded deferred tax benefits related to its December 31, 2012 and 2011 state deferred tax liabilities.
(k)During 2012, PPL recorded adjustments to deferred taxes related to net operating loss carryforwards of LKE based on income tax return adjustments.
(l)During 2012 and 2011, PPL recorded foreign income tax benefits related to interest expense on intercompany loans for which there was no domestic income tax expense.

269

    2012  2011  2010 
Taxes, other than income         
 State gross receipts $ 135  $ 140  $ 145 
 State utility realty   2    (9)   5 
 State capital stock   7    18    6 
 Foreign property (a)   147    113    52 
 Domestic property and other (b)   75    64    30 
 Total $ 366  $ 326  $ 238 

(a)
The increase between 2011 and 2010 is due primarily to the acquisition of WPD Midlands on April 1, 2011.  See Note 10 for additional information.
(b)The increase between 2011 and 2010 is due primarily to the acquisition of LKE on November l, 2010.  See Note 10 for additional information.        

(PPL Energy Supply)

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for accounting purposes and their basis for income tax purposes and the tax effects of net operating loss and tax credit carryforwards.

Net deferred tax assets have been recognized based on management's estimates of future taxable income for the U.S. jurisdictions in which PPL Energy Supply's operations have historically been profitable.

Significant components of PPL Energy Supply's deferred income tax assets and liabilities were as follows:

    2012  2011 
Deferred Tax Assets      
 Deferred investment tax credits $ 75  $ 55 
 Accrued pension costs   94    100 
 Federal loss carryforwards   51    1 
 Federal tax credit carryforwards   113    58 
 State loss carryforwards   79    78 
 Other   68    80 
 Valuation allowances   (74)   (72)
  Total deferred tax assets   406    300 
         
Deferred Tax Liabilities      
 Plant - net   1,579    1,407 
 Unrealized gain on qualifying derivatives   173    380 
 Other   44    51 
  Total deferred tax liabilities   1,796    1,838 
Net deferred tax liability $ 1,390  $ 1,538 

At December 31, PPL Energy Supply had the following loss and tax credit carryforwards.   
        
   2012   Expiration
Loss carryforwards      
 Federal net operating losses $ 143   2031-2032
 Federal charitable contributions   3   2016 
 State net operating losses   1,202   2013-2032
        
Credit carryforwards      
 Federal investment tax credit   108   2031-2032
 Federal - other   5   2031-2032
        

Valuation allowances have been established for the amount that, more likely than not, will not be realized.  The changes in deferred tax valuation allowances were:    

     Additions       
  Balance at    Charged to     Balance
  Beginning Charged Other     at End
  of Period to Income Accounts Deductions of Period
                  
2012  $ 72  $ 2          $ 74 
2011    408    22      $ 358 (a)   72 
2010    255    205        52 (b)   408 

(a)
During 2011, PPL Energy Supply distributed its membership interest in PPL Global to PPL Energy Funding.  See Note 9 for additional information.
(b)Resulting from the projected revenue increase in connection with the expiration of the Pennsylvania generation rate caps in 2010, the valuation allowance related to state net operating loss carryforwards over the remaining carryforward period was reduced by $52 million.        
270

Details of the components of income tax expense, a reconciliation of federal income taxes derived from statutory tax rates applied to "Income (Loss) from Continuing Operations Before Income Taxes" to income taxes for reporting purposes, and details of "Taxes, other than income" were:

     2012  2011  2010 
Income Tax Expense (Benefit)         
 Current - Federal $ 89  $ 139  $ 208 
 Current - State   22    (12)   78 
   Total Current Expense (Benefit)   111    127    286 
 Deferred - Federal   193    251    66 
 Deferred - State   10    70    (89)
   Total Deferred Expense (Benefit), excluding operating loss carryforwards   203    321    (23)
             
 Investment tax credit, net - federal   (2)   (3)   (2)
 Tax benefit of operating loss carryforwards         
  Deferred - Federal   (48)      
  Deferred - State   (1)      
   Total Tax Benefit of Operating Loss Carryforwards   (49)      
 Total income taxes from continuing operations (a) $ 263  $ 445  $ 261 
             
 Total income tax expense - Federal $ 232  $ 387  $ 272 
 Total income tax expense (benefit) - State   31    58    (11)
   Total income taxes from continuing operations (a) $ 263  $ 445  $ 261 

(a)
Excludes current and deferred federal, state and foreign tax expense (benefit) recorded to Discontinued Operations of $3 million in 2011 and $(5) million in 2010.  Also, excludes federal, state and foreign tax expense (benefit) recorded to OCI of $(267) million in 2012, $(83) million in 2011 and $132 million in 2010.  The deferred tax benefit of operating loss carryforwards was insignificant for 2011 and 2010.        

     2012  2011  2010 
Reconciliation of Income Tax Expense         
 Federal income tax on Income from Continuing Operations Before Income Taxes at         
  statutory tax rate - 35% $ 258  $ 424  $ 308 
Increase (decrease) due to:         
 State income taxes, net of federal income tax benefit   33    60    41 
 State valuation allowance adjustments (a)   2    22    (52)
 State deferred tax rate change (b)   (19)   (26)   
 Federal and state tax reserves adjustments   (2)   2    (11)
 Domestic manufacturing deduction (c) (d)         (11)
 Federal and state income tax return adjustments (d)   4    (22)   (6)
 Health Care Reform (e)         5 
 Federal income tax credits (f)   (12)   (12)   (12)
 Other   (1)   (3)   (1)
   Total increase (decrease)   5    21    (47)
Total income taxes from continuing operations $ 263  $ 445  $ 261 
Effective income tax rate  35.6%  36.7%  29.6%

(a)
During 2011, the Pennsylvania Department of Revenue issued interpretive guidance on the treatment of bonus depreciation for Pennsylvania income tax purposes.  The guidance allows 100% bonus depreciation for qualifying assets in the same year bonus depreciation is allowed for Federal income tax purposes.  Due to the decrease in projected taxable income related to bonus depreciation and a decrease in projected future taxable income, PPL Energy Supply recorded $22 million in state deferred income tax expense related to deferred tax valuation allowances during 2011.

Pennsylvania H.B. 1531, enacted in October 2009, increased the net operating loss limitation to 20% of taxable income for tax years beginning in 2010.  Based on the projected revenue increase related to the expiration of the generation rate caps, PPL Energy Supply recorded a $52 million state deferred income tax benefit related to the reversal of deferred tax valuation allowances over the remaining carry forward period of the net operating losses during 2010.
(b)In 2011, PPL Energy Supply completed the sale of certain non-core generation facilities.  See Note 9 for additional information.  Due to changes in state apportionment resulting in reductions in the future estimated state tax rate, PPL Energy Supply recorded deferred tax benefits related to its December 31, 2012 and 2011 state deferred tax liabilities.
(c)In December 2010, Congress enacted legislation allowing for 100% bonus depreciation on qualified property.  The increased tax depreciation deduction eliminated the tax benefits related to domestic manufacturing deductions in 2012 and 2011.
(d)During 2011, PPL recorded federal and state tax benefits related to the filing of the 2010 federal and state income tax returns.  Of this amount, $7 million in tax benefits related to an additional domestic manufacturing deduction resulting from revised bonus depreciation amounts.
(e)Beginning in 2013, provisions within Health Care Reform eliminated the tax deductibility of retiree health care costs to the extent of federal subsidies received by plan sponsors that provide retiree prescription drug benefits equivalent to Medicare Part D Coverage.  As a result, PPL Energy Supply recorded deferred income tax expense during 2010.  See Note 13 for additional information.
(f)During 2012, 2011 and 2010, PPL Energy Supply recorded a deferred tax benefit related to investment tax credits on progress expenditures related to hydroelectric plant expansions.  See Note 8 for additional information.                    
271

    2012  2011  2010 
Taxes, other than income         
 State gross receipts $ 35  $ 31  $ 15 
 State capital stock   5    12    4 
 Property and other   29    28    27 
  Total $ 69  $ 71  $ 46 

(PPL Electric)

The provision for PPL Electric's deferred income taxes for regulated assets and liabilities is based upon the ratemaking principles reflected in rates established by the PUC and the FERC.  The difference in the provision for deferred income taxes for regulated assets and liabilities and the amount that otherwise would be recorded under GAAP is deferred and included in "Regulatory assets" or "Regulated liabilities" on the Balance Sheets.

Significant components of PPL Electric's deferred income tax assets and liabilities were as follows:

    2012  2011 
Deferred Tax Assets      
 Accrued pension costs $81  $93 
 Contributions in aid of construction  106   104 
 Regulatory obligations  24   28 
 State loss carryforwards  39   26 
 Federal loss carryforwards  81   
 Other  46   29 
  Total deferred tax assets  377   283 
         
Deferred Tax Liabilities      
 Electric utility plant - net  1,229   1,078 
 Taxes recoverable through future rates  122   120 
 Reacquired debt costs  27   32 
 Other regulatory assets  174   127 
 Other  12   16 
  Total deferred tax liabilities  1,564   1,373 
Net deferred tax liability $1,187  $1,090 

At December 31, PPL Electric had the following loss carryforwards.   
        
   2012   Expiration
        
Loss carryforwards      
 Federal net operating losses $ 229   2031-2032
 Federal charitable contributions   2   2016
 State net operating losses   597   2030-2032

Details of the components of income tax expense, a reconciliation of federal income taxes derived from statutory tax rates applied to "Income Before Income Taxes" to income taxes for reporting purposes, and details of "Taxes, other than income" were:   
     2012  2011  2010 
Income Tax Expense (Benefit)         
 Current - Federal $ (28) $ (25) $ (127)
 Current - State   (18)   (13)   (14)
   Total Current Expense (Benefit)   (46)   (38)   (141)
 Deferred - Federal   162    123    184 
 Deferred - State   42    25    27 
   Total Deferred Expense (Benefit), excluding operating loss carryforwards   204    148    211 
             
 Investment tax credit, net - Federal   (1)   (2)   (2)
 Tax benefit of operating loss carryforwards         
  Deferred - Federal   (72)   (12)   6 
  Deferred - State   (17)   (28)   (17)
   Total Tax Benefit of Operating Loss Carryforwards   (89)   (40)   (11)
 Total income tax expense $ 68  $ 68  $ 57 
             
 Total income tax expense - Federal $ 61  $ 84  $ 61 
 Total income tax expense (benefit) - State   7    (16)   (4)
   Total income tax expense $ 68  $ 68  $ 57 
272

     2012  2011  2010 
Reconciliation of Income Taxes         
 Federal income tax on Income Before Income Taxes at statutory tax rate - 35% $ 71  $ 90  $ 67 
Increase (decrease) due to:         
 State income taxes, net of federal income tax benefit   9    12    9 
 Amortization of investment tax credit   (1)   (2)   (2)
 Federal and state tax reserves adjustments (a)   (8)   (9)   (12)
 Federal and state income tax return adjustments (b) (c)   7    (4)   (1)
 Depreciation not normalized (c)   (8)   (17)   (3)
 Other   (2)   (2)   (1)
   Total increase (decrease)   (3)   (22)   (10)
Total income tax expense $ 68  $ 68  $ 57 
Effective income tax rate  33.3%  26.5%  29.7%
(a)In July 2010, the U.S. Tax Court ruled in PPL Electric's favor in a dispute with the IRS, concluding that street lighting assets are depreciable for tax purposes over seven years.  As a result, PPL Electric recorded a $7 million tax benefit to federal and state income tax reserves and related deferred income taxes.  The IRS did not appeal this decision.

PPL Electric recorded a tax benefit of $6 million during 2012 and 2011 and $7 million during 2010 to federal and state income tax reserves related to stranded cost securitization.
(b)PPL Electric changed its method of accounting for repair expenditures for tax purposes effective for its 2008 tax year.  In August 2011, the IRS issued guidance regarding the use and evaluation of statistical samples and sampling estimates for network assets.  The IRS guidance provided a safe harbor method of determining whether the repair expenditures for electric transmission and distribution property can be currently deducted for tax purposes.  PPL Electric adopted the safe harbor method with the filing of its 2011 federal income tax return and recorded a $5 million adjustment to federal and state income tax expense resulting from the reversal of prior years' state income tax benefits related to regulated depreciation.

During 2011, PPL Electric recorded a $5 million federal and state income tax benefit as a result of filing its 2010 federal and state income tax returns.  Of this amount, $3 million in tax benefits related to the flow-through impact of Pennsylvania regulated 100% bonus tax depreciation.
(c)During 2011, the Pennsylvania Department of Revenue issued interpretive guidance on the treatment of bonus depreciation for Pennsylvania income tax purposes.  The guidance allows 100% bonus depreciation for qualifying assets in the same year bonus depreciation is allowed for federal income tax purposes.  The 100% Pennsylvania bonus depreciation deduction created a current state income tax benefit for the flow-through impact of Pennsylvania regulated state tax depreciation.  The federal provision for 100% bonus depreciation generally applies to property placed into service before January 1, 2012.  The placed in-service deadline is extended to January 1, 2013 for property that has a cost in excess of $1 million, has a production period longer than one year and has a tax life of at least ten years.  PPL Electric's tax deduction for 100% bonus depreciation was significantly lower in 2012 than in 2011.

    2012  2011  2010 
Taxes, other than income         
 State gross receipts $ 101  $ 109  $ 130 
 State utility realty (a)   2    (10)   5 
 State capital stock   1    4    2 
 Property and other   1    1    1 
  Total $ 105  $ 104  $ 138 

(a)2011 includes PURTA tax that was refunded to PPL Electric customers in 2011.

(LKE)

The provision for LKE's deferred income taxes for regulated assets and liabilities is based upon the ratemaking principles reflected in rates established by the KPSC, VSCC, TRA and the FERC.  The difference in the provision for deferred income taxes for regulated assets and liabilities and the amount that otherwise would be recorded under GAAP is deferred and included in "Regulatory assets" or "Regulatory liabilities" on the Balance Sheets.

Significant components of LKE's deferred income tax assets and liabilities were as follows:

    2012  2011 
Deferred Tax Assets      
 Net operating loss carryforward $376  $318 
 Federal tax credit carryforwards  170   170 
 Regulatory liabilities  99   124 
 Accrued pension costs  42   67 
 State capital loss carryforward    
 Income taxes due to customers  26   30 
 Deferred investment tax credits  54   56 
 Other  41   30 
 Valuation allowances  (5)  (5)
  Total deferred tax assets  808   795 
273

    2012  2011 
Deferred Tax Liabilities      
 Plant - net  1,171   986 
 Regulatory assets  152   180 
 Other  13   25 
  Total deferred tax liabilities  1,336   1,191 
Net deferred tax liability $528  $396 

LKE expects to have adequate levels of taxable income to realize its recorded deferred income tax assets.

At December 31, LKE had the following loss and tax credit carryforwards.

   2012  Expiration
       
Loss carryforwards     
 Federal net operating losses $ 948  2028-2032
 State net operating losses   1,173  2028-2032
 State capital losses   119  2013-2016
       
Credit carryforwards     
 Federal investment tax credit��  125  2025-2028
 Federal alternative minimum tax credit   20  Indefinite
 Federal - other   25  2016-2032
 State - other   2022 

Changes in deferred tax valuation allowances were:

  Balance at        Balance
  Beginning      at End
  of Period Additions Deductions of Period
              
2012  $ 5         $ 5 
2011    6     $ 1 (a)   5 
2010    7  $ 6 (b)  7 (c)   6 
(a)Primarily related to the expiration of state capital loss carryforwards.
(b)A valuation allowance was recorded against deferred tax assets for state capital loss carryforwards.
(c)Related to release of a valuation allowance associated with federal capital loss carryforwards due to the LKE acquisition by PPL.
Details of the components of income tax expense, a reconciliation of federal income taxes derived from statutory tax rates applied to "Income (Loss) from Continuing Operations Before Income Taxes" to income taxes for reporting purposes, and details of "Taxes, other than income" were:

    Successor  Predecessor
         Two Months  Ten Months
    Year Ended Year Ended Ended  Ended
    December 31, December 31, December 31,  October 31,
    2012  2011  2010   2010 
Income Tax Expense (Benefit)            
 Current - Federal$ (32) $ (71) $ (31)  $33 
 Current - State  2    6      11 
   Total Current Expense (Benefit)  (30)   (65)   (27)    44 
 Deferred - Federal  185    208    52     62 
 Deferred - State  15    16    1     5 
   Total Deferred Expense, excluding operating loss carryforwards  200    224    53     67 
 Investment tax credit, net - Federal  (6)   (6)   (1)    (2)
 Tax benefit of operating loss carryforwards            
  Deferred - Federal  (46)          
  Deferred - State  (12)          
   Total Tax Benefit of Operating Loss Carryforwards  (58)          
 Total income tax expense from continuing operations (a)$ 106  $ 153  $ 25   $ 109 
                
 Total income tax expense - Federal$ 101  $ 131  $ 20   $ 93 
 Total income tax expense - State  5    22    5     16 
   Total income tax expense from continuing operations (a)$ 106  $ 153  $ 25   $ 109 

(a)Excludes current and deferred federal and state tax expense (benefit) recorded to Discontinued Operations of $(4) million in 2012, $(1) million in 2011, $1 million for the two month period ended December 31, 2010 and $(1) million for the ten month period ended October 31, 2010.  Also, excludes deferred federal and state tax expense (benefit) recorded to OCI of $(12) million in 2012, $(1) million in 2011, $3 million for the two month period ended December 31, 2010 and $(7) million for the ten month period ended October 31, 2010.
274

     Successor  Predecessor
           Two Months  Ten Months
     Year Ended Year Ended Ended  Ended
     December 31, December 31, December 31,  October 31,
     2012  2011  2010   2010 
Reconciliation of Income Taxes             
 Federal income tax on Income Before Income Taxes at             
  statutory tax rate - 35% $ 116  $ 147  $ 25   $ 105 
Increase (decrease) due to:             
 State income taxes, net of federal income tax benefit   6    15    2     9 
 Amortization of investment tax credit   (6)   (5)       (2)
 Net operating loss carryforward (a)   (9)          
 Other   (1)   (4)   (2)    (3)
   Total increase (decrease)   (10)   6        4 
Total income tax expense from continuing operations $ 106  $ 153  $ 25   $ 109 
Effective income tax rate  32.0%  36.5%  35.7%   36.3%

(a)During 2012, LKE recorded adjustments to deferred taxes related to net operating loss carryforwards based on income tax return adjustments.

     Successor  Predecessor
          Two Months  Ten Months
     Year Ended Year Ended Ended  Ended
     December 31, December 31, December 31,  October 31,
     2012  2011  2010   2010 
Taxes, other than income             
 Property and other $ 46  $ 37  $ 2   $ 21 
   Total $ 46  $ 37  $ 2   $ 21 

(LG&E)

The provision for LG&E's deferred income taxes for regulated assets and liabilities is based upon the ratemaking principles reflected in rates established by the KPSC and the FERC.  The difference in the provision for deferred income taxes for regulated assets and liabilities and the amount that otherwise would be recorded under GAAP is deferred and included in "Regulatory assets" or "Regulatory liabilities" on the Balance Sheets.

Significant components of LG&E's deferred income tax assets and liabilities were as follows:

    2012  2011 
Deferred Tax Assets      
 Regulatory liabilities $54  $65 
 Deferred investment tax credits  16   17 
 Income taxes due to customers  21   23 
 Other    10 
  Total deferred tax assets  100   115 
         
Deferred Tax Liabilities      
 Plant - net  526   462 
 Regulatory assets  86   98 
 Accrued pension costs  27   19 
 Other    
  Total deferred tax liabilities  648   588 
Net deferred tax liability $548  $473 

LG&E expects to have adequate levels of taxable income to realize its recorded deferred income tax assets.

At December 31, 2012, LG&E had $22 million of state net operating loss carryforwards that expire in 2030.
Details of the components of income tax expense, a reconciliation of federal income taxes derived from statutory tax rates applied to "Income Before Income Taxes" to income taxes for reporting purposes, and details of "Taxes, other than income" were:     
275

     Successor  Predecessor
          Two Months  Ten Months
     Year Ended Year Ended Ended  Ended
     December 31, December 31, December 31,  October 31,
     2012  2011  2010   2010 
Income Tax Expense (Benefit)             
 Current - Federal $ (2) $ 12  $ (4)  $32 
 Current - State   3    8      
   Total Current Expense (Benefit)   1    20    (3)    37 
 Deferred - Federal   65    52    12     21 
 Deferred - State   6    2    1     2 
   Total Deferred Expense   71    54    13     23 
 Investment tax credit, net - Federal   (3)   (3)       (2)
   Total income tax expense (a) $ 69  $ 71  $ 10   $ 58 
                 
 Total income tax expense - Federal $ 60  $ 61  $ 8   $ 51 
 Total income tax expense - State   9    10    2     7 
   Total income tax expense (a) $ 69  $ 71  $ 10   $ 58 

(a)Excludes deferred federal and state tax expense recorded to OCI of $7 million for the ten month period ended October 31, 2010.

     Successor  Predecessor
          Two Months  Ten Months
     Year Ended Year Ended Ended  Ended
     December 31, December 31, December 31,  October 31,
     2012  2011  2010   2010 
Reconciliation of Income Taxes             
 Federal income tax on Income Before Income Taxes at             
  statutory tax rate - 35% $ 67  $ 68  $ 10   $ 58 
Increase (decrease) due to:             
 State income taxes, net of federal income tax benefit   5    7    1     4 
 Other   (3)   (4)   (1)    (4)
   Total increase (decrease)   2    3        
Total income tax expense $ 69  $ 71  $ 10   $ 58 
Effective income tax rate  35.9%  36.4%  34.5%   34.7%

     Successor  Predecessor
          Two Months  Ten Months
     Year Ended Year Ended Ended  Ended
     December 31, December 31, December 31,  October 31,
     2012  2011  2010   2010 
Taxes, other than income             
 Property and other $ 23  $ 18  $ 1   $ 12 
   Total $ 23  $ 18  $ 1   $ 12 

(KU)

The provision for KU's deferred income taxes for regulated assets and liabilities is based upon the ratemaking principles reflected in rates established by the KPSC, VSCC, TRA and the FERC.  The difference in the provision for deferred income taxes for regulated assets and liabilities and the amount that otherwise would be recorded under GAAP is deferred and included in "Regulatory assets" or "Regulatory liabilities" on the Balance Sheets.

Significant components of KU's deferred income tax assets and liabilities were as follows:

    2012  2011 
Deferred Tax Assets      
 Regulatory liabilities $45  $58 
 Deferred investment tax credits  38   39 
 Net operating loss carryforward  20    
 Income taxes due to customers    
 Accrued pension costs  (5)  
 Other    
  Total deferred tax assets  110   119 
276

    2012  2011 
Deferred Tax Liabilities      
 Plant - net  623   500 
 Regulatory assets  65   82 
 Other    16 
  Total deferred tax liabilities  693   598 
Net deferred tax liability $583  $479 

KU expects to have adequate levels of taxable income to realize its recorded deferred income tax assets.

At December 31, 2012, KU had $56 million of federal net operating loss carryforwards that expire in 2032.

Details of the components of income tax expense, a reconciliation of federal income taxes derived from statutory tax rates applied to "Income Before Income Taxes" to income taxes for reporting purposes, and details of "Taxes, other than income" were:    

    Successor  Predecessor
         Two Months  Ten Months
    Year Ended Year Ended Ended  Ended
    December 31, December 31, December 31,  October 31,
    2012  2011  2010   2010 
Income Tax Expense (Benefit)            
 Current - Federal$ (20) $ (8) $13   $46 
 Current - State  (1)   4      
   Total Current Expense (Benefit)  (21)   (4)   16     55 
 Deferred - Federal  111    101    4     20 
 Deferred - State  11    10        3 
   Total Deferred Expense, excluding operating loss carryforwards  122    111    4     23 
 Investment tax credit, net - Federal  (3)   (3)       
 Tax benefit of operating loss carryforwards            
  Deferred - Federal  (20)          
   Total Tax Benefit of Operating Loss Carryforwards  (20)          
 Total income tax expense (a)$ 78  $ 104  $ 20   $ 78 
                
 Total income tax expense - Federal$ 68  $ 90  $ 17   $ 66 
 Total income tax expense - State  10    14    3     12 
   Total income tax expense (a)$ 78  $ 104  $ 20   $ 78 

(a)Excludes deferred federal and state tax (benefit) recorded to OCI of $1 million in 2012 and $(1) million for the ten month period ended October 31, 2010.

     Successor  Predecessor
          Two Months  Ten Months
     Year Ended Year Ended Ended  Ended
     December 31, December 31, December 31,  October 31,
     2012  2011  2010   2010 
Reconciliation of Income Taxes             
 Federal income tax on Income Before Income Taxes at             
  statutory tax rate - 35% $ 75  $ 99  $ 19   $ 77 
Increase (decrease) due to:             
 State income taxes, net of federal income tax benefit   6    9    2     8 
 Other   (3)   (4)   (1)    (7)
   Total increase (decrease)   3    5    1     1 
Total income tax expense $ 78  $ 104  $ 20   $ 78 
Effective income tax rate  36.3%  36.9%  36.4%   35.8%

     Successor  Predecessor
          Two Months  Ten Months
     Year Ended Year Ended Ended  Ended
     December 31, December 31, December 31,  October 31,
     2012  2011  2010   2010 
Taxes, other than income             
 Property and other $ 23  $ 19  $ 1   $ 9 
   Total $ 23  $ 19  $ 1   $ 9 
277

Unrecognized Tax Benefits (PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and KU)

Changes to unrecognized tax benefits were as follows:

   2012  2011 
PPL      
 Beginning of period $145  $251 
 Additions based on tax positions of prior years  15   40 
 Reductions based on tax positions of prior years  (61)  (160)
 Additions based on tax positions related to the current year    25 
 Reductions based on tax positions related to the current year  (3)  (4)
 Settlements  (2)   
 Lapse of applicable statute of limitation  (9)  (10)
 Effects of foreign currency translation     
 End of period $92  $145 
        
PPL Energy Supply      
 Beginning of period $28  $183 
 Additions based on tax positions of prior years    
 Reductions based on tax positions of prior years  (2)   
 Reductions based on tax positions related to the current year     (1)
 Derecognize unrecognized tax benefits (a)     (155)
 End of period $30  $28 
        
PPL Electric      
 Beginning of period $73  $62 
 Reductions based on tax positions of prior years  (43)   
 Additions based on tax positions related to the current year    22 
 Reductions based on tax positions related to the current year     (1)
 Lapse of applicable statute of limitation  (9)  (10)
 End of period $26  $73 

(a)Represents unrecognized tax benefits derecognized as a result of PPL Energy Supply's distribution of its membership interest in PPL Global to PPL Energy Supply's parent, PPL Energy Funding.  See Note 9 for additional information on the distribution.

LKE's, LG&E's and KU's unrecognized tax benefits and changes in those unrecognized tax benefits are insignificant at December 31, 2012 and December 31, 2011.

At December 31, 2012, 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.  For LKE, LG&E and KU, no significant changes in unrecognized tax benefits are projected over the next 12 months.

  Increase Decrease
       
PPL $10  $90 
PPL Energy Supply    30 
PPL Electric  11   25 

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.

At December 31, the total unrecognized tax benefits and related indirect effects that, if recognized, would decrease the effective tax rate were as follows.  The amounts for LKE, LG&E and KU were insignificant.

  2012  2011 
       
PPL $38  $41 
PPL Energy Supply  13   13 
PPL Electric    
278

At December 31, the following receivable (payable) balances were recorded for interest related to tax positions.  The amounts for LKE, LG&E and KU were insignificant.

  2012  2011 
       
PPL $(16) $(20)
PPL Energy Supply  17   
PPL Electric    

The following interest expense (benefit) was recognized in income taxes.  The amounts for LKE, LG&E and KU were insignificant.

  2012  2011  2010 
          
PPL $ (4) $ 27  $ (39)
PPL Energy Supply   (4)   6    (30)
PPL Electric   (4)   (5)   (8)

PPL or its subsidiaries file tax returns in five major tax jurisdictions.  The income tax provisions for PPL Energy Supply, PPL Electric, LKE, LG&E and KU are calculated in accordance with an intercompany tax sharing agreement which provides that taxable income be calculated as if each domestic subsidiary filed a separate consolidated return.  Based on this tax sharing agreement, PPL Energy Supply or its subsidiaries indirectly or directly file tax returns in three major tax jurisdictions, PPL Electric or its subsidiaries indirectly or directly file tax returns in two major tax jurisdictions, and LKE, LG&E and KU or their subsidiaries indirectly or directly file tax returns in two major tax jurisdictions.  With few exceptions, at December 31, 2012, these jurisdictions, as well as the tax years that are no longer subject to examination, were as follows:  

PPL
PPLEnergy SupplyPPL ElectricLKELG&EKU
U.S. (federal) (a)1997 and prior1997 and prior1997 and prior10/31/2010 and prior10/31/2010 and prior10/31/2010 and prior
Pennsylvania (state)2008 and prior2008 and prior2008 and prior
Kentucky (state)2008 and prior2010 and prior2010 and prior2010 and prior
Montana (state)2008 and prior2008 and prior
U.K. (foreign)2010 and prior

(a)For LKE, LG&E and KU 2009, as well as the ten month period ending October 31, 2010, remain open under the standard three year statute of limitations; however, the IRS has completed its audit of these periods under the Compliance Assurance Process, effectively closing them to audit adjustments.  No issues remain outstanding.             

Other(PPL and PPL Energy Supply)

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 tax year 2009.  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.  The IRS has not yet issued guidance to provide a safe harbor method related to generation property.  The IRS may assert and ultimately conclude that PPL's deduction for generation-related expenditures should be disallowed in whole or in part.  PPL believes that it has established an adequate reserve for this contingency.

Tax Legislation(PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and KU)

On January 2, 2013, H.R. 8, The American Taxpayer Relief Act of 2012, was signed into law.  The most significant extension of tax relief under this Act applicable to PPL is the extension of bonus depreciation.  This provision extends the current 50% expensing provision for qualifying property purchased and placed in service before January 1, 2014 (before January 1, 2015 for certain longer-lived and transportation assets).  PPL is still evaluating the changes.  However, PPL does not expect that the changes related to this legislation will have a material impact on income tax expense.    
279

6.  Utility Rate Regulation

Regulatory Assets and Liabilities

(PPL, PPL Electric, LKE, LG&E and KU)

As discussed in Note 1 and summarized below, PPL, PPL Electric, LKE, LG&E and KU reflect the effects of regulatory actions in the financial statements for their cost-based rate-regulated utility operations.  Regulatory assets and liabilities are classified as current if, upon initial recognition, the entire amount related to that item will be recovered or refunded within a year of the balance sheet date.  As such, the primary items classified as current are related to rate mechanisms that periodically adjust to account for over- or under-collections.

(PPL, LKE, LG&E and KU)

LG&E is subject to the jurisdiction of the KPSC and FERC, and KU is subject to the jurisdiction of the KPSC, FERC, VSCC and TRA.

LG&E's and KU's Kentucky base rates are calculated based on a return on capitalization (common equity, long-term debt and short-term debt) including certain adjustments to exclude non-regulated investments and costs recovered separately through other rate mechanisms.  As such, LG&E and KU earn a return on the net cash invested in regulatory assets and regulatory liabilities.

As a result of purchase accounting requirements, certain fair value amounts related to contracts that had favorable or unfavorable terms relative to market were recorded on the Balance Sheets with an offsetting regulatory asset or liability.  LG&E and KU recover in customer rates the cost of coal contracts, power purchases and emission allowances.  As a result, management believes the regulatory assets and liabilities created to offset the fair value amounts at LKE's acquisition date meet the recognition criteria established by existing accounting guidance and eliminate any rate making impact of the fair value adjustments.  LG&E's and KU's customer rates will continue to reflect the original contracted prices for these contracts.

(PPL, LKE and KU)

KU's Virginia base rates are calculated based on a return on rate base (net utility plant plus working capital less deferred taxes and miscellaneous deductions).  All regulatory assets and liabilities, except the levelized fuel factor, are excluded from the return on rate base utilized in the calculation of Virginia base rates; therefore, no return is earned on the related assets.

KU's rates to municipal customers for wholesale requirements are calculated based on annual updates to a rate formula that utilizes a return on rate base (net utility plant plus working capital less deferred taxes and miscellaneous deductions).  All regulatory assets and liabilities are excluded from the return on rate base utilized in the development of municipal rates; therefore, no return is earned on the related assets.

(PPL and PPL Electric)

PPL Electric's distribution base rates are calculated based on a return on rate base (net utility plant plus a cash working capital allowance less plant-related deferred taxes and other miscellaneous additions and deductions).  PPL Electric's transmission revenues are billed in accordance with a FERC tariff that allows for recovery of transmission costs incurred, a return on transmission-related plant and an automatic annual update.  See "Transmission Formula Rate" below for additional information on this tariff.  All regulatory assets and liabilities are excluded from distribution and transmission return on investment calculations; therefore, generally no return is earned on PPL Electric's regulatory assets.

(PPL, PPL Electric, LKE, LG&E and KU)

The following tables provide information about the regulatory assets and liabilities of cost-based rate-regulated utility operations.
280

   PPL PPL Electric
   2012  2011  2012  2011 
              
Current Regulatory Assets:            
 Gas supply clause $ 11  $ 6       
 Fuel adjustment clause   6    3       
 Other   2          
Total current regulatory assets $ 19  $ 9       
              
Noncurrent Regulatory Assets:            
 Defined benefit plans $ 730  $ 615  $ 362  $ 276 
 Taxes recoverable through future rates   293    289    293    289 
 Storm costs   168    154    59    31 
 Unamortized loss on debt   96    110    65    77 
 Interest rate swaps   67    69       
 Accumulated cost of removal of utility plant   71    53    71    53 
 Coal contracts (a)   4    11       
 AROs   26    18       
 Other   28    30    3    3 
Total noncurrent regulatory assets $ 1,483  $ 1,349  $ 853  $ 729 
             
Current Regulatory Liabilities:            
 Generation supply charge $ 27  $ 42  $ 27  $ 42 
 ECR   4    7       
 Gas supply clause   4    6       
 Transmission service charge   6    2    6    2 
 Transmission formula rate      5       5 
 Universal Service Rider   17    1    17    1 
 Other   3    10    2    3 
Total current regulatory liabilities $ 61  $ 73  $ 52  $ 53 
              
Noncurrent Regulatory Liabilities:            
 Accumulated cost of removal of utility plant $ 679  $ 651       
 Coal contracts (a)   141    180       
 Power purchase agreement - OVEC (a)   108    116       
 Net deferred tax assets   34    39       
 Act 129 compliance rider   8    7  $ 8  $ 7 
 Defined benefit plans   17    9       
 Interest rate swaps   14          
 Other   9    8       
Total noncurrent regulatory liabilities $ 1,010  $ 1,010  $ 8  $ 7 

   LKE LG&E KU
   2012  2011  2012  2011  2012  2011 
                    
Current Regulatory Assets:                  
 Gas supply clause $ 11  $ 6  $ 11  $ 6       
 Fuel adjustment clause   6    3    6    3       
 Other   2       2          
Total current regulatory assets $ 19  $ 9  $ 19  $ 9       
                    
Noncurrent Regulatory Assets:                  
 Defined benefit plans $ 368  $ 339  $ 232  $ 225  $ 136  $ 114 
 Storm costs   109    123    59    66    50    57 
 Unamortized loss on debt   31    33    20    21    11    12 
 Interest rate swaps   67    69    67    69       
 Coal contracts (a)   4    11    2    5    2    6 
 AROs   26    18    15    11    11    7 
 Other   25    27    5    6    20    21 
Total noncurrent regulatory assets $ 630  $ 620  $ 400  $ 403  $ 230  $ 217 
                   
 Current Regulatory Liabilities:                  
  ECR $ 4  $ 7        $ 4  $ 7 
  Gas supply clause   4    6  $ 4  $ 6       
  Other   1    7       4    1    3 
Total current regulatory liabilities $ 9  $ 20  $ 4  $ 10  $ 5  $ 10 
281

   LKE LG&E KU
   2012  2011  2012  2011  2012  2011 
Noncurrent Regulatory Liabilities:                  
 Accumulated cost of removal                  
  of utility plant $ 679  $ 651  $ 297  $ 286  $ 382  $ 365 
 Coal contracts (a)   141    180    61    78    80    102 
 Power purchase agreement - OVEC (a)   108    116    75    80    33    36 
 Net deferred tax assets   34    39    28    31    6    8 
 Defined benefit plans   17    9          17    9 
 Interest rate swaps   14       7       7    
 Other   9    8    3    3    6    5 
Total noncurrent regulatory liabilities $ 1,002  $ 1,003  $ 471  $ 478  $ 531  $ 525 

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

Following is an overview of selected regulatory assets and liabilities detailed in the preceding tables.  Specific developments with respect to certain of these regulatory assets and liabilities are discussed in "Regulatory Matters."

(PPL and PPL Electric)

Generation Supply Charge

The generation supply charge is a cost recovery mechanism that permits PPL Electric to recover costs incurred to provide generation supply to PLR customers who receive basic generation supply service.  The recovery includes charges for generation supply (energy and capacity and ancillary services), as well as administration of the acquisition process.  In addition, the generation supply charge contains a reconciliation mechanism whereby any over- or under-recovery from prior quarters is refunded to, or recovered from, customers through the adjustment factor determined for the subsequent quarter.

Universal Service Rider (USR)

PPL Electric's distribution rates permit recovery of applicable costs associated with the universal service programs provided to PPL Electric's residential customers.  Universal service programs include low-income programs, such as OnTrack and Winter Relief Assistance Program (WRAP).  OnTrack is a special payment program for low-income households within the federal poverty level who have difficulty paying their electric bills.  This program is funded by residential customers and administered by community-based organizations.  Customers who participate in OnTrack receive assistance in the form of reduced payment arrangements, protection against termination of electric service and referrals to other community programs and services.  The WRAP program reduces electric bills and improves living comfort for low-income customers by providing services such as weatherization measures and energy education services.  The USR is applied to distribution charges for each customer who receives distribution service under PPL Electric's residential service rate schedules.  The USR contains a reconciliation mechanism whereby any over- or under-recovery from the current year is refunded to or recovered from residential customers through the adjustment factor determined for the subsequent year.

Taxes Recoverable through Future Rates

Taxes recoverable through future rates represent the portion of future income taxes that will be recovered through future rates based upon established regulatory practices.  Accordingly, this regulatory asset is recognized when the offsetting deferred tax liability is recognized.  For general-purpose financial reporting, this regulatory asset and the deferred tax liability are not offset; rather, each is displayed separately.  This regulatory asset is expected to be recovered over the period that the underlying book-tax timing differences reverse and the actual cash taxes are incurred.

Act 129 Compliance Rider

In compliance with Pennsylvania's Act 129 of 2008 and implementing regulations, PPL Electric's energy efficiency and conservation plan was approved by a PUC order in October 2009.  The order allows PPL Electric to recover the maximum $250 million cost of the program ratably over the life of the plan, from January 1, 2010 through May 31, 2013.  The plan includes programs intended to reduce electricity consumption.  The recoverable costs include direct and indirect charges, including design and development costs, general and administrative costs and applicable state evaluator costs.  The rates are applied to customers who receive distribution service through the Act 129 Compliance Rider.  The actual program costs are reconcilable, and any over- or under-recovery from customers will be refunded or recovered at the end of the program.  See below under "Regulatory Matters - Pennsylvania Activities" for additional information on Act 129.
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Transmission Service Charge (TSC)

PPL Electric is charged by PJM for transmission service-related costs applicable to its PLR customers.  PPL Electric passes these costs on to customers, who receive basic generation supply service through the PUC-approved TSC cost recovery mechanism.  The TSC contains a reconciliation mechanism whereby any over- or under-recovery from customers is either refunded to, or recovered from, customers through the adjustment factor determined for the subsequent year.

Transmission Formula Rates

PPL Electric's transmission revenues are billed in accordance with a FERC-approved open access transmission tariff that utilizes a formula-based rate recovery mechanism.  The formula rate is based on prior year expenditures and forecasted current calendar year transmission plant additions.  An adjustment to the prior year expenditures is recorded as a regulatory asset or liability.

(PPL, PPL Electric, LKE, LG&E and KU)

Defined Benefit Plans

Recoverable costs of defined benefit plans represent the portion of unrecognized transition obligation, prior service cost and net actuarial losses that will be recovered in defined benefit plans expense through future base rates based upon established regulatory practices and are amortized over the average service lives of plan participants.  These regulatory assets and liabilities are adjusted at least annually or whenever the funded status of defined benefit plans is re-measured.  Of the regulatory asset and liability balances recorded, costs of $60 million for PPL, $22 million for PPL Electric, $38 million for LKE, $24 million for LG&E and $14 million for KU are expected to be amortized into net periodic defined benefit costs in 2013.

Storm Costs

PPL Electric, LG&E and KU have the ability to request from the PUC, KPSC and VSCC the authority to treat expenses related to specific extraordinary storms as a regulatory asset and defer and amortize such costs for regulatory accounting and reporting purposes.  Once such authority is granted, PPL Electric, LG&E and KU can request recovery of those expenses in a base rate case.

Unamortized Loss on Debt

Unamortized loss on reacquired debt represents losses on long-term debt reacquired or redeemed that have been deferred and will be amortized and recovered over either the original life of the extinguished debt or the life of the replacement debt (in the case of refinancing).  Such costs are being amortized through 2029 for PPL Electric.  Such costs are being amortized through 2035 for LG&E and 2036 for PPL, LKE and KU.

Accumulated Cost of Removal of Utility Plant

LG&E and KU accrue for costs of removal through depreciation expense with an offsetting credit to a regulatory liability.  The regulatory liability is relieved as costs are incurred.  See Note 1 for additional information.

PPL Electric does not accrue for costs of removal.  When costs of removal are incurred, PPL Electric records the deferral of costs as a regulatory asset.  Such deferral is included in rates and amortized over the subsequent five-year period.           

(PPL, LKE, LG&E and KU)

ECR

Kentucky law permits LG&E and KU to recover the costs, including a return of operating expenses and a return of and on capital invested, of complying with the Clean Air Act and those federal, state or local environmental requirements which apply to coal combustion wastes and by-products from coal-fired electric generating facilities.  The KPSC requires reviews of the past operations of the environmental surcharge for six-month and two-year billing periods to evaluate the related charges, credits and rates of return, as well as to provide for the roll-in of ECR amounts to base rates each two-year period.  The ECR regulatory asset or liability represents the amount that has been under- or over-recovered due to timing or adjustments to the mechanism and is typically recovered within 12 months.  LG&E and KU are authorized to receive a 10.63% and 10.10% return on projects associated with the 2009 and 2011 compliance plans.  As a result of the settlement agreement in the 2012
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rate case, beginning in 2013, LG&E and KU will receive a 10.25% return on all ECR projects included in the 2009 and 2011 compliance plans.

Coal Contracts

As a result of purchase accounting associated with PPL's acquisition of LKE, LG&E's and KU's coal contracts were recorded at fair value on the Balance Sheets with offsets to regulatory assets for those contracts with unfavorable terms relative to current market prices and offsets to regulatory liabilities for those contracts with favorable terms relative to current market prices.  These regulatory assets and liabilities are being amortized over the same terms as the related contracts, which expire at various times through 2016.

Gas Supply Clause

LG&E's natural gas rates contain a gas supply clause, whereby the expected cost of natural gas supply and variances between actual and expected costs from prior periods are adjusted quarterly in LG&E's rates, subject to approval by the KPSC.  The gas supply clause includes a separate natural gas procurement incentive mechanism, a performance-based rate, which allows LG&E's rates to be adjusted annually to share variances between actual costs and market indices between the shareholders and the customers during each performance-based rate year (12 months ending October 31).  The regulatory assets or liabilities represent the total amounts that have been under- or over-recovered due to timing or adjustments to the mechanisms and are recovered within 18 months.

Fuel Adjustment Clauses

LG&E's and KU's retail electric rates contain a fuel adjustment clause, whereby variances in the cost of fuel for electric generation, including transportation costs, from the costs embedded in base rates are adjusted in LG&E's and KU's rates.  The KPSC requires public hearings at six-month intervals to examine past fuel adjustments and at two-year intervals to review past operations of the fuel clause and, to the extent appropriate, reestablish the fuel charge included in base rates.

KU also employs a levelized fuel factor mechanism for Virginia customers using an average fuel cost factor based primarily on projected fuel costs.  The Virginia levelized fuel factor allows fuel recovery based on projected fuel costs for the coming year plus an adjustment for any under- or over-recovery of fuel expenses from the prior year.  The regulatory assets or liabilities represent the amounts that have been under- or over-recovered due to timing or adjustments to the mechanism and are typically recovered within 12 months.

Interest Rate Swaps

(PPL, LKE and LG&E)

Because realized amounts associated with LG&E's interest rate swaps, including a terminated swap contract, are recoverable through rates based on an order from the KPSC, LG&E's unrealized gains and losses are recorded as a regulatory asset or liability until they are realized as interest expense.  Interest expense from existing swaps is realized and recovered over the terms of the associated debt, which matures through 2033.  Amortization of the gain/loss related to the terminated swap contract is recovered through 2035, as approved by the KPSC.

(LKE and LG&E)

In the third quarter of 2010, LG&E recorded a pre-tax gain to reverse previously recorded losses of $21 million and $9 million to reflect the reclassification of its ineffective swaps and terminated swap to regulatory assets based on an order from the KPSC in the 2010 rate case whereby the cost of LG&E's terminated swap was allowed to be recovered in base rates.  Previously, gains and losses on interest rate swaps designated as effective cash flow hedges were recorded within OCI and common equity.  The gains and losses on the ineffective portion of interest rate swaps designated as cash flow hedges were recorded to earnings monthly, as was the entire change in the market value of the ineffective swaps.
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(PPL, LKE, LG&E and KU)

In November 2012, 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.  These hedging instruments have terms identical to forward-starting swaps entered into by PPL with third parties.  LG&E and KU believe that realized gains and losses from the 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.  See Note 19 for additional information related to the forward-starting interest rate swaps.

AROs

As discussed in Note 1, the accretion and depreciation related to LG&E's and KU's AROs are offset with a regulatory credit on the income statement, such that there is no earnings impact.  When an asset with an ARO is retired, the related ARO regulatory asset created by the regulatory credit is offset against the associated regulatory liability, PP&E and ARO liability.

Power Purchase Agreement - OVEC

As a result of purchase accounting associated with PPL's acquisition of LKE, the fair values of the OVEC power purchase agreement were recorded on the balance sheets of LKE, LG&E and KU with offsets to regulatory liabilities.  The regulatory liabilities are being amortized using the units-of-production method until March 2026, the expiration date of the agreement at the date of the acquisition.

Regulatory Liability associated with Net Deferred Tax Assets

LG&E's and KU's regulatory liabilities associated with net deferred tax assets represent the future revenue impact from the reversal of deferred income taxes required primarily for unamortized investment tax credits.  These regulatory liabilities are recognized when the offsetting deferred tax assets are recognized.  For general-purpose financial reporting, these regulatory liabilities and the deferred tax assets are not offset; rather, each is displayed separately.

Regulatory Matters

Kentucky Activities

(PPL, LKE, LG&E and KU)

Rate Case Proceedings

In June 2012, LG&E and KU filed requests with the KPSC for increases in annual base electric rates of approximately $62 million at LG&E and approximately $82 million at KU and an increase in annual base gas rates of approximately $17 million at LG&E.  In November 2012, LG&E and KU along with all of the parties filed a unanimous settlement agreement.  Among other things, the settlement provided for increases in annual base electric rates of $34 million at LG&E and $51 million at KU and an increase in annual base gas rates of $15 million at LG&E.  The settlement agreement also included revised depreciation rates that result in reduced annual electric depreciation expense of approximately $9 million for LG&E and approximately $10 million for KU.  The settlement agreement included an authorized return on equity at LG&E and KU of 10.25%.  On December 20, 2012, the KPSC issued orders approving the provisions in the settlement agreement.  The new rates became effective on January 1, 2013.  In addition to the increased base rates, the KPSC approved a gas line tracker mechanism for LG&E to provide for recovery of costs associated with LG&E's gas main replacement program, gas service lines and risers.

Independent Transmission Operators

In September 2012, LG&E and KU completed the transition of their independent transmission operator contractual arrangements from Southwest Power Pool, Inc. to TranServ International, Inc.  This change had previously received approvals of the FERC and the KPSC.
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(PPL, LKE and LG&E)

CPCN Filing

In October 2012, LG&E filed an application with the KPSC to construct a new wet scrubber to serve Unit 3 at the Mill Creek Generating Station.  The application partially modifies the existing authority granted by the KPSC in 2011, which authorized LG&E to build two new scrubbers to serve Mill Creek Units 1 and 2 and another to serve Mill Creek Unit 4.  Additionally, authority was granted allowing the Mill Creek Unit 3 to be served by the existing Unit 4 scrubber.  The CPCN sought approval to construct a new wet scrubber on Mill Creek Unit 3 instead of utilizing the Unit 4 scrubber.  In February 2013, LG&E received the requested KPSC approval to construct a new wet scrubber to serve Unit 3 at the Mill Creek Generating Station.

Storm Costs

In August 2011, a strong storm hit LG&E's service area causing significant damage and widespread outages for approximately 139,000 customers.  LG&E filed an application with the KPSC in September 2011, requesting approval of a regulatory asset recorded to defer, for future recovery, $8 million in incremental operation and maintenance expenses related to the storm restoration.  An order was received in December 2011 granting the request.  On December 20, 2012, the KPSC in the approval of the unanimous rate case settlement agreement, authorized regulatory asset recovery effective January 1, 2013, over a five year period.

Pennsylvania Activities(PPL and PPL Electric)

Rate Case Proceeding

In March 2012, PPL Electric filed a request with the PUC to increase distribution rates by approximately $105 million, effective January 1, 2013.  In its December 28, 2012 final order, the PUC approved a 10.4% return on equity and a total distribution revenue increase of about $71 million.  The approved rates became effective January 1, 2013.

Also, in its December 28, 2012 final order, the PUC directed PPL Electric to file a proposed Storm Damage Expense Rider within 90 days following the order.  PPL Electric plans to file a proposed Storm Damage Expense Rider with the PUC and, as part of that filing, request recovery of the $28 million of qualifying storm costs incurred as a result of the October 2012 landfall of Hurricane Sandy.  See "Storm Costs" below for additional information regarding Hurricane Sandy.

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 exposed 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.  Act 129 requires EDCs to reduce overall electricity consumption by 1.0% by May 2011 and, by May 2013, reduce overall electricity consumption by 3.0% and reduce peak demand by 4.5%.  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.  EDCs will be 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 EE&C Plan, and in March 2012 confirmed that PPL Electric met the 2011 requirement.  PPL Electric will determine if it met the peak demand reduction target and the May 2013 energy reduction target after it completes the final program evaluation on November 5, 2013.

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 reduction target is 2.1%.  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 the PUC is expected to issue its decision in March 2013. Act 129 also requires the Default Service Provider (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
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years), with long-term contracts limited to 25% of load unless otherwise approved by the PUC.  The DSP will be able to recover the costs associated with a competitive procurement plan.

The PUC has approved PPL Electric's procurement plan for the period January 1, 2011 through May 31, 2013, and PPL Electric 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 its January 24, 2013 final order, the PUC approved PPL Electric's plan with modifications and directed PPL Electric to establish collaborative processes to address several retail competition issues.

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 will be able to recover the costs of providing smart metering technology.  In August 2009, PPL Electric filed its proposed smart meter technology procurement and installation plan with the PUC.  All of PPL Electric's metered customers currently have smart meters installed at their service locations.  PPL Electric's current advanced metering technology generally satisfies the requirements of Act 129 and does not need to be replaced.  In June 2010, the PUC entered its order approving PPL Electric's smart meter plan with several modifications.  In compliance with the order, in the third quarter of 2010, PPL Electric submitted a revised plan with a cost estimate of $38 million to be incurred over a five-year period, beginning in 2009, and filed its Section 1307(e) cost recovery mechanism, the Smart Meter Rider (SMR) to recover these costs beginning January 1, 2011.  In December 2010, the PUC approved PPL Electric's SMR which reflects the costs of its smart meter program plus a return on its Smart Meter investments.  The SMR, which became effective January 1, 2011, contains a reconciliation mechanism whereby any over- or under-recovery from customers is either refunded to or collected from customers in the subsequent year.  In August 2011, PPL Electric filed with the PUC an annual report describing the actions it was taking under its Smart Meter plan in 2011 and its planned actions for 2012.  PPL Electric also submitted revised SMR charges which became effective January 1, 2012.  In August 2012, PPL Electric filed with the PUC an annual report describing the actions it was taking under its Smart Meter plan in 2012 and its planned actions for 2013.  PPL Electric also submitted revised SMR charges which became effective January 1, 2013.

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 this phase 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.  In December 2011, the PUC issued a final order providing guidance to EDCs on the design of their next default service procurement plan filings.  In December 2011, the PUC also issued a tentative order proposing an intermediate work plan to address issues raised in the investigation.  In March 2012, the PUC entered a final order on the intermediate work plan, issued three possible models for the default service "end state" and held a hearing regarding those three models.  In September 2012, the PUC issued a Secretarial Letter setting forth an "RMI End State Proposal" for discussion.  The PUC issued a tentative implementation order in early November 2012, following which parties had 30 days to provide comment.  PPL Electric and PPL EnergyPlus filed joint comments.  A final implementation order was issued on February 15, 2013.  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.

Legislation - Regulatory Procedures and Mechanisms

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 PPL Electric filed a petition requesting permission to establish a DSIC on January 15, 2013, with rates proposed to be effective beginning May 1, 2013.
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Storm Costs

During 2012, PPL Electric experienced several PUC-reportable storms, including Hurricane Sandy, resulting in total restoration costs of $81 million, of which $61 million were initially recorded in "Other operation and maintenance" on the Statement of Income.  In particular, in late October 2012, PPL Electric experienced widespread significant damage to its distribution network from Hurricane Sandy resulting in total restoration costs of $66 million, of which $50 million were initially recorded in "Other operation and maintenance" on the Statement of Income.  Although PPL Electric had storm insurance coverage, the costs incurred from Hurricane Sandy exceeded the policy limits.  Probable insurance recoveries recorded during 2012 were $18.25 million, of which $14 million were included in "Other operation and maintenance" on the Statement of Income.  PPL Electric recorded a regulatory asset of $28 million in December 2012 (offset to "Other operation and maintenance" on the Statement of Income).  In February 2013, PPL Electric received an order from the PUC granting permission to defer qualifying storm costs in excess of insurance recoveries associated with Hurricane Sandy.  See "Rate Case Proceeding" above for information regarding PPL Electric's plan to file a proposed Storm Damage Expense Rider with the PUC.

PPL Electric experienced several PUC-reportable storms during 2011 including Hurricane Irene and a late October snow storm.  Total restoration costs were $84 million, of which $54 million were initially recorded in "Other operation and maintenance" on the Statement of Income.  Although PPL Electric had storm insurance coverage with a PPL affiliate, the costs associated with the unusually high number of PUC-reportable storms exceeded policy limits.  Probable insurance recoveries recorded during 2011 were $26.5 million, of which $16 million were included in "Other operation and maintenance" on the Statements of Income.  In December 2011, PPL Electric received orders from the PUC granting permission to defer qualifying storm costs in excess of insurance recoveries associated with Hurricane Irene and a late October 2011 snowstorm.  PPL Electric recorded a regulatory asset of $25 million in December 2011 (offset to "Other operation and maintenance" on the Statement of Income).  The PUC granted PPL Electric's recovery of the 2011 storm costs in its final order in the 2012 rate case.  Recovery began in January 2013 and will continue over a five year period.

Federal Matters

FERC Formula Rates (PPL and PPL Electric)

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.

PPL Electric has initiated its formula rate 2012, 2011 and 2010 Annual Updates.  Each update has been subsequently challenged by a group of municipal customers, which challenges have been opposed by PPL Electric.  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 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.

In March 2012, PPL Electric filed a request with the FERC seeking recovery of its regulatory asset related to the deferred state tax liability that existed at the time of the transition from the flow-through treatment of state income taxes to full normalization.  This change in tax treatment occurred in 2008 as a result of prior FERC initiatives that transferred regulatory jurisdiction of certain transmission assets from the PUC to FERC.  At December 31, 2012 and 2011, $52 million and $53 million respectively, are classified as taxes recoverable through future rates and included on the Balance Sheets in "Other Noncurrent Assets - Regulatory assets."  In May 2012, the FERC issued an order approving PPL Electric's request to recover the deferred tax regulatory asset over a 34-year period beginning June 1, 2012.               

U.K. Activities(PPL)

Ofgem Review of Line Loss Calculation

WPD had a $94 million liability recorded at December 31, 2012, compared with $170 million at December 31, 2011, related to the close-out of line losses for the prior price control period, DPCR4.  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.  In October 2011, Ofgem issued a consultation paper citing two potential changes to the methodology, both of which would result in a reduction of the liability.  In March 2012, Ofgem issued a decision regarding the preferred methodology.  In July 2012, Ofgem issued a
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consultation paper regarding certain aspects of the preferred methodology as it relates to the DPCR4 line loss incentive/penalty and a proposal to delay the target date for making a final decision until April 2013.  In October 2012, a license modification was issued to allow Ofgem to publish the final decisions on these matters by April 2013.  In November 2012, Ofgem issued an additional consultation on the final DPCR4 line loss close-out that published values for each DNO and further indicated the preferred methodology that would replace the methodology under WPD's licenses.  Based on applying the preferred methodology for DPCR4, the liability was reduced by $79 million, with a credit recorded in "Utility" on the Statement of Income, to reflect what WPD expects to be the final close-out settlement under Ofgem's preferred methodology.  This consultation also confirmed the final decisions will be published by April 2013.  In February 2013, Ofgem issued additional consultation proposing to delay the April 2013 decision date.  PPL cannot predict when this matter will be resolved.

Ofgem also stated in the November 2012 consultation that the line loss incentive implemented at the last rate review will be withdrawn and no incentive will apply for the DPCR5 period.  That decision resulted in the elimination of the DPCR5 liability of $11 million, with a credit recorded in "Utility" on the Statement of Income.

European Market Infrastructure Regulation

Regulation No. 648/2012 of the European Parliament and of the Council, commonly referred to as the European Market Infrastructure Regulation (EMIR), entered into force on August 16, 2012 and the European Commission adopted most of the Regulatory Technical Standards without modification in December 2012.  The EMIR establishes certain transaction clearing and other recordkeeping requirements for parties to over-the-counter derivatives transactions.  Included in the derivative transactions that are subject to EMIR are certain interest rate and currency derivative contracts utilized by WPD.  Generally, WPD is expected to qualify under the EMIR as a non-financial counterparty to the transactions in which it engages and further to qualify for certain exemptions that will relieve WPD from the mandatory clearing obligations imposed by the EMIR.  Although the EMIR will potentially impose significant additional recordkeeping requirements on WPD, the effect of the EMIR is not currently expected to have a significant adverse impact on WPD's financial condition or results of operation.

7.  Financing Activities

Credit Arrangements and Short-term Debt

(PPL, and PPL Energy Supply)

PPL Energy Supply, maintainsPPL Electric, LKE, LG&E and KU)

The Registrants maintain credit facilities in order to enhance liquidity, and provide credit support, and asprovide a backstop to its commercial paper program, when necessary.programs.  For reporting purposes, on a consolidated basis, the credit facilities of PPL Energy Supply, hadPPL Electric, LG&E and KU also apply to PPL and the credit facilities of LG&E and KU also apply to LKE.  The following credit facilities were in place at:

       December 31, 2012 December 31, 2011
                Letters of      Letters of
                Credit Issued       Credit Issued
                and       and
                Commercial       Commercial
       Expiration    Borrowed Paper Unused Borrowed Paper
        Date Capacity (a) Backup Capacity (a) Backup
PPL                    
 WPD Credit Facilities                    
  PPL WW Syndicated                    
   Credit Facility (b) (c) (f) Jan. 2013 £ 150  £ 106   n/a £ 44  £ 111   n/a
  WPD (South West)                    
   Syndicated Credit Facility (c) (f) Jan. 2017   245      n/a   245      n/a
  WPD (East Midlands)                    
   Syndicated Credit Facility (c) (d) (f) Apr. 2016   300          300     £ 70 
  WPD (West Midlands)                    
   Syndicated Credit Facility (c) (d) (f) Apr. 2016   300          300       71 
  Uncommitted Credit Facilities     84     £ 4    80       3 
   Total WPD Credit Facilities (e)   £ 1,079  £ 106  £ 4  £ 969  £ 111  £ 144 
                           
PPL Energy Supply                    
 Syndicated Credit Facility (f) (g) (h) Nov. 2017 $ 3,000     $ 499  $ 2,501     $ 541 
 Letter of Credit Facility (k) Mar. 2013   200   n/a   132    68   n/a   89 
 Uncommitted Credit Facilities (h)     200   n/a   40    160   n/a  n/a
   Total PPL Energy Supply                    
    Credit Facilities   $ 3,400     $ 671  $ 2,729     $ 630 
   December 31, 2009 December 31, 2008
 
Expiration
Date
 Capacity Borrowed (a) Letters of Credit Issued Unused Capacity Borrowed (a) Letters of Credit Issued
                            
PPL Energy Supply Domestic Credit Facilities (b)                           
364-day Bilateral Credit Facility (c) Mar-10  $200   n/a  $4  $196   n/a  $96 
364-day Syndicated Credit Facility (d) Sept-10   400           400         
5-year Structured Credit Facility (e) Mar-11   300   n/a   285   15   n/a   269 
5-year Syndicated Credit Facility (f) June-12   3,225  $285   373   2,567   285   255 
Total PPL Energy Supply Domestic Credit Facilities    $4,125  $285  $662  $3,178   285  $620 
                            
WPD Credit Facilities                           
WPDH Limited 5-year Syndicated Credit Facility (g) Jan-13  £150  £132   n/a  £18  £121   n/a 
WPD (South West) 3-year Syndicated Credit Facility (h) July-12   210   60   n/a   150   37   n/a 
WPD (South West) Uncommitted Credit Facilities (i)     65   21   n/a   44   8   n/a 
WPD (South West) Letter of Credit Facility Mar-10   4   n/a  £3   1   n/a  £4 
Total WPD Credit Facilities (j)    £429  £213  £3  £213  £166  £4 
289

       December 31, 2012 December 31, 2011
                Letters of      Letters of
                Credit Issued       Credit Issued
                and       and
                Commercial       Commercial
       Expiration    Borrowed Paper Unused Borrowed Paper
        Date Capacity (a) Backup Capacity (a) Backup
PPL Electric                    
 Syndicated Credit Facility (f) (h) Oct. 2017 $ 300     $ 1  $ 299     $ 1 
 Asset-backed Credit Facility (i) Sept 2013   100      n/a   100      n/a
   Total PPL Electric Credit Facilities   $ 400     $ 1  $ 399     $ 1 
                           
LG&E                    
 Syndicated Credit Facility (f) (h) Nov. 2017 $ 500       55  $ 445       
                           
KU                    
 Syndicated Credit Facility (f) (h) Nov. 2017 $ 400     $ 70  $ 330       
 Letter of Credit Facility (f) (h) (j) Apr. 2014   198       198      n/a $ 198 
   Total KU Credit Facilities   $ 598     $ 268  $ 330     $ 198 

(a)Amounts borrowed are recorded as "Short-term debt" on the Balance Sheets.
(b)These credit facilities contain a financial covenant requiring debt to total capitalization to not exceed 65%.
(c)In March 2009,December 2012, the PPL Energy Supply's 364-day bilateralWW credit facility was amended.  The amendment included extending the expiration date from March 2009 to March 2010subsequently replaced with a credit facility expiring in December 2016 and reducing the capacity from $300 millionwas increased to $200 million.  Under this facility, PPL Energy Supply can request the bank to issue letters of credit but cannot make cash borrowings.
(d)In September 2009, PPL Energy Supply's 364-day syndicated credit facility was amended and restated.  The amendment included extending the expiration date from September 2009 to September 2010, increasing the capacity from $385 million to $400 million and limiting the amount of letters of credit that may be issued.  Under this facility, PPL Energy Supply has the ability to make cash borrowings and to request the lenders to issue up to $200 million of letters of credit.  Borrowings generally bear interest at LIBOR-based rates plus a spread, depending upon the company's public debt rating.
(e)Under this facility, PPL Energy Supply has the ability to request the lenders to issue letters of credit but cannot make cash borrowings.  PPL Energy Supply's obligations under this facility are supported by a $300 million letter of credit issued on PPL Energy Supply's behalf under a separate, but related, $300 million five-year credit agreement, also expiring in March 2011.
(f)Under this facility, PPL Energy Supply has the ability to make cash borrowings and to request the lenders to issue letters of credit.  Borrowings generally bear interest at LIBOR-based rates plus a spread, depending upon the company's public debt rating.  The interest rate on the borrowings outstanding was 0.73% and 2.70% at December 31, 2009 and 2008.  Under certain conditions, PPL Energy Supply may elect to have the principal balance of the loans outstanding on the final expiration date of the facility continue as non-revolving term loans for a period of one year from that final expiration date.  Also, under certain conditions, PPL Energy Supply may request that the facility's capacity be increased by up to $500£210 million.
(c)
(g)
Under this facility, WPDH Limited has the ability to make cash borrowings but cannot request the lenders to issue letters of credit.  Borrowings under this facility bear interest at LIBOR-based rates plus a spread, depending on the company's public debt rating.  The cash borrowings outstanding at December 31, 2009 were comprised of a USD-denominated borrowing of $181 million, which equated to £107 million at the time of borrowing and bears interest at approximately 1.55%, and GBP-denominated borrowings in an aggregate of £25 million, which bear interest at a weighted-average rate of approximately 1.53%.  The interest rates at December 31, 2008 were 3.73% on USD-denominated borrowings and 3.11% on GBP-denominated borrowings.
This credit facility containsfacilities contain financial covenants that require WPDH Limited to maintain an interest coverage ratio of not less than 3.0 times consolidated earnings before income taxes, depreciation and amortization and a RAB that exceeds total net debt by the higher of an amount equal to 15% of total net debt or £150 million, in each case as calculated in accordance with the credit facility.
(h)In July 2009, WPD (South West) terminated its £150 million five-year syndicated credit facility, which was to expire in October 2009, and replaced it with a new £210 million three-year syndicated credit facility expiring in July 2012.  Under the new facility, WPD (South West) has the ability to make cash borrowings but cannot request the lenders to issue letters of credit.  The new facility contains financial covenants that require WPD (South West)company to maintain an interest coverage ratio of not less than 3.0 times consolidated earnings before income taxes, depreciation and amortization and total net debt not in excess of 85% of its RAB, in each caseRAV, calculated in accordance with the credit facility.
(d)
Borrowings under this facility bear interest at LIBOR-based rates plus a margin.  The borrowings outstanding at December 31, 2009 bear interest at a weighted-average rate of approximately 3.02%.  The interest rate at December 31, 2008 on the borrowings outstanding under the previous facility was approximately 3.01%.
(i)The weighted-average interest rate on the borrowings outstanding underUnder these facilities, was 1.22%WPD (East Midlands) and 2.77% at December 31, 2009 and 2008.
(j)The total amount borrowed under WPD's credit facilities equated to approximately $354 million and $299 million at December 31, 2009 and 2008.  At December 31, 2009,WPD (West Midlands) each have the unused capacity of the WPD credit facilities was approximately $349 million.

During 2008, PPL Energy Supply maintained a commercial paper program for up to $500 million, under which commercial paper issuances were supported by its credit facilities, to provide an additional financing source to fund its short-term liquidity needs, if and when necessary.  PPL Energy Supply had no commercial paper outstanding at December 31, 2008.  In January 2009, PPL Energy Supply closed its commercial paper program.

(PPL and PPL Electric)

PPL Electric maintains credit facilities in order to enhance liquidity and provide credit support, and as a backstop to its commercial paper program.  PPL Electric had the following credit facilities in place at:

   December 31, 2009 December 31, 2008
 Expiration Date Capacity Borrowed (a) Letters of Credit Issued Unused Capacity Borrowed (a) Letters of Credit Issued
                            
5-year Syndicated Credit Facility (b) May-12  $190      $6  $184  $95  $1 
Asset-backed Credit Facility (c) Jul-10   150           150         
Total PPL Electric Credit Facilities    $340      $6  $334  $95  $1 

(a)Amounts borrowed are recorded as "Short-term debt" on the Balance Sheets.
(b)Under this facility, PPL Electric has the ability to make cash borrowings and to request the lenders to issue up to £80 million of letters of credit.  Borrowingscredit in lieu of borrowing.
(e)The total amounts borrowed at December 31, 2012 and 2011 were USD-denominated borrowings of $171 million and $178 million, which equated to £106 million and £111 million at the time of the borrowings.  The interest rates at December 31, 2012 and 2011 were 0.8452% and 1.05%.  At December 31, 2012, the unused capacity of WPD's credit facilities was approximately $1.6 billion.
(f)Each company pays customary fees under its respective facility and borrowings generally bear interest at LIBOR-based rates plus an applicable margin.
(g)In October 2010, PPL Energy Supply borrowed $3.2 billion under this facility in order to enable a spread, depending uponsubsidiary to make loans to certain affiliates to provide interim financing of amounts required by PPL to partially fund PPL's acquisition of LKE.  Such borrowing bore interest at 2.26% and was refinanced primarily through the company's publicissuance of long-term debt rating.  The interest rateby LKE, LG&E and KU and the use of internal funds.  This borrowing and related payments were included in "Net increase (decrease) in short-term debt" on the borrowings outstanding at December 31, 2008 was 2.44%.  Under certain conditions, PPL Electric may elect to have the principal balanceStatement of the loans outstanding on the final expiration date of the facility continue as non-revolving term loans for a period of one year from that final expiration date.  Also, under certain conditions, PPL Electric may request that the facility's capacity be increased by up to $100 million.Cash Flows.

PPL Energy Supply incurred an aggregate of $41 million of fees in 2010 in connection with establishing this facility.  Such fees were initially deferred and amortized through December 2014.  In connection with the reduction in the capacity from $4 billion to $3 billion in December 2010, PPL Energy Supply wrote off $10 million, $6 million after tax, of deferred fees, which was reflected in "Interest Expense" in the Statement of Income.
(h)
This credit facility containsThe facilities contain a financial covenant requiring debt to total capitalization not to not exceed 65% for PPL Energy Supply and 70%. for PPL Electric, LG&E and KU, as calculated in accordance with the facilities and other customary covenants.  Additionally, as it relates to the syndicated credit facilities and subject to certain conditions, PPL Energy Supply may request that its facility's capacity be increased by up to $500 million and PPL Electric and KU each may request up to a $100 million increase in its facility's' capacity.
(c)(i)PPL Electric participates in an asset-backed commercial paper program through which PPL Electric obtains financing by selling and contributing its eligible accounts receivable and unbilled revenue to a special purpose, wholly owned subsidiary on an ongoing basis.  The subsidiary has pledged these assets to secure loans from a commercial paper conduit sponsored by a financial institution.  In July 2009, PPL Electric

At December 31, 2012 and December 31, 2011, $238 million and $251 million of accounts receivable and $106 million and $98 million of unbilled revenue were pledged by the subsidiary under the credit agreement related to PPL Electric's and the subsidiary's participation in the asset-backed commercial paper program.  Based on the accounts receivable and unbilled revenue pledged at December 31, 2012, the amount available for borrowing under the facility was $100 million.  PPL Electric's sale to its subsidiary of the accounts receivable and unbilled revenue is an absolute sale of assets, and PPL Electric does not retain an interest in these assets.  However, for financial reporting purposes, the subsidiary's financial results are consolidated in PPL Electric's financial statements.  PPL Electric performs certain record-keeping and cash collection functions with respect to the assets in return for a servicing fee from the subsidiary.
(j)KU's letter of credit facility agreement allows for certain payments under the letter of credit facility to be converted to loans rather than requiring immediate payment.
(k)In February 2013, PPL Energy Supply extended the expiration date of the credit agreement to July 2010.  The subsidiary's borrowing costs underMarch 2014 and, effective April 2013, the credit facility vary based on the commercial paper conduit's actual costcapacity will be reduced to issue commercial paper that supports the debt.  Borrowings under this program are subject to customary conditions precedent.  PPL Electric uses the proceeds under the credit facility for general corporate purposes.
At December 31, 2009 and 2008, $223 million and $76 million of accounts receivable and $192 million and $170 million of unbilled revenue were pledged by the subsidiary under the credit agreement related to PPL Electric's and the subsidiary's participation in the asset-backed commercial paper program.  Based on the accounts receivable and unbilled revenue pledged, $150 million was available for borrowing at December 31, 2009.  PPL Electric's sale to its subsidiary of the accounts receivable and unbilled revenue is an absolute sale of the assets, and PPL Electric does not retain an interest in these assets.  However, for financial reporting purposes, the subsidiary's financial results are consolidated in PPL Electric's financial statements.  PPL Electric performs certain record-keeping and cash collection functions with respect to the assets in return for a servicing fee from the subsidiary.million.
(PPL and PPL Energy Supply)

PPL ElectricEnergy 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 December 31, 2012, PPL Energy Supply has not requested any capacity for the issuance of letters of credit under this arrangement.
290

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, which had an aggregate carrying value of $2.7 billion at December 31, 2012.  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 December 31, 2012.

In April 2012, PPL Energy Supply increased the capacity of its commercial paper program for upfrom $500 million to $750 million to provide an additional financing source to fund its short-term liquidity needs, if and when necessary.  Commercial paper issuances are supported by PPL Energy Supply's Syndicated Credit Facility.  At December 31, 2012 and 2011, PPL Energy Supply had $356 million and $400 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheet, at weighted-average interest rates of 0.50% and 0.53%.

(PPL and PPL Electric)

In May 2012, PPL Electric increased the capacity of its commercial paper program from $200 million to $300 million to provide an additional financing source to fund its short-term liquidity needs, if and when necessary.  Commercial paper issuances are supported by PPL Electric's five-year syndicated credit facility that expires in May 2012 based on available capacity.Syndicated Credit Facility.  PPL Electric had no commercial paper outstanding at December 31, 2009 and 2008.
2012.

Long-term Debt(PPL, LKE, LG&E and KU)

  2009 (a) 2008
U.S. PPL PPL Energy Supply PPL Electric PPL PPL Energy Supply PPL Electric
                         
4.33% - 7.0% Senior Unsecured Notes, due 2009-2047 (b) $2,700(c) $2,600      $3,151  $2,850     
Junior Subordinated Notes, due 2067 (d)  500           500         
8.05% - 8.30% Senior Secured Notes, due 2013 (e)  437   437       437   437     
7.375% 1945 First Mortgage Bonds, due 2014 (f)  10      $10   10      $10 
4.30% - 7.125% Senior Secured Bonds, due 2009-2039 (g)  1,150       1,150   1,436       1,436 
4.70% - 4.75% Senior Secured Bonds (Pollution Control Series), due 2027-2029 (h)(i)  224       224   224       224 
Variable Rate Senior Secured Bonds (Pollution Control Series), due 2023 (h)(j)  90       90   90       90 
Variable Rate Exempt Facilities Notes, due 2037-2038 (k)  231   231       231   231     
Variable Rate Pollution Control Facilities Note, due 2027 (l)              9       9 
   5,342   3,268   1,474   6,088   3,518   1,769 
                         
U.K.                        
4.80436% - 9.25% Senior Unsecured Notes, due 2017-2037 (m)  1,327   1,327       1,261   1,261     
1.541% Index-linked Senior Unsecured Notes, due 2053-2056 (n)  397   397       377   377     
   1,724   1,724       1,638   1,638     
   7,066   4,992   1,474   7,726   5,156   1,769 
Fair value adjustments from hedging activities  44   3       80   5     
Fair value adjustments from purchase accounting (o)  35   35       35   35     
Unamortized premium  9   9       10   10     
Unamortized discount  (11)  (8)  (2)  (13)  (10)    
   7,143   5,031   1,472   7,838   5,196   1,769 
Less amount due within one year              (696)      (495)
Total Long-term Debt $7,143  $5,031  $1,472  $7,142  $5,196  $1,274 
In February 2012, LG&E and KU each established a commercial paper program for up to $250 million to provide an additional financing source to fund their short-term liquidity needs.  Commercial paper issuances are supported by LG&E's and KU's Syndicated Credit Facilities.  At December 31, 2012, LG&E had $55 million of commercial paper outstanding at a weighted-average interest rate of 0.42% and KU had $70 million of commercial paper outstanding at a weighted-average interest rate of 0.42%, included in "Short-term debt" on the Balance Sheet.

(PPL Energy Supply, LKE, LG&E and KU)

See Note 16 for discussion of intercompany borrowings.

2011 Bridge Facility(PPL)

In March 2011, concurrently and in connection with entering into the agreement to acquire WPD Midlands, PPL Capital Funding and PPL WEM, as borrowers, and PPL, as guarantor, entered into a 364-day unsecured £3.6 billion bridge facility to (i) fund the acquisition and (ii) pay certain fees and expenses in connection with the acquisition.  During 2011, PPL incurred $44 million of fees in connection with establishing the 2011 Bridge Facility, which is reflected in "Interest Expense" on the Statement of Income.  On April 1, 2011, concurrent with the closing of the WPD Midlands acquisition, PPL Capital Funding borrowed an aggregate of £1.75 billion and PPL WEM borrowed £1.85 billion under the 2011 Bridge Facility.  Borrowings bore interest at approximately 2.62%, determined by one-month LIBOR rates plus a spread, based on PPL Capital Funding's senior unsecured debt rating and the length of time from the date of the acquisition closing that borrowings were outstanding.  See Note 10 for additional information on the acquisition.

In accordance with the terms of the 2011 Bridge Facility, PPL Capital Funding's borrowings of £1.75 billion were repaid with approximately $2.8 billion of proceeds received from PPL's issuance of common stock and 2011 Equity Units in April 2011.  In April 2011, PPL WEM repaid £650 million of its 2011 Bridge Facility borrowing.  Such repayment was funded primarily with proceeds received from PPL WEM's issuance of senior notes.  In May 2011, PPL WEM repaid the remaining £1.2 billion of borrowings then-outstanding under the 2011 Bridge Facility, primarily with the proceeds from senior notes issued by WPD (East Midlands) and WPD (West Midlands).

In anticipation of the repayment of a portion of the borrowings under the 2011 Bridge Facility with U.S. dollar proceeds received from PPL's issuance of common stock and 2011 Equity Units and PPL WEM's issuance of U.S. dollar-denominated senior notes, PPL entered into forward contracts to purchase GBP in order to economically hedge the foreign currency exchange rate risk related to the repayment.  See Note 19 for additional information.
291

Long-term Debt (PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and KU)

    Weighted-Average   December 31,
    Rate Maturities 2012  2011 
PPL         
U.S.         
 Senior Unsecured Notes (a)4.66% 2013 - 2038 $ 4,506  $ 3,805 
 Senior Secured Notes/First Mortgage Bonds (b) (c) (d) (e)4.19% 2013 - 2041   5,587    5,111 
 Junior Subordinated Notes4.89% 2018 - 2067   2,608    2,608 
 Other6.95% 2014 - 2020   15    15 
   Total U.S. Long-term Debt      12,716    11,539 
             
U.K.         
 Senior Unsecured Notes (f)5.71% 2016 - 2040   6,111    5,862 
 Index-linked Senior Unsecured Notes (g)1.85% 2043 - 2056   608    581 
   Total U.K. Long-term Debt (h)      6,719    6,443 
   Total Long-term Debt Before Adjustments      19,435    17,982 
             
 Fair market value adjustments      78    65 
 Unamortized premium and (discount), net      (37)   (54)
   Total Long-term Debt      19,476    17,993 
 Less current portion of Long-term Debt      751    
   Total Long-term Debt, noncurrent    $ 18,725  $ 17,993 
             
PPL Energy Supply         
 Senior Unsecured Notes (a)5.50% 2013 - 2038 $ 2,581  $ 2,581 
 Senior Secured Notes (b)8.31% 2013 - 2025   663    437 
 Other6.00% 2020   5    5 
   Total Long-term Debt Before Adjustments      3,249    3,023 
             
 Fair market value adjustments      22    
 Unamortized premium and (discount), net      1    1 
   Total Long-term Debt      3,272    3,024 
 Less current portion of Long-term Debt      751    
   Total Long-term Debt, noncurrent    $ 2,521  $ 3,024 
             
PPL Electric         
 Senior Secured Notes/First Mortgage Bonds (c) (d)4.60% 2015 - 2041 $ 1,964  $ 1,714 
 Other7.38% 2014   10    10 
   Total Long-term Debt Before Adjustments      1,974    1,724 
             
 Unamortized discount      (7)   (6)
   Total Long-term Debt    $ 1,967  $ 1,718 
             
LKE         
 Senior Unsecured Notes3.31% 2015 - 2021 $ 1,125  $ 1,125 
 Senior Secured Notes/First Mortgage Bonds (c) (e)3.00% 2015 - 2040   2,960    2,960 
   Total Long-term Debt Before Adjustments      4,085    4,085 
             
 Fair market value adjustments      7    7 
 Unamortized discount      (17)   (19)
   Total Long-term Debt    $ 4,075  $ 4,073 
             
LG&E         
 Senior Secured Notes/First Mortgage Bonds (c) (e)2.49% 2015 - 2040 $ 1,109  $ 1,109 
   Total Long-term Debt Before Adjustments      1,109    1,109 
             
 Fair market value adjustments       
 Unamortized discount      (3)   (3)
   Total Long-term Debt    $ 1,112  $ 1,112 
             
KU         
 Senior Secured Notes/First Mortgage Bonds (c) (e)3.30% 2015 - 2040 $ 1,851  $ 1,851 
   Total Long-term Debt Before Adjustments      1,851    1,851 
             
 Fair market value adjustments       
 Unamortized discount      (10)   (10)
   Total Long-term Debt    $ 1,842  $ 1,842 
292

(a)
Aggregate maturities of long-term debt are:
PPL - 2010, $0; 2011, $500; 2012, $0; 2013, $1,137; 2014, $310; and $5,119 thereafter.
PPL Energy Supply - 2010, $0; 2011, $500; 2012, $0; 2013, $737; 2014, $300; and $3,455 thereafter.
PPL Electric - 2010, 2011 and 2012, $0; 2013, $400; 2014, $10; and $1,064 thereafter.
None of the debt securities outstanding have sinking fund requirements.
(b)
Includes $300 million of 5.70% REset Put Securities due 2035 (REPSSM)(REPS).  The REPS bear interest at a rate of 5.70% per annum to, but excluding, October 15, 2015 (Remarketing Date).  The REPS are required to be put by existing holders on the Remarketing Date either for (a) purchase and remarketing by a designated remarketing dealer or (b) repurchase by PPL Energy Supply.  If the remarketing dealer elects to purchase the REPS for remarketing, it will purchase the REPS at 100% of the principal amount, and the REPS will bear interest on and after the Remarketing Date at a new fixed rate per annum determined in the remarketing.  PPL Energy Supply has the right to terminate the remarketing process.  If the remarketing is terminated at the option of PPL Energy Supply or under certain other circumstances, including the occurrence of an event of default by PPL Energy Supply under the related indenture or a failed remarketing for certain specified reasons, PPL Energy Supply will be required to pay the remarketing dealer a settlement amount as calculated in accordance with the related remarketing agreement.
(b)
Also includes $250 million of notes that may be redeemed at par beginning in July 2011.
In March 2009, PPL Energy Supply completed tender offers to purchase up to $250 million aggregate principal amount of certain of its outstanding senior notes in order to reduce future interest expense.  Pursuant to the offers, PPL Energy Supply purchased approximately $100 million aggregate principal amount of its 6.00% Senior Notes due 2036 for $77 million, plus accrued interest, and approximately $150 million aggregate principal amount of its 6.20% Senior Notes due 2016 for $143 million, plus accrued interest.  In connection with the extinguishment of these notes, PPL and PPL Energy Supply recorded a net gain of $25 million, which is reflected in "Other Income - net" on the Statement of Income for 2009.  PPL recorded an additional net gain of $4 million in "Other Income - net" on the Statement of Income as a result of reclassifying gains and losses on related cash flow hedges from AOCI into earnings.
(c)
Includes $100 million of notes that may be redeemed at par beginning in July 2012.
In March 2009, PPL Capital Funding retired the entire $201 million of its 4.33% Notes Exchange Series A upon maturity.
(d)The notes bear interest at 6.70% into March 2017, at which time the notes will bear interest at three-month LIBOR plus 2.665%, reset quarterly, until maturity.  Interest payments may be deferred, from time to time, on one or more occasions for up to ten consecutive years.  The notes may be redeemed at par beginning in March 2017.  In connection with the issuance of the notes, PPL and PPL Capital Funding entered into a Replacement Capital Covenant, in which PPL and PPL Capital Funding agreed for the benefit of holders of a designated series of unsecured long-term indebtedness of PPL or PPL Capital Funding ranking senior to the notes that (i) PPL Capital Funding will not redeem or purchase the notes, or otherwise satisfy, discharge or defease the principal amount of the notes and (ii) neither PPL nor any of its other subsidiaries will purchase the notes before the end of March 2037, except, subject to certain limitations, to the extent that the applicable redemption or repurchase price or principal amount defeased does not exceed a specified amount of proceeds from the sale of qualifying replacement capital securities during the 180-day period prior to the date of that redemption, repurchase or defeasance.  The designated series of covered debt benefiting from the Replacement Capital Covenant at December 31, 2009 and 2008 was PPL Capital Funding's 6.85% Senior Notes due 2047.
(e)Represents lease financing consolidated through a variable interest entity.VIE.  See Note 322 for additional information.
(c)
(f)
The 1945 First Mortgage Bonds were issued under, and secured by, the lien of the 1945 First Mortgage Bond Indenture.  In December 2008,Includes PPL Electric completed an in-substance defeasance of the First Mortgage Bonds by depositing sufficient funds with the trustee solely to satisfy the principal and remaining interest obligations on the bonds when due.  The amount of funds on deposit with the trustee was $14 million at December 31, 2009 and $15 million at December 31, 2008, and is recorded as restricted cash, primarily in other noncurrent assets on the Balance Sheets.
Also in December 2008, PPL Electric discharged the lien under the 1945 First Mortgage Bond Indenture, which covered substantially all electric distribution plant and certain transmission plant owned by PPL Electric.
(g)TheElectric's senior secured and first mortgage bonds that are secured by the lien of thePPL Electric's 2001 Senior Secured BondMortgage Indenture, which covers substantially all electric distribution plant and certain transmission plant owned by PPL Electric.
In May 2009, PPL Electric issued $300 million of 6.25% First Mortgage Bonds due 2039 (6.25% Bonds).  The 6.25% Bonds may be redeemed any time prior to maturity at PPL Electric's option at make-whole redemption prices.  PPL Electric received proceeds of $296 million, net of a discount and underwriting fees, from the issuance of the 6.25% Bonds.  Approximately $86 million of the proceeds were used in August 2009 to partially fund the repayment at maturity of $486 million aggregate principal amountcarrying value of PPL Electric's Senior Secured Bonds, 6-1/4% Series.  The balance of such repaymentproperty, plant and equipment was funded from the issuance in October 2008 of $400 million of 7.125% Senior Secured Bonds due 2013.  The balance of the proceeds from the issuance of the 6.25% Bonds was used for general corporate purposes, including capital expenditures.
In December 2009, PPL Electric Utilities redeemed the entire $100 million aggregate principal amount of its 4.30% Senior Secured Bonds due 2013.  PPL Electric paid a premium of $9 million in connection with the redemption.  The total loss on the redemption of approximately $10 million pre-tax, which includes unamortized fees$4.3 billion and discounts, is reflected in "Regulatory assets" and "Other regulatory and noncurrent assets" on the Balance Sheets of PPL and PPL Electric$3.9 billion at December 31, 2009 as an unamortized loss on reacquired debt2012 and will be amortized through the original maturity of the debt.  Additionally,2011.

LG&E's first mortgage bonds are secured by the lien of the LG&E 2010 Mortgage Indenture, which creates a lien, subject to certain exceptions and exclusions, on substantially all of LG&E's real and tangible personal property located in Kentucky and used or to be used in connection with the generation, transmission and distribution of electricity and the storage and distribution of natural gas.  The aggregate carrying value of the property subject to the lien was $2.7 billion and $2.6 billion at December 31, 2012 and December 31, 2011.

KU's first mortgage bonds are secured by the lien of the KU 2010 Mortgage Indenture, which creates a lien, subject to certain exceptions and exclusions, on substantially all of KU's real and tangible personal property located in Kentucky and used or to be used in connection with the generation, transmission and distribution of electricity.  The aggregate carrying value of the property subject to the lien was $4.4 billion and $4.1 billion at December 31, 2012 and December 31, 2011.
(d)Includes PPL recorded a net gain of approximately $4 million pre-tax in "Other Income - net" on the Statement of Income as a result of reclassifying gains and losses on related cash flow and fair value hedges from AOCI and Long-term Debt into earnings.
(h)PPL Electric issued aElectric's series of its senior secured bonds tothat secure its obligations to make payments with respect to each series of Pollution Control Bonds that were issued by the LCIDA and the PEDFA on behalf of PPL Electric.  These senior secured bonds were issued in the same principal amount, contain payment and redemption provisions that correspond to and bear the same interest rate as such Pollution Control Bonds.  These senior secured bonds were issued under thePPL Electric's 2001 Senior Secured BondMortgage Indenture and are secured as noted in (g)(c) above.
(i)The senior secured bonds  This amount includes $224 million that may be redeemed at par beginning in 2015.
(j)The related Pollution Control Bonds2015 and $90 million that may be redeemed, in whole or in part, at par beginning in October 2020 and are structured as variable-rate remarketable bonds.  PPL Electric may convertsubject to mandatory redemption upon determination that the interest rate on the bonds from timewould be included in the holders' gross income for federal tax purposes.
(e)Includes LG&E's and KU's series of first mortgage bonds that were issued to timethe respective trustees of tax-exempt revenue bonds to a commercial paper rate, daily rate, weekly rate or a term ratesecure its respective obligations to make payments with respect to each series of at least one year.bonds.  The first mortgage bonds are subjectwere issued in the same principal amount, contain payment and redemption provisions that correspond to mandatory purchase under certain circumstances, including upon conversion to a differentand bear the same interest rate mode.  To the extent that a purchase is required prior to the maturity date, PPL Electric has the ability and intent to refinance the bonds on a long-term basis.  At December 31, 2009 and 2008, theas such tax-exempt revenue bonds.  These first mortgage bonds were issued under the LG&E 2010 Mortgage Indenture and the KU 2010 Mortgage Indenture and are secured as noted in a term rate mode and bear interest at 4.85% until October 2010, at which time the(c) above.  The related tax-exempt revenue bonds will be remarketed based upon the interest rate mode electedwere issued by PPL Electric.
(k)The PEDFA issued Exempt Facilities Revenue Bondsvarious governmental entities, principally counties in Kentucky, on behalf of PPL Energy Supply in December 2007 (Series 2007 Bonds)LG&E and December 2008 (Series 2008 Bonds).  In connection with the issuances of such bonds, PPL Energy Supply entered into loan agreements with the PEDFA pursuantKU.  The related revenue bond documents allow LG&E and KU to which the PEDFA loaned to PPL Energy Supply the proceeds of the bonds on payment terms that correspond to those of the bonds.  PPL Investment Corp. acted as initial purchaser of the Series 2008 Bonds upon issuance.  At December 31, 2008, the Series 2007 Bonds and the Series 2008 Bonds bore interest at 3.20% and 5.50%.
In April 2009, the PEDFA issued $231 million aggregate principal amount of Exempt Facilities Revenue Refunding Bonds, Series 2009A and 2009B due 2038 and Series 2009C due 2037 (PPL Energy Supply, LLC Project), on behalf of PPL Energy Supply.  The Series 2009A bonds, in an aggregate principal amount of $100 million, and the Series 2009B bonds, in an aggregate principal amount of $50 million, were issued by the PEDFA in order to refund $150 million aggregate principal amount of Exempt Facilities Revenue Bonds, Series 2008A and 2008B (PPL Energy Supply, LLC Project) due 2038 that were issued by the PEDFA in December 2008 on behalf of PPL Energy Supply, and for which PPL Investment Corp. acted as initial purchaser.  The Series 2009C bonds, in an aggregate principal amount of $81 million, were issued in order to refund $81 million aggregate principal amount of Exempt Facilities Revenue Bonds, Series 2007 (PPL Energy Supply, LLC Project) due 2037 that were issued by the PEDFA in December 2007 on behalf of PPL Energy Supply.  Among other things, the completed refundings were able to take advantage of provisions in the Economic Stimulus Package that eliminated the application of the AMT to interest payable on the refinanced indebtedness.  The refundings of the bonds were effected by the ultimate distribution of $231 million by the PEDFA to the bond holders, including PPL Investment Corp.  As a result of the refundings of the bonds, PPL Investment Corp. received proceeds of $150 million, which is reflected as a cash flow from investing activities on the Statement of Cash Flows for PPL and PPL Energy Supply in 2009.
Similar to the Series 2007 Bonds and the Series 2008 Bonds, the Series 2009A, 2009B and 2009C bonds are structured as variable-rate remarketable bonds.  PPL Energy Supply may convert the interest rate mode on the bonds from time to time to a commercial paper rate, daily rate, weekly rate, or a term rate of at least one year.  The bonds are subject to mandatory purchase under certain circumstances, including upon conversion toyear or, in some cases, an auction rate or a different interest rate mode, and are subject to mandatory redemption upon a determination that the interest on the bonds would be included in the holders' gross income for federal tax purposes.  To the extent that a purchase is required prior to the maturity date, PPL Energy Supply has the ability and intent to refinance the bonds on a long-term basis.  The Series 2009A bonds bore interest at an initial rate of 0.90% through June 30, 2009.  The Series 2009B bonds bore interest at an initial rate of 1.25% through September 30, 2009.  The Series 2009C bonds were in a weekly interest rate mode through December 9, 2009.LIBOR index rate.

At December 31, 2012, the aggregate tax-exempt revenue bonds issued on behalf of LG&E and KU that were in a term rate mode totaled $321 million for LKE, comprised of $294 million and $27 million for LG&E and KU.  At December 31, 2012, the aggregate tax-exempt revenue bonds issued on behalf of LG&E and KU that were in a variable rate mode totaled $604 million for LKE, comprised of $280 million and $324 million for LG&E and KU.

Several series of the tax-exempt revenue bonds are insured by monoline bond insurers whose ratings were reduced due to exposures relating to insurance of sub-prime mortgages.  Of the bonds outstanding, $231 million are in the form of insured auction rate securities, wherein interest rates are reset either weekly or every 35 days via an auction process.  Beginning in late 2007, the interest rates on these insured bonds began to increase due to investor concerns about the creditworthiness of the bond insurers.  During 2008, interest rates increased, and LG&E and KU experienced failed auctions when there were insufficient bids for the bonds.  When a failed auction occurs, the interest rate is set pursuant to a formula stipulated in the indenture.  As noted above, the instruments governing these auction rate bonds permit LG&E and KU to convert the bonds to other interest rate modes.

Certain variable rate tax-exempt revenue bonds totaling $348 million at December 31, 2012, are subject to tender for purchase by LG&E and KU at the option of the holder and to mandatory tender for purchase by LG&E and KU upon the occurrence of certain events.
PPL Energy Supply elected to change the interest rate mode on the Series 2009A and Series 2009B bonds to a commercial paper rate mode upon expiration of the initial rate period for each series.  The Series 2009A bonds were converted to a commercial paper rate mode in July 2009 and currently bear interest at 0.62% through August 31, 2010.  The Series 2009B bonds were converted to a commercial paper rate mode in October 2009 and currently bear interest at 0.50% through March 31, 2010.  At the end of each commercial paper rate period, the bonds will be remarketed based upon an interest rate mode elected by PPL Energy Supply.
PPL Energy Supply converted the interest rate mode on the Series 2009C bonds from a weekly interest rate mode to a commercial paper rate mode in December 2009.  The bonds currently bear interest at 0.62% through August 31, 2010, at which time the bonds will be remarketed based upon an interest rate mode elected by PPL Energy Supply.
In connection with the issuance of each series of bonds by the PEDFA, PPL Energy Supply entered into separate loan agreements with the PEDFA pursuant to which the PEDFA loaned to PPL Energy Supply the proceeds of the Series 2009A, Series 2009B and Series 2009C bonds on payment terms that correspond to those of the bonds.  PPL Energy Supply issued separate promissory notes to the PEDFA to evidence its obligations under each of the loan agreements.  These loan agreements and promissory notes replaced those associated with the refunded 2007 and 2008 PEDFA bonds in a non-cash transaction that is excluded from the Statement of Cash Flows in 2009.
Separate letters of credit were issued under PPL Energy Supply's $3.2 billion five-year syndicated credit facility to the trustee in support of each series of bonds.  The letters of credit permit the trustee to draw amounts to pay principal of and interest on, and the purchase price of, the Series 2009A, Series 2009B and Series 2009C bonds when due.  PPL Energy Supply is required to reimburse any draws on the letters of credit within one business day of such draw.
(l)In June 2009, PPL Electric repaid its $9 million obligation under a Variable Rate Pollution Control Facilities Note in connection with the early redemption in full of the underlying pollution control revenue bonds that were issued by the Indiana County Industrial Development Authority and due in June 2027.
(m)Although financial information of foreign subsidiaries is recorded on a one-month lag, WPD's December 2008 retirement of $225 million of senior notes is reflected in the 2008 Financial Statements and its December 2007 retirement of $175 million of senior notes is reflected in the 2007 Financial Statements due to the materiality of these retirements.
(f)Includes £225 million ($369361 million at December 31, 2009 and $345 million at December 31, 2008)2012) of notes that may be redeemed, in total but not in part, on December 21, 2026, at the greater of the principal value or a value determined by reference to the gross redemption yield on a nominated U.K. Government bond.  Additionally, the £225 million of such notes may be put by the holders back to the issuer for redemption if the long-term credit ratings assigned to the notes by Moody's, S&P or Fitch are withdrawn by any of the rating agencies or reduced to a non-investment grade rating of Ba1 or BB+ in connection with a restructuring event.  A restructuring event includes the loss of, or a material adverse change to, the distribution license under which the issuer operates.
Change from 2008 to 2009 includes an increase of $66 million resulting from movements in foreign currency exchange rates.
(n)(g)The principal amount of thesethe notes isissued by WPD (South West) and WPD (East Midlands) are adjusted on a semi-annual basis based on changes in a specified index, as detailed in the terms of the related indentures.  The adjustment to the principal amountamounts from 20082011 to 20092012 was a decreasean increase of approximately £3£9 million ($614 million) and is offset by a $26 million increase resulting from movements in foreign currency exchange rates.
Theseinflation.  In addition, this amount includes £225 million ($361 million at December 31, 2012) of notes issued by WPD (South West) that may be redeemed, in total by series, on December 1, 2026, at the greater of the adjusted principal value and a make-whole value determined by reference to the gross real yield on a nominated U.K. government bond.  Additionally, these
(h)Includes £3.3 billion ($5.3 billion at December 31, 2012) of notes that may be put by the holders back to the issuer for redemption if the long-term credit ratings assigned to the notes by Moody's, S&P or Fitch are withdrawn by any of the rating agencies (Moody's, S&P or Fitch) or reduced to a non-investment grade rating of Ba1 or BB+ in connection with a restructuring event.  A restructuring event which includes the loss of, or a material adverse change to, the distribution licenselicenses under which the issuer operates.

None of the outstanding debt securities noted above have sinking fund requirements.  The aggregate maturities of long-term debt for the periods 2013 through 2017 and thereafter are as follows.
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     PPL            
     Energy PPL         
  PPL Supply Electric LKE LG&E KU
                   
2013  $ 751  $ 751             
2014    328    318  $ 10          
2015    1,317    317    100  $ 900  $ 250  $ 250 
2016   ��828    368             
2017    118    18             
Thereafter   16,093    1,477    1,864    3,185    859    1,601 
Total $ 19,435  $ 3,249  $ 1,974  $ 4,085  $ 1,109  $ 1,851 

Long-term Debt and Equity Securities Activities

(PPL)

In April 2012, PPL made a registered underwritten public offering of 9.9 million shares of its common stock.  In conjunction with that offering, the underwriters exercised an option to purchase 591 thousand additional shares of PPL common stock solely to cover over-allotments.

In connection with the registered public offering, PPL entered into forward sale agreements with two counterparties covering the 9.9 million shares of PPL common stock.  Settlement of these initial forward sale agreements will occur no later than April 2013.  As a result of the underwriters' exercise of the overallotment option, PPL entered into additional forward sale agreements covering the 591 thousand additional shares of PPL common stock.  Settlement of the subsequent forward sale agreements will occur no later than July 2013.  Upon any physical settlement of any forward sale agreement, PPL will issue and deliver to the forward counterparties shares of its common stock in exchange for cash proceeds per share equal to the forward sale price.  The forward sale price will be calculated based on an initial forward price of $27.02 per share reduced during the period the contracts are outstanding as specified in the forward sale agreements.  PPL may, in certain circumstances, elect cash settlement or net share settlement for all or a portion of its rights or obligations under the forward sale agreements.

PPL will not receive any proceeds or issue any shares of common stock until settlement of the forward sale agreements.  PPL intends to use any net proceeds that it receives upon settlement to repay short-term debt obligations and for other general corporate purposes.

The forward sale agreements are classified as equity transactions.  As a result, no amounts will be recorded in the consolidated financial statements until the settlement of the forward sale agreements.  Prior to those settlements, the only impact to the financial statements will be the inclusion of incremental shares within the calculation of diluted EPS using the treasury stock method.  See Note 4 for information on the forward sale agreements impact on the calculation of diluted EPS.

In April 2012, WPD (East Midlands) issued £100 million aggregate principal amount of 5.25% Senior Notes due 2023.  WPD (East Midlands) received proceeds of £111 million, which equated to $178 million at the time of issuance, net of underwriting fees.  The net proceeds were used for general corporate purposes.

In June 2012, PPL Capital Funding issued $400 million of 4.20% Senior Notes due 2022.  The notes may be redeemed at PPL Capital Funding's option any time prior to maturity at make-whole redemption prices.  PPL Capital Funding received proceeds of $396 million, net of a discount and underwriting fees, which were used for general corporate purposes.

In August 2012, PPL Capital Funding redeemed at par, plus accrued interest, the $99 million outstanding principal amount of its 6.85% Senior Notes due 2047.

In October 2012, PPL Capital Funding issued $400 million of 3.50% Senior Notes due 2022.  The notes may be redeemed at PPL Capital Funding's option any time prior to maturity at make-whole redemption prices.  PPL Capital Funding received proceeds of $397 million, net of a discount and underwriting fees, which were used to repay short-term debt obligations, including commercial paper borrowings and for general corporate purposes.

(PPL and PPL Energy Supply)

In April 2012, an indirect, wholly owned subsidiary of PPL Energy Supply completed the Ironwood Acquisition.  See Note 10 for information on the transaction and the long-term debt of PPL Ironwood, LLC assumed through consolidation as part of the acquisition.
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In February 2013, PPL Energy Supply completed an exchange offer to exchange up to all, but not less than a majority, of 8.857% Senior Secured Bonds due 2025 of its wholly owned subsidiary, PPL Ironwood (the "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 PPL Energy Supply Senior Notes, Series 4.60% due 2021.

(PPL and PPL Electric)

See Note 3 for information regarding PPL Electric's June 2012 redemption of all 2.5 million shares of its 6.25% Series Preference Stock, par value $100 per share.

In August 2012, PPL Electric issued $250 million of 2.50% First Mortgage Bonds due 2022.  The notes may be redeemed at PPL Electric's option any time prior to maturity at make-whole redemption prices.  PPL Electric received proceeds of $247 million, net of a discount and underwriting fees.  The net proceeds were used to repay short-term debt incurred to fund PPL Electric's redemption of its 6.25% Series Preference Stock in June 2012 and for other general corporate purposes.

(PPL and LKE)

In June 2012, LKE completed an exchange of $250 million of 4.375% Senior Notes due 2021 issued in September 2011 in a transaction not registered under the Securities Act of 1933, for similar securities that were issued in a transaction registered with the SEC.

(PPL)

2011 Equity Units

In April 2011, in connection with the acquisition of WPD Midlands, PPL issued 92 million shares of its common stock at a public offering price of $25.30 per share, for a total of $2.328 billion.  Proceeds from the issuance were $2.258 billion, net of the $70 million underwriting discount.  PPL also issued 19.55 million 2011 Equity Units at a stated amount per unit of $50.00 for a total of $978 million.  Proceeds from the issuance were $948 million, net of the $30 million underwriting discount.  PPL used the net proceeds to repay PPL Capital Funding's borrowings under the 2011 Bridge Facility, as discussed above, to pay certain acquisition-related fees and expenses and for general corporate purposes.

Each 2011 Equity Unit consists 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 (2019 Notes).

Each 2011 Purchase Contract obligates the holder to purchase, and PPL to sell, for $50.00 a number of shares of PPL common stock to be determined by the average VWAP of PPL's common stock for the 20-trading day period ending on the third trading day prior to May 1, 2014, subject to antidilution adjustments and an early settlement upon a Fundamental Change as follows:

·
(o)Represents adjustments made to record WPD's long-term debt at fair value atif the timeaverage VWAP equals or exceeds approximately $30.99, then 1.6133 shares (a minimum of acquisition of the controlling interest in WPD in 2002.31,540,015 shares);
·if the average VWAP is less than approximately $30.99 but greater than $25.30, a number of shares of common stock having a value, based on the average VWAP, equal to $50.00; and
·if the average VWAP is less than or equal to $25.30, then 1.9763 shares (a maximum of 38,636,665 shares).

If holders elect to settle the 2011 Purchase Contract prior to May 1, 2014, they will receive 1.6133 shares of PPL common stock, subject to antidilution adjustments and an early settlement upon a Fundamental Change.

A holder's ownership interest in the 2019 Notes is pledged to PPL to secure the holder's obligation under the related 2011 Purchase Contract.  If a holder of a 2011 Purchase Contract chooses at any time no longer to be a holder of the 2019 Notes, such holder's obligation under the 2011 Purchase Contract must be secured by a U.S. Treasury security.

Each 2011 Purchase Contract also requires PPL to make quarterly contract adjustment payments at a rate of 4.43% per year on the $50.00 stated amount of the 2011 Equity Unit.  PPL has the option to defer these contract adjustment payments until the 2011 Purchase Contract settlement date.  Deferred contract adjustment payments will accrue additional contract adjustment payments at the rate of 8.75% per year until paid.  Until any deferred contract adjustment payments have been paid, PPL may not declare or pay any dividends or distributions on, or redeem, purchase or acquire or make a liquidation payment with respect to, any of its capital stock, subject to certain exceptions.
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The 2019 Notes are fully and unconditionally guaranteed by PPL as to payment of principal and interest.  The 2019 Notes initially bear interest at 4.32% and are not subject to redemption prior to May 2016.  Beginning May 2016, PPL Capital Funding may, at its option, redeem the 2019 Notes, in whole but not in part, at any time, at par plus accrued and unpaid interest.  The 2019 Notes are expected to be remarketed in 2014 into two tranches, such that neither tranche will have an aggregate principal amount of less than the lesser of $250 million and 50% of the aggregate principal amount of the 2019 Notes to be remarketed.  One tranche will mature on or about the third anniversary of the settlement of the remarketing, and the other tranche will mature on or about the fifth anniversary of such settlement.  Upon a successful remarketing, the interest rate on the 2019 Notes may be reset and the maturity of the tranches may be modified as necessary.  In connection with a remarketing, PPL Capital Funding may elect with respect to each tranche, to extend or eliminate the early redemption date and/or calculate interest on the notes of a tranche on a fixed or floating rate basis.  If the remarketing fails, holders of the 2019 Notes will have the right to put their notes to PPL Capital Funding on May 1, 2014 for an amount equal to the principal amount plus accrued interest.

Prior to May 2016, PPL Capital Funding may elect at one or more times to defer interest payments on the 2019 Notes for one or more consecutive interest periods until the earlier of the third anniversary of the interest payment due date and May 2016.  Deferred interest payments will accrue additional interest at a rate equal to the interest rate then applicable to the 2019 Notes.  Until any deferred interest payments have been paid, PPL may not, subject to certain exceptions, (i) declare or pay any dividends or distributions on, or redeem, purchase or acquire or make a liquidation payment with respect to, any of its capital stock, (ii) make any payment of principal of, or interest or premium, if any, on, or repay, purchase or redeem any of its debt securities that upon its liquidation ranks equal with, or junior in interest to, the subordinated guarantee of the 2019 Notes by PPL as of the date of issuance and (iii) make any payments regarding any guarantee by PPL of securities of any of its subsidiaries (other than PPL Capital Funding) if the guarantee ranks equal with, or junior in interest to, the 2019 Notes as of the date of their issuance.

In the financial statements, the proceeds from the sale of the 2011 Equity Units were allocated to the 2019 Notes and the 2011 Purchase Contracts, including the obligation to make contract adjustment payments, based on the underlying fair value of each instrument at the time of issuance.  As a result, the 2019 Notes were recorded at $978 million, which approximated fair value, as long-term debt.  At the time of issuance, the present value of the contract adjustment payments of $123 million was recorded to other liabilities representing the obligation to make contract adjustment payments, with an offsetting reduction to additional paid-in capital for the issuance of the 2011 Purchase Contracts, which approximated the fair value of each.  The liability is being accreted through interest expense over the three-year term of the 2011 Purchase Contracts.  The initial valuation of the contract adjustment payments is considered a non-cash transaction that is excluded from the Statement of Cash Flows in 2011.  Costs to issue the 2011 Equity Units were primarily allocated on a relative cost basis, resulting in $25 million being recorded to "Additional paid-in capital" and $6 million being recorded to "Other noncurrent assets" on the Balance Sheet.  See Note 4 for EPS considerations related to the 2011 Purchase Contracts.

2010 Equity Units

In June 2010, in connection with the acquisition of LKE, PPL issued 103.5 million shares of its common stock at a public offering price of $24.00 per share, for a total of $2.484 billion.  Proceeds from the issuance were $2.409 billion, net of the $75 million underwriting discount.  PPL also issued 23 million 2010 Equity Units at a stated amount per unit of $50.00 for a total of $1.150 billion.  Proceeds from the issuance were $1.116 billion, net of the $34 million underwriting discount.

Each 2010 Equity Unit consists of a 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 (2018 Notes).

Each 2010 Purchase Contract obligates the holder to purchase, and PPL to sell, for $50.00 a variable number of shares of PPL common stock determined by the average VWAP of PPL's common stock for the 20-trading day period ending on the third trading day prior to July 1, 2013, subject to antidilution adjustments and an early settlement upon a Fundamental Change as follows:

·if the average VWAP equals or exceeds $28.80, then 1.7361 shares (a minimum of 39,930,300 shares);
·if the average VWAP is less than $28.80 but greater than $24.00, a number of shares of common stock having a value, based on the average VWAP, equal to $50.00; and
·if the average VWAP is less than or equal to $24.00, then 2.0833 shares (a maximum of 47,915,900 shares).

If holders elect to settle the 2010 Purchase Contract prior to July 1, 2013, they will receive 1.7361 shares of PPL common stock, subject to antidilution adjustments and an early settlement upon a Fundamental Change.
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A holder's ownership interest in the 2018 Notes is pledged to PPL to secure the holder's obligation under the related 2010 Purchase Contract.  If a holder of a 2010 Purchase Contract chooses at any time to no longer be a holder of the 2018 Notes, such holder's obligation under the 2010 Purchase Contract must be secured by a U.S. Treasury security.

Each 2010 Purchase Contract also requires PPL to make quarterly contract adjustment payments at a rate of 4.875% per year on the $50.00 stated amount of the 2010 Equity Unit.  PPL has the option to defer these contract adjustment payments until the 2010 Purchase Contract settlement date.  Deferred contract adjustment payments will accrue additional contract adjustment payments at the rate of 9.5% per year until paid.  Until any deferred contract adjustment payments have been paid, PPL may not declare or pay any dividends or distributions on, or redeem, purchase or acquire or make a liquidation payment with respect to, any of its capital stock, subject to certain exceptions.

The 2018 Notes are fully and unconditionally guaranteed by PPL as to payment of principal and interest.  The 2018 Notes initially bear interest at 4.625% and are not subject to redemption prior to July 2015.  Beginning July 2015, PPL Capital Funding may, at its option, redeem the 2018 Notes, in whole but not in part, at any time, at par plus accrued and unpaid interest.  The 2018 Notes are expected to be remarketed in 2013 in two tranches, such that neither tranche will have an aggregate principal amount of less than the lesser of $300 million and 50% of the aggregate principal amount of the 2018 Notes to be remarketed.  One tranche will mature on or about the third anniversary of the settlement of the remarketing, and the other tranche will mature on or about the fifth anniversary of such settlement.  The 2018 Notes will be remarketed as subordinated, unsecured obligations of PPL Capital Funding, as PPL Capital Funding notified the trustee in September 2010 of its irrevocable election to maintain the subordination provisions of the notes and related guarantees in a remarketing.  Upon a successful remarketing, the interest rate on the 2018 Notes may be reset and the maturity of the tranches may be modified as necessary.  In connection with a remarketing, PPL Capital Funding may elect, with respect to each tranche, to extend or eliminate the early redemption date and/or calculate interest on the notes of a tranche on a fixed or floating rate basis.  If the remarketing fails, holders of the 2018 Notes will have the right to put their notes to PPL Capital Funding on July 1, 2013 for an amount equal to the principal amount plus accrued interest.

Prior to July 2013, PPL Capital Funding may elect at one or more times to defer interest payments on the 2018 Notes for one or more consecutive interest periods until the earlier of the third anniversary of the interest payment due date and July 2015.  Deferred interest payments will accrue additional interest at a rate equal to the interest rate then applicable to the 2018 Notes.  Until any deferred interest payments have been paid, PPL may not, subject to certain exceptions, (i) declare or pay any dividends or distributions on, or redeem, purchase or acquire or make a liquidation payment with respect to, any of its capital stock, (ii) make any payment of principal of, or interest or premium, if any, on, or repay, purchase or redeem any of its debt securities that upon its liquidation ranks equal with, or junior in interest to, the subordinated guarantee of the 2018 Notes by PPL as of the date of issuance and (iii) make any payments regarding any guarantee by PPL of securities of any of its subsidiaries (other than PPL Capital Funding) if the guarantee ranks equal with, or junior in interest to, the 2018 Notes as of the date of their issuance.

In the financial statements, the proceeds from the sale of the 2010 Equity Units were allocated to the 2018 Notes and the 2010 Purchase Contracts, including the obligation to make contract adjustment payments, based on the underlying fair value of each instrument at the time of issuance.  As a result, the 2018 Notes were recorded at $1.150 billion, which approximated fair value, as long-term debt.  At the time of issuance, the present value of the contract adjustment payments of $157 million was recorded to other liabilities, representing the obligation to make contract adjustment payments, with an offsetting reduction to additional paid-in capital for the issuance of the 2010 Purchase Contracts, which approximated the fair value of each.  The liability is being accreted through interest expense over the three-year term of the 2010 Purchase Contracts.  The initial valuation of the contract adjustment payments is considered a non-cash transaction that was excluded from the Statement of Cash Flows in 2010.  Costs to issue the 2010 Equity Units were primarily allocated on a relative cost basis, resulting in $29 million being recorded to "Additional paid-in capital" and $7 million being recorded to "Other noncurrent assets" on the Balance Sheet.  See Note 4 for EPS considerations related to the 2010 Purchase Contracts.

Legal Separateness (PPL, PPL Energy Supply, and PPL Electric)

In 2001, PPL Electric completed a strategic initiative to confirm its legal separation from PPL and PPL's other affiliated companies.  This initiative was designed to enable PPL Electric to substantially reduce its exposure to volatility in energy prices and supply risks through 2009 and to reduce its business and financial risk profile by, among other things, limiting its business activities to the transmission and distribution of electricity and businesses related to or arising out of the electric transmission and distribution businesses.  In connection with this initiative, PPL Electric:

·obtained long-term electric supply contracts to meet its PLR obligations (with its affiliate PPL EnergyPlus) through 2009, as further described in Note 15 under "PLR Contracts" (also see Note 14 under "Energy Purchase Commitments" for information on current PLR supply procurement procedures);
·agreed to limit its businesses to electric transmission and distribution and related activities;
·adopted amendments to its Articles of Incorporation and Bylaws containing corporate governance and operating provisions designed to clarify and reinforce its legal and corporate separateness from PPL and its other affiliated companies;
·appointed an independent director to its Board of Directors and required the unanimous approval of the Board of Directors, including the consent of the independent director, to amendments to these corporate governance and operating provisions or to the commencement of any insolvency proceedings, including any filing of a voluntary petition in bankruptcy or other similar actions.

In addition, in connection with the issuance of certain series of bonds, PPL Electric entered into a compliance administration agreement with an independent compliance administrator to review, on a semi-annual basis, its compliance with the corporate governance and operating requirements contained in its Articles of Incorporation and Bylaws.  Such series of bonds are no longer outstanding and the compliance administration agreement has terminated, but PPL Electric continues to comply with the corporate separateness provisions in its Articles of Incorporation and Bylaws.

The enhancements to PPL Electric's legal separation from its affiliates are intended to minimize the risk that a court would order PPL Electric's assets and liabilities to be substantively consolidated with those of PPL or another affiliate of PPL in the event that PPL or another PPL affiliate were to become a debtor in a bankruptcy case.  Based on these various measures, PPL Electric was able to issue and maintain a higher level of debt and use it to replace higher cost equity, thereby maintaining a lower total cost of capital.  Nevertheless, if PPL or another PPL affiliate were to become a debtor in a bankruptcy case, there can be no assurance that a court would not order PPL Electric's assets and liabilities to be consolidated with those of PPL or such other PPL affiliate.LKE)

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 thePPL'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.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 the creditors of its subsidiaries or as required by applicable law or regulation.

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Similarly, the subsidiaries of PPL Energy Supply, and PPL Electric and LKE are each separate legal entities.  These subsidiaries are not liable for the debts of PPL Energy Supply, PPL Electric and PPL Electric.LKE.  Accordingly, creditors of PPL Energy Supply, and 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.  In addition,Similarly, absent a specific contractual undertaking or as required by applicable law or regulation, PPL Energy Supply, and PPL Electric and LKE are not liable for the debts of their subsidiaries.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, or PPL Electric and LKE (or their other subsidiaries) absent a specific contractual undertaking by that parent or other subsidiary to pay thesuch creditors of its subsidiaries or as required by applicable law or regulation.

Common Stock Repurchase Program (PPL)

In June 2007, PPL's Board of Directors authorized the repurchase by PPL of up to $750 million of its common stock.  A total of 15,732,708 shares were repurchased for $750 million, excluding related fees, under the plan during 2008 and 2007.  These purchases were primarily recorded as a reduction to "Capital in excess of par value" on the Balance Sheet.

Distributions, Capital Contributions and Related Restrictions

(PPL)

In February 2009,November 2012, PPL announced an increase todeclared its quarterly common stock dividend, effective April 1, 2009, to 34.5payable January 2, 2013, at 36.0 cents per share (equivalent to $1.38$1.44 per annum).  In February 2013, PPL declared its quarterly common stock dividend, payable April 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 dependentdepend upon future earnings, cash flows, financial and legal requirements and other factors.

Neither PPL Capital Funding nor PPL may declare or pay any cash dividend or distribution on its capital stock during any period in which PPL Capital Funding defers interest payments on its 2007 Series A Junior Subordinated Notes due 2067.  Subject to certain exceptions, PPL may not declare or pay any dividend or distribution on its capital stock until any deferred interest payments on its 4.625% Junior Subordinated Notes due 2018 and its 4.32% Junior Subordinated Notes due 2019 have been paid and deferred contract adjustment payments on PPL's Purchase Contracts have been paid.  At December 31, 2009,2012, no interest payments were deferred.deferred on any series of junior subordinated notes or the Purchase Contracts.

(PPL, PPL Electric, LKE, LG&E and KU)

PPL relies on dividends or loans from its subsidiaries to fund PPL's dividends to its common shareholders.  The net assets of certain PPL subsidiaries are subject to legal restrictions.  LKE primarily relies on dividends from its subsidiaries to fund its dividends to PPL.  LG&E, KU and PPL Electric are subject to Section 305(a) of the Federal Power Act, which makes it unlawful for a public utility to make or pay a dividend from any funds "properly included in capital account."  The meaning of this limitation has never been clarified under the Federal Power Act.  LG&E, KU and PPL Electric believe, however, that this statutory restriction, as applied to their circumstances, would not be construed or applied by the FERC to prohibit the payment from retained earnings of dividends that are not excessive and are for lawful and legitimate business purposes.  In February 2012, LG&E and KU petitioned the FERC requesting authorization to pay dividends in the future based on retained earnings balances calculated without giving effect to the impact of purchase accounting adjustments for the acquisition of LKE by PPL.  In May 2012, FERC approved the petitions with the further condition that each utility may not pay dividends if such payment would cause its adjusted equity ratio to fall below 30% of total capitalization.  Accordingly, at December 31, 2012, net assets of $2.3 billion ($893 million for LG&E and $1.4 billion for KU) were restricted for purposes of paying dividends to LKE, and net assets of $2.3 billion ($917 million for LG&E and $1.4 billion for KU) were available for payment of dividends to LKE.  LG&E and KU believe they will not be required to change their current dividend practices as a result of the foregoing requirement.  In addition, under Virginia law, KU is prohibited from making loans to affiliates without the prior approval of the VSCC.  There are no comparable statutes under Kentucky law applicable to LG&E and KU, or under Pennsylvania law applicable to PPL Electric.  However, orders from the KPSC require LG&E and KU to obtain prior consent or approval before lending amounts to PPL.

(PPL and PPL Energy Supply)

The PPL Montana Colstrip lease places certain restrictions on PPL Montana's ability to declare dividends.  At this time, PPL believes that these covenants will not limit PPL's or PPL Energy Supply's ability to operate as desired and will not affect their ability to meet any of their cash obligations.

(PPL)

WPD subsidiaries also have financing arrangements that limit their ability to pay dividends.  However, PPL does not, at this time, expect that any of such limitations would significantly impact PPL's or PPL Energy Supply's ability to meet theirits cash obligations.

(PPL Energy Supply)
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(PPL Energy Supply, PPL Electric, LKE, LG&E and KU)
                    
The following distributions and capital contributions occurred in 2012:
                  
    PPL Energy PPL          
    Supply Electric LKE LG&E KU
                    
Dividends/distributions paid to parent/member $ 787   $ 95  $ 155   $ 75  $ 100 
Capital contributions received from parent/member   563     150           

During 2009, PPL Energy Supply distributed $943 million to its parent company, PPL Energy Funding, and received cash capital contributions of $50 million.

(PPL and PPL Electric)

As discussed in Note 6, PPL Electric may not pay dividends on its common stock, except in certain circumstances, unless full dividends have been paid on the Preference Shares for the then-current dividend period.  The quarterly dividend rate for PPL Electric's Preference Shares is $1.5625 per share.  PPL Electric has declared and paid dividends on its outstanding Preference Shares since issuance.  Dividends on the Preference Shares are not cumulative and future dividends, declared at the discretion of PPL Electric's Board of Directors, will be dependent upon future earnings, cash flows, financial requirements and other factors.

PPL Electric is subject to Section 305(a) of the Federal Power Act, which makes it unlawful for a public utility to make or pay a dividend from any funds "properly included in capital account."  The meaning of this limitation has never been clarified under the Federal Power Act.  PPL Electric believes, however, that this statutory restriction, as applied to its circumstances, would not be construed or applied by the FERC to prohibit the payment from retained earnings of dividends that are not excessive and are for lawful and legitimate business purposes.

(PPL Electric)

During 2009, PPL Electric paid common stock dividends of $274 million to PPL, and received cash capital contributions of $400 million.

8.  
Acquisitions,8.  Acquisitions, Development and Divestitures

(PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and PPL Electric)KU)

PPL and its subsidiaries continuously evaluate strategic options and,The Registrants from time to time PPL and its subsidiaries negotiate with third parties regardingevaluate opportunities for potential acquisitions, and dispositions of businesses and assets, joint venturesdivestitures and development projects.  Development projects which mayare reexamined based on market conditions and other factors to determine whether to proceed with the projects, sell, cancel or may not result in consummated transactions.expand them, execute tolling agreements or pursue other options.  Any suchresulting transactions may impact future financial results.  See Note 9 for information on anticipatedPPL Energy Supply's 2011 distribution of its membership interest in PPL Global to its parent, PPL Energy Funding, which was presented as discontinued operations by PPL Energy Supply, and completedthe sales of businesses in 2011 and prior years that were presented as discontinued operations by PPL, PPL Energy Supply and LKE.  See Note 10 for information on PPL's and PPL Energy Supply.Supply's 2012 Ironwood Acquisition and PPL's 2011 acquisition of WPD Midlands and 2010 acquisition of LKE.

Domestic(PPL, LKE, LG&E and KU)

License Renewals(PPL and PPL Energy Supply)Acquisition

PPL Susquehanna operates Units 1Terminated Bluegrass CTs Acquisition

In September 2011, LG&E and 2 pursuantKU entered into an asset purchase agreement with Bluegrass Generation for the purchase of the Bluegrass CTs, aggregating approximately 495 MW, plus limited associated contractual arrangements required for operation of the units, for a purchase price of $110 million, pending receipt of applicable regulatory approvals.  In May 2012, the KPSC issued an order approving the request to NRC operating licenses.purchase the Bluegrass CTs.  In November 2009,2011, LG&E and KU filed an application with the NRC approved PPL Susquehanna's application for 20-year license renewals for eachFERC under the Federal Power Act requesting approval to purchase the Bluegrass CTs.  In May 2012, the FERC issued an order conditionally authorizing the acquisition of the Susquehanna units, extendingBluegrass CTs, subject to approval by the expiration dateFERC of satisfactory mitigation measures to 2042address market-power concerns.  After a review of potentially available mitigation options, LG&E and KU determined that the options were not commercially justifiable.  In June 2012, LG&E and KU terminated the asset purchase agreement for Unit 1the Bluegrass CTs in accordance with its terms and to 2044 for Unit 2.  At December 31, 2009made applicable filings with the KPSC and 2008, $17 million and $15 million of license renewal costs were capitalized and are included in noncurrent "Other intangibles" on the Balance Sheets.FERC.

Development

Cane Run Unit 7 Construction

In September 2011, LG&E and KU filed a CPCN with the KPSC requesting approval to build Cane Run Unit 7.  In May 2012, the KPSC issued an order approving the request.  LG&E will own a 22% undivided interest, and KU will own a 78% undivided interest in the new generating unit.  A formal request for recovery of the costs associated with the construction was not included in the CPCN filing with the KPSC but is expected to be included in future rate proceedings.  LG&E and KU commenced preliminary construction activities in the third quarter of 2012 and project construction is expected to be completed by May 2015.  The project, which includes building a natural gas supply pipeline and related transmission projects, has an estimated cost of approximately $600 million.

In conjunction with this construction and to meet new, more stringent EPA regulations with a 2015 compliance date, LG&E and KU anticipate retiring five older coal-fired electric generating units at the Cane Run and Green River plants, which have a combined summer capacity rating of 726 MW.  In addition, KU retired the remaining 71 MW unit at the Tyrone plant in February 2013.
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Future Capacity Needs

In addition to the construction of a combined cycle gas unit at the Cane Run station, LG&E and KU continue to assess future capacity needs.  As a part of the assessment, LG&E and KU issued an RFP in September 2012 for up to 700 MW of capacity beginning as early as 2015.  

(PPL and PPL Energy Supply)

In 2007, PPL requested FERC approval to expand the capacity of its Holtwood hydroelectric plant by 125 MW.  In 2008, PPL withdrew the application due to then-prevailing economic conditions, including the high cost of capital and projected future energy prices.  As a result, the Supply segment recorded an impairment of $22 million ($13 million after tax), which is included in "Other operation and maintenance" on the Statements of Income.Hydroelectric Expansion Projects

In April 2009, PPL filed a new application with the FERC to expand capacity at its Holtwood hydroelectric plant by 125 MW, and in October 2009 the FERC granted the approval.  PPL reconsidered this project in light of the availability of tax incentives and potential federal loan guarantees for renewable projects contained in the Economic Stimulus Package.  In approving thisPackage, PPL Energy Supply filed an application with the FERC extendedto expand capacity at its Holtwood hydroelectric plant, which the operating license forFERC approved.  The project's expected cost is $443 million.  Construction continues on the Holtwood plant to August 2030.  The expansion project, has an expected capital cost of approximately $434 million.  Site preparation began in the fourth quarter of 2009 and construction began in the first quarter of 2010, with commercial operations scheduled to begin in 2013.  A PPL subsidiary has applied to the DOE for a federal loan guarantee for the project.  At December 31, 2012, expected remaining expenditures are $84 million.

In March 2009, PPL Montana received FERC approval for its request to redevelop the Rainbow hydroelectric facility nearat Great Falls, Montana, for total plant capacity of approximately 60 MW (an increase of 28 MW).Montana.  The project's expected redevelopment project cost is $230$209 million.  Construction began in October 2009, with commercialCommercial operations is scheduled to begin in 2012.  A 2013.  At December 31, 2012, expected remaining expenditures were insignificant.

PPL subsidiary has applied to the DOEEnergy Supply believes that it is qualified for a federal loan guaranteeeither investment tax credits or Treasury grants for the project.projects at the Holtwood and Rainbow facilities.  PPL Energy Supply has recognized investment tax credits and continues to evaluate whether to seek Treasury grants in lieu of the credits.  During 2012, 2011 and 2010, PPL Energy Supply recorded deferred investment tax credits of $40 million, $52 million and $52 million.  PPL Energy Supply anticipates recognizing an additional $23 million in investment tax credits for tax year 2013.  These credits reduce PPL Energy Supply's tax liability and will be amortized over the life of the related assets.

In 2008, PPL Susquehanna received NRC approval for its request to increase the generation capacity of the Susquehanna nuclear plant.  The total expected capacity increase is 159 MW, of which PPL Susquehanna's 90% ownership share is 143 MW.  The first uprate for Unit 1 was 50 MW and was completed in 2008.  The second uprate for Unit 1 is scheduled to be completed in 2010.  The first uprate for Unit 2 was 50 MW and was completed in 2009, and the second uprate is scheduled to be completed in 2011.  The remaining increase is 59 MW, of which PPL Susquehanna's share is 53 MW.  PPL Susquehanna's share of the expected capital cost for the total uprate of 143 MW is $345 million.Bell Bend COLA

In October 2008, a PPL Energy Supply subsidiary, PPL Bell Bend, LLC (PPL Bell Bend) submitted a COLA to the NRC for the proposed Bell Bend nuclear generating unit (Bell Bend) to be built adjacent to PPL'sthe Susquehanna plant.  TheAlso in 2008, the COLA was formally docketed and accepted for review by the NRC in December 2008.  The NRC is now reviewing the COLA.  In May 2009,NRC.  PPL Bell Bend continues to respond to questions from the NRC published its officialregarding technical and site specific information provided in the initial COLA and subsequent amendments.  PPL Bell Bend does not expect to complete the COLA review schedule that culminatesprocess with issuance of Bell Bend's final safety evaluation report in 2012, after which public hearings will be held before Bell Bend's license can be issued.the NRC prior to 2015.

In 2008, a PPL subsidiaryBell Bend submitted Parts I and II of an application for a federal loan guarantee for Bell Bend to the DOE.  In June 2009,The DOE is expected in the DOE announced that it was workingfirst half of 2013 to finalize the first nuclear loan guarantees related to four projects, none of which was Bell Bend.  Noneguarantee for a project in Georgia.  Eight of the ten applicants whothat submitted Part II applications has been formally eliminated byremain active in the DOE;DOE program; however, the DOE has stated that the $18.5 billion currently appropriated to support new nuclear projects would not likely be enough for more than fourthree projects.  A PPL subsidiaryBell Bend submits quarterly application updates for Bell Bend to the DOE to remain active in the loan guarantee application process and plans to continue to do so in 2010.process.

The President's proposed budget for fiscal year 2011 includes an additional $36 billion of loan guarantees for nuclear projects.  If this increased loan guarantee authorization is approved, PPL believes that Bell Bend could be a candidate for a share of such additional guarantees.  However, PPL 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 has announced that itBell 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 and its subsidiaries areBell Bend is currently authorized by PPL's Board of Directors to spend up to $111$205 million through 2015 on the COLA and other permitspermitting costs necessary for construction.construction, which is expected to be sufficient to fund the project through receipt of the license.  At December 31, 20092012 and 2008, $772011, $154 million and $58$131 million of costs, which includes capitalized interest, associated with the licensing application were capitalized and are included in noncurrent "Other intangibles" on the Balance Sheets asin noncurrent "Other intangibles."  PPL Bell Bend believes it is probable that these costs are ultimately recoverable following approval by the NRC either through construction of the new nuclear unit, transferestimated fair value of the COLA rightscurrently exceeds the costs expected to a joint venture, or sale ofbe capitalized for the COLA rights to another party.licensing application.

(PPLRegional Transmission Line Expansion Plan (PPL and PPL Electric)

Susquehanna-Roseland

In June 2007, the PJM directed the construction of a new 150-mile, 500-kilovolt transmission line between the Susquehanna substation in Pennsylvania and the Roseland substation in New Jersey that it identified as essential to long-term reliability of the mid-AtlanticMid-Atlantic electricity grid.  The  PJM determined that the line iswas needed to prevent potential overloads that could occur in the next decade on several existing transmission lines in the interconnected PJM system.  The PJM has directed PPL Electric to construct the portion of
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the Susquehanna-Roseland line in Pennsylvania and has directed Public Service Electric & Gas Company to construct the portion of the line in New Jersey, in each case by June 1, 2012.  PPL Electric's estimated share of the project costs at December 31, 2009 was $510 million.Jersey.

This project is pending certain regulatory approvals.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 as the preferred alternative under the NPS's National Environmental Policy Act review.  On October 15, 2012, a complaint was filed in the United States District Court for the District of Columbia by various environmental groups, including the Sierra Club, challenging the ROD and seeking to prohibit its implementation, and on December 6, 2012, the groups filed a petition for injunctive relief seeking to prohibit all construction activities until the court issues a final decision on the complaint.  PPL Electric has identifiedintervened in the approximately 100-milelawsuit.  The chosen route for the Pennsylvania portion of the line.  In February 2010,had previously been approved by the PUC and the New Jersey Board of Public Utilities approved the project.  In addition, both companies are working with theUtilities.

On December 13, 2012, PPL Electric received federal construction and right of way permits to build on National Park Service lands.

Construction activities have begun on portions of the 101-mile route in Pennsylvania.  The line is expected to obtain any approvals that may be required to routecompleted before the line throughpeak summer demand period of 2015.  At December 31, 2012, PPL Electric's estimated share of the Delaware Water Gap National Recreation Area.project cost was $560 million.

PPL and PPL Electric cannot predict the ultimate outcome or timing of any legal challenges to the National Park Service approval.  However, PPL Electric currently anticipates delays in the approval process which will affect the PJM-directed in-service date and projected costs of the line.  PPL Electric also cannot predictproject or what action,additional actions, if any, the PJM might take in the event of a further delay to itsthe 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, three new substations and upgrades to adjacent facilities).  The incentives were specifically tailored to address the risks and challenges PPL Electric will face in building the project.  The FERC granted the incentive for inclusion of all prudently incurred construction work in progress (CWIP) costs in rate base and denied the request for a 100 basis point adder to the return on equity incentive.  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 will submit with the FERC in March 2013.  PPL Electric expects the project to be completed in 2017.  At December 31, 2012, PPL Electric estimates the total project costs to be approximately $200 million with approximately $190 million qualifying for the CWIP incentive.

9.  Discontinued Operations

(PPL and PPL Energy Supply)

Sale of Telecommunication OperationsCertain Non-core Generation Facilities

In the first quarter of 2007, PPL completed a review of strategic options for the transport operations of its domestic telecommunications subsidiary, which offered fiber optic capacity to other telecommunications companies and enterprise customers.  The operating results of this subsidiary were included in the Supply segment.  Due to significant capital requirements for the telecommunication operations and competing capital needs in PPL's core electricity supply and delivery businesses, PPL decided to market these operations.  The transport operations did not meet the criteria for discontinued operations on the Statement of Income because there were not separate and distinguishable cash flows, among other factors.  In August 2007, PPL sold its telecommunication operations.

In connection with the sale, in 2007 PPL and2011, PPL Energy Supply recorded impairmentssubsidiaries completed the sale of $39 million ($23 million after tax) of the telecommunication assets based on their estimated fair value.  The impairments are includedownership interests in "Energy-related businesses" expenses on the Statement of Income. PPL realized net proceeds of $47 million from the sale.

Acquisition of a Long-term Tolling Agreement

In 2008, PPL EnergyPlus acquired the rights to an existing long-term tolling agreement associated with the capacity and energy of Ironwood.  The tolling agreement extends through 2021 and is considered to contain an operating lease for accounting purposes.  As a result of this agreement, PPL EnergyPlus recognized an intangible asset.  See Note 10 for additional information on the lease.

9.  
Discontinued Operations

(PPL and PPL Energy Supply)

Anticipated Sale of Long Island Generation Business

As a result of management's ongoing strategic review of PPL'scertain non-core asset portfolio, in May 2009, PPL Generation signed a definitive agreement to sell its Long Island generation business,facilities, which iswere included in the Supply segment, for approximately $135 million$381 million.  The transaction included the natural gas-fired facilities in cash, adjusted for working capital at the sale dateWallingford, Connecticut and subject to reduction monthly, effective September 1, 2009.  The Long IslandUniversity Park, Illinois and an equity interest in Safe Harbor Water Power Authority has contracted with PPL Energy Supply subsidiaries to purchase all of this business' capacity and ancillary services as part of tolling agreements that expireCorporation, which owns a hydroelectric facility in 2017 and 2018.  Each agreement is considered to contain a lease for accounting purposes.  These tolling agreements will be transferred to the purchaser upon completion of the sale.Conestoga, Pennsylvania.

The Long IslandThese non-core generation businessfacilities met the held for sale criteria in the secondthird quarter of 2009.2010.  As a result, net assets held for sale with a carrying amount of $189 million were written down to their estimated fair value (less cost to sell) of $137 million at June 30, 2009, resulting in a pre-tax impairment charge of $52$96 million ($3458 million after tax).  At both September 30 was recorded and December 31, 2009, the estimated fair value (less cost to sell) was remeasured and additional impairments totaling $10$5 million ($3 million after tax) were recorded.  In addition, $2 million ($14 million after tax) of goodwill allocated to this businessgoodwill was written off in 2009.  The impairment charges recognized in the third and fourth quarters of 2009 had no significant impact on earnings, as such amounts were substantially offset by tolling revenues from the Long Island generation assets.off.  These charges are included in "Income (Loss) from Discontinued Operations (net of income taxes)" on the 2009 Statement2010 Statements of Income.  Closing of the sale is expected to occur on or about February 26, 2010.  After adjusting for the delayed closing provisions, proceeds will approximate $125 million, excluding working capital.

Following are the components of Discontinued Operations in the Statements of Income.

 2009 2008 2007   2011   2010 
             
Operating revenues $24 $26 $28    $ 19  $ 113 
Operating expenses (a)  73   8   8      11    156 
Operating income (loss) (49) 18 20     8   (43)
Other income (expense) - net      2 
Interest expense (b)  4   3   2      3    11 
Income (loss) before income taxes (53) 15 18     5   (52)
Income taxes  (20)  5   8 
Income tax expense (benefit)     3    (18)
Income (Loss) from Discontinued Operations $(33) $10  $10    $ 2  $ (34)

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(a)
20092010 includes the impairments to the carrying value of the business.non-core generation facilities and the write-off of allocated goodwill.
(b)Represents allocated interest expense based upon debt attributable to PPL's Long Islandthe generation business.facilities sold.          

The major classesSale of assets reported as held for sale on the Balance Sheet at December 31, 2009 were $41 million of PP&E and an $86 million net investment in a direct-financing lease (corresponding amounts at December 31, 2008, were $88 million of PP&E and a $104 million net investment in a direct-financing lease, which have not been reclassified on the Balance Sheet as of that date).Long Island Generation Business

In 2010, PPL Energy Supply subsidiaries completed the sale of the Long Island generation business, which was included in the Supply segment.  Proceeds from the sale approximated $124 million.  There was no significant impact on earnings in 2010 from the operation of this business or as a result of the sale.

Sale of Maine Hydroelectric Generation Business

In 2004,2010, a PPL Maine entered into an agreement with a coalition of government agencies and private groups to sell threeEnergy Supply subsidiary completed the sale of its hydroelectric facilities in Maine.  Under the agreement, a non-profit organization designated by the coalition received a five-year option to purchase the hydroelectric facilities for $25 million and, if the option was exercised, PPL Maine would receive rights to increase energy output at its other Maine hydroelectric facilities.  The coalition announced plans to remove or bypass the subject facilities to restore runs of Atlantic salmon and other migratory fish to the Penobscot River.  In June 2008, the coalition notified PPL Maine of its intent to exercise the purchase option.  The agreement requires updates to its representations and warranties, and is subject to approvals by the FERC and other regulatory agencies.  In November 2008, PPL Maine and the coalition requested the FERC, the U.S. Army Corps of Engineers and the Maine DEP to approve the transfer of ownership of the three facilities.  Certain of these required approvals have been obtained, but PPL cannot predict whether or when all of them will be obtained.  As a result, these three Maine hydroelectric facilities did not meet the held for sale criteria at December 31, 2009.

In July 2009, indirectly related to the above potential sale and as a result of management's ongoing strategic review of PPL's non-core asset portfolio, PPL Maine signed a definitive agreement to sell the majority of its hydroelectric generation business, which was included in the Supply segment.  PPL completed this sale in November 2009 for $81 million in cash, adjusted for working capital.  The assets sold in this transactionbusiness included fiveeight hydroelectric facilities and PPL'sas well as a 50% equity interest in a sixthanother hydroelectric facility, which had been accounted for as an equity investment, as well as the rights to increase energy output at these facilities if the potential salefacility.  The majority of the business was sold in 2009.  The remaining three other hydroelectric facilities (discussed above) is completed.  PPL's interestwere sold in these six facilities represented a total2010 for $24 million, and also resulted in the receipt of 30 MW of electric generating capacity.an additional $14 million in contingent consideration in connection with the 2009 sale.  As a result of this sale,the consideration received in 2010, PPL Energy Supply recorded a gain of $38$25 million ($2215 million after tax), reflected in "Income (Loss) from Discontinued Operations (net of income taxes)" on the 20092010 Statement of Income.

Distribution of Membership Interest in PPL Global to Parent(PPL Energy Supply)

In addition, upon completionJanuary 2011, PPL Energy Supply distributed its entire membership interest in PPL Global, which represented the entire U.K. Regulated segment, to PPL Energy Supply's parent, PPL Energy Funding.  The distribution was made based on the book value of the saleassets and liabilities of PPL Global with financial effect as of January 1, 2011, and no gains or losses were recognized on the distribution.  The purpose of the three other hydroelectric facilities noted above,distribution was to better align PPL's organizational structure with the manner in which it manages these businesses, separating the U.S.-based competitive energy marketing and supply business from the U.K.-based regulated electricity distribution business.  Following the distribution, PPL will receive $14 millionEnergy Supply operates in contingent considerationa single reportable segment, and record an associated additional after-tax gainthrough its subsidiaries is primarily engaged in the generation and marketing of between $7power, primarily in the northeastern and $9 million.northwestern U.S.

Following are the components of Discontinued Operations in the StatementsStatement of Income.

  2009 2008 2007
             
Operating revenues $5  $11  $8 
Operating expenses (a)  (34)  3   4 
Operating income  39   8   4 
Other income-net  3   2   2 
Interest expense (b)  1   1     
Income before income taxes  41   9   6 
Income taxes  17   4   4 
Income from Discontinued Operations $24  $5  $2 
2010 
Operating revenues$ 761 
Operating expenses 368 
Operating income 393 
Other income (expense) - net 4 
Interest expense (a) 135 
Income before income taxes 262 
Income tax expense 1 
Income (Loss) from Discontinued Operations$ 261 

(a)2009 includes the gain recorded on the sale.
(b)RepresentsNo interest was allocated, interest expense based upon debt attributable to the Maine hydroelectric generation business.as PPL Global was sufficiently capitalized.

Upon completionThe amount of cash and cash equivalents of PPL Global at the time of the sale, $23 milliondistribution was reflected as a financing activity in the 2011 Statement of PP&E, an $18 million equity method investment and $1 million of allocated goodwill were removed from the Balance Sheet.Cash Flows.

Sale of Interest in Wyman Unit 4WKE

As(PPL and LKE)

WKE had a result25-year lease for and operated generating facilities of management's ongoing strategic reviewBREC, and a coal-fired generating facility owned by the City of PPL's non-core asset portfolio,Henderson, Kentucky.  WKE terminated the lease in December 2009 prior to PPL Maine sold its 8.33% ownership interestacquiring LKE.  See Note 15 for additional information related to the termination of the lease.  In 2012, an adjustment was made to the liability for certain WKE indemnifications, which is reflected in the 610 MW Wyman Unit 4 generating station, an oil-fired plant locatedDiscontinued Operations.  See "Guarantees and Other Assurances" in Yarmouth, Maine.  PPL's interest in the plant was included in the Supply segment.  In connection with the sale, PPL recorded a loss of $6 million ($4 million after tax).  This charge is included in "Income (Loss) from Discontinued Operations (net of income taxes)"Note 15 for additional information on the 2009 Statement of Income.  PPL's share of theadjustment and related indemnification.  The results of operations for the years 2007 - 2009 was insignificant.2012, 2011 and 2010 periods were not significant.
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10.  Business Acquisitions

Sale of Latin American BusinessesIronwood Acquisition(PPL and PPL Energy Supply)

In March 2007,On April 13, 2012, an indirect, wholly owned subsidiary of PPL Energy Supply completed the acquisition of all of the equity interests of two subsidiaries of The AES Corporation, AES Ironwood, L.L.C. (subsequently renamed PPL Ironwood, LLC) and AES Prescott, L.L.C. (subsequently renamed PPL Prescott, LLC), which own and operate, respectively, the Ironwood Facility.  The Ironwood Facility began operation in 2001 and, since 2008, PPL EnergyPlus has supplied natural gas for the facility and received the facility's full electricity output and capacity value pursuant to a reviewtolling agreement that expires in 2021.  The acquisition provides PPL Energy Supply, through its subsidiaries, operational control of strategic options for its Latin American businesses and announced its intention to sell its regulated electricity delivery businessesadditional combined-cycle gas generation in Chile, El Salvador and Bolivia, which were included in the International Delivery segment.PJM.

In April 2007, PPL agreed to sell its Bolivian businesses.  As a result, in 2007, PPL recorded impairments totaling $37 million ($20 million after tax) to reflect the estimatedThe fair value of the consideration paid for this acquisition was as follows.

Aggregate enterprise consideration$326 
Less: Fair value of long-term debt outstanding assumed through consolidation (a)258 
Plus: Restricted cash debt service reserves17 
Cash consideration paid for equity interests (including working capital adjustments)$85 

(a)The long-term debt assumed through consolidation consisted of $226 million aggregate principal amount of 8.857% senior secured bonds to be fully repaid by 2025, plus $8 million of debt service reserve loans, and a $24 million fair value adjustment.

Purchase Price Allocation

The following table summarizes the allocation of the purchase price to the fair value of the major classes of assets acquired and liabilities assumed through consolidation, and the effective settlement of the tolling agreement through consolidation.

PP&E$ 505 
Long-term debt (current and noncurrent) (a) (258)
Tolling agreement (b) (170)
Other net assets (a) 8 
Net identifiable assets acquired$ 85 

(a)Represents non-cash activity excluded from the 2012 Statement of Cash Flows.
(b)
Prior to the acquisition, PPL EnergyPlus had recorded primarily an intangible asset, which represented its rights to and the related accounting for the tolling agreement with PPL Ironwood, LLC.  On the acquisition date, PPL Ironwood, LLC recorded a liability, recognized at fair value, for its obligation to PPL EnergyPlus.  The tolling agreement assets of PPL EnergyPlus and the tolling agreement liability of PPL Ironwood, LLC eliminate in consolidation for PPL and PPL Energy Supply as a result of the acquisition, and therefore the agreement is considered effectively settled.  The difference between the tolling agreement assets and liability resulted in an insignificant loss on the effective settlement of the agreement.

During the fourth quarter of 2012, the purchase price allocation was finalized with no material adjustments made to the preliminary valuation.

Acquisition of WPD Midlands(PPL)

On April 1, 2011, PPL, through its indirect, wholly owned subsidiary PPL WEM, completed its acquisition of all of the outstanding ordinary share capital of Central Networks East plc and Central Networks Limited, the sole owner of Central Networks West plc, together with certain other related assets and liabilities (collectively referred to as Central Networks and subsequently renamed WPD Midlands), from subsidiaries of E.ON AG.  The consideration for the acquisition consisted of cash of $5.8 billion, including the repayment of $1.7 billion of affiliate indebtedness owed to subsidiaries of E.ON AG, and approximately $800 million of long-term debt assumed through consolidation.  WPD Midlands operates two regulated distribution networks that serve five million end-users in the Midlands area of England.  The acquisition increased the regulated portion of PPL's business and enhances rate-regulated growth opportunities as the regulated businesses atmake investments to improve infrastructure and customer reliability.  Further, since the service territories of WPD (South Wales), WPD (South West) and WPD Midlands are contiguous, cost savings, efficiencies and other benefits are achieved from the combined operations of these entities.

The fair value of the consideration paid for this acquisition was as follows (in billions).
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Aggregate enterprise consideration$ 6.6 
Less: Fair value of long-term debt outstanding assumed through consolidation 0.8 
Total cash consideration paid 5.8 
Less: Funds used to repay pre-acquisition affiliate indebtedness 1.7 
Cash consideration paid for Central Networks' outstanding ordinary share capital$ 4.1 

The total cash consideration paid was primarily funded by borrowings under the 2011 Bridge Facility on the date of acquisition.  Subsequently, PPL repaid those borrowings in 2011 using proceeds from the agreement.  This salepermanent financing, including issuances of common stock and 2011 Equity Units, as well as proceeds from the issuance of debt by PPL WEM, WPD (East Midlands) and WPD (West Midlands).  See Note 7 for additional information.

Purchase Price Allocation

The following table summarizes (in billions) the allocation of the purchase price to the fair value of the major classes of assets acquired and liabilities assumed.

Current assets (a)$ 0.2 
PP&E 4.9 
Intangible assets 0.1 
Other noncurrent assets 0.1 
Current liabilities (b) (0.4)
PPL WEM affiliate indebtedness (1.7)
Long-term debt (current and noncurrent) (b) (0.8)
Other noncurrent liabilities (b) (0.7)
Net identifiable assets acquired 1.7 
Goodwill 2.4 
Net assets acquired$ 4.1 

(a)
Includes gross contractual amount of the accounts receivable acquired of $122 million, which approximates fair value.
(b)Represents non-cash activity excluded from the 2011 Statement of Cash Flows.

The purchase price allocation resulted in goodwill of $2.4 billion that was completedassigned to the U.K. Regulated segment.  The goodwill is attributable to the expected continued growth of a rate-regulated business with a defined service area operating under a constructive regulatory framework, expected cost savings, efficiencies and other benefits resulting from a contiguous service area with WPD (South West) and WPD (South Wales), as well as the ability to leverage WPD (South West)'s and WPD (South Wales)'s existing management team's high level of performance in July 2007.  capital cost efficiency, system reliability and customer service.  The goodwill is not deductible for U.K. income tax purposes.

Separation Benefits - U.K. Regulated Segment

In May 2007,connection with the 2011 acquisition, PPL completed the sale of its El Salvadoran business for $180 million in cash.  PPL recorded a gain of $94 million ($89 million after tax) asreorganization designed to transition WPD Midlands from a functional operating structure to a regional operating structure requiring a smaller combined support structure, reducing duplication and implementing more efficient procedures.  As a result of the sale.  In November 2007, PPL completedreorganization, 729 employees of WPD Midlands have been terminated.

The separation benefits, before income taxes, associated with the sale of its Chilean business for $660 million in cash and recorded a related gain of $306 million ($197 million after tax).reorganization are as follows.

Severance compensation$61 
Early retirement deficiency costs (ERDC) under applicable pension plans46 
Outplacement services
Total separation benefits$108 

In 2008, PPL Global recognized income tax benefits and miscellaneous expenses in Discontinued Operations in connection with the dissolutionreorganization, WPD Midlands recorded $93 million of certain Latin American holding companies.  This process was substantially completedthe total expected separation benefits in 2008.2011, of which $48 million related to severance compensation and $45 million related to ERDC.  WPD Midlands recorded an additional $15 million of total separation benefits in 2012, of which $13 million related to severance compensation and $2 million related to ERDC.  The accrued severance compensation is reflected in "Other current liabilities" and the ERDC reduced "Other noncurrent assets" on the Balance Sheets.  All separation benefits are included in "Other operation and maintenance" on the Statements of Income.
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The changes in the carrying amounts of accrued severance were as follows.

   2012   2011 
       
Accrued severance at beginning of period $ 21    
Severance compensation   13  $ 48 
Severance paid   (34)   (27)
Accrued severance at end of period $  $ 21 
In 2009, PPL identified a correctionaddition to the previously computed tax basesreorganization costs noted above, an additional $9 million was recorded in 2011 for ERDC payable under applicable pension plans and severance compensation for certain employees who separated from the WPD Midlands companies, but were not part of the Latin American businesses.  The most significant adjustment related to the sale of the El Salvadoran businessreorganization.  These separation benefits are also included in "Other operation and was largely due to returns of capital in certain prior years that had not been reflected in the calculated tax basis.  As a result, PPL and PPL Energy Supply recorded $24 million of additional income tax expense in 2009, which is reflectedmaintenance" on the Statement of Income.

Other

WPD Midlands 2011 financial results included in PPL's Statement of Income and included in "Income (Loss)the U.K. Regulated segment were as follows.

Operating Revenues$ 790 
Net Income Attributable to PPL Shareowners 137 

Pro forma Information

The pro forma financial information, which includes LKE, discussed below, as if the acquisition had occurred January 1, 2009 and WPD Midlands as if the acquisition had occurred January 1, 2010, is as follows.

      2011  2010 
            
Operating Revenues - PPL consolidated pro forma (unaudited)      $ 13,140  $ 11,850 
Net Income Attributable to PPL Shareowners - PPL consolidated pro forma (unaudited)        1,800    1,462 

The pro forma financial information presented above has been derived from Discontinued Operations (net of income taxes)."  The additional expense is not considered by management to be material to the historical consolidated financial statements of PPL and PPL Energy SupplyLKE, which was acquired on November 1, 2010, and from the historical combined financial statements of WPD Midlands, which was acquired on April 1, 2011.  Income (loss) from discontinued operations (net of income taxes), which was not significant for 2011 and was $(18) million for 2010, were excluded from the years ended 2007 and 2009.pro forma amounts above.

Following areThe pro forma financial information presented above includes adjustments to depreciation, net periodic pension costs, interest expense and the componentsrelated income tax effects to reflect the impact of Discontinued Operationsthe acquisition.  The pre-tax nonrecurring credits (expenses) presented in the Statementsfollowing table were directly attributable to the WPD Midlands and LKE acquisitions and adjustments were included in the calculation of Income.pro forma operating revenue and net income to remove the effect of these nonrecurring items and the related income tax effects.

  2009 2008 2007
             
Operating revenues         $529 
Operating expenses (a)     $2   497 
Operating income (loss)      (2)  32 
Other income - net      (1)  15 
Interest expense (b)          25 
Income (Loss) before income taxes      (3)  22 
Income taxes (c) $27   (8)  (5)
Gain on sale of businesses (net of tax expense of $114 million)          286 
Income (Loss) from Discontinued Operations  (27)  5   313 
Income from Discontinued Operations Attributable to Noncontrolling Interests          6 
Income (Loss) from Discontinued Operations Attributable to PPL/PPL Energy Supply $(27) $5  $307 
   Income Statement    
   Line Item     2011  2010 
                
WPD Midlands acquisition             
 2011 Bridge Facility costs (a)Interest Expense       $ (44)   
 Foreign currency loss on 2011 Bridge Facility (b)Other Income (Expense) - net         (57)   
 Net hedge gains associated with the 2011 Bridge Facility (c)Other Income (Expense) - net         55    
 Hedge ineffectiveness (d)Interest Expense         (12)   
 U.K. stamp duty tax (e)Other Income (Expense) - net         (21)   
 Separation benefits (f)Other operation and maintenance         (102)   
 Other acquisition-related adjustments(g)         (77)   
               
LKE acquisition             
 2010 Bridge Facility costs (h)Interest Expense          $ (80)
 Other acquisition-related adjustments (i)Other Income (Expense) - net            (31)

(a)
The 2011 Bridge Facility costs, primarily commitment and structuring fees, were incurred to establish a bridge facility for purposes of funding the WPD Midlands acquisition purchase price.
(b)2007The 2011 Bridge Facility was denominated in GBP.  The amount includes a $42 million foreign currency loss on PPL Capital Funding's repayment of its 2011 Bridge Facility borrowing and a $15 million foreign currency loss associated with proceeds received on the impairmentsU.S. dollar-denominated senior notes issued by PPL WEM in April 2011 that were used to repay a portion of PPL WEM's borrowing under the carrying value2011 Bridge Facility.
(c)The repayment of borrowings on the Bolivian businesses.  Also included are fees2011 Bridge Facility was economically hedged to mitigate the effects of changes in foreign currency exchange rates with forward contracts to purchase GBP, which resulted in net hedge gains.
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(d)The hedge ineffectiveness includes a combination of ineffectiveness associated with closed out interest rate swaps and a charge recorded as a result of certain interest rate swaps failing hedge effectiveness testing, both associated with the divestiture of the Latin American businesses of $12 million ($7 million after tax).acquisition financing.
(b)(e)2007 includes $5 million of allocated interest expense basedThe U.K. stamp duty tax represents a tax on the discontinued operation's sharetransfer of ownership of property in the net assets of PPL Energy Supply.
(c)2009 includesU.K. incurred in connection with the $24 million income tax adjustment referred to above.  2008 includes $6 million from the recognition of a previously unrecognized tax benefit associated with a prior year tax position.  2007 includes U.S. deferred tax charges of $7 million.  As a result of PPL's decision to sell its Latin American businesses, it no longer qualified for the permanently reinvested exception to recording deferred taxes.acquisition.
(f)See "Separation Benefits - U.K. Regulated Segment" above.
(g)Primarily includes acquisition-related advisory, accounting and legal fees recorded in "Other Income (Expense) - net" and contract termination costs, rebranding costs and relocation costs recorded in "Other operation and maintenance."  
(h)Primarily commitment and structuring fees, incurred to establish a bridge facility for purposes of funding the acquisition purchase price.
(i)Primarily includes acquisition-related advisory, accounting and legal fees.

Acquisition of LKE

(PPL)

Sale of Gas and Propane Businesses

In July 2007, PPL completed a review of strategic options for its natural gas distribution and propane businesses and announced its intention to sell these businesses, which were included in the Pennsylvania Delivery segment.  Based on the expectation that the natural gas distribution and propane assets would be sold and an assessment of prevailing market conditions, an impairment charge of $22 million and an associated income tax benefit of $1 million were recorded in 2007.

In March 2008, PPL signed a definitive agreement to sell these businesses for $268 million in cash, adjusted for working capital at the sale date, pursuant to a stock purchase agreement.On November 1, 2010, PPL completed the sale in October 2008.  Sale proceedsacquisition of $303 million, including estimated working capital, were contributed to PPLall of the limited liability company interests of E.ON U.S. LLC from a wholly owned subsidiary of E.ON AG.  Upon completion of the acquisition, E.ON U.S. LLC was renamed LG&E and KU Energy SupplyLLC (LKE).  LKE is a holding company with regulated utility operations conducted through its parent, PPL Energy Funding.  In 2008, PPL recorded impairmentsubsidiaries, LG&E and other charges related toKU.  The acquisition reapportions the sale totaling $10 million ($6 million after tax).  Also in 2008, PPL Gas Utilities paid a $3 million ($2 million after tax) premium to prepaymix of PPL's regulated and competitive businesses by increasing the entire $10 million aggregate principalregulated portion of its 8.70% Senior Notes due December 2022.  Inbusiness, strengthens PPL's credit profile and enhances rate-regulated growth opportunities as the first quarter of 2009, PPL recognized an insignificant charge in Discontinued Operations in connection with the settlementregulated businesses make investments to improve infrastructure and customer reliability.

The fair value of the working capital adjustment.

Following are the components in Discontinued Operations in the Statements of Income.

  2008 2007
         
Operating revenues $162  $218 
Operating expenses (a)  154   211 
Operating income  8   7 
Other income - net  (3)    
Interest expense (b)  4   6 
Income before income taxes  1   1 
Income taxes (c)  (2)  33 
Income (Loss) from Discontinued Operations $3  $(32)
consideration paid for this acquisition was as follows (in billions).

Aggregate enterprise consideration$ 7.6 
Less: Fair value of assumed long-term debt outstanding, net 0.8 
Total cash consideration paid 6.8 
Less: Funds used to repay pre-acquisition affiliate indebtedness 4.3 
Cash consideration paid for E.ON U.S. LLC equity interests$ 2.5 

The total cash consideration paid, including repayment of affiliate indebtedness, was funded by PPL's June 2010 issuance of $3.6 billion of common stock and 2010 Equity Units that provided proceeds totaling $3.5 billion, net of underwriting discounts, $3.2 billion of borrowings under an existing credit facility in October 2010, $249 million of proceeds from the monetization of certain full-requirement sales contracts in July 2010 and cash on hand.  See Note 7 for additional information on the issuance of common stock and 2010 Equity Units and the October 2010 borrowing under PPL Energy Supply's syndicated credit facility that provided interim financing to partially fund the acquisition.  See Note 19 for additional information on the monetization of certain full-requirement sales contracts.

Purchase Price Allocation

The following table summarizes (in billions) the allocation of the purchase price to the fair value of the major classes of assets acquired and liabilities assumed.

Current assets (a) 2008$ 0.9 
PP&E 7.5 
Other intangibles (current and 2007 include impairmentnoncurrent) 0.4 
Regulatory and other charges related to the sale of $10 million and $22 million.noncurrent assets 0.7 
Current liabilities, excluding current portion of long-term debt (b) 2008 and 2007 include $3 million and $5 million of allocated interest expense based upon debt attributable to PPL's natural gas distribution and propane businesses. (0.5)
PPL affiliate indebtedness (c) As a result of classifying the natural gas distribution (4.3)
Long-term debt (current and propane businesses as Discontinued Operations in 2007, PPL recorded a deferred income tax charge of $23 million related to its book/tax basis difference in the investment in these assets.noncurrent) (b) (0.9)
Other noncurrent liabilities (b) (2.3)
Net identifiable assets acquired 1.5 
Goodwill 1.0 
Net assets acquired$ 2.5 

10. 
Leases(a)
Includes gross contractual amount of the accounts receivable acquired of $186 million.  PPL expected $11 million to be uncollectible; however, credit risk is mitigated since uncollectible accounts are a component of customer rates.
(b)Represents non-cash activity excluded from the 2010 Statement of Cash Flows.
(c)Includes $1.6 billion designated as a capital contribution to LKE.

For purposes of goodwill impairment testing, the $996 million of goodwill was assigned to the PPL reportable segments expected to benefit from the acquisition.  Both the Kentucky Regulated and the Supply segments are expected to benefit and the assignment of goodwill was $662 million to the Kentucky Regulated segment and $334 million to the Supply segment.  The goodwill at the Kentucky Regulated segment reflects the value paid for the expected continued growth of a rate-regulated business located in a defined service area with a constructive regulatory environment, the ability of LKE to leverage its assembled workforce to take advantage of those growth opportunities and the attractiveness of stable, growing cash flows.  Although no other assets or liabilities from the acquisition were assigned to the Supply segment, the Supply
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segment obtained a synergistic benefit attributed to the overall de-risking of the PPL portfolio, which enhanced PPL Energy Supply's credit profile, thereby increasing the value of the Supply segment.  This increase in value resulted in the assignment of goodwill to the Supply segment.  The goodwill is not deductible for income tax purposes.  As such, no deferred taxes were recorded related to goodwill.

See Note 9 and the "Guarantees and Other Assurances" section of Note 15 for additional information on certain indemnifications provided by LKE, the most significant of which relates to the discontinued operations of WKE.

The 2010 LKE financial results included in PPL's Statement of Income and included in the Kentucky Regulated segment were as follows.

     Net Income 
     (Loss) 
     Attributable 
  Operating to PPL 
  Revenues Shareowners 
        
From November 1, 2010 - December 31, 2010 $ 493  $ 47  

(PPL, PPL Energy Supply, LKE, LG&E and KU)

In November 2010, LKE, LG&E and KU issued debt totaling $2.9 billion, of which LKE used $100 million to return capital to PPL.  The majority of these proceeds, together with a borrowing by LG&E under its available credit facilities, were used to repay borrowings from a PPL Energy Supply subsidiary.  Such borrowings were incurred to permit LKE to repay certain indebtedness owed to affiliates of E.ON AG upon the closing of the acquisition.  In November 2010, PPL Energy Supply used the above-referenced amounts received from LKE, together with other cash on hand, to repay approximately $3.0 billion of its October 2010 borrowing under existing credit facilities.

(PPL and PPL Energy Supply)

To ensure adequate funds were available for the acquisition, in July 2010, PPL Energy Supply monetized certain full-requirement sales contracts that resulted in cash proceeds of $249 million.  See "Commodity Price Risk (Non-trading) - Monetization of Certain Full-Requirement Sales Contracts" in Note 19 for additional information.  Additionally, PPL Energy Supply received proceeds in 2011 from the sale of certain non-core generation facilities, which were used to repay the short-term borrowings drawn on existing credit facilities.  See "Sale of Certain Non-core Generation Facilities" in Note 9 for additional information.

As a result of the monetization of these full-requirement sales contracts, coupled with the expected net proceeds from the then-anticipated sale of these non-core generation facilities, debt that had been planned to be issued by PPL Energy Supply in late 2010 was no longer needed.  Therefore, hedge accounting associated with interest rate swaps entered into by PPL in anticipation of a debt issuance by PPL Energy Supply was discontinued.  Net gains (losses) of $(29) million, or $(19) million after tax, were reclassified from AOCI to "Other Income (Expense) - net" on PPL's 2010 Statement of Income.

(LKE, LG&E and KU)

On November 1, 2010, PPL completed its acquisition of LKE and its subsidiaries.  The push-down basis of accounting was used to record the fair value adjustments of assets and liabilities on LKE at the acquisition date.  PPL paid cash consideration for the equity interests in LKE and its subsidiaries of $2,493 million and provided a capital contribution on November 1, 2010, of $1,565 million; included within this was the consideration paid of $1,702 million for LG&E and $2,656 million for KU.  The allocation of the purchase price was based on the fair value of assets acquired and liabilities assumed.

The push-down accounting for the fair value of assets acquired and liabilities assumed was as follows (in millions).
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   LKE  LG&E  KU
          
Current assets $ 969  $ 503  $ 341 
Investments   31    1    30 
PP&E   7,469    2,935    4,531 
Other intangibles (current and noncurrent)   427    226    201 
Regulatory and other noncurrent assets   689    416    274 
Current liabilities, excluding current portion of long-term debt   (516)   (420)   (367)
PPL affiliate indebtedness   (4,349)   (485)   (1,331)
Long-term debt (current and noncurrent)   (934)   (580)   (352)
Other noncurrent liabilities   (2,289)   (1,283)   (1,278)
Net identifiable assets acquired   1,497    1,313    2,049 
Goodwill   996    389    607 
Net assets acquired   2,493    1,702    2,656 
Capital Contribution on November 1, 2010, to replace affiliate indebtedness   1,565       
Beginning equity balance on November 1, 2010 $ 4,058  $ 1,702  $ 2,656 

Goodwill represents value paid for the rate regulated businesses of LG&E and KU, which are located in a defined service area with a constructive regulatory environment, which provides for future investment, earnings and cash flow growth, as well as the talented and experienced workforce.  LG&E's and KU's franchise values are being attributed to the going concern value of the business, and thus were recorded as goodwill rather than a separately identifiable intangible asset.  None of the goodwill recognized is deductible for income tax purposes or included in customer rates.

Adjustments to LKE's, LG&E's and KU's assets and liabilities that contributed to goodwill are as follows:

The fair value adjustment on the EEI investment was calculated using the discounted cash flow valuation method.  The result was an increase in KU's value of the investment in EEI; the fair value of EEI was calculated to be $30 million and a fair value adjustment of $18 million was recorded on KU.  The fair value adjustment to EEI was being amortized over the expected remaining useful life of plant and equipment at EEI, which was estimated to be over 20 years.  During the fourth quarter of 2012, KU recorded an impairment in EEI.  See Notes 1 and 18 for additional information.

The pollution control bonds, excluding the reacquired bonds, had a fair value adjustment of $7 million for LG&E and $1 million for KU.  All variable bonds were valued at par while the fixed rate bonds were valued with a yield curve based on average credit spreads for similar bonds.

As a result of the purchase accounting associated with the acquisition, the following items had a fair value adjustment but no effect on goodwill as the offset was either a regulatory asset or liability.  The regulatory asset or liability has been recorded to eliminate any ratemaking impact of the fair value adjustments:

·The value of OVEC was determined to be $126 million based upon an announced transaction by another owner.  LG&E and KU's combined investment in OVEC was not significant and the power purchase agreement was valued at $87 million for LG&E and $39 million for KU.  An intangible asset was recorded with the offset to regulatory liability and is amortized using the units of production method until March 2026, the expiration date of the agreement at the date of the acquisition.

·LG&E and KU each recorded an emission allowance intangible asset and a regulatory liability as the result of adjusting the fair value of the emission allowances at LG&E and KU.  The emission allowance intangible of $8 million at LG&E and $9 million at KU represents allocated and purchased sulfur dioxide and nitrogen oxide emission allowances that were unused as of the valuation date or allocated for use in future years.  LG&E and KU had previously recorded emission allowances as other materials and supplies.  To conform to PPL's accounting policy all emission allowances are now recorded as intangible assets.  The emission allowance intangible asset is amortized as the emission allowances are consumed, which is expected to occur through 2040.

·Coal contract intangible assets were recorded at LG&E for $124 million and at KU for $145 million as well as a non-current liability of $11 million for LG&E and $22 million for KU on the Balance Sheets.  An offsetting regulatory asset was recorded for those contracts with unfavorable terms relative to market.  An offsetting regulatory liability was recorded for those contracts that had favorable terms relative to market.  All coal contracts held by LG&E and KU, wherein it had entered into arrangements to buy amounts of coal at fixed prices from counterparties at a future date, were fair valued.  The intangible assets and other liabilities, as well as the regulatory assets and liabilities, are being amortized over the same terms as the related contracts, which expire through 2016.

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·Adjustments on November 1, 2010 were made to record LKE pension assets at fair value, remeasure its pension and postretirement benefit obligations at current discount rates and eliminate accumulated other comprehensive income (loss).  An increase of $4 million in the liability balances of LG&E and KU was recorded, due to the lowering of the discount rate; this was credited to their respective pension and postretirement liability balances with offsetting adjustments made to the related regulatory assets and liabilities.

The fair value of intangible assets and liabilities (e.g. contracts that have favorable or unfavorable terms relative to market), including coal contracts and power purchase agreements, as well as emission allowances, have been reflected on the Balance Sheets with offsetting regulatory assets or liabilities.  Prior to the acquisition, LG&E and KU recovered the cost of the coal contracts, power purchases and emission allowances and this rate treatment will continue after the acquisition.  As a result, management believes the regulatory assets and liabilities created to offset the fair value adjustments meet the recognition criteria established by existing accounting guidance and eliminate any ratemaking impact of the fair value adjustments.  LG&E's and KU's customer rates will continue to reflect these items (e.g. coal, purchased power, emission allowances) at their original contracted prices.

LG&E and KU also considered whether a separate fair value should be assigned to LG&E's and KU's rights to operate within its various electric and natural gas distribution service areas but concluded that these rights only provided the opportunity to earn a regulated return and barriers to market entry, which in management's judgment is not considered a separately identifiable intangible asset under applicable accounting guidance; rather, it is considered going-concern value, or goodwill.

Kentucky Acquisition Commitments

(PPL, LKE, LG&E and KU)

In connection with the September 2010 approval of PPL's acquisition of LKE, LG&E and KU agreed to implement the Acquisition Savings Sharing Deferral (ASSD) methodology whereby LG&E's and KU's adjusted jurisdictional revenues, expenses, and net operating income are calculated each year.  If LG&E's or KU's actual earned rate of return on common equity exceeds 10.75%, half of the excess amount will be deferred as a regulatory liability and ultimately returned to customers.  The first ASSD filing with the KPSC was made on March 30, 2012 based on the 2011 calendar year.  On July 2, 2012, the KPSC issued an order approving the calculations contained in the 2011 ASSD filing and determined that such calculations produced no deferral amounts for the purpose of establishing regulatory liabilities and are proper and in accordance with the settlement agreement.  The ASSD methodology for each of LG&E's and KU's utility operations terminated on January 1, 2013, when new rates went into effect.  Therefore, no further ASSD filings will be made.

11.  Leases

Lessee Transactions

Tolling Agreement(PPL, LKE, LG&E and KU)

E.W. Brown Combustion Turbines

LG&E and KU are participants in a sale-leaseback transaction involving two combustion turbines at the E.W. Brown generating plant.  In 2008, PPL EnergyPlus acquiredDecember 1999, after selling their interests in the rightscombustion turbines, LG&E and KU entered into an 18-year lease of the turbines.  LG&E and KU provided funds to fully defease the lease including the repurchase price and have the right to exercise an existing long-term tolling agreementearly purchase option contained in the lease after 15.5 years, which will occur in 2015.  The financial statement treatment of this transaction is the same as if LG&E and KU had retained their ownership interest.  Since the lease was defeased, there are no remaining minimum lease payments and all related PP&E is reflected on the Balance Sheets.  See Note 14 for the capacity and energy of Ironwood.  Underbalances included on the agreement, PPL EnergyPlus has control over the plant's dispatch into the electricity grid and will supply the natural gas necessaryBalance Sheets related to operate the plant.  The tolling agreement extends through 2021 and is considered to contain an operating leasethis transaction.  Depreciation expense was insignificant for accounting purposes.  The fixed paymentsall periods presented.

Upon a default under the tolling agreementlease, LG&E and KU are subjectobligated to adjustment based upon changespay to the facility capacity rating, which may occur uplessor their share of certain amounts.  Primary events of default include loss or destruction of the combustion turbines, failure to twice per year.  Certain costs withininsure or maintain the tolling agreement, primarily non-lease costs, are subjectcombustion turbines and unwinding of the transaction due to escalation.governmental actions.  No events of default currently exist with respect to the lease.  Upon any termination of the lease, whether by default or expiration of its term, title to the combustion turbines reverts to LG&E and KU.  The maximum aggregate amount at December 31, 2012 that could be required to be paid by LKE is $5 million, by LG&E is $2 million and by KU is $3 million.  LKE has guaranteed the payment of these potential default payments of LG&E and KU.
309

(PPL and PPL Energy Supply)

Colstrip Generating Plant

In July 2000, PPL Montana sold its interest in the Colstrip generating plants to owner lessors who are leasinglease back to PPL Montana, under four 36-year non-cancelable leases, a 50% interest in Colstrip Units 1 and 2 and a 30% interest in Unit 3 back to PPL Montana under four 36-year non-cancelable leases.3.  This transaction is accounted for as a sale-leaseback and classified as an operating lease.  These leases provide two renewal options basedPPL Montana is responsible for its share of the operating expenses associated with its leasehold interests.  See Note 14 for information on the economic useful life of the generation assets.sharing agreement for Colstrip Units 3 and 4.  PPL Montana currently amortizes material leasehold improvements over no more than the remaining life of the original leases.  PPL Montana is required to pay all expenses associated withleases; however, the operationsleases provide two renewal options based on the economic useful life of the generation units.assets.  The leases place certain restrictions on PPL Montana's ability to incur additional debt, sell assets and declare dividends and require PPL Montana to maintain certain financial ratios related to cash flow and net worth.  There are no residual value guarantees in these leases.  However, upon an event of default or an event of loss, PPL Montana could be required to pay a termination value of amounts sufficient to allow the lessor to repay amounts owing on the lessor notes and make the lessor whole for its equity investment and anticipated return on investment.  The events of default include payment defaults, breaches of representations or covenants, acceleration of other indebtedness of PPL Montana, change in control of PPL Montana and certain bankruptcy events.  The termination value was estimated to be $734$301 million at December 31, 2009.2012.

Kerr Dam

At December 31, 2009,Under the Kerr Hydroelectric Project No. 5 joint operating license issued by the FERC, PPL Montana continuedis responsible to participate in a lease arrangement withmake payments to the Confederated Salish and Kootenai Tribes of the Flathead Reservation.  Under a joint operating license, issued by the FERC to Montana Power in 1985, and subsequently to PPL Montana as a result of the purchase of Kerr Dam from Montana Power, PPL Montana is responsible to make payments to the tribes,Nation for the use of certain of their property.tribal lands in connection with the operation of Kerr Dam.  This agreement,payment arrangement, subject to escalation based upon inflation, extends until the end of the license term in 2035.  Between 2015 and 2025, the tribes have the option to purchase, hold and operate the project, whichat a conveyance price to be determined in accordance with the provisions in the FERC license.  Exercise of the option by the tribes would result in the termination of this leasing arrangement.payment arrangement obligation for PPL Montana.  The payment arrangement has been treated as an operating lease for accounting purposes.  In February 2013, the parties to the license submitted the issue of the appropriate amount of the conveyance price to arbitration.

(PPL, PPL Energy Supply, LKE, LG&E and KU)

Other Leases

PPL and its subsidiaries have entered into various agreements for the lease of office space, vehicles, land gas storage and other equipment.

Rent - Operating Leases

Rent expense for PPL's and PPL Energy Supply's operating leases was $86 million, $73 million and $54 million in 2009, 2008 and 2007.as follows:   

Total future minimum rental payments for all operating leases are estimated to be:
   2012   2011   2010 
          
PPL $116  $109  $90 
PPL Energy Supply  62   84   87 

2010 $108 
2011  109 
2012  107 
2013  112 
2014  111 
Thereafter  421 
  $968 (a)
  Successor  Predecessor
        Two Months  Ten Months
  Year Ended Year Ended  Ended  Ended
  December 31, December 31,  December 31,  October 31,
  2012  2011   2010   2010 
               
LKE $ 18  $ 18   $ 3   $ 14 
LG&E   7    7     1     5 
KU   10    10     2     8 

(a)Includes $9 million in aggregate of future minimum lease payments related to the Long Island generation business.  See Note 9 for additional information on the anticipated sale of this business.
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Lessor Transactions

A PPL Energy Supply subsidiary is the lessor, for accounting purposes, of each of the Shoreham and Edgewood plants (collectively with related tolling agreements, the Long Island generation business).  In May 2009, PPL Generation signed a definitive agreement to sell the Long Island generation business.  The tolling agreements related to these plants, accounted for as containing leases, will be transferred to the purchaser upon completion of the sale.  See Note 9 for additional information.

Direct Financing Lease

The lease related to the Shoreham plant is classified as a direct-financing lease.  Rental income received during 2009 and 2007 was $14 million and $13 million in 2008.  Total future minimum lease payments are estimated at $16 million for each of the years from 2010 through 2014.  Substantially all of these lease payments are no longer expected to be received subsequent to the anticipated sale of the Long Island generation business.

Operating Lease
Total future minimum rental payments for all operating leases are estimated to be:
                
    PPL      
  PPL Energy Supply LKE LG&E KU
                
2013  $ 109  $ 76  $ 15  $ 5  $ 9 
2014    106    78    15    6    8 
2015    85    65    12    5    7 
2016    37    26    8    3    5 
2017    21    13    6    2    4 
Thereafter   149    104    34    14    18 
Total $ 507  $ 362  $ 90  $ 35  $ 51 

The lease related to the Edgewood plant is classified as an operating lease.  At December 31, 2009, total minimum future rentals under this lease were estimated to be $25 million, including $3 million per year for 2010 through 2014.  These minimum future rentals are no longer expected to be received subsequent to the anticipated sale of the Long Island generation business.

11.  
12.  Stock-Based Compensation

(PPL, PPL Energy Supply, PPL Electric and LKE)

In 2012, shareowners approved the PPL Electric)SIP.  This new equity plan replaces the PPL ICP and incorporates the following changes:

·  Eliminates the potential to pay dividend equivalents on stock options.

·  Eliminates the automatic lapse of restrictions on all equity awards in the event of a "potential" change in control and requires that a termination of employment occur in the event of a change in control before restrictions lapse.

·  Changes the treatment of outstanding stock options upon retirement to limit the exercise period to the earlier of the end of the term (ten years from grant) or five years after retirement.

To further align the executives' interests with those of PPL shareowners, this plan provides that each restricted stock unit entitles the executive to accrue additional restricted stock units equal to the amount of quarterly dividends paid on PPL stock.  These additional restricted stock units would be deferred and payable in shares of PPL common stock at the end of the restriction period.  Dividend equivalents on restricted stock unit awards prior to 2013 are currently paid in cash when dividends are declared by PPL.

Under the PPL Incentive Compensation Plan (ICP)ICP, SIP and the Incentive Compensation Plan for Key Employees (ICPKE)ICPKE (together, the Plans), restricted shares of PPL common stock, restricted stock units, performance units and stock options may be granted to officers and other key employees of PPL, PPL Energy Supply, PPL Electric, LKE and other affiliated companies.  Awards under the Plans are made by the Compensation, Governance and Nominating Committee (CGNC) of the PPL Board of Directors, in the case of the ICP and SIP, and by the PPL Corporate Leadership Council (CLC), in the case of the ICPKE.

The ICPfollowing table details the award limits the total number of awards that may be granted under it after April 23, 1999 to 15,769,430 awards, or 5%each of the total shares of PPL common stock that were outstanding at April 23, 1999.  The ICPKE limits the total number of awards that may be granted under it after April 25, 2003 to 16,573,608 awards, or 5% of the total shares of PPL common stock that were outstanding at January 1, 2003, reduced by outstanding awards of 2,373,812, for which PPL common stock was not yet issued as of April 25, 2003, resulting in a limit of 14,199,796.  In addition, each Plan limits the number of shares available for awards in any calendar year to 2% of the outstanding common stock of PPL on the first day of such calendar year.  The maximum number of options that can be awarded under each Plan to any single eligible employee in any calendar year is three million shares.  plans.

    Annual Grant Limit   Annual Grant Limit
    Total As % of   For Individual Participants -
  Total Plan Outstanding Annual Grant Performance Based Awards
  Award PPL Common Stock Limit For awards For awards
  Limit On First Day of Options denominated in denominated in
Plan (Shares) Each Calendar Year (Shares) shares (Shares) cash (in dollars)
            
ICP(a) 15,769,431  2% 3,000,000      
SIP 10,000,000    2,000,000  750,000  $15,000,000 
ICPKE 14,199,796  2% 3,000,000      

(a)Applicable to outstanding awards granted from January 27, 2006 to January 26, 2012.  During 2012, the total plan award limit was reached and the ICP was replaced by the SIP.

Any portion of these optionsawards that has not been granted may be carried over and used in any subsequent year.  If any award lapses, is forfeited or the rights of the participant terminate, the shares of PPL common stock underlying such an award are again available for grant.  Shares delivered under the Plans may be in the form of authorized and unissued PPL common stock, common stock held in treasury by PPL or PPL common stock purchased on the open market (including private purchases) in accordance with applicable securities laws.

311

Restricted Stock and Restricted Stock Units

Restricted shares of PPL common stock are outstanding shares with full voting and dividend rights.  Restricted stock awards are granted as a retention award for select key executives and vest when the recipient reaches a certain age or meets service or other criteria set forth in the executive's restricted stock award agreement.  The shares are subject to forfeiture or accelerated payout under Planplan provisions for termination, retirement, disability and death of employees.  Restricted shares vest fully, if control of PPL changes,in certain situations, as defined by each of the plans.Plans.

The Plans allow for the grant of restricted stock units.  Restricted stock units are awards based on the fair market value of PPL common stock.stock on the date of grant.  Actual PPL common shares will be issued upon completion of a vesting period, generally three years.

The fair value of restricted stock and restricted stock units granted is recognized on a straight-line basis over the service period or through the date at which the employee reaches retirement eligibility.  The fair value of restricted stock and restricted stock units granted to retirement-eligible employees is recognized as compensation expense immediately upon the date of grant.  Recipients of restricted stock and restricted stock units may also be granted the right to receive dividend equivalents through the end of the restriction period or until the award is forfeited.  Restricted stock and restricted stock units are subject to forfeiture or accelerated payout under the Planplan provisions for termination, retirement, disability and death of employees.  Restricted stock and restricted stock units vest fully, if control of PPL changes,in certain situations, as defined by each of the Plans.

The weighted-average grant date fair value of restricted stock and restricted stock units granted was:

   2012  2011  2010 
           
PPL $ 28.35  $ 25.25  $ 28.93 
PPL Energy Supply   28.29    25.14    29.49 
PPL Electric   28.51    25.09    29.40 
LKE   28.34       26.31 

Restricted stock and restricted stock unit activity for 20092012 was:

  Restricted Shares/Units Weighted-Average Grant Date Fair Value
PPL        
Nonvested, beginning of period  1,656,830  $36.56 
Granted  528,580   29.07 
Vested  (743,968)  30.23 
Forfeited  (33,400)  39.79 
Nonvested, end of period  1,408,042   36.97 
         
PPL Energy Supply        
Nonvested, beginning of period  788,010  $35.07 
Granted  228,000   28.49 
Vested  (416,548)  28.41 
Forfeited  (22,050)  41.16 
Nonvested, end of period  577,412   37.04 
         
    Weighted-
    Average
  Restricted Grant Date Fair
  Shares/Units Value Per Share
PPLPPL    
Nonvested, beginning of periodNonvested, beginning of period  2,040,035  $ 27.03 
Granted  1,487,556   28.35 
Vested  (1,002,229)  27.23 
Forfeited  (21,592)  27.69 
Nonvested, end of periodNonvested, end of period  2,503,770   27.73 
     
PPL Energy SupplyPPL Energy Supply    
Nonvested, beginning of periodNonvested, beginning of period  665,180  $ 27.30 
Transferred  62,320   28.66 
Granted  564,020   28.29 
Vested  (219,124)  27.04 
Forfeited  (11,710)  27.97 
Nonvested, end of periodNonvested, end of period  1,060,686   27.95 
     
PPL Electric     PPL Electric    
Nonvested, beginning of period 123,390 $39.28 Nonvested, beginning of period  251,595  $ 27.10 
Granted 81,230 29.49 
Vested (49,660) 33.44 
Forfeited  (740) 42.94 
Transferred  (54,460)  28.93 
Granted  133,530   28.51 
Vested  (61,995)  27.63 
Forfeited  (7,442)  27.46 
Nonvested, end of period 154,220 36.05 Nonvested, end of period  261,228   27.30 
     
LKELKE    
Nonvested, beginning of periodNonvested, beginning of period  145,210  $ 26.31 
Granted  144,340   28.34 
Vested   (149,910)  26.38 
Nonvested, end of periodNonvested, end of period  139,640   28.34 

Substantially all restricted stock and restricted stock unit awards are expected to vest.

The weighted-average grant datetotal fair value of restricted stock and restricted stock units granted during 2008 was $46.22vesting for PPL, $46.03 for PPL Energy Supply and $45.92 for PPL Electric.

The weighted-average grant date fair value of restricted stock and restricted stock units granted during 2007 was $37.10 for PPL, $37.88 for PPL Energy Supply and $37.95 for PPL Electric.

Atthe years ended December 31 2009, unrecognized compensation cost related to nonvested awards was:

  Restricted Stock/Units Unrecognized Compensation Cost 
Weighted-Average
Period for Recognition
         
PPL $11   2.8 years 
PPL Energy Supply  5   1.7 years 
PPL Electric  2   4.6 years 
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The total fair value of restricted shares/units vesting was:

 Year Ended December 31, 
 2009 2008 2007   2012  2011  2010 
              
PPL $22 $25 $32 PPL $ 27  $ 19  $ 15 
PPL Energy Supply 12 13 8 PPL Energy Supply  6   6   7 
PPL Electric 2 2 4 PPL Electric  2   2   2 
LKELKE  4   1   

Performance Units

PPL began granting performance units in 2008.  Performance units are intended to encourage and award future performance.  Performance units represent a target number of shares (Target Award) of PPL's common stock that the officerrecipient would receive upon PPL's attainment of the applicable performance goal.  Performance is determined based on total shareowner return during a three-year3-year performance period.  At the end of the period, payout is determined by comparing PPL's performance to the total shareowner return of the companies included in an Index Group,index group, in thisthe case of the 2010 and 2011 awards, the S&P 500 Electric Utilities Index, and in the case of the 2012 awards, the Philadelphia Electric Utilities Index.  Awards granted in 2010 are payable on a graduated basis within the following ranges:  if PPL's performance is at or above the 85th percentile of the Index Group,index group, the award is paid at 200% of the Target Award; at the 50th percentile of the Index Group,index group, the award is paid at 100% of the Target Award; at the 40th percentile of the Index Group,index group, the award is paid at 50% of the Target Award; and below the 40th percentile, no award is payable.  Awards granted in 2011 and 2012 are payable on a graduated basis similar to 2010, except that the 2011 awards provide for a minimum payment at 25% of the Target Award if performance falls below the 40th percentile of the index group, and in 2012 the minimum payment was eliminated, with no award payable if performance falls below the 25th percentile.  Dividends payable during the performance cycle accumulate and will beare converted into additional performance units and are payable in shares of PPL common stock upon completion of the performance period based on the determination of the CGNC of whether the performance goals have been achieved.  Under the Planplan provisions, performance units are subject to forfeiture upon termination of employment except for retirement, disability or death of an employee, in which case the total performance units remain outstanding and are eligible for vesting through the conclusion of the performance period.  The fair value of performance units granted is recognized as compensation expense on a straight-line basis over the 3-year performance period.  Performance units vest on a pro rata basis, if control of PPL changes,in certain situations, as defined by each of the Plan.

Performance unit activity for 2009 was:

  Performance Units Weighted-Average Grant Date Fair Value
PPL        
Nonvested, beginning of period  66,785  $48.94 
Granted  106,587   39.76 
Forfeited  (6,908)  45.06 
Nonvested, end of period  166,464   43.23 
         
PPL Energy Supply        
Nonvested, beginning of period  22,583  $48.58 
Granted  27,451   38.18 
Forfeited  (3,607)  49.04 
Nonvested, end of period  46,427   42.39 
         
PPL Electric        
Nonvested, beginning of period  3,732  $48.57 
Granted  7,903   39.95 
Nonvested, end of period  11,635   42.71 

Substantially all performance unit awards are expected to vest.Plans.

The weighted-average grant date fair value of performance units granted during 2008 was $48.97 for PPL, $48.69 for PPL Energy Supply and $48.57 for PPL Electric.

At December 31, 2009, unrecognized compensation cost related to nonvested awards was:

  Performance Units Unrecognized Compensation Cost Weighted-Average Period for Recognition
         
PPL $4   1.8 years 
PPL Energy Supply  1   1.8 years 

At December 31, 2009, PPL Electric's unrecognized compensation cost was insignificant and the weighted-average period for recognition was 1.9 years.

The estimated fair value of each performance unit granted was calculatedestimated using a Monte Carlo pricing model that considers historicalstock beta, a risk-free interest rate, expected stock volatility and expected life.  The stock beta was calculated comparing the risk of the individual securities to the average risk of the companies in the index group.  The risk-free interest rate reflects the yield on a U.S. Treasury bond commensurate with the expected life of the performance unit.  Volatility over three yearsthe expected term of the performance unit is calculated using daily stock price observations for PPL and all companies in the Index Group.  Volatility over the expected term of the performance unitsindex group and is evaluated with consideration given to prior periods that may need to be excluded based on events not likely to recur that had impacted PPL and the companies in the Index Group.index group.  PPL had used historical volatility to value its performance units in 2010.  Beginning in 2011, PPL began using a mix of historic and implied volatility in response to the significant changes in its business model, moving from a primarily unregulated to a primarily regulated business model, as a result of the acquisitions of LKE and WPD Midlands.

The weighted-average assumptions used in the model were:

 2009 2008   2012  2011  2010 
            
Risk-free interest rate 1.11% 2.30% Risk-free interest rate 0.30% 1.00% 1.41%
Expected stock volatility 31.30% 20.70% Expected stock volatility 19.30% 23.40% 34.70%
Expected life 3 years 3 years Expected life 3 years 3 years 3 years

The weighted-average grant date fair value of performance units granted was:    

   2012  2011  2010 
           
PPL $ 31.41  $ 29.67  $ 34.06 
PPL Energy Supply   31.40    29.68    34.16 
PPL Electric   31.37    29.57    33.54 
LKE   31.30    29.20    
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Performance unit activity for 2012 was:   

      Weighted-
      Average Grant
   Performance Date Fair Value
   Units Per Share
PPL      
Nonvested, beginning of period   398,609  $ 33.31 
 Granted   322,771    31.41 
 Forfeited   (127,177)   38.61 
Nonvested, end of period   594,203    31.14 
        
PPL Energy Supply      
Nonvested, beginning of period   75,067  $ 33.00 
 Transferred   12,719    34.15 
 Granted   71,572    31.40 
 Forfeited   (35,169)   38.90 
Nonvested, end of period   124,189    31.26 
        
PPL Electric      
Nonvested, beginning of period   32,808  $ 33.11 
 Transferred   (12,719)   34.15 
 Granted   16,234    31.37 
 Forfeited   (10,240)   34.17 
Nonvested, end of period   26,083    31.10 
        
LKE      
Nonvested, beginning of period   26,893  $ 29.20 
 Granted   55,857    31.30 
Nonvested, end of period   82,750    30.62 

Stock Options

Under the Plans, stock options may also be granted with an option exercise price per share not less than the fair market value of PPL's common stock on the date of grant.  The options areOptions outstanding at December 31, 2012, become exercisable in equal installments over a three-year service period beginning one year after the date of grant, assuming the individual is still employed by PPL or a subsidiary.  Options outstanding at December 31, 2009, become exercisable in equal installments over a three-year period from the date of grant.  The CGNC and CLC have discretion to accelerate the exercisability of the options, except that the exercisability of an option issued under the ICP may not be accelerated unless the individual remains employed by PPL or a subsidiary for one year from the date of grant.  All options expire no later than ten years from the grant date.  The options become exercisable immediately if control of PPL changes,in certain situations, as defined by each of the Plans.  The fair value of options granted is recognized as compensation expense on a straight-line basis over the service period or through the date at which the employee reaches retirement eligibility.  The fair value of options granted to retirement-eligible employees is recognized as compensation expense immediately upon the date of grant.

Stock option activity for 2009 was:

  Number of Options Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term Aggregate Total Intrinsic Value
PPL              
Outstanding at beginning of period  4,027,371  $32.56       
Granted  1,053,320   31.86       
Exercised  (137,840)  22.15       
Forfeited  (340,810)  34.12       
Outstanding at end of period  4,602,041   32.59  6.8 $11 
Options exercisable at end of period  2,968,551   30.73  5.8  11 
               
PPL Energy Supply              
Outstanding at beginning of period  1,434,356  $32.05       
Granted  262,770   31.83       
Exercised  (46,900)  19.56       
Forfeited  (241,290)  34.20       
Outstanding at end of period  1,408,936   32.05  6.3 $4 
Options exercisable at end of period  1,022,909   32.84  6.2  4 
               
PPL Electric              
Outstanding at beginning of period  146,120  $36.09       
Granted  79,550   32.22       
Outstanding at end of period  225,670   34.72  7.1    
Options exercisable at end of period  100,388   29.05  5.4    

Substantially all stock option awards are expected to vest.

The estimated fair value of each option granted was calculatedis estimated using a Black-Scholes option-pricing model.  PPL uses historicala risk-free interest rate, expected option life, expected volatility and exercise behaviordividend yield to value its stock options.  The risk-free interest rate reflects the yield for a U.S. Treasury Strip available on the date of grant with constant rate maturity approximating the option's expected life.  Expected life is calculated based on historical exercise behavior.  Volatility over the expected term of the options is evaluated with consideration given to prior periods that may need to be excluded based on events not likely to recur that had impacted PPL's volatility in those prior periods.  Management's expectations for future volatility, considering potential changes to PPL's business model and other economic conditions, are also reviewed in addition to the historical data to determine the final volatility assumption.  PPL had used historical volatility to value its stock options granted in 2010.  Beginning in 2011, PPL began using a mix of historic and implied volatility in response to the significant changes in its business model, moving from a primarily unregulated to a primarily regulated business model, as a result of the acquisitions of LKE and WPD Midlands.  The weighted-averagedividend yield is based on several factors, including PPL's most recent dividend payment, as of the grant date and the forecasted stock price through 2013.  The assumptions used in the model were:

 2009 2008 2007   2012  2011  2010 
              
Risk-free interest rate 2.07% 2.95% 4.85% Risk-free interest rate 1.13% 2.34% 2.52%
Expected option life 5.25 years 5.41 years 6.00 years Expected option life 6.17 years 5.71 years 5.43 years
Expected stock volatility 26.06% 20.85% 21.61% Expected stock volatility 20.60% 21.60% 28.57%
Dividend yield 3.48% 3.10% 3.31% Dividend yield 5.00% 5.93% 5.61%

314

The weighted-average grant date fair valuesvalue of options granted were:was:

 2009 2008 2007   2012  2011  2010 
              
PPL 5.55 7.61 7.08 PPL $ 2.48  $ 2.47  $ 4.70 
PPL Energy Supply 5.55 7.62 7.08 PPL Energy Supply  2.51   2.47   4.73 
PPL Electric 5.65 7.60 7.08 PPL Electric  2.50   2.47   4.62 
LKELKE  2.51   2.47   

Stock option activity for 2012 was:

       Weighted-  
      Weighted Average   
     Average Remaining Aggregate
   Number Exercise Contractual Total Intrinsic
   of Options Price Per Share Term Value
PPL            
Outstanding at beginning of period   7,530,198  $ 30.65       
 Granted   1,948,550    28.19       
 Exercised   (263,094)   23.22       
 Forfeited   (81,109)   28.43       
Outstanding at end of period   9,134,545    30.36    6.3  $ 9 
Options exercisable at end of period   6,134,265    31.70    5.7    6 
              
PPL Energy Supply            
Outstanding at beginning of period   1,690,153  $ 30.79       
 Transferred   176,070    31.90       
 Granted   483,740    28.19       
 Exercised   (36,358)   24.35       
 Forfeited   (48,482)   29.34       
Outstanding at end of period   2,265,123    30.45    6.1  $ 2 
Options exercisable at end of period   1,529,711    31.80    4.9    1 
              
PPL Electric            
Outstanding at beginning of period   460,510  $ 31.05       
 Transferred   (176,070)   31.90       
 Granted   100,590    28.22       
 Exercised   (11,873)   25.67       
 Forfeited   (32,627)   27.07       
Outstanding at end of period   340,530    30.35    7.0    
Options exercisable at end of period   193,355    32.43    5.8    
              
LKE            
Outstanding at beginning of period   329,600  $ 25.77       
 Granted   354,490    28.17       
 Exercised   (49,243)   25.74       
Outstanding at end of period   634,847    27.11    8.6  $ 1 
Options exercisable at end of period   144,260    26.62    8.4    

PPL received $6 million in cash from stock options exercised in 2012.  The related tax savings were not significant for 2012.  Substantially all stock option awards are expected to vest.

The total intrinsic value of stock options exercised was:

  Year Ended December 31, 
  2009 2008 2007 
        
PPL $2 $20 $54 
PPL Energy Supply  1  7  13 
PPL Electric     2  3 

Atfor the years ended December 31, 2009, unrecognized compensation cost related to stock options was:

  Unrecognized Compensation Cost 
Weighted-Average
Period for Recognition
         
PPL $3   1.8 years 
PPL Energy Supply  1   1.9 years 

At December 31, 2009, PPL Electric's unrecognized compensation cost2012, 2011 and 2010 was insignificant and the weighted-average period for recognition was 1.9 years.

PPL received cash from stock option exercises during 2009 of $3 million.not significant.

Compensation CostsExpense

Compensation costsexpense for restricted stock, restricted stock units, performance units and stock options accounted for as equity awards werewas as follows:

 2009 2008 2007   2012  2011  2010 
              
PPL (a) $23 $28 $26  $ 49  $ 36  $ 26 
PPL Energy Supply (b) 17 22 21   23   16   20 
PPL Electric (c) 5 6 5   11   8   6 
LKELKE  8   5   
315

The income tax benefit related to above compensation expense was as follows:     

(a)Net of an income tax benefit of $9 million, $11 million and $10 million.
(b)Net of an income tax benefit of $7 million, $9 million and $9 million.
(c)Net of an income tax benefit of $2 million for each year.
   2012  2011  2010 
           
PPL $ 20  $ 15  $ 11 
PPL Energy Supply   10    6    8 
PPL Electric   4    3    3 
LKE   4    2    

The income tax benefit PPL realized from stock-based arrangementsawards vested or exercised for 20092012 was insignificant.not significant.

Directors Stock Units(PPL)

Under the Directors Deferred Compensation Plan, a mandatory amount of the cash retainers of the members of the Board of Directors who are not employees of PPL is deferred intoAt December 31, 2012, unrecognized compensation expense related to nonvested restricted stock, units.  Such deferredrestricted stock units, represent the number of shares of PPL's commonperformance units and stock to which the board members are entitled after they cease serving as a member of the Board of Directors.  Board members are entitled to defer any or all of their fees and cash retainers that are not part of the mandatory deferral into stock units.  The stock unit accounts of each board member are increased based on dividends paid or other distributions on PPL's common stock.  There were 406,584 such stock units outstanding at December 31, 2009, which were accounted for as liabilities with changes in fair value recognized currently in earnings based on PPL's common stock price at the end of each reporting period.

  Compensation Costs (Credits)
  2009 2008 2007
             
PPL (a) $2  $(4) $5 
option awards was:   

(a) Net of income tax benefit (expense) of $1 million, $(2) million and $2 million.
Weighted-
UnrecognizedAverage
CompensationPeriod for
ExpenseRecognition
PPL$ 27 2.1 years
PPL Energy Supply 11 2.4 years
PPL Electric 2 2.2 years
LKE 2 1.8 years

Awards paid during 2009, 2008 and 2007 were insignificant.

Stock Appreciation Rights(PPL and PPL Energy Supply)

WPD uses stock appreciation rights to compensate senior management employees.  Stock appreciation rights are granted with a reference price to PPL's common stock at the date of grant.  These awards vest over a three-year period and have a 10-year term, during which time employees are entitled to receive a cash payment of any appreciation in the price of PPL's common stock over the grant date fair value.  At December 31, 2009, there were 416,891 stock appreciation rights outstanding, which are accounted for as liabilities with changes in fair value recognized currently in earnings based on updated Black-Scholes calculations.

Compensation costs related to stock appreciation rights in 2009 were insignificant.  Compensation credits in 2008 were $2 million, with related income tax expense of $1 million.  Compensation costs for 2007 were $5 million, with related income tax benefits of $2 million.

There were no awards exercised and paid in 2009.  Awards paid in 2008 and 2007 were each $2 million.

12.  
Retirement13.  Retirement and Postemployment Benefits

(PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and PPL Electric)KU)

Defined Benefits

PPL and certain of its subsidiaries sponsor various defined benefit plans.

TheUntil January 1, 2012, the majority of PPL's subsidiaries domestic employees arewere eligible for pension benefits under non-contributory defined benefit pension plans with benefits based on length of service and final average pay, as defined by the plans.  CertainEffective January 1, 2012, PPL's domestic qualified pension plans were closed to newly hired salaried employees.  Newly hired bargaining unit employees may alsowill continue to be eligible for pension enhancementsunder the plans based on their collective bargaining agreements.  Salaried employees hired on or after January 1, 2012 are eligible to participate in the formnew PPL Retirement Savings Plan, a 401(k) savings plan with enhanced employer matching.  PPL does not expect a significant near-term cost impact as a result of special termination benefits under PPL's separation plan.  See "Separation Benefits" below for additional information regarding PPL's separation plan.the change.

EmployeesUntil January 1, 2012, employees of PPL Montana arewere eligible for pension benefits under a cash balance pension plan.  Effective January 1, 2012, that plan also was closed to newly hired salaried employees.  Newly hired bargaining unit employees will continue to be eligible under the plan based on their collective bargaining agreements.  Salaried employees hired on or after January 1, 2012 are eligible to participate in the new PPL Retirement Savings Plan.  PPL Montana does not expect a significant near-term cost impact as a result of the change.

The defined benefit pension plans of LKE and its subsidiaries were closed to new salaried and bargaining unit employees hired after December 31, 2005.  Employees hired after December 31, 2005 receive additional company contributions above the standard matching contributions to their savings plans.

Employees of certain of PPL'sPPL Energy Supply's mechanical contracting companies are eligible for benefits under multi-employermultiemployer plans sponsored by various unions.  The

Effective April 1, 2010, PPL WW's principal defined benefit pension plan was closed to most new employees, ofexcept for those meeting specific grandfathered participation rights.  WPD Midlands was acquired by PPL WEM on April 1, 2011.  WPD Midlands' defined benefit plan had been closed to new members, except for those meeting specific grandfathered participation rights, prior to acquisition.  New employees not eligible to participate in the plan are eligible for pensionoffered benefits under a defined benefit pension plan with benefits based on length of service and final average pay.contribution plan.

PPL and certain of its subsidiaries also provide supplemental retirement benefits to executives and other key management employees through unfunded nonqualified retirement plans.

316

The majority of employees of PPL's domestic subsidiaries will become eligible for certain health care and life insurance benefits upon retirement through contributory plans.  Postretirement health benefits undermay be paid from 401(h) accounts established as part of the PPL Retiree HealthRetirement Plan are paid from funded VEBA trusts sponsored by PPL Services and a 401(h) account establishedthe LG&E and KU Retirement Plan within the PPL Services pension master trust by the respective companies.Corporation Master Trust, funded VEBA trusts and company funds.  Postretirement benefits under the PPL Montana Retiree Health Plan are paid from company assets.  WPD does not sponsor any postretirement benefit plans other than pensions.

(PPL)

The following disclosures distinguish between the domestic (U.S.) and WPD (U.K.) pension plans.

  Pension Benefits  
  U.S. U.K. Other Postretirement Benefits
  2009 2008 2007 2009 2008 2007 2009 2008 2007
PPL                                    
Net periodic defined benefit costs:                                    
Service cost $60  $62  $63  $9  $16  $24  $6  $8  $8 
Interest cost  145   140   132   156   188   170   29   33   31 
Expected return on plan assets  (169)  (180)  (175)  (189)  (231)  (227)  (18)  (21)  (21)
Amortization of:                                    
Transition (asset) obligation  (5)  (4)  (4)              9   9   9 
Prior service cost  19   20   19   4   5   5   9   9   9 
Actuarial (gain) loss  3   (9)  2   2   18   55   2   5   6 
Net periodic defined benefit costs (credits) prior to settlement charges and termination benefits  53   29   37   (18)  (4)  27   37   43   42 
Settlement charges (a)  2       3                         
Termination benefits (b)  9       6           3             
Net periodic defined benefit costs (credits) $64  $29  $46  $(18) $(4) $30  $37  $43  $42 
                                     
Other Changes in Plan Assets and Benefit Obligations Recognized in OCI and regulatory assets - Gross                                    
Settlements $(2)     $(3)                        
Current year net (gain) loss  102  $635   (137) $403  $476  $(254) $32  $(31) $(4)
Current year prior service cost (credit)  1       9               (4)  (2)  5 
Amortization of:                                    
Transition asset (obligation)  5   4   4               (9)  (9)  (9)
Prior service cost  (19)  (22)  (19)  (4)  (5)  (5)  (8)  (9)  (9)
Actuarial loss  (3)  (1)  (2)  (2)  (18)  (55)  (2)  (9)  (6)
Total recognized in OCI and regulatory assets (c) (d)  84   616   (148)  397   453   (314)  9   (60)  (23)
                                     
Total recognized in net periodic benefit costs, OCI and regulatory assets (d) $148  $645  $(102) $379  $449  $(284) $46  $(17) $19 
    Pension Benefits         
    U.S. U.K. Other Postretirement Benefits
    2012  2011  2010  2012  2011  2010  2012  2011  2010 
PPL                           
Net periodic defined benefit costs                           
 (credits):                           
Service cost $ 103  $ 95  $ 64  $ 54  $ 44  $ 17  $ 12  $ 12  $ 8 
Interest cost   220    217    159    340    282    151    31    33    28 
Expected return on plan assets   (259)   (245)   (184)   (458)   (338)   (202)   (23)   (23)   (20)
Amortization of:                           
  Transition (asset) obligation                     2    2    5 
  Prior service cost   24    24    21    4    4    4    1       4 
  Actuarial (gain) loss   42    30    8    79    57    48    4    6    6 
Net periodic defined benefit costs                           
 (credits) prior to settlement                           
 charges and termination benefits   130    121    68    19    49    18    27    30    31 
Settlement charges   11                         
Termination benefits (a)            2    50             
Net periodic defined benefit costs                           
 (credits) $ 141  $ 121  $ 68  $ 21  $ 99  $ 18  $ 27  $ 30  $ 31 
                              
Other Changes in Plan Assets                           
 and Benefit Obligations                           
 Recognized in OCI and                           
 Regulatory Assets/Liabilities -                           
 Gross:                           
Settlements $ (11)                        
Net (gain) loss   372  $ 117  $ 142  $ 1,073  $ 152  $ 17  $ 13  $ (9) $ 20 
Prior service cost                           
 (credit)      8                (1)   10    (71)
Amortization of:                           
  Transition asset                     (2)   (2)   (5)
  Prior service cost   (24)   (24)   (21)   (4)   (4)   (4)   (1)      (4)
  Actuarial gain (loss)   (42)   (30)   (7)   (79)   (57)   (48)   (4)   (6)   (6)
Acquisition of regulatory assets/                           
 liabilities:                           
  Transition obligation                           4 
  Prior service cost         31                   6 
  Actuarial (gain) loss         303                   (2)
Total recognized in OCI and                           
 regulatory assets/liabilities (b)   295    71    448    990    91    (35)   5    (7)   (58)
                              
Total recognized in net periodic                           
 defined benefit costs, OCI and                           
 regulatory assets/liabilities (b) $ 436  $ 192  $ 516  $ 1,011  $ 190  $ (17) $ 32  $ 23  $ (27)

(a) Includes the settlement of the pension plan of PPL's former mining subsidiary, PA Mines, LLC in 2009 and a non-qualified plan settlement in 2007.
(b) The $9 million U.S. cost of termination benefits in 2009 was related to a 2009 cost reduction initiative.  The $6 million U.S. and $3 million U.K. costs of termination benefits for 2007 were related primarily to the elimination of positions at PPL's Martins Creek plant due to the shutdown of two coal-fired units in September 2007, and the closing of WPD's meter test station.
(c) For PPL's U.S. pension and other post-retirement benefits the amounts recognized in OCI and regulatory assets are as follows:
    U.S. Pension Benefits Other Postretirement Benefits 
    2009 2008 2007 2009 2008 2007 
                            
  OCI $51  $395  $(87) $6  $(38) $(7) 
  Regulatory assets  33   221   (61)  3   (22)  (16) 
  Total recognized in OCI and regulatory assets $84  $616  $(148) $9  $(60) $(23) 
   
(d) WPD is not subject to accounting for the effects of certain types of regulation as prescribed by GAAP.  As a result, WPD does not record regulatory assets.
(a)Related to the WPD Midlands separations in the U.K.
(b)WPD is not subject to accounting for the effects of certain types of regulation as prescribed by GAAP.  As a result, WPD does not record regulatory assets/liabilities.

For PPL's U.S. pension benefits and for other postretirement benefits, the amounts recognized in OCI and regulatory assets/liabilities for the years ended December 31 were as follows:

   U.S. Pension Benefits  Other Postretirement Benefits
    2012   2011   2010   2012   2011   2010 
                    
OCI $ 181  $ 47  $ 84  $ 12  $ (6) $ (40)
Regulatory assets/liabilities   114    24    364    (7)   (1)   (18)
Total recognized in OCI and                  
 regulatory assets/liabilities $ 295  $ 71  $ 448  $ 5  $ (7) $ (58)
317

The estimated amounts to be amortized from AOCI and regulatory assets/liabilities into net periodic defined benefit costs in 2013 are as follows:

        Other
  Pension Benefits Postretirement
  U.S. U.K. Benefits
          
Prior service cost $ 22       
Actuarial loss   78  $ 154  $ 6 
Total $ 100  $ 154  $ 6 
          
Amortization from Balance Sheet:         
AOCI $ 43  $ 154  $ 3 
Regulatory assets/liabilities   57       3 
Total $ 100  $ 154  $ 6 

(PPL Energy Supply)                           
    Pension Benefits         
    U.S. U.K. (a) Other Postretirement Benefits
    2012  2011  2010  2012  2011  2010  2012  2011  2010 
PPL Energy Supply                           
Net periodic defined benefit costs                           
(credits):                           
Service cost $ 6  $ 5  $ 4        $ 17  $ 1  $ 1  $ 1 
Interest cost   7    7    7          151    1    1    1 
Expected return on plan assets   (9)   (9)   (7)         (202)         
Amortization of:                           
  Prior service cost                  4          
  Actuarial (gain) loss   2    2    2          48          
Net periodic defined benefit costs                           
 (credits) prior to settlement charges   6    5    6          18    2    2    2 
Net periodic defined benefit costs                           
 (credits) $ 6  $ 5  $ 6        $ 18  $ 2  $ 2  $ 2 
                              
Other Changes in Plan Assets                           
 and Benefit Obligations                           
 Recognized in OCI:                           
Current year net (gain) loss $ 16  $ 7  $ 4        $ 17     $ (2)   
Current year prior service credit                   $ (1)      
Amortization of:                           
  Prior service cost                  (4)         
  Actuarial gain (loss)   (2)   (2)   (2)         (48)         
Total recognized in OCI   14    5    2          (35)   (1)   (2)   
                              
Total recognized in net periodic                           
 defined benefit costs and OCI $ 20  $ 10  $ 8        $ (17) $ 1  $  $ 2 

(a)In January 2011, PPL Energy Supply distributed its membership interest in PPL Global to PPL Energy Supply's parent.  See Note 9 for additional information.

Actuarial loss of $3 million related to PPL Energy Supply's U.S. pension plan is expected to be amortized from AOCI into net periodic defined benefit costs in 2013.     

(LKE)

The following table provides the components of net periodic defined benefit costs for LKE's pension and other postretirement benefit plans for the years ended December 31, 2012, and 2011, and November 1, 2010 through December 31, 2010, for the Successor and January 1, 2010 through October 31, 2010, for the Predecessor.
318

    Pension Benefits Other Postretirement Benefits
    Successor  Predecessor Successor  Predecessor
    2012  2011  2010   2010  2012  2011  2010   2010 
LKE                          
Net periodic defined benefit costs                          
 (credits):                          
Service cost $ 22  $ 24  $ 4   $ 17  $ 4  $ 4  $ 1   $ 3 
Interest cost   64    67    11     54    9    10    1     9 
Expected return on plan assets   (70)   (64)   (9)    (45)   (4)   (3)       (2)
Amortization of:                          
  Transition obligation                2    2        1 
  Prior service cost   5    5    1     7    3    2        2 
  Actuarial (gain) loss   22    24    5     16    (1)          
Net periodic defined benefit costs $ 43  $ 56  $ 12   $ 49  $ 13  $ 15  $ 2   $ 13 
                             
Other Changes in Plan Assets                          
 and Benefit Obligations                          
 Recognized in OCI and                          
 Regulatory Assets/Liabilities -                          
 Gross:                          
Current year net (gain) loss $ 96  $ 29  $ (22)  $ 96  $ (11) $ (3) $ (2)  $ 3 
Current year prior service cost      8              11        
Amortization of:                          
  Transition obligation                (2)   (2)       (2)
  Prior service cost   (5)   (5)   (1)    (7)   (3)   (2)       (1)
  Actuarial gain (loss)   (22)   (24)   (5)    (16)   1           
Total recognized in OCI and                          
 regulatory assets/liabilities   69    8    (28)    73    (15)   4    (2)    
                             
Total recognized in net periodic                          
 defined benefit costs, OCI and regulatory                          
 assets/liabilities $ 112  $ 64  $ (16)  $ 122  $ (2) $ 19  $   $ 13 

For LKE's pension and other postretirement benefits, the amounts recognized in OCI and regulatory assets/liabilities are as follows at December 31, 2012, 2011 and 2010 for the Successor, and at October 31, 2010 for the Predecessor.
    Pension Benefits Other Postretirement Benefits
    Successor  Predecessor Successor  Predecessor
    2012  2011  2010   2010  2012  2011  2010   2010 
                             
                             
 OCI $ 34  $ 1  $ (8)  $ 32  $ (1) $ 2  $ (1)  $ (1)
 Regulatory assets/liabilities   35    7    (20)    41    (14)   2    (1)    1 
 Total recognized in OCI and                          
  regulatory assets/liabilities $ 69  $ 8  $ (28)  $ 73  $ (15) $ 4  $ (2)  $ 

The estimated amounts to be amortized from AOCI and regulatory assets/liabilities into net periodic defined benefit costs for LKE in 2013 are as follows.

     Other
  Pension Postretirement
  Benefits Benefits
       
Prior service cost $ 5  $ 3 
Actuarial loss   31    (1)
Total $ 36  $ 2 
       
Amortization from Balance Sheet:      
Regulatory assets/liabilities $ 36  $ 2 
Total $ 36  $ 2 

(LG&E)

The following table provides the components of net periodic defined benefit costs for LG&E's pension benefit plan for the years ended December 31, 2012 and 2011, and November 1, 2010 through December 31, 2010, for the Successor and January 1, 2010 through October 31, 2010, for the Predecessor.
319

    Pension Benefits
    Successor   Predecessor
    2012  2011  2010    2010 
LG&E              
Net periodic defined benefit costs (credits):              
Service cost $ 2  $ 2       $ 1 
Interest cost   14    14  $ 2      12 
Expected return on plan assets   (19)   (18)   (3)     (13)
Amortization of:              
  Prior service cost   3    2    1      2 
  Actuarial loss   11    11    2      6 
Net periodic defined benefit costs $ 11  $ 11  $ 2    $ 8 
                 
Other Changes in Plan Assets and Benefit Obligations              
 Recognized in Regulatory Assets - Gross:              
Current year net (gain) loss $ 18  $ 15  $ (5)   $ 18 
Current year prior service cost      9         
Amortization of:              
  Prior service cost   (2)   (2)        (2)
  Actuarial (loss)   (11)   (11)   (2)     (6)
Total recognized in regulatory assets   5    11    (7)     10 
                 
Total recognized in net periodic defined benefit costs and regulatory assets $ 16  $ 22  $ (5)   $ 18 

The estimated amounts to be amortized from regulatory assets into net periodic defined benefit costs for LG&E in 20102013 are as follows:

  Pension Benefits  
  U.S. U.K. Other Postretirement Benefits
             
Transition obligation         $9 
Prior service cost $19  $4   7 
Actuarial loss  3   52   5 
Total $22  $56  $21 
             
Amortization from Balance Sheet:            
AOCI $15  $56  $13 
Regulatory assets  7       8 
Total $22  $56  $21 


  Pension Benefits  
  U.S. U.K. Other Postretirement Benefits
  2009 2008 2007 2009 2008 2007 2009 2008 2007
PPL Energy Supply                                    
Net periodic defined benefit costs:                                    
Service cost $4  $4  $4  $9  $16  $24  $1  $1  $1 
Interest cost  6   6   6   156   188   170   1   1   1 
Expected return on plan assets  (6)  (8)  (8)  (189)  (231)  (227)            
Amortization of:                                    
Prior service cost              4   5   5             
Actuarial loss  2           2   18   55             
Net periodic pension and postretirement costs (credits) prior to settlement charges and termination benefits  6   2   2   (18)  (4)  27   2   2   2 
Settlement charges (a)  2                                 
Termination benefits (b)                      3             
Net periodic defined benefit costs (credits) $8  $2  $2  $(18) $(4) $30  $2  $2  $2 
                                     
Other Changes in Plan Assets and Benefit Obligations Recognized in OCI                                    
Settlements $(2)                                
Current year net (gain) loss  4  $27  $(7) $403  $476  $(254)     $(1)    
Current year prior service credit                              (1)    
Amortization of:                                    
Prior service cost              (4)  (5)  (5)            
Actuarial loss  (2)          (2)  (18)  (55)            
Total recognized in OCI      27   (7)  397   453   (314)      (2)    
                                     
Total recognized in net periodic benefit cost and OCI $8  $29  $(5) $379  $449  $(284) $2  $   $2 
follows.

(a) Includes the settlement of the pension plan of PPL's former mining subsidiary, PA Mines, LLC in 2009.
(b) The $3 million U.K.Pension
Benefits
Prior service cost of termination benefits for 2007 was related to the closing of a WPD meter test station.  In addition, severance of $2 million was also recorded for a total charge of $5 million ($4 million after tax).$ 2 
Actuarial loss 13 
Total$ 15 

Prior service costs for(PPL, PPL Energy Supply of $4 million and actuarial loss of $52 million related to the U.K. pension plans are expected to be amortized from AOCI into net periodic benefit costs in 2010.
PPL Electric)

Net periodic defined benefit costs (credits) charged to operating expense, excluding amounts charged to construction and other non-expense accounts were:

 Pension Benefits   Pension Benefits      
 U.S. U.K. Other Postretirement Benefits U.S. U.K. Other Postretirement Benefits
 2009 2008 2007 2009 2008 2007 2009 2008 2007  2012  2011  2010  2012  2011  2010(a) 2012  2011  2010 
                                     
PPL $56 $24 $40 $(17) $(4) $27 $31 $36 $35  $ 119  $ 98  $ 59  $ 25  $ 82  $ 16  $ 22  $ 24  $ 27 
PPL Energy Supply (a) 26 10 19 (17) (4) 27 14 16 16   37   27   24       16   6   7   12 
PPL Electric (b) 14 5 7       10 13 10   19   14   12         3   4   8 

(a)In addition to the specific plans it sponsors,As a result of PPL Energy Supply andSupply's January 2011 distribution of its subsidiariesmembership interest in PPL Global to its parent, PPL Energy Funding, these amounts are also allocated costs of defined benefit plans sponsored by PPL Services, included in the total cost above, based"Income (Loss) from Discontinued Operations (net of income taxes)" on their participation in those plans.PPL Energy Supply's Statements of Income.  See Note 9 for additional information.
(b)PPL Electric does not directly sponsor any defined benefit plans.  PPL Electric was allocated these costs of defined benefit plans sponsored by PPL Services, based on its participation in those plans.plans, which management believes are reasonable.

In the table above, for PPL Energy Supply, amounts include costs for the specific plans it sponsors and the following allocated costs of defined benefit plans sponsored by PPL Services, based on PPL Energy Supply's participation in those plans, which management believes are reasonable:
    Pension Benefits  Other Postretirement Benefits
     2012   2011   2010   2012   2011   2010 
                     
  PPL Energy Supply $ 31  $ 23  $ 19  $ 5  $ $ 10 

(LKE, LG&E and KU)

The following table provides net periodic defined benefit costs charged to operating expense for the years ended December 31, 2012, and 2011, and November 1, 2010 through December 31, 2010, for the Successor and January 1, 2010 through October 31, 2010, for the Predecessor.
320

  Pension Benefits Other Postretirement Benefits
  Successor  Predecessor  Successor  Predecessor
  2012  2011  2010   2010   2012  2011  2010   2010 
                            
LKE $ 31  $ 40  $ 9   $ 37   $ 9  $ 11  $ 2   $ 9 
LG&E   13    16    3     12     5    5    1     4 
KU (a)   8    10    2     8     3    4    1     3 

(a)KU does not directly sponsor any defined benefit plans.  KU was allocated these costs of defined benefit plans sponsored by LKE, based on its participation in those plans, which management believes are reasonable.             

In the table above, for LG&E, amounts include costs for the specific plans it sponsors and the following allocated costs of defined benefit plans sponsored by LKE, based on its participation in those plans, which management believes are reasonable.
  Pension Benefits  Other Postretirement Benefits
  Successor  Predecessor  Successor  Predecessor
  2012  2011  2010   2010   2012  2011  2010   2010 
                            
LG&E $ 5  $ 7  $ 1   $ 6   $ 2  $ 5  $ 1   $ 4 

(PPL and PPL Energy Supply)

The following weighted-average assumptions were used in the valuation of the benefit obligations at December 31.

  Pension Benefits  
  U.S. U.K. Other Postretirement Benefits
  2009 2008 2007 2009 2008 2007 2009 2008 2007
PPL                                   
Discount rate  6.00%   6.50%   6.39%   5.55%   7.47%   6.37%   5.81%   6.45%   6.26%
Rate of compensation increase  4.75%   4.75%   4.75%   4.00%   4.00%   4.25%   4.75%   4.75%   4.75%
                                    
PPL Energy Supply                                   
Discount rate  6.00%   6.50%   6.39%   5.55%   7.47%   6.37%   5.55%   6.37%   6.13%
Rate of compensation increase  4.75%   4.75%   4.75%   4.00%   4.00%   4.25%   4.75%   4.75%   4.75%
                                    
   Pension Benefits      
   U.S. U.K. Other Postretirement Benefits
   2012  2011  2012  2011  2012  2011 
PPL                  
 Discount rate  4.22%  5.06%  4.27%  5.24%  4.00%  4.80%
 Rate of compensation increase  3.98%  4.02%  4.00%  4.00%  3.97%  4.00%
                   
PPL Energy Supply                  
 Discount rate  4.25%  5.12%        3.77%  4.60%
 Rate of compensation increase  3.95%  4.00%        3.95%  4.00%

(LKE and LG&E)

The following table provides the weighted-average assumptions used in the valuation of the benefit obligations at December 31.

               
    Pension Benefits Other Postretirement Benefits
    2012  2011  2012  2011 
LKE             
 Discount rate   4.24%  5.08%  3.99%  4.78%
 Rate of compensation increase   4.00%  4.00%  4.00%  4.00%
LG&E             
 Discount rate   4.20%  5.00%      
 Rate of compensation increase   N/A  N/A      

(PPL and PPL Energy Supply)

The following weighted-average assumptions were used to determine the net periodic defined benefit costs for the year ended December 31.

  Pension Benefits  
  U.S. U.K. Other Postretirement Benefits
  2009 2008 2007 2009 2008 2007 2009 2008 2007
PPL                                   
Discount rate  6.50%   6.39%   5.94%   7.47%   6.37%   5.17%   6.45%   6.26%   5.88%
Rate of compensation increase  4.75%   4.75%   4.75%   4.00%   4.25%   4.00%   4.75%   4.75%   4.75%
Expected return on plan assets (a)  8.00%   8.25%   8.50%   7.90%   7.90%   8.09%   7.00%   7.80%   7.75%
                                    
PPL Energy Supply                                   
Discount rate  6.50%   6.39%   5.94%   7.47%   6.37%   5.17%   6.37%   6.13%   5.79%
Rate of compensation increase  4.75%   4.75%   4.75%   4.00%   4.25%   4.00%   4.75%   4.75%   4.75%
Expected return on plan assets (a)  7.78%   8.04%   8.27%   7.90%   7.90%   8.09%   N/A   N/A   N/A
   Pension Benefits         
   U.S. U.K. Other Postretirement Benefits
   2012  2011  2010  2012  2011  2010  2012  2011  2010 
PPL                           
 Discount rate  5.06%  5.42%  5.96%  5.24%  5.59%  5.59%  4.80%  5.14%  5.47%
 Rate of compensation increase  4.02%  4.88%  4.79%  4.00%  3.75%  4.00%  4.00%  4.90%  4.78%
 Expected return on plan assets (a)  7.07%  7.25%  7.96%  7.17%  7.04%  7.91%  5.99%  6.57%  6.90%
                            
PPL Energy Supply                           
 Discount rate  5.12%  5.47%  6.00%        5.59%  4.60%  4.95%  5.55%
 Rate of compensation increase  4.00%  4.75%  4.75%        4.00%  4.00%  4.75%  4.75%
 Expected return on plan assets (a)  7.00%  7.25%  8.00%        7.91%  N/A  N/A  N/A
321

(LKE and LG&E)

The following table provides the weighted-average assumptions used to determine the net periodic defined benefit costs for the years ended December 31, 2012, and 2011, and November 1, 2010 through December 31, 2010, for the Successor and January 1, 2010 through October 31, 2010, for the Predecessor.

   Pension Benefits Other Postretirement Benefits
   Successor  Predecessor Successor  Predecessor
   2012  2011  2010   2010  2012  2011  2010   2010 
LKE                          
 Discount rate  5.09%  5.49%  5.40%   6.11%  4.78%  5.12%  4.94%   5.82%
 Rate of compensation increase  4.00%  5.25%  5.25%   5.25%  4.00%  5.25%  5.25%   5.25%
 Expected return on plan assets (a)  7.25%  7.25%  7.25%   7.75%  7.02%  7.16%  7.04%   7.20%
LG&E                          
 Discount rate  5.00%  5.39%  5.28%   6.08%             
 Rate of compensation increase  N/A  N/A  N/A   N/A             
 Expected return on plan assets (a)  7.25%  7.25%  7.25%   7.75%             

(PPL, PPL Energy Supply, LKE and LG&E)

(a)
The expected long-term rates of return for PPL andPPL's, PPL Energy Supply's, LKE's and LG&E's U.S. pension and other postretirement benefits have been developed using a best-estimate of expected returns, volatilities and correlations for each asset class.  The best estimates are based on historical performance, future expectations and periodic portfolio rebalancing among the diversified asset classes.  PPL management corroborates these rates with expected long-term rates of return calculated by its independent actuary, who uses a building block approach that begins with a risk-free rate of return with factors being added such as inflation, duration, credit spreads and equity risk.  Each plan's specific asset allocation is also considered in developing a reasonable return assumption.

The expected long-term rates of return for PPL and PPL Energy Supply'sPPL's U.K. pension plans have been developed by WPDPPL management with assistance from an independent actuary using a best-estimatebest estimate of expected returns, volatilities and correlations for each asset class.  The best estimates are based on historical performance, future expectations and periodic portfolio rebalancing among the diversified asset classes.

  Assumed Health Care Cost Trend Rates at December 31,
  2009 2008 2007
PPL and PPL Energy Supply      
Health care cost trend rate assumed for next year      
  - obligations 8.0% 8.4% 9.0%
  - cost 8.4% 9.0% 9.0%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)      
  - obligations 5.5% 5.5% 5.5%
  - cost 5.5% 5.5% 5.5%
Year that the rate reaches the ultimate trend rate      
  - obligations 2016 2014 2014
  - cost 2014 2014 2012
(PPL and PPL Energy Supply)

The following table provides the assumed health care cost trend rates for the year ended December 31:

     2012  2011  2010 
PPL and PPL Energy Supply         
 Health care cost trend rate assumed for next year         
   - obligations  8.0%  8.5%  9.0%
   - cost  8.5%  9.0%  8.0%
 Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)         
   - obligations  5.5%  5.5%  5.5%
   - cost  5.5%  5.5%  5.5%
 Year that the rate reaches the ultimate trend rate         
   - obligations  2019   2019   2019 
   - cost  2019   2019   2016 

(LKE)

The following table provides the assumed health care cost trend rates for the years ended December 31, 2012, 2011 and November 1, 2010 through December 31, 2010, for the Successor and January 1, 2010 through October 31, 2010, for the Predecessor.

     Successor  Predecessor
     2012  2011  2010   2010 
LKE             
 Health care cost trend rate assumed for next year             
   - obligations  8.0%  8.5%  9.0%   7.8%
   - cost  8.5%  9.0%  9.0%   8.0%
 Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)             
   - obligations  5.5%  5.5%  5.5%   4.5%
   - cost  5.5%  5.5%  5.5%   4.5%
 Year that the rate reaches the ultimate trend rate             
   - obligations  2019   2019   2019    2029 
   - cost  2019   2019   2019    2029 
322

(PPL and LKE)

A one percentage point change in the assumed health care costs trend rate assumption would have had the following effects on the other postretirement benefit plans in 2009.2012:

  One Percentage Point
  Increase Decrease
PPL      
Effect on service cost and interest cost components $1  $(1)
Effect on accumulated postretirement benefit obligation  14   (12)
   One Percentage Point
   Increase Decrease
Effect on accumulated postretirement benefit obligation      
 PPL $ 7  $ (6)
 LKE   5    (4)

(PPL Energy Supply)

The effects on PPL Energy Supply's other postretirement benefit plansplan would not have been significant.

(PPL)

The funded status of the PPL plans was as follows.follows:

  Pension Benefits  
  U.S. U.K. Other Postretirement Benefits
  2009 2008 2009 2008 2009 2008
Change in Benefit Obligation                        
Benefit Obligation, beginning of period $2,231  $2,189  $2,152  $3,295  $451  $541 
Service cost  60   62   9   15   6   8 
Interest cost  145   140   156   188   29   33 
Participant contributions          5   7   6   8 
Plan amendments  1               (4)  (2)
Actuarial (gain) loss  125   (13)  611   (411)  43   (94)
Termination benefits  9                     
Actual expenses paid  (1)  (1)                
Gross benefits paid  (104)  (95)  (189)  (180)  (36)  (36)
Settlements (b)  (6)                    
Federal subsidy                  3   2 
Currency conversion          189   (762)        
Divestiture (a)      (51)              (9)
Benefit Obligation, end of period  2,460   2,231   2,933   2,152   498   451 
                         
Change in Plan Assets                        
Plan assets at fair value, beginning of period  1,637   2,212   1,842   3,388   267   291 
Actual return on plan assets  192   (469)  427   (770)  28   (42)
Employer contributions  54   29   95   92   33   38 
Participant contributions          5   7   6   12 
Actual expenses paid  (1)  (1)                
Gross benefits paid  (104)  (95)  (189)  (179)  (33)  (32)
Settlements (a)  (6)                    
Currency conversion          151   (696)        
Divestiture (b)      (39)                
Plan assets at fair value, end of period  1,772   1,637   2,331   1,842   301   267 
                         
Funded Status, end of period $(688) $(594) $(602) $(310) $(197) $(184)
                         
Amounts recognized in the Balance Sheets consist of:                        
Current liability $(7) $(5)         $(1) $(1)
Noncurrent liability  (681)  (589) $(602) $(310)  (196)  (183)
Net amount recognized, end of period $(688) $(594) $(602) $(310) $(197) $(184)
                         
    Pension Benefits      
    U.S. U.K. Other Postretirement Benefits
    2012  2011  2012  2011  2012  2011 
Change in Benefit Obligation                  
Benefit Obligation, beginning of period $ 4,381  $ 4,007  $ 6,638  $ 2,841  $ 687  $ 667 
  Service cost   103    95    54    44    12    12 
  Interest cost   220    217    340    282    31    33 
  Participant contributions         15    11    6    5 
  Plan amendments      8          (1)   10 
  Actuarial loss   546    220    1,081    257    31    6 
  Acquisition (a)            3,501       
  Settlements   (25)               
  Termination benefits         2    50       
  Net transfer in (out)         12          
  Actual expenses paid   (3)               
  Gross benefits paid   (176)   (166)   (397)   (309)   (46)   (47)
  Federal subsidy               2    1 
  Currency conversion         143    (39)      
Benefit Obligation, end of period   5,046    4,381    7,888    6,638    722    687 
                     
Change in Plan Assets                  
Plan assets at fair value, beginning of period   3,471    2,819    6,351    2,524    391    360 
  Actual return on plan assets   432    349    476    444    42    38 
  Employer contributions   239    470    341    164    27    33 
  Participant contributions         15    11    5    5 
  Acquisition (a)            3,567       
  Settlements   (25)               
  Actual expenses paid   (2)   (1)            
  Gross benefits paid   (176)   (166)   (397)   (309)   (44)   (45)
  Currency conversion         125    (50)      
Plan assets at fair value, end of period   3,939    3,471    6,911    6,351    421    391 
                     
Funded Status, end of period $ (1,107) $ (910) $ (977) $ (287) $ (301) $ (296)
                     
Amounts recognized in the Balance                  
 Sheets consist of:                  
  Noncurrent asset          $ 130       
  Current liability $ (8) $ (29)       $ (1) $ (1)
  Noncurrent liability   (1,099)   (881) $ (977)   (417)   (300)   (295)
Net amount recognized, end of period $ (1,107) $ (910) $ (977) $ (287) $ (301) $ (296)
                     
Amounts recognized in AOCI and                  
 regulatory assets/liabilities (pre-tax)                  
 consist of:                  
Transition obligation                $ 2 
Prior service cost (credit) $ 91  $ 115  $ 1  $ 3  $ (7)   (5)
Net actuarial loss   1,241    922    2,184    1,191    106    97 
Total (b) $ 1,332  $ 1,037  $ 2,185  $ 1,194  $ 99  $ 94 
                     
Total accumulated benefit obligation                  
 for defined benefit pension plans $ 4,569  $ 3,949  $ 7,259  $ 6,144       
Amounts recognized in AOCI and regulatory assets (pre-tax) consist of: (c)                        
Transition (asset) obligation     $(4)         $26  $35 
Prior service cost $120   139  $13  $16   31   43 
Net actuarial loss  398   300   1,126   726   101   70 
Total $518  $435  $1,139  $742  $158  $148 
                         
Total accumulated benefit obligation for defined benefit pension plans $2,237  $1,999  $2,806  $2,058         
323

(a)Includes the pension plans of WPD Midlands, which was acquired in 2011.  See Note 10 for additional information.
(b)WPD is not subject to accounting for the effects of certain types of regulation as prescribed by GAAP.  As a result, WPD does not record regulatory assets/liabilities.

(a) Includes the settlement of the pension plan of PPL's former mining subsidiary, PA Mines LLC in 2009.
(b) Includes the pension and postretirement medical plans related to the gas and propane businesses that were sold in 2008.  See Note 9 for additional information.
(c) For PPL's U.S. pension and other post-retirement benefits, the amounts recognized in AOCI and regulatory assets are as follows:
    U.S. Pension Benefits Other Postretirement Benefits 
    2009 2008 2009 2008 
                    
  AOCI $346  $295  $95  $89  
  Regulatory assets  172   140   63   59  
  Total $518  $435  $158  $148  
For PPL's U.S. pension and other postretirement benefit plans, the amounts recognized in AOCI and regulatory assets/liabilities at December 31 were as follows:

  U.S. Pension Benefits Other Postretirement Benefits
  2012  2011  2012  2011 
         
AOCI $ 659  $ 481  $ 59  $ 56 
Regulatory assets/liabilities   673    556    40    38 
Total $ 1,332  $ 1,037  $ 99  $ 94 

All of PPL's U.S. pension plans had projected and accumulated benefit obligations in excess of plan assets at December 31, 20092012 and 2008.2011.  All of PPL's other postretirement benefit plans had accumulated postretirement benefit obligations in excess of plan assets at December 31, 20092012 and 2008.2011.

(For the U.K. pension plans of PPL Energy Supply)WEM, projected benefit obligations of $4.3 billion were in excess of plan assets of $4.1 billion at December 31, 2012.

The funded statusFor the U.K. pension plans of the PPL Energy Supply plans wasWW, projected and accumulated benefit obligations were in excess of plan assets at December 31 as follows.follows (in billions):

  Pension Benefits  
  U.S. U.K. Other Postretirement Benefits
  2009 2008 2009 2008 2009 2008
Change in Benefit Obligation                        
Benefit Obligation, beginning of period $95  $89  $2,152  $3,295  $15  $16 
Service cost  4   4   9   15   1   1 
Interest cost  6   6   156   188   1   1 
Participant contributions          5   7         
Plan amendments                      (1)
Actuarial (gain) loss  7   (2)  611   (411)      (1)
Settlements (a)  (6)                    
Gross benefits paid  (2)  (2)  (189)  (180)      (1)
Currency conversion          189   (762)        
Benefit Obligation, end of period  104   95   2,933   2,152   17   15 
                         
Change in Plan Assets                        
Plan assets at fair value, beginning of period  78   100   1,842   3,388         
Actual return on plan assets  9   (20)  427   (770)        
Employer contributions  9       95   92       1 
Participant contributions          5   7         
Gross benefits paid  (3)  (2)  (189)  (179)      (1)
Settlements (a)  (6)                    
Currency conversion          151   (696)        
Plan assets at fair value, end of period  87   78   2,331   1,842         
                         
Funded Status, end of period $(17) $(17) $(602) $(310) $(17) $(15)
                         
Amounts recognized in the Balance Sheets consist of:                        
Current liability                 $(1) $(1)
Noncurrent liability $(17) $(17) $(602) $(310)  (16)  (14)
Net amount recognized, end of period $(17) $(17) $(602) $(310) $(17) $(15)
                         
Amounts recognized in AOCI (pre-tax) consist of:                        
Prior service cost (credit) $2  $2  $13  $16  $(1) $(1)
Net actuarial loss  30   30   1,126   726   4   4 
Total $32  $32  $1,139  $742  $3  $3 
                         
Total accumulated benefit obligation for defined benefit pension plans $104  $95  $2,806  $2,058         
  2012  2011 
       
Projected benefit obligation $ 3.6  $ 3.0 
Accumulated benefit obligation   3.3    2.8 
Fair value of plan assets   2.8    2.6 

(PPL Energy Supply)               
                     
The funded status of the PPL Energy Supply plans were as follows:
                     
    Pension Benefits      
    U.S. U.K. Other Postretirement Benefits
    2012  2011  2012  2011  2012  2011 
Change in Benefit Obligation                  
Benefit Obligation, beginning of period $ 143  $ 121     $ 2,841  $ 17  $ 18 
  Service cost   6    5          1    1 
  Interest cost   7    7          1    1 
  Plan amendments               (1)   
  Actuarial loss   23    13             (2)
  Distribution to parent (a)            (2,841)      
  Actual expenses paid                  (1)
  Gross benefits paid   (3)   (3)         (1)   
Benefit Obligation, end of period   176    143          17    17 
                     
Change in Plan Assets                  
Plan assets at fair value, beginning of                  
 period   132    106       2,524       
  Actual return on plan assets   16    14             
  Employer contributions   4    15             
  Distribution to parent (a)            (2,524)      
  Gross benefits paid   (3)   (3)            
Plan assets at fair value, end of period   149    132             
                     
Funded Status, end of period $ (27) $ (11)    $  $ (17) $ (17)
                     
Amounts recognized in the Balance                  
 Sheets consist of:                  
  Current liability             $ (1) $ (1)
  Noncurrent liability $ (27) $ (11)         (16)   (16)
Net amount recognized, end of period $ (27) $ (11)       $ (17) $ (17)
324

    Pension Benefits      
    U.S. U.K. Other Postretirement Benefits
    2012  2011  2012  2011  2012  2011 
Amounts recognized in AOCI                  
 (pre-tax) consist of:                  
Prior service cost (credit)    $ 1        $ (1)   
Net actuarial loss $ 52    38          2  $ 2 
Total $ 52  $ 39        $ 1  $ 2 
                     
Total accumulated benefit obligation                  
 for defined benefit pension plans $ 176  $ 143             

(a)Includes the settlement of the pension planAs a result of PPL Energy Supply's former mining subsidiary, PA Mines LLCJanuary 2011 distribution of its membership interest in 2009.PPL Global to its parent, PPL Energy Funding, the funded status and AOCI were removed from the balance sheet in January 2011.  See Note 9 for additional information.


All of PPL Energy Supply's pension plansplan had projected and accumulated benefit obligations in excess of plan assets at December 31, 20092012 and 2008.  All of2011.  PPL Energy Supply's other postretirement benefit plansplan had accumulated postretirement benefit obligations in excess of plan assets at December 31, 20092012 and 2008.2011.

In addition to the plans it sponsors, PPL Energy Supply and its subsidiaries are allocated a portion of the funded status and costs of the defined benefit plans sponsored by PPL Services based on their participation in those plans.plans, which management believes are reasonable.  The actuarially determined obligations of current active employees are used as a basis to allocate total plan activity, including active and retiree costs and obligations.  Allocations to PPL Energy Supply'sSupply resulted in liabilities at December 31 as follows:

  2012  2011 
       
Funded status of the pension plans $ 268  $ 204 
Other postretirement benefits   60    51 

(LKE)

The funded status of the LKE plans was as follows.

    Pension Benefits Other Postretirement Benefits
    2012  2011  2012  2011 
Change in Benefit Obligation            
Benefit Obligation, beginning of period $ 1,306  $ 1,229  $ 214  $ 204 
  Service cost   22    24    4    4 
  Interest cost   63    67    9    10 
  Plan amendments      9       10 
  Actuarial loss (gain)   144    25    (8)   (3)
  Gross benefits paid   (48)   (48)   (11)   (12)
  Federal subsidy         1    1 
Benefit Obligation, end of period   1,487    1,306    209    214 
               
Change in Plan Assets            
Plan assets at fair value, beginning of period   944    778    58    49 
  Actual return on plan assets   117    62    8    3 
  Employer contributions   57    152    13    18 
  Gross benefits paid   (48)   (48)   (11)   (12)
Plan assets at fair value, end of period   1,070    944    68    58 
               
Funded Status, end of period $ (417) $ (362) $ (141) $ (156)
               
Amounts recognized in the Balance            
 Sheets consist of:            
  Current liability $ (3) $ (3)      
  Noncurrent liability   (414)   (359) $ (141) $ (156)
Net amount recognized, end of period $ (417) $ (362) $ (141) $ (156)
               
Amounts recognized in AOCI and            
 regulatory assets/liabilities (pre-tax)            
 consist of:            
Transition obligation          $ 2 
Prior service cost $ 28  $ 34  $ 11    14 
Net actuarial (gain) loss   355    280    (17)   (7)
Total $ 383  $ 314  $ (6) $ 9 
               
Total accumulated benefit obligation            
 for defined benefit pension plans $ 1,319  $ 1,141       
325

At December 31, the amounts recognized in AOCI and regulatory assets/liabilities are as follows.
   Pension Benefits Other Postretirement Benefits
   2012  2011  2012  2011 
          
 AOCI $ 27  $ (7)    $ 1 
 Regulatory assets/liabilities   356    321  $ (6)   8 
 Total $ 383  $ 314  $ (6) $ 9 

All of LKE's pension plans had projected and accumulated benefit obligations in excess of plan assets at December 31, 2012 and 2011.  LKE's other postretirement benefit plan had accumulated postretirement benefit obligations in excess of plan assets at December 31, 2012 and 2011.

(LG&E)

The funded status of the LG&E plan was as follows.    

        Pension Benefits
        2012  2011 
Change in Benefit Obligation          
Benefit Obligation, beginning of period     $ 298  $ 274 
  Service cost       1    2 
  Interest cost       14    14 
  Plan amendments          9 
  Actuarial loss       32    14 
  Gross benefits paid       (14)   (15)
Benefit Obligation, end of period       331    298 
             
Change in Plan Assets          
Plan assets at fair value, beginning of period       256    217 
  Actual return on plan assets       32    16 
  Employer contributions       13    38 
  Gross benefits paid       (14)   (15)
Plan assets at fair value, end of period       287    256 
             
Funded Status, end of period     $ (44) $ (42)
             
Amounts recognized in the Balance Sheets consist of:          
  Noncurrent liability     $ (44) $ (42)
Net amount recognized, end of period     $ (44) $ (42)
             
Amounts recognized in regulatory assets (pre-tax)          
 consist of:          
Prior service cost     $ 17  $ 20 
Net actuarial loss       123    115 
Total     $ 140  $ 135 
             
Total accumulated benefit obligation for defined benefit pension plan     $ 328  $ 292 

LG&E's pension plan had projected and accumulated benefit obligations in excess of plan assets at December 31, 2012 and 2011.

In addition to the plan it sponsors, LG&E is allocated sharea portion of the funded status and costs of the pensioncertain defined benefit plans sponsored by LKE based on its participation in those plans, which management believes are reasonable.  The actuarially determined obligations of current active employees and retired employees are used as a basis to allocate total plan activity, including active and retiree costs and obligations.  Allocations to LG&E resulted in a liability of $265 million and $229 millionliabilities at December 31 2009as follows.    

  2012  2011 
       
Funded status of the pension plans $ 58  $ 53 
Other postretirement benefits   81    87 

(PPL and 2008. PPL Energy Supply's allocated share of other postretirement benefits was a liability of $74 million and $69 million at December 31, 2009 and 2008.Supply)

PPL Energy Supply's subsidiaries engaged in the mechanical contracting businesssubsidiaries make contributions to various multi-employerover 70 multiemployer pension plans, based on the bargaining units from which labor is procured.  The risks of participating in these multiemployer plans are different from single-employer plans in the following aspects:
326

·
Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers.

·If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers.

·If PPL Energy Supply's mechanical contracting subsidiaries choose to stop participating in some of their multiemployer plans, they may be required to pay those plans an amount based on the unfunded status of the plan, referred to as a withdrawal liability.

PPL Energy Supply identified the Steamfitters Local Union No. 420 Pension Plan, EIN/Plan Number 23-2004424/001 as the only significant plan to which contributions are made.  Contributions to this plan by PPL Energy Supply's mechanical contracting companies were $5 million for 2012, $5 million for 2011 and $4 million for 2010.  At the date the financial statements were issued, the Form 5500 was not available for the plan year ending in 2012.  Therefore, the following disclosures specific to this plan are being made based on the Form 5500s filed for the plan years ended December 31, 2011 and 2010.  PPL Energy Supply's mechanical contracting subsidiaries were not identified individually as greater than 5% contributors on the Form 5500s.  However, the combined contributions of the three subsidiaries contributing to the plan had exceeded 5%.  The plan had a Pension Protection Act zone status of yellow and red, without utilizing an extended amortization period, as of December 31, 2011 and 2010.  In addition, the plan is subject to a rehabilitation plan and surcharges have been applied to participating employer contributions.  The expiration date of the collective-bargaining agreement related to those employees participating in this plan is April 30, 2014.  There were no other plans deemed individually significant based on a multifaceted assessment of each plan.  This assessment included review of the funded/zone status of each plan and PPL Energy Supply's potential obligations under the plan and the number of participating employers contributing to the plan.

PPL Energy Supply's mechanical contracting subsidiaries also participate in multiemployer other postretirement plans that provide for retiree life insurance and health benefits.

The table below details total contributions to all multiemployer pension and other postretirement plans, including the plan identified as significant above.  The contribution amounts fluctuate each year based on the volume of work and type of projects undertaken from year to year.

  2012  2011  2010 
          
Pension Plans $31  $36  $26 
Other Postretirement Medical Plans  28   31   23 
Total Contributions $59  $67  $49 

PPL Energy Supply maintains a liability for the cost of health care of retired miners of former subsidiaries that had been engaged in coal mining, as required by the Coal Industry Retiree Health Benefit Act of 1992.  At December 31, 2012, the liability was $3 million.  The liability is the net of $67 million of estimated future benefit payments offset by $35 million of assets in a retired miners VEBA trust and welfare plans, depending on an employee's status.  Contributions were $54additional $29 million of excess assets available in 2009 and $61 million in both 2008 and 2007.a Black Lung Trust that can be used to fund the health care benefits of retired miners.

(PPL Electric)

Although PPL Electric does not directly sponsor any defined benefit plans, it is allocated a portion of the funded status and costs of plans sponsored by PPL Services based on its participation in those plans.plans, which management believes are reasonable.  The actuarially determined obligations of current active employees are used as a basis to allocate total plan activity, including active and retiree costs and obligations.  Allocations to PPL Electric'sElectric resulted in liabilities at December 31 as follows:

  2012  2011 
       
Funded status of the pension plans $ 237  $ 186 
Other postretirement benefits   61    53 
327

(KU)

Although KU does not directly sponsor any defined benefit plans, it is allocated sharea portion of the funded status and costs of the pension plans sponsored by LKE based on its participation in those plans, which management believes are reasonable.  The actuarially determined obligations of current active employees and retired employees of KU are used as a basis to allocate total plan activity, including active and retiree costs and obligations.  Allocations to KU resulted in a liability of $245 million and $209 millionliabilities at December 31 2009 and 2008.  PPL Electric's allocated share of other postretirement benefits was a liability of $73 million and $69 million at December 31, 2009 and 2008.as follows.


(PPL and PPL Electric)
  2012  2011 
       
Funded status of the pension plans $ 104  $ 83 
Other postretirement benefits   53    62 

PPL Electric maintains a liability for the cost of health care of retired miners of former subsidiaries that had been engaged in coal mining, as required by the Coal Industry Retiree Health Benefit Act of 1992.  However, total obligations of $59 million are offset by assets in a retired miners VEBA fund and excess Black Lung Trust assets.

Plan Assets - U.S. Pension Plans

(PPL, and PPL Energy Supply)Supply, LKE and LG&E)

PPL's primary legacy pension plan and the pension plan in which employees of PPL and PPL Energy Supply's U.S. pension plansMontana participate are invested in a master trustthe PPL Services Corporation Master Trust that also includes a 401(h) account that is restricted for certain other postretirement benefit obligations.  Through December 31, 2011, the plans sponsored by LKE, including LG&E's plan, were invested in Pension Trusts that also included a 401(h) account that is restricted for certain other postretirement benefit obligations.  Effective January 1, 2012, the assets in the LKE Pension Trusts were transferred into the PPL Services Corporation Master Trust.  The investment strategy for the master trust is to achieve a risk-adjusted return on a mix of assets that, in combination with PPL's funding policy, and tolerance for return volatility, will ensure that sufficient assets are available to provide long-term growth and liquidity for benefit payments.  The master trust benefits from a wide diversification of asset types, investment fund strategies and external investment fund managers, and therefore has no significant concentration of risk.

The investment policiespolicy of the U.S. pension plans outline allowable investmentsPPL Services Corporation Master Trust outlines investment objectives and definedefines the responsibilities of the internal pension administrative committee and theEBPB, external investment managers.  The only prohibited investments are investments in debt or equity securities issued by PPLmanagers, investment advisor and its subsidiaries or PPL's pension plan consultant.trustee and custodian.  The investment policies arepolicy is reviewed and approved annually by PPL's Board of Directors.

The EBPB created a risk management framework around the trust assets and pension liabilities.  This framework considers the trust assets as being composed of three sub-portfolios:  the growth, immunizing and liquidity portfolios.  The growth portfolio is comprised of investments that generate a return at a reasonable risk, including equity securities, certain debt securities and alternative investments.  The immunizing portfolio consists of debt securities and derivative positions that will typically have long durations.  The immunizing portfolio is designed to offset a portion of the change in the pension liabilities due to changes in interest rates.  The liquidity portfolio consists primarily of cash and cash equivalents.

Target allocation ranges have been developed for each portfolio on a plan basis based on input from external consultants with a goal of limiting funded status volatility.  The assetsEBPB monitors the investments in each portfolio on a plan basis, and seeks to obtain a target portfolio that emphasizes reduction of risk of loss from market volatility.  In pursuing that goal, the U.S. pension plansEBPB establishes revised guidelines from time to time.  EBPB investment guidelines on a plan basis, as well as the weighted average of such guidelines, as of the end of 2012 are rebalanced as necessary to maintain the target asset allocation ranges.  presented below.

The asset allocation for the master trusttrusts and the target allocation by asset class,portfolio, at December 31, are detailed below.as follows:

Asset Class Percentage of plan assets Target Range Target Asset Allocation 
  2009 2008 2009 2009 
Equity securities         
U.S. 31% 37% 18-32% 25% 
International 19% 15% 10-24% 17% 
Debt securities and derivatives 38% 41% 31-45% 38% 
Alternative investments 8% 5% 8-22% 15% 
Cash and cash equivalents 4% 2% 0-12% 5% 
Total 100% 100%   100% 
PPL Services Corporation Master Trust

U.S. equity securities include investments in large-cap and small-cap companies.  International equity securities include investments in developed markets and emerging markets.  The investments in U.S. and international equity securities include investments in individual securities and investments in commingled funds. Investments in debt securities include U.S. Treasuries, U.S. government agencies, residential mortgage-backed securities, asset-backed securities, investment-grade corporate bonds, high-yield corporate bonds, municipal bonds and international debt securities.  Alternative investments include investments in real estate, private equity funds and hedge fund of funds that follow several different strategies. Derivative instruments are utilized as a cost-effective means to mitigate risk and match the duration of investments to projected obligations.
                 
         2012 Target Asset Allocation (a)
   Percentage of trust assets  Weighted      
   2012 (a)  2011    Average  PPL Plans  LKE Plans
                
Growth Portfolio   58%   57%  56%  55%  59%
 Equity securities   31%   31%         
 Debt securities (b)   18%   17%         
 Alternative investments   9%   9%         
Immunizing Portfolio   41%   41%  42%  43%  38%
 Debt securities (b)   40%   40%         
 Derivatives   1%   1%         
Liquidity Portfolio   1%   2%  2%  2%  3%
Total   100%   100%  100%  100%  100%

(PPL)
328

(a)Allocations exclude consideration of cash for the WKE Bargaining Employees' Retirement Plan and a guaranteed annuity contract held by the LG&E and KU Retirement Plan.
(b)Includes commingled debt funds, which PPL treats as debt securities for asset allocation purposes.
LG&E and KU Energy LLC Pension Trusts      
   Percentage Target Asset
    of trust assets Allocation
  2011  2011 
        
Growth Portfolio   54%   59%
 Equity securities   33%   
 Debt securities (a)   21%   
Immunizing Portfolio   34%   38%
 Debt securities (a) (b)   34%   
Liquidity Portfolio (b)   12%   3%
Total   100%   100%

(a)Includes commingled debt funds, which LKE treats as debt securities for asset allocation purposes.
(b)The asset allocation for this portfolio was not within the established target range due to the transition of assets at the end of 2011 in anticipation of transfer into the PPL Services Corporation Master Trust in January 2012.                   

(PPL Energy Supply)

PPL Montana, a subsidiary of PPL Energy Supply, has a pension plan whose assets are invested solely in the PPL Services Corporation Master Trust, which is fully disclosed below.  The fair value of this plan's assets of $149 million at December 31, 2012 represents an interest of approximately 4% in the master trust.

(LKE)

LKE has pension plans, including LG&E's plan, whose assets, effective January 1, 2012, are invested solely in the PPL Services Corporation Master Trust, which is fully disclosed below.  The fair value of these plans' assets of $1.1 billion at December 31, 2012 represents an interest of approximately 26% in the master trust.

(LG&E)

LG&E has a pension plan whose assets, effective January 1, 2012, are invested solely in the PPL Services Corporation Master Trust, which is fully disclosed below.  The fair value of this plan's assets of $287 million at December 31, 2012 represents an interest of approximately 7% in the master trust.  At December 31, 2011, this plan's assets were invested solely in the LG&E and KU Energy LLC Pension Trusts, which is also fully disclosed below.  The fair value of this plan's assets of $256 million at December 31, 2011 represents an interest of approximately 26% in the pension trust.

(PPL, PPL Energy Supply, LKE and LG&E)

The fair value of net assets in the U.S. pension plansplan trusts by asset class and level within the fair value hierarchy was:

  December 31, 2009
    Fair Value Measurements Using
  Total Level 1 Level 2 Level 3
                 
Cash and cash equivalents $90  $90         
Equity securities:                
U.S.:                
Large-cap (a)  511   361  $150     
Small-cap (b)  84   84         
International:                
Developed markets (c)  327   205   122     
Emerging markets (d)  71   9   62     
Debt securities:                
U.S.:                
U.S. Treasury  212   212         
U.S. government agency  6       6     
Residential mortgage-backed (e)  50       48  $2 
Asset-backed (f)  9       9     
Investment-grade corporate (g)  191       189   2 
High-yield corporate (h)  92       84   8 
Other                
International (i)  5       5     
Alternative investments:                
Real estate (j)  65       65     
Private equity (k)  6           6 
Hedge fund of funds (l)  64       64     
Derivatives:                
Foreign currency forward contracts (m)  1       1     
To-be-announced (TBA) debt securities (n)  10           10 
Interest rate swaps  (4)      (4)    
Receivables (o)  15   8   7     
Payables (p)  (22)  (22)        
Total master trust assets  1,783   947   808   28 
401(h) account restricted for other postretirement benefit obligations  (11)  (6)  (5)    
Fair value - U.S. pension plans $1,772  $941  $803  $28 
     December 31, 2012 December 31, 2011
        Fair Value Measurements Using    Fair Value Measurements Using
     Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
PPL Services Corporation Master Trust                        
Cash and cash equivalents $ 84  $ 84        $ 78  $ 78       
Equity securities:                        
  U.S.:                        
   Large-cap   558    206  $ 352       371    247  $ 124    
   Small-cap   124    124          112    112       
   Commingled debt   676    56    620       458       458    
  International   557    184    373       299    102    197    
Debt securities:                        
  U.S. Treasury and U.S. government sponsored                        
   agency   704    634    70       515    443    72    
  Residential/commercial backed securities   12       11  $ 1    9       9    
  Corporate   874       847    27    446       439  $ 7 
  Other   24       23    1    10       10    
  International   7       7       6       6    
329

     December 31, 2012 December 31, 2011
        Fair Value Measurements Using    Fair Value Measurements Using
     Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
Alternative investments:                        
  Commodities   59       59                
  Real estate   93       93       85       85    
  Private equity   75          75    45          45 
  Hedge funds   125       125       92       92    
Derivatives:                        
  Interest rate swaps and swaptions   36       36       20       20    
  Other   2       2       5       5    
Insurance contracts   42          42             
Receivables   55    29    26       50    31    19    
Payables   (66)   (55)   (11)      (48)   (40)   (8)   
Total PPL Services Corporation Master Trust assets   4,041    1,262    2,633    146    2,553    973    1,528    52 
401(h) account restricted for other                        
 postretirement benefit obligations   (102)   (32)   (66)   (4)   (26)   (10)   (16)   
Fair value - PPL Services Corporation Master                        
 Trust pension assets   3,939    1,230    2,567    142    2,527    963    1,512    52 
                            
(PPL, LKE and LG&E)                        
                            
LG&E and KU Energy LLC Pension Trusts                        
Cash and cash equivalents               122    122       
Equity securities:                        
  U.S.:                        
   Large-cap               220       220    
   Commingled debt               65       65    
  International               106    44    62    
Debt securities:                        
  U.S. Treasury               97    97       
  Corporate               342       342    
Derivatives:                        
  Total return swaps               4       4    
Insurance contracts               46          46 
Total LG&E and KU Energy LLC                        
 Pension Trusts assets               1,002    263    693    46 
401(h) account restricted for other                        
 postretirement benefit obligations               (58)   (13)   (45)   
Fair value - LG&E and KU Energy LLC                        
 Pension Trusts pension assets               944    250    648    46 
                            
Fair value - total U.S. pension plans $ 3,939  $ 1,230  $ 2,567  $ 142  $ 3,471  $ 1,213  $ 2,160  $ 98 

(a)Represents actively and passively managed investments that are measured against various U.S. equity indices.
(b)Represents actively managed investments in small-cap growth companies that are measured against the Russell 2000 Growth Index.
(c)Represents actively managed investments that are measured against the MSCI EAFE Index.
(d)Represents actively managed investments that are measured against the MSCI Emerging Markets Index.
(e)Represents investments in securities issued by U.S. agencies and securitized by residential mortgages.
(f)Represents investments securitized by auto loans, credit cards and other pooled loans.
(g)Represents investments in investment grade bonds issued by U.S. companies across several industries.
(h)Represents investments in non-investment grade bonds issued by U.S. companies across several industries.
(i)Represents investments in debt securities issued by foreign governments and corporations.
(j)Represents an investment in a real estate fund through a partnership that invests in core U.S. real estate properties diversified geographically and across major property types (e.g., office, industrial, retail, etc).  The manager is focused on properties with high occupancy rates with quality tenants. This results in a focus on high income and stable cash flows with appreciation being a secondary factor. Core real estate generally has a lower degree of leverage when compared to more speculative real estate investing strategies.
(k)Represents investments through partnerships in multiple early-state venture capital funds and private equity fund of funds that use diverse investment strategies.
(l)Represents investments in hedge fund of funds that follow a number of different investment strategies to create a well-diversified portfolio.
(m)Represents contracts utilized to mitigate foreign currency risk associated with anticipated foreign denominated cash receipts and payments.
(n)Represents commitments to purchase debt securities.  Used as a cost effective means of managing the duration of assets in the trust.
(o)Represents interest and dividends earned but not received (Level 2) as well as investments sold but not yet settled (Level 1).
(p)Represents costs incurred but not yet paid (Level 2) and investments purchased but not yet settled (Level 1).

A reconciliation of masterU.S. pension trust assets classified as Level 3 at December 31, 20092012 is as follows.follows:     

  Residential mortgage backed securities Investment-grade corporate debt High-yield corporate debt Private equity TBA Debt Securities Total
                         
Balance at beginning of period $4  $3  $4  $5  $51  $67 
Actual return on plan assets                        
Relating to assets still held at the reporting date  (1)      1       1   1 
Relating to assets sold during the period  1       (1)  (2)  (1)  (3)
Purchases, sales and settlements  (2)  (1)  4   3   (41)  (37)
Transfers into and/or (out of) Level 3                        
Balance at end of period $2  $2  $8  $6  $10  $28 
      Residential/               
      commercial              
      backed Corporate Private Insurance Other   
      securities debt equity contracts Debt Total
                       
Balance at beginning of period    $ 7  $ 45  $ 46     $ 98 
 Actual return on plan assets                  
   Relating to assets still held                  
    at the reporting date      1    10    3       14 
   Relating to assets sold during the period      2             2 
 Purchases, sales and settlements $ 1    21    20    (7)      35 
 Transfers from level 2 to level 3             $ 1    1 
 Transfers from level 3 to level 2      (4)            (4)
Balance at end of period $ 1  $ 27  $ 75  $ 42  $ 1  $ 146 

A reconciliation of U.S. pension trust assets classified as Level 3 at December 31, 2011 is as follows:
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      Residential/               
      commercial              
      backed Corporate Private Insurance     
      securities debt equity contracts Other Total
                       
Balance at beginning of period    $ 6  $ 10  $ 47     $ 63 
 Actual return on plan assets                  
   Relating to assets still held                  
    at the reporting date      (4)   8    3       7 
 Purchases, sales and settlements      5    27    (4)      28 
Balance at end of period    $ 7  $ 45  $ 46     $ 98 

(PPL, PPL Energy Supply, LKE and LG&E)

The fair value measurements of cash and cash equivalents are based on the amounts on deposit.

The market approach is used to measure fair value of equity securities.  The fair value measurements of equity securities (excluding commingled funds), which are generally classified as Level 1, are based on quoted prices in active markets.  The fair value measurements ofThese securities represent actively and passively managed investments that are managed against various equity indices.

Investments in commingled equity and debt funds are categorized as equity securities.  These investments are classified as Level 2, except for exchange-traded funds, which are classified as Level 1 based on quoted prices in active markets.  The fair value measurements for Level 2 and categorized as equity securities,investments are based on firm quotes of net asset values per share, which are not considered obtained from a quoted pricesprice in an active markets.  market.  For the commingled equity funds, these securities represent investments that are measured against the Russell 1000 Growth Index, the Russell 1000 Index, the Russell 3000 Index and the MSCI EAFE Index.  Commingled debt funds are described in greater detail in the following discussion of debt securities.

The fair value measurements of debt securities are generally based on evaluated prices that reflect observable market information, such as actual trade information for identical securities or for similar securities, adjusted for observable differences.  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 this information is not available,necessary, the fair value of debt securities is measured using present value techniques,the income approach, which incorporate otherincorporates similar observable inputs including interest rates foras well as benchmark yields, credit valuation adjustments, reference data from market research publications, monthly payment data, collateral performance and new issue data.  For the PPL Services Corporation Master Trust, these securities represent investments in securities issued by U.S. Treasury and U.S. government sponsored agencies; investments securitized by residential mortgages, auto loans, credit cards and other pooled loans; investments in investment grade and non-investment grade bonds issued by U.S. companies across several industries; investments in debt securities with credit ratingsissued by foreign governments and terms to maturity similar tocorporations; and exchange traded funds as well as commingled fund investments.  Investments in commingled funds include a fund that invests in a diversified portfolio of emerging market debt obligations that is measured against the JP Morgan EMBI Global Diversified Index, as well as funds that invest in investment grade long duration fixed income securities that are measured against the Barclays Long A or Better Index.  During the first ten months of 2011 for the LG&E and KU Energy LLC Pension Trusts, debt securities within commingled trusts were measured against the Barclays Aggregated Bond Index and the Barclays U.S. Government/Credit Long Index.  During the last two months of 2011, the debt securities for the LG&E and KU Energy LLC Pension Trusts were transitioned to debt securities similar to those within the PPL Services Corporation Master Trust.  The debt securities, excluding those in commingled funds, held by the PPL Services Corporation Master Trust at December 31, 2012 have a weighted-average coupon of 3.49% and a weighted-average maturity of 21 years.

Investments in commodities represent ownership of units of a commingled fund that is invested as a long-only, unleveraged portfolio of exchange-traded futures and forward contracts in tangible commodities to obtain broad exposure to all principal groups in the global commodity markets, including energies, agriculture and metals (both precious and industrial) using proprietary commodity trading strategies.  The fund has daily liquidity with a specified notification period.  The fund's fair value is based upon a unit value as calculated by the fund's trustee.

Investments in real estate represent an investment in a partnership whose purpose is to manage investments in core U.S. real estate properties diversified geographically and across major property types (e.g., office, industrial, retail, etc.).  The manager is focused on properties with high occupancy rates with quality tenants.  This results in a focus on high income and stable cash flows with appreciation being measured.  When these inputs are not observable,a secondary factor.  Core real estate generally has a lower degree of leverage when compared with more speculative real estate investing strategies.  The partnership has limitations on the amounts that may be redeemed based on available cash to fund redemptions.  Additionally, the general partner may decline to accept redemptions when necessary to avoid adverse consequences for the partnership, including legal and tax implications, among others.  The fair value of the investment is based upon a partnership unit value.
331

Investments in private equity represent interests in partnerships in multiple early-stage venture capital funds and private equity fund of funds that use a number of diverse investment strategies.  Four of the partnerships have limited lives of ten years, while the fifth has a life of 15 years, after which liquidating distributions will be received.  Prior to the end of each partnership's life, the investment cannot be redeemed with the partnership; however, the interest may be sold to other parties, subject to the general partner's approval.  The PPL Services Corporation Master Trust has unfunded commitments of $73 million that may be required during the lives of the partnerships.  Fair value is based on an ownership interest in partners' capital to which a proportionate share of net assets is attributed.

Investments in hedge funds represent investments in three hedge fund of funds.  Hedge funds seek a return utilizing a number of diverse investment strategies.  The strategies, when combined aim to reduce volatility and risk while attempting to deliver positive returns under all market conditions.  Major investment strategies for the hedge fund of funds include long/short equity, market neutral, distressed debt, securitiesand relative value.  Generally, shares may be redeemed on 90 days prior written notice.  The funds are subject to short term lockups and have limitations on the amount that may be withdrawn based on a percentage of the total net asset value of the fund, among other restrictions.  All withdrawals are subject to the general partner's approval.  The fair value for two of the funds has been estimated using the net asset value per share and the third fund's fair value is classified as Level 3.  based on an ownership interest in partners' capital to which a proportionate share of net assets is attributed.

The fair value measurements of derivative instruments utilize various inputs that include quoted prices for similar contracts or market-corroborated inputs.  In certain instances, when observable market prices are not available, these instruments may be valued using models, with market observable inputs including forward pricesstandard option valuation models and standard industry models.  These securities primarily represent investments in interest rates, among others.rate swaps and swaptions (the option to enter into an interest rate swap) which are valued based on the swap details, such as swap curves, notional amount, index and term of index, reset frequency, volatility and payer/receiver credit ratings.

The U.S. pension plans hold alternativeReceivables/payables classified as Level 1 represent investments including investments in real estate, private equitysold/purchased but not yet settled.  Receivables/payables classified as Level 2 represent interest and hedge fund of funds.dividends earned but not yet received and costs incurred but not yet paid.

·Real estate - RepresentsInsurance contracts, classified as Level 3, represent an investment in a partnership whose purpose is to manage investments in U.S. real estate.  The partnership has limitations on the amounts that may be redeemed based on available cash to fund redemptions.  Additionally, the general partner may decline to accept redemptions when necessary to avoid adverse consequences for the partnership, including legal and tax implications, among others.  The fair value of the investment is based upon a partnership unit value.
·Private equity - Represents interests in partnerships that invest across industries using a number of diverse investment strategies.  Two of the partnerships have limited lives of ten years, while the third has a life of 15 years, after which the master trust will receive liquidating distributions.  Prior to the end of each partnership's life, the master trust's investment can not be redeemed with the partnership; however, the interest may be sold to other parties, subject to the general partner's approval.  The master trust has unfunded commitments of $56 million that may be required during the lives of the partnerships.  Fair value is based on an ownership interest in partners' capital to which a proportionate share of net assets is attributed.
·Hedge fund of funds - Represents investments in two hedge fund of funds each with a different investment objective.  Generally, shares may be redeemed on 90 days prior written notice.  Both funds are subject to short term lockups and have limitations on the amount that may be withdrawn based on a percentage of the total net asset value of the fund, among other restrictions.  All withdrawals are subject to the general partner's approval.  Major investment strategies for both hedge fund of funds include long/short equity, market neutral, distressed debt, and relative value.  One fund's fair value has been estimated using the net asset value per share and the other fund's fair value is based on an ownership interest in partners' capital to which a proportionate share of net assets is attributed.

(PPL Energy Supply)

PPL Montana, a subsidiary of PPL Energy Supply, has a pension plan whose assets are solely invested in the master trust, which is fully disclosed by PPL (above).an immediate participation guaranteed group annuity contract.  The fair value of this plan's assets of $87 million at December 31, 2009is based on contract value, which represents a 4.9% undividedcost plus interest in each assetincome less distributions for benefit payments and liability of PPL's master trust, including each asset whose fair value measurement was determined using significant unobservable inputs (Level 3).administrative expenses.

Plan Assets - U.S. Other Postretirement Benefit Plans (PPL)(PPL and LKE)

PPL's and LKE's investment strategy with respect to its other postretirement benefit obligations is to fund VEBA trusts and aand/or 401(h) accountaccounts with voluntary contributions and to invest in a tax efficient manner.  Excluding the 401(h) accountaccounts included in the master trust,PPL Services Corporation Master Trust in 2012 and LG&E and KU Energy LLC Pension Trusts in 2011 discussed in thePlan Assets - U.S. PensionsPension Plans section above, PPL's and LKE's other postretirement benefit plans are invested in a mix of assets for long-term growth with an objective of earning returns that provide liquidity as required for benefit payments.  These plans benefit from diversification of asset types, investment fund strategies and investment fund managers, and therefore, have no significant concentration of risk.  The only prohibited investments are investments in debt or equity securities issued by PPL and its subsidiaries.  Equity securities include investments in domestic large-cap commingled funds.  Securities issued byOwnership interests in commingled funds that invest entirely in debt securities are tradedclassified as equity units,securities, but treated by PPL and LKE as debt securities for asset allocation and target allocation purposes.  Securities issued byOwnership interests in commingled money market funds that invest entirely in money market securities are tradedclassified as equity units,securities, but treated by PPL and LKE as cash and cash equivalents for asset allocation and target allocation purposes.  The asset allocation for the VEBA trusts and the target allocation, by asset class, at December 31 are detailed below.

Asset Class Percentage of plan assets Permitted Range Target Asset Allocation 
 2009 2008 2009 2009     Target Asset
           Percentage of plan assets Allocation
U.S. equity securities 54% 43% 45-65% 55% 
 2012  2011  2012 
Asset ClassAsset Class      
U.S. Equity securitiesU.S. Equity securities  46%  41% 45%
Debt securities (a) 37% 45% 30-50% 40% Debt securities (a)  51%  53% 50%
Cash and cash equivalents (b) 9% 12% 0-15% 5% Cash and cash equivalents (b)   3%   6%  5%
Total 100% 100%   100% 
Total   100%   100%   100%

(a)Includes commingled debt funds and debt securities.
(b)Includes commingled money market fund.

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The fair value of assets in the U.S. other postretirement benefit plans by asset class and level within the fair value hierarchy was:

  December 31, 2009
    Fair Value Measurements Using
  Total Level 1 Level 2 Level 3
                 
U.S. equity securities:                
Large-cap (a) $156      $156     
Commingled debt (b)  61       61     
Commingled money market funds  26       26     
Debt securities:                
Municipalities (c)  46       46     
Receivables (d)  1       1     
Total VEBA trust assets  290       290     
401(h) account assets in master trust  11  $6   5     
Fair value - U.S. other postretirement benefit plans $301  $6  $295     
     December 31, 2012 December 31, 2011
        Fair Value Measurement Using    Fair Value Measurement Using
     Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
U.S. Equity securities:                        
  Large-cap $ 145     $ 145     $ 126     $ 126    
  Commingled debt   119       119       121       121    
  Commingled money market funds   13  $ 13          20       20    
  Municipalities   41       41       40       40    
Receivables   1       1                
Total VEBA trust assets   319    13    306       307       307    
401(h) account assets (a)   102    32    66  $ 4    84  $ 23    61    
Fair value - U.S. other postretirement                        
 benefit plans $ 421  $ 45  $ 372  $ 4  $ 391  $ 23  $ 368    

(a)Represents investments in passively managed equity index funds that that are measured against the S&P 500 Index.
(b)Represents investments in passively managed commingled fundsLKE's other postretirement benefit plan was invested in obligations of the U.S. Treasury.
(c)Represents investmentsprimarily in a diverse mix of tax-exempt municipal securities.401(h) account as disclosed in the PPL Services Corporation Master trust in 2012 and the LG&E and KU Energy LLC Pension Trusts in 2011.
(d)Represents

Investments in large-cap equity securities represent investments in a passively managed equity index fund that invests in securities and a combination of other collective funds that together track the performance of the S&P 500 Index.  Redemptions can be made daily on this fund.

Investments in commingled debt securities represent investments in a fund that invests in a diversified portfolio of investment grade long-duration fixed income securities that are managed to track the Barclays U.S. Long Credit Index, as well as a fund that is tracked to the Barclays U.S. Long Treasury Index.  Redemptions can be made weekly on these funds.

Investments in commingled money market funds represent investments in a fund that invests primarily in a diversified portfolio of investment grade money market instruments, including, but not limited to, commercial paper, notes, repurchase agreements and other evidences of indebtedness with a maturity not exceeding 13 months from the date of purchase.  The primary objective of the fund is a high level of current income consistent with stability of principal and liquidity.  Redemptions can be made daily on this fund.

Investments in municipalities represent investments in a diverse mix of tax-exempt municipal securities.

Receivables represent interest and dividends earned but not received as well as investments sold but not yet settled.

The fair value measurements of the domestic other postretirement benefit plan assets are based on the same inputs and measurement techniques used to measure the U.S. pension assets described above.

Plan Assets - U.K. Pension Plans (PPL and PPL Energy Supply)(PPL)

The overall investment strategy of WPD's pension plans is developed by each plan's independent trustees in its Statement of Investment Principles in compliance with the U.K. Pensions Act of 1995 and other U.K. legislation.  The trustees' primary focus is to ensure that assets are sufficient to meet members' benefits as they fall due with a longer term objective to reduce investment risk.  The investment strategy is intended to maximize investment returns while not incurring excessive volatility in the funding position.  WPD's plans are invested in a wide diversification of asset types, fund strategies and fund managers and therefore have no significant concentration of risk.  Equity securities primarily include investments in U.K. and other international large and mid-cap companies.  Commingled funds that consist entirely of debt securities are traded as equity units, but treated by WPD as debt securities for asset allocation and target allocation purposes.  These include investments in U.K. corporate bonds and U.K. gilts.  Debt securities include corporate bonds of companies from diversified U.K. industries.  The only alternative investment is an investment in a real estate fund.

The asset allocation and target allocation at December 31 of WPD's pension plans are detailed below.


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Asset Class Percentage of plan assets Target Asset Allocation 
  2009 2008 2009 
Equity securities:       
U.K. companies 22% 25% 18% 
European companies (excluding the U.K.) 13% 11% 12% 
Asian-Pacific companies 10% 10% 10% 
North American companies 6% 7% 9% 
Emerging markets companies 5% 1% 5% 
Currency 2% 2% 2% 
Global Tactical Asset Allocation 1% 1% 3% 
Debt securities (a) 35% 37% 33% 
Alternative investments and cash 6% 6% 8% 
Total 100% 100% 100% 

         Target Asset
   Percentage of plan assets Allocation
  2012  2011  2012 
Asset Class         
Cash and cash equivalents      5%   
Equity securities         
 U.K.   6%   14%  6%
 European (excluding the U.K.)   14%   5%  4%
 Asian-Pacific      5%  3%
 North American      5%  5%
 Emerging markets   3%   2%  5%
 Currency   2%   1%  1%
 Global Tactical Asset Allocation   18%     18%
Debt securities (a)   51%   56%  52%
Alternative investments   6%   7%  6%
 Total   100%   100%   100%

(a)Includes commingled debt funds.

The fair value of assets in the U.K. pension plans by asset class and level within the fair value hierarchy was:

  December 31, 2009
    Fair Value Measurements Using
  Total Level 1 Level 2 Level 3
                 
Cash and cash equivalents $5  $5         
Equity securities:                
U.K. companies (a)  501      $501     
European companies (excluding the U.K.) (b)  290       290     
Asian-Pacific companies (c)  242       242     
North American companies (d)  149       149     
Emerging markets companies (e)  110       110     
Currency (f)  42       42     
Global Tactical Asset Allocation (g)  30       30     
Commingled debt:                
U.K. corporate bonds  308       308     
U.K. gilts  24       24     
U.K. index-linked gilts  489       489     
Alternative investments:                
Real estate (h)  141       141     
Fair value - international pension plans $2,331  $5  $2,326     

(a)Represents passively managed equity index funds that are measured against the FTSE All Share Index.
(b)Represents passively managed equity index funds that are measured against the FTSE Europe ex UK Index.
(c)Represents an actively managed equity index fund that aims to outperform 50% FTSE Asia Pacific ex-Japan Index and 50% FTSE Japan Index.
(d)Represents passively managed equity index funds that are measured against the FTSE North America Index.
(e)Represents passively managed equity index funds that are measured against the MSCI Emerging Markets Index.
(f)Represents investments in unitized passive and actively traded currency funds.
(g)The Global Tactical Asset Allocation investment strategy attempts to benefit from short-term market inefficiencies by taking positions in worldwide markets with the objective to profit from relative movements across those markets.
(h)Represents investments in a unitized fund that owns and manages U.K. industrial and commercial real estate with a strategy of earning current rental income and achieving capital growth.
     December 31, 2012 December 31, 2011
        Fair Value Measurement Using    Fair Value Measurement Using
     Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
                            
Cash and cash equivalents $ 14  $ 14        $ 313  $ 313       
Equity securities:                        
  U.K. companies   440    223  $ 217       921     $ 921    
  European companies (excluding the U.K.)   956    720    236       313       313    
  Asian-Pacific companies               312       312    
  North American companies               335       335    
  Emerging markets companies   231       231       116       116    
  Currency   127       127       31       31    
  Global Tactical Asset Allocation   1,220       1,220       25       25    
  Commingled debt:                        
   U.K. corporate bonds   593       593       699       699    
   U.K. gilts   1,664       1,664       2,109       2,109    
   U.K. index-linked gilts   1,243       1,243       744       744    
Alternative investments:                        
  Real estate   423       423       433       433    
Fair value - U.K. pension plans $ 6,911  $ 957  $ 5,954     $ 6,351  $ 313  $ 6,038    

Except for investments in real estate, the fair value measurements of WPD's pension plan assets are based on the same inputs and measurement techniques used to measure the U.S. pension plan assets described above.

Investments in U.K. equity securities represent passively managed equity index funds that are measured against the FTSE All Share Index.  Investments in European equity securities represent passively managed equity index funds that are measured against the FTSE Europe ex U.K. Index.  Investments in Asian-Pacific equity securities represent passively managed equity index funds that aim to outperform 50% FTSE Asia Pacific ex-Japan Index and 50% FTSE Japan Index.  Investments in North American equity securities represent passively managed index funds that are measured against the FTSE North America Index.  Investments in emerging market equity securities represent passively managed equity index funds that are measured against the MSCI Emerging Markets Index.  Investments in currency equity securities represent investments in unitized passive and actively traded currency funds.  The Global Tactical Asset Allocation strategy attempts to benefit from short-term market inefficiencies by taking positions in worldwide markets with the objective to profit from relative movements across those markets.

Debt securities include investment grade corporate bonds of companies from diversified U.K. industries.

Investments in real estate represent holdings in a U.K. unitized fund whosethat owns and manages U.K. industrial and commercial real estate with a strategy of earning current rental income and achieving capital growth.  The fair value measurement of the fund is based upon a net asset value per share.  The fund's net asset valueshare, which is based on the value of underlying properties that are independently appraised in accordance with Royal Institution of Chartered Surveyors valuation standards at least annually with quarterly valuation updates based on recent sales of similar properties, leasing levels, property operations and/or market conditions.  The fund may be subject to redemption restrictions in the unlikely event of a large forced sale in order to ensure other unit holders are not disadvantaged.

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Expected Cash Flows - U.S. Defined Benefit Plans (PPL)

There are no cash contributions required for PPL's primary U.S. pension plan because contribution requirements could be satisfied by applyingdefined benefit plans have the option to utilize available prior year credit balances.balances to meet current and future contribution requirements.  However, PPL contributed $120$394 million to its primary U.S. pension planplans in January 2010 to ensure future compliance with minimum funding requirements.2013.

PPL sponsors various non-qualified supplemental pension plans for which no assets are segregated from corporate assets.  PPL expects to make approximately $4$7 million of benefit payments under these plans in 2010.2013.

PPL is not required to make contributions to its other postretirement benefit plans but has historically funded these plans in amounts equal to the postretirement benefit costs recognized.  Continuation of this past practice would cause PPL to contribute $34$24 million to its other postretirement benefit plans in 2010.2013.

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid and the following federal subsidy payments are expected to be received by the separate plan trusts.

    Other Postretirement
  Pension Benefit Payment Expected Federal Subsidy
       
2010 $115  $42  $3 
2011  123   47   3 
2012  131   50   3 
2013  145   55   4 
2014  148   60   4 
2015 - 2019  897   359   28 
     Other Postretirement
        Expected
     Benefit Federal
   Pension Payment Subsidy
          
2013  $ 196  $ 49  $ 1 
2014    206    53    1 
2015    219    55    1 
2016    232    58    1 
2017    249    60    1 
2018-2022   1,475    333    3 

(PPL Energy Supply)

There are no contributions expected or required for theThe PPL Montana pension plan.plan has the option to utilize available prior year credit balances to meet current and future contribution requirements.  Therefore, no contributions are expected for 2013.

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid by the separate plan trusts.

  Pension Other Postretirement 
      
2010 $2  $1  
2011  3   2  
2012  4   2  
2013  4   2  
2014  5   2  
2015 - 2019  36   13  
     Other
  Pension Postretirement
       
2013  $ 4  $ 1 
2014    5    2 
2015    6    2 
2016    6    2 
2017    7    2 
2018-2022   48    12 

(LKE)

LKE's defined benefit plans have the option to utilize available prior year credit balances to meet current and future contribution requirements.  However, LKE contributed $150 million to its pension plans in January 2013.

LKE sponsors various non-qualified supplemental pension plans for which no assets are segregated from corporate assets.  LKE expects to make $3 million of benefit payments under these plans in 2013.

LKE is not required to make contributions to its other postretirement benefit plan but has historically funded this plan in amounts equal to the postretirement benefit costs recognized.  Continuation of this past practice would cause LKE to contribute $12 million to its other postretirement benefit plan in 2013.

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid and the following federal subsidy payments are expected to be received by the separate plan trusts.
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     Other Postretirement
        Expected
     Benefit Federal
   Pension Payment Subsidy
          
2013  $ 55  $ 13  $ 1 
2014    55    13    
2015    58    14    1 
2016    60    14    
2017    65    14    1 
2018 - 2022   399    77    2 

(LG&E)

LG&E's defined benefit plan has the option to utilize available prior year credit balances to meet current and future contribution requirements.  However, LG&E contributed $11 million to its pension plan in January 2013.

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid by the separate plan trust.

   Pension
    
2013  $ 15 
2014    15 
2015    15 
2016    16 
2017    16 
2018 - 2022   95 

Expected Cash Flows - U.K. Pension Plans (PPL and PPL Energy Supply)(PPL)

The pension plans of WPD are subject to formal actuarial valuations every three years, which are used to determine funding requirements.  Future contributions for PPL WW were evaluated in accordance with the latest valuation performed as of March 31, 2007,2010, in respect of WPD'sPPL WW's principal pension scheme,plan, to determine contribution requirements for 20092013 and forward.  Future contributions for PPL WEM were evaluated in accordance with the latest valuation performed as of June 30, 2011, in respect of PPL WEM's principal pension plan, to determine contribution requirements for 2013 and forward.  WPD expects to make contributions of approximately $62$136 million in 2010.  WPD is2013.  PPL WW and PPL WEM are currently permitted to recover in rates approximately 65%75% of itstheir deficit funding requirements for itstheir primary pension plan.  This recovery rate will increase to 76% effective April 1, 2010.plans.

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid by the separate plan trusts.

  Pension 
    
2010 $161 
2011  165 
2012  170 
2013  174 
2014  179 
2015 - 2019  974 
  Pension
    
2013  $ 379 
2014    385 
2015    393 
2016    400 
2017    406 
2018-2022   2,141 

Savings Plans(PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and PPL Electric)

Savings PlansKU)

Substantially all employees of PPL's domestic subsidiaries are eligible to participate in deferred savings plans (401(k)s).  Employer contributions to the plans approximated the following.were:

   2009 2008 2007
        
 PPL $17 $17 $16
 PPL Energy Supply  10  9  9
 PPL Electric  4  4  4
  2012  2011  2010 
          
PPL $ 36  $ 31  $ 23 
PPL Energy Supply   12    11    10 
PPL Electric   5    5    4 
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     Successor  Predecessor
          Two Months  Ten Months
     Year Ended Year Ended Ended  Ended
     December 31, December 31, December 31,  October 31,
     2012  2011  2010   2010 
                 
LKE $12  $11  $  $
LG&E         
KU         

The increase for PPL in 2012 and 2011 is primarily the result of PPL's acquisition of LKE and the employer contributions related to the employees of that company and its subsidiaries under their existing plans.

(PPL, PPL Energy Supply and PPL Electric)

Employee Stock Ownership Plan

Certain PPL sponsorssubsidiaries sponsor a non-leveraged ESOP in which substantially all domestic employees, excluding those of PPL Montana, LKE and the mechanical contractors, are enrolled on the first day of the month following eligible employee status.  Dividends paid on ESOP shares are treated as ordinary dividends by PPL.  Under existing income tax laws, PPL is permitted to deduct the amount of those dividends for income tax purposes and to contribute the resulting tax savings (dividend-based contribution) to the ESOP.

The dividend-based contribution is used to buy shares of PPL's common stock and is expressly conditioned upon the deductibility of the contribution for federal income tax purposes.  Contributions to the ESOP are allocated to eligible participants' accounts as of the end of each year, based 75% on shares held in existing participants' accounts and 25% on the eligible participants' compensation.

Compensation expense for ESOP contributions was $8 million in 20092012, 2011 and $7 million in 2008 and 2007.2010.  These amounts were offset by the dividend-based contribution tax savings and had no impact on PPL's earnings.

PPL shares within the ESOP shares outstanding at December 31, 2009,2012 were 7,691,5407,857,222, or 2%1% of total common shares outstanding, and are included in all EPS calculations.

Postemployment Benefits

Certain PPL subsidiaries provide health and life insurance benefits to disabled employees and income benefits to eligible spouses of deceased employees.  Postemployment benefits charged to operating expenses were not significant for 2009, 2008 and 2007.

Separation Benefits

Certain PPL subsidiaries provide separation benefits to eligible employees.  These benefits may be provided in the case of separations due to performance issues, loss of job related qualifications or organizational changes.  CertainUntil December 1, 2012, certain employees separated arewere eligible for cash severance payments, outplacement services, accelerated stock award vesting, continuation of group health and welfare coverage, and enhanced pension and postretirement medical benefits.  The typeAs of December 1, 2012, separation benefits for certain employees were changed to eliminate accelerated stock award vesting and enhanced pension and postretirement medical benefits.  Also, the continuation of group health and welfare coverage was replaced with a single sum payment approximating the dollar amount of benefits provided is based upon age, yearspremium payments that would be incurred for continuation of servicegroup health and the nature of the separation.welfare coverage.  Separation benefits are recorded when such amounts are probable and estimable.

In February 2009, PPL announced workforce reductions that resulted in the elimination of approximately 200 management and staff positions across PPL's domestic operations, or approximately 6% of PPL's non-union, domestic workforce.  The charges noted below consisted primarily of enhanced pension and severance benefits under PPL's Pension Plan and Separation Policy and were recorded to "Other operation and maintenance" expense on the Statement of Income.

As a result of the workforce reductions, PPL recorded a charge of $22 million ($13 million after tax) in 2009.

PPL Energy Supply eliminated approximately 50 management and staff positions and recorded a charge of $13 million ($8 million after tax) in 2009.  Included in this charge was $8 million ($4 million after tax) of allocated costs associated with the elimination of employees of PPL Services.

PPL Electric eliminated approximately 50 management and staff positions and recorded a charge of $9 million ($5 million after tax) in 2009.  Included in this charge was $3 million ($1 million after tax) of allocated costs associated with the elimination of employees of PPL Services.

Separation benefits were not significant in 2008.2012 and 2010.

SeparationSee Note 10 for separation benefits recorded in 2007 were related2011 in connection with a reorganization following the acquisition of WPD Midlands.

(PPL, PPL Energy Supply, PPL Electric and LKE)

Health Care Reform

In March 2010, Health Care Reform was signed into law.  Many provisions of Health Care Reform do not take effect for an extended period of time, and most will require the publication of implementing regulations and/or issuance of program guidelines.
337

Beginning in 2013, provisions within Health Care Reform eliminate the tax deductibility of retiree health care costs to the eliminationextent of positions at PPL's Martins Creek plant duefederal subsidies received by plan sponsors that provide retiree prescription drug benefits equivalent to the shutdown of two coal-fired units and the closing of WPD's meter test station.  Total costs recorded were $13 million ($9 million after tax).  These costs included $4 million of cash severance payments and enhanced pension benefits provided to domestic employees of $6 million and $3 million provided to WPD employees.  See "Defined Benefits" above for more information.Medicare Part D Coverage.  As a result, in 2010:

13.  ·PPL recorded income tax expense of $8 million; and
Jointly Owned Facilities
·PPL Energy Supply recorded income tax expense of $5 million.

(Other provisions within Health Care Reform that apply to PPL and its subsidiaries include:

·an excise tax, beginning in 2018, imposed on high-cost plans providing health coverage that exceeds certain thresholds;
·a requirement to extend dependent coverage up to age 26; and
·broadening the eligibility requirements under the Federal Black Lung Act.

PPL and its subsidiaries have evaluated the provisions of Health Care Reform and have included the applicable provision in the valuation of those benefit plans that are impacted.  The inclusion of the various provisions of Health Care Reform did not have a material impact on the financial statements.  PPL and its subsidiaries will continue to monitor the potential impact of any changes to the existing provisions and implementation guidance related to Health Care Reform on their benefit programs.

14.  Jointly Owned Facilities

(PPL, PPL Energy Supply)Supply, LKE, LG&E and KU)

At December 31, 20092012 and 2008, subsidiaries of PPL and PPL Energy Supply2011, the Balance Sheets reflect the owned interests in the facilities listed below.

                Construction
     Ownership    Other Accumulated Work
     Interest Electric Plant Property Depreciation in Progress
PPL               
 December 31, 2012               
 Generating Plants               
  Susquehanna  90.00% $ 4,628     $ 3,530  $ 65 
  Conemaugh  16.25%   238       122    30 
  Keystone  12.34%   206       82    3 
  Trimble County Units 1 & 2  75.00%   1,279       112    43 
 Merrill Creek Reservoir  8.37%    $ 22    15    
                  
 December 31, 2011               
 Generating Plants               
  Susquehanna  90.00% $ 4,608     $ 3,496  $ 42 
  Conemaugh  16.25%   233       115    14 
  Keystone  12.34%   198       69    3 
  Trimble County Units 1 & 2  75.00%   1,245       61    35 
 Merrill Creek Reservoir  8.37%    $ 22    15    

PPL Energy Supply               
 December 31, 2012               
 Generating Plants               
  Susquehanna  90.00% $ 4,628     $ 3,530  $ 65 
  Conemaugh  16.25%   238       122    30 
  Keystone  12.34%   206       82    3 
 Merrill Creek Reservoir  8.37%    $ 22    15    
                  
 December 31, 2011               
 Generating Plants               
  Susquehanna  90.00% $ 4,608     $ 3,496  $ 42 
  Conemaugh  16.25%   233       115    14 
  Keystone  12.34%   198       69    3 
 Merrill Creek Reservoir  8.37%    $ 22    15    
338

                Construction
     Ownership    Other Accumulated Work
     Interest Electric Plant Property Depreciation in Progress
LKE                
 December 31, 2012               
 Generating Plants               
  Trimble County Unit 1  75.00% $ 304     $ 33  $ 10 
  Trimble County Unit 2  75.00%   975       79    33 
                  
 December 31, 2011               
 Generating Plants               
  Trimble County Unit 1  75.00% $ 297     $ 19  $ 11 
  Trimble County Unit 2  75.00%   948       42    24 
                  
LG&E               
 December 31, 2012               
 Generating Plants               
  E.W. Brown Units 6-7  38.00% $ 40     $ 5    
  Paddy's Run Unit 13 & E.W. Brown Unit 5  53.00%   46       3    
  Trimble County Unit 1  75.00%   304       33  $ 10 
  Trimble County Unit 2  14.25%   198       14    13 
  Trimble County Units 5-6  29.00%   29       2    
  Trimble County Units 7-10  37.00%   68       6    2 
  Cane Run Unit 7 CCGT  22.00%            16 
                  
 December 31, 2011               
 Generating Plants               
  E.W. Brown Units 6-7  38.00% $ 39     $ 3    
  Paddy's Run Unit 13 & E.W. Brown Unit 5  53.00%   44       2  $ 5 
  Trimble County Unit 1  75.00%   297       19    11 
  Trimble County Unit 2  14.25%   190       7    7 
  Trimble County Units 5-6  29.00%   31       1    
  Trimble County Units 7-10  37.00%   64       4    1 
KU                
 December 31, 2012               
 Generating Plants               
  E.W. Brown Units 6-7  62.00% $ 64     $ 7  $ 1 
  Paddy's Run Unit 13 & E.W. Brown Unit 5  47.00%   42       2    
  Trimble County Unit 2  60.75%   777       65    20 
  Trimble County Units 5-6  71.00%   70       4    
  Trimble County Units 7-10  63.00%   116       10    2 
  Cane Run Unit 7 CCGT  78.00%            53 
                  
 December 31, 2011               
 Generating Plants               
  E.W. Brown Units 6-7  62.00% $ 64     $ 5    
  Paddy's Run Unit 13 & E.W. Brown Unit 5  47.00%   39       2  $ 4 
  Trimble County Unit 2  60.75%   758       35    17 
  Trimble County Units 5-6  71.00%   66       2    4 
  Trimble County Units 7-10  63.00%   109       6    5 

Each subsidiary owning these interests provides its own funding for its share of the facility.  Each receives a portion of the total output of the generating plants equal to its percentage ownership.  The Balance Sheetsshare of PPLfuel and PPL Energy Supply includeother operating costs associated with the amounts notedplants is included in the following table.

  Ownership Interest Electric Plant Other Property Accumulated Depreciation Construction Work in Progress
December 31, 2009            
PPL Generation              
Generating Stations            
Susquehanna 90.00% $4,571    $3,475 $108
Conemaugh 16.25%  206     99  9
Keystone 12.34%  199     61  4
Merrill Creek Reservoir 8.37%    $22  15   
               
December 31, 2008            
PPL Generation              
Generating Stations            
Susquehanna 90.00% $4,513    $3,472 $111
Conemaugh 16.25%  206     93  1
Keystone 12.34%  105     58  64
Wyman Unit 4 (a) 8.33%  15     7   
Merrill Creek Reservoir 8.37%    $22  14   

(a)See Note 9 for information regarding the December 2009 sale of this interest.
corresponding operating expenses on the Statements of Income.

In addition to the interests mentioned above, at December 31, 2012 and 2011, PPL Montana hadhas a 50% leasehold interest in Colstrip Units 1 and 2 and a 30% leasehold interest in Colstrip Unit 3 under operating leases.  See Note 1011 for additional information.  At December 31, 20092012 and 2008,2011, NorthWestern owned a 30% leasehold interest in Colstrip Unit 4.  PPL Montana and NorthWestern have a sharing agreement to governthat governs each party's responsibilities regardingand rights relating to the operation of Colstrip Units 3 and 4, and4.  Under the terms of that agreement, each party is responsible for 15% of the respectivetotal non-coal operating and construction costs of Colstrip Units 3 and 4, regardless of whether a particular cost is specifiedspecific to Colstrip Unit 3 or 4.

Each PPL Generation subsidiary provides its own funding for its share4, and is entitled to take up to the same percentage of the facility.  Each receives a portion of the total output of the generating stations equal to its percentage ownership.  The share of fuelavailable generation from Units 3 and other operating costs associated with the stations is included in the corresponding operating expenses on the Statements of Income.
4.

14.  
Commitments
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15.  Commitments and Contingencies

Energy Purchases, Energy Sales and Other Commitments

Energy Purchase Commitments

(PPL and PPL Energy Supply)

PPL and PPL Energy Supply enters into long-term energy and energy related contracts which include commitments to purchase:

Maximum
Maturity
Contract TypeDate
Fuels (a)2023 
Limestone2030 
Natural Gas Storage2015 
Natural Gas Transportation2032 
Power, excluding wind2017 
RECs2038 
Wind Power2027 

(a)PPL Energy Supply enters into long-term purchase contracts to supply the coal requirements for its coal-fired generation facilities.  As a result of lower electricity and natural gas prices, coal unit utilization has decreased.  To mitigate the risk of exceeding available coal storage, PPL Energy Supply incurred pre-tax charges of $29 million during 2012 to reduce its 2012 and 2013 contracted coal deliveries.  These charges were recorded to "Fuel" on the Statement of Income.

(PPL, LKE, LG&E and KU)

LG&E and KU enter into long-term purchase contracts to supply the fuelcoal and natural gas requirements for generation facilities.facilities and LG&E's gas supply operations.  These contracts include commitments to purchase coal, emission allowances, limestone, natural gas, oil and nuclear fuel.  These long-term contracts extend through 2019, excluding a limestone contract that extends through 2030.  PPL and PPL Energy Supply also enter into long-term contracts for the storage and transportation of natural gas.  The long-term natural gas storage contracts extend through 2015, and the long-term natural gas transportation contracts extend through 2032.  Additionally, PPL and PPL Energy Supply have entered into long-term contracts to purchase power that extend through 2017, excluding long-term power purchase agreements for the full output of two wind farms that extend through 2027.following commitments:

As part of the purchase of generation assets from Montana Power, PPL Montana assumed
Maximum
Maturity
Contract TypeDate
Coal2017 
Coal Transportation and Fleeting Services2023 
Natural Gas Storage2013 
Natural Gas Transportation2024 

LG&E and KU have a power purchase agreement with OVEC expiring in June 2040.  Pursuant to the OVEC power purchase contract, LG&E and power sales agreement, which expiresKU are responsible for their pro-rata share of certain obligations of OVEC under defined circumstances.  These potential liabilities include unpaid OVEC indebtedness as well as shortfall amounts in certain excess decommissioning costs and other post-employment and post-retirement benefit costs other than pension.  LKE's proportionate share of OVEC's outstanding debt was $135 million at December 31, 2010.  In accordance with purchase accounting guidelines, PPL Montana recorded a liability2012, consisting of $58LG&E's share of $93 million and KU's share of $42 million.  Future obligations for power purchases from OVEC are unconditional demand payments, comprised of annual minimum debt service payments, as the fair valuewell as contractually required reimbursement of the agreement at the acquisition date.  The liability is being reduced over the term of the agreementplant operating, maintenance and other expenses as an adjustment to "Energy purchases" on the Statements of Income.  At December 31, 2009, the $11 million unamortized balance of this liability was included in "Other current liabilities" on the Balance Sheet.  At December 31, 2008, the unamortized balance of this liability was $24 million, of which $13 million was included in "Other current liabilities" and $11 million was included in "Other deferred credits and noncurrent liabilities" on the Balance Sheet.follows:

  LG&E KU Total
          
2013  $ 21  $ 9  $ 30 
2014    21    9    30 
2015    21    9    30 
2016    22    10    32 
2017    22    10    32 
Thereafter   612    272    884 
  $ 719  $ 319  $ 1,038 

In 1998, PPL Electric recorded an $879 million loss accrualaddition, LG&E and KU had total energy purchases under the OVEC power purchase agreement for above-market contracts with NUGs, due to deregulation of its generation business.  Effective January 1999, PPL Electric began reducing this liabilitythe periods ended as an offset to "Energy purchases" on the Statements of Income.  This reduction is based on the estimated timing of the purchases from the NUGs and projected market prices for this generation.  The final NUG contract expires in 2014.  In connection with PPL's corporate realignment in 2000, the remaining balance of this liability was transferred to PPL EnergyPlus.  At December 31, 2009, the unamortized balance of this liability was $4 million, of which $1 million was included in "Other current liabilities" and $3 million was included in "Other deferred credits and noncurrent liabilities" on the Balance Sheet.  At December 31, 2008, the unamortized balance of this liability was $29 million, of which $25 million was included in "Other current liabilities" and $4 million was included in "Other deferred credits and noncurrent liabilities" on the Balance Sheet.follows:

In 2008, PPL EnergyPlus acquired the rights to an existing long-term tolling agreement associated with the capacity and energy of Ironwood.  Under the agreement, PPL EnergyPlus has control over the plant's dispatch into the electricity grid and supplies the natural gas necessary to operate the plant.  The tolling agreement extends through 2021.  See Note 10 for additional information.
340

  Successor  Predecessor
       Two Months  Ten Months
  Year Ended Year Ended Ended  Ended
  December 31, December 31, December 31,  October 31,
  2012  2011  2010   2010 
              
LG&E $ 20  $ 22  $  $17 
KU   9    10      
Total $ 29  $ 32  $  $24 

(PPL and PPL Electric)

From 2007 through October 2009, PPL Electric conducted six competitive solicitations to purchase electricity generation supply in 2010 for customers who do not choose an alternative supplier.  Average generation supply prices (per MWh) for all six solicitations, including Pennsylvania gross receipts tax and an adjustment for line losses, were $99.48 for residential customers and $100.52 for small commercial and small industrial customers.

In October 2009, PPL Electric purchased 2010 supply for fixed-price default service to large commercial and large industrial customers who elect to take that service.  In November 2009, PPL Electric purchased supply to provide hourly default service to large commercial and industrial customers in 2010.

In June 2009, the PUC approved PPL Electric's procurement plan to purchase its PLR electricity supply for the period January 2011 through May 2013.  In August and October 2009,To date, PPL Electric has conducted the first twoall of its 14 planned competitive solicitations.  A third solicitation was conducted in January 2010.  The solicitations include a mix of long-term and short-term purchases, ranging from five months to ten years, to fulfill PPL Electric's obligation to provide for customer supply including contractsas a PLR.  In May 2012, PPL Electric filed a plan with the PUC to purchase its electricity supply for load-following, spot, block and alternative energy credits.default customers for the period June 2013 through May 2015.  The PUC subsequently approved PPL Electric's plan on January 24, 2013.  The approved plan proposes that PPL Electric procure this electricity through competitive solicitations conducted twice each plan year beginning in April 2013.

(PPL Energy Supply and PPL Electric)

See Note 1516 for information on the power supply agreements between PPL EnergyPlus and PPL Electric.

Energy Sales Commitments

(PPL and PPL Energy Supply)

In connection with its marketing activities or hedging strategy for its power plants, PPL Energy Supply has entered into long-term power sales contracts that extend through 2023,into 2019, excluding a long-term retail sales agreement for the full output from a solar generatorrenewable energy agreements that extends through 2034.  All long-term contracts were executed at prices approximating market prices at the time of execution.extend into 2038.

(PPL Energy Supply and PPL Electric)Supply)

See Note 1516 for information on the power supply agreements between PPL EnergyPlus and PPL Electric.

PPL Montana Hydroelectric License Commitments (PPL and PPL Energy Supply)

PPL Montana owns and operates 11 hydroelectric facilities and one storage reservoir licensed by the FERC under long-term licenses pursuant to the Federal Power Act.  Pursuant to Section 8(e) of the Federal Power Act, the FERC approved the transfer from Montana Power to PPL Montana of all pertinent licenses and any amendments in connection with the Montana Asset Purchase Agreement.

The Kerr Dam Project license (50-year term) was jointly issued by the FERC jointly to Montana Power and the Confederated Salish and Kootenai Tribes of the Flathead ReservationNation in 1985, and requires PPL Montana Power(as successor licensee to Montana Power) to hold and operate the project for at least 30 years (to 2015).  Between 2015 and 2025, the tribes have the option to purchase, hold and operate the project for the remainder of the license term, which expires in 2035.  While the tribes have indicated their intent to exercise the option at the earliest possible date, PPL Montana cannot predict if and when this option will be exercised.  The license also requires Montana Power and PPL Montana as successor to Montana Power, to continue to implement a plan to mitigate the impact of the Kerr Dam on fish, wildlife and their habitats.  Under this arrangement, PPL Montana has a remaining commitment to spend $12$6 million between 20102013 and 2015, in addition to the annual rent it pays to the tribes.  Between 2015 and 2025, the tribes have the option to purchase, hold and operate the project for the remainder of the license term, which expires in 2035.

PPL Montana entered into two Memoranda of Understanding (MOUs) with state, federal and private entities related to the issuance in 2000 of the FERC renewal license for the nine dams forcomprising the Missouri-Madison project.  The MOUs are periodically updated and renewed and require PPL Montana to implement plans to mitigate the impact of its projects on fish, wildlife and their habitats, and to increase recreational opportunities.  The MOUs were created to maximize collaboration between the parties and enhance the possibility to receive matching funds from relevant federal agencies.  Under these arrangements, PPL Montana has a remaining commitment to spend $36$30 million between 20102013 and 2040.

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Legal Matters

(PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and PPL Electric)KU)

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.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)

Montana Power Shareholders' Litigation

In August 2001, a purported class-action lawsuit was filed by a group of Montana Power shareholders against Montana Power, the directors of Montana Power, certain advisors and consultants of Montana Power, and PPL Montana.  The plaintiffs allege, among other things, that Montana Power failed to obtain shareholder approval for the sale of Montana Power's generation assets to PPL Montana in 1999, and that the sale was null and void.  Among the remedies sought by the plaintiffs is the establishment of a "resulting and/or constructive trust" on both the generation assets and all profits earned by PPL Montana from the generation assets, plus interest on the amounts subject to the trust.  This lawsuit is pending in the U.S. District Court of Montana, Butte Division.  Settlement discussions resumed in June 2009.  A proposed settlement of this lawsuit has been reached under which plaintiffs will receive approximately $115 million.  Under the proposed settlement, PPL Montana is not required to pay any portion of this settlement amount.  The proposed settlement was filed with the judge in November 2009 and is pending court approval.  PPL and PPL Energy Supply cannot predict the outcome of this matter.

Montana Hydroelectric Litigation

In November 2004, PPL Montana, Avista Corporation (Avista) and PacifiCorp commenced an action for declaratory judgment in Montana First Judicial District Court seeking a determination that no lease payments or other compensation for their hydroelectric facilities' use and occupancy of streambedscertain riverbeds in Montana can be collected by the State of Montana.  This request was brought following thelawsuit followed dismissal on jurisdictional grounds of the State of Montana'san earlier federal lawsuit seeking such payments or compensation in the U.S. District Court of Montana, Missoula Division.Montana.  The State's federal lawsuit was founded on allegationsalleged that the beds of Montana's navigable rivers became state-owned trust property upon Montana's admission to statehood, and that the use of them for placement of dam structures, affiliated structures and reservoirs should, under a 1931 regulatory scheme enacted after all but one of the damshydroelectric facilities in question were constructed, trigger lease payments for use of land beneath.  In July 2006, the Montana state court approved a stipulation by the State of Montana that it iswas not seeking lease payments or other compensation from PPL Montana for the period prior to PPL Montana's December 1999 acquisition of the hydroelectric facilities.

In June and OctoberFollowing a number of adverse trial court rulings, in 2007 Pacificorp and Avista respectively,each entered into settlement agreements with the State of Montana providing, in pertinent part, that each company would make prospective lease payments of $50,000 and $4 million per year for use of the State's navigable streambed (adjusted annually for inflation and subjectriverbeds (subject to othercertain future adjustments).  Under these settlement agreements, the future annual payments resolved, resolving the State's claims for both past and future compensation.

In theFollowing an October 2007 trial of this matter on damages, in June 2008, the Montana District Court awarded the State of Montana asserted that PPL Montana should make a prospective lease payment for use of the State's streambeds of $6 million per year (adjusted annually for inflation) and a retroactive compensation paymentof approximately $35 million for the 2000-2006 period (including interest) of $41 million.  PPL Montana vigorously contested both such assertions.

In June 2008, the District Court issued a decision awarding compensation of approximately $34 million for prior years and approximately $6 million for 2007 compensation.  Those unpaid amounts accrue interest at 10% per year.  The Montana District Court also deferred the determination of compensation for 2008 and future years to the Montana State Land Board.

PPL Montana believes that the District Court's decision and a number of its pretrial rulings are erroneous.  In October 2008, PPL Montana filed an appeal ofappealed the decision to the Montana Supreme Court, andrequesting a stay of judgment includingand a stay of the Land Board's authority to assess compensation for 2008 and future periods.  Oral argument of the case was held before

In March 2010, the Montana Supreme Court substantially affirmed the June 2008 Montana District Court decision.  As a result, in September 2009.  For 2007the first quarter of 2010, PPL Montana recorded a pre-tax charge of $56 million ($34 million after tax), representing estimated rental compensation for the first quarter of 2010 and prior years, including interest.  Rental compensation was estimated for periods subsequent to 2007.  The portion of the pre-tax charge that related to prior years totaled $54 million ($32 million after tax).  The pre-tax charge recorded on the Statement of Income was $49 million in "Other operation and maintenance" and $7 million in "Interest Expense."

In August 2010, PPL Montana filed a petition for a writ of certiorari with the U.S. Supreme Court requesting review of this matter.  In June 2011, the U.S. Supreme Court granted PPL Montana's petition, and in February 2012 issued a decision overturning the Montana Supreme Court decision and remanded the case to the Montana Supreme Court for further proceedings consistent with the U.S. Supreme Court's opinion.  As a result, in the fourth quarter of 2011 PPL Montana reversed its total loss accrual of $89 million ($53 million after-tax) which had been recorded prior to the U.S. Supreme Court decision.  The amount reversed was recorded on the Statement of Income as a $75 million credit to "Other operation and maintenance" and a $14 million credit to "Interest Expense." PPL Montana believes the U.S. Supreme Court decision resolves certain questions of liability in this case in favor of PPL Montana and leaves open for reconsideration by Montana courts, consistent with the findings of the U.S. Supreme Court, certain other questions.  In April 2012, the case was returned by the Montana Supreme Court to the Montana First Judicial District Court.  Further proceedings have not yet been scheduled by the District Court.  PPL Montana has concluded it is no longer probable, but it remains reasonably possible, that a loss has been incurred.  While unable to estimate a range of loss, PPL Montana believes that any such amount would not be material.
342

Bankruptcy of SMGT

In October 2011, SMGT, a Montana cooperative and purchaser of electricity under a long-term supply contract with PPL EnergyPlus expiring in June 2019 (SMGT Contract), filed for protection under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Montana.  At the time of the bankruptcy filing, SMGT was PPL EnergyPlus' largest unsecured credit exposure.  This contract was accounted for as NPNS by PPL EnergyPlus.

The SMGT Contract provided for fixed volume purchases on a monthly basis at established prices.  Pursuant to a court order and subsequent years, PPL's management believes it is probablestipulations entered into between the SMGT bankruptcy trustee and PPL EnergyPlus, since the date of its Chapter 11 filing through January 2012, SMGT continued to purchase electricity from PPL EnergyPlus at the price specified in the SMGT Contract and made timely payments for such purchases, but at lower volumes than as prescribed in the SMGT Contract.  In January 2012, the trustee notified PPL EnergyPlus that its hydroelectric projects will be subjectSMGT would not purchase electricity under the SMGT Contract for the month of February.  In March 2012, the U.S. Bankruptcy Court for the District of Montana issued an order approving the request of the SMGT trustee and PPL EnergyPlus to annual estimated compensation ranging from $3terminate the SMGT Contract.  As a result, the SMGT Contract was terminated effective April 1, 2012, allowing PPL EnergyPlus to resell to other customers the electricity previously contracted to SMGT.

PPL EnergyPlus' receivable under the SMGT Contract, representing non-performance by SMGT prior to termination of the SMGT Contract, totaled approximately $21 million to $6 million.  PPL Montana's loss accrual at December 31, 2009 was $92012, which has been fully reserved.

In July 2012, PPL EnergyPlus filed its proof of claim in the SMGT bankruptcy proceeding.  The total claim, including the above receivable, is approximately $375 million, predominantly an unsecured claim representing the value for energy sales that will not occur as a result of which $8 million ($5 million after tax or $0.01 per share) wasthe termination of the SMGT Contract.  No assurance can be given as to the collectability of the claim, thus no amounts have been recorded in 2009.the 2012 financial statements.

PPL Energy Supply cannot predict any amount that it may recover in connection with the SMGT bankruptcy or the prices and other terms on which it will be able to market to third parties the power that SMGT will not purchase from PPL EnergyPlus due to the termination of the SMGT Contract.

Notices of Intent to Sue Colstrip Owners

In July 2012, PPL Montana received a Notice of Intent to Sue for violations of the Clean Air Act at Colstrip Steam Electric Station (Notice) from counsel on behalf of the Sierra Club and the 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 PacifiCorp.  The Notice alleges certain violations of the Clean Air Act, including New Source Review, Title V and opacity requirements.  The Amended Notice alleges additional opacity violations at Colstrip, and the Second Amended Notice alleges additional Title V violations.  The Supplemental Notice includes additional New Source Review Claims.  All four notices state that Sierra Club and MEIC will request a United States District Court to impose injunctive relief and civil penalties, require a beneficial environmental project in the areas affected by the alleged air pollution and require reimbursement of Sierra Club's and MEIC's costs of litigation and attorney's fees.  Under the Clean Air Act, lawsuits cannot be filed until 60 days after the applicable notice date.  PPL is evaluating the allegations set forth in the Notices and cannot at this time predict the outcome of this matter.

PJM/MISO Billing DisputeRegulatory Issues

(PPL, PPL Electric, LKE, LG&E and KU)

See Note 6 for information on regulatory matters related to utility rate regulation.

Enactment of Financial Reform Legislation(PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and KU)

The Dodd-Frank Act became effective in July 2010 and includes provisions that impose derivative transaction reporting requirements and require most over-the-counter derivative transactions to be executed through an exchange and to be centrally cleared.  The Dodd-Frank Act also provides that the U.S. Commodity Futures Trading Commission (CFTC) may impose collateral and margin requirements for over-the-counter derivative transactions, as well as capital requirements for certain entity classifications.  Final rules on major provisions in the Dodd-Frank Act are being established through rulemakings.  The rulemakings are scheduled to become effective at different times beginning with the October 12, 2012 effective date of the definitional rule for the term "swap".  In particular, the CFTC's Final Rule (Final Rule), defining key terms such as "swap dealer" and "major swap participant", took effect with the effectiveness of the swap definitional rule.
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The heightened thresholds and requirements for these entity classifications set forth in the Final Rule resulted in the Registrants currently being designated neither swap dealers nor major swap participants.  The Dodd-Frank Act and its implementing regulations, however, will impose on the Registrants significant additional and costly recordkeeping and reporting requirements.  Also, the Registrants could face significantly higher operating costs or may be required to post additional collateral if they or their counterparties are subject to capital or margin requirements as ultimately adopted in the implementing regulations of the Dodd-Frank Act.  The Registrants will continue to evaluate the provisions of the Dodd-Frank Act and its implementing regulations.  At this time, the Registrants cannot predict the impact that the law or its implementing regulations will have on their businesses or operations, or the markets in which they transact business, but could incur significant costs related to compliance with the Dodd-Frank Act.

(PPL, PPL Energy Supply and PPL Electric)

New Jersey Capacity Legislation

In September 2009, PJM reportedJanuary 2011, New Jersey enacted a law that it had discovered a modeling errorintervenes in the market-to-market power flow calculations betweenwholesale 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 Midwest ISO (MISO).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 error wasAct 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 incorrect modelingtheir exercise of certain generation resources thatbuyer 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 an impact on power flows across the PJM/MISO border.  PJM's preliminary estimatefiled appeals of the magnitude of the error is approximately $77 million.  To date, the MISO does not agree with PJM's estimate.  Informal settlement discussions on this issue have commenced.FERC's order.  PPL, participates in markets in both the MISOPPL Energy Supply and PJM.  The amount and timing of any payment by PJM to the MISO relating to this modeling error is uncertain, as is the method by which PJM or the MISO would allocate any such payment to PJM and the MISO participants.  PPL Electric cannot predict the outcome of this matter; however,proceeding or the economic impact on PPL subsidiaries is not expected to be material.their businesses or operations, or the markets in which they transact business.

Regulatory Issues

Pennsylvania Activities(In addition, in February 2011, PPL, and PPL Electric)

Certain Pennsylvania legislators proposed legislationseveral other generating companies and utilities filed a complaint in 2009 to extend PLR generation rate caps or otherwise limit cost recovery through rates for Pennsylvania utilities beyond their transition periods, whichU.S. District Court in PPL Electric's case was December 31, 2009.  PPL and PPL Electric previously expressed strong concern regardingNew Jersey challenging the adverse consequences of such legislationAct on customer service, system reliability, adequate future generation supply and PPL Electric's financial viability.  As generation rate caps are set to expire for three other Pennsylvania electric delivery companies at the end of 2010,grounds that it is possible that a debate on rate caps, rate mitigationviolates well-established principles under the Supremacy Clause and the creationCommerce Clause of a state power authority may resume in 2010.  PPL and PPL Electric believe the enactment of legislation extending PPL Electric rate caps would be a violation of federal law and the U.S. Constitution.

For several years, PPL  In this action, the plaintiffs request declaratory and PPL Electric worked with Pennsylvania legislators, regulators and others to develop programs to help customers transition to market rates after 2009, including rate mitigation, educational and energy conservation programs.  Two plans were proposed and approvedinjunctive relief barring implementation of the Act by the PUC.  Under the first plan, residential and small commercial customers could elect to pay additional amounts with their electric bills from mid-2008 through 2009, with such additional amounts, plus accrued interest of 6%, applied to their 2010 and 2011 electric bills.  Approximately 123,000 customers enrolled in the program, and at December 31, 2009, PPL Electric has recorded a liability of $36 million related to this activity.  Under the second plan, eligible residential and eligible small-business customers could elect to defer payment of any increase greater than 25% in their 2010 electric bills.  Deferred amounts, plus 6% interest, will be paid by customers over a one- or two-year period, depending on their electricity use.  All deferrals will be paid by the end of 2012.

Act 129 became effective in October 2008.  The law 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 makes changes to the existing Alternative Energy Portfolio Standard.  The law also requires electric utilities to meet specified goals for reduction in customer electricity usage and peak demand by specified dates.  Utilities not meeting the requirements of Act 129 are subject to significant penalties.

Under Act 129, Electric Distribution Companies (EDCs) must develop and file an energy efficiency and conservation plan (EE&C Plan) with the PUC and contract with a conservation service provider to implement all or a portionCommissioners of the EE&C Plan.  Act 129 requires EDCs to cause reduced electricity consumption of 1% by 2011 and 3% by 2013, and reduced peak demand of 4.5% by 2013.  EDCs will be able to recover the costs (capped at 2% of the EDC's 2006 revenue) of implementing their EE&C Plans.BPU.  In October 2009,2011, the PUC approvedcourt denied the BPU's motion to dismiss the proceeding.  In September 2012, the U.S. District Court denied all summary judgment motions, and the litigation is continuing.  Trial is scheduled to begin in March 2013.  PPL, Electric's EE&C Plan.  The plan includes 14 programs, all of which are voluntary for customers.  The plan includes a proposed rate mechanism for recovery of all costs incurred by PPL Electric to implement the plan.

Act 129 also requires installation of smart meters for new construction, upon the request of consumers at their cost, or on a depreciation schedule not exceeding 15 years.  Under Act 129, EDCs will be able to recover the costs of providing smart metering technology.  In August 2009, PPL Electric filed its proposed smart meter technology procurementEnergy Supply and installation plan with the PUC.  All of PPL Electric's metered customers currently have smart meters installed at their service locations and PPL Electric's current advanced metering technology generally satisfies the requirements of Act 129 and does not need to be replaced.  PPL Electric's smart meter plan proposes to study, test and pilot applications to enhance and expand smart meter capabilities.  PPL Electric estimates these studies will cost approximately $62 million over the next five years.  PPL Electric has proposed a rate mechanism for recovery of these costs.  An Administrative Law Judge has issued a recommended decision generally approving PPL Electric's plan, but PPL Electric cannot predict whether the plan will be approved.outcome of this proceeding or the economic impact on their businesses or operations, or the markets in which they transact business.

Act 129 also requiresMaryland Capacity Order

In April 2012, the default service provider (DSP)Maryland Public Service Commission (MD PSC) ordered three electric utilities in Maryland to provideenter into long-term contracts to support the construction of new electric generation supply servicegenerating facilities in Maryland, specifically a 661 MW natural gas-fired combined-cycle generating facility to customers pursuant to a PUC-approved competitive procurement plan through auctions, requests for proposalbe owned by CPV Maryland, LLC.  PPL believes the intent and bilateral contracts at the sole discretioneffect of the DSP.  Act 129 requires a mixaction by the MD PSC is to encourage the construction of spot market purchases, short-term contractsnew 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 contracts (4 to 20 years, with long-term contracts limited to up to 25%ability of the load unless otherwise approvedPJM 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.  In this action, the plaintiffs request declaratory and injunctive relief barring implementation of the order by the PUC).  The DSP will be ableCommissioners of the MD PSC.  In August 2012, the court denied the MD PSC and CPV Maryland, LLC motions to recoverdismiss the costs associated with a competitive procurement plan.

Under Act 129,proceeding and the DSP competitive procurement plan must ensure adequate and reliable service "at least costlitigation is continuing.  Trial is scheduled to customers" over time.  Act 129 grants the PUC authority to extend long-term power contracts up to 20 years, if necessary, to achieve the "least cost" standard.  The PUC has approvedbegin in March 2013.  PPL, Electric's procurement plan for the period January 1, 2011 through May 31, 2013PPL Energy Supply, and PPL Electric has begun purchasing under that plan.cannot predict the outcome of this proceeding or the economic impact on their businesses or operations, or the markets in which they transact business.

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FERC Transmission Rates(PPL and PPL Electric)

In August 2008, PPL Electric asked the FERC to change the method for calculating its transmission rates to formula-based rates to support continued investment in its transmission system.  Under formula-based rates, a fixed earnings level is set for the utility, and the utility annually adjusts its transmission rates, subject to FERC review, to reflect cost changes.  The process offers an opportunity for public input.  The proposed rate design prevents over-recovery or under-recovery of the actual costs of providing transmission delivery service.  This request would not affect generation charges or distribution rates.  PPL Electric requested that the proposed rate take effect November 1, 2008.

In October 2008, the FERC accepted the proposed rate for filing, effective November 1, 2008, subject to refund, and set the matter for hearing, but held the hearings in abeyance to establish settlement judge procedures.  In May 2009, a settlement was reached by all interested parties which, among other things, reduced PPL Electric's return on equity to approximately 11.70%.  PPL Electric was granted approval to implement the formula-based rate as established in the settlement, effective June 1, 2009.  In August 2009, the FERC approved the settlement.  See Note 1 for information on a true-up of these revenues.

California ISO and WesternPacific Northwest Markets (PPL and PPL Energy Supply)

Through its subsidiaries, PPL Energy Supply made $18 millionspot market bilateral sales of sales topower in the California ISOPacific Northwest during the period Octoberfrom December 2000 through June 2001, $17 million of which has not been paid to PPL subsidiaries.  Given the myriad of electricity supply problems faced by California electric utilities and the California ISO, PPL cannot predict whether or when it will receive payment.  At December 31, 2009, PPL continues to be fully reserved for non-payment for these sales.

Regulatory proceedings arising out of the California electricity supply controversy have been filed2001.  Several parties subsequently claimed refunds at the FERC.  The FERC has determined that all sellers of energy into markets operated by the California ISO and the California Power Exchange, including PPL Montana, should be subject to refund liability for the period beginning October 2, 2000 through June 20, 2001, but the FERC has not yet ruled on the exact amounts that the sellers, including PPL Montana, would be required to refund.  In decisions in September 2004 and August 2006, the U.S. Court of Appeals for the Ninth Circuit held that the FERC had the additional legal authority to order refunds for periods prior to October 2, 2000, and ordered the FERC to determine whether or not it would be appropriate to grant such additional refunds.  In February 2008, the FERC initiated proceedings to determine whether it would be appropriate to grant additional refunds.  In November 2009, the FERC issued an order scheduling evidentiary hearings in 2010 on such refunds but has suspended certain of these proceedings and instituted settlement procedures.

In June 2003, the FERC took several actions as a result of a number of related investigations.  Thethese 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 consider additional evidence.  TheIn October 2011, FERC also commencedinitiated proceedings to consider additional investigations relating to "gaming" and bidding practices during 2000 and 2001, but neitherevidence.  At June 30, 2012, there were two remaining claims against PPL EnergyPlus nor PPL Montana believes it is a subject of these investigations.

Energy Supply totaling $73 million.  In February 2004, the Montana Public Service Commission initiated a limited investigation of the Montana retail electricity market for the years 2000 and 2001, focusing on how that market was affected by transactions involving the possible manipulation of the electricity grid in the western U.S.  The investigation includes all public utilities and licensed electricity suppliers in Montana, including PPL Montana, as well as other entities that may possess relevant information.  In June 2004, the Montana Attorney General servedJuly 2012, PPL Montana and more than 20 other companies with subpoenas requesting documents, andthe City of Tacoma, one of the parties claiming refunds at FERC, reached a settlement whereby PPL Montana has provided responsive documentswould pay $75 thousand to resolve the Montana Attorney General.City of Tacoma's $23 million claim, $9 million of which represents interest.  The settlement does not resolve the remaining claim outstanding at December 31, 2012 of approximately $50 million.

WhileAlthough PPL and its subsidiaries believe that they have not engaged in any improper trading or marketing practices affecting the CaliforniaPacific Northwest markets, PPL and western markets, PPL Energy Supply cannot predict the outcome of the above-described investigations, lawsuits and proceedings or whether any PPL subsidiaries will be the targetsubject 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.

PJM RPM Litigation(PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and PPL Electric)KU)

FERC Market-Based Rate Authority

In May 2008, a group of state public utility commissions, state consumer advocates, municipal entities and electric cooperatives, industrial end-use customers and a single electric distribution company (collectively, the RPM Buyers) filed a complaint before the FERC objecting to the prices for capacity under the PJM Reliability Pricing Model (RPM) that were set in the 2008-09, 2009-10 and 2010-11 RPM base residual auctions.  The RPM Buyers requested that the FERC reset the rates paid to generators for capacity in those periods to a significantly lower level.  Thus, the complaint requests that generators be paid less for those periods through refunds and/or prospective changes in rates.  The relief requested in the complaint, if granted, could have a material effect on PPL, PPL Energy Supply and PPL Electric.  PJM, PPL and numerous other parties have responded to the complaint, strongly opposing the relief sought by the RPM Buyers.  In September 2008, the FERC entered an order denying the complaint.  In August 2009, the RPM Buyers appealed the FERC's decision to the U.S. Court of Appeals for the Fourth Circuit.  PPL cannot predict the outcome of this proceeding.

In December 2008, the PJM submitted amendments to certain provisions governing its RPM capacity market.  The amendments were intended to permit the compensation available to suppliers that provide capacity, like PPL Energy Supply, to increase.  The PJM sought approval of the amendments in time for them to be implemented for the May 2009 capacity auction (for service in June 2012 through May 2013).  Numerous parties, including PPL, protested the PJM's filing.  Certain of the protesting parties proposed changes to the capacity market auction that would result in a reduction in compensation to capacity suppliers.  The changes proposed by the PJM and by other parties in response to the PJM proposals could significantly affect the compensation available to suppliers of capacity participating in future RPM auctions.  In March 2009, the FERC entered an order approving in part and disapproving in part the changes proposed by the PJM.  In August 2009, the FERC issued an order granting rehearing in part, denying rehearing in part and clarifying its March 2009 order.  PPL cannot predict the outcome of this proceeding.  No request for rehearing or appeal of the August 2009 order has been timely filed.

FERC Market-Based Rate Authority(PPL and PPL Energy Supply)

In December 1998, the FERC authorized LG&E, KU and PPL EnergyPlus to make wholesale sales of electric power and related products at market-based rates.  In that order,those orders, the FERC directed LG&E, KU and PPL EnergyPlus, respectively, to file an updated market analysis within three years after the order, and every three years thereafter.  Since then, periodic market-based rate filings with the FERC have been made by LG&E, KU, PPL EnergyPlus, PPL Electric, PPL Montana and most of PPL Generation's subsidiaries.  These filings consisted of a WesternNorthwest market-based rate filing for PPL Montana and an Easterna Northeast market-based rate filing for most of the other PPL subsidiaries in PJM's region.  In June 2011, FERC approved PPL's market-based rate update for the PJMEastern and Western regions.  Also, in June 2011, PPL filed its market-based rate update for the Southeast region, including LG&E and KU in addition to PPL EnergyPlus.  In June 2011, the FERC issued an order approving LG&E's and KU's request for a determination that they no longer be deemed to have market power in the BREC balancing area and removing restrictions on their market-based rate authority in such region.  The next filings will be due later in 2010.

Currently, a seller granted FERC market-based rate authority by the FERC may enter into power contracts during an authorized time period.  If the FERC determines that the market is not workably competitive or that the seller possesses market power or is not charging "just and reasonable" rates, it may institute prospective action, but any contracts entered into pursuant to the FERC's market-based rate authority remain in effect and are generally subject to a high standard of review before the FERC can order changes.  Recent court decisions by the U.S. Court of Appeals for the Ninth Circuit have raised issues that may make it more difficult for the FERC to continue its program of promoting wholesale electricity competition through market-based rate authority.  These court decisions permit retroactive refunds and a lower standard of review by the FERC for changing power contracts, and could have the effect of requiring the FERC in advance to review most, if not all, power contracts.  In June 2008, the U.S. Supreme Court reversed one of the decisions of the U.S. Court of Appeals for the Ninth Circuit, thereby upholding the higher standard of review for modifying contracts.  The FERC has not yet taken action in response to these recent court decisions.  At this time, PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and KU cannot predict the impact of these court decisions on the FERC's future market-based rate authority program or on PPL's business.
their businesses.

IRS Synthetic Fuels Tax Credits(PPL and PPL Energy Supply)Electric Reliability Standards

PPL, through its subsidiaries, had interests in two synthetic fuel production facilities:  the Somerset facility, located in Pennsylvania,The NERC is responsible for establishing and the Tyrone facility, located in Kentucky.  PPL received tax credits pursuant to Section 29/45K of the Internal Revenue Code based on the sale of synthetic fuel from these facilities.  The Section 29/45K tax credit program expired at the end of 2007, and production of synthetic fuel at these facilities and all other synthetic fuel operations ceased as of December 31, 2007.  The facilities were dismantled and retired in 2008.

In April 2008, the IRS published the domestic first purchase price (DFPP) for 2007 indicating that the DFPP reference price increased above PPL's estimated price levels for 2007 and the inflation-adjusted phase-out range decreased from PPL's estimate for 2007.  Therefore, PPL recorded an expense of $13 million ($0.04 per share, basic and diluted, for PPL) in 2008, to "Income Taxes" on the Statement of Income to account for this difference.

Energy Policy Act of 2005 - Reliability Standards(PPL, PPL Energy Supply and PPL Electric)

In August 2005, the Energy Policy Act of 2005 (the 2005 Energy Act) became law.  The 2005 Energy Act substantially affects the regulation of energy companies, amends federal energy laws and provides the FERC with new oversight responsibilities.  Among the important changes in this law is the appointment of the NERC to establish and enforceenforcing 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.  The FERC has indicated it intends to enforce vigorously the Reliability Standards using, among other means, civil penalty authority.  Under the Federal Power Act, the FERC may assess civil penalties of up to $1 million per day, per violation, for certain violations.  The first group of Reliability Standards approved by the FERC became effective in June 2007.

Since 2007, LG&E, KU, PPL Electric and certain subsidiaries of PPL Energy Supply have self-reportedmonitor their compliance with the Reliability Standards and continue to the RFCself-report potential violations of certain applicable reliability requirements and submittedsubmit accompanying mitigation plans, the resolutionsas required.  The resolution of whicha number of potential violation reports areviolations 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.  PPL Electric has reached agreement with the RFC concerning some, but not all, of the reliability matters reported by it to the RFC.  PPL Electric and PPL Energy Supply cannot predict the outcome of these matters.

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In the course of implementing its programtheir programs to ensure compliance with the Reliability Standards by those PPL affiliates subject to the standards, certain other instances of potential non-compliance will continue tomay be identified from time to time.  PPLThe Registrants cannot predict the finesoutcome 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.  The FERC proposes to direct NERC to submit for approval Reliability Standards that address the impact of geomagnetic disturbances on the reliable operation of the bulk-power system, including one or penaltiesmore measures to protect against damage to the bulk-power system, such as the installation of equipment that blocks geomagnetically induced currents on implicated transformers.  If the NOPR is adopted by the FERC, it is expected to require the Registrants either or both to make significant expenditures in new equipment or modifications to their facilities.  The Registrants are unable to predict whether the NOPR will be adopted as proposed by the FERC or the amount of any expenditures that may be imposed.required as a result of the adoption of any Reliability Standards for geomagnetic disturbances.

U.K. Overhead Electricity NetworksSettled Litigation (PPL and PPL Energy Supply)

In 2002, for safety reasons, the U.K. Government issued guidance that low voltage overhead electricity networks within three meters horizontal clearance of a building should either be insulated or relocated.  This imposed a retroactive requirement on existing assets that were built with lower clearances.  In 2008, following extensive discussion, the U.K. Government determined that the U.K. electricity network should comply with the guidance issued.  WPD estimates that the cost of compliance will be approximately $93 million.  The projected expenditures over the next five years have been allowed to be recovered through rates and it is expected that expenditures beyond this five year period will also be recovered through rates.  The Government has determined that WPD (South Wales) should comply by 2015 and WPD (South West) by 2018.Spent Nuclear Fuel Litigation

In January 2009,May 2011, PPL Susquehanna entered into a settlement agreement with the U.S. Government relating to improve network reliabilityPPL Susquehanna's lawsuit, seeking damages for the U.K. Government enforced a regulation requiring network operatorsDepartment of Energy's failure to implement a risk-based program over 25 yearsaccept spent nuclear fuel from the PPL Susquehanna plant.  PPL Susquehanna recorded credits totaling $56 million to clear trees within falling distance"Fuel" on the Statement of key high-voltage overhead lines.  WPD estimatesIncome in 2011 to recognize recovery, under the settlement agreement, of certain costs to store spent nuclear fuel at the Susquehanna plant.  The amounts recorded through September 2011 cover costs incurred from 1998 through December 2010.  PPL Susquehanna is eligible to receive payment of annual claims for allowed costs, as set forth in the settlement agreement, that are incurred through December 31, 2013.  In exchange, PPL Susquehanna has waived any claims against the cost of compliance will be approximately $107 million overUnited States government for costs paid or injuries sustained related to storing spent nuclear fuel at the 25-year period.  The projected expenditures over the next five years have been allowed to be recoveredSusquehanna plan through rates and it is expected that expenditures beyond this five year period will also be recovered through rates.December 31, 2013.

Environmental Matters - Domestic

(PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and PPL Electric)KU)

Due to the environmental issues discussed below or other environmental matters, PPL subsidiariesit may be requirednecessary for the Registrants to modify, curtail, replace or cease operating certain facilities or operations to comply with statutes, regulations and other requirements of regulatory bodies or courts.  In this regard, PPL subsidiaries also may incur capital expendituresaddition, legal challenges to new environmental permits or operating expenses in amounts which are not now determinable, but could be significant.rules add to the uncertainty of estimating the future cost impact of these permits and rules.

Air(PPLLG&E and PPL Energy Supply)

The Clean Air Act addresses, among other things, emissions causing acid deposition, installationKU are entitled to recover, through the ECR mechanism, certain costs of best available control technologies for new or substantially modified sources, attainment of federal ambient air quality standards, toxic air emissions and visibility standards in the U.S.  Amendments tocomplying with the Clean Air Act requiring additional emission reductionsas amended and those federal, state, or local environmental requirements which apply to coal combustion wastes and by-products from facilities utilized for production of energy from coal in accordance with their approved compliance plans.  Costs not covered by the ECR for LG&E and KU and all such costs for PPL Electric are likelysubject to continuerate recovery before their respective state regulatory authorities, or the FERC, if applicable.  Because PPL Electric does not own any generating plants, its exposure to be proposed inenvironmental compliance costs is reduced.  As PPL Energy Supply is not a rate regulated entity, it does not have any mechanism for seeking rate recovery of environmental compliance costs.  PPL, PPL Electric, LKE, LG&E and KU can provide no assurances as to the U.S. Congress.  Theultimate outcome of future environmental or rate proceedings before regulatory authorities.

(PPL, PPL Energy Supply, LKE, LG&E and KU)

Air

CSAPR (formerly Clean Air Act allows states to develop more stringent regulationsTransport Rule) and in some instances, as discussed below, Pennsylvania and Montana have done so.

Clean Air Interstate Rule (CAIR)

Citing its authority under the Clean Air Act, in 1997, the EPA developed new standards for ambient levels of ozone and fine particulates in the U.S.  To facilitate attainment of these standards, the EPA promulgated CAIR for 28 midwestern and eastern states, including Pennsylvania, to reduce sulfur dioxide emissions by about 50% by 2010 and to extend the current seasonal program for reduction in nitrogen oxides emissions to a year-round program starting in 2009.  Starting in 2015, CAIR requires further reductions in the CAIR region, in sulfur dioxide of 30% from 2010 levels, and nitrogen oxides during the ozone season of approximately 17% from 2009 levels.  CAIR allows these reductions to be achieved through cap-and-trade programs.

In July 2008,2011, the United StatesEPA adopted the CSAPR, which was intended to finalize and rename the Clean Air Transport Rule (Transport Rule) proposed in August 2010.  The CSAPR replaced the EPA's previous CAIR which was invalidated by the U.S. Court of Appeals for the D.C.District of Columbia Circuit (the U.S. Circuit Court) in July 2008.  CAIR subsequently was effectively reinstated by the Court in December 2008, pending finalization of the Transport Rule.  Like CAIR, CSAPR only applied to PPL's fossil-fueled generating plants located in Kentucky and Pennsylvania.
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In December 2011, the 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 Court issued a ruling that invalidated CAIR in its entirety, including its cap-and-trade program.

As a result of this decision, in 2008, PPL determined that all ofinvalidating CSAPR, remanding the annual nitrogen oxide allowances purchased by PPL EnergyPlus pursuant to CAIR were no longer required, had no value and, therefore, recorded a pre-tax impairment charge of $33 million ($20 million after tax).  Further, PPL EnergyPlus recorded in the third quarter 2008 an additional charge and corresponding reserve of $12 million pre-tax ($7 million after tax) related to its sale of certain annual nitrogen oxide allowance put options.  These charges, recorded in PPL and PPL Energy Supply's Supply segment, are included in "Other operation and maintenance" expense on the Statement of Income.  The U.S. Circuit Court's decision did not impact PPL EnergyPlus' seasonal nitrogen oxide allowances.

In December 2008, the U.S. Circuit Court remanded CAIRrule to the EPA without vacatingfor further action, and leaving CAIR in place during the cap-and-trade program, effectively reinstating,interim.  A further revised rule is not expected from the EPA for at least temporarily, CAIRtwo years.
The CSAPR was meant to facilitate attainment of ambient air quality standards for ozone and its requirements for annual-reduction of nitrogen oxides beginning in 2009 and for further reductionfine particulates by requiring reductions in sulfur dioxide by requiring the surrender of two acid rain allowancesand nitrogen oxides emissions.  The CSAPR established new sulfur dioxide and nitrogen oxide emission allowance cap and trade programs that were more restrictive than previously under CAIR.  The CSAPR provided for every tontwo-phased programs of sulfur dioxide emitted beginning in 2010.  As a result of this December 2008 ruling and associated delivery of allowances under other option contracts that were not in dispute, the reserve recorded in the third quarter of 2008 of $12 million pre-tax ($7 million after-tax) related to certain annual nitrogen oxide allowance put options was revisedemissions reductions, with initial reductions in the fourth quarter of 2008 to $9 million pre-tax ($5 million after tax).2012 and more stringent reductions in 2014.

See Note 17 for information on impairments recorded in 2009 related toThe Kentucky fossil-fueled generating plants can meet the CAIR sulfur dioxide emission allowances.

To continue meeting the sulfur dioxide reduction requirements under the acid rain provisions of the Clean Air Act, and the reductions required by CAIR (remanded by the U.S. Circuit Court, but currently in place), PPL installed and is operating scrubbers at its Montour and Brunner Island plants.  In addition, with respect to compliance with annual and ozone season nitrogen oxide reduction requirements, PPL utilizes SCRs and combustion controls at Montour Units 1 and 2, and combustion controls at Brunner Island Units 1, 2 and 3.  Additional emission allowances, when needed, are purchased in the open market.

The ultimate disposition of CAIR's cap-and-trade program and the value of annual nitrogen oxide allowances, as well asutilizing sulfur dioxide allowances remain uncertain.  If(including banked allowances).  To meet nitrogen oxide standards, under the EPA revises CAIR, the Kentucky companies will need to require more stringent emission reductions buy allowances and/or revises CAIR to eliminate or limit the regional cap-and-trade program,make operational changes.  LG&E and KU do not currently anticipate that the costs of compliance are not now determinable, but couldmeeting these reinstated CAIR requirements or standards will be significant.

FurtherPPL 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 nitrogen oxide standards, under the CAIR, 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

In addition to the reductions in sulfur dioxide and nitrogen oxide emissions beyondrequired under the CAIR for its Pennsylvania and Kentucky plants, PPL's fossil-fueled generating plants, including those required by CAIR, could be requiredin Montana, may face further reductions in sulfur dioxide and nitrogen oxide 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 fine particulates.states are required to identify areas that meet those standards and areas that are in non-attainment.  For non-attainment areas, states are required to develop plans by 2014 to achieve attainment by 2017.  For areas that are in attainment or that are unclassifiable, states are required to develop maintenance plans by mid-2013 that demonstrate continued attainment.  In December 2012, the EPA issued final rules that strengthen the particulate standards.  Under the final rule, states and the EPA have until the end of 2014 to identify initial non-attainment areas, and states have until 2020 to achieve attainment status for those areas.  States can request an extension to 2025 to comply with the rule.  Until particulate matter and sulfur dioxide maintenance and compliance plans are developed, PPL, PPL Energy Supply, LKE, LG&E and KU cannot predict which of their facilities may be located in a non-attainment area and what measures would be required to achieve attainment status.

PPL, PPL Energy Supply, LKE, LG&E and KU anticipate that some of the measures required for compliance with the CAIR, the MATS, or the Regional Haze requirements, such as upgraded or new sulfur dioxide scrubbers at some of their 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 costs are not now determinable, butfinancial impact could be significant.

Mercury and otherOther Hazardous Air Pollutants

Citing its authority under the Clean Air Act, inIn May 2005,2011, the EPA issued the Clean Air Act Mercury Regulations (CAMR) affecting coal-fired power plants.  These regulations establishpublished a cap-and-trade program to take effect in two phases, with the first phase to begin in January 2010, and the second, moreproposed regulation providing for stringent phase to begin in January 2018.  Becausereductions of a February 2008 decision by the U.S. Circuit Court of Appeals overturning CAMR, the EPA is proceeding to develop standards imposing MACT for mercury emissions and other hazardous air pollutants from electric generating units.  Under a recent proposed settlement,pollutants.  In February 2012, the EPA published the final rule, known as the MATS, with an effective date of April 16, 2012.  The rule is planningbeing challenged by industry groups and states.  The EPA issued a proposed rule in November 2012 reconsidering limited aspects of its MATS and New Source Performance Standards (NSPS) to issue final MACT standards by November 2011.  In order to develop these standards, the EPA is collecting information from coal-and-oil-fired electric utility steam generating units.  which PPL responded with comments.

The costs of complyingrule provides for a three-year compliance deadline with the final MACT standards are not now determinable, but could be significant.

Pennsylvania adopted mercury emission standards more stringent than CAMR.  However, PPL challenged those rulespotential for a one-year extension as provided under the statute.  Based on their assessment of the need to install pollution control equipment to meet the provisions of the Pennsylvania Air Pollution Control Act in lightproposed rule, LG&E and KU filed requests with the KPSC for environmental cost recovery to facilitate moving forward with plans to install environmental controls including chemical additive and fabric-filter baghouses to remove certain hazardous air pollutants.  Recovery of the federal court decision overturning CAMR, andcost of certain controls was granted by the KPSC in December 2009,2011.  See Note 6 for information on LG&E's and KU's anticipated retirement of certain coal-fired electric generating units in response to this and other environmental regulations.  With the publication of the final MATS rule, LG&E and KU are currently assessing whether any revisions of their approved compliance plans will be necessary.
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With respect to PPL Energy Supply's Pennsylvania Supreme Court declaredplants, PPL Energy Supply believes that certain coal-fired plants may require installation of chemical additive systems, the Pennsylvania mercury rules invalid and unenforceable.

In 2006,cost of which is not expected to be significant.  With respect to PPL Energy Supply's Montana finalizedplants, modifications to the current 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 mercury emission rules that require, by 2010, every coal-fired generatingintention, beginning in April 2015, to place the plant in Montanalong-term reserve status, suspending the plant's operation due to achieve reductions more stringent than CAMR's 2018expected market conditions and the costs to comply with the MATS requirements.  The Corette plant asset group's carrying amount at December 31, 2012 was approximately $68 million.  Although the Corette plant asset group was not determined to be impaired at December 31, 2012, it is reasonably possible that an impairment could occur in future periods as higher priced sales contracts settle, adversely impacting projected cash flows.  PPL has installed chemical injection systemsEnergy Supply, LG&E and KU are continuing to meet these requirements.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.

Regional Haze and Visibility

The Clean Air Visibility Rule was issued byIn January 2012, the EPA in June 2005, to addressproposed limited approval of the Pennsylvania regional haze or regionally-impaired visibility caused by multiple sources overState Implementation Plan (PA SIP).  That proposal would essentially approve PPL's analysis that further particulate controls at PPL Energy Supply's Pennsylvania plants are not warranted.  The limited approval does not address deficiencies of the state plan arising from the remand of the CAIR.  Previously, the EPA had determined that implementation of the CAIR requirements would meet regional haze requirements.

In 2012, the EPA finalized a wide area.  The rule requiresproviding that implementation of the CSAPR would also meet the Best Available Retrofit Technology (BART) for certain electric generating units.  Under the BART rule, PPL submitted to the Pennsylvania DEP its analyses of the visibility impacts of particulate matter emissions from Martins Creek Units 3 and 4, Brunner Island Units 2 and 3 and Montour Units 1 and 2.  No analysis was submittedrequirements for sulfur dioxide orand nitrogen oxides becauseoxides.  This rule also addresses the PA SIP deficiency arising from the CAIR remand.  However, in August 2012, the U.S. Court of Appeals for the District of Columbia Circuit (Court) vacated and remanded the CSAPR back to the EPA determinedfor further rulemaking (as discussed above).  In September 2012, several environmental groups filed a petition for review with the Court challenging the EPA's approval of the PA SIP.  At this time, it is not known whether the EPA will reinstate its previous determination that meeting the requirements for CAIR also meetssatisfies the BART requirements for those pollutants.  PPL's analyses have shown that because PPL had already upgraded its particulate emissions controls at Montour Units 1 and 2 and Brunner Island Units 2 and 3 further controls are not justified as there would be little corresponding visibility improvement.  PPL has not received comments from the Pennsylvania DEP on these submissions.requirement or will require states to conduct source-specific BART studies.

Also underIn Montana, the EPA Region 8 developed the regional haze plan as the Montana Department of Environmental Quality declined to develop a BART rule,state implementation plan at this time.  PPL submitted to the EPA its analyses of the visibility impacts of sulfur dioxide, nitrogen oxides and particulate matter emissions for Colstrip Units 1 and 2 and Corette.  PPL's analyses concluded that further reductions are not needed.  Thewarranted, except that the EPA respondedconcurred with the installation of Separated Overfire Air (SOFA) and lime injection for Units 1 and 2.  PPL has also submitted data and analyses of various air emission control options under the rules to PPL's reports for Colstrip and Corette and requested further information and analysis.  PPL completed further analysis and submitted addendums to its initial reports for Colstrip and Corette.  In February 2009, PPL received an information request for additional datareduce air emissions related to the non-BART-affected emission sources of Colstrip generating station non-BART affected emission sources.  PPL responded to this request in March 2009.  PPL hasUnits 3 and 4.  The analyses show that any incremental reductions would not received comments frombe cost-effective and that further analysis is not warranted.

In September 2012, the EPA onissued its final Federal Implementation Plans (FIP) for the Montana regional haze rule.  The final FIP indicated that no additional controls were required 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 submissions.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 "Mercury and Other Hazardous Air Pollutants" discussion above.  Under the final FIP, Colstrip Units 1 and 2 will 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 the parties have agreed to a briefing schedule.

PPL cannot predict whether any additional reductions will be required in Pennsylvania or Montana.  If additional reductions are required,LG&E and KU also submitted analyses of the visibility impacts of their Kentucky BART-eligible sources to the Kentucky Division for Air Quality (KDAQ).  Only LG&E's Mill Creek plant was determined to have a significant regional haze impact.  The KDAQ has submitted a regional haze SIP to the EPA which requires the Mill Creek plant to reduce its sulfuric acid mist emissions from Units 3 and 4, the costs of which are not now determinable, but couldexpected to be significant.  After approval of the Kentucky SIP by the EPA and revision of the Mill Creek plant's air permit under Title V, LG&E intends to install sorbent injection controls at the plant to reduce sulfuric acid mist emissions.

New Source Review (NSR)

The EPA has reinitiatedcontinued its NSR enforcement efforts.  This initiative targets older,efforts targeting coal-fired powergenerating plants.  The EPA has asserted that modification toof these plants has increased their emissions and, consequently, that they are subject to more stringent NSR requirements under the Clean Air Act.  In April 2009, PPL received EPA information requests for its Montour and Brunner Island plants.  PPL has met with the EPA and exchanged information regarding this matter.  The requests are similar to those that PPL received several years agoin the early 2000s for its Colstrip, Corette and Martins Creek plants.  PPL's response toPPL and the request for Montour and Brunner Island is currently on hold pending further discussions with the EPA.  PPL cannot predict the outcome ofEPA have exchanged certain information regarding this matter.

In January 2009, PPL and other
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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 the 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 the 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 addition, 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.

In March 2009, KU received a 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 work in question, as pollution control projects, was 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 and a September 2007 notice of violation alleging opacity violations at the plant.  A consent decree was lodged in the U.S. District Court for the Eastern District of Kentucky in December 2012.  PPL, LKE and KU cannot predict the outcome of this matter.

States and environmental groups also have initiated enforcement actions and litigation alleging violationsmatter until the consent decree is entered by the Court, but currently do not expect such outcome to result in costs in excess of the NSR regulations by coal-fired plants, and PPL is unable to predict whether such actions will be brought against any of PPL's plants.amounts already accrued, which amounts are not material.

If PPL issubsidiaries are found to have violated NSR regulations, PPL, PPL Energy Supply, LKE, LG&E and KU would, among other things, be required to install best available control technologymeet 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 install and operatemeet such limits, including installation of technology are not now determinable, butat certain units, could be significant.

PursuantStates and environmental groups also have provided notice of their intention to initiate enforcement actions and litigation alleging violations of the NSR regulations by coal-fired generating plants.  See "Legal Matters" above for information on a notice of intent to sue received in July 2012 (and amended multiple times thereafter) by PPL Montana and other owners of Colstrip.  PPL, PPL Energy Supply, LKE, LG&E and KU are unable to predict whether such actions will be brought against any of their other plants.

Colstrip and Corette Air Permits (PPL and PPL Energy Supply)

In January 2013, Earthjustice, on behalf of the Sierra Club and the MEIC filed an administrative appeal with the Board of Environmental Review, setting forth challenges to certain components of the Title V permits for Colstrip and Corette.  These challenges include: 1) the regional haze requirements should have been included in the Title V permits for Corette and Colstrip; 2) the MATS requirements should have been included in the Title V permits for Corette and Colstrip; 3) the particulate monitoring methodology is inadequate at Corette and Colstrip; and 4) sulfur dioxide monitoring is inadequate at Corette.  PPL Montana intends to participate in this proceeding and cannot predict its outcome.

On January 31, 2013, the Sierra Club and the MEIC alleged identical claims in their joint petition to the 2007 U.S. Supreme Court decision on global climate change, as discussed below,EPA, requesting that the EPA is expectedobject to regulate carbon dioxide emissionsthe MDEQ's issuance of Colstrip's and Corette's Title V permits.  PPL Montana cannot predict the outcome of this parallel matter pending before the EPA.

TC2 Air Permit (PPL, LKE, LG&E and KU)

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 2010.  Such regulation would subject carbon dioxide emissionsan order issued in September 2007.  In response to NSR regulations.  As a result, in October 2009,subsequent petitions by environmental groups, the EPA published its proposalordered certain non-material changes to require large industrial facilities that annually emit at least 25,000 tons of greenhouse gases, including carbon dioxide, to obtain construction and operating permits covering significant increasesthe permit which were incorporated into a final revised permit issued by the KDAQ in these emissions ifJanuary 2010.  In March 2010, the facility undergoes any major modification or during initial construction.  If the modifications result in emissions increases exceeding certain thresholds, whichenvironmental groups petitioned the EPA has not yet established,to object to the plant will need to conduct an analysis of, and possibly implement, best available control technology for carbon dioxide emissions.  To date,revised state permit.  Until the EPA has not provided official guidance, but has indicated that it may look at efficiency projects as possible Best Available Control Technology for carbon dioxide emissions.  The implicationsissues a final ruling on the pending petition and all available appeals are exhausted, PPL, LKE, LG&E and KU cannot predict the outcome of these developments are uncertainthis matter or the potential impact on the capital costs of this project, if any.
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(PPL, PPL Energy Supply, LKE, LG&E and any associated costs are not now determinable, but could be significant.KU)

Opacity

From time to time environmental concerns are raised with respect to visible opacity of emissions from our power plants.  PPL addresses these issues on a case by case basis.  If it is determined that actions must be taken to address visible opacity issues, such actions could result in costs that are not now determinable, but could be significant.

Global Climate Change

There is concern nationally and internationally about global climate change and the possible contribution of greenhouse gasGHG emissions including, most significantly, carbon dioxide, from the combustion of fossil fuels.  This has resulted in increased demands for carbon dioxide emission reductions byfrom investors, environmental organizations, government agencies and the international community.  These demands and concerns have led to increased federal legislative proposals, actions at regional, state and local levels, as well as litigation relating to greenhouse gas emissions.  Of particular note,GHG emissions and the EPA regulations on GHGs.

Greenhouse Gas Legislation

While climate change legislation was actively considered in 2009-2010, such legislation has not significantly progressed.  Since that time, although the U.S. House of Representatives passed legislation attempting to bar the EPA from regulating GHG emissions under the existing authority of the Clean Air Act, the Senate never took up the legislation.  The timing and elements of future federal legislation addressing GHG emission reductions are uncertain at this time.

Greenhouse Gas Regulations and Tort Litigation

As a result of the April 2007 the U.S. Supreme Court helddecision that the EPA has authority under the authorityClean Air Act to regulate greenhouse gasGHG 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 apply 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.  More recently,As a result, any new sources or major modifications to existing GHG sources causing a net significant emissions increase requires the BACT permit limits for GHGs.  The rules were challenged, and in June 2012, the U.S. Court of Appeals for the District of Columbia Circuit upheld the EPA's regulations.  In December 2012, the Court denied petitions for rehearing pertaining to the Court's June 2012 opinion.

In addition, in April 2012, the EPA proposed NSPS for carbon dioxide emissions from new coal-fired generating units, combined-cycle natural gas units, and integrated gasification combined-cycle units.  The proposal would require new coal plants to achieve the same stringent limitations on carbon dioxide emissions as the best performing new gas plants.  There presently is no commercially available technology to allow new coal plants to achieve these limitations and, as a result, the EPA's proposal would effectively preclude future construction of new coal-fired generation.  In December 2012, the U.S. Court of Appeals for the District of Columbia Circuit dismissed consolidated challenges to the NSPS holding that the proposed rule is not a final agency action.  The EPA is expected to finalize the NSPS for new sources in early 2013.

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.

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 technically unachievable.  To date, there have been no regulatory or legislative actions taken to implement the recommendations of the report.  In addition, legislation has been introduced that would, if enacted, accelerate solar supply requirements and restrict eligible solar projects to those located in Pennsylvania.  PPL and PPL Energy Supply cannot predict at this time whether this legislation will be enacted.

Eleven western states and certain Canadian provinces established the Western Climate Initiative (WCI) in 2003.  The WCI established a goal of reducing carbon dioxide emissions by 15% below 2005 levels by 2020 and developed GHG emission allocations, offsets, and reporting recommendations.  Montana was once a partner in the WCI, but by 2011 withdrew, along with several other western states.
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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 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 greenhouse gases.GHGs.  In June 2011, the U.S. Supreme Court overturned the lower court 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 court granted defendants' motions to dismiss the state common law claims because plaintiffs had previously raised the same claims, plaintiffs lacked standing, plaintiffs' claims were displaced by the Clean Air Act, and other grounds.  In April 2012, plaintiffs filed a notice of appeal in the Fifth Circuit.  Additional litigation in federal and state courts over these issues is continuing.

As  PPL, LKE and KU cannot predict the outcome of this litigation or estimate a resultrange of the 2007 Supreme Court's decision, in 2008, the EPA issued an "Advance Notice of Proposed Rulemaking," proposing alternative approaches to regulate carbon dioxide emissions.  The EPA is moving forward with regulation of greenhouse gas emissions under the Clean Air Act.  In 2009, the EPA also issued a rule, effective January 1, 2010, requiring economy-wide reporting of greenhouse gas emissions and in December 2009, issued a final endangerment finding that greenhouse gases contribute to air pollution and may endanger public health or welfare.  The EPA's proposed light-duty vehicle emissions standards are expected to be finalized by March 31, 2010, leading to regulation of greenhouse gas emissions under the New Source Review provisions of the Clean Air Act.  Accordingly, unless Congress acts sooner, it appears likely that greenhouse gas emissions will be regulated by the EPA.reasonably possible losses, if any.

In June 2009, the U.S. House of Representatives passed H.R. 2454, the American Clean Energy and Security Act of 2009.  A key element affecting PPL includes a declining cap on carbon emissions beginning in 2012, which requires a three percent reduction in greenhouse gas emissions (below 2005 levels) by 2012, increasing to 83% by 2050.  The legislation also would require that electric utilities meet a mandatory 20% renewable energy supply and energy efficiency requirement by 2020.  In September 2009, S. 1733, the Clean Energy, Jobs and American Power Act, a comprehensive climate change bill, was introduced in the U.S. Senate.  The Senate Committee on Environment and Public Works approved S.1733 in November 2009.  Debate on climate legislation continues in Congress; however, given other competing legislative priorities, the timing and elements of any future legislation addressing greenhouse gas emission reductions and renewable energy requirements are uncertain.

Renewable electricity standards are currently included in a separate Senate bill, S.1462, the American Clean Energy Leadership Act of 2009, which passed in the Senate Energy Committee in June 2009.  Under this bill, electric utilities would be required by 2021 to meet a 15% standard through renewable sources of energy and energy efficiency.

At the regional level, ten northeastern states signed a Memorandum of Understanding (MOU) agreeing to establish a greenhouse gas emission cap-and-trade program, called the Regional Greenhouse Gas Initiative (RGGI).  The program commenced in January 2009 and calls for stabilization of 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 in carbon dioxide emissions from base levels by 2019.

Pennsylvania has not stated an intention to join RGGI, but has enacted the Pennsylvania Climate Change Act of 2008 (PCCA).  The PCCA established a Climate Change Advisory Committee to advise the DEP on the development of a Climate Change Action Plan.  In December 2009, the Advisory Committee finalized its Climate Change Action Report which identifies specific actions that could result in reducing greenhouse gas emissions by 30% by 2020.  Some of the proposed actions, such as a mandatory 5% efficiency improvement at power plants, could be technically unachievable.  In addition, legislation has been introduced in the Pennsylvania House of Representatives that would, if enacted, significantly increase renewable and solar supply requirements.

In the Western U.S., 11 states, including Montana, and Canadian provinces are members of the Western Climate Initiative (WCI).  The WCI has established a goal of reducing carbon dioxide emissions 15% below 2005 levels by 2020 and is currently developing greenhouse gas emission allocations, offsets, and reporting recommendations.

PPL has conducted an inventory of its carbon dioxide emissions and is continuing to evaluate options for reducing, avoiding, off-setting or sequestering its carbon dioxide emissions.  In 2009, PPL's power plants emitted in excess of approximately 2570 million tons of carbon dioxide (basedcompared with 74 million tons in 2011.  The totals reflect 35 million tons from PPL Generation and 35 million tons from LG&E's and KU's generating fleet.  All tons are U.S. short tons (2,000 pounds/ton).

Renewable Energy Legislation (PPL, PPL Energy Supply, LKE, LG&E and KU)

There has been interest in renewable energy legislation at both the state and federal levels.  Federal legislation on PPL's equity sharerenewable energy is not expected to be introduced this year.  In Pennsylvania, bills were recently introduced in both the Senate and House amending the existing AEPS to accelerate the current solar generation obligation, but no action was taken before the end of these assets).
the 2011-2012 legislative session.  Future bills are expected calling for an increase in AEPS Tier 1 (renewable resources, such as wind and solar) obligations and to create a $25 million permanent funding program for solar.  Bills have also been introduced in Montana to add hydropower as a qualified source to the renewable portfolio standard.

PPL, understandsPPL Energy Supply, LKE, LG&E and KU believe there are financial, regulatory and logistical uncertainties related to greenhouse gas reductions and the implementation of renewable energy mandates.  Thesemandates that will need to be resolved before the impact of such requirements on PPLthem can be meaningfully estimated.  Such uncertainties, among others, include the need to provide back-up supply to augment intermittent renewable generation, potential generation oversupplyover-supply that could result from such renewable generation and back-up, impacts to the PJMPJM's capacity market and the need for substantial changes to transmission and distribution systems to accommodate renewable energy; whichenergy sources.  These uncertainties are not directly addressed by the proposed legislation.  PPL and PPL Energy Supply cannot predict at this time the effect on itstheir merchant plants' future competitive position, results of operation, cash flows and financial position of any greenhouse gas emission, renewable energy mandate or other global climate change requirementsmandates that may be adopted, although the costs to implement and comply with any such requirements could be significant.

Water/Waste

Water/WasteCoal Combustion Residuals (CCRs) (PPL, PPL Energy Supply, LKE, LG&E and KU)

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.  The first approach would regulate CCRs as a hazardous waste under Subtitle C of the RCRA.  This approach 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 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 second approach would regulate CCRs as a solid (non-hazardous) waste under Subtitle D of the RCRA.  This approach would mainly affect disposal and most significantly affect any wet
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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 requirements of Subtitle D of the RCRA, 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 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) that requests comments on selected documents that the EPA received during the comment period for the proposed regulations.  In addition, the U.S. House of Representatives in September 2012 approved a bill that was revised in the Senate to modify Subtitle D of the RCRA to provide for the proper management and disposal of CCRs and to preclude the EPA from regulating CCRs under Subtitle C of the RCRA.  This revised bill is being considered in the Senate and the prospect for passage is uncertain.

In January 2012, a coalition of environmental groups filed a 60-day notice of intent to sue the EPA for failure to perform nondiscretionary duties under RCRA, which could require a deadline for the EPA to issue strict CCR regulations.  In February 2012, two CCR recycling companies also issued a 60-day notice of intent to sue the EPA over its timeliness in issuing CCR regulations, but they requested that the EPA take a Subtitle D approach that would allow for continued recycling of CCRs.  The coalition filed its lawsuit in April 2012 and litigation is continuing.

A final rulemaking is currently expected before the end of 2015.  However, the timing of the final regulations could be accelerated by the outcome of the above litigation, which could require the EPA to issue its regulations sooner.

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 impact could be material if regulated as a hazardous waste under Subtitle C and significant if regulated under Subtitle D.

(PPLMartins Creek Fly Ash Release (PPL and PPL Energy Supply)

Martins Creek Fly Ash Release

In 2005, there was a release of approximately 100 million gallons of water containing fly ash was released from a disposal basin at the Martins Creek plant used in connection with the operation of the plant's two 150 MW coal-fired generating units at the plant.units.  This resulted in ash being deposited onto adjacent roadways and fields, and into a nearby creek and the Delaware River.  The leak was stopped, and  PPL determined that the release was caused by a failure in the disposal basin's discharge structure.  PPL conducted extensive clean-up and completed studies, in conjunction with a group of natural resource trustees and the Delaware River Basin Commission, evaluating the effects of the release on the river's sediment, water quality and ecosystem.

The Pennsylvania DEPPADEP filed a complaint in Pennsylvania Commonwealth Court against PPL Martins Creek and PPL Generation, alleging violations of various state laws and regulations and seeking penalties and injunctive relief.  PPL and the Pennsylvania DEPPADEP have settled this matter.  The settlement required a payment of $1.5 million in penalties and reimbursement of the DEP's costs.  PPL made this payment in the second quarter of 2008.  The settlement also requiresrequired PPL to submit a report on the completed studies of possible natural resource damages.  PPL subsequently submitted the assessment report to the Pennsylvania and New Jersey regulatory agencies in 2007 and has continued discussing potential natural resource damages and mitigation options with the agencies.  Subsequently, in August 2011 the PADEP submitted its National Resource Damage Assessment report to the court and to the interveners.  In December 2011, the interveners commented on the PADEP report and in February 2012 the PADEP and PPL filed separate responses with the court.  In March 2012, the court dismissed the interveners' case, but the interveners have appealed the dismissal to the Pennsylvania Supreme Court and a decision by the court is still pending.

Through December 31, 2009,2012, PPL Energy Supply has spent $28 million for remediation and related costs and an immaterialinsignificant remediation liability remained.remains on the balance sheet.  PPL and PPL Energy Supply cannot be certain of the outcome of the natural resource damage assessment or the associated costs, the outcome of any lawsuit that may be brought by citizens or businesses or the exact nature of any other regulatory or other legal actions that may be initiated against PPL, PPL Energy Supply or their subsidiaries as a result of the disposal basin release.  However, PPL and PPL Energy Supply currently do not expect such outcomes to result in significant losses above the amounts currently recorded.
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Seepages and Groundwater Infiltration - Pennsylvania, Montana and Kentucky

Basin Seepage - Pennsylvania(PPL, PPL Energy Supply, LKE, LG&E and KU)

Seepages or groundwater infiltration have been detected at active and retired wastewater basins and landfills at various PPL, plants, including the MontourPPL Energy Supply, LKE, LG&E and Brunner Island generating facilities.KU plants.  PPL, hasPPL Energy Supply, LKE, LG&E and KU have completed an assessmentor are completing assessments of some of the seepages or groundwater infiltration at the Montour and Brunner Islandvarious facilities and ishave completed or are working with the Pennsylvania DEPagencies to implement abatement measures, for those seepages.  PPL continues to assess other seepages at the Brunner Island facility.  PPLwhere required.  A range of reasonably possible losses cannot currently plans to spend up to $64 million to upgrade and/or replace certain wastewater facilities in response to the seepages and for other facility changes.  The potential additional cost to address the identified seepages or other seepages at all of PPL's Pennsylvania plants is not now determinable, but could be significant.estimated.

Basin Seepage - Montana

In May 2003, approximately 50 plaintiffs brought an action against (PPL Montana and the other owners of the Colstrip plant alleging property damage from seepage from the freshwater and wastewater ponds at Colstrip.  In July 2008, the plaintiffs and the owner-defendants remaining after dismissal of NorthWestern, due to its bankruptcy, executed a settlement agreement.  PPL Montana's share of the settlement was approximately $8 million.  In 2008, PPL Montana recorded an insignificant reserve for its share of potential additional settlements with three property owners living near the original plaintiffs but who were not parties to the lawsuit.  In the fourth quarter of 2009, PPL Montana settled with two of these property owners.  PPL Montana may incur additional costs related to the potential claims, including additional groundwater investigations and any related remedial measures, which are not now determinable, but could be significant.Energy Supply)

In 2007, six plaintiffs filed a separate lawsuit in the Montana Sixteenth Judicial District Court against the Colstrip plant owners asserting similar property damage claimsdue 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 on December 31, 2012 and denied plaintiff's motion for rehearing on February 5, 2013.  The parties have 60 days after the February 5, 2013 decision to complete the settlement.  PPL Montana's share of the settlement is not expected to be 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 were assertedcontemplated by the plaintiffsMFSA.  In October 2012, Earthjustice filed a petition for review of the AOC in the May 2003 complaint.  The lawsuit isMontana state district court in its initial stages of discovery and investigation,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 addressed above, requests a writ of mandamus directing the MDEQ to enforce the same, and seeks recovery of attorneys' fees and costs.  PPL is unable tovigorously defending these allegations, and PPL and PPL Energy Supply cannot predict the outcome of these proceedings.  PPL Montana has undertaken certain groundwater investigations and remediation at the Colstrip plant to address groundwater contamination alleged by the plaintiffs, as well as other groundwater contamination at the plant.  PPL Montana may incur further costs based on the outcome of this lawsuit and its additional groundwater investigations and any related remedial measures, which are not now determinable, but could be significant.matter.

Other IssuesClean Water Act 316(b)(PPL, PPL Energy Supply, LKE, LG&E and KU)

In 2006, the EPA significantly decreased to 10 parts per billion (ppb), the drinking water standard related to arsenic.  In Pennsylvania and Montana, this arsenic standard has been incorporated into the states' water quality standards and could result in more stringent limits to PPL's NPDES permits for its Pennsylvania and Montana plants.  Recently, the EPA developed a draft risk assessment of arsenic that increases the cancer risk exposure by more than 20 times, which would lower the current standard from 10 ppb to 0.1 ppb.  If the lower standard became effective, very expensive treatment would be required to attempt to meet the standard and, at this time, there is no assurance that it could be achieved.

The EPA finalized requirements in 2004 for new or modified cooling water intake structures.  These requirements affect where generating facilitiesplants are built, establish intake design standards and could lead to requirements for cooling towers at new and modified power plants.  Another rule, finalized in 2004, that addressed existing structures was withdrawn following a 2007 decision by the U.S. Court of Appeals for the Second Circuit.  In 2008,2009, however, the U.S. Supreme Court ruled that the EPA has discretion to use cost-benefit analysis in determining the best technology available for minimizing adverse environmental impact.impact to aquatic organisms.  The EPA is developing apublished the proposed rule on new or modified cooling water intake structures in April 2011.  The industry and PPL reviewed the proposed rule whichand submitted comments.  The EPA has been evaluating comments and meeting with industry groups to discuss options.  Two NODAs have been issued on the rule that indicate the EPA may be willing to amend the rule based on certain industry group comments, and the EPA's comment period on the NODAs has ended.  The final rule is expected to be finalizedissued in 2012.  How2013.  The proposed rule contains two requirements to reduce impact to aquatic organisms.  The first requires all existing facilities to meet standards for the reduction of mortality of aquatic organisms that become trapped against water intake screens regardless of the levels of mortality actually occurring or the cost of achieving the requirements.  The second requirement is to determine and install the best technology available to reduce mortality of aquatic organisms that are pulled through the plant's cooling water system.  A form of cost-benefit analysis will be employed,is allowed for this second requirement.  This process involves a site-specific evaluation based on nine factors, including impacts to energy delivery reliability and the remaining useful life of the plant.  PPL, PPL Energy Supply, LKE, LG&E and KU cannot reasonably estimate a range of reasonably possible costs, if incorporated, as well as other issues raised byany, until a final rule is issued, the Second Circuit Court (not reviewed byrequired studies have been completed, and each state in which they operate has decided how to implement the U.S. Supreme Court)rule.
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Effluent Limitations Guidelines and actions the states may take on their own could result in stricter standards for existing structures that could impose significant costs onStandards (PPL, PPL subsidiaries.Energy Supply, LKE, LG&E and KU)

In October 2009, the EPA released its Final Detailed Study of the Steam Electric Power Generating effluent limitations guidelines and standards.  Draft regulations that would include revisions to the effluent limitations guidelines areThe EPA is expected to be published in September 2011, withissue the final regulations to be effective September 2013.  in 2014.  PPL, expectsPPL Energy Supply, LKE, LG&E and KU expect the revised guidelines and standards to be more stringent than the current standards especially for sulfur dioxide scrubber wastewater.  The guidelines are also expected to require dry ash handling, which could result in additional costs for technology retrofits for closure of wet basins.  In the interim, states may impose more stringent limits on a case-by-case basis under existing authority as permits are renewed.  Under the Clean Water Act, permits are subject to renewal every five years.  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.

Other Issues (PPL, PPL Energy Supply, LKE, LG&E and KU)

In 2006, the EPA significantly decreased to 10 parts per billion (ppb) the drinking water standards for arsenic.  In Pennsylvania, Montana and Kentucky, this arsenic standard has been incorporated into the states' water quality standards and could result in more stringent discharge permit limits.limits in NPDES permits for PPL's Pennsylvania, Montana and Kentucky plants.  Subsequently, the EPA developed a draft risk assessment for arsenic that increases the cancer risk exposure by more than 20, which would lower the current standard from 10 ppb to  0.1 ppb.  If the lower standard becomes effective, costly treatment would be required to attempt to meet the standard and, at this time, there is no assurance that it could be achieved.  PPL, PPL Energy Supply, LKE, LG&E and KU cannot predict the outcome of the draft risk assessment and what impact, if any, it would have on their plants, but the costs could be significant.

The EPA is reassessing its polychlorinated biphenyls (PCB) regulations under the Toxics 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 late 2013.  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.

A PPL hasEnergy Supply subsidiary signed a consent orderConsent Order and Agreement (COA) with the Pennsylvania DEPPADEP in July 2008 under which it willagreed, under certain conditions, to take further actions to minimize the possibility of fish kills at its Brunner Island plant.  Fish are attracted to warm water in the power plant discharge channels,channel, especially during cold weather.  In the past, fish kills have occurred at Brunner Island when debrisDebris at intake pumps resultedcan result in a unit trip or reduction in load, causing a sudden change in water temperature in the discharge channel whenand fish were present.  In 2008, PPL paid a nominal penalty to the DEP for fish kills at Brunner Island that occurred in 2008 and 2007.

PPLmortality.  A barrier has committed to construct a barrierbeen constructed to prevent debris from entering the river water intake area.  PPL expects to construct the debris barrier in 2010area at a cost of approximately $4 million.  that was not significant.

PPL Energy Supply's subsidiary has also committed to investigateinvestigated alternatives to exclude fish from the discharge area.  PPL will needchannel, but the subsidiary and the PADEP have concluded that a barrier method to implement oneexclude fish is not workable.  In June 2012, a new 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 new COA requires a retrofit of these fish exclusion alternatives if a fish kill occurs afterimpingement control technology at the intakes to the cooling towers, become operational atthe cost of which could be significant.

In May 2010, the subsidiary received a draft NPDES permit (renewed) for the Brunner Island in 2010. 

The EPA is considering establishing regulations underplant from the Resource ConservationPADEP.  This permit includes new water quality-based limits for the scrubber wastewater plant.  Some of these limits may not be achievable with the existing treatment system.  Several agencies and Recovery Act (RCRA) that could impact the disposal and management of coal combustion products (CCPs), including ash and scrubber wastes and other by-products.  Following the large ash release at a Tennessee Valley Authority site in Tennessee in December 2008 and subsequent widespread media coverage, the EPA, under pressure from certain environmental groups and legislators, has committedcommented on the draft permit, raising issues that must be resolved to proposing CCP regulations.  Draft regulations are expected in 2010.  The EPA has been seeking information fromobtain a final permit for the power industry as it considers whether or not to regulate CCPs as hazardous waste, and PPL has responded to the EPA's requests.  The EPA conducted a follow-up inspection of PPL Montana's Colstrip plant and PPL's Martins Creek plant.  PPL is implementing certain actions in response to recommendations from these inspections.  In June 2009,Energy Supply cannot predict the EPA's Officeoutcome of Enforcement and Compliance Assurance issued a much broader information request to Colstrip and 18 other non-affiliated plants, seeking information under the RCRA,final resolution of the Clean Water Act and the Emergency Planning and Community Right-to-Know Act.  PPL responded to the EPA's broader information request.  Although the EPA's enforcement office issued the request, the EPA has not necessarily concluded that the plants are in violation of any EPA requirements.  The EPA conducted a multi-media inspection at Colstrip in August 2009 and has not yet issued a report from that inspection.  PPL cannot predictpermit issues at this time, the outcome of these matters or the requirements of the EPA's regulations and what impact, if any, they would have on PPL's facilities,this facility, but the costs to PPL 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.  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 United States" 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
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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

(PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and PPL Electric)KU)

PPL Electric is a potentially responsible partyfor costs at several sites listed by the EPA under the federal Superfund program, including the Columbia Gas Plant Site,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.PPL Electric.  However, should the EPA require different or additional measures in the future, or should PPL'sPPL Electric's share of costs at multi-party sites increase significantlysubstantially more than currently expected, the costs to PPL could be significant.

PPL Electric, has beenLG&E and KU are remediating or have completed the remediation of several sites that were not being addressed under anothera 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 facilitiesplants 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 a predecessorPPL 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 PPL Electric.predict what, if any, potential liability they may have.

Depending on the outcome of investigations at sites where investigations have not begun or have not 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 substantial.material.  PPL, PPL Electric, LKE, LG&E and its subsidiaries also could incur other non-remediation costs at sites included in the consent orders or other contaminated sites, the costsKU cannot estimate a range of which are not now determinable, but could be significant.reasonably possible losses, if any, related to these matters.

The EPA is evaluating the risks associated with polycyclic aromatic hydrocarbons and naphthalene, a chemical by-productby-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 facilities.  The costsplants.  PPL, PPL Electric, LKE, LG&E and KU cannot estimate a range of reasonably possible losses, if any, related to PPL of complying with any such requirements are not now determinable, but could be significant.

(PPL and PPL Energy Supply)these matters.

Under the Pennsylvania Clean Streams Law, subsidiaries of PPL Generation are obligated to remediate acid mine drainage at former mine sites and may be required to take additional steps to prevent potential acid mine drainage at previously capped refuse piles.  One PPL Generation subsidiary is pumping mine water at two mine sites and treating water at one of these sites.  Another PPL Generation subsidiary has installed a passive wetlands treatment system at a third site.  At December 31, 2009,2012, PPL Energy Supply had accrued a discounted liability of $24$26 million to cover the costs of pumping and treating groundwater at the two mine sites for 50 years and for operating and maintaining passive wetlands treatment at the third site.  PPL Energy Supply discounted this liability based on risk-free rates at the time of the mine closures.  The weighted averageweighted-average rate used was 8.04%8.19%.  Expected undiscounted payments are estimated at $3 million for 2013, $1 million for each of the years from 20102014 through 2014,2017, and $144$139 million for work after 2014.2017.

(PPL,From time to time, PPL Energy Supply, PPL Electric, LG&E and PPL Electric)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 materialsignificant additional operating costs for PPL subsidiaries that cannot be estimated at this time.

Electric and Magnetic Fields(PPL, PPL Energy Supply and PPL Electric)

Concerns have been expressed by some members of the public regarding potential health effects of power frequency EMFs, which are emitted by all devices carrying electricity, including electric transmission and distribution lines and substation equipment.  Government officials in the U.S. and the U.K. have reviewed this issue.  The U.S. National Institute of Environmental Health Sciences concluded in 2002 that, for most health outcomes, there is no evidence that EMFs cause adverse effects.  The agency further noted that there is some epidemiological evidence of an association with childhood leukemia, but that the evidence is difficult to interpret without supporting laboratory evidence.  The U.K. National Radiological Protection Board (part of the U.K. Health Protection Agency) concluded in 2004 that, while the research on EMFs does not provide a basis to find that EMFs cause any illness, there is a basis to consider precautionary measures beyond existing exposure guidelines.  In April 2007, the Stakeholder Group on Extremely Low Frequency EMF, set up by the U.K. Government, issued its interim assessment which describes a number of options for reducing public exposure to EMFs. The U.K. Government responded to this assessment in October 2009, agreeing to some of the proposals, including a proposed voluntary code to optimally phase 132 kilovolt overhead lines to reduce public exposure to EMF where it is cost effective to do so.  PPL and its subsidiaries believe the current efforts to determine whether EMFs cause adverse health effects should continue and are taking steps to reduce EMFs, where practical, in the design of new transmission and distribution facilities.  PPL and its subsidiaries are unable to predict what effect, if any, the EMF issue might have on their operations and facilities either in the U.S. or the U.K., and the associated cost, or what, if any, liabilities they might incur related to the EMF issue.Registrants.

Environmental Matters - WPD (PPL and PPL Energy Supply)(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.

The U.K. governmentGovernment has implemented a projectrequested that utilities undertake projects to determinealleviate the impact of flooding on the U.K. utility infrastructure, including major electricity substations.  WPD has agreed with the Ofgem to spend $28$45 million on flood prevention, which will be recovered through rates during the 5-yearten-year period commencing April 2010.  WPD is currently liaising on site-specific proposals with local offices of a U.K. Government agency.

U.K. legislation has been passed that imposes a duty on certain companies including WPD to report on climate change adaptation.  It is expected that the first "Direction to Report" will be issued early in 2010 with reports due for submission at the end of the year.
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There are no other material legal or administrative proceedings pending against or related to WPD with respect to environmental matters.  See "Environmental Matters - Domestic - Superfund and Other Remediation - Electric and Magnetic Fields" for a discussion of EMFs.

Other

Labor Unions(PPL, PPL Energy Supply and PPL Electric)

At December 31, 2009, the breakdown of the total workforce that is represented by unions was:

  Number of Employees Percent of Total Workforce 
      
PPL  6,840   65%  
PPL Energy Supply  4,850   69%  
PPL Electric  1,570   72%  

In May 2010, PPL's bargaining agreement with its largest IBEW local expires.  The agreement covers the following:

  Number of Employees Percent of Total Workforce 
      
PPL  3,200   31%  
PPL Energy Supply  1,210   17%  
PPL Electric  1,570   72%  

Negotiations commenced in February 2010.  PPL cannot predict the outcome of the collective labor bargaining negotiations.
Nuclear Insurance (PPL and PPL Energy Supply)

PPL Susquehanna is a member of certain insurance programs that provide coverage for property damage to members' nuclear generating stations.plants.  Facilities at the Susquehanna stationplant are insured against property damage losses up to $2.75 billion under these programs.  PPL Susquehanna is also a member of an insurance program that provides insurance coverage for the cost of replacement power during prolonged outages of nuclear units caused by certain specified conditions.

Under the property and replacement power insurance programs, PPL Susquehanna could be assessed retroactive premiums in the event of the insurers' adverse loss experience.  At December 31, 2009,2012, this maximum assessment was $37$48 million.

In the event of a nuclear incident at the Susquehanna station,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 Amendments under the Energy Policy Act of 2005.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 Amendments under the Energy Policy Act of 2005,as amended, PPL Susquehanna could be assessed up to $235 million per incident, payable at $35 million per year.

At December 31, 2009, the property, replacement power and nuclear incident insurers maintained an A.M. Best financial strength rating of A ("Excellent").

Guarantees and Other Assurances

(PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and PPL Electric)KU)

In the normal course of business, PPL, PPL Energy Supply and PPL Electricthe 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 enter.engage.

(PPL)

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

(PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and PPL Electric)KU)

The table below details guarantees provided as of December 31, 2009.2012.  The total recorded liability at December 31, 20092012 and 20082011 was $3$24 million and $4 million.  Other than as noted in the description$14 million for PPL and $20 million and $11 million 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,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 probabilityletters of expected payment/performance under eachcredit), PPL Electric, LKE, LG&E and KU also apply to PPL, and all guarantees of these guarantees is remote.LG&E and KU also apply to LKE.

  
Exposure at December 31, 
2009 (a)
 
Expiration
Date
 Description
PPL          
Indemnifications for sale of PPL Gas Utilities $300      PPL has provided indemnification to the purchaser of PPL Gas Utilities and Penn Fuel Propane, LLC 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 certain pre-closing unknown environmental liabilities relating to former manufactured gas plant properties or off-site disposal sites, if any, outside of Pennsylvania.  The indemnification provisions for most representations and warranties, including tax and environmental matters, are capped at 15% of the purchase price ($45 million), in the aggregate, and are triggered (i) only if the individual claim exceeds $50,000, and (ii) only if, and only to the extent that, in the aggregate, total claims exceed 1.5% of the purchase price ($4.5 million).  The indemnification provisions for most representations and warranties expired on September 30, 2009 without any claims having been made.  Certain representations and warranties, including those having to do with transaction authorization and title, survive indefinitely, are capped at the purchase price and are not subject to the above threshold or deductible.  The indemnification provision for the tax matters representations survives for the duration of the applicable statute of limitations, and the indemnification provision for the environmental matters representations survives for a period of three years after the transaction closing.  The indemnification relating to unknown environmental liabilities for manufactured gas plants and disposal sites outside of Pennsylvania could survive more than three years, but only with respect to applicable property or sites identified by the purchaser prior to the third anniversary of the transaction closing.  The indemnification for covenants survives until the applicable covenant is performed and is not subject to any cap.
           
PPL Energy Supply (b)
          
Letters of credit issued on behalf of affiliates  17   2010 to 2011  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.
           
Retroactive premiums under nuclear insurance programs  37      PPL Susquehanna is contingently obligated to pay this amount related to potential retroactive premiums that could be assessed under its nuclear insurance programs.  See "Nuclear Insurance" for additional information.
           
Nuclear claims under The Price-Anderson Act Amendments under The Energy Policy Act of 2005  235      This is the maximum amount PPL Susquehanna could be assessed for each incident at any of the nuclear reactors covered by this Act.  See "Nuclear Insurance" for additional information.
           
Indemnifications for entities in liquidation and sales of assets  186   2010 to 2012  
PPL Energy Supply's maximum exposure with respect to certain indemnifications and the expiration of the indemnifications cannot be estimated because, in the case of certain 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.
 
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 2009, $212 million of previously disclosed exposure expired.
 
          
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.
 
          
A subsidiary of PPL Energy Supply has agreed to provide indemnification to the purchaser of the six Maine hydroelectric facilities 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 of the PPL Energy Supply subsidiary relating to the pre-closing ownership or operation of those hydroelectric facilities or relating to other assets of the PPL Energy Supply subsidiary that were not included in that sale.  The indemnification obligations are subject to certain customary limitations, including thresholds for allowable claims, caps on aggregate liability, and time limitations for claims arising out of breaches of representations and warranties.
 
          PPL Energy Supply has provided indemnification to the purchaser of a generating facility for losses arising out of any breach of the representations, warranties and covenants under the related transaction documents and for losses arising with respect to liabilities not specifically assumed by the purchaser, including certain pre-closing environmental and tort liabilities.  The indemnification other than for pre-closing environmental and tort liabilities is triggered only if the purchaser's losses reach $1 million in the aggregate, capped at 50% of the purchase price (or $95 million), and either expired in May 2007 or will expire pursuant to applicable statutes of limitations.  The indemnification provision for unknown environmental and tort liabilities related to periods prior to PPL Energy Supply's ownership of the real property on which the facility is located is capped at $4 million in the aggregate and survives for a maximum period of five years after the transaction closing.
           
Indemnification to operators of jointly owned facilities  6      In December 2007, a subsidiary of PPL Energy Supply executed revised owners agreements for two jointly owned facilities, the Keystone and Conemaugh generating stations.  The agreements require that in the event of any default by an owner, the other owners fund contributions for the operation of the generating stations, based upon their ownership percentages.  The maximum obligation among all owners, for each station, is currently $20 million.  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 agreements do not have an expiration date.
           
WPD guarantee of pension and other obligations of unconsolidated entities  31   2017  As a result of the privatization of the utility industry in the U.K., certain electric associations' roles and responsibilities were discontinued or modified.  As a result, certain obligations, primarily pension-related, associated with these organizations have been guaranteed by the participating members.  Costs are allocated to the members based on predetermined percentages as outlined in specific agreements.  However, if a member becomes insolvent, costs can be reallocated to and are guaranteed by the remaining members.  At December 31, 2009, 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.
           
Tax indemnification related to unconsolidated WPD affiliates  8   2012  Two WPD unconsolidated affiliates were refinanced during 2005.  Under the terms of the refinancing, WPD has indemnified the lender against certain tax and other liabilities.
           
Guarantee of a portion of an unconsolidated entity's debt  22   2018  Reflects principal payments only.
   Exposure at Expiration
   December 31, 2012 (a) Date
PPL      
Indemnifications related to the WPD Midlands acquisition   (b)  
WPD indemnifications for entities in liquidation and sales of assets $ 11 (c) 2015
WPD guarantee of pension and other obligations of unconsolidated entities   91 (d) 2015
        
PPL Energy Supply      
Letters of credit issued on behalf of affiliates   23 (e) 2013 - 2014
Retrospective premiums under nuclear insurance programs   48 (f)  
Nuclear claims assessment under The Price-Anderson Act Amendments      
 under The Energy Policy Act of 2005   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
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   Exposure at Expiration
   December 31, 2012 (a) Date
PPL Electric      
Guarantee of inventory value   21 (k) 2016
        
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)Other thanIn connection with the lettersliquidation 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 December 31, 2012, 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 all guaranteesarrangements 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 limitation.  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.

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.
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(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 a consolidated basis, also apply to PPL on a consolidated basis.  Neither PPL northe purchaser's stock of Safe Harbor, in the event PPL Energy Supply is liablerequired to make a payment under the guarantee.  The exposure noted reflects principal only.  See Note 9 for obligations under guarantees provided by WPD, asadditional information on the beneficiariessale of this interest.
(k)PPL Electric entered into a contract with a third party logistics firm that provides inventory procurement and fulfillment services.  Under the contract, the logistics firm has title to the inventory purchased for PPL Electric's use.  Upon termination of the contract, 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, thus protecting the logistics firm from reductions in the fair value of the inventory.
(l)LKE provides certain indemnifications, the most significant of which relate to the termination of the WKE lease in July 2009.  See Note 9 for additional information.  These guarantees docover 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 a December 2012 order of the Henderson Circuit Court confirming the arbitration award.  LKE believes its indemnification obligations in this matter remain subject to various uncertainties, including the 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 have recourseaware 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 entities.indemnification circumstances, but does not currently expect such outcomes to result in significant losses above the amounts recorded.
(m)As described in the "Energy Purchase Commitments" above, 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.

PPL, PPL Energy Supply and PPL Electric and their subsidiariesThe 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, PPL, PPL Energy Supply and PPL Electric and their subsidiariesno significant payments have notbeen made any significant payments 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 requires a maximum $4 million deductible per occurrence and provides maximum aggregate coverage of $150$200 million.  This insurance may be applicable to obligations under certain of these contractual arrangements.

15.  
 Related Party Transactions

Affiliate Trust(PPL and PPL Energy Supply)16.  Related Party Transactions

In February 2007, WPD LLP redeemed all of the 8.23% Subordinated Debentures maturing in February 2027 that were held by SIUK Capital Trust I.  Upon redemption, WPD LLP paid a premium of 4.115%, or approximately $3 million, on the principal amount of $85 million of subordinated debentures.  Payment of $29 million was also made to settle related cross-currency swaps and is included on the Statement of Cash Flows as a component of "Retirement of long-term debt."  Interest expense on this obligation was $2 million for 2007.  The redemption resulted in a recorded loss of $2 million during 2007.  This interest expense and loss are both reflected in "Interest Expense" for PPL and PPL Energy Supply on the Statement of Income.

PLR Contracts(PPL Energy Supply and PPL Electric)

PLR Contracts/Purchase of Accounts Receivable

PPL Electric had power purchase agreements withholds competitive solicitations for PLR generating supply.  PPL EnergyPlus effective July 2000has been awarded a portion of the PLR generation supply through these competitive solicitations.  See Note 15 for additional information on the solicitations.  The sales and January 2002, under whichpurchases between PPL EnergyPlus suppliedand PPL Electric's entire PLR load.  These contracts expired December 31, 2009.  Under these contracts, PPL EnergyPlus provided electricity at the predetermined capped prices that PPL Electric was authorized to charge its PLR customers.  These purchases totaled $1.8 billion in 2009, 2008 and 2007.  These purchases include nuclear decommissioning recovery and amortization of an up-front contract payment and are included in the Statements of Income as "Wholesale energy marketing to affiliate" by PPL Energy Supply and as "Energy purchases from affiliate" by PPL Electric.

Under one of the PLR contracts, PPL Electric was required to make performance assurance deposits with PPL EnergyPlus when the market price of electricity was less than the contract price by more than its contract collateral threshold.  Conversely, PPL EnergyPlus was required to make performance assurance deposits with PPL Electric when the market price of electricity was greater than the contract price by more than its contract collateral threshold.  At December 31, 2008, PPL Energy Supply was required to provide PPL Electric with performance assurance of $300 million.  PPL Electric paid interest equal to the one-month LIBOR plus 0.5% on this deposit, which is included in "Interest Expense with Affiliate" on the Statements of Income.  PPL Energy Supply recorded the receipt of the interest as affiliated interest income, which is included in "Interest Income from Affiliates" on the Statements of Income.  Interest related to the required deposits was $2 million, $10 million and $17 million for 2009, 2008 and 2007.

PPL Electric has held competitive solicitations for generation supply in 2010 and 2011.  PPL EnergyPlus was one of the successful bidders in the first competitive solicitation process and has entered into an agreement with PPL Electric to supply up to 671 MW of total peak load in 2010, at an average price of $91.42 per MWh.

Under the standard Supply Master Agreement for the bid solicitation process, PPL Electric requires all suppliers to post collateral once credit exposures exceed defined credit limits.  In no instance is PPL Electric required to post collateral to suppliers under these supply contracts.  With respect with its agreement with PPL Electric,  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, thisPPL EnergyPlus' credit limit was $35 million at December 31, 2012.  In no instance is $35 million.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 1 for additional information regarding PPL Electric's purchases of accounts receivable from alternative suppliers, including PPL EnergyPlus.
358

At December 31, 2012, PPL Energy Supply hashad a net credit exposure of $27 million to PPL Electric under certain energy supply contracts.  See Note 17 for additional information on this credit exposure.from its commitment as a PLR supplier and from the sale of its accounts receivable to PPL Electric.

NUGWholesale Sales and Purchases(PPL Energy SupplyLG&E and PPL Electric)KU)

PPL ElectricLG&E and KU jointly dispatch their generation units with the lowest cost generation used to serve their retail native load.  When LG&E has a reciprocal contract with PPL EnergyPlus to sell electricity purchased under contracts with NUGs.  PPL Electricexcess generation capacity after serving its own retail native load and its generation cost is lower than that of KU, KU purchases electricity from the NUGs at contractual ratesLG&E.  When KU has excess generation capacity after serving its own retail native load and then sells theits generation cost is lower than that of LG&E, LG&E purchases electricity at the same price to PPL EnergyPlus.from KU.  These purchases totaled $70 million in 2009, $108 million in 2008 and $156 million in 2007.  These amountstransactions are includedreflected in the Statements of Income as "Wholesale electric to"Electric revenue from affiliate" by PPL Electric, and as "Energy purchases from affiliate" by PPL Energy Supply.and are recorded at a price equal to the seller's fuel cost.  Savings realized from such intercompany transactions are shared equally between both companies.  The volume of energy each company has to sell to the other is dependent on its native load needs and its available generation.

Allocations of Corporate ServicePPL Services Costs (PPL Energy Supply, PPL Electric and PPL Electric)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 thesethe services that is not directly charged to PPL subsidiaries is allocated to certain of theapplicable subsidiaries based on an average of the subsidiaries' relative invested capital, operation and maintenance expenses and number of employees.  PPL Services allocatedcharged the following amounts for the years ended December 31, which PPL management believes are reasonable, to PPL Energy Supply and PPL Electric, including amounts applied to accounts that are further distributed between capital and expense.

 2009 (a) 2008 2007  2012   2011   2010  
              
PPL Energy Supply $214 $209 $230  $ 212  $ 189  $ 232  
PPL Electric 121 116 112   157   145   134  
LKE  15   16   3 (a)

(a)
ExcludesRepresents costs allocated costs associated withduring the February 2009 workforce reduction.  See Note 12 for additional information.two months ended December 31, 2010 as LKE was acquired November 1, 2010.     

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, which LKE management believes are reasonable, including amounts that are further distributed between capital and expense.

  Successor  Predecessor
        Two Months  Ten Months
  Year Ended  Year Ended  Ended  Ended
  December 31,  December 31,  December 31,  October 31,
  2012   2011   2010   2010 
                
LG&E $186   $190   $32   $200 
KU  161    204    34    222 

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 KU are reimbursed through LKS.

Intercompany Borrowings

(PPL Energy Supply)

A PPL Energy Supply subsidiary has an $800 millionperiodically holds revolving lines of credit and demand note to an affiliate.  There was no balance outstanding atnotes from certain affiliates that are reflected in "Note receivable from affiliates" on the Balance Sheet.  At December 31, 2009 and 2008.  In 2009,2012, there were no outstanding balances.  At December 31, 2011, a note with PPL Energy Funding had an outstanding balance of $198 million with an interest was due monthly at a rate equal to 1-month LIBOR plus 1%of 3.77%.  Interest earned on this notethese revolving facilities is included in "Interest Income from Affiliates" on the Statements of Income.  While balances were outstanding,For 2012, interest earned on borrowings was $4insignificant.  For 2011, interest earned on borrowings,
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which was substantially attributable to borrowings by PPL Energy Funding as discussed above, was $8 million.  For 2010, interest earned on borrowings, excluding the term notes discussed below, was $5 million and $12 million for 2008 and 2007.  Interest was not significant for 2009.with interest rates equal to one-month LIBOR plus a spread.

(PPL Electric)Energy Supply, LKE, LG&E and KU)

AIn November 2010, a PPL ElectricEnergy Supply subsidiary has a $300 million demand note to an affiliate.  There washeld term notes with LG&E and KU.  These notes were subsequently repaid and therefore no outstanding balance at December 31, 2009 and a $300 million balancebalances were outstanding at December 31, 2008.  The interest rate2010.  Interest on these notes was equal to 3-month LIBOR plus 3.50% and 3-month LIBOR plus 1.00% at December 31, 2009 and 2008.  This note is shown on the Balance Sheet as "Note receivable from affiliate."  Interest earned on the note is included in "Interest Income from Affiliates" for PPL Energy Supply and "Interest Expense with Affiliate" for LKE, LG&E and KU.  When balances were outstanding, interest on these notes was insignificant for 2010.

(LKE)

LKE maintains a $300 million revolving line of credit 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 December 31, 2012, $25 million was outstanding and was reflected in "Notes payable with affiliates" on the StatementsBalance Sheet.  The interest rate on the outstanding borrowing at December 31, 2012 was 1.71%.  The line of Income, andcredit was $4 million, $9 million and $19 millionheld by another PPL subsidiary in 2011.  No balance was outstanding at December 31, 2011.  Interest on the revolving line of credit was not significant for 2009, 2008 and 2007.2012 or 2011.

LKE maintains an agreement with a PPL affiliate that has a $300 million borrowing limit whereby LKE can loan funds on a short-term basis at market-based rates.  At December 31, 2012, there was no outstanding balance.  At December 31, 2011, $15 million was outstanding and was reflected in "Notes receivable from affiliates" on the Balance Sheet.  The interest rates on loans are based on the PPL affiliate's credit rating and are currently equal to one-month LIBOR plus a spread.  The interest rate on the outstanding borrowing at December 31, 2011 was 2.27%.  Interest income on this note was not significant in 2012 or 2011.

(LG&E)

LG&E participates in an intercompany money pool agreement whereby LKE and/or KU make available to LG&E funds up to $500 million at an interest rate based on a market index of commercial paper issues.  At December 31, 2012 and 2011, there was no balance outstanding.  Interest expense incurred and interest income earned on the money pool agreement with LKE and/or KU was not significant for 2012, 2011 or 2010.

(KU)

KU participates in an intercompany money pool agreement whereby LKE and/or LG&E make available to KU funds up to $500 million at an interest rate based on a market index of commercial paper issues.  At December 31, 2012 and 2011, there was no balance outstanding.  Interest expense incurred and interest income earned on the money pool agreement with LKE and/or LG&E was not significant for 2012, 2011 or 2010.

Intercompany Derivatives(PPL Energy Supply)LKE, LG&E and KU)

In 2009, 2008November 2012, LG&E and 2007, PPL Energy SupplyKU entered into a combination of averageforward-starting interest rate forwards and average rate optionsswaps with PPL to sell British pounds sterling.for notional amounts of $150 million each.  These hedging instruments have terms identical to average rate forwards and average rate options entered into by PPL with third parties to protect the translation of expected income denominated in British pounds sterling to U.S. dollars.  Gains and losses, both realized and unrealized, on these types of hedging instruments are included in "Other Income - - net" on the Statements of Income.  PPL Energy Supply recorded a net loss of $9 million during 2009, a net gain of $9 million during 2008 and a net loss of $4 million during 2007 related to average rate forwards and average rate options.  Contracts outstanding at December 31, 2009 hedge a total exposure of £48 million related to the translation of expected income for 2010.  The fair value of these positions was a net asset of $2 million, which is reflected in "Current Assets - Price risk management assets" on the Balance Sheet.  No similar hedging instruments were outstanding at December 31, 2008.

In 2007, PPL Energy Supply entered into forward contracts with PPL to sell Chilean pesos.  These hedging instruments had terms identical to forward sales contracts entered into by PPL with third parties to protect the value of its net investment in Emel, as well as a portion of the proceeds in excess of its net investment expected from the then-anticipated sale of Emel.  These contracts were terminated in 2007 in connection with the sale of Emel.  For 2007, PPL Energy Supply's Statement of Income reflects losses of $7 million in "Other income - net" and $23 million in Discontinued Operations related to these contracts.

PPL Energy Supply is also party to forward contracts with PPL to sell British pounds sterling to protect the value of a portion of its net investment in WPD.  These hedging instruments have terms identical to forward sales contractsforward-starting swaps entered into by PPL with third parties.  The total notional amount of the contracts outstanding at December 31, 2009 and 2008 was £40 million (approximately $78 million basedSee Note 19 for additional information on contracted rates) and £68 million (approximately $134 million based on contracted rates).  The fair value of these positions was an asset of $13 million and $34 million at December 31, 2009 and 2008, which is included in the foreign currency translation adjustment component of AOCI on the Balance Sheets.  Additionally, $8 million and $16 million were included in "Current Assets - Price risk management assets" on the Balance Sheets at December 31, 2009 and 2008 and $5 million and $18 million were included in "Other Noncurrent Assets - Price risk management assets" on the Balance Sheets at December 31, 2009 and 2008.intercompany derivatives.

Trademark Royalties(PPL Energy Supply)

Trademark Royalties

A PPL subsidiary owns PPL trademarks and billsbilled certain affiliates for their use.use under a licensing agreement.  This agreement was terminated in December 2011.  PPL Energy Supply was allocatedcharged $40 million of license fees in 2009, $48 million in 20082011 and $39 million in 2007.2010.  These allocationscharges are primarily included in "Other operation and maintenance" on the Statements of Income.
360

Distribution of Interest in PPL Global to Parent

Transmission (PPL,In January 2011, PPL Energy Supply and distributed its membership interest in PPL Global to its parent, PPL Energy Funding.  See Note 9 for additional information.

Intercompany Insurance (PPL Electric)

PPL Energy Supply owns no domestic transmission or distribution facilities, other than facilitiesPower Insurance Ltd. (PPL Power Insurance) is a subsidiary of PPL that provides insurance coverage to interconnectPPL and its generation with the electric transmission system.  Therefore, PPL EnergyPlussubsidiaries for property damage, general/public liability and other PPL Generation subsidiaries must pay PJM, the operator of the transmission system,workers' compensation.

Due to deliver the energy these subsidiaries supply to retaildamages resulting from several PUC-reportable storms that occurred in 2012 and wholesale customers in PPL Electric's franchised territory in eastern and central Pennsylvania.  PJM in turn pays2011, PPL Electric exceeded its deductible for both policy years.  Probable recoveries on insurance claims with PPL Power Insurance of $18.25 million for 2012 and $26.5 million for 2011 were recorded in those years, of which $14 million and $16 million were included in "Other operation and maintenance" on the useStatements of Income.  In both years, the remainder was recorded in PP&E on the Balance Sheets.  In September 2012, PPL Electric received $26.5 million from the settlement of its transmission system.2011 claims.

Effective January 1, 2013, PPL eliminates the impact of these revenues and expenses on its Statements of Income.Electric no longer has storm insurance with PPL Power Insurance.

Other (PPL PPL Energy Supply, PPL Electric, LKE, LG&E and PPL Electric)KU)

See Note 1 for discussions regarding the intercompany tax sharing policyagreement and intercompany allocations of stock-based compensation expense.  See Note 7 for a discussion regarding capital transactions betweenby PPL Energy Supply, PPL Electric, LKE, LG&E and its affiliates.  SeeKU.  For PPL Energy Supply, PPL Electric and LKE, refer to Note 121 for discussions regarding intercompany allocations of stock-based compensation expense.  For PPL Energy Supply, PPL Electric, LG&E and KU, see Note 13 for discussions regarding intercompany allocations associated with defined benefits.

17.  Other Income (Expense) - net
            
(PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and KU)
            
The breakdown of "Other Income (Expense) - net" for the years ended December 31 was:
            
    PPL
    2012  2011  2010 
Other Income         
 Earnings on securities in NDT funds $ 22  $ 24  $ 20 
 Interest income   5    7    8 
 AFUDC - equity component   10    7    5 
 Net hedge gains associated with the 2011 Bridge Facility (a)      55    
 Earnings (losses) from equity method investments   (8)   1    2 
 Gain on redemption of debt (b)      22    
 Miscellaneous - Domestic   11    10    3 
 Miscellaneous - U.K.   2      1 
 Total Other Income   42    127    39 
Other Expense         
 Economic foreign currency exchange contracts (Note 19)   52    (10)   (3)
 Charitable contributions   10    9    4 
 Cash flow hedges (c)         29 
 LKE acquisition-related costs (Note 10)         31 
 WPD Midlands acquisition-related costs (Note 10)      34    
 Foreign currency loss on 2011 Bridge Facility (d)      57    
 U.K. stamp duty tax (Note 10)      21    
 Miscellaneous - Domestic   16    9    7 
 Miscellaneous - U.K.   3    3    2 
 Total Other Expense   81    123    70 
Other Income (Expense) - net $ (39) $ 4  $ (31)
361

    Successor  Predecessor
        Two Months  Ten Months
    Year Ended Year Ended Ended  Ended
    December 31, December 31, December 31,  October 31,
    2012  2011  2010   2010 
LKE             
Other Income             
 Net derivative gains (losses)           $ 19 
 Interest income    $ 1        
 Earnings (losses) from equity method investments $ (8)   1        3 
 Life insurance   1           2 
 Miscellaneous   3    2        1 
 Total Other Income   (4)   4        25 
Other Expense             
 Charitable contributions   4    4  $ 1     5 
 Joint-use-asset depreciation             3 
 Miscellaneous   7    1    1     3 
 Total Other Expense   11    5    2     11 
Other Income (Expense) - net $ (15) $ (1) $ (2)  $ 14 
                
LG&E             
Other Income             
 Net derivative gains (losses)           $ 19 
 Miscellaneous $ 1           1 
 Total Other Income   1           20 
Other Expense             
 Charitable contributions   2  $ 1        2 
 Miscellaneous   2    1  $ 3     1 
 Total Other Expense   4    2    3     3 
Other Income (Expense) - net $ (3) $ (2) $ (3)  $ 17 
                
KU             
Other Income             
 Earnings (losses) from equity method investments $ (8) $ 1      $ 3 
 Life insurance   1           2 
 Miscellaneous   1           1 
 Total Other Income   (6)   1        6 
Other Expense             
 Charitable contributions   1    1        1 
 Joint-use-asset depreciation             3 
 Miscellaneous   1    1        1 
 Total Other Expense   2    2        5 
Other Income (Expense) - net $ (8) $ (1)     $ 1 
16.  (a)
Other Income - net
Represents a gain on foreign currency contracts that hedged the repayment of the 2011 Bridge Facility borrowing.
(b)In July 2011, as a result of PPL Electric's redemption of 7.125% Senior Secured Bonds due 2013, PPL recorded a gain on the accelerated amortization of the fair value adjustment to the debt recorded in connection with previously settled fair value hedges.
(c)Represents losses reclassified from AOCI into earnings associated with discontinued hedges at PPL for debt that had been planned to be issued by PPL Energy Supply.  As a result of the expected net proceeds from the sale of certain non-core generation facilities, coupled with the monetization of full-requirement sales contracts, the debt issuance was no longer needed.
(d)Represents a foreign currency loss related to the repayment of the 2011 Bridge Facility borrowing.

"Other Income (Expense) - net" for the years ended December 31, 2012, 2011 and 2010 is primarily earnings on securities in NDT funds for PPL Energy Supply and the equity component of AFUDC for PPL Electric.

18.  Fair Value Measurements and Credit Concentration

(PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and PPL Electric)

The breakdown of "Other Income - net" was:

  2009 2008 2007
PPL            
             
Other Income            
Gains related to the extinguishment of notes (Note 7) $29         
Earnings on securities in the NDT funds  20  $10  $16 
Interest income  14   33   61 
Mine remediation liability adjustment      11   (2)
Hyder liquidation distributions      3   6 
Gain (loss) on sales of PP&E      (1)  12 
Miscellaneous - Domestic  11   7   12 
Miscellaneous - International  1   1   9 
Total  75   64   114 
Other Deductions            
Economic foreign currency hedges  9   (9)  8 
Charitable contributions  6   5   6 
Miscellaneous - Domestic  7   7     
Miscellaneous - International  4   6   3 
Other Income - net $49  $55  $97 
             
PPL Energy Supply            
             
Other Income            
Gains related to the extinguishment of notes (Note 7) $25         
Earnings on securities in the NDT funds  20  $10  $16 
Interest income  6   23   48 
Mine remediation liability adjustment      11   (2)
Hyder liquidation distributions      3   6 
Gain (loss) on sales of PP&E      1   8 
Miscellaneous - Domestic  5   6   8 
Miscellaneous - International  1   1   9 
Total  57   55   93 
Other Deductions            
Economic foreign currency hedges  9   (9)  8 
Miscellaneous - Domestic  9   10   2 
Miscellaneous - International  4   6   3 
Other Income - net $35  $48  $80 
             
PPL Electric            
             
Other Income            
Interest income $8  $7  $9 
Gain on sales of PP&E          4 
Miscellaneous          1 
Total  8   7   14 
Other Deductions  2   2   2 
Other Income - net $6  $5  $12 

17.  
Fair Value Measurements and Credit Concentrations

(PPL, PPL Energy Supply and PPL Electric)KU)

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).  FairA market approach (generally, data from market transactions), an income approach (generally, present value guidance establishestechniques and option-pricing models), and/or a fair value hierarchy that prioritizes the inputscost approach (generally, replacement cost) are used to measure fair value into three broad levels.  See Note 1 for additional information on fair value measurements.  See Note 12 for more information regarding 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 related valuation techniques for retirementliabilities is measured on a net basis.  Transfers between levels are recognized at end-of-reporting-period values.  During 2012, there were no transfers between Level 1 and postretirement benefit plan assets.Level 2.

362

Recurring Fair Value Measurements

The assets and liabilities measured at fair value were:

  December 31, 2009 December 31, 2008
    Fair Value Measurements Using   Fair Value Measurements Using
  Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
PPL                                
Assets                                
Cash and cash equivalents $801  $801          $1,100  $1,100         
Short-term investments - municipal debt securities                  150   150         
Restricted cash and cash equivalents  129   129           347   347         
Price risk management assets:                                
Energy commodities  3,354   3  $3,234  $117   2,460   19  $2,143  $298 
Interest rate/foreign currency exchange  77       77       156       152   4 
   3,431   3   3,311   117   2,616   19   2,295   302 
NDT funds:                                
Cash and cash equivalents  7   7           4   4         
Equity securities:                                
U.S. large-cap  259   176   83       182   116   66     
U.S. mid/small-cap  101   75   26       69   50   19     
Debt securities:                                
U.S. Treasury  74   74           77   77         
U.S. government agency  9       9       14       14     
Municipality  65       65       61       61     
Investment-grade corporate  29       29       33       33     
Residential mortgage-backed securities  1       1       2       2     
Other                  1       1     
Receivables/payables, net  3       3       3       3     
   548   332   216       446   247   199     
Auction rate securities  25           25   24           24 
  $4,934  $1,265  $3,527  $142  $4,683  $1,863  $2,494  $326 
                                 
Liabilities                                
Price risk management liabilities:                                
Energy commodities $2,080  $2  $2,068  $10  $2,133  $15  $2,008  $110 
Interest rate/foreign currency exchange  4       4       27       27     
  $2,084  $2  $2,072  $10  $2,160  $15  $2,035  $110 
                                 
     December 31, 2012 December 31, 2011
     Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
PPL                        
Assets                        
 Cash and cash equivalents $ 901  $ 901        $ 1,202  $ 1,202       
 Restricted cash and cash equivalents (a)   135    135          209    209       
 Price risk management assets:                        
  Energy commodities   2,068    2  $ 2,037  $ 29    3,423    3  $ 3,390  $ 30 
  Interest rate swaps   15       15       3       3    
  Foreign currency contracts               18       18    
  Cross-currency swaps   14       13    1    24       20    4 
 Total price risk management assets   2,097    2    2,065    30    3,468    3    3,431    34 
 NDT funds:                        
  Cash and cash equivalents   11    11          12    12       
  Equity securities                        
   U.S. large-cap   412    308    104       357    267    90    
   U.S. mid/small-cap   60    25    35       52    22    30    
  Debt securities                        
   U.S. Treasury   95    95          86    86       
   U.S. government sponsored agency   9       9       10       10    
   Municipality   82       82       83       83    
   Investment-grade corporate   40       40       38       38    
   Other   3       3       2       2    
  Receivables (payables), net      (2)   2          (3)   3    
 Total NDT funds   712    437    275       640    384    256    
 Auction rate securities (b)   19       3    16    24          24 
Total assets $ 3,864  $ 1,475  $ 2,343  $ 46  $ 5,543  $ 1,798  $ 3,687  $ 58 
                            
Liabilities                        
 Price risk management liabilities:                        
  Energy commodities $ 1,566  $ 2  $ 1,557  $ 7  $ 2,345    1  $ 2,327  $ 17 
  Interest rate swaps   80       80       63       63    
  Foreign currency contracts   44       44                
  Cross-currency swaps   4       4       2       2    
 Total price risk management liabilities $ 1,694  $ 2  $ 1,685  $ 7  $ 2,410    1  $ 2,392  $ 17 
                            
PPL Energy Supply                        
Assets                        
 Cash and cash equivalents $ 413  $ 413        $ 379  $ 379       
 Restricted cash and cash equivalents (a)   63    63          145    145       
 Price risk management assets:                        
  Energy commodities   2,068    2  $ 2,037  $ 29    3,423    3  $ 3,390  $ 30 
 Total price risk management assets   2,068    2    2,037    29    3,423    3    3,390    30 
 NDT funds:                        
  Cash and cash equivalents   11    11          12    12       
  Equity securities                        
   U.S. large-cap   412    308    104       357    267    90    
   U.S. mid/small-cap   60    25    35       52    22    30    
  Debt securities                        
   U.S. Treasury   95    95          86    86       
   U.S. government sponsored agency   9       9       10       10    
   Municipality   82       82       83       83    
   Investment-grade corporate   40       40       38       38    
   Other   3       3       2       2    
  Receivables (payables), net      (2)   2          (3)   3    
 Total NDT funds   712    437    275       640    384    256    
 Auction rate securities (b)   16       3    13    19          19 
Total assets $ 3,272  $ 915  $ 2,315  $ 42  $ 4,606  $ 911  $ 3,646  $ 49 
                            
Liabilities                        
 Price risk management liabilities:                        
  Energy commodities $ 1,566  $ 2  $ 1,557  $ 7  $ 2,345   1  $ 2,327  $ 17 
 Total price risk management liabilities $ 1,566  $ 2  $ 1,557  $ 7  $ 2,345   1  $ 2,327  $ 17 
PPL Energy Supply                                
Assets                                
Cash and cash equivalents $245  $245          $464  $464         
Short-term investments - municipal debt securities                  150   150         
Restricted cash and cash equivalents  111   111           328   328         
Price risk management assets:                                
Energy commodities  3,354   3  $3,234  $117   2,460   19  $2,143  $298 
Interest rate/foreign currency exchange  27       27       107       103   4 
   3,381   3   3,261   117   2,567   19   2,246   302 
NDT funds:                                
Cash and cash equivalents  7   7           4   4         
Equity securities:                                
U.S. large-cap  259   176   83       182   116   66     
U.S. mid/small-cap  101   75   26       69   50   19     
Debt securities:                                
U.S. Treasury  74   74           77   77         
U.S. government agency  9       9       14       14     
Municipality  65       65       61       61     
Investment-grade corporate  29       29       33       33     
Residential mortgage-backed securities  1       1       2       2     
Other                  1       1     
Receivables/payables, net  3       3       3       3     
   548   332   216       446   247   199     
Auction rate securities  20           20   19           19 
  $4,305  $691  $3,477  $137  $3,974  $1,208  $2,445  $321 
                                 
Liabilities                              �� 
Price risk management liabilities:                                
Energy commodities $2,080  $2  $2,068  $10  $2,133  $15  $2,008  $110 
Interest rate/foreign currency exchange  4       4       16       16     
  $2,084  $2  $2,072  $10  $2,149  $15  $2,024  $110 
                                 
PPL Electric                                
Assets                                
Cash and cash equivalents $485  $485          $483  $483         
Restricted cash and cash equivalents  14   14           15   15         
  $499  $499          $498  $498         
363

     December 31, 2012 December 31, 2011
     Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
PPL Electric                        
Assets                        
 Cash and cash equivalents $ 140  $ 140        $ 320  $ 320       
 Restricted cash and cash equivalents (c)   13    13          13    13       
Total assets $ 153  $ 153        $ 333  $ 333       
LKE                        
Assets                        
 Cash and cash equivalents $ 43  $ 43        $ 59  $ 59       
 Restricted cash and cash equivalents (d)   32    32          29    29       
 Price risk management assets:                        
  Interest rate swaps   14     $ 14                
 Total price risk management assets   14       14                
Total assets $ 89  $ 75  $ 14     $ 88  $ 88       
                            
Liabilities                        
 Price risk management liabilities:                        
  Interest rate swaps (e) $ 58     $ 58     $ 60     $ 60    
 Total price risk management liabilities $ 58     $ 58     $ 60     $ 60    
                            
LG&E                        
Assets                        
 Cash and cash equivalents $ 22  $ 22        $ 25  $ 25       
 Restricted cash and cash equivalents (d)   32    32          29    29       
 Price risk management assets:                        
  Interest rate swaps   7     $ 7                
 Total price risk management assets   7       7                
Total assets $ 61  $ 54  $ 7     $ 54  $ 54       
                            
Liabilities                        
 Price risk management liabilities:                        
  Interest rate swaps (e) $ 58     $ 58     $ 60     $ 60    
 Total price risk management liabilities $ 58     $ 58     $ 60     $ 60    
                            
KU                        
Assets                        
 Cash and cash equivalents $ 21  $ 21        $ 31  $ 31       
 Price risk management assets:                        
  Interest rate swaps   7     $ 7                
 Total price risk management assets   7       7                
Total assets $ 28  $ 21  $ 7     $ 31  $ 31       

A reconciliation
(a)Current portion is included in "Restricted cash and cash equivalents" and 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.
(e)Current portion is included in "Other current liabilities" on the Balance Sheets.  The long-term portion is included in "Price risk management liabilities" on the Balance Sheets.

A reconciliation of net assets and liabilities classified as Level 3 for the years ended is as follows:
                 
      PPL
      Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
      Energy Auction Cross-   
      Commodities, Rate Currency   
       net Securities Swaps Total
December 31, 2012            
Balance at beginning of period $ 13  $ 24  $ 4  $ 41 
  Total realized/unrealized gains (losses)            
    Included in earnings   2       (1)   1 
    Included in OCI (a)   1       1    2 
  Sales      (5)      (5)
  Settlements   (13)         (13)
  Transfers into Level 3   8          8 
  Transfers out of Level 3   11    (3)   (3)   5 
Balance at end of period $ 22  $ 16  $ 1  $ 39 
364

      PPL
      Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
      Energy Auction Cross-   
      Commodities, Rate Currency   
       net Securities Swaps Total
December 31, 2011            
Balance at beginning of period $ (3) $ 25     $ 22 
  Total realized/unrealized gains (losses)            
    Included in earnings   (65)         (65)
    Included in OCI (a)   (1)   (1) $ (10)   (12)
  Purchases   1          1 
  Sales   (3)         (3)
  Settlements   20          20 
  Transfers into Level 3   (10)      14    4 
  Transfers out of Level 3   74          74 
Balance at end of period $ 13  $ 24  $ 4  $ 41 

(a)"Energy Commodities" 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 years ended is as follows:
              
      PPL Energy Supply
      Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
      Energy Auction   
      Commodities, Rate   
       net Securities Total
December 31, 2012         
Balance at beginning of period $ 13  $ 19  $ 32 
  Total realized/unrealized gains (losses)         
    Included in earnings   2       2 
    Included in OCI (a)   1       1 
  Sales      (3)   (3)
  Settlements   (13)      (13)
  Transfers into Level 3   8       8 
  Transfers out of Level 3   11    (3)   8 
Balance at end of period $ 22  $ 13  $ 35 
              
December 31, 2011         
Balance at beginning of period $ (3) $ 20  $ 17 
  Total realized/unrealized gains (losses)         
    Included in earnings   (65)      (65)
    Included in OCI (a)   (1)   (1)   (2)
  Purchases   1       1 
  Sales   (3)      (3)
  Settlements   20       20 
  Transfers into Level 3   (10)      (10)
  Transfers out of Level 3   74       74 
Balance at end of period $ 13  $ 19  $ 32 

(a)
"Energy Commodities" 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 the fair value measurement of net assets and liabilities classified as Level 3 isat December 31, 2012 are as follows.follows:
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Quantitative Information about Level 3 Fair Value Measurements
Fair Value, netRange
AssetValuationUnobservable(Weighted
(Liability)TechniqueInput(s)Average) (a)
PPL
Energy commodities
Retail natural gas sales contracts (b) 24 Discounted cash flowObservable wholesale prices used as proxy for retail delivery points21% - 100% (75%)
Power sales contracts (c) (4)Discounted cash flowProprietary model used to calculate forward basis prices24% (24%)
FTR purchase contracts (d) 2 Discounted cash flowHistorical settled prices used to model forward prices 100% (100%)
Auction rate securities (e) 16 Discounted cash flowModeled from SIFMA Index54% - 74% (64%)
Cross-currency swaps (f) 1 Discounted cash flowCredit valuation adjustment 22% (22%)
PPL Energy Supply
Energy commodities
Retail natural gas sales contracts (b) 24 Discounted cash flowObservable wholesale prices used as proxy for retail delivery points21% - 100% (75%)
Power sales contracts (c) (4)Discounted cash flowProprietary model used to calculate forward basis prices24% (24%)
FTR purchase contracts (d) 2 Discounted cash flowHistorical settled prices used to model forward prices100% (100%)
Auction rate securities (e) 13 Discounted cash flowModeled from SIFMA Index57% - 74% (65%)

  Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
  December 31, 2009 December 31, 2008
  Energy Commodities, net Interest Rate/ Foreign Currency Exchange Auction Rate Securities Total Energy Commodities, net Interest Rate/ Foreign Currency Exchange Auction Rate Securities Total
PPL                                
Balance at beginning of period $188  $4  $24  $216  $134          $134 
Total realized/unrealized gains (losses)                                
Included in earnings  (136)          (136)  2           2 
Included in OCI  18   (28)  5   (5)  11      $(5)  6 
Purchases, sales, issuances and settlements, net  104       (4)  100   2       (11)  (9)
Transfers (out of) and/or into Level 3  (67)  24       (43)  39  $4   40   83 
Balance at end of period $107  $   $25  $132  $188  $4  $24  $216 
                                 
PPL Energy Supply                                
Balance at beginning of period $188  $4  $19  $211  $134          $134 
Total realized/unrealized gains (losses)                                
Included in earnings  (136)          (136)  2           2 
Included in OCI  18   (28)  5   (5)  11      $(5)  6 
Purchases, sales, issuances and settlements, net  104       (4)  100   2       (11)  (9)
Transfers (out of) and/or into Level 3  (67)  24       (43)  39  $4   35   78 
Balance at end of period $107  $   $20  $127  $188  $4  $19  $211 
(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)Retail natural gas sales contracts extend into 2017.  $11 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)Power sales contracts extend into 2014.  $(4) million of the fair value is scheduled to deliver within the next 12 months.  As the forward price of basis increases/(decreases), the fair value of the contracts (decreases)/increases.
(d)FTR purchase contracts extend into 2015.  $2 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).
(e)Auction rate securities have a weighted average contractual maturity of 23 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)Cross-currency swaps extend into 2017.  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.

Net gains and losses on assets and liabilities classified as Level 3 and included in earnings arefor the years ended December 31 were reported in the Statements of Income as follows.follows:

  December 31, 2009 December 31, 2008
  Energy Commodities, net Energy Commodities, net
  Wholesale Energy Marketing Net Energy Trading Margins Energy Purchases Unregulated Retail Electric and Gas Net Energy Trading Margins Energy Purchases Unregulated Retail Electric and Gas
PPL and PPL Energy Supply                            
Total gains (losses) included in earnings for the period $22  $(16) $(155) $13  $(1) $(3) $6 
Change in unrealized gains (losses) relating to positions still held at the reporting date  12   1   (83)  8   1   (3)  5 
    Cross-Currency
  Energy Commodities, net Swaps
               
  Unregulated Retail Wholesale Energy Net Energy Energy Interest
  Electric and Gas Marketing Trading Margins Purchases Expense
  2012  2011  2012  2011  2012  2011  2012  2011  2012  2011 
PPL                              
Total gains (losses) included in earnings $26  $32   (7)    $ (12) $ (1) $ (5) $ (96)  (1)   
Change in unrealized gains (losses) relating to                              
 positions still held at the reporting date  29   23    (4) $ 5    1    1    1    (2)      
                                
PPL Energy Supply                              
Total gains (losses) included in earnings  26   32    (7)      (12)   (1)   (5)   (96)      
Change in unrealized gains (losses) relating to                              
 positions still held at the reporting date  29   23    (4)   5    1      1    (2)      

Cash and Cash Equivalents, Short-term Investments, and Restricted Cash and Cash Equivalents

The fair value of cash and cash equivalents and restricted cash and cash equivalents is based on the amount on deposit.  The fair value measurements of short-term investments are based on quoted prices.

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

The only energyEnergy commodity contracts classified as Level 1 are generally valued using the income approach, except for exchange-traded derivative gas and oil contracts.contracts, which are valued using the market approach and are classified as Level 1.  When observablethe lowest level inputs that are usedsignificant to measure all or most of the fair value measurement of a contract are observable, the contract is classified as Level 2.  Over-the-counter (OTC)Level 2 contracts are valued by traders 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.  PPL's risk management group obtainsFurthermore, independent quotes are obtained from the market to validate the forward price curves.  OTCThese contracts include
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forwards, swaps, options and structured dealstransactions for electricity, gas, oil and/or emission allowances 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 instrumentscontracts may be valued using models, including standard option valuation models and standard industry models.  For example, the fair value of a structured dealfull-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 FTR prices, or historical prices.

When unobservable inputs are significant to the fair value measurement, a contract is classified as Level 3.  The fair value of contracts classified as Level 3 has been calculated using PPL proprietary models which include significant unobservable inputs such as delivery at a location where pricing is unobservable, assumptions for customer migration or delivery dates that are beyond the dates for which independent quotes are available.  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 and uses probabilities of defaultwhich is used by accounting personnel to calculate the credit valuation adjustment.  PPL assumes that

In certain instances, energy commodity contracts are transferred between Level 2 and Level 3.  The primary reasons for the transfers during 2012 and 2011 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 prices include sufficient adjustments for liquidity and modeling risks, but for Level 3 fair value measurements, PPL also assesses the need for additional adjustments for liquidity or modeling risks.  The contracts classified as Level 3 represent contracts for which the delivery dates are beyond the dates for which independent prices are available or for certain power basis positions, which PPL generally values using historical prices.information.

Price Risk Management Assets/Liabilities - Interest Rate/Rate Swaps/Foreign Currency Exchange Contracts/Cross-Currency Swaps (PPL, LKE, LG&E and KU)

To manage its interest rate and foreign currency exchange risk, PPL, LKE, LG&E and PPL Energy Supply generallyKU use interest rate contracts such as forward-starting swaps, floating-to-fixed swaps and fixed-to-floating swaps;swaps.  To manage foreign currency exchange risk, PPL uses foreign currency contracts such as forwards, and options;options, and cross-currency swaps that contain characteristics of both interest rate and foreign currency exchange contracts.  PPL and PPL Energy Supply use anAn income approach is used to measure the fair value of these contracts, utilizing bothreadily observable inputs, such as forward interest rates (e.g., LIBOR and government security rates) and forward foreign currency exchange rates (e.g., GBP and Euro), as well as inputs that may not be observable, such as credit valuation adjustments.  In certain cases, PPL and PPL Energy Supplymarket information cannot practicably obtain market informationbe obtained to value credit risk and therefore rely on their own models.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.  The primary reason for the transfers during 2012 and 2011 was the change in the significance of the credit valuation adjustment.  Cross-currency swaps classified as Level 3 are valued by PPL's Corporate Finance department, which reports to the CFO.  Accounting personnel, who also report to the CFO, interpret analysis quarterly to appropriately classify the contracts in the fair value hierarchy.  Valuation techniques are evaluated periodically.

(PPL and PPL Energy Supply)

NDT Funds

PPL and PPL Energy Supply generally use theThe market approach is used to measure the fair value of theequity securities held in the NDT funds.  The fair value measurements of cash and cash equivalents are based on the amount on deposit.  The fair value measurements of equity securities are based on quoted prices in active markets.  The fair value measurements of commingled equity index funds are based on firm quotes of net asset values per share, which are not obtained from a quoted price in an active market.  Equity securities are classified as Level 1 and are comprised of securities that are representative of the Wilshire 5000 index, which is invested in approximately 70% large-cap stocks and 30% mid/small-cap stocks. Investments in commingled equity funds are classified as Level 2 and represent securities that track the S&P 500 index and the Wilshire 4500 index.  The fair value measurements of debt

·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 based on evaluatedmeasured using a market approach, including the use of matrix pricing.  Common inputs include reported trades, broker/dealer bid/ask prices, that reflect observable market information, such as actual trade information for identicalbenchmark securities or for similar securities, adjusted for observable differences.and credit valuation adjustments.  When this information is not available,necessary, the fair value of debt securities is measured using present value techniques,the income approach, which incorporate otherincorporates similar observable inputs including interest rates foras well as benchmark yields, credit valuation adjustments, reference data from market research publications, monthly payment data, collateral performance and new issue data.
367

The debt securities with credit ratings and terms to maturity similar to the debt securities being measured.

PPL and PPL Energy Supply recorded impairments of $18 million in 2009, $36 million in 2008 and $3 million in 2007 for certain securities invested inheld by the NDT funds.  These impairments are reflected on the Statementsfunds at December 31, 2012 have a weighted-average coupon of Income in "Other-Than-Temporary Impairments."4.11% and a weighted-average maturity of 8.26 years.

Auction Rate Securities

Prior to early 2008, auctionAuction rate securities had normally been remarketed on a short-term basis with auction dates commonly set at seven-day, 28-day, 35-day or 49-day intervals.  Historically, an active market existed for such investments, and the auctions provided an opportunity for investors either to hold an investment at a periodically reset interest rate or to sell the investment at its par value for immediate liquidity.  In early 2008, investor concerns about credit and liquidity in the financial markets, generally, as well as investor concerns over specific insurers that guarantee the credit of certain of the underlying securities, created uncertainty in the auction rate securities market and these securities generally failed to be remarketed through their established auction process.  These auction failures and the resulting illiquidity continue to impact PPL's and PPL Energy Supply's auction rate securities.  Despite failed auctions in 2008 and 2009, PPL and PPL Energy Supply continued to earn interest on these investments at contractually prescribed interest rates.

PPL and PPL Energy Supply estimates the fair value of auction rate securities based on the following criteria:  (i) the underlying structure and credit quality of each security; (ii) the present value of future estimated interest and principal payments discounted using interest rates for bonds with a credit rating and remaining term to maturity similar to the stated maturity of the auction rate securities; and (iii) consideration of the impact of auction failures or redemption at par.  The estimated fair value of these securities could change significantly based on future market conditions.

PPL's and PPL Energy Supply's auction rate securities are recorded in "Other investments" on the Balance Sheets.  Based upon the evaluation of available information, PPL and PPL Energy Supply believe these investments, which include Federal Family Education Loan Program guaranteed student loan revenue bonds, as well as various municipal bond issues, continue to be of high credit quality.  PPL and PPL Energy Supply do not have significantissues.  The exposure to realize losses on these securities.  However,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 transfer out of Level 3 because failed auctions limitin 2012 was the amountchange in the significance of observable market data that is available for measuringthe present value of future interest payments as maturity dates approach.

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 appropriately classify the contracts in the fair value of these securities.

At December 31, 2008, the par value of auction rate securities totaled $29 million for PPL and $24 million for PPL Energy Supply.  At December 31, 2008, the fair value of auction rate securities was estimated to be $24 million for PPL and $19 million for PPL Energy Supply and the $5 million temporary declines from par value were recorded to OCI.

In 2009, PPL and PPL Energy Supply liquidated $4 million of securities at par.  At December 31, 2009, the fair value of auction rate securities was estimated to be equal to par value, which was $25 million for PPL and $20 million for PPL Energy Supply, and the contractual maturities for these securities was a weighted average of approximately 26 years.  PPL and PPL Energy Supply reversed $5 million of previously recorded temporary impairments by crediting OCI.hierarchy.  Valuation techniques are evaluated periodically.

Nonrecurring Fair Value Measurements(PPL, and PPL Energy Supply)Supply, LKE and KU)

  Fair Value Measurements Using
  Total Level 2 Level 3 Loss
Sulfur dioxide emission allowances (a):                
March 31, 2009 $15      $15  $(30)
December 31, 2009  13       13   (7)
Long Island generation business (b):                
June 30, 2009  138  $138       (52)
September 30, 2009  133   133       (5)
December 31, 2009  128   128       (5)
The following nonrecurring fair value measurements occurred during the reporting periods, resulting in asset impairments.

     Carrying Fair Value Measurements Using   
    Amount (a) Level 2 Level 3 Loss (b)
PPL, LKE and KU            
 Equity investment in EEI:            
  December 31, 2012 $ 25        $ 25 
PPL and PPL Energy Supply            
 Sulfur dioxide emission allowances (c):            
  December 31, 2010   2     $ 1    1 
  September 30, 2010   6       2    4 
  June 30, 2010   11       3    8 
  March 31, 2010   13       10    3 
 RECs (c):            
  September 30, 2011   1          1 
  June 30, 2011   2  $ 1       1 
  March 31, 2011   3          3 
 Certain non-core generation facilities:            
  September 30, 2010   473    381       96 

(a)Represents carrying value before fair value measurement.
(b)The loss on the EEI investment was recorded in the Kentucky Regulated segment and included in "Other-Than-Temporary Impairments" on the Statement of Income.  Losses on sulfur dioxide emission allowances and RECs were recorded in the Supply segment and included in "Other operation and maintenance" on the Statements of Income.  Losses on certain non-core generation facilities were recorded in the Supply segment and included in "Income (Loss) from Discontinued Operations (net of income taxes)" on the Statement of Income.
(c)Current and long-term sulfur dioxide emission allowances and RECs are included in "Other current assets" and "Other intangibles" in their respective areas on the Balance Sheet.Sheets.

The significant unobservable inputs used in the nonrecurring fair value measurement of assets and liabilities classified as Level 3 at December 31, 2012 are as follows:
(b) Assets of the Long Island generation business disposal group are included
Quantitative Information about Level 3 Fair Value Measurements
Fair Value, netRange
AssetValuationUnobservable(Weighted
(Liability)TechniqueInput(s)Average)
PPL, LKE, and KU
Equity investment in "Assets held for sale" on the Balance Sheet.EEI$Discounted cash flowLong-term forward price curves and capital expenditure projections100%  (100%)
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Equity Investment in EEI (PPL, LKE and KU)

During the fourth quarter 2012, KU recorded an other-than-temporary decline in the value of its equity investment in EEI.  KU performed an internal analysis using an income approach based on discounted cash flows to assess the current fair value of its investment based on several factors.  KU considered the following factors:  long-dated forward power and fuel price curves, the cost of compliance with environmental standards, and the majority owner and operator's announcement in the fourth quarter 2012 to exit from the merchant generation business.  Assumptions used in the fair value assessment were forward energy price curves, expectations for capacity (demand) for energy in EEI's market, and expected capital expenditures used in the calculation that were comparable to assumptions used by KU for internal budgeting and forecasting purposes.  Through this analysis, KU determined the fair value to be zero.

(PPL and PPL Energy Supply)

Sulfur Dioxide Emission Allowances

Due to a significant declinedeclines in market prices, at March 31, 2009, PPL Energy Supply assessed the recoverability of sulfur dioxide emission allowances not expected to be consumed.  As a result, emission allowances with a carrying amount of $45 million were written down to their estimated fair value of $15 million, resulting in an impairment charge of $30 million being recorded during the first quarter of 2009.  Due to a further decline in market prices and the reassessment of the quantity of emission allowances not expected to be consumed at December 31, 2009, PPL Energy Supply evaluated the recoverability of those allowances.  As a result, emission allowances with a carrying amount of $20 million were written down to their estimated fair value of $13 million, resulting in an impairment charge of $7 million being recorded during the fourth quarter of 2009.  These charges, recorded in the Supply segment for PPL and PPL Energy Supply, are included in "Other operation and maintenance" on the Statement of Income.

When available, observable market prices were used to value the sulfur dioxide emission allowances.  When observable market prices were not available, fair value was modeled using prices from observable transactions and appropriate discount rates.  The modeled values were significant to the overall fair value measurement.measurement, resulting in the Level 3 classification.

Long Island Generation BusinessRECs

The Long IslandDue to declines in forecasted full-requirement obligations in certain markets as well as declines in market prices, PPL Energy Supply assessed the recoverability of certain RECs not expected to be used.  Observable market prices (Level 2) were used to value the RECs.

Certain Non-Core Generation Facilities

Certain non-core generation businessfacilities met the held for sale criteria in the second quarter of 2009.at September 30, 2010.  As a result, net assets held for sale with a carrying amount of $189 million were written down to their estimated fair value (lessless cost to sell) of $137 million at June 30, 2009.  At both September 30 and December 31, 2009, thesell.  The fair value (less cost to sell) was remeasured and additional impairments totaling $10 million were recorded.  In addition, $2 million of goodwill allocated to this business was written off in 2009.  See Note 9 for additional information on the anticipated sale.

The fair values in the table above exclude $1excludes $4 million of estimated costs to sell and werewas based on the negotiated sales price (achieved through an active auction process) adjusted.  See Note 9 for additional information on the additional anticipated cash flows from operations prior to and following the anticipated sale date.  The sales price is consistent with and corroborated by fair values modeled internally using inputs obtained from third parties and appropriate discount rates.completed sale.

Financial Instruments Not Recorded at Fair Value(PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and PPL Electric)KU)

NPNS

PPLThe carrying amounts of contract adjustment payments related to the Purchase Contract component of the Equity Units and PPL Energy Supply enter into full-requirement sales contracts, power purchase agreements, certain retail energy and physical capacity contracts.  These contracts range in maturity through 2023 and qualify for NPNS.  PPL Electric has also entered into contracts that qualify for NPNS.  See "Energy Purchase Commitments" within Note 14 for information about PPL Electric's competitive solicitations.  All of these contracts are accounted for using accrual accounting; therefore, there were no amounts recorded on the Balance Sheets at December 31, 2009 and 2008.  The estimated fair value of these contracts was:

  Net Asset (Liability)
  December 31, 2009 December 31, 2008
         
PPL $122  $136 
PPL Energy Supply  334   239 
PPL Electric  (216)  (103)

Other

Financial instruments for which the carrying amountlong-term debt on the Balance Sheets and thetheir estimated fair value (based on quoted market prices for the securities where available and estimates based on current rates where quoted market prices are not available) are different,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.

   December 31, 2012 December 31, 2011
   Carrying    Carrying   
   Amount Fair Value Amount Fair Value
PPL            
 Contract adjustment payments (a) $ 105  $ 106  $ 198  $ 198 
 Long-term debt   19,476    21,671    17,993    19,392 
PPL Energy Supply            
 Long-term debt   3,272    3,556    3,024    3,397 
PPL Electric            
 Long-term debt   1,967    2,333    1,718    2,012 
LKE            
 Long-term debt   4,075    4,423    4,073    4,306 
LG&E            
 Long-term debt   1,112    1,178    1,112    1,164 
KU            
 Long-term debt   1,842    2,056    1,842    2,000 

(a)Included in "Other current liabilities" and "Other deferred credits and noncurrent liabilities" on the Balance Sheets.
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The carrying value of "Collateral on PLR energy supply to/from affiliate"short-term debt (including notes between affiliates), when outstanding, represents or approximates fair value due to the variable interest rates associated with the financial instruments and is classified as Level 2.  The carrying value of held-to-maturity, short-term investments at December 31, 2008 and "Short-term debt" at December 31, 2009 and 2008 on the Balance Sheets represented or2011 approximated fair value due to the liquid nature and short-term duration of the instruments or variable interest rates associated with the financialthese instruments.

  December 31, 2009 (a) December 31, 2008
  Carrying Amount Fair Value Carrying Amount Fair Value
PPL                
Long-term debt $7,143  $7,280  $7,838  $6,785 
PPL Energy Supply                
Long-term debt  5,031   5,180   5,196   4,507 
PPL Electric                
Long-term debt  1,472   1,567   1,769   1,682 

(a)The effect of third-party credit enhancements is not included in the fair value measurement.  See "New Accounting Guidance Adopted - Issuer's Accounting for Liabilities Measured at Fair Value with a Third-Party Credit Enhancement" within Note 1 for additional information.

Credit Concentration Associated with Financial Instruments

(PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and PPL Electric)KU)

PPL and its subsidiaries enterContracts are entered into contracts with many entities for the purchase and sale of energy.  Many of these contracts are considered a normal part of doing businessqualify 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 1819 for information on credit policies used by PPL and its subsidiaries to manage credit risk, including master netting arrangements and collateral requirements.

(PPL)

At December 31, 2009,2012, PPL had credit exposure of $3.6$1.8 billion tofrom energy trading partners, excluding the effects of netting arrangements and collateral.  As a result of netting arrangements and collateral, PPL's credit exposure was reduced to $1.2 billion.  One of the$688 million.  The top ten counterparties accounted for 23% of this exposure, and no other individual counterparty accounted for more than 13% of the exposure.  Ten counterparties accounted for $926$367 million, or 74%53%, of the net exposure.  Nine of these counterpartiesexposure and all had an investment grade credit ratingratings from S&P and accounted for 97% of the top ten counterparty exposures.  The remaining counterparty has not been rated by S&P, but is current on its obligations.or Moody's.

(PPL Energy Supply)

At December 31, 2009,2012, PPL Energy Supply had credit exposure of $3.6$1.8 billion tofrom energy trading partners, excluding exposure from related parties and the effects of netting arrangements and collateral.  As a result of netting arrangements and collateral, this credit exposure was reduced to $1.2 billion.  One of the$688 million.  The top ten counterparties accounted for 23% of this exposure, and no other individual counterparty accounted for more than 13% of the exposure.  Ten counterparties accounted for $926$367 million, or 74%53%, of the net exposure.  Nine of these counterpartiesexposure and all had an investment grade credit ratingratings from S&P and accountedor Moody's.  See Note 16 for 97% ofinformation regarding the top ten counterparty exposures.  The remaining counterparty has not been rated by S&P, but is current on its obligations.

At December 31, 2009, PPL Energy Supply'srelated party credit exposure under certain energy supply contracts to PPL Electric was $203 million, excluding the effects of netting arrangements.  As a result of netting arrangements, this credit exposure was unchanged.exposure.

(PPL Electric)

At December 31, 2009,2012, PPL Electric had no credit exposure under energy supply contracts (including its supply contracts with its affiliate PPL EnergyPlus).  All counterparties had an investment grade credit rating from S&P.

18.  
Derivative Instruments and Hedging Activities
(LKE, LG&E and KU)

At December 31, 2012, LKE's, LG&E's and KU's credit exposure was not significant.

19.  Derivative Instruments and Hedging Activities

Risk Management Objectives

(PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and PPL Electric)KU)

PPL has a risk management policy approved by the Board of Directors to manage market risk (including price, liquidity and counterpartyvolumetric risk) and credit risk.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 isincludes the potential loss PPL and its subsidiariesthat may incurbe incurred as a result of price changes associated with a particular financial or commodity instrument.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.
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The table below summarizes the market risks that affect PPL and its subsidiaries.

PPLPPL
PPLEnergy SupplyElectricLKELG&EKU
Commodity price risk (including basis and
volumetric risk)XXMMMM
Interest rate risk:
Debt issuancesXXMMMM
Defined benefit plansXXMMMM
NDT securitiesXX
Equity securities price risk:
Defined benefit plansXXMMMM
NDT securitiesXX
Future stock transactionsX
Foreign currency risk - WPD investmentX

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 PPL Energy Supply are exposed to market risk from:volumetric risks

·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 (including full-requirement sales contracts) 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 market risk.  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; and
·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.

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 foreign currency exchange 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.  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 debt used to finance operations, as well as debt and equity securities in NDT funds andheld by defined benefit plans; and
·foreign currency exchange rateplans.  Additionally, PPL Energy Supply is exposed to equity securities price risk associated with investments in U.K. affiliates, as well as purchases of equipment in currencies other than U.S. dollars.the NDT funds.

PPL and PPL Energy Supply utilize forward contracts, futures contracts, options, swaps and structured deals such as tolling agreements as part of the risk management strategy to minimize unanticipated fluctuations in earnings caused by changes in commodity prices, interest rates and foreign currency exchange rates.  All derivatives are recognized on the balance sheet at their fair value, unless they qualify for NPNS.
·PPL is exposed to equity securities price risk from future stock sales and/or purchases.

PPL and PPL Electric are exposed to market price and volumetric risks from PPL Electric's obligation as the PLR to its customers.  It has mitigated thatForeign currency risk with the fixed-price PLR agreement with PPL EnergyPlus, which expired at the end of 2009, and by entering into supply agreements for its customers for 2010 and 2011.

·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 PPL and its subsidiariesthat may incurbe incurred due to a counterparty's non-performance, including defaults on payments and energy commodity deliveries.

PPL and PPL Energy Supply areis exposed to credit risk from: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.
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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.

·commodity derivatives with its energy trading partners, which include other energy companies, fuel suppliers, and financial institutions;
·interest rate derivatives with financial institutions; and
·foreign currency derivatives with financial institutions.

PPLLKE, LG&E and PPL ElectricKU are exposed to credit risk from PPL Electric's supply agreements for its customers for 2010 and 2011."in-the-money" interest rate derivatives with financial institutions.

The majority of the credit risk stems from PPL Energy Supply's and PPL Electric's commodity derivatives for multi-year contracts for energy sales and purchases.  If thePPL Energy Supply's counterparties fail to perform their obligations under such contracts and PPL and its subsidiariesEnergy 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 risk for these entities.

PPL and its subsidiaries have credit policies in place to manage their credit risk, including the use of an established credit approval process, daily monitoring of counterparty positions and the use of master netting agreements.  These agreements generally include credit mitigation provisions, such as margin, prepayment or collateral requirements.  PPL and its subsidiaries may request the additional credit assurance, in certain circumstances, in the event that the counterparties' credit ratings fall below investment grade or their exposures exceed an established credit limit.  See Note 1718 for credit concentration associated with financial instruments.energy trading partners.

Master Netting Arrangements

Net derivative positions 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.

PPL's and PPL Energy Supply's obligation to return counterparty cash collateral under master netting arrangements was $355$112 million and $22$147 million at December 31, 20092012 and 2008.December 31, 2011.

PPL Electric, LKE, and LG&E had no obligation to return cash collateral to PPL Energy Supply under master netting arrangements at December 31, 20092012 and an obligationDecember 31, 2011.

PPL, LKE and LG&E had posted cash collateral under master netting arrangements of $300$32 million at December 31, 2008.  See Note 15 for additional information.2012 and $29 million at December 31, 2011.

At December 31, 2009, PPL, PPL Energy Supply and PPL Electric had not posted any cash collateral under master netting arrangements.  Atarrangements at December 31, 2008, PPL2012 and PPL Electric had not posted any cash collateral under master netting arrangements and PPL Energy Supply only had posted the $300 million noted above.December 31, 2011.

Commodity Price Risk (Non-trading) (PPL and PPL Energy Supply)

Commodity Price Risk (Non-trading)

Commodity price risk, including basis and basis risks arevolumetric 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 and proprietary trading 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, transportationtransportation/transmission availability and reliability within and between regions, market liquidity, and the nature and extent of current and potential federal and state regulations.

ToPPL 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 impactforecasted purchase and sale of market price fluctuations on PPL'selectricity and related fuels for its competitive baseload generation fleet, which includes 7,275 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 energy-related assets, liabilitiesmarketing portfolio is comprised of full-requirement sales contracts and related supply contracts, retail natural gas and electricity sales contracts and other contractual arrangements discussed above, PPL EnergyPlus sells and purchases physical energy at the wholesale level under FERC market-based tariffs throughout the U.S. and enters into financial exchange-traded and over-the-counter contracts.  Certain contracts qualify for NPNS or are non-derivatives and are therefore not reflected in the financial statements until delivery.  See Note 17 for additional information on NPNS.  PPL andmarketing activities.  The strategies that PPL Energy Supply segregate their remaining non-trading activities into two categories:  cash flowuses to hedge activityits full-
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requirement sales contracts include purchasing energy (at a liquid trading hub or directly at the load delivery zone), capacity and economic activity.

Cash Flow HedgesRECs 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.  ManyCertain 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.  In addition, the monetization of certain full-requirement sales contracts in 2010 impacted both the cash flow hedge and economic activity, as discussed below.

Monetization of Certain Full-Requirement Sales Contracts

In July 2010, in order to raise additional cash for the LKE acquisition, PPL Energy Supply monetized certain full-requirement sales contracts that resulted in cash proceeds of $249 million and triggered certain accounting:

·A portion of these sales contracts had previously been accounted for as NPNS and received accrual accounting treatment.  PPL Energy Supply could no longer assert that it was probable that any contracts with these counterparties would result in physical delivery.  Therefore, the fair value of the NPNS contracts of $160 million was recorded on the Balance Sheet in "Price risk management assets," with a corresponding gain of $144 million recorded to "Wholesale energy marketing - Realized" on the Statement of Income, and $16 million recorded to "Wholesale energy marketing - Unrealized economic activity," related to full-requirement sales contracts that had not been monetized.

·  The related purchases to supply these sales contracts were accounted for as cash flow hedges, with the effective portion of the change in fair value being recorded in AOCI and the ineffective portion recorded in "Energy purchases - Unrealized economic activity."  The corresponding cash flow hedges were dedesignated and all amounts previously recorded in AOCI were reclassified to earnings.  This resulted in a pre-tax reclassification of $(173) million of losses from AOCI into "Energy purchases - Unrealized economic activity" on the Statement of Income.  An additional charge of $(39) million was also recorded in "Wholesale energy marketing - Unrealized economic activity" on the Statement of Income to reflect the fair value of the sales contracts previously accounted for as economic activity.

·The net result of these transactions, excluding the full-requirement sales contracts that have not been monetized, was a loss of $(68) million, or $(40) million, after tax.

The proceeds of $249 million from these monetizations are reflected in the Statement of Cash Flows as a component of "Net cash provided by operating activities."

Cash Flow Hedges

Certain derivative contracts have qualified for hedge accounting.  Contractsaccounting 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.  The cash flow hedges that existed at December 31, 20092012 range in maturity through 2014.2016.  At December 31, 2009,2012, the accumulated net unrealizedunrecognized after-tax gains on qualifying derivatives(losses) that are expected to be reclassified into earnings during the next 12 months were $233$124 million for both 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 to earnings.into earnings once it is determined that the hedge transaction is probable of not occurring.  For 2009, 20082012 and 2007,2011 such reclassifications were aninsignificant.  For 2010, such reclassifications were after-tax gaingains (losses) of $9 million, an after-tax loss$(89) million.  The amounts recorded in 2010 were primarily due to the monetization of $8 million and an insignificant amount.certain full-requirement sales contracts, for which the associated hedges are no longer required, as discussed above.

For 2009, 2008 and 2007, hedgeHedge ineffectiveness associated with energy derivatives was after tax, a loss of $174 million, a gain of $310insignificant in 2012.  For 2011 and 2010, after-tax gains (losses) from hedge ineffectiveness were $(22) million and $(30) million.

Prior to the adoption of new accounting guidance, in 2010, after-tax gains of $82 million, which had been recognized in a loss of $3 million.  Certain power and gasprevious period due to ineffectiveness on cash flow hedges, failed hedge effectiveness testing in the third and fourth quarters of 2008, as well as the first quarter of 2009.  Hedge accounting is not permitted for the quarter in which this occurs and, accordingly, the entire change in fair value for the periods that failed was recorded to the income statement.  However, these transactions were not dedesignated as hedges, asreversed from earnings based on prospective regression analysis demonstrateddemonstrating that these hedges arewere expected to be highly effective over their term.  For 2008, an after-tax gain of $298 million was recognized in earnings as a result of these hedge failures.  During the second, third and fourth quarters of 2009, fewer power and gas cash flow hedges failed hedge effectiveness testing; therefore, a portion of the previously recognized unrealized gains recorded in the second half of 2008 and the first quarter of 2009 associated with these hedges were reversed.  For 2009, after-tax losses of $215 million were recognized in earnings as a result of these reversals.

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Economic Activity

PPL Energy Supply also usesMany derivative contracts to economically hedge the impact of marketcommodity price fluctuations on its energy-related assets, liabilitiesrisk associated with electricity, natural gas, oil and other contractual arrangements thatcommodities but do not receive hedge accounting treatment.  PPL Energy Supply refers to these transactions as economic activity.  The economic activity category includes energy derivative transactions that have previously qualified or could potentially qualifytreatment because they were not eligible for hedge accounting; however, these transactions have either been disqualified from hedge accounting or management hasfor which hedge accounting was not elected to designate them as accounting hedges.  This activity includes the changes in fair value of positions used toelected.  These derivatives hedge a portion of the economic value of PPL Energy Supply's competitive generation assets load-followingand unregulated full-requirement and retail activities.  This economic activity iscontracts, which are subject to changes in fair value due to market price volatility of the input and output commodities (e.g., fuel and power).  These contracts range in maturity through 2017.volume expectations.  Additionally, premium amortization of $53 million associated with options classified as economic activity andincludes the ineffective portion of qualifying cash flow hedges including the entire change in fair value for certain cash flow hedges that failed effectiveness testing during the current period as discussed in the preceding(see "Cash Flow Hedges" section, are also includedabove).  The derivative contracts in economic activity.this category that existed at December 31, 2012 range in maturity through 2019.

Examples of transactions represented in this categoryeconomic activity include hedges on sales of baseload generation, certain purchase contracts used to supply full-requirement sales contracts;contracts, FTRs or basis swaps used to hedge basis risk associated with the sale of competitive generation or supplying unregulated full-requirement sales contracts; spark spreads (sale of electricity with the simultaneous purchase of fuel);contracts, Spark Spread hedging contracts, retail electric and natural gas activities;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 PPL Energy Supply owns the physical generating capacity itsis owned, price exposure is generally limited to the cost of the particular generating unit and does not expose PPL Energy Supply to uncovered market price risk.  PPL Energy Supply

Unrealized activity associated with monetizing certain full-requirement sales contracts was also purchases call options or sells put options to create a net purchase position to cover an overall short positionincluded in its non-trading portfolio.economic activity during 2012, 2011 and 2010.

The net fair value of economic positions at December 31, 2012 and December 31, 2011 was a net asset (liability) of $346 million and $(63) million for PPL and PPL Energy Supply.  The unrealized gains (losses) for thiseconomic activity are reflected in the Statements of Incomewere as follows.

  Gains (Losses)
  2009 2008 2007
Operating Revenues            
Unregulated retail electric and gas $6  $5     
Wholesale energy marketing  (280)  1,056  $(145)
Operating Expenses            
Fuel  49   (79)  15 
Energy purchases  (158)  (553)  185 
   2012  2011  2010 
           
Operating Revenues         
 Unregulated retail electric and gas $ (17) $ 31  $ 1 
 Wholesale energy marketing   (311)   1,407    (805)
Operating Expenses         
 Fuel   (14)   6    29 
 Energy purchases   442    (1,123)   286 

The net gains (losses) recorded in "Wholesale energy marketing" resulted primarily from hedges of baseload generation, from certain full-requirement sales contracts, from hedge ineffectiveness, as discussed in "Cash Flow Hedges" above, and from the monetization of certain full-requirement sales contracts in which PPL Energy Supply did not elect NPNS and from hedge ineffectiveness, including hedges that failed effectiveness testing, as2010, also discussed in the "Cash Flow Hedges" section above.  The net gains (losses) recorded in "Energy purchases" resulted primarily from certain purchase contracts to supply the full-requirement sales contracts noted above, for which PPL Energy Supply did not elect hedge treatment and from hedge ineffectiveness, including hedgesand from purchase contracts that failed effectiveness testing.no longer hedge the full-requirement sales contracts that were monetized in 2010.

Commodity Price Risk (Trading) (PPL and PPL Energy Supply)

Commodity Price Risk (Trading)

PPL Energy Supply also executes energy contractshas 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 significant losses if prices do not move in the manner or direction anticipated.  The proprietary trading portfolio is not a significant part of PPL Energy Supply's trading activitybusiness and is shown in "Net energy trading margins" on the Statements of Income.

Commodity Volumetric Activity(PPL and PPL Energy Supply)

PPL Energy Supply currently employs four primary strategies to maximize the valueAs of its wholesale energy portfolio.  As further discussed below, these strategies include the sales of baseload generation, optimization of intermediate and peaking generation, marketing activities, and proprietary trading activities.

Sales of Baseload Generation

PPL Energy Supply has a formal hedging program for its baseload generation fleet, which includes 7,370 MW of generating capacity.  The objective of this program is to provide a reasonable level of near-term cash flow and earnings certainty for the next three years while preserving upside potential of power price increases over the medium term; however, in certain instances, PPL Energy Supply will sell power and purchase fuel beyond this three-year period.  PPL Energy Supply sells its expected generation output on a forward basis using both derivative and non-derivative instruments.  Both are included in the following tables.

The following table presents the expected sales, in GWh, of baseload generation based on current forecasted assumptions for 2010-2014.  These expected sales could be impacted by several factors, including plant availability.

 2010 2011 2012 2013 2014
 52,114  52,087  56,130  55,184  55,504 

The following table presents the percentage of expected baseload generation sales shown above that has been sold forward under fixed-price contracts and the related percentage of fuel that has been purchased or committed at December 31, 2009.

  Derivative Total Power Fuel Purchases (c)
Year Sales (a) Sales (b) Coal Nuclear
                 
2010  91%   99%   99%   100% 
2011  80%   88%   89%   100% 
2012  48%   55%   70%   100% 
2013  6%   13%   57%   100% 
2014  1%   5%   51%   100% 

(a)Excludes non-derivative contracts and contracts that qualify for NPNS.  Volumes for option contracts factor in the probability of an option being exercised and may be less than the notional amount of the option.  Percentages are based on fixed-price contracts only.
(b)Amount represents derivative and non-derivative contracts.  Volumes for option contracts factor in the probability of an option being exercised and may be less than the notional amount of the option.  Percentages are based on fixed-price contracts only.
(c)Coal and nuclear contracts receive accrual accounting treatment, as they are not derivative contracts.  Percentages are based on both fixed- and variable-priced contracts.

In addition to2012, the fuel purchases above, PPL Energy Supply attempts to economically hedge the fuel price risk that is within its fuel-related contracts and coal transportation contracts, which are tied to changes in crude oil or diesel prices.  The following table presents thenet notional volumes (in thousands of barrels) of derivative (sales)/purchase contracts used in support of this strategy at December 31, 2009.the various strategies discussed above were as follows.

Contract Type 2010 2011 2012 
           
Oil Swaps  420  408  180 
    Volume
Commodity Unit of Measure 2013  2014  2015  Thereafter
           
Power MWh  (38,791,951)  (16,720,361)  1,636,197   3,871,199 
Capacity MW-Month  (8,248,465)  (135,110)  (37,208)  525 
Gas MMBtu  18,419,599   (21,663,269)  (10,386,745)  (5,027,288)
Coal Tons  (240,000)      
FTRs MW-Month  28,690   6,389   1,465   
Oil Barrels  (4,022,000)  240,000   300,000   180,000 

Optimization of Intermediate and Peaking Generation
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Interest Rate Risk

In addition to its baseload generation activities, PPL Energy Supply attempts to optimize the overall value of its intermediate and peaking fleet, which includes 4,349 MW of gas and oil-fired generation.  PPL Energy Supply uses both option and non-option contracts to support this strategy.  The following table presents the volumes of derivative contracts used in support of this strategy at December 31, 2009.

Units2010
Net Power Sales:
Options (a)GWh507
Non-option contracts (b)GWh1,156
Net Fuel Sales:
Non-option contracts (c)Barrels145,000
Net Power/Fuel Purchases:
Non-option contractsBcf9.3

(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)Included in these volumes are exercised option contracts that converted to non-option derivative contracts.
(c)Represents the forward sale of physical oil inventory with a January 2010 delivery.

Marketing Activities

PPL Energy Supply's marketing portfolio is comprised of full-requirement sales contracts and their related supply contracts, retail gas and electricity sales contracts and other marketing activities.  The full-requirement sales contracts and their related supply contracts make up a significant component of the marketing portfolio.  The obligations under the full-requirement sales contracts include supplying a bundled product of energy, capacity, RECs, and other ancillary products.  PPL Energy Supply uses a variety of strategies to hedge its full-requirement sales contracts, including purchasing energy at a liquid trading hub or directly at the load delivery zone, purchasing capacity and RECs in the market and supplying the energy, capacity and RECs with its generation.  RECs are not derivatives and are excluded from the table below.  The following table presents the volumes of (sales)/purchase contracts, excluding FTRs, basis and capacity contracts, used in support of these activities at December 31, 2009.

 Units 2010 2011 2012 2013 2014 - 2019
                       
Energy sales contracts (a) GWh  (32,866)  (14,693)  (4,364)  (2,233)  (10,122)
Related energy supply contracts                      
Energy purchases GWh  28,919   12,353   2,207   92     
Volumetric hedges (b) GWh  170   218   48         
Volumetric hedges (b) Bcf  (0.6)                
Generation Supply GWh  3,327   2,240   2,232   2,135   10,122 

(a)The majority of PPL Energy Supply's full-requirement sales contracts receive accrual accounting as they qualify for NPNS or are not derivative contracts.  Also included in these volumes are the sales from PPL EnergyPlus to PPL Electric to supply PPL Electric's 2010 PLR load obligation.
(b)PPL Energy Supply uses power and gas options, swaps and futures to hedge the volumetric risk associated with full-requirement sales contracts since the demand for power varies hourly.  Volumes for option contracts factor in the probability of an option being exercised and may be less than the notional amount of the option.

As noted above, PPL Energy Supply's marketing activities also include its retail gas portfolios.  PPL Energy Supply has sold a total of 8.2 Bcf of gas to retail customers through 2012, all of which has been hedged with gas purchases.

FTRs and Other Basis Positions

PPL Energy Supply buys and sells FTRs and other basis positions to mitigate the basis risk between delivery points related to the sales of its generation, the supply of its full-requirement sales contracts and retail contracts, as well as for proprietary trading purposes.  The following table presents the volumes of derivative FTR and basis (sales)/purchase contracts at December 31, 2009.

Commodity  Units 2010 2011 2012
              
FTRs  GWh  38,309  406    
Power Basis Positions  GWh  (19,086) (861)   
Gas Basis Positions  Bcf  3.2  0.1  (0.3)

Capacity Positions

PPL Energy Supply buys and sells capacity related to the sales of its generation and the supply of its full-requirement sales contracts, as well as for proprietary trading purposes.  The following table presents the volumes of derivative capacity (sales)/purchase contracts (in MW-months) at December 31, 2009.

2010 2011 2012 2013 2014 - 2023 (a)
(90,960) (49,193) (11,894) 1,626  2,720 

(a)2,972 MW-months deliver in the 2014 to 2016 period.

Proprietary Trading Activity

At December 31, 2009, PPL Energy Supply's proprietary trading positions, excluding FTRs, basis and capacity contracts, were not significant.

Interest Rate Risk (PPL, LKE, LG&E and PPL Energy Supply)KU)

PPL and its subsidiaries have issuedissue debt to finance itstheir operations, which results in an exposureexposes them to interest rate risk.  PPL and its subsidiaries utilize variousVarious financial derivative instruments are utilized to adjust the mix of fixed and floating interest rates in itstheir debt portfolio, adjust the duration of itsthe debt portfolio and lock in benchmark interest rates in anticipation of future financing, when appropriate.  Risk limits under thePPL's risk management program are designed to balance risk exposure to volatility in interest expense and changes in the fair value of PPL's and itsthe subsidiaries' 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.  PPL and PPL Energy Supply may enter into financialFinancial 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.  For PPL, theseOutstanding interest rate swap contracts rangeranged in maturity through 20412024 for WPD and through 2043 for PPL's domestic interest rate swaps.  These swaps had aan aggregate notional value of $425 million$1.2 billion at December 31, 2009.  For 2009, 20082012, of which £290 million (approximately $465 million based on spot rates) was related to WPD.  Included in this total are forward-starting interest rate swaps entered into by PPL on behalf of LG&E and 2007, hedge ineffectiveness associated withKU.  LG&E and KU believe that realized gains and losses from the swaps are probable of recovery through regulated rates; as such, the fair value of these derivatives was not significant.  No contracts were outstanding at PPL Energy Supply at December 31, 2009.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.

WPDH LimitedPPL holds a net notional position in cross-currency interest rate swaps totaling $302 million$1.3 billion that mature through 2028 to hedge the interest payments and principal of itsWPD's U.S. dollar-denominated senior notesnotes.

For 2012, hedge ineffectiveness associated with maturity dates ranging from December 2017interest rate derivatives was insignificant.  For 2011, hedge ineffectiveness associated with these derivatives resulted in a net after-tax gain (loss) of $(9) million, which included a gain (loss) of $(4) million attributable to December 2028.certain interest rate swaps that failed hedge effectiveness testing during the second quarter of 2011.  For 2009, 2008 and 2007, no amounts were recorded related to2010, hedge ineffectiveness.ineffectiveness associated with these derivatives resulted in a net after-tax gain (loss) of $(9) million.

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 to earnings.  PPL reclassified a net after-tax gaininto earnings once it is determined that the hedged transaction is probable of $1 million in 2009 and a net after-tax loss of $3 million in 2007.not occurring.  PPL had no such reclassifications in 2008.for 2012 and 2011.  As a result of the expected net proceeds from the anticipated sale of certain non-core generation facilities, coupled with the monetization of certain full-requirement sales contracts, debt that had been planned to be issued by PPL Energy Supply hadin 2010 was no such reclassificationslonger needed.  As a result, hedge accounting associated with interest rate swaps entered into by PPL in 2009, 2008 and 2007.anticipation of a debt issuance by PPL Energy Supply was discontinued.  PPL reclassified into earnings a net after-tax gain (loss) of $(19) million in 2010.

At December 31, 2009,2012, the accumulated net unrealizedunrecognized after-tax lossesgains (losses) on qualifying derivatives that are expected to be reclassified into earnings during the next 12 months were $1 million for PPL and insignificant for PPL Energy Supply.$(13) million.  Amounts are reclassified as the hedged interest payments are made.

(LKE, LG&E and KU)

In November 2012, 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.  These hedging instruments have terms identical to forward-starting swaps entered into by PPL with third parties.  LG&E and KU believe that realized gains and losses from the 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 December 31, 2012, LG&E and KU each held contracts with aggregate notional amounts of $150 million that range in maturity through 2043.

(PPL Energy Supply)

In January 2011, PPL Energy Supply distributed its membership interest in PPL Global to PPL Energy Supply's parent, PPL Energy Funding.  Therefore, effective January 2011, PPL Energy Supply is no longer subject to interest rate risk associated with investments in U.K. affiliates.  For 2010, hedge ineffectiveness associated with these derivatives was insignificant for
375

interest rate cross-currency swaps contracts.  For 2010, PPL Energy Supply had no reclassifications for cash flows hedges that were discontinued when it was no longer probable that the original forecasted transaction would occur by the end of the originally specified period.
Fair Value Hedges

(PPL)

PPL and PPL Energy Supply areis exposed to changes in the fair value of their domestic and internationalits debt portfolios.portfolio.  To manage this risk, PPL and PPL Energy Supplyfinancial contracts may enterbe entered into financial contracts to hedge fluctuations in the fair value of existing debt issuances due to changes in benchmark interest rates.  At December 31, 2009,In July 2012, contracts held by PPL held contracts that rangeranged in maturity through 2047 and had a notional value of $750 million.$99 million were canceled without penalties by the counterparties. PPL Energy Supply did not hold any such contracts at December 31, 2009.2012.  PPL and PPL Energy Supply did not recognize any gains or losses resulting from the ineffective portion of fair value hedges or from a portion of the hedging instrument being excluded from the assessment of hedge effectiveness for 2009, 2008 and 2007.  Additionally, PPL recognized a net after-tax gain of $4 millionor from hedges of debt issuances that no longer qualified as fair value hedges for 2009, while2012, 2011 and 2010.

In 2011, PPL Electric redeemed $400 million of 7.125% Senior Secured Bonds due 2013.  As a result of this redemption, PPL recorded a gain (loss) of $22 million, or $14 million after tax, for 2011 in "Other Income (Expense) - net" on the amounts were not significant for 2008 and 2007.Statement of Income as a result of accelerated amortization of the fair value adjustments to the debt in connection with previously settled fair value hedges.

(PPL Energy Supply)

In January 2011, PPL Energy Supply distributed its membership interest in PPL Global to PPL Energy Supply's parent, PPL Energy Funding.  Therefore, effective January 2011, PPL Energy Supply is no longer subject to interest rate risk associated with investments in U.K. affiliates.  PPL Energy Supply did not recognize any gains or losses resulting from the ineffective portion of fair value hedges or from a portion of the hedging instrument being excluded from the assessment of hedge effectiveness or resulting from hedges of debt issuances that no longer qualified as fair value hedges for 2009, 2008 and 2007.2010.

Foreign Currency Risk Economic Activity(PPL, LKE and PPL Energy Supply)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 December 31, 2012, LG&E held contracts with aggregate notional amounts of $179 million that range in maturity through 2033.  The fair value of these contracts were recorded as liabilities of $58 million and $60 million at December 31, 2012 and 2011, with equal offsetting amounts recorded as regulatory assets.

Foreign Currency Risk

(PPL)

PPL and PPL Energy Supply areis exposed to foreign currency risk, primarily through investments in U.K. affiliates.  In addition, PPL's and PPL Energy Supply's domestic operations may make purchases of equipment in currencies other than U.S. dollars.

PPL and PPL Energy Supply havehas 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 and PPL Energy Supply enterenters into financial instruments to protect against foreign currency translation risk of expected earnings.

Cash Flow Hedges

PPL and PPL Energy Supply may enter into foreign currency derivatives associated with foreign currency-denominated debt and the exchange rate associated with firm commitments denominated in foreign currencies; however, at December 31, 2009, there were no existing contracts of this nature.  Amounts previously classified in AOCI are reclassified as the hedged interest payments are made and as the related equipment is depreciated.

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 to earnings.  There were no such reclassifications during 2009, 2008 and 2007.

Fair Value Hedges

PPL and PPL Energy Supply enter into foreign currency forward contracts to hedge the exchange rates associated with firm commitments denominated in foreign currencies; however, at December 31, 2009, there were no existing contracts of this nature.  PPL and PPL Energy Supply did not recognize any gains or losses resulting from the ineffective portion of fair value hedges or from a portion of the hedging instrument being excluded from the assessment of hedge effectiveness for 2009, 2008 and 2007.  Additionally, PPL and PPL Energy Supply did not recognize any gains or losses resulting from hedges of firm commitments that no longer qualified as fair value hedges for 2009, 2008 and 2007.

Net Investment Hedges

PPL and PPL Energy Supply may enterenters into foreign currency contracts on behalf of a subsidiary to protect the value of a portion of theirits net investment in WPD.  The total notional amount of the contracts outstanding at December 31, 2009 was £402012 had an aggregate notional amount of £162 million (approximately $78$261 million based on contracted rates).  The settlement dates of these contracts range from March 2010May 2013 through June 2011.December 2013.  At December 31, 2009,2012 and 2011, the fair value of these positions was a net asset (liability) of $13$(2) million and $7 million.  For 2009, 2008 and 2007,

Additionally, in 2012, a PPL andGlobal subsidiary that has a U.S. dollar functional currency entered into a GBP intercompany loan payable with a PPL Energy Supply recognized after taxWEM subsidiary that has a GBP functional currency.  The loan qualifies as a net investment hedge for the PPL Global subsidiary.  As such, the foreign currency gains and losses on the intercompany loan for the PPL Global subsidiary are recorded to the foreign currency translation adjustment component of $5AOCI.  At December 31, 2012, the intercompany loan outstanding was £47 million (approximately $76 million based on spot rates).
376

For 2012, PPL recognized after-tax net investment hedge gains (losses) of $20 million and $2$(5) million in the foreign currency translation adjustment component of OCI.AOCI.  For 2011 and 2010, PPL recognized after-tax net investment hedge gains (losses) of $4 million in the foreign currency translation adjustment component of AOCI.  At December 31, 2009,2012 and 2011, PPL had $14 million and PPL Energy Supply had $11$19 million of accumulated net investment hedge after-tax gains after tax,(losses) that were included in the foreign currency translation adjustment component of AOCI comparedAOCI.

(PPL Energy Supply)

In January 2011, PPL Energy Supply distributed its membership interest in PPL Global to PPL Energy Supply's parent, PPL Energy Funding.  Therefore, effective January 2011, PPL Energy Supply is no longer subject to foreign currency exchange risk associated with $16 millioninvestments in U.K. affiliates.  For 2010, PPL Energy Supply recognized insignificant amounts in the foreign currency translation adjustment component of gainsAOCI.

Cash Flow Hedges

(PPL)

PPL may enter into foreign currency derivatives associated with foreign currency-denominated debt and the exchange rate associated with firm commitments (including those for the purchase of equipment) denominated in foreign currencies; however, at December 31, 2008.  See Note 152012, there were no existing contracts of this nature.  Amounts previously settled and recorded in AOCI are reclassified as the hedged interest payments are made and as the related equipment is depreciated.  Insignificant amounts are expected to be reclassified into earnings during the next 12 months.

During 2012, 2011 and 2010, no cash flow hedges were discontinued because it was probable that the original forecasted transaction would not occur by the end of the originally specified time periods.

Fair Value Hedges

PPL enters into foreign currency forward contracts to hedge the exchange rate risk associated with firm commitments denominated in foreign currencies; however, at December 31, 2012, there were no existing contracts of this nature and no gains or losses recorded for additional information.2012, 2011 and 2010 related to hedge ineffectiveness, or from a portion of the hedging instrument being excluded from the assessment of hedge effectiveness, or from hedges of firm commitments that no longer qualified as fair value hedges.

Economic Activity

PPL and PPL Energy Supply may enterenters into foreign currency contracts as an economicon behalf of a subsidiary to economically hedge ofGBP-denominated anticipated earnings denominated in British pounds sterling.earnings.  At December 31, 2009,2012, the total exposure hedged by PPL was £48approximately £1.3 billion (approximately $2.0 billion based on contracted rates) and the net fair value of these positions was an asset (liability) of $(42) million.  These contracts had termination dates ranging from January 2013 through February 2015.  Realized and unrealized gains (losses) on these contracts are included in "Other Income (Expense) - net" on the Statements of Income and were $(52) million for 2012.  At December 31, 2011, the total exposure hedged by PPL was £288 million and the net fair value of these positions was a netan asset (liability) of $2$11 million.  These contracts had termination dates ranging from January 2010 to June 2010.  No similar hedging instruments were outstanding at December 31, 2008.  Gains and losses, both realizedRealized and unrealized ongains (losses) were $10 million for 2011 and insignificant for 2010.

In anticipation of the repayment of a portion of the GBP-denominated borrowings under the 2011 Bridge Facility with U.S. dollar proceeds received from PPL's issuance of common stock and 2011 Equity Units and PPL WEM's issuance of U.S. dollar-denominated senior notes, PPL entered into forward contracts to purchase GBP in order to economically hedge the foreign currency exchange rate risk related to the repayment.  When these contracts are includedtrades were settled in April 2011, PPL recorded $55 million of pre-tax, net gains (losses) in "Other Income (Expense) - net" on the Statements of Income.  For 2009,

(PPL andEnergy Supply)

In January 2011, PPL Energy Supply distributed its membership interest in PPL Global to PPL Energy Supply's parent, PPL Energy Funding.  Therefore, effective January 2011, PPL Energy Supply is no longer subject to earnings denominated in British pounds sterling.  PPL Energy Supply recorded net lossesgains (losses) on these contracts, both realized and unrealized, in "Income (Loss) from Discontinued Operations (net of $9 million.income taxes)" on the Statements of Income.  For 2008 and 2007, PPL and2010, PPL Energy Supply recorded netinsignificant gains of $9 million and net losses of $4 million related to similar average rate forwards and average rate options.  See Note 15 for additional information.(losses).

377

Accounting and Reporting

(PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and PPL Electric)KU)

All derivative instruments are recorded at fair value on the balance sheetBalance Sheet as an asset or liability (unlessunless they qualify for NPNS),NPNS.  NPNS contracts for PPL and changesPPL Energy Supply include full-requirement sales contracts, other physical purchases and sales contracts and certain retail energy and physical capacity contracts, and for PPL Electric include full-requirement purchase contracts and other physical purchase contracts.  Changes in the derivatives' fair value of derivatives not designated as NPNS are recognized currently in earnings unless specific hedge accounting criteria are met.met, except for the changes in fair value of LG&E's and KU's interest rate swaps, which beginning in the third quarter of 2010, are recognized as regulatory assets or liabilities.  See Note 176 for amounts recorded in regulatory assets at December 31, 2012 and 2011.

See Note 1 for additional information on NPNS.accounting policies related to derivative instruments.

PPL and its subsidiaries have elected not to offset net derivative positions in the financial statements.  Accordingly, PPL and its subsidiaries do not offset such derivative positions against the fair value of amounts (or amounts that approximate fair value) recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) under master netting arrangements.(PPL)

Gains and losses associated with non-trading bilateral sales of electricity at major market delivery points are netted with purchases that offset the sales at those same delivery points.  A major market delivery point is any delivery point with liquid pricing available.

PPL and PPL Energy Supply reflect their net realized and unrealized gains and losses associated with all derivatives that are held for trading purposes in the "Net energy trading margins" line on the Statements of Income.

The circumstances and intent existing at the time that derivative contracts are entered into are used to determine their accounting designation, which is subsequently verified by an independent internal group on a daily basis.  The following summarizes the guidelines that have been provided to the marketers who are responsible for contract designation for derivative energy contracts.

·Any wholesale and retail contracts to sell electricity and the related capacity that do not meet the definition of a derivative receive accrual accounting.
·Physical electricity-only transactions can receive cash flow hedge treatment if all of the qualifications are met.
·Physical capacity-only transactions to sell excess capacity from PPL's and PPL Energy Supply's generation qualify for NPNS.  The forward value of these transactions is not recorded in the financial statements and has no earnings impact until delivery.
·Any physical energy sale or purchase not intended to hedge an economic exposure is considered speculative, with unrealized gains or losses recorded immediately through earnings.
·Financial transactions that can be settled in cash do not qualify for NPNS because they do not require physical delivery.  These transactions can receive cash flow hedge treatment if they lock in the cash flows PPL and PPL Energy Supply will receive or pay for energy expected to be sold or purchased in the spot market.
·PPL and PPL Energy Supply purchase FTRs for both proprietary trading activities and hedging purposes.  FTRs, although economically effective as electricity basis hedges, do not currently qualify for hedge accounting treatment.  Unrealized and realized gains and losses from FTRs that were entered into for trading purposes are recorded in "Net energy trading margins" on the Statements of Income.  Unrealized and realized gains and losses from FTRs that were entered into for hedging purposes are recorded in "Energy purchases" on the Statements of Income.
·Physical and financial transactions for gas and oil to meet fuel and retail requirements can receive cash flow hedge treatment if they lock in the price PPL and PPL Energy Supply will pay and meet the definition of a derivative.
·Certain option contracts may receive hedge accounting treatment.  Those that are not eligible are marked to fair value through earnings.

Unrealized gains or losses on cash flow hedges are recorded in OCI, excluding ineffectiveness that is recognized immediately in earnings.  These unrealized gains and losses become realized when the contracts settle and are recognized in earnings when the hedged transactions occur.

The following is a summary of certain guidelines that have been provided to PPL's Finance Department, which is responsible for contract designation for interest rate and foreign currency derivatives.

·Transactions to lock in an interest rate prior to a debt issuance can be designated as cash flow hedges.  Any unrealized gains or losses on transactions receiving cash flow hedge treatment are recorded in OCI and are amortized as a component of interest expense when the hedged transactions occur.
·Transactions entered into to hedge fluctuations in the fair value of existing debt can be designated as fair value hedges.  To the extent that the change in the fair value of the derivative offsets the change in the fair value of the existing debt, there is no earnings impact, as both changes are reflected in interest expense.  Realized gains and losses over the life of the hedge are reflected in interest expense.
·Transactions entered into to hedge the value of a net investment of foreign operations can be designated as net investment hedges.  To the extent that the derivatives are highly effective at hedging the value of the net investment, gains and losses are recorded in the foreign currency translation adjustment component of OCI and will not be recorded in earnings until the investment is substantially liquidated.
·Derivative transactions that do not qualify for hedge accounting treatment are marked to fair value through earnings.  These transactions generally include hedges of earnings translation risk associated with subsidiaries that report their financial statements in a currency other than the U.S. dollar.  As such, these transactions eliminate earnings volatility due solely to changes in foreign currency exchange rates.

(PPL and PPL Energy Supply)

The following tables present the fair value and location of derivative instruments recorded on the Balance Sheets at December 31, 2009.
Sheets.

  PPL PPL Energy Supply
  Derivatives designated as hedging instruments Derivatives not designated as hedging instruments (a) Derivatives designated as hedging instruments Derivatives not designated as hedging instruments (a)
  Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities
Current:                                
Price Risk Management Assets/Liabilities (b)                              
Interest rate swaps $10                             
Cross-currency swaps contracts  1  $4          $1  $4         
Foreign currency exchange contracts  8      $2       8      $2     
Commodity contracts  741   219   1,395  $1,279   741   219   1,395  $1,279 
   760   223   1,397   1,279   750   223   1,397   1,279 
Noncurrent:                                
Price Risk Management Assets/Liabilities (b)                              
Interest rate swaps  40                             
Cross-currency swaps contracts  11               11             
Foreign currency exchange contracts  5               5             
Commodity contracts  578   118   640   464   578   118   640   464 
   634   118   640   464   594   118   640   464 
                                 
Total derivatives $1,394  $341  $2,037  $1,743  $1,344  $341  $2,037  $1,743 
       December 31, 2012 December 31, 2011
       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 $ 14  $ 22     $ 5  $ 3  $ 3     $ 5 
   Cross-currency swaps      3             2       
   Foreign currency                        
    contracts      2       23    7     $ 11    
   Commodity contracts   59     $ 1,452    1,010    872    3    1,655    1,557 
     Total current   73    27    1,452    1,038    882    8    1,666    1,562 
Noncurrent:                        
 Price Risk Management                        
  Assets/Liabilities (b):                        
   Interest rate swaps   1          53             55 
   Cross-currency swaps   14    1          24          
   Foreign currency                        
    contracts            19             
   Commodity contracts   27       530    556    42    2    854    783 
     Total noncurrent   42    1    530    628    66    2    854    838 
Total derivatives $ 115  $ 28  $ 1,982  $ 1,666  $ 948  $ 10  $ 2,520  $ 2,400 

(a)$375300 million and $237 million of net gains associated with derivatives that were no longer designated as hedging instruments are recorded in AOCI at December 31, 2009.2012 and 2011.
(b)Represents the location on the balance sheet.Balance Sheet.

The after-tax balances of accumulated net gains (losses) (excluding net investment hedges) in AOCI were:were $132 million, $527 million and $695 million at December 31, 2012, 2011 and 2010.

  2009 2008 2007 
              
PPL $602  $(21) $(192) 
PPL Energy Supply  573   (12)  (188) 

(PPL)

The following tables present the pre-tax effect of derivative instruments recognized in income, OCI or OCI in 2009.

Derivatives in Fair Value Hedging Relationships Hedged Items in Fair Value Hedging Relationships Location of Gains (Losses) Recognized in Income Gain (Loss) Recognized in Income on Derivative 
Gain (Loss) Recognized in
Income on Related Item
             
Interest rate swaps Fixed rate debt Interest expense $12  $29 
    Other income-net      7 
regulatory assets and regulatory liabilities.

Derivative Relationships Derivative Gain (Loss) Recognized in OCI (Effective Portion) Location of Gains (Losses) Recognized in Income Gain (Loss) Reclassified from AOCI into Income (Effective Portion) Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Cash Flow Hedges:              
Interest rate swaps $64  Interest expense $(2)    
      Other income - net  1     
Cross-currency swaps  (45) Interest expense  2     
      Other income - net  (20)    
Commodity contracts  829  Wholesale energy marketing  358  $(296)
      Fuel  (20)  2 
      Energy purchases  (544)  (7)
      Other operation and maintenance  1     
      Depreciation  1     
  $848    $(223) $(301)
Net Investment Hedges:              
Foreign currency exchange contracts $(9)          
 Derivatives in Hedged Items in Location of Gain      
 Fair Value Hedging Fair Value Hedging (Loss) Recognized Gain (Loss) Recognized Gain (Loss) Recognized
 Relationships Relationships in Income in Income on Derivative in Income on Related Item
            
2012           
 Interest rate swaps Fixed rate debt Interest Expense    $ 3 
            
2011           
 Interest rate swaps Fixed rate debt Interest Expense $ 2  $ 25 
     Other Income      
     (Expense) - net      22 
2010           
 Interest rate swaps Fixed rate debt Interest Expense $ 48  $ (6)
378

             Gain (Loss) Recognized
             in Income on Derivative
     Derivative Gain   Gain (Loss) Reclassified (Ineffective Portion and
   Derivative (Loss) Recognized in Location of Gain (Loss) from AOCI into Income Amount Excluded from
   Relationships  OCI (Effective Portion) Recognized in Income (Effective Portion) Effectiveness Testing)
2012            
 Cash Flow Hedges:           
  Interest rate swaps $ (28) Interest Expense $ (18)   
        Other Income (Expense) - net   1    
  Cross-currency swaps   (15) Interest Expense   (2)   
        Other Income (Expense) - net   (23)   
  Commodity contracts   114  Wholesale energy marketing   891   (1)
        Depreciation   2    
        Energy purchases   (139)   (2)
 Total $ 71    $ 712  $ (3)
 Net Investment Hedges:           
  Foreign currency contracts $ (7)        
               
2011            
 Cash Flow Hedges:           
  Interest rate swaps $ (55) Interest Expense $ (13) $ (13)
  Cross-currency swaps   (35) Interest Expense   5    
        Other Income (Expense) - net   29    
  Commodity contracts   431  Wholesale energy marketing   835    (39)
        Fuel   1    
        Depreciation   2    
        Energy purchases   (243)   1 
 Total $ 341    $ 616  $ (51)
 Net Investment Hedges:           
  Foreign currency contracts $ 6         
               
2010            
 Cash Flow Hedges:           
  Interest rate swaps $ (145) Interest Expense $ (4) $ (17)
        Other Income (Expense) - net   (30)   
  Cross-currency swaps   25  Interest Expense   2    
        Other Income (Expense) - net   16    
  Commodity contracts   487  Wholesale energy marketing   680    (201)
        Fuel   2    
        Depreciation   2    
        Energy purchases   (458)   3 
 Total $ 367    $ 210  $ (215)
 Net Investment Hedges:           
  Foreign currency contracts $ 5         


Derivatives Not Designated as Hedging Instruments: Location of Gains (Losses) Recognized in Income on Derivatives 2009
       
Foreign currency exchange contracts Other income - net $(9)
Commodity contracts Unregulated retail electric and gas  13 
  Wholesale energy marketing  588 
  Net energy trading margins (a)    
  Fuel  12 
  Energy purchases  (808)
    $(204)
Derivatives Not Designated as Location of Gain (Loss) Recognized in         
 Hedging Instruments  Income on Derivatives  2012   2011   2010 
            
Foreign currency contracts Other Income (Expense) - net $ (52) $ 65  $ 3 
Interest rate swaps Interest Expense   (8)   (8)   
Commodity contracts Utility      (1)   (2)
  Unregulated retail electric and gas   30    39    11 
  Wholesale energy marketing   1,191    1,606    (70)
  Net energy trading margins (a)   8    (6)   1 
  Fuel      (1)   12 
  Energy purchases   (965)   (1,493)   (405)
  Total $ 204  $ 201  $ (450)
            
Derivatives Not Designated as Location of Gain (Loss) Recognized as         
 Hedging Instruments Regulatory Liabilities/Assets  2012   2011    
            
Interest rate swaps Regulatory assets - noncurrent $ 1  $ (26)   
            
Derivatives Designated as Location of Gain (Loss) Recognized as         
 Cash Flow Hedges Regulatory Liabilities/Assets  2012   2011    
            
Interest rate swaps Regulatory liabilities - noncurrent $ 14       

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

(PPL Energy Supply)

The following tables present the fair value and location of derivative instruments recorded on the Balance Sheets.
379

       December 31, 2012 December 31, 2011
       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):                        
   Commodity contracts $ 59     $ 1,452  $ 1,010  $ 872  $ 3  $ 1,655  $ 1,557 
     Total current   59       1,452    1,010    872    3    1,655    1,557 
Noncurrent:                        
 Price Risk Management                        
  Assets/Liabilities (b):                        
   Commodity contracts   27       530    556    42    2    854    783 
     Total noncurrent   27       530    556    42    2    854    783 
Total derivatives $ 86     $ 1,982  $ 1,566  $ 914  $ 5  $ 2,509  $ 2,340 

(a)$300 million and $237 million of net gains associated with derivatives that were no longer designated as hedging instruments are recorded in AOCI at December 31, 2012 and 2011.
(b)Represents the location on the Balance Sheet.

The after-tax balances of accumulated net gains (losses) (excluding net investment hedges) in AOCI were $210 million, $605 million and $733 million at December 31, 2012, 2011 and 2010.  The December 31, 2011 AOCI balance reflects the effect of PPL Energy Supply's distribution of its membership interest in PPL Global to its parent, PPL Energy Funding.  See Note 9 for additional information.

The following tables present the pre-tax effect of derivative instruments recognized in income or OCI in 2009.OCI.  There were no gains (losses) on interest rate swaps for 2012.

Derivatives in Fair Value Hedging Relationships Hedged Items in Fair Value Hedging Relationships Location of Gains (Losses) Recognized in Income Gain (Loss) Recognized in Income on Derivative 
Gain (Loss) Recognized in
Income on Related Item
             
Interest rate swaps Fixed rate debt Interest expense $1     
Derivatives inHedged Items inLocation of Gain
Fair Value HedgingFair Value Hedging(Loss) RecognizedGain (Loss) RecognizedGain (Loss) Recognized
RelationshipsRelationshipsin Incomein Income on Derivativein Income on Related Item
2011 
Interest rate swapsFixed rate debtInterest Expense$ 2 
2010 
Interest rate swapsFixed rate debtInterest Expense$ 2 


             Gain (Loss) Recognized
             in Income on Derivative
     Derivative Gain   Gain (Loss) Reclassified (Ineffective Portion and
  Derivative (Loss) Recognized in Location of Gain (Loss) from AOCI into Income Amount Excluded from
  Relationships  OCI (Effective Portion) Recognized in Income (Effective Portion) Effectiveness Testing)
2012            
 Cash Flow Hedges:           
  Commodity contracts $ 114  Wholesale energy marketing $ 891  $ (1)
        Depreciation   2    
        Energy purchases   (139)   (2)
 Total $ 114    $ 754  $ (3)
               
2011            
 Cash Flow Hedges:           
  Commodity contracts $ 431  Wholesale energy marketing $ 835  $ (39)
        Fuel   1    
        Depreciation   2    
        Energy purchases   (243)   1 
 Total $ 431    $ 595  $ (38)
               
2010            
 Cash Flow Hedges:           
  Interest rate swaps   Discontinued Operations (net of      
        income taxes)    $ (3)
  Cross-currency swaps$ 25  Discontinued Operations (net of      
        income taxes) $ 18    
  Commodity contracts   487  Wholesale energy marketing   680    (201)
        Fuel   2    
        Depreciation   2    
        Energy purchases   (458)   3 
 Total $ 512    $ 244  $ (201)
 Net Investment Hedges:           
  Foreign currency contracts $ 5         
Derivative Relationships Derivative Gain (Loss) Recognized in OCI (Effective Portion) Location of Gains (Losses) Recognized in Income Gain (Loss) Reclassified from AOCI into Income (Effective Portion) Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Cash Flow Hedges:              
Interest rate swaps     Interest expense        
      Other income - net        
Cross-currency swaps $(45) Interest expense $2     
      Other income - net  (20)    
Commodity contracts  829  Wholesale energy marketing  358  $(296)
      Fuel  (20)  2 
      Energy purchases  (544)  (7)
      Other operation and maintenance  1     
      Depreciation  1     
  $784    $(222) $(301)
Net Investment Hedges:              
Foreign currency exchange contracts $(9)          


380
Derivatives Not Designated as Hedging Instruments: Location of Gains (Losses) Recognized in Income on Derivatives 2009
       
Foreign currency exchange contracts Other income - net $(9)
Commodity contracts Unregulated retail electric and gas  13 
  Wholesale energy marketing  588 
  Net energy trading margins (a)    
  Fuel  12 
  Energy purchases  (808)
    $(204)

Derivatives Not Designated as Location of Gain (Loss) Recognized in         
 Hedging Instruments  Income on Derivatives  2012   2011   2010 
            
Foreign currency contracts Discontinued Operations         
   (net of income taxes)       $ 3 
Commodity contracts Unregulated retail electric and gas $ 30  $ 39    11 
  Wholesale energy marketing   1,191    1,606    (70)
  Net energy trading margins (a)   8    (6)   1 
  Fuel      (1)   12 
  Energy purchases   (965)   (1,493)   (405)
  Total $ 264  $ 145  $ (448)

(a)Differs from statementthe Statement of incomeIncome 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 location of derivative instruments recorded on the Balance Sheets:

       December 31, 2012 December 31, 2011
       Derivatives designated as Derivatives not designated Derivatives designated as Derivatives not designated
       hedging instruments as hedging instruments hedging instruments as hedging instruments
Current: Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities
 Other Current                        
  Assets/Liabilities (a):                        
   Interest rate swaps $ 14        $ 5           $ 5 
     Total current   14          5             5 
Noncurrent:                        
 Price Risk Management                        
  Assets/Liabilities (a):                        
   Interest rate swaps            53             55 
     Total noncurrent            53             55 
Total derivatives $ 14        $ 58           $ 60 

(a)Represents the location on the Balance Sheet.

The following tables present the pre-tax effect of derivative instruments recognized in income or regulatory assets and regulatory liabilities for the periods ended December 31, 2012, 2011 and 2010, for the Successor and Predecessor.

    Successor  Predecessor
        
Two Months
Ended
  
Ten Months
Ended
Derivatives Not Designated as Location of Gain (Loss) Recognized in December 31, December 31, December 31,  October 31,
 Hedging Instruments  Income on Derivatives 2012  2011  2010   2010 
                
Interest rate swaps Interest Expense $ (8) $ (8) $ (1)  $ (7)
Commodity contracts Operating Revenues      (1)   (2)    3 
  Total $ (8) $ (9) $ (3)  $ (4)
                
                
Derivatives Not Designated as Location of Gain (Loss) Recognized as         
 Hedging Instruments Regulatory Liabilities/Assets December 31, 2012 December 31, 2011
                
Interest rate swaps Regulatory assets - noncurrent $    1  $     (26)
                
                
Derivatives Designated as Location of Gain (Loss) Recognized as         
Cash Flow Hedges Regulatory Liabilities/Assets December 31, 2012 December 31, 2011
                
Interest rate swaps Regulatory liabilities - noncurrent $    14        

(LG&E)

The following table presents the fair value and location of derivative instruments recorded on the Balance Sheets:
381

       December 31, 2012 December 31, 2011
       Derivatives designated as Derivatives not designated Derivatives designated as Derivatives not designated
       hedging instruments as hedging instruments hedging instruments as hedging instruments
Current: Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities
 Other Current                        
  Assets/Liabilities (a):                        
   Interest rate swaps $ 7        $ 5           $ 5 
     Total current   7          5             5 
Noncurrent:                        
 Price Risk Management                        
  Assets/Liabilities (a):                        
   Interest rate swaps            53             55 
     Total noncurrent            53             55 
Total derivatives $ 7        $ 58           $ 60 

(a)Represents the location on the balance sheet.

The following tables present the pre-tax effect of derivative instruments recognized in income or regulatory assets and regulatory liabilities for the periods ended December 31, 2012, 2011 and 2010, for the Successor and Predecessor.

    Successor  Predecessor
    Year Ended Year Ended Two Months Ended  
Ten Months
Ended
Derivatives Not Designated as Location of Gain (Loss) Recognized in December 31, December 31, December 31,  October 31,
 Hedging Instruments  Income on Derivatives 2012  2011  2010   2010 
                
Interest rate swaps Interest Expense $ (8) $ (8) $ (1)  $ (7)
Commodity contracts Operating Revenues      (1)   (2)    3 
  Total $ (8) $ (9) $ (3)  $ (4)
                
                
Derivatives Not Designated as Location of Gain (Loss) Recognized as         
 Hedging Instruments Regulatory Liabilities/Assets December 31, 2012 December 31, 2011
                
Interest rate swaps Regulatory assets - noncurrent $    1  $     (26)
                
                
Derivatives Designated as Location of Gain (Loss) Recognized as         
Cash Flow Hedges Regulatory Liabilities/Assets December 31, 2012 December 31, 2011
                
Interest rate swaps Regulatory liabilities - noncurrent $    7        

(KU)

At December 31, 2012, KU had interest rate swaps, which were designated as hedging instruments, of $7 million recorded in "Other current assets" on the Balance Sheet.  KU recognized a $7 million, pre-tax gain on the derivative instruments in "Noncurrent regulatory liabilities" at December 31, 2012.

Credit Risk-Related Contingent Features (PPL, and PPL Energy Supply)Supply, LKE, LG&E and KU)

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

Additionally, certain of PPL's and PPL Energy Supply's derivative contracts contain credit risk-related contingent provisions that require PPL or PPL Energy Supply to provide "adequate assurance"adequate assurance of performance be provided if the other party has reasonable grounds for insecurityconcerns regarding PPL's or PPL Energy Supply'sthe performance of itsPPL's obligation under the 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
382

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" provisions.

To determine net liability positions, PPLAt December 31, 2012, the effect of a decrease in credit ratings below investment grade on derivative contracts that contain credit risk-related contingent features and PPL Energy Supply use the fair value of each agreement.  The aggregate fair value of all derivative instruments with the credit contingent provisions described above that were in a net liability position at December 31, 2009 was $197 million for both PPL and PPL Energy Supply, of which both had posted collateral of $163 million in the normal course of business.  At December 31, 2009, if the credit contingent provisions underlying these derivative instruments were triggered due to a credit downgrade below investment grade, PPL and PPL Energy Supply would have been required to post an additional $131 million of collateral to their counterparties.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 provisions $ 219  $ 142  $ 39  $ 39 
Aggregate fair value of collateral posted on these derivative instruments   39    7    32    32 
Aggregate fair value of additional collateral requirements in the event of            
 a credit downgrade below investment grade (a)   202   155    9   

19. 
Goodwill(a)
Includes the effect of net receivables and Other Intangible Assetspayables already recorded on the Balance Sheet.

Goodwill (PPL and PPL Energy Supply)

The changes in the carrying amount of goodwill by segment were:

  Supply International Delivery Total
  2009 2008 2009 2008 2009 2008
                         
Balance at beginning of period (a) $94  $94  $669  $897  $763  $991 
Allocation to discontinued operations (b)  (3)              (3)    
Effect of foreign currency exchange rates          46   (228)  46   (228)
Balance at end of period $91  $94  $715  $669  $806  $763 
20.  Goodwill and Other Intangible Assets
                            
Goodwill
                            
(PPL and PPL Energy Supply)
                            
The changes in the carrying amount of goodwill by segment were:
                            
     Kentucky Regulated U.K. Regulated Supply Total
     2012  2011  2012  2011  2012  2011  2012  2011 
PPL                        
Balance at beginning of period (a) $ 662  $ 662  $ 3,032  $ 679  $ 420  $ 420  $ 4,114  $ 1,761 
 Goodwill recognized during the period (b)         (14)   2,391          (14)   2,391 
 Effect of foreign currency exchange rates         58    (38)         58    (38)
Balance at end of period (a) $ 662  $ 662  $ 3,076  $ 3,032  $ 420  $ 420  $ 4,158  $ 4,114 
                            
PPL Energy Supply                        
Balance at beginning of period (a)          $ 679  $ 86  $ 86  $ 86  $ 765 
 Derecognition (c)            (679)            (679)
Balance at end of period (a)          $  $ 86  $ 86  $ 86  $ 86 

(a)There were no accumulated impairment losses related to goodwill recorded at January 1, 2008.goodwill.
(b)Represents goodwill recognized as a result of the acquisition of WPD Midlands.  See Note 10 for additional information.
(c)AllocatedRepresents the amount of goodwill derecognized as a result of PPL Energy Supply's distribution of its membership interest in PPL Global to PPL Energy Supply's parent, PPL Energy Funding.  See Note 9 for additional information on the distribution.  Subsequent to the Long Islanddistribution, PPL Energy Supply operates in a single reportable segment and the majority of the Maine hydroelectric generation businesses and written off.reporting unit.

Other Intangibles
Other Intangibles
               
(PPL)
               
The gross carrying amount and the accumulated amortization of other intangible assets were:
               
    December 31, 2012 December 31, 2011
    Gross    Gross   
    Carrying Accumulated Carrying Accumulated
    Amount Amortization Amount Amortization
Subject to amortization:            
 Contracts (a) (b) (c) $ 408  $ 150  $ 611  $ 155 
 Land and transmission rights   284    113    263    110 
 Emission allowances/RECs (d) (e) (f)   17       20    
 Licenses and other (g)   287    39    265    35 
Total subject to amortization   996    302    1,159    300 
               
Not subject to amortization due to indefinite life:            
 Land and transmission rights   18       16    
 Easements (h)   220       199    
Total not subject to amortization due to indefinite life   238       215    
Total $ 1,234  $ 302  $ 1,374  $ 300 

(PPL)
383


The gross carrying amount and the accumulated amortization of other intangible assets were:

  December 31, 2009 December 31, 2008
  Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization
Subject to amortization:                
Land and transmission rights $272  $114  $244  $110 
Emission allowances/RECs (a) (b)  56       88     
Lease arrangement and other (c)  375   41   372   23 
Not subject to amortization due to indefinite life:                
Land and transmission rights  16       16     
Easements  76       67     
  $795  $155  $787  $133 

(a)In 2012, intangible assets related to a tolling agreement were eliminated in consolidation as a result of the Ironwood Acquisition.  See Note 10 for additional information.
(b)Removed fromGross carrying amount for 2011 includes $10 million, which represents the Balance Sheets andfair value of customer contracts with terms favorable to market recognized as a result of the 2011 acquisition of WPD Midlands.  The weighted-average amortization period of these contracts was ten years at the acquisition date.  See Note 10 for additional information.
(c)The gross carrying amount includes $269 million of coal contracts related to LKE, which represents the fair value of contracts with terms that are favorable to market recognized as a result of the 2010 acquisition of LKE by PPL.  An offsetting regulatory liability was recorded related to these contracts, which is being amortized over the same period as the intangible assets, eliminating any income statement impact.  See Note 6 for additional information.
(d)PPL Energy Supply emission allowances/RECs are expensed when consumed or sold.  Consumption expense was $32$12 million, $25$16 million, and $108$45 million in 2009, 2008,2012, 2011 and 2007.2010.  Consumption expense is estimatedexpected to be insignificant in future periods.
(e)Includes emission allowances of LKE.  An offsetting regulatory liability is recorded related to these emission allowances, which is being amortized as the emission allowances are consumed, eliminating any income statement impact.  The carrying amounts of these emission allowances were insignificant at $26 million for 2010, $8 million for 2011, $2 million forDecember 31, 2012 and $12011.  Consumption related to these emission allowances was insignificant in 2012 and $11 million for 2013 and 2014.in 2011.
(b)(f)During 2009,2011, PPL recorded $37$7 million of impairment charges.  See Note 1718 for additional information.
(g)"Other" includes costs for the development of licenses, the most significant of which is the COLA.  Amortization of these costs begins when the related asset is placed in service.  See Note 8 for additional information on the COLA.
(h)Gross carrying amount for 2011 includes $88 million, which represents the fair value of easements recognized as a result of the 2011 acquisition of WPD Midlands.  See Note 10 for additional information.

Current intangible assets are included in "Other current assets" and long-term intangible assets are included in "Other intangibles" in their respective areas on the Balance Sheets.

Amortization expense, excluding consumption of emission allowances/RECs, was as follows:
          
   2012   2011   2010 
          
Intangible assets with no regulatory offset $ 14  $ 25  $ 24 
Intangible assets with regulatory offset   47    87    11 
Total $ 61  $ 112  $ 35 

Amortization expense for each of the next five years, excluding consumption of emission allowances/RECs, is estimated to be:
                
   2013   2014   2015   2016   2017 
                
Intangible assets with no regulatory offset $ 10  $ 10  $ 10  $ 8  $ 8 
Intangible assets with a regulatory offset   52    46    51    27    9 
Total $ 62  $ 56  $ 61  $ 35  $ 17 

(PPL Energy Supply)
               
The gross carrying amount and the accumulated amortization of other intangible assets were:
               
    December 31, 2012 December 31, 2011
    Gross    Gross   
    Carrying Accumulated Carrying Accumulated
    Amount Amortization Amount Amortization
Subject to amortization:            
 Contracts (a)       $ 203  $ 53 
 Land and transmission rights $ 17  $ 13    17    13 
 Emission allowances/RECs (b) (c)   13       15    
 Licenses and other (d)   277    35    255    30 
Total subject to amortization $ 307  $ 48  $ 490  $ 96 

(a)In 2012, intangible assets related to a tolling agreement were eliminated in consolidation as a result of the Ironwood acquisition.  See Note 10 for additional information.
(b)These emission allowances/RECs are expensed when consumed or sold.  Consumption expense was $12 million, $16 million, and $46 million in 2012, 2011, and 2010.  Consumption expense is expected to be insignificant in future periods.
(c)During 2011, PPL Energy Supply recorded $7 million of impairment charges.  See Note 18 for additional information.
(d)"Other" includes costs for the development of licenses, the most significant of which is the COLA.  Amortization of these costs begins when the related asset is placed in service.  See Note 8 for additional information on the COLA.

Current intangible assets and long-term intangible assets are included in "Other intangibles" in their respective areas on the Balance Sheets.

Amortization expense, excluding consumption of emission allowances/RECs, was $22 million, $13 million and $7 million in 2009, 2008 and 2007, and is estimated to be $23 million per year for 2010 through 2014.

(PPL Energy Supply)

The gross carrying amount and the accumulated amortization of other intangible assets were:

  December 31, 2009  December 31, 2008 
  Gross Carrying Amount  Accumulated Amortization  Gross Carrying Amount  Accumulated Amortization 
Subject to amortization:                
Land and transmission rights $59  $23  $42  $22 
Emission allowances/RECs (a) (b)  56       88     
Lease arrangement and other (c)  375   41   372   23 
Not subject to amortization due to indefinite life:                
Easements  76       67     
  $566  $64  $569  $45 

(a)Removed from the Balance Sheets and expensed when consumed or sold.  Consumption expense was $32 million, $25 million, and $108 million in 2009, 2008, and 2007.  Consumption expense is estimated at $26 million for 2010, $8 million for 2011, $2 million for 2012 and $1 million for 2013 and 2014.
(b)During 2009, PPL Energy Supply recorded $37 million of impairment charges.  See Note 17 for additional information.
(c)"Other" includes costs for the development of licenses, the most significant of which is the COLA.  Amortization of these costs begins when the related asset is placed in service.  See Note 8 for additional information on the COLA.

Current intangible assetscurrent assets" and long-term intangible assets are presented as "Other intangibles" in their respective areas on the Balance Sheets.

Amortization expense, excluding consumption of emission allowances/RECs, was $19 million, $10 million and $4 million in 2009, 2008 and 2007, and is estimated to be $20 million per year for 2010 through 2014.
384

Amortization expense, excluding consumption of emission allowances/RECs, was as follows:
          
   2012   2011   2010 
          
Amortization expense $ 9  $ 20  $ 20 

(PPL Electric)
Amortization expense for each of the next five years, excluding consumption of emission allowances/RECs, is estimated to be:
                
   2013   2014   2015   2016   2017 
                
Estimated amortization expense $ 5  $ 5  $ 5  $ 3  $ 3 

The gross carrying amount and the accumulated amortization of intangible assets were:

(PPL Electric)(PPL Electric)
          
The gross carrying amount and the accumulated amortization of other intangible assets were:The gross carrying amount and the accumulated amortization of other intangible assets were:
          
   December 31, 2012 December 31, 2011
 December 31, 2009  December 31, 2008    Gross   Gross  
 Gross Carrying Amount  Accumulated Amortization  Gross Carrying Amount  Accumulated Amortization    Carrying Accumulated Carrying Accumulated
            Amount Amortization Amount Amortization
Subject to amortization:         Subject to amortization:        
Land and transmission rights $214 $91 $203 $89 
Land and transmission rights $ 249  $ 99  $ 232  $ 96 
Licenses and other   4    1    4    1 
Total subject to amortizationTotal subject to amortization   253    100    236    97 
          
Not subject to amortization due to indefinite life:         Not subject to amortization due to indefinite life:        
Land and transmission rights  16       16     
 $230  $91  $219  $89 Land and transmission rights   18       16    
TotalTotal $ 271  $ 100  $ 252  $ 97 

Intangible assets are shown as "Intangibles" on the Balance Sheets.

Amortization expense was $3 million for 2009insignificant in 2012, 2011 and 2008 and $2 million for 2007,2010, and is estimatedexpected to be $3 million per year for 2010 through 2014.insignificant in future years.

(PPL, PPL Energy Supply and PPL Electric)

The annual provisions for amortization have been computed principally in accordance with the following weighted-average asset lives (in years):
(LKE)
               
The gross carrying amount and the accumulated amortization of other intangible assets were:
               
    December 31, 2012 December 31, 2011
    Gross    Gross   
    Carrying Accumulated Carrying Accumulated
    Amount Amortization Amount Amortization
Subject to amortization:            
 Coal contracts (a) $ 269  $ 128  $ 269  $ 89 
 Land and transmission rights (b)   18    1    14    1 
 Emission allowances (c)   4       5    
 OVEC power purchase agreement (d)   126    17    126    9 
Total subject to amortization $ 417  $ 146  $ 414  $ 99 

(a)Gross carrying amount represents the fair value of coal contracts with terms favorable to market recognized as a result of the 2010 acquisition by PPL.  An offsetting regulatory liability was recorded related to these contracts, which is being amortized over the same period as the intangible assets, eliminating any income statement impact.  See Note 6 for additional information.
(b)Gross carrying amount includes $14 million, which represents the fair value of land and transmission rights recognized as an intangible asset as a result of adopting PPL's accounting policies in the Successor period. Amortization expense is recovered through base rates and is expected to be insignificant for future periods.
(c)Weighted-Average LifeRepresents the fair value of emission allowances recognized as a result of the 2010 acquisition by PPL.  An offsetting regulatory liability is recorded related to these emission allowances, which is being amortized as the emission allowances are consumed, eliminating any income statement impact.  Consumption related to these emission allowances was insignificant in 2012 and $11 million in 2011.
(d)Gross carrying amount represents the fair value of the OVEC power purchase contract recognized as a result of the 2010 acquisition by PPL.  See Note 6 for additional information.

Current intangible assets are included in "Other current assets" on the Balance Sheets.  Long-term intangible assets are presented as "Other intangibles" on the Balance Sheets.
385

Amortization expense for the Successor, excluding consumption of emission allowances, was as follows:
          
   2012   2011   2010 
          
Intangible assets with no regulatory offset    $ 1    
Intangible assets with regulatory offset $ 47    87  $ 11 
Total $ 47  $ 88  $ 11 

Amortization expense for each of the next five years, excluding consumption of emission allowances, is estimated to be:
                
   2013   2014   2015   2016   2017 
                
Intangibles with regulatory offset $ 52  $ 46  $ 51  $ 27  $ 9 

(LG&E)
               
The gross carrying amount and the accumulated amortization of other intangible assets were:
               
    December 31, 2012 December 31, 2011
    Gross    Gross   
    Carrying Accumulated Carrying Accumulated
    Amount Amortization Amount Amortization
Subject to amortization:            
 Coal contracts (a) $ 124  $ 62  $ 124  $ 46 
 Land and transmission rights (b)   8    1    6    1 
 Emission allowances (c)   1       2    
 OVEC power purchase agreement (d)   87    13    87    6 
Total subject to amortization $ 220  $ 76  $ 219  $ 53 

(a)Gross carrying amount represents the fair value of coal contracts with terms favorable to market recognized as a result of the 2010 acquisition by PPL.  An offsetting regulatory liability was recorded related to these contracts, which is being amortized over the same period as the intangible assets, eliminating any income statement impact.  See Note 6 for additional information.
(b)Gross carrying amount includes $6 million, which represents the fair value of land and transmission rights recognized as an intangible asset as a result of adopting PPL's accounting policies in the Successor period. Amortization expense is recovered through base rates and is expected to be insignificant for future periods.
(c)Represents the fair value of emission allowances recognized as a result of the 2010 acquisition by PPL.  An offsetting regulatory liability is recorded related to these emission allowances, which is being amortized as the emission allowances are consumed, eliminating any income statement impact.  Consumption related to these emission allowances was insignificant in 2012 and $5 million in 2011.
(d)Gross carrying amount represents the fair value of the OVEC power purchase contract recognized as a result of the 2010 acquisition by PPL.  See Note 6 for additional information.

Current intangible assets are included in "Other current assets" on the Balance Sheets.  Long-term intangible assets are presented as "Other intangibles" on the Balance Sheets.

Amortization expense for the Successor, excluding consumption of emission allowances, was as follows:
          
   2012   2011   2010 
          
Intangible assets with no regulatory offset    $ 1    
Intangible assets with regulatory offset $ 23    45  $ 7 
Total $ 23  $ 46  $ 7 

Amortization expense for each of the next five years, excluding consumption of emission allowances, is estimated to be:
                
   2013   2014   2015   2016   2017 
                
Intangibles with regulatory offset $ 25  $ 23  $ 24  $ 14  $ 6 

(KU)
     
Land and transmission rights  67 
Emission allowances/RECs (a)    
Lease arrangementThe gross carrying amount and the accumulated amortization of other21 intangible assets were:
386

               
    December 31, 2012 December 31, 2011
    Gross    Gross   
    Carrying Accumulated Carrying Accumulated
    Amount Amortization Amount Amortization
Subject to amortization:            
 Coal contracts (a) $ 145  $ 66  $ 145  $ 43 
 Land and transmission rights (b)   10       8    
 Emission allowances (c)   3       3    
 OVEC power purchase agreement (d)   39    4    39    3 
Total subject to amortization $ 197  $ 70  $ 195  $ 46 

(a)Gross carrying amount represents the fair value of coal contracts with terms favorable to market recognized as a result of the 2010 acquisition by PPL.  An offsetting regulatory liability was recorded related to these contracts, which is being amortized over the same period as the intangible assets, eliminating any income statement impact.  See Note 6 for additional information.
(b)Expensed whenGross carrying amount includes $8 million, which represents the fair value of land and transmission rights recognized as an intangible asset as a result of adopting PPL's accounting policies in the Successor period. Amortization expense is recovered through base rates and is expected to be insignificant for future periods.
(c)Represents the fair value of emission allowances recognized as a result of the 2010 acquisition by PPL.  An offsetting regulatory liability is recorded related to these emission allowances, which is being amortized as the emission allowances are consumed, or sold.eliminating any income statement impact.  Consumption related to these emission allowances was $6 million for 2011.  KU had no consumption related to these emission allowances in 2012.
(d)Gross carrying amount represents the fair value of the OVEC power purchase contract recognized as a result of the 2010 acquisition by PPL.  See Note 6 for additional information.

FollowingCurrent intangible assets are included in "Other current assets" on the weighted-average rates of amortization at December 31.Balance Sheets.  Long-term intangible assets are presented as "Other intangibles" on the Balance Sheets.

  2009 2008
       
Land and transmission rights  1.23%   1.28% 
Emission allowances/RECs (a)        
Lease arrangement and other  6.09%   6.10% 
Amortization expense for the Successor, excluding consumption of emission allowances, was as follows:
          
   2012   2011   2010 
          
Intangible assets with regulatory offset $ 24  $ 42  $ 4 

(a)Expensed when consumed or sold.
Amortization expense for each of the next five years, excluding consumption of emission allowances, is estimated to be:
                
   2013   2014   2015   2016   2017 
                
Intangibles with regulatory offset $ 27  $ 23  $ 27  $ 13  $ 3 

(PPL and PPL Energy Supply)21.  Asset Retirement Obligations

In November 2009, the NRC approved PPL Susquehanna's application for 20-year license renewals for each of the Susquehanna nuclear units.  Costs of $17 million were capitalized(PPL)

WPD has recorded conditional AROs required by U.K. law related to these license renewals.  The weighted-average period prior to the next PPL Susquehanna license renewal is 34 years.  See Note 8 for additional information.

20.  
Asset Retirement Obligations
treated wood poles, gas-filled switchgear and fluid-filled cables.

(PPL and PPL Energy Supply)

PPL and PPL Energy Supply recognized, ashas recorded liabilities in the financial statements to reflect various legal obligations associated with the retirement of long-lived assets, the largestmost significant of which relates to the decommissioning of the Susquehanna nuclear plant.  The accrued nuclear decommissioning obligation was $316 million and $292 million at December 31, 2012 and 2011.  The fair value of investments that are legally restricted for the decommissioning of the Susquehanna nuclear plant was $712 million and $640 million at December 31, 2012 and 2011, and is included in "Nuclear plant decommissioning trust funds" on the Balance Sheets.  See Notes 18 and 23 for additional information on the nuclear decommissioning trust funds.  Other AROs recorded relate to significant interim retirements at the Susquehanna plant and various environmental requirements for coal piles, ash basins and other waste basin retirements.

PPL and PPL Energy Supply havehas recorded several conditional AROs, the most significant of which related to the removal and disposal of asbestos-containing material.

In addition to the AROs that were recorded for asbestos-containing material, PPL and PPL Energy Supply identified other asbestos-related obligations, but werewas unable to reasonably estimate their fair values.  These retirement obligations could not be reasonably estimated due to indeterminable settlement dates.  The generation plants, where significant amounts of asbestos-containing material are located, have been well maintained and large capital and environmental investments are being made at these plants.  During the previous five years, the useful lives of the plants had been reviewed and in most cases significantly extended.  Due to these circumstances, PPL Energy Supply management was unable to reasonably estimate a settlement date or range of settlement dates for the remediation of all of the asbestos-containing material at certain of the generation plants.  If economic events or other circumstances change that enable PPL and PPL Energy Supply to reasonably estimate the fair value of these retirement obligations, they will be recorded at that time.

Other conditional AROs that were recorded related to treated wood poles, gas-filled switchgear and fluid-filled cables.  These obligations, required by U.K. law, had an insignificant impact on the financial statements.

PPL and PPL Energy Supply also identified legal retirement obligations associated with the retirement of a reservoir and certain transmission assets that could not be reasonably estimated due to an indeterminable settlement dates.date.

Current AROs are included in "Other current liabilities" and long-term AROs are included in "Asset retirement obligations" on the Balance Sheets.  The changes in the carrying amounts of AROs were:
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  2009 2008
       
ARO at beginning of period $389  $376 
Accretion expense  31   29 
New obligations incurred  9   12 
Change in estimated cash flow or settlement date  16   (4)
Change in foreign currency exchange rates      (2)
Obligations settled  (19)  (22)
ARO at end of period $426  $389 

Changes in ARO costs and settlement dates, which affect the carrying value of various AROs, are reviewed periodically to ensure that any material changes are incorporated into the latest estimates of the obligation.  In 2009, PPL Energy Supply revised cost estimates for several AROs and recognized additional asbestos liabilities at several plants, the most significant being the asbestos AROs at the Montour plant.  In 2008, PPL Energy Supply revised estimated settlement dates and cost estimates for remediating several AROs, the most significant being the ash basins at the Montour and Brunner Island plants.  In addition, PPL Energy Supply recognized additional liabilities for asbestos-containing material at several plants.  The effect of these new and revised liabilities was to increase the ARO liability and related plant balances by $25 million in 2009 and $8 million in 2008.  The 2009 and 2008 income statement impact of these changes was insignificant.

The most significant ARO recorded by PPL and PPL Energy Supply relates to the decommissioning of the Susquehanna nuclear plant.  The expected cost to decommission the Susquehanna plant is based on a 2002 site-specific study that estimated the cost to dismantle and decommission each unit immediately following final shutdown.  PPL Susquehanna's 90% share of the total estimated cost of decommissioning the Susquehanna plant was approximately $936 million measured in 2002 dollars.  This estimate includes decommissioning the radiological portions of the station and the cost of removal of non-radiological structures and materials.  In 2010, PPL Energy Supply plans to perform a site-specific study to estimate the cost to decommission each unit.  The impact of this study on the recorded ARO is not now determinable, but could be significant.

The accrued nuclear decommissioning obligation was $348 million and $322 million at December 31, 2009 and 2008, and is included in "Asset retirement obligations" on the Balance Sheets.  The fair value of investments that are legally restricted for the decommissioning of the Susquehanna nuclear plant was $548 million and $446 million at December 31, 2009 and 2008, and is included in "Nuclear plant decommissioning trust funds" on the Balance Sheets.  See Notes 17 and 21 for additional information on the nuclear decommissioning trust funds.  Accretion expense, associated with the obligation, was $26 million in 2009, $24 million in 2008 and $22 million in 2007, and is included in "Other operation and maintenance" on the Statements of Income.

(PPL and PPL Electric)

PPL Electric has identified legal retirement obligations for the retirement of certain transmission assets that could not be reasonably estimated due to indeterminable settlement dates.  These assets are located on rights-of-way that allow the grantor to require PPL Electric to relocate or remove the assets.  Since this option is at the discretion of the grantor of the right-of-way, PPL Electric is unable to determine when these events may occur.

21.  
Available-for-Sale Securities
(PPL, LKE, LG&E and KU)

LG&E's and KU's AROs are primarily related to the final retirement of assets associated with generating units.  LG&E also has AROs related to natural gas mains and wells.  LG&E's and KU's transmission and distribution lines largely operate under perpetual property easement agreements which do not generally require restoration upon removal of the property.  Therefore, no material AROs are recorded for transmission and distribution assets.  As described in Notes 1 and 6, the accretion and depreciation expense recorded by LG&E and KU is offset with a regulatory credit on the income statement, such that there is no earnings impact.

(PPL, PPL Energy Supply, LKE, LG&E and PPL Electric)KU)

The changes in the carrying amounts of AROs were as follows.

    PPL PPL Energy Supply
    2012  2011  2012  2011 
               
ARO at beginning of period $ 497  $ 448  $ 359  $ 345 
 Accretion expense   36    33    28    26 
 Obligations assumed in acquisition of WPD Midlands (a)      15       
 Derecognition (b)            (5)
 Obligations incurred   9    14    3    11 
 Changes in estimated cash flow or settlement date   31    5    (7)   (1)
 Effect of foreign currency exchange rates   1          
 Obligations settled   (22)   (18)   (8)   (17)
ARO at end of period $ 552  $ 497  $ 375  $ 359 

                     
    LKE LG&E KU
    2012  2011  2012  2011  2012  2011 
                     
ARO at beginning of period $ 118  $ 103  $ 57  $ 49  $ 61  $ 54 
 Accretion expense   6    6    3    3    3    3 
 Obligations incurred   6    3       2    6    1 
 Changes in estimated cash flow                  
  or settlement date   15    7    5    4    10    3 
 Obligations settled   (14)   (1)   (3)   (1)   (11)   
ARO at end of period $ 131  $ 118  $ 62  $ 57  $ 69  $ 61 

(a)
Obligations required under U.K. law related to treated wood poles, gas-filled switchgear and fluid-filled cables.  See Note 10 for additional information on the acquisition.       
(b)Represents AROs derecognized as a result of PPL Energy Supply's distribution of its membership interest in PPL Global to PPL Energy Supply's parent, PPL Energy Funding.  See Note 9 for additional information on the distribution.

Substantially all of the ARO balances are classified as noncurrent at December 31, 2012 and its subsidiaries classify auction rate securities, certain short-term investments and securities held by the NDT funds as available-for-sale.  Available-for-sale securities are carried on the balance sheet 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.2011.

22.  Variable Interest Entities

(PPL and PPL Energy Supply)

In December 2001, a subsidiary of PPL Energy Supply entered into a $455 million operating lease arrangement, as lessee, for the development, construction and operation of a gas-fired combined-cycle generation facility located in Lower Mt. Bethel Township, Northampton County, Pennsylvania.  The owner/lessor of this generation facility, LMB Funding, LP, was created to own/lease the facility and incur the related financing costs.  The initial lease term commenced on the date of commercial operation, which occurred in May 2004, and ends in December 2013.  Under a residual value guarantee, if the generation facility is sold at the end of the lease term and the cash proceeds from the sale are less than the original acquisition cost, the subsidiary of PPL Energy Supply is obligated to pay up to 70.52% of the original acquisition cost.  This residual value guarantee protects the other variable interest holders from losses related to their investments.  LMB Funding, LP cannot
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extend or cancel the lease or sell the facility without the prior consent of the PPL Energy Supply subsidiary.  As a result, LMB Funding, LP was determined to be a VIE and the subsidiary of PPL Energy Supply was considered the primary beneficiary that consolidates this VIE.

The lease financing, which includes $437 million of debt and $18 million of "Noncontrolling interests" at December 31, 2012 and December 31, 2011, is secured by, among other things, the generation facility, the carrying amount of which is disclosed on the Balance Sheets.  The debt matures in December 2013, the end of the initial lease term, and therefore has been classified in "Long-term debt due within one year" at December 31, 2012.  As a result of the consolidation, PPL Energy Supply has recorded interest expense in lieu of rent expense.  For 2012, 2011 and 2010, additional depreciation on the generation facility of $16 million was recorded each year.

23.  Available-for-Sale Securities

(PPL, PPL Energy Supply, LKE and LG&E)

Certain short-term investments, securities held by the NDT funds and auction rate securities are classified as available-for-sale.

The following table shows the amortized cost, of available-for-sale securities and the gross unrealized gains and losses recorded in AOCI at December 31.  See Note 17 for information regardingand the fair value of theseavailable-for-sale securities.

  2009 2008
  Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Amortized Cost Gross Unrealized Gains 
Gross Unrealized Losses (a)
PPL                        
Short-term investments – municipal debt securities             $150         
NDT funds:                        
Cash and cash equivalents $7           4         
Equity securities:                        
U.S. large-cap  170  $89       160  $22     
U.S. mid/small-cap  65   36       60   9     
Debt securities:                        
U.S. Treasury  72   2       67   10     
U.S. government agency  9           13   1     
Municipality  63   2       59   2     
Investment-grade corporate  28   1       31   2     
Residential mortgage-backed securities  1           2         
Other              1         
Receivables/Payables, net  3           3         
   418   130       400   46     
Auction rate securities  25           29      $(5)
Total PPL $443  $130      $579  $46  $(5)
                         
PPL Energy Supply                        
Short-term investments – municipal debt securities             $150         
NDT funds:                        
Cash and cash equivalents $7           4         
Equity securities:                        
U.S. large-cap  170  $89       160  $22     
U.S. mid/small-cap  65   36       60   9     
Debt securities:                        
U.S. Treasury  72   2       67   10     
U.S. government agency  9           13   1     
Municipality  63   2       59   2     
Investment-grade corporate  28   1       31   2     
Residential mortgage-backed securities  1           2         
Other              1         
Receivables/Payables, net  3           3         
   418   130       400   46     
Auction rate securities  20           24      $(5)
Total PPL Energy Supply $438  $130      $574  $46  $(5)

(a)Prior to the April 1, 2009 adoption of accounting guidance addressing other-than-temporary impairments, there were no unrealized losses recorded in AOCI on debt securities in the NDT funds.  See "New Accounting Guidance Adopted - Recognition and Presentation of Other-Than-Temporary Impairments" in Note 1 for additional information.
       December 31, 2012 December 31, 2011
          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 $ 11        $ 11  $ 12        $ 12 
   Equity securities:                        
    U.S. large-cap   222  $ 190       412    211  $ 146       357 
    U.S. mid/small-cap   30    30       60    29    23       52 
   Debt securities:                        
    U.S. Treasury   86    9       95    76    10       86 
    U.S. government sponsored                        
     agency   8    1       9    9    1       10 
    Municipality   78    5  $ 1    82    80    4  $ 1    83 
    Investment-grade corporate   36    4       40    35    3       38 
    Other   3          3    2          2 
   Total NDT funds   474    239    1    712    454    187    1    640 
 Auction rate securities   20       1    19    25       1    24 
 Total $ 494  $ 239  $ 2  $ 731  $ 479  $ 187  $ 2  $ 664 
                              
PPL Energy Supply                        
 NDT funds:                        
   Cash and cash equivalents $ 11        $ 11  $ 12        $ 12 
   Equity securities:                        
    U.S. large-cap   222  $ 190       412    211  $ 146       357 
    U.S. mid/small-cap   30    30       60    29    23       52 
   Debt securities:                        
    U.S. Treasury   86    9       95    76    10       86 
    U.S. government sponsored                        
     agency   8    1       9    9    1       10 
    Municipality   78    5  $ 1    82    80    4  $ 1    83 
    Investment-grade corporate   36    4       40    35    3       38 
    Other   3          3    2          2 
   Total NDT funds   474    239    1    712    454    187    1    640 
 Auction rate securities   17       1    16    20       1    19 
 Total $ 491  $ 239  $ 2  $ 728  $ 474  $ 187  $ 2  $ 659 

There were no securities with gross unrealizedcredit losses not recognized in earnings at December 31, 2009.  At December 31, 2008, the fair value of PPL's2012 and PPL Energy Supply's auction rate securities in an unrealized loss position for less than 12 months was $21 million and $19 million.  The gross unrealized losses on these securities were $5 million for PPL and PPL Energy Supply.2011.

The following table shows the scheduled maturity dates of debt securities held at December 31, 2009.2012.        
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   Maturity Maturity Maturity Maturity   
    Less Than1-56-10in Excess  
   1 YearYearsYearsof 10 YearsTotal
PPL               
Amortized cost $ 12  $ 79  $ 62  $ 78  $ 231 
Fair value   12    83    68    85    248 
                 
PPL Energy Supply               
Amortized cost $ 12  $ 79  $ 62  $ 75  $ 228 
Fair value   12    83    68    82    245 

  
Maturity
Less Than
1 Year
 
Maturity
1-5 Years
 
Maturity
5-10 Years
 
Maturity
in Excess
of 10 Years
 Total
PPL                    
Amortized Cost $7  $79  $49  $63  $198 
Fair Value  7   81   51   64   203 
                     
PPL Energy Supply                    
Amortized Cost $7  $79  $49  $58  $193 
Fair Value  7   81   51   59   198 

The following table shows proceeds from and realized gains (losses) on sales of available-for-sale securities.

The following table shows proceeds from and realized gains and losses on sales of available-for-sale securities.The following table shows proceeds from and realized gains and losses on sales of available-for-sale securities.
 2009 2008 2007       
          2012  2011  2010 
PPL        PPL      
Proceeds from sales of NDT securities (a) $201 $197 $175 Proceeds from sales of NDT securities (a) $ 139  $ 156  $ 114 
Other proceeds from sales 154 126 648 Other proceeds from sales  5   163   
Gross realized gains (b) 27 19 15 Gross realized gains (b)  29   28   13 
Gross realized losses (b) (20) (23) (10)Gross realized losses (b)  21   16   5 
              
PPL Energy Supply       PPL Energy Supply      
Proceeds from sales of NDT securities (a) $201 $197 $175 Proceeds from sales of NDT securities (a) $ 139  $ 156  $ 114 
Other proceeds from sales 154 33 584 Other proceeds from sales  3     
Gross realized gains (b) 27 19 15 Gross realized gains (b)  29   28   13 
Gross realized losses (b) (20) (23) (10)Gross realized losses (b)  21   16   5 

(a)These proceeds along with deposits of amounts collected from customers, 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 inon the Statements of Income.

NDT FundsShort-term Investments(PPL, LKE and LG&E)

BeginningAt December 31, 2010, LG&E held $163 million aggregate principal amount of tax-exempt revenue bonds issued by Louisville/Jefferson County, Kentucky on behalf of LG&E that were purchased from the remarketing agent in January 19992008.  In 2011, LG&E received $163 million for its investments in these bonds when they were remarketed to unaffiliated investors.  No realized or unrealized gains (losses) were recorded on these securities, as the difference between carrying value and ending in December 2009, in accordance with the PUC Final Order, approximately $130 million of decommissioning costs were recovered from fair value was not significant.

NDT Funds(PPL Electric's customers through the CTC over the 11-year life of the CTC rather than the remaining life of the Susquehanna nuclear plant.  The recovery included a return on unamortized decommissioning costs.  Under the power supply agreements between PPL Electric and PPL EnergyPlus, these revenues were passed on to PPL EnergyPlus.  Similarly, these revenues were passed on to PPL Susquehanna under a power supply agreement between PPL EnergyPlus and PPL Susquehanna.Energy Supply)

Amounts previously collected from PPL Electric's customers for decommissioning the Susquehanna nuclear plant, less applicable taxes, arewere deposited in external trust funds for investment and can only be used for future decommissioning costs.  To the extent that the actual costs for decommissioning exceed the amounts in the nuclear decommissioning trust funds, PPL Susquehanna would be obligated to fund 90% of the shortfall.

When the fair value of a security is less than amortized cost, PPL and PPL Energy Supply must make certain assertions to avoid recording an other-than-temporary impairment that requires a current period charge to earnings.  The NRC requires that nuclear decommissioning trusts be managed by independent investment managers, with discretion to buy and sell securities in the trusts.  As a result, PPL and PPL Energy Supply have been unable to demonstrate the ability to hold an impaired security until it recovers its value; therefore, unrealized losses on debt securities through March 31, 2009 and unrealized losses on equity securities for all periods presented, represented other-than-temporary impairments that required a current period charge to earnings.

As described in "New Accounting Guidance Adopted - Recognition and Presentation of Other-Than-Temporary Impairments" in Note 1, effective April 1, 2009, when  PPL and PPL Energy Supply intend to sell a debt security or more likely than not will be required to sell a debt security before recovery, then the other-than-temporary impairment recognized in earnings will equal the entire difference between the security's amortized cost basis and its fair value.  However, if there is no intent to sell a debt security and it is not more likely than not that they will be required to sell the security before recovery, but the security has suffered a credit loss, the other-than-temporary impairment will be separated into the credit loss component, which is recognized in earnings, and the remainder of the other-than-temporary impairment, which is recorded in OCI.  Temporary impairments of debtfor certain securities and unrealized gains on both debt and equity securities are recorded to OCI.  There were no credit losses on debt securities heldinvested in the NDT funds at December 31, 2009.of $1 million, $6 million and $3 million for 2012, 2011 and 2010.  These impairments are reflected on the Statements of Income in "Other-Than-Temporary Impairments."

Auction Rate Securities

At December 31, 2009 and 2008, auction rate securities were recorded in "Other investments" on the Balance Sheets.  Historically, the fair value of auction rate securities approximated their par value due to the frequent resetting of the interest rates through the auction process.  The auctions for these outstanding securities failed in 2008 and 2009.  Based upon the evaluation of available information, PPL and PPL Energy Supply believe these investments continue to be of high credit quality and they do not have significant exposure to realize losses on these securities.  PPL and PPL Energy Supply continue to earn interest on these investments at contractually prescribed interest rates.  PPL and PPL Energy Supply have no current plans to sell these securities until they can be liquidated at par value and do not anticipate having to sell these securities in order to fund operations or for any other purpose.  As such, the decline in fair value noted below was deemed temporary due to general market conditions.

At December 31, 2008, the estimated fair value of the auction rate securities was $5 million lower than par value for PPL and PPL Energy Supply.  In 2008, unrealized losses of $5 million for both PPL and PPL Energy Supply were recorded to OCI.  During 2009, PPL Energy Supply liquidated $4 million of these securities at par.  At December 31, 2009, the estimated fair value was determined to approximate par value.  As such, PPL and PPL Energy Supply reversed $5 million of previously recorded temporary impairments.  See Note 17 for additional information on these securities, including fair value.

Short-term Investments

(PPL and PPL Energy Supply)

In December 2008, the PEDFA issued $150 million aggregate principal amount of Exempt Facilities Revenue Bonds, Series 2008A and 2008B due 2038 (Series 2008 Bonds) on behalf of PPL Energy Supply.  PPL Investment Corp. acted as the initial purchaser of the Series 2008 Bonds upon issuance.  At December 31, 2008, these investments were reflected in "Short-term investments" on the Balance Sheet.  In April 2009, PPL Investment Corp. received $150 million for its investment in the Series 2008 bonds when they were refunded by the PEDFA.  See "Long-term Debt" in Note 7 for more information on the refundings.  No realized or unrealized gains (losses) were recorded on these securities, as the difference between carrying value and fair value was insignificant.

(PPL and PPL Electric)

In October 2008, the PEDFA issued $90 million aggregate principal amount of Pollution Control Revenue Refunding Bonds, Series 2008 (PPL Electric Utilities Corporation Project) due 2023 (PPL Electric Series 2008 Bonds) on behalf of PPL Electric.  PPL Electric acted as the initial purchaser of the PPL Electric Series 2008 Bonds upon issuance.  PPL Electric remarketed the PPL Electric Series 2008 Bonds to unaffiliated investors in November 2008.  No realized or unrealized gains (losses) were recorded in 2008 related to these securities, as the difference between carrying value and fair value was insignificant.

22.  
24.  New Accounting Guidance Pending Adoption

(PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and PPL Electric)KU)

Accounting for Transfers of Financial AssetsImproving Disclosures about Offsetting Balance Sheet Items

Effective January 1, 2010, PPL and its subsidiaries2013, the Registrants will retrospectively adopt 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.

Upon adoption, the enhanced disclosure requirements are not expected to have a significant impact on the Registrants.
390

Testing Indefinite-Lived Intangible Assets for Impairment

Effective January 1, 2013, the Registrants will prospectively adopt accounting guidance that was issuedallows an entity to reviseelect the accounting for transfersoption to first make a qualitative evaluation about the likelihood of financial assets.  This guidance: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, the fair value of that asset does not need to be calculated.  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.

·eliminates the concept of a qualifying special-purpose entity (QSPE); therefore, QSPEs will be subject to consolidation guidance;
·changes the requirements for the derecognition of financial assets;
·establishes new criteria for reporting the transfer of a portion of a financial asset as a sale;
·requires transferors to initially recognize, at fair value, assets obtained and liabilities incurred as a result of a transfer accounted for as a sale; and
·requires enhanced disclosures to improve the transparency around transfers of financial assets and a transferor's continuing involvement.

EarlyUpon adoption, is prohibited.  Thisthe guidance will be applied prospectively to new transfers of financial assets.  Disclosures will be required for all transfers, including those entered into before the effective date.  Comparative disclosures are encouraged, but not required, for periods in which these disclosures were not previously required.  The January 1, 2010 adoption is not expected to have a significant impact on PPL and its subsidiaries; however, the impact in future periods could be material.Registrants.

ConsolidationReporting Amounts Reclassified Out of Variable Interest EntitiesAOCI

Effective January 1, 2010, PPL and its subsidiaries2013, the Registrants will prospectively adopt accounting guidance that was issued to replaceimprove the quantitative-based risks and rewards calculation for determining which entity, if any, has a controlling financial interest in a variable interest entity (VIE) and is the primary beneficiary.reporting of reclassifications out of AOCI.  The primary beneficiary must consolidate the VIE.  This guidance:

·prescribes a qualitative approach focused on identifying which entity has the power to direct the activities of a VIE that most significantly impact the VIE's economic performance and the obligation to absorb losses of or the right to receive benefits from the VIE that could potentially be significant to the VIE;
·requires ongoing assessments of whether an entity is the primary beneficiary of a VIE;
·requires enhanced disclosures to improve the transparency of an entity's involvement in a VIE;
·requires that all previous consolidation conclusions be reconsidered; and
·requires that QSPEs be evaluated for consolidation (resulting from the elimination of the QSPE concept in the guidance addressing accounting for transfers of financial assets).

If the initial application results in consolidation of a VIE, the assets, liabilities and noncontrolling interests of the VIERegistrants will be measured atrequired to provide information about the effects on net income of significant amounts reclassified out of AOCI by their carrying amounts asrespective statement of income line item, if this guidance had been applied from the point in time the entity became the primary beneficiary of the VIE (unless the fair value optionitem is elected).  Any difference between the net amounts required to be recognized andreclassified to net income in its entirety.  For items not reclassified to net income in their entirety, the amount of any previously recognized interestRegistrants will be reflected as a cumulative-effect adjustmentrequired to retained earnings.  If initial application results in deconsolidation of a VIE, any retained interest in the VIE will be measured at its carrying value as if this guidance had been applied from the inception of the VIE.reference other disclosures that provide details on these amounts.

EarlyUpon adoption, is prohibited.  Comparative disclosuresthe enhanced disclosure requirements are not required for periods in which these disclosures were not previously required.  PPL and its subsidiaries are assessing the potential impact of adoption to the financial statements.  The January 1, 2010 adoption is not expected to have a significant impact on PPL and its subsidiaries; however, the impact in future periods could be material.Registrants.
391


SCHEDULE I - LG&E and KU Energy LLC
CONDENSED UNCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Millions of Dollars)       
                 
     Successor  Predecessor
         Two Months  Ten Months
     Year Ended Year Ended Ended  Ended
     December 31, December 31, December 31,  October 31,
     2012  2011  2010   2010 
              
Operating Revenues
             
              
Operating Expenses             
 
Other operation and maintenance
 $ 3         $ (3)
 
Total Operating Expenses
   3          (3)
                 
Operating Income (Loss)
   (3)          3 
                 
Equity in Earnings of Subsidiaries
   234  $ 267  $ 48     204 
                 
Other Income (Expense) - net
             (1)
              
Interest Income with Affiliate
   10    29    5     29 
                 
Interest Expense
   39    31    4     
                 
Interest Expense with Affiliate
   2    2    1     47 
                 
Income (Loss) Before Income Taxes
   200    263    48     188 
                 
Income Tax Expense (Benefit)
   (19)   (2)   1     (2)
                 
Net Income (Loss) Attributable to Member
 $ 219  $ 265  $ 47   $ 190 
                 
Comprehensive Income (Loss) Attributable to Member
 $ 200  $ 263  $ 53   $ 180 
                 
The accompanying Notes to Condensed Unconsolidated Financial Statements are an integral part of the financial statements.
392

SCHEDULE I - LG&E and KU Energy LLC
CONDENSED UNCONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)       
                 
     Successor  Predecessor
         Two Months  Ten Months
     Year Ended Year Ended Ended  Ended
     December 31, December 31, December 31,  October 31,
     2012  2011  2010   2010 
              
Cash Flows from Operating Activities             
Net cash provided by (used in) operating activities
 $ 364  $ 346  $ 53   $ 156 
              
Cash Flows from Investing Activities             
  
Capital contributions to affiliated subsidiaries
         (3)    (525)
  
Net decrease (increase) in notes receivable from affiliates
   (15)   (63)   313     234 
Net cash provided by (used in) investing activities
   (15)   (63)   310     (291)
                 
Cash Flows from Financing Activities             
  
Net increase (decrease) in debt with affiliates
         (208)    243 
  Net (decrease) increase in notes payable with affiliates  (196)          
  
Repayment of short-term borrowings
         (2,103)    
  
Retirement of long-term debt
         (400)    
  
Issuance of long-term debt
      250    870     
  
Debt-issuance costs
         (6)    
  
Contribution from member
         1,565     
  
Distribution to member
   (155)   (533)   (100)    
  
Payment of common stock dividends
             (87)
Net cash provided by (used in) financing activities
   (351)   (283)   (382)    156 
                 
Net Increase (Decrease) in Cash and Cash Equivalents   (2)      (19)    21 
Cash and Cash Equivalents at Beginning of Period
   2    2    21     
Cash and Cash Equivalents at End of Period
 $  $ 2  $ 2   $ 21 
                 
                 
Supplemental disclosures of cash flow information:             
Cash Dividends Received from Affiliated Subsidiaries
 $ 175  $ 207  $   $ 105 
                 
The accompanying Notes to Condensed Unconsolidated Financial Statements are an integral part of the financial statements.
393


Improving Disclosures about Fair Value Measurements
SCHEDULE I - LG&E and KU Energy LLC
CONDENSED UNCONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
(Millions of Dollars)
          
     2012  2011 
Assets      
          
Current Assets      
 
Cash and cash equivalents
    $ 2 
 
Accounts receivable from affiliates
 $ 4    11 
 
Notes receivable from affiliates
   1,560    1,520 
 
Other current assets
   1    4 
 
Total Current Assets
   1,565    1,537 
          
Investments      
 
Affiliated companies at equity
   4,096    4,056 
          
Other Noncurrent Assets      
 
Deferred income taxes
   184    163 
 
Other noncurrent assets
   7    8 
 
Total Other Noncurrent Assets
   191    171 
          
Total Assets
 $ 5,852  $ 5,764 
          
Liabilities and Equity      
          
Current Liabilities      
 
Notes payable to affiliates
 $ 25    
 
Accounts payable to affiliates
   906  $ 701 
 
Taxes
   8    
 
Other current liabilities
   6    6 
 
Total Current Liabilities
   945    707 
          
Long-term Debt      
 
Long-term debt
   1,121    1,120 
 
Notes payable to affiliates
      196 
 
Total Long-term Debt
   1,121    1,316 
       
Equity
   3,786    3,741 
          
Total Liabilities and Equity
 $ 5,852  $ 5,764 
          
The accompanying Notes to Condensed Unconsolidated Financial Statements are an integral part of the financial statements.

Effective January 1, 2010, PPL
394

Schedule I - LG&E and its subsidiaries will prospectively adopt accounting guidance that was issuedKU Energy LLC
Notes to improve disclosures about fair value measurements.  This guidance:Condensed Unconsolidated Financial Statements

·1.requires disclosures be provided for each classBasis of assets and liabilities, with class determined on the basis of the nature and risks of the assets and liabilities;
·for recurring fair value measurements, requires disclosure of significant transfers between Levels 1 and 2 and transfers into and out of Level 3 and the reasons for those transfers; and
·clarifies that a description of valuation techniques and inputs used to measure fair value is required for Level 2 and Level 3 recurring and nonrecurring fair value measurements.Presentation

Effective January 1, 2011, PPLLG&E and KU Energy LLC (LKE) is a holding company and conducts substantially all of its business operations through its subsidiaries.  Substantially all of its consolidated assets are held by such subsidiaries.  Accordingly, its cash flow and its ability to meet its obligations are largely dependent upon the earnings of these subsidiaries will adopt provisionsand the distribution or other payment of this guidance that require Level 3 activitysuch earnings to it in the form of purchases, sales, issuancesdividends or repayment of loans and settlementsadvances from the subsidiaries.  These condensed financial statements and related footnotes have been prepared in accordance with Reg. §210.12-04 of Regulation S-X.  These statements should be provided on a gross basis.read in conjunction with the consolidated financial statements and notes thereto of LKE.

This guidance makes corresponding amendments to employers' disclosures about pensions and other postretirement benefits.

Early adoption is permitted.  Comparative disclosures are required only for periods ending after initial adoption.  PPL andLKE indirectly or directly owns all of the ownership interests of its significant subsidiaries.  LKE relies primarily on dividends from its subsidiaries are assessing the potential impact of adoption.  The adoption could have a significant impact on required disclosures.

Subsequent Measurement - Cash Flow Hedges

Effective April 1, 2010, PPLto fund LKE's dividends to its member and to meet its subsidiaries will prospectively adopt accounting guidance that was issued to clarify how an entity should reflect the subsequent measurement ofother cash flow hedges in AOCI if, during a prior period, hedge accounting was not permitted.  This situation may arise if an entity's retrospective assessment of hedge effectiveness indicated that the hedging relationship had not been highly effective in a period, but the prospective assessment of hedge effectiveness showed an expectation that the hedging relationship would be highly effective in the future; therefore, the hedging relationship continued even though hedge accounting was not permitted for a certain period.  This guidance:requirements.

·2.requires that the cumulative gain or loss on the derivative that is used to determine the maximum amount of gain or loss that may be reflected in AOCI exclude the gains or losses that occurred during the period when hedge accounting was not permitted;Commitments and
·requires that the cumulative change in the expected future cash flows on the hedged transaction exclude the changes related to the period when hedge accounting was not applied. Contingencies

PPLSee Note 15 to LKE's consolidated financial statements for commitments and contingencies of its subsidiaries are assessingsubsidiaries.

Guarantees

LKE provides certain indemnifications, the most significant of which relate to the termination of the WKE lease in July 2009.  See Note 9 to LKE's consolidated financial statements for additional information.  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 a December 2012 order of the Henderson Circuit Court confirming the arbitration award.  LKE believes its indemnification obligations in this matter remain subject to various uncertainties, including the potential impactfor 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 adoption.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 potential impact of adoptionindemnifications vary by entity and the maximum exposures range from being capped at the sale price to no specified maximum; however, LKE is not yet determinable butaware of formal claims under such indemnities made by any party at this time.  LKE could be material.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 investments in subsidiaries for certain of these indemnifications by $9 million ($5 million after-tax), which is reflected in "Equity in Earnings of Subsidiaries" on the Statement of Income.  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.
395

 
 
QUARTERLY FINANCIAL, COMMON STOCK PRICE AND DIVIDEND DATA (Unaudited)
PPL Corporation and Subsidiaries
(Millions of Dollars, except per share data)
  For the Quarters Ended (a)
  March 31 June 30 Sept. 30 Dec. 31
2009                
Operating revenues as previously reported $2,359             
Reclassification of discontinued operations (b)  (8)            
Operating revenues  2,351  $1,673  $1,805  $1,727 
Operating income as previously reported  417             
Reclassification of discontinued operations (b)  (5)            
Operating income  412   104   181   264 
Income from continuing operations after income taxes as previously reported  246             
Reclassification of discontinued operations (b)  (3)            
Income from continuing operations after income taxes  243   29   50   144 
Income (loss) from discontinued operations as previously reported                
Reclassification of discontinued operations (b)  3             
Income (loss) from discontinued operations  3   (32)  (24)  13 
Net income (loss)  246   (3)  26   157 
Net income attributable to PPL  241   (7)  20   153 
Income from continuing operations after income taxes available to PPL common shareowners: (c)                
Basic EPS  0.64   0.07   0.12   0.37 
Diluted EPS  0.64   0.07   0.12   0.37 
Net income available to PPL common shareowners: (c)                
Basic EPS  0.64   (0.02)  0.05   0.40 
Diluted EPS  0.64   (0.02)  0.05   0.40 
Dividends declared per share of common stock (d)  0.345   0.345   0.345   0.345 
Price per common share:                
High $33.54  $34.42  $34.21  $33.05 
Low  24.25   27.40   28.27   28.82 
                 
2008                
Operating revenues $1,516  $1,014  $2,971  $2,506 
Operating income  473   385   384   551 
Income from continuing operations after income taxes  247   189   210   281 
Income (loss) from discontinued operations  18   6   (2)  1 
Net income  265   195   208   282 
Net income attributable to PPL  260   190   203   277 
Income from continuing operations after income taxes available to PPL common shareowners: (c)                
Basic EPS  0.64   0.49   0.54   0.73 
Diluted EPS  0.64   0.49   0.54   0.73 
Net income available to PPL common shareowners: (c)                
Basic EPS  0.69   0.50   0.54   0.74 
Diluted EPS  0.69   0.50   0.54   0.74 
Dividends declared per share of common stock (d)  0.335   0.335   0.335   0.335 
Price per common share:                
High $55.23  $54.00  $53.78  $37.88 
Low  44.72   46.04   34.95   26.84 
QUARTERLY FINANCIAL, COMMON STOCK PRICE AND DIVIDEND DATA (Unaudited)
PPL Corporation and Subsidiaries
(Millions of Dollars, except per share data)
    For the Quarters Ended (a)
    March 31 June 30 Sept. 30 Dec. 31
2012             
Operating revenues
 $ 4,112  $ 2,549  $ 2,403  $ 3,222 
Operating income
   1,051    572    664    822 
Income from continuing operations after income taxes
   545    277    355    360 
Income (loss) from discontinued operations
      (6)      
Net income
   545    271    355    360 
Net income attributable to PPL
   541    271    355    359 
Income from continuing operations after income taxes available to            
 PPL common shareowners: (b)            
  
Basic EPS
   0.93    0.47    0.61    0.61 
  
Diluted EPS
   0.93    0.47    0.61    0.60 
Net income available to PPL common shareowners: (b)            
  
Basic EPS
   0.93    0.46    0.61    0.61 
  
Diluted EPS
   0.93    0.46    0.61    0.60 
Dividends declared per share of common stock (c)
   0.360    0.360    0.360    0.360 
Price per common share:            
  
High
 $ 29.85  $ 28.44  $ 29.98  $ 30.18 
  
Low
   27.29    26.68    27.72    27.74 
               
2011             
Operating revenues
 $ 2,910  $ 2,489  $ 3,120  $ 4,218 
Operating income
   805    595    767    934 
Income from continuing operations after income taxes
   402    201    449    458 
Income (loss) from discontinued operations
   3    (1)      
Net income
   405    200    449    458 
Net income attributable to PPL
   401    196    444    454 
Income from continuing operations after income taxes available to            
 PPL common shareowners: (b)            
  
Basic EPS
   0.82    0.35    0.76    0.78 
  
Diluted EPS
   0.82    0.35    0.76    0.78 
Net income available to PPL common shareowners: (b)            
  
Basic EPS
   0.82    0.35    0.76    0.78 
  
Diluted EPS
   0.82    0.35    0.76    0.78 
Dividends declared per share of common stock (c)
   0.350    0.350    0.350    0.350 
Price per common share:            
  
High
 $ 26.98  $ 28.38  $ 29.61  $ 30.27 
  
Low
   24.10    25.23    25.00    27.00 

(a)Quarterly results can vary depending on, among other things, weather and the forward pricing of power.  In addition, earnings in 2009 and 2008 were affected by special items.  Accordingly, comparisons among quarters of a year may not be indicative of overall trends and changes in operations.  These special items include $24 million of tax expense recorded in the third quarter of 2009 for the correction to the previously computed tax bases of the Latin American businesses that were sold in 2007.  See Note 9 to the Financial Statements for additional information.
(b)In 2009, PPL Generation signed a definitive agreement to sell its Long Island generation business and PPL Maine sold the majority of its hydroelectric generation business.  See Note 9 to the Financial Statements for additional information on these transactions and other completed sales.
(c)The sum of the quarterly amounts may not equal annual earnings per share due to changes in the number of common shares outstanding during the year or rounding.
(d)(c)PPL has paid quarterly cash dividends on its common stock in every year since 1946.  Future dividends, declared at the discretion of the Board of Directors, will be dependent upon future earnings, cash flows, financial requirements and other factors.
396

 
QUARTERLY FINANCIAL DATA (Unaudited)
PPL Energy Supply, LLC and Subsidiaries
(Millions of Dollars)
  For the Quarters Ended (a)
  March 31 June 30 Sept. 30 Dec. 31
2009                
Operating revenues as previously reported $1,964             
Reclassification of discontinued operations (b)  (8)            
Operating revenues  1,956  $1,356  $1,456  $1,364 
Operating income as previously reported  300             
Reclassification of discontinued operations (b)  (5)            
Operating income  295   34   91   167 
Income from continuing operations after income taxes as previously reported  191             
Reclassification of discontinued operations (b)  (3)            
Income from continuing operations after income taxes  188   1   9   89 
Income (loss) from discontinued operations as previously reported                
Reclassification of discontinued operations (b)  3             
Income (loss) from discontinued operations  3   (32)  (24)  13 
Net income (loss)  191   (31)  (15)  102 
Net income (loss) attributable to PPL Energy Supply  191   (31)  (16)  102 
                 
2008                
Operating revenues $1,124  $670  $2,610  $2,131 
Operating income  357   300   274   441 
Income from continuing operations after income taxes  195   153   158   244 
Income (loss) from discontinued operations  9   5   3   3 
Net income  204   158   161   247 
Net income attributable to PPL Energy Supply  204   157   161   246 
QUARTERLY FINANCIAL DATA (Unaudited)
PPL Electric Utilities Corporation and Subsidiaries
(Millions of Dollars)
  For the Quarters Ended (a)
   March 31  June 30  Sept. 30  Dec. 31
2012             
Operating revenues
 $ 458  $ 404  $ 444  $ 457 
Operating income
   79    63    71    81 
Net income
   37    29    33    37 
Net income available to PPL
   33    29    33    37 
             
2011             
Operating revenues
 $ 558  $ 440  $ 455  $ 439 
Operating income
   103    82    69    94 
Net income
   56    40    32    61 
Net income available to PPL
   52    36    28    57 

(a)Quarterly results can vary depending on, among other things, weather and the forward pricing of power.  In addition, earnings in 2009 and 2008 were affected by special items.  Accordingly, comparisons among quarters of a year may not be indicative of overall trends and changes in operations.  These special items include $24 million of tax expense recorded in the third quarter of 2009 by for the correction to the previously computed tax bases of the Latin American businesses that were sold in 2007.  See Note 9 to the Financial Statements for additional information.
(b)In 2009, PPL Generation signed a definitive agreement to sell its Long Island generation business and PPL Maine sold the majority of its hydroelectric generation business.  See Note 9 to the Financial Statements for additional information on these transactions and other completed sales.

QUARTERLY FINANCIAL DATA (Unaudited)
PPL Electric Utilities Corporation and Subsidiaries
(Millions of Dollars)
  For the Quarters Ended (a) 
  March 31 June 30 Sept. 30 Dec. 31 
2009 (b)                
Operating revenues $910  $747  $809  $826 
Operating income  106   61   78   84 
Net income  54   21   32   35 
Income available to PPL  49   17   27   31 
                 
2008                
Operating revenues $908  $800  $842  $851 
Operating income  111   78   87   99 
Net income  56   36   41   43 
Income available to PPL  51   32   36   39 

(a)PPL Electric's business is seasonal in nature, with peak sales periods generally occurring in the winter and summer months.  In addition, earnings in 2009 were affected by special items.  Accordingly, comparisons among quarters of a year may not be indicative of overall trends and changes in operations.
(b)During the second quarter of 2009, PPL Electric recorded an $8 million reduction to operating revenues and a $5 million reduction to net income and income available to PPL as a result of a true-up for the FERC formula-based transmission revenues for 2008 and the first quarter of 2009.
397


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE

PPL Corporation, PPL Energy Supply, LLC, and PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company

None.

ITEM 9A. CONTROLS AND PROCEDURES
 
PPL Corporation, PPL Energy Supply, LLC and PPL Electric Utilities Corporation
(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) andor 15d-15(e) of the Securities Exchange Act of 1934) have concluded that, as of December 31, 2009,2012, the registrants' disclosure controls and procedures are effective to ensure that material information relating to the registrants and their consolidated subsidiaries is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms, particularly during the period for which this annual report has been prepared.  The aforementioned principal officers have concluded that the disclosure controls and procedures are also effective to ensure that information required to be disclosed in reports filed under the Exchange Act is accumulated and communicated to management, including the principal executive and principal financial officers, to allow for timely decisions regarding required disclosure.
   
(b) Changes in internal control over financial reporting.
 
PPL Corporation
The registrant's principal executive officer and principal financial officer have concluded that there were no changes in the registrant's internal control over financial reporting during the registrant's fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, the registrant's internal control over financial reporting.
As reported in the 2011 Form 10-K, PPL's principal executive officer and principal financial officer concluded that a systems migration related to the WPD Midlands acquisition created a material change to its internal control over financial reporting in 2012.  In December 2011, the use of legacy information technology systems at WPD Midlands was discontinued and the related data, processes and internal controls were migrated to the systems, processes and controls currently in place at PPL WW.
Risks related to the systems migration were partially mitigated by PPL's expanded internal control over financial reporting that were implemented subsequent to the acquisition and PPL's existing policy of consolidating foreign subsidiaries on a one-month lag, which provided management additional time for review and analysis of WPD Midlands' results and their incorporation into PPL's consolidated financial statements.
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 have concluded that there were no changes in the registrants' internal control over financial reporting during the registrants' fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, the registrants' internal control over financial reporting.
 
Management's Report on Internal Control over Financial Reporting
 

398



PPL Corporation
   
  
PPL's management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) or 15d-15(f).  PPL's internal control over financial reporting is a process designed to provide reasonable assurance to PPL's management and Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
 
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in "Internal Control - Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on our evaluation under the framework in "Internal Control - Integrated Framework," our management concluded that our internal control over financial reporting was effective as of December 31, 2009.2012.  The effectiveness of our internal control over financial reporting has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report contained on page 90.197.
 
 
PPL Energy Supply, LLC, and PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company

  
Management of PPL's non-accelerated filer companies, PPL Energy Supply, and PPL Electric, isLKE, LG&E and KU, are responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) or 15d-15(f).  PPL'sEach of the aforementioned companies' internal control over financial reporting is a process designed to provide reasonable assurance to PPL's management and Board of Directors of these companies regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
 
Under the supervision and with the participation of our management, including ourthe principal executive officers and principal financial officers of the companies listed above, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in "Internal Control - Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on our evaluation under the framework in "Internal Control - Integrated Framework," our management of these companies concluded that our internal control over financial reporting was effective as of December 31, 2009.2012.  This annual report does not include an attestation report of Ernst & Young LLP, the companies' independent registered public accounting firm regarding internal control over financial reporting.  Management's reportreporting for these non-accelerated filer companies.  The effectiveness of internal control over financial reporting for the aforementioned companies was not subject to attestation by the companies' registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit thethese companies to provide only management's report in this annual report.

ITEM 9B. OTHER INFORMATION
 
PPL Corporation, PPL Energy Supply, LLC, and PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company
 
None.


399



PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

PPL Corporation

Additional information for this item will be set forth in the sections entitled "Nominees for Directors," "Directors Continuing in Office," "Board Committees - Audit Committee" and "Section 16(a) Beneficial Ownership Reporting Compliance" in PPL's 20102013 Notice of Annual Meeting and Proxy Statement, which will be filed with the SEC not later than 120 days after December 31, 2009,2012, and which information is incorporated herein by reference.  There have been no changes to the procedures by which shareowners may recommend nominees to PPL's board of directors since the filing with the SEC of PPL's 20092012 Notice of Annual Meeting and Proxy Statement.  Information required by this item concerning the executive officers of PPL is set forth at the end of Part I of this report.

PPL has adopted a code of ethics entitled "Standards of Conduct and Integrity" that applies to all directors, managers, trustees, officers (including the principal executive officers, principal financial officers and principal accounting officers (each, a "principal officer")), employees and agents of PPL and PPL's subsidiaries for which it has operating control (including PPL Energy Supply, PPL Electric, LKE, LG&E and PPL Electric)KU).  The "Standards of Conduct and Integrity" are posted on PPL's Internet Web site:website: www.pplweb.com/about/corporate+governanceabout-us/corporate-governance.  A description of any amendment to the "Standards of Conduct and Integrity" (other than a technical, administrative or other non-substantive amendment) will be posted on PPL's Internet Web sitewebsite within four business days following the date of the amendment.  In addition, if a waiver constituting a material departure from a provision of the "Standards of Conduct and Integrity" is granted to one of the principal officers, a description of the nature of the waiver, the name of the person to whom the waiver was granted and the date of the waiver will be posted on PPL's Internet Web sitewebsite within four business days following the date of the waiver.

PPL also has adopted its "Guidelines for Corporate Governance," which address, among other things, director qualification standards and director and board committee responsibilities.  These guidelines, and the charters of each of the committees of PPL's board of directors, are posted on PPL's Internet Web site:website: www.pplweb.com/about/corporate+governanceabout-us/corporate-governance.

PPL Energy Supply, LLC, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company

Item 10 is omitted as PPL Energy Supply, meetsPPL Electric, LKE, LG&E and KU meet the conditions set forth in General Instruction (I)(1)(a) and (b) of Form 10-K.10-K
400

EXECUTIVE OFFICERS OF THE REGISTRANTS

Officers of the Registrants are elected annually by their Boards of Directors (or Board of Managers for PPL Energy Supply) to serve at the pleasure of the respective Boards.  There are no family relationships among any of the executive officers, nor is there any arrangement or understanding between any executive officer and any other person pursuant to which the officer was selected.

There have been no events under any bankruptcy act, no criminal proceedings and no judgments or injunctions material to the evaluation of the ability and integrity of any executive officer during the past five years.

Listed below are the executive officers at December 31, 2012.

PPL Electric Utilities Corporation

NameAgePositions Held During the Past Five YearsDates
William H. Spence (a)55Chairman, President and Chief Executive OfficerApril 2012 - present
President and Chief Executive OfficerNovember 2011 - March 2012
President and Chief Operating OfficerJuly 2011 - November 2011
Executive Vice President and Chief Operating OfficerJune 2006 - July 2011
Paul A. Farr45Executive Vice President and Chief Financial OfficerApril 2007 - present
Senior Vice President-FinancialJanuary 2006 - March 2007
Robert J. Grey (b)62Executive Vice President, General Counsel and SecretaryNovember 2012 - present
Senior Vice President, General Counsel and SecretaryMarch 1996 - November 2012
David G. DeCampli (c) (f)55President-PPL Energy SupplyMarch 2012 - present
President-PPL ElectricApril 2007 - March 2012
Gregory N. Dudkin (d) (f)55President-PPL ElectricMarch 2012 - present
Senior Vice President-Operations-PPL ElectricJune 2009 - March 2012
Independent ConsultantFebruary 2009 - June 2009
Senior Vice-President of Technical Operations andJune 2006 - January 2009
 Fulfillment-Comcast Corporation
Robert D. Gabbard (f)53President-PPL EnergyPlusJune 2008 - present
Senior Vice President-Trading-PPL EnergyPlusJune 2008 - June 2008
Senior Vice President Merchant Trading Operations-Conectiv Energy
June 2005 - May 2008
Rick L. Klingensmith (f)52President-PPL GlobalAugust 2004 - present
Victor A. Staffieri (f)
57
Chairman of the Board, President and Chief Executive
Officer-LKE
May 2001 - present
Mark F. Wilten (e)45Vice President-Finance and TreasurerJune 2012 - present
Treasurer-Nissan North America and Nissan MotorAugust 2010 - May 2012
 Acceptance Corporation
Assistant Treasurer-Nissan Motor Acceptance CorporationAugust 2008 - August 2010
Group Treasurer-Kensington Group plcOctober 2004 - January 2008
Vincent Sorgi41Vice President and ControllerMarch 2010 - present
Controller-Supply AccountingJune 2008 - March 2010
Controller-PPL EnergyPlusApril 2007 - June 2008
Additional information for this item will be set forth in the sections entitled "Nominees for Directors," "Board Committees," and "Section 16(a) Beneficial Ownership Reporting Compliance" in PPL Electric's 2010 Notice of Annual Meeting and Information Statement, which will be filed with the SEC not later than 120 days after December 31, 2009, and which information is incorporated herein by reference.  PPL Electric's parent, PPL, has adopted a code of ethics entitled "Standards of Conduct and Integrity," which applies to all directors, managers, officers (including the principal executive officers, principal financial officers and principal accounting officers), employees and agents of PPL Electric and its subsidiaries.  The full text of the "Standards of Conduct and Integrity" is posted in the Corporate Governance section of PPL's Internet Web site: www.pplweb.com/about/corporate+governance.  Information required by this item concerning the executive officers of PPL Electric is set forth at the end of Part I of this report.

(a)On April 1, 2012, William H. Spence was elected Chairman, President and Chief Executive Officer.
(b)On November 1, 2012, Robert J. Grey was elected Executive Vice President, General Counsel and Secretary.
(c)On March 4, 2012, David G. DeCampli resigned as President of PPL Electric.  On March 5, 2012, Mr. DeCampli was elected as
President of PPL Energy Supply.
(d)On March 4, 2012, Gregory N. Dudkin resigned as Senior Vice President-Operations of PPL Electric.  On March 5, 2012, Mr.
Dudkin was elected as President of PPL Electric.
(e)On June 4, 2012, Mark F. Wilten was elected Vice President-Finance and Treasurer.
(f)Designated an executive officer of PPL by virtue of their respective positions at a PPL subsidiary.
401

ITEM 11. EXECUTIVE COMPENSATION

PPL Corporation

Information for this item will be set forth in the sections entitled "Compensation of Directors," "Compensation Committee Interlocks and Insider Participation" and "Executive Compensation" in PPL's 20102013 Notice of Annual Meeting and Proxy Statement, which will be filed with the SEC not later than 120 days after December 31, 2009,2012, and which information is incorporated herein by reference.

PPL Energy Supply, LLC, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company

Item 11 is omitted as PPL Energy Supply, meetsPPL Electric, LKE, LG&E and KU meet the conditions set forth in General InstructionInstructions (I)(1)(a) and (b) of Form 10-K.

PPL Electric Utilities Corporation

Information for this item will be set forth in the sections entitled "Compensation of Directors" and "Executive Compensation" in PPL Electric's 2010 Notice of Annual Meeting and Information Statement, which will be filed with the SEC not later than 120 days after December 31, 2009, and which information is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS

PPL Corporation

Information for this item will be set forth in the section entitled "Stock Ownership" in PPL's 20102013 Notice of Annual Meeting and Proxy Statement, which will be filed with the SEC not later than 120 days after December 31, 2009,2012, and which information is incorporated herein by reference.  In addition, provided below in tabular format is information as of December 31, 2009,2012, with respect to compensation plans (including individual compensation arrangements) under which equity securities of PPL are authorized for issuance.

Equity Compensation Plan Information

Number of securities to be issued upon exercise of outstanding options, warrants and rights (3)
Weighted-average exercise price of outstanding options, warrants and rights (3)
Number of securities remaining available for future issuance under equity compensation plans (4)
Equity compensation plans approved by security holders (1)
2,778,235 - ICP
1,823,806 - ICPKE
4,602,041 - Total
$33.03 - ICP
$31.92 - ICPKE
$32.59 - Combined
  3,458,171 - ICP
  9,840,240 - ICPKE
14,578,022 - DDCP
27,876,433 - Total
Equity compensation plans not approved by security holders (2)
Equity Compensation Plan Information
       
 Number of securities to be  Number of securities
 issued upon exercise ofWeighted-average exerciseremaining available for future
 outstanding options, warrantsprice of outstanding options,issuance under equity
 
and rights (3)
warrants and rights (3)
compensation plans (4)
Equity compensation     334,877 - ICP
plans approved by 4,968,849 - ICP$ 30.72- ICP 5,688,059 - ICPKE
security holders (1) 413,210 - SIP$ 28.19- SIP 9,541,170 - SIP
  3,752,486 - ICPKE$ 30.12- ICPKE 1,948,928 - DDCP
  9,134,545 - Total$ 30.36- Combined 17,513,034 - Total
       
Equity compensation      
plans not approved by      
security holders (2)      

(1) Includes (a) the Amended and Restated Incentive Compensation Plan (ICP), under which stock options, restricted stock, restricted stock units, performance units, dividend equivalents and other stock-based awards may be awarded to executive officers of PPL; (b) the Amended and Restated Incentive Compensation Plan for Key Employees (ICPKE), under which stock options, restricted stock, restricted stock units, performance units, dividend equivalents and other stock-based awards may be awarded to non-executive key employees of PPL and its subsidiaries; (c) the PPL 2012 SIP approved by shareowners in 2012 under which stock options, restricted stock, restricted stock units, performance units, dividend equivalents and (c)other stock-based awards may be awarded to executive officers of PPL and its subsidiaries; and (d) the Directors Deferred Compensation Plan (DDCP), under which stock units may be awarded to directors of PPL.  See Note 1112 to the financial statementsFinancial Statements for additional information.
   
(2) All of PPL's current compensation plans under which equity securities of PPL are authorized for issuance have been approved by PPL's shareowners.
   
(3) Relates to common stock issuable upon the exercise of stock options awarded under the ICP, SIP and ICPKE as of December 31, 2009.2012.  In addition, as of December 31, 2009,2012, the following other securities had been awarded and are outstanding under the ICP, SIP, ICPKE and DDCP:  45,40030,400 shares of restricted stock, 416,840400,660 restricted stock units and 101,139324,387 performance units under the ICP; 40,000 shares of restricted stock, 1,856 restricted stock units and 3,927 performance units under the SIP; 24,600 shares of restricted stock, 921,2022,006,254 restricted stock units and 65,324265,889 performance units under the ICPKE; and 406,584467,741 stock units under the DDCP.
402

   
(4) Based upon the following aggregate award limitations under the ICP, SIP, ICPKE and DDCP: (a) under the ICP, 15,769,43015,769,431 awards (i.e., 5% of the total PPL common stock outstanding as of April 23, 1999) granted after April 23, 1999; (b) under the SIP, 10,000,000 awards; (c) under the ICPKE, 16,573,608 awards (i.e., 5% of the total PPL common stock outstanding as of January 1, 2003) granted after April 25, 2003, reduced by outstanding awards for which common stock was not yet issued as of such date of 2,373,812 resulting in a limit of 14,199,796; and (c)(d) under the DDCP, 15,052,856 securities.the number of shares available for issuance was reduced to 2,000,000 shares in March 2012.  In addition, each of the ICP and ICPKE includes an annual award limitation of 2% of total PPL common stock outstanding as of January 1 of each year.

PPL Energy Supply, LLC, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company

Item 12 is omitted as PPL Energy Supply, meetsPPL Electric, LKE, LG&E and KU meet the conditions set forth in General InstructionInstructions (I)(1)(a) and (b) of Form 10-K.

PPL Electric Utilities Corporation

Information for this item will be set forth in the section entitled "Stock Ownership" in PPL Electric's 2010 Notice of Annual Meeting and Information Statement, which will be filed with the SEC not later than 120 days after December 31, 2009, and which information is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

PPL Corporation

Information for this item will be set forth in the sections entitled "Transactions with Related Persons" and "Independence of Directors" in PPL's 20102013 Notice of Annual Meeting and Proxy Statement, which will be filed with the SEC not later than 120 days after December 31, 2009,2012, and is incorporated herein by reference.

PPL Energy Supply, LLC, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company

Item 13 is omitted as PPL Energy Supply, meetsPPL Electric, LKE, LG&E and KU meet the conditions set forth in General InstructionInstructions (I)(1)(a) and (b) of Form 10-K.

PPL Electric Utilities Corporation

Information for this item will be set forth in the sections entitled "Transactions with Related Persons" and "Nominations" in PPL Electric's 2010 Notice of Annual Meeting and Information Statement, which will be filed with the SEC not later than 120 days after December 31, 2009, and is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

PPL Corporation

Information for this item will be set forth in the section entitled "Fees to Independent Auditor for 20092012 and 2008"2011" in PPL's 20102013 Notice of Annual Meeting and Proxy Statement, which will be filed with the SEC not later than 120 days after December 31, 2009,2012, and which information is incorporated herein by reference.

PPL Energy Supply, LLC

The following table presents an allocation of fees billed, including expenses, by Ernst & Young LLP (EY) to PPL for the fiscal years ended December 31, 20092012 and 2008,2011, for professional services rendered for the audit of PPL Energy Supply's annual financial statements and for fees billed for other services rendered by EY.

 2009 2008 2012  2011 
 (in thousands) 
(in thousands)
          
Audit fees (a) $2,621 $3,031 $ 2,132  $ 1,701 
Audit-related fees (b)  31  111  54   9 
Tax fees (c)        163   518 
All other fees (d)  8  64

(a) Includes estimated fees for audit of annual financial statements and review of financial statements included in PPL Energy Supply's Quarterly Reports on Form 10-Q and for services in connection with statutory and regulatory filings or engagements, including comfort letters and consents for financings and filings made with the SEC.
   
(b) Fees for due diligence work, a reviewperformance of eXtensible Business Reporting Language tags assigned to financial statement line items and for consultation to ensure appropriate accounting and reporting in connection with various business and financing transactions.specific agreed-upon procedures.
   
(c) The independent auditor did not provideIncludes fees for tax advice in connection with a tax basis and earnings and profit study, a private letter ruling related to the sale of Safe Harbor, Ironwood purchase accounting, and review, consultation and analysis related to investment tax credits and related capital expenditures on certain hydro-electric plant upgrades.
403

PPL Electric Utilities Corporation

The following table presents an allocation of fees billed, including expenses, by EY to PPL for the fiscal years ended December 31, 2012 and 2011, for professional services rendered for the audit of PPL Electric's annual financial statements and for fees billed for other services rendered by EY.

  2012  2011 
  
(in thousands)
       
Audit fees (a) $ 1,319  $ 1,193 
Audit-related fees (b)   10    45 
Tax fees (c)   207    19 

(a)Includes estimated fees for audit of annual financial statements and review of financial statements included in PPL Electric's Quarterly Reports on Form 10-Q and for services to PPL Energy Supplyin connection with statutory and regulatory filings or any of its affiliates.engagements, including comfort letters and consents for financings and filings made with the SEC.

(d)(b)Fees for consultation on a transmission and distribution study and performance of specific agreed-upon procedures.

(c)Includes fees for tax advice in connection with non-income tax processes, sales and use tax matters and analysis related to access to an EY online accounting research tool,the deductibility of certain transmission and distribution costs.

LG&E and KU Energy LLC

The following table presents an allocation of fees billed, including expenses, by EY to LKE for the fiscal years ended December 31, 2012 and 2011, for professional services rendered for the audits of LKE's annual financial statements and for fees billed for other services rendered by EY.

  2012  2011 
  
(in thousands)
       
Audit fees (a) $ 1,715  $ 1,528 

(a)Includes estimated fees for audit of grant applications relating to network connections, consultationannual financial statements and review of financial statements included in LKE's Quarterly Reports on Form 10-Q and for services in connection with outside counsel regarding U.K. GAAPstatutory and miscellaneous regulatory consulting services.filings or engagements, including comfort letters and consents for financings and filings made with the SEC.

Louisville Gas and Electric Company

The following table presents an allocation of fees billed, including expenses, by EY to LG&E for the fiscal years ended December 31, 2012 and 2011, for professional services rendered for the audits of LG&E's annual financial statements and for fees billed for other services rendered by EY.

  2012  2011 
  
(in thousands)
       
Audit fees (a) $ 731  $ 552 

(a)Includes estimated fees for audit of annual financial statements and review of financial statements included in LG&E's Quarterly Reports on Form 10-Q and for services in connection with statutory and regulatory filings or engagements, including comfort letters and consents for financings and filings made with the SEC.

Kentucky Utilities Company

The following table presents an allocation of fees billed, including expenses, by EY to KU for the fiscal years ended December 31, 2012 and 2011, for professional services rendered for the audits of KU's annual financial statements and for fees billed for other services rendered by EY.
404

     
  2012  2011 
  
(in thousands)
       
Audit fees (a) $ 626  $ 552 

(a)Includes estimated fees for audit of annual financial statements and review of financial statements included in KU's Quarterly Reports on Form 10-Q and for services in connection with statutory and regulatory filings or engagements, including comfort letters and consents for financings and filings made with the SEC.

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

Approval of Fees The Audit Committee of PPL has procedures for pre-approving audit and non-audit services to be provided by the independent auditor.  These procedures are designed to ensure the continued independence of the independent auditor.  More specifically, the use of the independent auditor to perform either audit or non-audit services is prohibited unless specifically approved in advance by the Audit Committee of PPL.  As a result of this approval process, the Audit Committee of PPL has establishedpre-approved specific categories of services and authorization levels.  All services outside of the specified categories and all amounts exceeding the authorization levels are reviewedapproved by the Chair of the Audit Committee of PPL, who serves as the Committee designee to review and approve audit and non-audit related services during the year.  A listing of the approved audit and non-audit services is reviewed with the full Audit Committee of PPL no later than its next meeting.

The Audit Committee of PPL approved 100% of the 20092012 and 20082011 services provided by EY.

PPL Electric Utilities Corporation

Information for this item will be set forth in the section entitled "Fees to Independent Auditor for 2009 and 2008" in PPL Electric's 2010 Notice of Annual Meeting and Information Statement, which will be filed with the SEC not later than 120 days after December 31, 2009, and which information is incorporated herein by reference.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

PPL Corporation, PPL Energy Supply, LLC, and PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company
 
(a)  The following documents are filed as part of this report:
  
 1.Financial Statements - Refer to the "Index to Item 8. Financial Statements and Supplementary Data""Table of Contents" for an index of the financial statements included in this report.
   
 2.Supplementary Data and Supplemental Financial Statement Schedule - included in response to Item 8.
   
  Schedule I - LG&E and KU Energy LLC Condensed Unconsolidated Financial Statements.
All supplemental financial statementother schedules are omitted because of the absence of the conditions under which they are required or because the required information is included in the financial statements or notes thereto.
   
 3.Exhibits
   
  See Exhibit Index immediately following the signature pages.

405


SHAREOWNER AND INVESTOR INFORMATION


Annual Meetings:  The 20102013 annual meeting of shareowners of PPL will be held on Wednesday, May 19, 2010,15, 2013, at the Holiday InnZoellner Arts Center, on the campus of Lehigh University in Fogelsville,Bethlehem, Pennsylvania, in LehighNorthampton County.  The 2010 meeting for PPL Electric will be held on Thursday, May 20, 2010, at the offices of the company at Two North Ninth Street, Allentown, Pennsylvania.

Proxy and Information Statement Material:  A proxy statement or information statement, and notice of PPL's and PPL Electric's annual meetings aremeeting is mailed to all shareowners of record as of February 26, 2010.28, 2013.

PPL Annual Report: The report is published and mailed in the beginning of April to all shareowners of record.  The latest annual report can be accessed at www.pplweb.com.  If you have more than one account, or if there is more than one investor in your household, you may call the PPL Shareowner Information Line to request that only one annual report be delivered to your address.  Please provide account numbers for all duplicate mailings.

Dividends:  Subject to the declaration of dividends on PPL common stock by the PPL Board of Directors or its Executive Committee and PPL Electric preferred stock and preference stock by the PPL Electric Board of Directors, dividends are paid on the first business day of April, July, October and January.  The 20102013 record dates for dividends are expected to be March 10,8, June 10, September 10 and December 10.

Direct Deposit of Dividends: Shareowners may choose to have their dividend checks deposited directly into their checking or savings account.

PPL Shareowner Information Line (1-800-345-3085): Shareowners can get detailedobtain corporate and financial information 24 hours a day using the PPL Shareowner Information Line.  They can hear timely recorded messages about earnings,Earnings, dividends and other company news releases; request informationreleases are available by fax; and request printed materials in thefax or mail.  Other PPL publications, such as the annual and quarterly reports to the Securities and Exchange Commission (Forms 10-K and 10-Q), will be mailed upon request, or write to:

Manager - PPL Investor Services
Two North Ninth Street (GENTW13)
Allentown, PA  18101

FAX:  610-774-5106
Via email:  invserv@pplweb.com

PPL's Web SiteWebsite (www.pplweb.com):  Shareowners can access PPL Securities and Exchange Commission filings, corporate governance materials, news releases, stock quotes and historical performance.  Visitors to our Web sitewebsite can provide their email address and indicate their desire to receive future earnings or news releases automatically.

Shareowner Inquiries:

PPL Shareowner Services
Wells Fargo Bank, N.A.
161 North Concord Exchange1110 Centre Pointe Curve, Suite 101
South St. Paul,Mendota Heights, MN 55075-113955120

Toll Free:  1-800-345-3085
Outside U.S.:  651-453-2129
FAX:  651-450-4085
www.wellsfargo.com/shareownerservicesshareowneronline.com

Online Account Access:  Registered shareowners can accessactivate their account informationfor online access by visiting www.shareowneronline.com.shareowneronline.com.

Dividend Reinvestment Plan:and Direct Stock Purchase Plan (Plan):  PPL offers investors the opportunity to acquire shares of PPL common stock through its Plan.  Through the Plan, participants are eligible to invest up to $25,000 per calendar month in PPL common stock.  Shareowners may choose to have dividends on their PPL common stock fully or PPL Electric preferred and preference stockpartially reinvested in PPL common stock insteador can receive full payment of receiving the dividendcash dividends by check.check or EFT.  Participants in PPL's Dividend Reinvestmentthe Plan may choose to have their common stock certificates deposited into their Plan account.

Direct Registration System:  PPL and PPL Electric participateparticipates in the Direct Registration System (DRS).  Shareowners may choose to have their common or preferred stock certificates deposited intoconverted to book entry form within the DRS.DRS by submitting their certificates to PPL's transfer agent.

406

Listed Securities:

New York Stock Exchange

PPL Corporation:
Common Stock (Code:  PPL)

    PPL Energy Supply, LLC:Corporate Units issued 2010 (Code:  PPLPRU)
    7.0% Senior Unsecured Notes due 2046
(Code:  PLS)

    PPL Electric Utilities Corporation:Corporate Units issued 2011 (Code:  PPLPRW)
    4-1/2% Preferred Stock
(Code:  PPLPRB)

    4.40% Series Preferred Stock
(Code:  PPLPRA)

PPL Capital Funding, Inc.:
2007 Series A Junior Subordinated Notes due 2067
(Code: (Code:  PPL/67)

    6.85% Senior Notes due 2047
(Code:  PLV)

Fiscal Agents:

Stock Transfer Agent and Registrar;
Dividend Reinvestment Plan Agent
Wells Fargo Bank, N.A.
Shareowner Services
161 North Concord Exchange1110 Centre Pointe Curve, Suite 101
South St. Paul,Mendota Heights, MN 55075-113955120

Toll Free:  1-800-345-3085
Outside U.S.:  651-453-2129

Dividend Disbursing Office
PPL Investor Services
Two North Ninth Street (GENTW13)
Allentown, PA  18101

FAX:  610-774-5106
Via email:  invserv@pplweb.com

Or call the PPL Shareowner Information Line
Toll Free:  1-800-345-3085

1945 Mortgage Bond Trustee,
Transfer and Bond Interest Paying Agent
Deutsche Bank Trust Company Americas
648 Grassmere Park Road5022 Gate Parkway (Suite 200)
Nashville, TN  37211Jacksonville, FL  32256

Toll Free:  1-800-735-7777
FAX:  615-835-2727615-866-3887

Indenture Trustee
The Bank of New York Mellon
101 Barclay Street
New York, NY 10286

 
407


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

PPL Corporation
(Registrant)

By  /s/ JamesWilliam H. MillerSpence    
JamesWilliam H. MillerSpence -    
Chairman, President and    
Chief Executive Officer    
     
     
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
     
     
     
    TITLE
By  /s/ William H. Spence    
By  /s/ JamesWilliam H. MillerPrincipal Executive Officer and Director
James H. MillerSpence -    
Chairman, President and    
Chief Executive Officer
(Principal Executive Officer)    
     
     
By  /s/ Paul A. Farr   Principal Financial Officer
Paul A. Farr -    
Executive Vice President and    
Chief Financial Officer    
(Principal Financial Officer)
     
     
By  /s/ J. Matt Simmons, Jr.Vincent Sorgi   Principal Accounting Officer
J. Matt Simmons, Jr.Vincent Sorgi -    
Vice President and Controller
(Principal Accounting Officer)    
     
     
     
Directors:    
     
Frederick M. Bernthal Stuart HeydtVenkata Rajamannar Madabhushi  
John W. Conway Craig A. Rogerson  
E. Allen DeaverSteven G. Elliott W. Keith SmithWilliam H. Spence  
Louise K. Goeser Natica von Althann  
Stuart E. Graham Keith H. Williamson  
Stuart Heydt
     
By  /s/ JamesWilliam H. MillerSpence    
JamesWilliam H. Miller,Spence, Attorney-in-fact Date:  February 25, 201028, 2013  
408

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

PPL Energy Supply, LLC
(Registrant)

By  /s/ James H. MillerDavid G. DeCampli    
James H. MillerDavid G. DeCampli -    
President    
     
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
     
    TITLE
     
By  /s/ James H. MillerDavid G. DeCampli   Principal Executive Officer and Manager
James H. MillerDavid G. DeCampli -    
President
(Principal Executive Officer)    
     
By  /s/ Paul A. Farr   Principal Financial Officer and Manager
Paul A. Farr -    
Executive Vice President    
(Principal Financial Officer)
     
By  /s/ J. Matt Simmons, Jr.Vincent Sorgi   Principal Accounting Officer
J. Matt Simmons, Jr.Vincent Sorgi -    
Vice President and Controller    
(Principal Accounting Officer)
     
Managers:
/s/ David G. DeCampli
David G. DeCampli
/s/ Paul A. Farr
Paul A. Farr    
     
/s/ Robert J. Grey    
Robert J. Grey    
     
/s/ William H. Spence    
William H. Spence    
     
/s/ James E. Abel
James E. Abel
     
     
     
     
     
     
Date:  February 25, 201028, 2013    
409

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

PPL Electric Utilities Corporation
(Registrant)

By  /s/ David G. DeCampliGregory N. Dudkin    
David G. DeCampliGregory N. Dudkin -    
President    
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
     
    TITLE
     
By  /s/ David G. DeCampliGregory N. Dudkin   Principal Executive Officer and Director
David G. DeCampliGregory N. Dudkin -    
President
(Principal Executive Officer)    
     
By  /s/ J. Matt Simmons, Jr.Vincent Sorgi   Principal Financial Officer and
J. Matt Simmons, Jr.Vincent Sorgi -   Principal Accounting Officer
Vice President and ControllerChief Accounting Officer
(Principal Financial and Accounting Officer)    
     

     
Directors:    
     
/s/ James H. Miller/s/ William H. Spence /s/ Gregory N. Dudkin 
James H. MillerWilliam H. SpenceGregory N. Dudkin  
     
/s/ Paul A. Farr /s/ Dean A. Christiansen  
Paul A. Farr Dean A. Christiansen  
     
/s/ Robert J. Grey    
Robert J. Grey    
     
     
     
     
     
     
     
     
Date:  February 25, 201028, 2013    
410

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

LG&E and KU Energy LLC
(Registrant)

By  /s/ Victor A. Staffieri
Victor A. Staffieri -
Chairman of the Board, Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
By  /s/ Victor A. Staffieri
Victor A. Staffieri -
Chairman of the Board, Chief Executive Officer and President
(Principal Executive Officer)
By  /s/ Kent W. Blake
Kent W. Blake -
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
Directors:
/s/ Paul A. Farr/s/ William H. Spence
Paul A. FarrWilliam H. Spence
/s/ Chris Hermann
/s/ Victor A. Staffieri
Chris HermannVictor A. Staffieri
/s/ S. Bradford Rives
/s/ Paul W. Thompson
S. Bradford RivesPaul W. Thompson
Date:  February 28, 2013

411

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Louisville Gas and Electric Company
(Registrant)

By  /s/ Victor A. Staffieri
Victor A. Staffieri -
Chairman of the Board, Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
By  /s/ Victor A. Staffieri
Victor A. Staffieri -
Chairman of the Board, Chief Executive Officer and President
(Principal Executive Officer)
By  /s/ Kent W. Blake
Kent W. Blake -
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
Directors:
/s/ Paul A. Farr/s/ William H. Spence
Paul A. FarrWilliam H. Spence
/s/ Chris Hermann
/s/ Victor A. Staffieri
Chris HermannVictor A. Staffieri
/s/ S. Bradford Rives
/s/ Paul W. Thompson
S. Bradford RivesPaul W. Thompson
Date:  February 28, 2013
412

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Kentucky Utilities Company
(Registrant)

By  /s/ Victor A. Staffieri
Victor A. Staffieri -
Chairman of the Board, Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
By  /s/ Victor A. Staffieri
Victor A. Staffieri -
Chairman of the Board, Chief Executive Officer and President
(Principal Executive Officer)
By  /s/ Kent W. Blake
Kent W. Blake -
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
Directors:
/s/ Paul A. Farr/s/ William H. Spence
Paul A. FarrWilliam H. Spence
/s/ Chris Hermann
/s/ Victor A. Staffieri
Chris HermannVictor A. Staffieri
/s/ S. Bradford Rives
/s/ Paul W. Thompson
S. Bradford RivesPaul W. Thompson
Date:  February 28, 2013
413

EXHIBIT INDEX

The following Exhibits indicated by an asterisk preceding the Exhibit number are filed herewith.  The balance of the Exhibits have heretofore been filed with the Commission and pursuant to Rule 12(b)-32 are incorporated herein by reference.  Exhibits indicated by a [_] are filed or listed pursuant to Item 601(b)(10)(iii) of Regulation S-K.
3(a)-Amended and Restated Articles of Incorporation of PPL Corporation, effective as of May 21, 2008 (Exhibit 3(i) to PPL Corporation Form 8-K Report (File No. 1-11459) dated May 21, 2008)
   
3(b)-Amended and Restated Articles of Incorporation of PPL Electric Utilities Corporation, effective as of May 2, 2006 (Exhibit 3(a) to PPL Electric Utilities Corporation Form 10-Q Report (File No. 1-905) for the quarter ended March 31, 2006)
   
3(c)-1-Certificate of Formation of PPL Energy Supply, LLC, effective as of November 14, 2000 (Exhibit 3.1 to PPL Energy Supply, LLC Form S-4 (Registration Statement No. 333-74794))
   
3(c)-2-Certificate of Amendment of PPL Energy Supply, LLC, effective as of November 12, 2002 (Exhibit 3(c)-2 to PPL Energy Supply, LLC Form 10-K Report (File No. 1-32944) for the year ended December 31, 2011)
3(d)-Amended and Restated Bylaws of PPL Corporation, effective as of May 21, 200819, 2010 (Exhibit 3.(ii)99.1 to PPL Corporation Form 8-K Report (File No. 1-11459) dated May 21, 2008)24, 2010)
   
3(e)-Amended and Restated Bylaws of PPL Electric Utilities Corporation, effective as amended and restated effectiveof March 30, 2006 (Exhibit 3.2 to PPL Electric Utilities Corporation Form 8-K Report (File No. 1-905) dated March 30, 2006)
   
3(f)-Limited Liability Company Agreement of PPL Energy Supply, LLC, datedeffective as of March 20, 2001 (Exhibit 3.2 to PPL Energy Supply, LLC Form S-4 (Registration Statement No. 333-74794))
   
3(g)-Articles of Organization of LG&E and KU Energy LLC, effective as of December 29, 2003 (Exhibit 3(a) to Registration Statement filed on Form S-4 (File No. 333-173665))
3(h)-Amended and Restated Operating Agreement of LG&E and KU Energy LLC, effective as of November 1, 2010 (Exhibit 3(b) to Registration Statement filed on Form S-4 (File No. 333-173665))
3(i)-1-Amended and Restated Articles of Incorporation of Louisville Gas and Electric Company, effective as of November 6, 1996 (Exhibit 3(a) to Registration Statement filed on Form S-4 (File No. 333-173676))
3(i)-2-Articles of Amendment to Articles of Incorporation of Louisville Gas and Electric Company, effective as of April 6, 2004 (Exhibit 3(b) to Registration Statement filed on Form S-4 (File No. 333-173676))
3(j)-Bylaws of Louisville Gas and Electric Company, effective as of December 16, 2003 (Exhibit 3(c) to Registration Statement filed on Form S-4 (File No. 333-173676))
3(k)-1-Amended and Restated Articles of Incorporation of Kentucky Utilities Company, effective as of December 14, 1993 (Exhibit 3(a) to Registration Statement filed on Form S-4 (File No. 333-173675))
3(k)-2-Articles of Amendment to Articles of Incorporation of Kentucky Utilities Company, effective as of April 8, 2004 (Exhibit 3(b) to Registration Statement filed on Form S-4 (File No. 333-173675))
3(l)-Bylaws of Kentucky Utilities Company, effective as of December 16, 2003 (Exhibit 3(c) to Registration Statement filed on Form S-4 (File No. 333-173675))
4(a)-Pollution Control Facilities Loan Agreement, dated as of May 1, 1973, between PPL Electric Utilities Corporation and the Lehigh County Industrial Development Authority (Exhibit 5(z) to Registration Statement No. 2-60834)
4(b)-1-Amended and Restated Employee Stock Ownership Plan, dated January 12, 2007 (Exhibit 4(a) to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2006)
414

   
4(a)4(b)-2-Amendment No. 1 to said Amended and Restated Employee Stock Ownership Plan, dated July 2, 2007 (Exhibit 4(a) to PPL Corporation Form 10-Q Report (File No. 1-11459) for the quarter ended September 30, 2007)
   
4(a)4(b)-3-Amendment No. 2 to said Amended and Restated Employee Stock Ownership Plan, dated December 13, 2007 (Exhibit 4(a)-3 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2007)
   
4(a)4(b)-4-Amendment No. 3 to said Amended and Restated Employee Stock Ownership Plan, dated August 19, 2009 (Exhibit 4(a) to PPL Corporation Form 10-Q Report (File No. 1-11459) for the quarter ended September 30, 2009)
   
-Amendment No. 4 to said Amended and Restated Employee Stock Ownership Plan, dated December 2, 2009 (Exhibit 4(a)-5 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2009)
   
4(b)-6-Amendment No. 5 to said Employee Stock Ownership Plan, dated November 17, 2010 (Exhibit 4(b)-6 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(b)-7-Amendment No. 6 to said Employee Stock Ownership Plan, dated January 18, 2012 (Exhibit 4(a) to PPL Corporation Form 10-Q Report (File No. 1-11459) for the quarter ended March 31, 2012)
4(b)-8-Amendment No. 7 to said Employee Stock Ownership Plan, dated May 30, 2012 (Exhibit 4(a) to PPL Corporation Form 10-Q Report (File No. 1-11459) for the quarter ended June 30, 2012)
4(b)-9-Amendment No. 8 to said Employee Stock Ownership Plan, dated July 17, 2012 (Exhibit 4(b) to PPL Corporation Form 10-Q Report (File No. 1-11459) for the quarter ended June 30, 2012)
-Amendment No. 9 to said Employee Stock Ownership Plan, dated December 21, 2012
4(c)-Trust Deed constituting £150 million 9 ¼ percent Bonds due 2020, dated November 9, 1995, between South Wales Electric plc and Bankers Trustee Company Limited (Exhibit 4(k) to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2004)
   
4(c)4(d)-1-Indenture, dated as of November 1, 1997, among PPL Corporation, PPL Capital Funding, Inc. and JPMorgan Chase Bank (formerly The Chase Manhattan Bank), as Trustee (Exhibit 4.1 to PPL Corporation Form 8-K Report (File No. 1-11459) dated November 12, 1997)
   
4(c)4(d)-2-Supplement, dated as of May 18, 2004, to saidSupplemental Indenture (Exhibit 4.7 to Registration Statement Nos. 333-116478, 333-116478-01 and 333-116478-02)
4(c)-3-Supplement,No. 7, dated as of July 1, 2007, to said Indenture (Exhibit 4(b) to PPL Corporation Form 8-K Report (File No. 1-11459) dated July 16, 2007)
   
4(d)-3-Supplemental Indenture No. 8, dated as of June 14, 2012, to said Indenture (Exhibit 4(b) to PPL Corporation Form 8-K Report (File No. 1-11459) dated June 14, 2012)
4(d)-4-Supplemental Indenture No. 9, dated as of October 15, 2012, to said Indenture (Exhibit 4(b) to PPL Corporation Form 8-K Report (File No. 1-11459) dated October 15, 2012)
4(e)-Indenture, dated as of March 16, 2001, among WPD Holdings UK, Bankers Trust Company, as Trustee, Principal Paying Agent, and Transfer Agent and Deutsche Bank Luxembourg, S.A., as Paying and Transfer Agent (Exhibit 4(g) to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2009)
4(f)-1-Indenture, dated as of August 1, 2001, by PPL Electric Utilities Corporation and JPMorgan Chase Bank (formerly The Chase Manhattan Bank), as Trustee (Exhibit 4.1 to PPL Electric Utilities Corporation Form 8-K Report (File No. 1-905) dated August 21, 2001)
   
4(d)4(f)-2-Supplement,Supplemental Indenture No. 4, dated as of February 1, 2005, to said Indenture (Exhibit 4(g)-5 to PPL Electric Utilities Corporation Form 10-K Report (File No. 1-905) for the year ended December 31, 2004)
   
415

4(d)4(f)-3-Supplement,Supplemental Indenture No. 5, dated as of May 1, 2005, to said Indenture (Exhibit 4(b) to PPL Electric Utilities Corporation Form 10-Q Report (File No. 1-905) for the quarter ended June 30, 2005)
   
4(d)4(f)-4-Supplement,Supplemental Indenture No. 6, dated as of December 1, 2005, to said Indenture (Exhibit 4(a) to PPL Electric Utilities Corporation Form 8-K Report (File No. 1-905) dated December 22, 2005)
   
4(d)4(f)-5-Supplement,Supplemental Indenture No. 7, dated as of August 1, 2007, to said Indenture (Exhibit 4(b) to PPL Electric Utilities Corporation Form 8-K Report (File No. 1-905) dated August 14, 2007)
   
4(d)4(f)-6-Supplement, dated as of October 1, 2008, to saidSupplemental Indenture (Exhibit 4(b) to PPL Electric Utilities Corporation Form 8-K Report (File No. 1-905) dated October 20, 2008)
4(d)-7-Supplement,9, dated as of October 1, 2008, to said Indenture (Exhibit 4(c) to PPL Electric Utilities Corporation Form 8-K Report (File No. 1-905) dated October 31, 2008)
   
4(d)-84(f)-7-Supplement,Supplemental Indenture No. 10, dated as of May 1, 2009, to said Indenture (Exhibit 4(b) to PPL Electric Utilities Corporation Form 8-K Report (File No. 1-905) dated May 22, 2009)
   
4(e)4(f)-8-Supplemental Indenture No. 11, dated as of July 1, 2011, to said Indenture (Exhibit 4.1 to PPL Electric Utilities Corporation Form 8-K Report (File No. 1-905) dated July 13, 2011)
4(f)-9-Supplemental Indenture No. 12, dated as of July 1, 2011, to said Indenture (Exhibit 4(a) to PPL Electric Utilities Corporation Form 8-K Report (File No. 1-905) dated July 18, 2011)
4(f)-10-Supplemental Indenture No. 13, dated as of August 1, 2011, to said Indenture (Exhibit 4(a) to PPL Electric Utilities Corporation Form 8-K Report (File No. 1-905) dated August 23, 2011)
4(f)-11-Supplemental Indenture No. 14, dated as of August 1, 2012, to said Indenture (Exhibit 4(a) to PPL Electric Utilities Corporation Form 8-K Report (File No. 1-905) dated August 24, 2012)
4(g)-1-Indenture, dated as of October 1, 2001, by PPL Energy Supply, LLC and JPMorgan Chase Bank (formerly The Chase Manhattan Bank), as Trustee (Exhibit 4.1 to PPL Energy Supply, LLC Form S-4 (Registration Statement No. 333-74794))
   
4(e)-24(g)- 2-Supplement, dated as of October 1, 2001, to saidSupplemental Indenture (Exhibit 4.2 to PPL Energy Supply, LLC Form S-4 (Registration Statement No. 333-74794))
4(e)-3-Registration Rights Agreement, dated October 19, 2001, between PPL Energy Supply, LLC and the Initial Purchasers (Exhibit 4.5 to PPL Energy Supply, LLC Form S-4 (Registration Statement No. 333-74794))
4(e)-4-Supplement,2, dated as of August 15, 2004, to said Indenture (Exhibit 4(h)-4 to PPL Energy Supply, LLC Form 10-K Report (File No. 333-74794) for the year ended December 31, 2004)
   
4(e)-54(g)-3-Supplement,Supplemental Indenture No. 3, dated as of October 15, 2005, to said Indenture (Exhibit 4(a) to PPL Energy Supply, LLC Form 8-K Report (File No. 333-74794) dated October 28, 2005)
   
4(e)-64(g)-4-
Form of Note for PPL Energy Supply, LLC's $300 million aggregate principal amount of 5.70% REset Put Securities due 2035 (REPSSM) (Exhibit 4(b) to PPL Energy Supply, LLC Form 8-K Report (File No. 333-74794) dated October 28, 2005)
   
4(e)-74(g)-5-Supplement,Supplemental Indenture No. 4, dated as of May 1, 2006, to said Indenture (Exhibit 4(a) to PPL Energy Supply, LLC Form 10-Q Report (File No. 333-74794) for the quarter ended June 30, 2006)
   
4(e)-84(g)-6-Supplement, dated as of July 1, 2006, to saidSupplemental Indenture (Exhibit 4(b) to PPL Energy Supply, LLC Form 10-Q Report (File No. 333-74794) for the quarter ended June 30, 2006)
4(e)-9-Supplement,6, dated as of July 1, 2006, to said Indenture (Exhibit 4(c) to PPL Energy Supply, LLC Form 10-Q Report (File No. 333-74794) for the quarter ended June 30, 2006)
   
4(e)-104(g)-7-Supplement,Supplemental Indenture No. 7, dated as of December 1, 2006, to said Indenture (Exhibit 4(f)-10 to PPL Energy Supply, LLC Form 10-K Report (File No. 333-74794) for the year ended December 31, 2006)
   
4(e)-114(g)-8-Supplement,Supplemental Indenture No. 8, dated as of December 1, 2007, to said Indenture (Exhibit 4(b) to PPL Energy Supply, LLC Form 8-K Report (File No. 333-74794) dated December 18,20, 2007)
   
4(e)-124(g)-9-Supplement,Supplemental Indenture No. 9, dated as of March 1, 2008, to said Indenture (Exhibit 4(b) to PPL Energy Supply, LLC Form 8-K Report (File No. 333-74794) dated March 14, 2008)
   
416

4(e)-134(g)-10-Supplement,Supplemental Indenture No. 10, dated as of July 1, 2008, to said Indenture (Exhibit 4(b) to PPL Energy Supply, LLC Form 8-K Report (File No. 1-32944) dated July 21, 2008)
   
4(f)4(g)-11-Supplemental Indenture No. 11, dated as of December 1, 2011, to said Indenture (Exhibit 4(a) to PPL Corporation Form 8-K Report (File No. 1-1149) dated December 16, 2011)
4(h)-1-Trust Deed constituting £200 million 5.875 percent Bonds due 2027, dated March 25, 2003, between Western Power Distribution (South West) plc and J.P. Morgan Corporate Trustee Services Limited (Exhibit 4(o)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2004)
   
4(f)4(h)-2-Supplement, dated May 27, 2003, to said Trust Deed, constituting £50 million 5.875 percent Bonds due 2027 (Exhibit 4(o)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2004)
   
4(i)-1-Indenture,Pollution Control Facilities Loan Agreement, dated as of March 16, 2001, among WPD Holdings UK, Bankers Trust Company, as Trustee, Principal Paying Agent,February 1, 2005, between PPL Electric Utilities Corporation and Transfer Agent and Deutsche Bank Luxembourg, S.A., as Paying and Transfer Agentthe Lehigh County Industrial Development Authority (Exhibit 10(ff) to PPL Electric Utilities Corporation Form 10-K Report (File No. 1-905) for the year ended December 31, 2004)
   
4(h)4(i)-2-Pollution Control Facilities Loan Agreement, dated as of May 1, 2005, between PPL Electric Utilities Corporation and the Lehigh County Industrial Development Authority (Exhibit 10(a) to PPL Electric Utilities Corporation Form 10-Q Report (File No. 1-905) for the quarter ended June 30, 2005)
4(i)-3-Pollution Control Facilities Loan Agreement, dated as of October 1, 2008, between Pennsylvania Economic Development Financing Authority and PPL Electric Utilities Corporation (Exhibit 4(a) to PPL Electric Utilities Corporation Form 8-K Report (File No. 1-905) dated October 31, 2008)
4(j)-Trust Deed constituting £105 million 1.541 percent Index-Linked Notes due 2053, dated December 1, 2006, between Western Power Distribution (South West) plc and HSBC Trustee (CI) Limited (Exhibit 4(i) to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2006)
   
4(i)4(k)-Trust Deed constituting £120 million 1.541 percent Index-Linked Notes due 2056, dated December 1, 2006, between Western Power Distribution (South West) plc and HSBC Trustee (CI) Limited (Exhibit 4(j) to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2006)
   
4(j)4(l)-Trust Deed constituting £225 million 4.80436 percent Notes due 2037, dated December 21, 2006, between Western Power Distribution (South Wales) plc and HSBC Trustee (CI) Limited (Exhibit 4(k) to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2006)
   
4(k)4(m)-1-Subordinated Indenture, dated as of March 1, 2007, between PPL Capital Funding, Inc., PPL Corporation and The Bank of New York, as Trustee (Exhibit 4(a) to PPL Corporation Form 8-K Report (File No. 1-11459) dated March 20, 2007)
   
4(k)4(m)-2-Supplement,Supplemental Indenture No. 1, dated as of March 1, 2007, to said Subordinated Indenture (Exhibit 4(b) to PPL Corporation Form 8-K Report (File No. 1-11459) dated March 20, 2007)
   
4(l)4(m)-3-Supplemental Indenture No. 2, dated as of June 28, 2010, to said Subordinated Indenture (Exhibit 4.3 to PPL Corporation Form 8-K Report (File No. 1-11459) dated June 30, 2010)
4(m)-4-Supplemental Indenture No. 3, dated as of April 15, 2011, to said Subordinated Indenture (Exhibit 4.3 to PPL Corporation Form 8-K Report (File No. 1-11459) dated April 19, 2011)
4(n)-1-Series 2009A Exempt Facilities Loan Agreement, dated as of April 1, 2009, between PPL Energy Supply, LLC and Pennsylvania Economic Development Financing Authority (Exhibit 4(a) to PPL Energy Supply, LLC Form 8-K Report (File No. 1-32944) dated April 9, 2009)
   
417

4(l)4(n)-2-Series 2009B Exempt Facilities Loan Agreement, dated as of April 1, 2009, between PPL Energy Supply, LLC and Pennsylvania Economic Development Financing Authority (Exhibit 4(b) to PPL Energy Supply, LLC Form 8-K Report (File No. 1-32944) dated April 9, 2009)
   
4(l)4(n)-3-Series 2009C Exempt Facilities Loan Agreement, dated as of April 1, 2009, between PPL Energy Supply, LLC and Pennsylvania Economic Development Financing Authority (Exhibit 4(c) to PPL Energy Supply, LLC Form 8-K Report (File No. 1-32944) dated April 9, 2009)
   
10(a)4(o)-$150 Million CreditTrust Deed constituting £200 million 5.75 percent Notes due 2040, dated March 23, 2010, between Western Power Distribution (South Wales) plc and Reimbursement Agreement, dated as of April 25, 2001, among PPL Montana, LLC and the banks named thereinHSBC Corporate Trustee Company (UK) Limited (Exhibit 10(d)4(a) to PPL Montana, LLCCorporation Form 10-Q Report (File No. 333-50350)1-11459) for the quarter ended June 30, 2001)March 31, 2010)
   
10(b)4(p)-Trust Deed constituting £200 million 5.75 percent Notes due 2040, dated March 23, 2010, between Western Power Distribution (South West) plc and HSBC Corporate Trustee Company (UK) Limited (Exhibit 4(b) to PPL Corporation Form 10-Q Report (File No. 1-11459) for the quarter ended March 31, 2010)
4(q)-1-Indenture, dated as of October 1, 2010, between Kentucky Utilities Company and The Bank of New York Mellon, as Trustee (Exhibit 4(q)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(q)-2-Supplemental Indenture No. 1, dated as of October 15, 2010, to said Indenture (Exhibit 4(q)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(q)-3-Supplemental Indenture No. 2, dated as of November 1, 2010, to said Indenture (Exhibit 4(q)-3 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(r)-1-Indenture, dated as of October 1, 2010, between Louisville Gas and Electric Company and The Bank of New York Mellon, as Trustee (Exhibit 4(r)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(r)-2-Supplemental Indenture No. 1, dated as of October 15, 2010, to said Indenture (Exhibit 4(r)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(r)-3-Supplemental Indenture No. 2, dated as of November 1, 2010, to said Indenture (Exhibit 4(r)-3 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(s)-1-Indenture, dated as of November 1, 2010, between LG&E and KU Energy LLC and The Bank of New York Mellon, as Trustee (Exhibit 4(s)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(s)-2-Supplemental Indenture No. 1, dated as of November 1, 2010, to said Indenture (Exhibit 4(s)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(s)-3-Supplemental Indenture No. 2, dated as of September 1, 2011, to said Indenture (Exhibit 4(a) to PPL Corporation Form 8-K Report (File No. 1-11459) dated September 30, 2011)
4(t)-1-2002 Series A Carroll County Loan Agreement, dated February 1, 2002, by and between Kentucky Utilities Company, and County of Carroll, Kentucky (Exhibit 4(w)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(t)-2-Amendment No. 1 dated as of September 1, 2010 to said Loan Agreement by and between Kentucky Utilities Company, and County of Carroll, Kentucky (Exhibit 4(w)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
418

4(u)-1-2002 Series B Carroll County Loan Agreement, dated February 1, 2002, by and between Kentucky Utilities Company, and County of Carroll, Kentucky (Exhibit 4(x)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(u)-2-Amendment No. 1 dated as of September 1, 2010, to said Loan Agreement by and between Kentucky Utilities Company, and County of Carroll, Kentucky (Exhibit 4(x)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(v)-1-2002 Series C Carroll County Loan Agreement, dated July 1, 2002, by and between Kentucky Utilities Company, and County of Carroll, Kentucky (Exhibit 4(y)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(v)-2-Amendment No. 1 dated as of September 1, 2010, to said Loan Agreement by and between Kentucky Utilities Company, and County of Carroll, Kentucky (Exhibit 4(y)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(w)-1-2004 Series A Carroll County Loan Agreement, dated October 1, 2004 and amended and restated as of September 1, 2008, by and between Kentucky Utilities Company, and County of Carroll, Kentucky (Exhibit 4(z)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(w)-2-Amendment No. 1 dated as of September 1, 2010, to said Loan Agreement by and between Kentucky Utilities Company, and County of Carroll, Kentucky (Exhibit 4(z)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(x)-1-2006 Series B Carroll County Loan Agreement, dated October 1, 2006 and amended and restated September 1, 2008, by and between Kentucky Utilities Company, and County of Carroll, Kentucky (Exhibit 4(aa)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(x)-2-Amendment No. 1 dated as of September 1, 2010, to said Loan Agreement by and between Kentucky Utilities Company, and County of Carroll, Kentucky (Exhibit 4(aa)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(y)-1-2007 Series A Carroll County Loan Agreement, dated March 1, 2007, by and between Kentucky Utilities Company and County of Carroll, Kentucky (Exhibit 4(bb)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(y)-2-Amendment No. 1 dated September 1, 2010, to said Loan Agreement by and between Kentucky Utilities Company, and County of Carroll, Kentucky (Exhibit 4(bb)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(z)-1-2008 Series A Carroll County Loan Agreement, dated August 1, 2008 by and between Kentucky Utilities Company, and County of Carroll, Kentucky (Exhibit 4(cc)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(z)-2-Amendment No. 1 dated September 1, 2010, to said Loan Agreement by and between Kentucky Utilities Company, and County of Carroll, Kentucky (Exhibit 4(cc)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(aa)-1-2000 Series A Mercer County Loan Agreement, dated May 1, 2000 and amended and restated as of September 1, 2008, by and between Kentucky Utilities Company, and County of Mercer, Kentucky (Exhibit 4(dd)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(aa)-2-Amendment No. 1 dated September 1, 2010, to said Loan Agreement by and between Kentucky Utilities Company, and County of Mercer, Kentucky (Exhibit 4(dd)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
419

4(bb)-1-2002 Series A Mercer County Loan Agreement, dated February 1, 2002, by and between Kentucky Utilities Company, and County of Mercer, Kentucky (Exhibit 4(ee)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(bb)-2-Amendment No. 1 dated September 1, 2010, to said Loan Agreement by and between Kentucky Utilities Company, and County of Mercer, Kentucky (Exhibit 4(ee)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(cc)-1-2002 Series A Muhlenberg County Loan Agreement, dated February 1, 2002, by and between Kentucky Utilities Company, and County of Muhlenberg, Kentucky (Exhibit 4(ff)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(cc)-2-Amendment No. 1 dated September 1, 2010, to said Loan Agreement by and between Kentucky Utilities Company, and County of Muhlenberg, Kentucky (Exhibit 4(ff)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(dd)-1-2007 Series A Trimble County Loan Agreement, dated March 1, 2007, by and between Kentucky Utilities Company, and County of Trimble, Kentucky (Exhibit 4(gg)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(dd)-2-Amendment No. 1 dated September 1, 2010, to said Loan Agreement by and between Kentucky Utilities Company, and County of Trimble, Kentucky (Exhibit 4(gg)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(ee)-1-2000 Series A Louisville/Jefferson County Metro Government Loan Agreement, dated May 1, 2000 and amended and restated as of September 1, 2008, by and between Louisville Gas and Electric Company, and Louisville/Jefferson County Metro Government, Kentucky (Exhibit 4(hh)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(ee)-2-Amendment No. 1 dated September 1, 2010, to said Loan Agreement by and between Louisville Gas and Electric Company, and Louisville/Jefferson County Metro Government, Kentucky (Exhibit 4(hh)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(ee)-3-Amendment No. 2 dated as of October 1, 2011, to said Loan Agreement by and between Louisville Gas and Electric Company, and Louisville/Jefferson County Metro Government, Kentucky (Exhibit 4(ee)-3 to Louisville Gas and Electric Company Form 10-K Report (File No. 1-2893) for the year ended December 31, 2011)
4(ff)-1-2001 Series A Jefferson County Loan Agreement, dated July 1, 2001, by and between Louisville Gas and Electric Company, and Jefferson County, Kentucky (Exhibit 4(ii)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(ff)-2-Amendment No. 1 dated September 1, 2010, to said Loan Agreement by and between Louisville Gas and Electric Company, and Jefferson County, Kentucky (Exhibit 4(ii)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(gg)-1-2001 Series A Jefferson County Loan Agreement, dated November 1, 2001, by and between Louisville Gas and Electric Company, and Jefferson County, Kentucky (Exhibit 4(jj)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(gg)-2-Amendment No. 1 dated September 1, 2010, to said Loan Agreement by and between Louisville Gas and Electric Company, and Jefferson County, Kentucky (Exhibit 4(jj)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(hh)-1-2001 Series B Jefferson County Loan Agreement, dated November 1, 2001, by and between Louisville Gas and Electric Company, and Jefferson County, Kentucky (Exhibit 4(kk)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
420

4(hh)-2-Amendment No. 1 dated September 1, 2010, to said Loan Agreement by and between Louisville Gas and Electric Company, and Jefferson County, Kentucky (Exhibit 4(kk)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(ii)-1-2003 Series A Louisville/Jefferson County Metro Government Loan Agreement, dated October 1, 2003, by and between Louisville Gas and Electric Company and Louisville/Jefferson County Metro Government, Kentucky (Exhibit 4(ll)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(ii)-2-Amendment No. 1 dated September 1, 2010, to said Loan Agreement by and between Louisville Gas and Electric Company, and Louisville/Jefferson County Metro Government, Kentucky (Exhibit 4(ll)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(jj)-1-2005 Series A Louisville/Jefferson County Metro Government Loan Agreement, dated February 1, 2005 and amended and restated as of September 1, 2008, by and between Louisville Gas and Electric Company, and Louisville/Jefferson County Metro Government, Kentucky (Exhibit 4(mm)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(jj)-2-Amendment No. 1 dated September 1, 2010, to said Loan Agreement by and between Louisville Gas and Electric Company, and Louisville/Jefferson County Metro Government, Kentucky (Exhibit 4(mm)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(kk)-1-2007 Series A Louisville/Jefferson County Metro Government Loan Agreement, dated as of March 1, 2007 and amended and restated as of September 1, 2008, by and between Louisville Gas and Electric Company, and Louisville/Jefferson County Metro Government, Kentucky (Exhibit 4(nn)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(kk)-2-Amendment No. 1 dated September 1, 2010, to said Loan Agreement by and between Louisville Gas and Electric Company, and Louisville/Jefferson County Metro Government, Kentucky (Exhibit 4(nn)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(ll)-2007 Series B Louisville/Jefferson County Metro Government Amended and Restated Loan Agreement, dated November 1, 2010, by and between Louisville Gas and Electric Company and Louisville/Jefferson County Metro Government, Kentucky (Exhibit 4(oo) to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(mm)-1-2000 Series A Trimble County Loan Agreement, dated August 1, 2000, by and between Louisville Gas and Electric Company, and County of Trimble, Kentucky (Exhibit 4(pp)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(mm)-2-Amendment No. 1 dated September 1, 2010, to said Loan Agreement by and between Louisville Gas and Electric Company, and County of Trimble, Kentucky (Exhibit 4(pp)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(nn)-1-2001 Series A Trimble County Loan Agreement, dated November 1, 2001, by and between Louisville Gas and Electric Company, and County of Trimble, Kentucky (Exhibit 4(qq)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(nn)-2-Amendment No. 1 dated September 1, 2010, to said Loan Agreement by and between Louisville Gas and Electric Company, and the County of Trimble, Kentucky (Exhibit 4(qq)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(oo)-1-2001 Series B Trimble County Loan Agreement, dated November 1, 2001, by and between Louisville Gas and Electric Company, and County of Trimble, Kentucky (Exhibit 4(rr)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
421

4(oo)-2-Amendment No. 1 dated September 1, 2010, to said Loan Agreement by and between Louisville Gas and Electric Company, and County of Trimble, Kentucky (Exhibit 4(rr)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(pp)-1-2002 Series A Trimble County Loan Agreement, dated July 1, 2002, by and between Louisville Gas and Electric Company, and County of Trimble, Kentucky (Exhibit 4(ss)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(pp)-2-Amendment No. 1 dated September 1, 2010, to said Loan Agreement by and between Louisville Gas and Electric Company, and County of Trimble, Kentucky (Exhibit 4(ss)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(qq)-1-2007 Series A Trimble County Loan Agreement, dated March 1, 2007, by and between Louisville Gas and Electric Company, and County of Trimble, Kentucky (Exhibit 4(tt)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(qq)-2-Amendment No. 1 dated September 1, 2010, to said Loan Agreement by and between Louisville Gas and Electric Company, and County of Trimble, Kentucky (Exhibit 4(tt)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
4(rr)-1-Indenture, dated April 21, 2011, between PPL WEM Holdings PLC, as Issuer, and The Bank of New York Mellon, as Trustee (Exhibit 10.2 to PPL Corporation Form 8-K Report (File No. 1-11459) dated April 21, 2011)
4(rr)-2-Supplemental Indenture No. 1, dated April 21, 2011, to said Indenture (Exhibit 10.3 to PPL Corporation Form 8-K Report (File No. 1-11459) dated April 21, 2011)
4(ss)-1-Trust Deed, dated April 27, 2011, by and among Western Power Distribution (East Midlands) plc and Western Power Distribution (West Midlands) 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 May 17, 2011)
4(ss)-2-Final Terms of WPD West Midlands £800,000,000 5.75 per cent Notes due 2032 (Exhibit 1.1 to PPL Corporation Form 8-K Report (File No. 1-11459) dated May 17,  2011)
4(ss)-3-Final Terms of WPD East Midlands £600,000,000 5.25 per cent Notes due 2023 (Exhibit 1.2 to PPL Corporation Form 8-K Report (File No. 1-11459 ) dated May 17, 2011)
4(ss)-4-Final Terms of WPD East Midlands £100,000,000 Index Linked Notes due 2043 (Exhibit 1.1 to PPL Corporation Form 8-K Report (File No. 1-11459) dated June 2, 2011)
4(ss)-5-Final Terms of WPD East Midlands £100,000,000 5.25% Notes due 2023 (Exhibit 1.1 to PPL Corporation Form 8-K Report (File No. 1-11459) dated April 19, 2012)
4(tt)-Agency Agreement, dated April 27, 2011, by and among Western Power Distribution (East Midlands) plc and Western Power Distribution (West Midlands) plc, as Issuers, and HSBC Corporate Trustee Company (UK) Limited and HSBC Bank plc (Exhibit 4.2 to PPL Corporation Form 8-K Report (File No. 1-11459) dated May 17, 2011)
10(a)-Generation Supply Agreement, dated as of June 20, 2001, between PPL Electric Utilities Corporation and PPL EnergyPlus, LLC (Exhibit 10.5 to PPL Energy Supply, LLC Form S-4 (Registration Statement No. 333-74794))
   
10(c)10(b)-1-Master Power Purchase and Sale Agreement, dated as of October 15, 2001, between NorthWestern Energy Division (successor in interest to The Montana Power Company) and PPL Montana, LLC (Exhibit 10(g) to PPL Montana, LLC Form 10-K Report (File No. 333-50350) for the year ended December 31, 2001)
   
422

10(c)10(b)-2-Confirmation Letter, dated July 5, 2006, between PPL Montana, LLC and NorthWestern Corporation (PPL Corporation and PPL Energy Supply, LLC Form 8-K Reports (File Nos. 1-11459 and 333-74794) dated July 6, 2006)
   
10(d)10(c)-Guaranty, dated as of December 21, 2001, from PPL Energy Supply, LLC in favor of LMB Funding, Limited Partnership (Exhibit 10(j) to PPL Energy Supply, LLC Form 10-K Report (File No. 333-74794) for the year ended December 31, 2001)
   
10(e)10(d)-1-Agreement for Lease, dated as of December 21, 2001, between LMB Funding, Limited Partnership and Lower Mt. Bethel Energy, LLC (Exhibit 10(m) to PPL Energy Supply, LLC Form 10-K Report (File No. 333-74794) for the year ended December 31, 2003)
   
10(e)10(d)-2-Amendment No. 1 to said Agreement for Lease, dated as of September 16, 2002, between LMB Funding, Limited Partnership and Lower Mt. Bethel Energy, LLC (Exhibit 10(m)-1 to PPL Energy Supply, LLC Form 10-K Report (File No. 333-74794) for the year ended December 31, 2003)
   
10(f)10(e)-1-Lease Agreement, dated as of December 21, 2001, between LMB Funding, Limited Partnership and Lower Mt. Bethel Energy, LLC (Exhibit 10(n) to PPL Energy Supply, LLC Form 10-K Report (File No. 333-74794) for the year ended December 31, 2003)
   
10(f)10(e)-2-Amendment No. 1 to said Lease Agreement, dated as of September 16, 2002, between LMB Funding, Limited Partnership and Lower Mt. Bethel Energy, LLC (Exhibit 10(n)-1 to PPL Energy Supply, LLC Form 10-K Report (File No. 333-74794) for the year ended December 31, 2003)
   
10(g)-Pollution Control Facilities Loan Agreement, dated as of May 1, 1973, between PPL Electric Utilities Corporation and the Lehigh County Industrial Development Authority (Exhibit 5(z) to Registration Statement No. 2-60834)
10(h)10(f)-Facility Lease Agreement (BA 1/2) between PPL Montana, LLC and Montana OL3, LLC (Exhibit 4.7a to PPL Montana, LLC Form S-4 (Registration Statement No. 333-50350))
   
10(i)10(g)-Facility Lease Agreement (BA 3) between PPL Montana, LLC and Montana OL4, LLC (Exhibit 4.8a to PPL Montana, LLC Form S-4 (Registration Statement No. 333-50350))
   
10(j)10(h)-Services Agreement, dated as of July 1, 2000, among PPL Corporation, PPL Energy Funding Corporation and its direct and indirect subsidiaries in various tiers, PPL Capital Funding, Inc., PPL Gas Utilities Corporation, PPL Services Corporation and CEP Commerce, LLC (Exhibit 10.20 to PPL Energy Supply, LLC Form S-4 (Registration Statement No. 333-74794))
   
10(k)10(i)-1-Asset Purchase Agreement, dated as of June 1, 2004, by and between PPL Sundance Energy, LLC, as Seller, and Arizona Public Service Company, as Purchaser (Exhibit 10(a) to PPL Corporation and PPL Energy Supply, LLC Form 10-Q Reports (File Nos. 1-11459 and 333-74794) for the quarter ended June 30, 2004)
   
10(k)10(i)-2-Amendment No. 1, dated December 14, 2004, to said Asset Purchase Agreement (Exhibit 99.1 to PPL Corporation and PPL Energy Supply, LLC Form 8-K Reports (File Nos. 1-11459 and 333-74794) dated December 15, 2004)
   
10(l)10(j)-1-Receivables Sale Agreement, dated as of August 1, 2004, between PPL Electric Utilities Corporation, as Originator, and PPL Receivables Corporation, as Buyer (Exhibit 10(d) to PPL Electric Utilities Corporation Form 10-Q Report (File No. 1-905) for the quarter ended June 30, 2004)
   
10(l)10(j)-2-Amendment No. 1, to Receivables Sale Agreement, dated as of August 5, 2008, to said Receivables Sale Agreement, between PPL Electric Utilities Corporation, as Originator, and PPL Receivables Corporation, as Buyer (Exhibit 10(b) to PPL Electric Utilities Corporation Form 8-K Report (File No. 1-905) dated August 6, 2008)
   
10(l)10(j)-3-Credit and Security Agreement, dated as of August 5, 2008, among PPL Receivables Corporation, PPL Electric Utilities Corporation, Victory Receivables Corporation, the Liquidity Banks from time to time party thereto and The Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch (Exhibit 10(a) to PPL Electric Utilities Corporation Form 8-K Report (File No. 1-905) dated August 6, 2008)
   

423

10(1)10(j)-4-Amendment No. 1, to said Credit and Security Agreement, dated as of July 28, 2009, among PPL Receivables Corporation, as Borrower, PPL Electric Utilities Corporation, as Servicer, Victory Receivables Corporation, as a Lender,to said Credit and The Bank of Tokyo-Mitsubishi UFJ, Ltd, New York Branch, as Liquidity Bank and as AgentSecurity Agreement (Exhibit 10(a) to PPL Electric Utilities Corporation Form 10-Q Report (File No. 1-905) for the quarter ended September 30, 2009)
   
10(1)10(j)-5-AmendedAmendment No. 2, dated as of July 27, 2010, to said Credit and Restated Fee Letter, dated July 28, 2009, among PPL Receivables Corporation, as Borrower,Security Agreement (Exhibit 10(g) to PPL Electric Utilities Corporation Form 10-Q Report (File No. 1-905) for the quarter ended June 30, 2010)
10(j)-6-Amendment No. 3, dated as Servicer, Victory Receivablesof December 23, 2010, to said Credit and Security Agreement (Exhibit 10(j)-6 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
10(j)-7-Amendment No. 4, dated as a Lender,of March 31, 2011, to said Credit and The BankSecurity Agreement (Exhibit 10(c) to PPL Corporation Form 10-Q Report (File No. 1-11459) for the quarter ended March 31, 2011)
10(j)-8-Amendment No. 5, dated as of Tokyo-Mitsubishi UFJ, Ltd, New York Branch,July 26, 2011, to said Credit and Security Agreement (Exhibit 10(c) to PPL Corporation Form 10-Q/A Report (File No. 1-11459) for the quarter ended June 30, 2011)
10(j)-9-Amendment No. 6, dated as Liquidity Bankof July 24, 2012, to said Credit and Security Agreement (Exhibit 10(a) to PPL Electric Utilities Corporation Form 10-Q Report (File No. 1-905) for the quarter ended September 30, 2012)
10(j)-10-Amendment No. 7, dated as Agentof September 24, 2012, to said Credit and Security Agreement (Exhibit 10(b) to PPL Electric Utilities Corporation Form 10-Q Report (File No. 1-905) for the quarter ended September 30, 2009)2012)
   
10(m)-$300 Million Demand Loan Agreement, dated as of August 20, 2004, among CEP Lending, Inc. and PPL Energy Funding Corporation (Exhibit 10(dd) to PPL Electric Utilities Corporation Form 10-K Report (File No. 1-905) for the year ended December 31, 2004)
10(n)10(k)-1-Reimbursement Agreement, dated as of March 31, 2005, among PPL Energy Supply, LLC, The Bank of Nova Scotia, as Issuer and Administrative Agent, and the Lenders party thereto from time to time (Exhibit 10(a) to PPL Energy Supply, LLC Form 10-Q Report (File No. 333-74794) for the quarter ended March 31, 2005)
   
10(n)10(k)-2-First Amendment, to said Reimbursement Agreement, dated as of June 16, 2005, to said Reimbursement Agreement (Exhibit 10(b) to PPL Energy Supply, LLC Form 10-Q Report (File No. 333-74794) for the quarter ended June 30, 2005)
   
10(n)10(k)-3-Second Amendment, to said Reimbursement Agreement, dated as of September 1, 2005, to said Reimbursement Agreement (Exhibit 10(a) to PPL Energy Supply, LLC Form 10-Q Report (File No. 333-74794) for the quarter ended September 30, 2005)
   
10(n)10(k)-4-Third Amendment, to said Reimbursement Agreement, dated as of March 30, 2006, to said Reimbursement Agreement (Exhibit 10(a) to PPL Energy Supply, LLC Form 8-K Report (File No. 333-74794) dated April 5, 2006)
   
10(n)10(k)-5-Fourth Amendment, to said Reimbursement Agreement, dated as of April 12, 2006, to said Reimbursement Agreement (Exhibit 10(b) to PPL Energy Supply, LLC Form 10-Q Report (File No. 333-74794) for the quarter ended September 30, 2006)
   
10(n)10(k)-6-Fifth Amendment, to said Reimbursement Agreement, dated as of November 1, 2006, to said Reimbursement Agreement (Exhibit 10(q)-6 to PPL Energy Supply, LLC Form 10-K Report (File No. 333-74794) for the year ended December 31, 2006)
   
10(n)10(k)-7-Sixth Amendment, to said Reimbursement Agreement, dated as of March 29, 2007, to said Reimbursement Agreement (Exhibit 10(q)-7 to PPL Energy Supply, LLC Form 10-K Report (File No. 333-74794) for the year ended December 31, 2007)
   
10(n)10(k)-8-Seventh Amendment, to said Reimbursement Agreement, dated as of March 1, 2008, to said Reimbursement Agreement (Exhibit 10(a) to PPL Energy Supply, LLC Form 10-Q Report (File No. 333-74794) for the quarter ended March 31, 2008)
   
424

10(n)10(k)-9-Eighth Amendment, to said Reimbursement Agreement, dated as of March 30, 2009, to said Reimbursement Agreement (Exhibit 10(a) to PPL Energy Supply, LLC Form 10-Q Report (File No. 1-32944) for the quarter ended March 31, 2009)
   
10(o)-110(k)-10-$300 Million Five-Year Letter of Credit and Revolving Credit Agreement,Ninth Amendment, dated as of December 15, 2005, among PPL Energy Supply, LLC and the banks named therein (Exhibit 10(b) to PPL Energy Supply, LLC Form 8-K Report (File No. 333-74794) dated December 21, 2005)
10(o)-2-First AmendmentMarch 31, 2010, to said Letter of Credit and Revolving Credit Agreement, dated as of December 29, 2006 (Exhibit 10(t)-2 to PPL Energy Supply, LLC Form 10-K Report (File No. 333-74794) for the year ended December 31, 2006)
10(p)-1-$300 Million Five-Year Letter of Credit and Reimbursement Agreement dated as of December 15, 2005, among PPL Energy Supply and the banks named therein (Exhibit 10(c) to PPL Energy Supply, LLC Form 8-K Report (File No. 333-74794) dated December 21, 2005)
10(p)-2-First Amendment to said Letter of Credit and Reimbursement Agreement, dated as of December 29, 2006 (Exhibit 10(u)-2 to PPL Energy Supply, LLC Form 10-K Report (File No. 333-74794) for the year ended December 31, 2006)
10(q)-$400 million Amended and Restated 364-Day Credit Agreement, dated as of September 8, 2009, among PPL Energy Supply, LLC and the banks named therein (Exhibit 10(a) to PPL Energy Supply, LLC Form 8-K Report (File No. 1-32944) dated September 11, 2009)
10(r)-1-$200 million Third Amended and Restated Five-Year Credit Agreement, dated as of May 4, 2007, among PPL Electric Utilities Corporation and the banks named therein (Exhibit 10(b) to PPL Electric Utilities Corporation Form 8-K Report (File No. 1-905) dated May 9, 2007)
10(r)-2-First Amendment to Third Amended and Restated Credit Agreement, dated as of December 3, 2008, by and among PPL Electric Utilities Corporation, certain of the lenders party to the Third Amended and Restated Credit Agreement dated as of May 4, 2007 and Wachovia Bank, National Association, as administrative agent (Exhibit 99.2 to PPL Electric Utilities Corporation Form 8-K Report (File No. 1-905) December 4, 2008)
10(s)-1-$3.4 billion Second Amended and Restated Five-Year Credit Agreement, dated as of May 4, 2007, among PPL Energy Supply, LLC and the banks named therein (Exhibit 10(a) to PPL Energy Supply, LLC Form 8-K Report (File No. 333-74794) dated May 9, 2007)
10(s)-2-First Amendment to Second Amended and Restated Credit Agreement, dated as of December 3, 2008, by and among PPL Energy Supply, LLC, certain of the lenders party to the Second Amended and Restated Credit Agreement dated as of May 4, 2007 and Wachovia Bank, National Association, as administrative agent (Exhibit 99.1 to PPL Energy Supply, LLC Form 8-K Report (File No. 1-32944) dated December 4, 2008)April 6, 2010)
   
10(t)10(k)-11-£150 million CreditTenth Amendment, dated as of February 22, 2012, to said Reimbursement Agreement (Exhibit 10(k)-11 to PPL Energy Supply, LLC Form 10-K Report (File No. 1-32944) for the year ended December 31, 2011)
-Eleventh Amendment, dated as of February 28, 2013, to said Reimbursement Agreement
10(l)-Purchase and Sale Agreement, dated as of January 24, 2007,April 28, 2010, by and between E.ON US Investments Corp., PPL Corporation and E.ON AG (Exhibit No. 99.1 to PPL Corporation Form 8-K Report (File No. 1-11459) dated April 30, 2010)
10(m)-$500 million Facility Agreement, dated as of May 14, 2010, among Western Power DistributionPPL Energy Supply, LLC, as Borrower, and Morgan Stanley Bank, as Issuer (Exhibit 10(b) to PPL Energy Supply, LLC Form 10-Q Report (File No. 1-32944) for the quarter ended June 30, 2010)
10(n)-Purchase and Sale Agreement, dated as of September 9, 2010, by and between PPL Holtwood, LLC and LSP Safe Harbor Holdings, LimitedLLC (Exhibit 10.1 to PPL Corporation Form 8-K Report (File No. 1-11459) dated September 13, 2010)
10(o)-Purchase and Sale Agreement, dated as of September 9, 2010, by and between PPL Generation, LLC and Harbor Gen Holdings, LLC (Exhibit 10.2 to PPL Corporation Form 8-K Report (File No. 1-11459) dated September 13, 2010)
10(p)-Open-End Mortgage, Security Agreement and Fixture Filing from PPL Montour, LLC to Wilmington Trust FSB, as Collateral Agent, dated as of October 26, 2010 (Exhibit 10(w) to PPL Corporation Form 10-K Report (File No. 1-11459) for the banks namedyear ended December 31, 2010)
10(q)-Open-End Mortgage, Security Agreement and Fixture Filing from PPL Brunner Island, LLC to Wilmington Trust FSB, as Collateral Agent, dated as of October 26, 2010 (Exhibit 10(x) to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)
10(r)-Guaranty of PPL Montour, LLC and PPL Brunner Island, LLC, dated as of November 3, 2010, in favor of Wilmington Trust FSB, as Collateral Agent, for itself as Beneficiary and for the Secured Counterparties described therein (Exhibit 10(y) to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2006)2010)
10(s)-£300,000,000 Multicurrency Revolving Credit Facility Agreement, dated April 4, 2011, among Western Power Distribution (West Midlands) plc and Royal Bank of Canada as Lead Arranger, Bank of America Securities Limited as Bookrunner and Facility Agent, Bank of America, N.A. as Issuing Bank and the other banks party thereto as Mandated Lead Arrangers (Exhibit 10.1 to PPL Corporation Form 8-K Report (File No. 1-11459) dated April 8, 2011)
10(t)-£300,000,000 Multicurrency Revolving Credit Facility Agreement, dated April 4, 2011, among Western Power Distribution (East Midlands) plc and Royal Bank of Canada as Lead Arranger, Bank of America Securities Limited as Bookrunner and Facility Agent, Bank of America, N.A. as Issuing Bank and the other banks party thereto as Mandated Lead Arrangers (Exhibit 10.2 to PPL Corporation Form 8-K Report (File No. 1-11459) dated April 8, 2011)
   
10(u)-1-Pollution Control Facilities LoanAmendment and Restatement Agreement, dated as of February 1, 2005, between PPL ElectricAugust 16, 2012, regarding $198,309,583.05 Amended and Restated Letter of Credit Agreement, dated as of August 16, 2012, among Kentucky Utilities CorporationCompany, the Lenders from time to time party hereto, and the Lehigh County Industrial Development AuthorityBanco Bilbao Vizcaya Argentaria, S.A., New York Branch, as Administrative Agent (Exhibit 10(ff)10(c) to PPL ElectricKentucky Utilities CorporationCompany Form 10-K10-Q Report (File No. 1-905)1-3464) for the yearquarter ended December 31, 2004)September 30, 2012)
425

10(v)-£245,000,000 Revolving Credit Facility Agreement, dated January 12, 2012, among Western Power Distribution (South West) plc, the lenders party thereto and Lloyds TSB Bank Plc and Mizuho Corporate Bank, Ltd. as Joint Coordinators (Exhibit 10.1 to PPL Corporation Form 8-K Report (File No. 1-11459) dated January 18, 2012)
   
10(u)-210(w)-1-Pollution Control Facilities Loan Agreement,
Confirmation of Forward Sale Transaction, dated as of May 1, 2005,April 9, 2012, between PPL Electric Utilities Corporation and the Lehigh County Industrial Development AuthorityMorgan Stanley & Co. LLC (Exhibit 10(a)10.1 to PPL Electric Utilities Corporation Form 10-Q8-K Report (File No. 1-905) for the quarter ended June 30, 2005)1-11459) dated April 13, 2012)
   
10(u)-310(w)-2-Pollution Control Facilities Loan Agreement,Confirmation of Forward Sale Transaction, dated as of October 1, 2008,April 20, 2012, between Pennsylvania Economic Development Financing AuthorityPPL Corporation and PPL Electric Utilities CorporationMorgan Stanley & Co. LLC (Exhibit 4(a)10.1 to PPL Electric Utilities Corporation Form 8-K Report (File No. 1-905)1-11459) dated October 31, 2008)April 26, 2012)
   
10(v)10(x)-1-£210 million Multicurrency Revolving FacilityConfirmation of Forward Sale Transaction, dated April 9, 2012, between PPL Corporation and Merrill Lynch International (Exhibit 10.2 to PPL Corporation Form 8-K Report (File No. 1-11459) dated April 13, 2012)
10(x)-2-Confirmation of Forward Sale Transaction, dated April 20, 2012, between PPL Corporation and Merrill Lynch International (Exhibit 10.2 to PPL Corporation Form 8-K Report (File No. 1-11459) dated April 26, 2012)
10(y)-Commitment Increase Agreement, dated July 7, 2009, between Western Power Distribution (South West) plcas of April 20, 2012, entered into by and HSBCamong PPL Electric Utilities Corporation, the Lenders who are increasing their Commitments, the JLA Issuing Banks, who are consenting to the increase in Fronting Sublimit, and Wells Fargo Bank, plc, Lloyds TSB Bank plcNational Association, as Administrative Agent, Swingline Lender and Clydesdale Bank plcIssuing Lender (Exhibit 10(c)10(f) to PPL Corporation Form 10-Q Report (File No. 1-11459) for the quarter ended March 31, 2012)
10(z)-1-Uncommitted Line of Credit Letter Agreement, dated as of July 1, 2012, between PPL Energy Supply, LLC, the Borrower, and Banco Bilbao Vizcaya Argentaria, S.A., the Bank (Exhibit 10(b) to PPL Energy Supply, LLC Form 10-Q Report (File No. 1-32944) for the quarter ended June 30, 2009)2012)
10(z)-2-Reimbursement Agreement, dated as of July 1, 2012, between PPL Energy Supply, LLC and Banco Bilbao Vizcaya Argentaria, S.A. (Exhibit 10(c) to PPL Energy Supply, LLC Form 10-Q Report (File No. 1-32944) for the quarter ended June 30, 2012)
10(aa)-Letter of Credit Issuance and Reimbursement Agreement, dated as of July 27, 2012, between PPL Energy Supply, LLC and Canadian Imperial Bank of Commerce, New York Agency (Exhibit 10(e) to PPL Energy Supply, LLC Form 10-Q Report (File No. 1-32944) for the quarter ended June 30, 2012)
-$300,000,000 Amended and Restated Revolving Credit Agreement, dated as of November 6, 2012, among PPL Electric Utilities Corporation, the Lenders party thereto and Wells Fargo Bank, National Association, as Administrative Agent, Issuing Lender and Swingline Lender
-$3,000,000,000 Amended and Restated Revolving Credit Agreement, dated as of November 6, 2012, among PPL Energy Supply, LLC, the Lenders party thereto and Wells Fargo Bank, National Association, as Administrative Agent, Issuing Lender and Swingline Lender
-$400,000,000 Amended and Restated Revolving Credit Agreement, dated as of November 6, 2012, among Kentucky Utilities Company, the Lenders party thereto and Wells Fargo Bank, National Association, as Administrative Agent, Swingline Lender and Issuing Lender
-$500,000,000 Amended and Restated Revolving Credit Agreement, dated as of November 6, 2012, among Louisville Gas and Electric Company, the Lenders party thereto and Wells Fargo Bank, National Association, as Administrative Agent, Swingline Lender and Issuing Lender
426

-£210,000,000 Multicurrency Revolving Facility Agreement, dated December 21, 2012, among PPL WW Holdings Ltd., as the Company, Lloyds TSB Bank plc and Mizuho Corporate Bank, Ltd., as Joint Coordinators and Bookrunners, Barclays Bank PLC, Commonwealth Bank of Australia, HSBC Bank plc, Lloyds TSB Bank plc, Mizuho Corporate Bank, Ltd., The Bank of Tokyo-Mitsubishi UFJ, Ltd. and The Royal Bank of Scotland plc, as Mandated Lead Arrangers and Mizuho Corporate Bank, Ltd., as Facility Agent
   
[_]10(w)10(gg)-1-Amended and Restated Directors Deferred Compensation Plan, dated June 12, 2000 (Exhibit 10(h) to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2000)
   
[_]10(w)10(gg)-2-Amendment No. 1 to said Amended and Restated Directors Deferred Compensation Plan, dated December 18, 2002 (Exhibit 10(m)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2002)
   
[_]10(w)10(gg)-3-Amendment No. 2 to said Amended and Restated Directors Deferred Compensation Plan, dated December 4, 2003 (Exhibit 10(q)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2003)
   
[_]10(w)10(gg)-4-Amendment No. 3 to said Amended and Restated Directors Deferred Compensation Plan, dated as of January 1, 2005 (Exhibit 10(cc)-4 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2005)
   
[_]10(w)10(gg)-5-Amendment No. 4 to said Amended and Restated Directors Deferred Compensation Plan, dated as of May 1, 2008 (Exhibit 10(x)-5 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2008)
   
[_]10(x)-110(gg)-6-Amendment No. 5 to said Directors Deferred Compensation Plan, dated May 28, 2010 (Exhibit 10(a) to PPL Corporation Form 10-Q Report (File No. 1-11459) for the quarter ended June 30, 2010)
-PPL Corporation Directors Deferred Compensation Plan Trust Agreement, dated as of April 1, 2001, between PPL Corporation and Wachovia Bank, N.A. (as successor to First Union National Bank), as Trustee
-PPL Officers Deferred Compensation Plan, PPL Supplemental Executive Retirement Plan and PPL Supplemental Compensation Pension Plan Trust Agreement, dated as of April 1, 2001, between PPL Corporation and Wachovia Bank, N.A. (as successor to First Union National Bank), as Trustee
   
[_]10(x)-210(hh)-3-PPL Revocable Employee Nonqualified Plans Trust Agreement, dated as of March 20, 2007, between PPL Corporation and Wachovia Bank, N.A., as Trustee (Exhibit 10(c) to PPL Corporation Form 10-Q Report (File No. 1-1149) for the quarter ended March 31, 2007)
   
[_]10(x)-310(hh)-4-PPL Employee Change in Control Agreements Trust Agreement, dated as of March 20, 2007, between PPL Corporation and Wachovia Bank, N.A., as Trustee (Exhibit 10(d) to PPL Corporation Form 10-Q Report (File No. 1-11459) for the quarter ended March 31, 2007)
   
[_]10(x)-410(hh)-5-PPL Revocable Director Nonqualified Plans Trust Agreement, dated as of March 20, 2007, between PPL Corporation and Wachovia Bank, N.A., as Trustee (Exhibit 10(e) to PPL Corporation Form 10-Q Report (File No. 1-11459) for the quarter ended March 31, 2007)
   
[_]10(y)10(ii)-1-Amended and Restated Officers Deferred Compensation Plan, dated December 8, 2003 (Exhibit 10(r) to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2003)
   
[_]10(y)10(ii)-2-Amendment No. 1 to said Amended and Restated Officers Deferred Compensation Plan, dated as of January 1, 2005 (Exhibit 10(ee)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2005)
   
427

[_]10(y)10(ii)-3-Amendment No. 2 to said Amended and Restated Officers Deferred Compensation Plan, dated as of January 22, 2007 (Exhibit 10(bb)-3 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2006)
   
[_]10(y)10(ii)-4-Amendment No. 3 to said Amended and Restated Officers Deferred Compensation Plan, dated as of June 1, 2008 (Exhibit 10(z)-4 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2008)
   
[_]10(z)10(ii)-5-Amendment No. 4 to said Officers Deferred Compensation Plan, dated as of February 15, 2012 (Exhibit 10(ff)-5 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2011)
[_]10(jj)-1-Amended and Restated Supplemental Executive Retirement Plan, dated December 8, 2003 (Exhibit 10(s) to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2003)
   
[_]10(z)10(jj)-2-Amendment No. 1 to said Supplemental Executive Retirement Plan, dated December 16, 2004 (Exhibit 99.1 to PPL Corporation Form 8-K Report (File No. 1-11459) dated December 17, 2004)
   
[_]10(z)10(jj)-3-Amendment No. 2 to said Supplemental Executive Retirement Plan, dated as of January 1, 2005 (Exhibit 10(ff)-3 to PPL Corporation Form 10-K Report (File 1-11459) for the year ended December 31, 2005)
   
[_]10(z)10(jj)-4-Amendment No. 3 to said Supplemental Executive Retirement Plan, dated as of January 22, 2007 (Exhibit 10(cc)-4 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2006)
   
[_]10(z)10(jj)-5-Amendment No. 4 to said SupplementSupplemental Executive Retirement Plan, dated as of December 9, 2008 (Exhibit 10(aa)-5 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2008)
   
[_]10(aa)10(jj)-6-Amendment No. 5 to said Supplemental Executive Retirement Plan, dated as of February 15, 2012 (Exhibit 10(gg)-6 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2011)
[_]10(kk)-1-Amended and Restated Incentive Compensation Plan, amended and restated effective January 1, 2003 (Exhibit 10(p) to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2002)
   
[_]10(aa)10(kk)-2-Amendment No. 1 to said Incentive Compensation Plan, dated as of January 1, 2005 (Exhibit 10(gg)-2 to PPL Corporation Form 10-K Report (File 1-11459) for the year ended December 31, 2005)
   
[_]10(aa)10(kk)-3-Amendment No. 2 to said Incentive Compensation Plan, dated as of January 26, 2007 (Exhibit 10(dd)-3 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2006)
   
[_]10(aa)10(kk)-4-Amendment No. 3 to said Incentive Compensation Plan, dated as of March 21, 2007 (Exhibit 10(f) to PPL Corporation Form 10-Q Report (File No. 1-11459) for the quarter ended March 31, 2007)
   
[_]10(aa)10(kk)-5-Amendment No. 4 to said Incentive Compensation Plan, effective December 1, 2007 (Exhibit 10(a) to PPL Corporation Form 10-Q Report (File No. 1-11459) for the quarter ended September 30, 2008)
   
[_]10(aa)10(kk)-6-Amendment No. 5 to said Incentive Compensation Plan, dated as of December 16, 2008 (Exhibit 10(bb)-6 to PPL Corporation Form 10-K Report (File 1-11459) for the year ended December 31, 2008)
   
[_]10(aa)10(kk)-7-Form of Stock Option Agreement for stock option awards under the Incentive Compensation Plan (Exhibit 10(a) to PPL Corporation Form 8-K Report (File No. 1-11459) dated February 1, 2006)
   
[_]10(aa)10(kk)-8-Form of Restricted Stock Unit Agreement for restricted stock unit awards under the Incentive Compensation Plan (Exhibit 10(b) to PPL Corporation Form 8-K Report (File No. 1-11459) dated February 1, 2006)
428

   
[_]10(aa)10(kk)-9-Form of Restricted StockPerformance Unit Agreement for restricted stockperformance unit awards under the Incentive Compensation Plan pursuant to PPL Corporation Cash Incentive Premium Exchange Program (Exhibit 10(c)10(ss) to PPL Corporation Form 8-K10-K Report (File No. 1-11459) dated February 1, 2006)for the year ended December 31, 2007)
   
[_]10(bb)10(ll)-1-Amended and Restated Incentive Compensation Plan for Key Employees, amended and restated effective January 1, 2003 (Schedule B to Proxy Statement of PPL Corporation, dated March 17, 2003)
   
[_]10(bb)10(ll)-2-Amendment No. 1 to said Incentive Compensation Plan for Key Employees, dated as of January 1, 2005 (Exhibit (hh)-1 to PPL Corporation Form 10-K Report (File 1-11459) for the year ended December 31, 20052005)
   
[_]10(bb)10(ll)-3-Amendment No. 2 to said Incentive Compensation Plan for Key Employees, dated as of January 26, 2007 (Exhibit 10(ee)-3 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2006)
   
[_]10(bb)10(ll)-4-Amendment No. 3 to said Incentive Compensation Plan for Key Employees, dated as of March 21, 2007 (Exhibit 10(q) to PPL Corporation Form 10-Q Report (File No. 1-11459) for the quarter ended March 31, 2007)
   
[_]10(bb)10(ll)-5-Amendment No. 4 to said Incentive Compensation Plan for Key Employees, dated as of December 15, 2008 (Exhibit 10(cc)-5 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2008)
   
[_]10(cc)10(ll)-6-Amendment No. 5 to said Incentive Compensation Plan for Key Employees, dated as of March 24, 2011 (Exhibit 10(a) to PPL Corporation Form 10-Q Report (File No. 1-11459) for the quarter ended March 31, 2011)
[_]10(mm)-Short-term Incentive Plan (Schedule A to Proxy Statement of PPL Corporation, dated March 20, 2006)April 6, 2011)
   
[_]10(dd)10(nn)-Agreement, dated January 15, 2003, between PPL Corporation and Mr. Miller regarding Supplemental Pension Benefits (Exhibit 10(u) to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2002)
   
[_]10(ee)-Employment letter dated December 19, 2005 between PPL Services Corporation and Jerry Matthews Simmons, Jr. (Exhibit 10(jj) to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2006)
[_]10(ff)10(oo)-Employment letter, dated May 31, 2006, between PPL Services Corporation and William H. Spence (Exhibit 10(pp) to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2006)
   
[_]10(gg)-Employment letter dated August 29, 2006, between PPL Services Corporation and David G. DeCampli (Exhibit 10(qq) to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2006)
[_]10(hh)-Amendments to certain compensation programs and arrangements for Named Executive Officers of PPL Corporation and PPL Electric Utilities Corporation and compensation arrangement changes for non-employee Directors of PPL Corporation (PPL Corporation and PPL Electric Utilities Corporation Form 8-K Reports (File Nos. 1-11459 and 1-905) dated November 1, 2006)
[_]10(ii)10(pp)-Form of Retention Agreement entered into between PPL Corporation and Messrs. Champagne,DeCampli, Dudkin, Farr Miller and ShriverGabbard (Exhibit 10(h) to PPL Corporation Form 10-Q Report (File No. 1-11459) for the quarter ended March 31, 2007)
   
[_]10(jj)10(qq)-1-Form of Severance Agreement entered into between PPL Corporation and the Named Executive Officers (Exhibit 10(i) to PPL Corporation Form 10-Q Report (File No. 1-11459) for the quarter ended March 31, 2007)
   
[_]10(jj)10(qq)-2-Amendment to said Severance Agreement (Exhibit 10(a) to PPL Corporation Form 10-Q Report (File No. 1-11459) for the quarter ended June 30, 2009)
   
[_]10(kk)10(rr)-FormAmended and Restated Employment and Severance Agreement, dated as of Performance Unit Agreement entered intoOctober 29, 2010, between PPL CorporationE.ON U.S. LLC and the Named Executive OfficersVictor A. Staffieri (Exhibit 10(ss) to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2007)2010)
   
[_]10(ll)10(ss)-1-2009 compensation matters regarding PPL Corporation Named Executive Officers (PPL Corporation Form 8-K Report (File No. 1-11459) dated January 28, 2009)
[_]10(mm)-2009 compensation matters regarding PPL Electric Utilities Corporation Named Executive Officers (PPL Electric Utilities Corporation Form 8-K Report (File No. 1-905) dated January 28, 2009)
[_]10(nn)-Establishment of 2009 annual performance goals and business criteria for incentive awards to PPL Corporation Named Executive Officers (PPL Corporation Form 8-K Report (File No. 1-11459) dated April 1, 2009)
[_]10(oo)-Establishment of 2009 annual performance goals and business criteria for incentive awards to PPL Electric Utilities Corporation Named Executive Officers (PPL Electric Utilities Corporation Form 8-K Report (File No. 1-905) dated April 1, 2009)
[_]10(pp)-Employment letter dated May 22, 2009, between PPL Services Corporation and Gregory W. DudkinChange in Control Severance Protection Agreement as adopted March 5, 2012 (Exhibit 10(b) to PPL Corporation Form 10-Q Report (File No. 1-11459) for the quarter ended March 31, 2012)
429

[_]10(ss)-2-
Form of Change in Control Severance Protection Agreement entered into between PPL Corporation and Messrs. Dudkin and Staffieri (Exhibit 10(c) to PPL Corporation Form 10-Q Report (File No. 1-11459) for the quarter ended March 31, 2012)
[_]10(tt)-1-PPL Corporation 2012 Stock Incentive Plan (Annex A to Proxy Statement of PPL Corporation, dated April 3, 2012)
-Form of Performance Unit Agreement for performance unit awards under the Stock Incentive Plan
-Form of Performance Contingent Restricted Stock Unit Agreement for restricted stock unit awards under the Stock Incentive Plan
-Form of Nonqualified Stock Option Agreement for stock option awards under the Stock Incentive Plan
[_]10(uu)-PPL Corporation Executive Severance Plan, effective as of July 26, 2012 (Exhibit 10(d) to PPL Corporation Form 10-Q Report (File No. 1-11459) for the quarter ended June 30, 2009)2012)
   
-
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 PPL CorporationRatio 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
-Subsidiaries of PPL Electric Utilities Corporation
   
-Consent of Ernst & Young LLP - PPL Corporation
   
-Consent of Ernst & Young LLP - PPL Energy Supply, LLC
   
-Consent of Ernst & Young LLP - PPL Electric Utilities Corporation
   
-PowerConsent of AttorneyPricewaterhouseCoopers LLP - PPL Corporation
   
-Consent of Ernst & Young LLP - LG&E and KU Energy LLC
-Consent of Ernst & Young LLP - Louisville Gas and Electric Company
-Consent of Ernst & Young LLP - Kentucky Utilities Company
-Consent of PricewaterhouseCoopers LLP - LG&E and KU Energy LLC
-Consent of PricewaterhouseCoopers LLP - Louisville Gas and Electric Company
-Consent of PricewaterhouseCoopers LLP - Kentucky Utilities Company
-Power of Attorney
430

-
Certificate of PPL's principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
-Certificate of PPL's principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
-Certificate of PPL Energy Supply's principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
-Certificate of PPL Energy Supply's principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
-Certificate of PPL Electric's principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
-Certificate of PPL Electric's principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
-Certificate of LKE's principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
-Certificate of LKE's principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
-Certificate of LG&E's principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
-Certificate of LG&E's principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
-Certificate of KU's principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
-Certificate of KU's principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
-
Certificate of PPL's principal executive officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
-Certificate of PPL'sPPL Energy Supply's principal executive officer and principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
-Certificate of PPL Energy Supply'sElectric's principal executive officer and principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
-Certificate of PPL Energy Supply'sLKE's principal executive officer and principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
-Certificate of PPL Electric'sLG&E's principal executive officer and principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
-Certificate of PPL Electric'sKU's principal executive officer and principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
-Examples of Wholesale Energy, Fuel and Emission Allowance Price Fluctuations - 2005 through 2009
**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
431

   
**101.SCH-XBRL Taxonomy Extension Schema for PPL Corporation, 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 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 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 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 Corporation, PPL Energy Supply, LLC, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company

** - XBRL information will be considered to be furnished, not filed, for the first two years of a company's submission of XBRL information.432