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, 20102013
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
 
2011 Corporate Units of PPL CorporationNew York Stock Exchange
Senior Notes of PPL Energy Supply, LLC
7.0% due 2046New York Stock Exchange
 
Junior Subordinated Notes of PPL Capital Funding, Inc.
 
2007 Series A due 2067
2013 Series B due 2073
New York Stock Exchange
Senior Notes of PPL Capital Funding, Inc.
6.85% due 2047
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
 
Common Stock of PPL Electric Utilities Corporation 

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

 PPL Corporation
Yes  X   
No        
 
 PPL Energy Supply, LLC
Yes        
No  X   
 
 PPL Electric Utilities Corporation
Yes        
No  X   
 
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 registrants are not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

 PPL Corporation
Yes        
No  X   
 
 PPL Energy Supply, LLC
Yes        
No  X   
 
 PPL Electric Utilities Corporation
Yes        
No  X   
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 registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.

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

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

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


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

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

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

 PPL Corporation
Yes        
No  X   
 
 PPL Energy Supply, LLC
Yes        
No  X   
 
 PPL Electric Utilities Corporation
Yes        
No  X   
 
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, 2010,28, 2013, PPL Corporation had 482,187,931591,622,064 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 $12,030,588,878.$17,902,483,657.  As of January 31, 2011,2014, PPL Corporation had 484,392,173630,716,792 shares of its $.01 par value Common Stock outstanding.

As of January 31, 2011,2014, 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, 2014, 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, 2014, 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, and PPL 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 are therefore filing this form with the reduced disclosure format.

Documents incorporated by reference:

PPL Corporation has incorporated herein by reference certain sections of PPL Corporation's 20112014 Notice of Annual Meeting and Proxy Statement, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2010.2013.  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, 20102013

TABLE OF CONTENTS

This combined Form 10-K is separately filed by the following Registrants in their individual capacity:  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 Corporationany individual Registrant is filed by PPL Corporationsuch Registrant solely on its own behalf and separately by PPL Energy Supply, LLC and PPL Electric Utilities Corporation on their own behalf.  No registrantno Registrant makes any representation as to information relating to any other registrant,Registrant, except that information under "Forward-Looking Information" relating to the twosubsidiaries of PPL Corporation subsidiaries is also attributed to PPL Corporation.Corporation and information relating to the subsidiaries of LG&E and KU Energy LLC is also attributed to LG&E and KU Energy LLC.

Item  Page
PART I
  
Glossary of Terms and Abbreviations
i
  
Forward-Looking Information
viii
1. 
Business
1
1A. 
Risk Factors
17
1B. 
Unresolved Staff Comments
27
2. 
Properties
28
3. 
Legal Proceedings
30
    
PART II
5. 
Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
31
6. 
Selected Financial and Operating Data
31
7. Management's Discussion and Analysis of Financial Condition and Results of Operations 
  
PPL Corporation and Subsidiaries
33
  
PPL Energy Supply, LLC and Subsidiaries
69
  
PPL Electric Utilities Corporation and Subsidiaries
97
7A. 
Quantitative and Qualitative Disclosures About Market Risk
112
  
Reports of Independent Registered Public Accounting Firms
113
8. Financial Statements and Supplementary Data 
  FINANCIAL STATEMENTS 
  PPL Corporation 
  
Consolidated Statements of Income for the years ended December 31, 2010, 2009 and 2008
118
  
Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008
  119
  
Consolidated Balance Sheets at December 31, 2010 and 2009
120
  
Consolidated Statements of Equity for the years ended December 31, 2010, 2009 and 2008
122
  
Consolidated Statements of Comprehensive Income for the years ended December 31, 2010, 2009 and 2008
123
  PPL Energy Supply, LLC 
  
Consolidated Statements of Income for the years ended December 31, 2010, 2009 and 2008
124
  
Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008
125
  
Consolidated Balance Sheets at December 31, 2010 and 2009
126
  
Consolidated Statements of Equity for the years ended December 31, 2010, 2009 and 2008
128
  
Consolidated Statements of Comprehensive Income for the years ended December 31, 2010, 2009 and 2008
129
  PPL Electric Utilities Corporation 
  
Consolidated Statements of Income for the years ended December 31, 2010, 2009 and 2008
130
  
Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008
131
  
Consolidated Balance Sheets at December 31, 2010 and 2009
132
  
Consolidated Statements of Shareowners' Equity for the years ended December 31, 2010, 2009 and 2008
134
    
  COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
  
1.  Summary of Significant Accounting Policies
135
  
2.  Segment and Related Information
150
  
3.  Regulatory Assets and Liabilities
153
  
4.  Earnings Per Share
158
  
5.  Income and Other Taxes
159
  
6.  Preferred Securities
168
  
7.  Financing Activities
169
  
8.  Acquisitions, Development and Divestitures
178
  
9.  Discontinued Operations
179
  
10.  Acquisition of E.ON.U.S. LLC
183
  
11.  Leases
185
  
12.  Stock-Based Compensation
186
  
13.  Retirement and Postemployment Benefits
191
  
14.  Jointly Owned Facilities
205
  
15.  Commitments and Contingencies
206
  
16.  Related Party Transactions
226
  
17.  Other Income (Expense) - net
228
  
18.  Fair Value Measurements and Credit Concentration
228
  
19.  Derivative Instruments and Hedging Activities
234
  
20.  Goodwill and Other Intangible Assets
245
  
21.  Asset Retirement Obligations
247
  
22.  Variable Interest Entities
249
  
23.  Available-for-Sale Securities
249
  
24.  Subsequent Events
252
    
  SUPPLEMENTARY DATA 
  
Schedule I - PPL Corporation Condensed Unconsolidated Financial Statements
253
  
Quarterly Financial, Common Stock Price and Dividend Data - PPL Corporation
257
  
Quarterly Financial Data - PPL Energy Supply, LLC
259
    
9. 
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
260
9A. 
Controls and Procedures
260
9B. 
Other Information
261
    
PART III
10. 
Directors, Executive Officers and Corporate Governance
261
11. 
Executive Compensation
264
12. 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
264
13. 
Certain Relationships and Related Transactions, and Director Independence
265
14. 
Principal Accounting Fees and Services
265
    
PART IV
15. 
Exhibits, Financial Statement Schedules
267
  
Shareowner and Investor Information
268
  
Signatures
270
  
Exhibit Index
273
  
Computation of Ratio of Earnings to Fixed Charges
287
  
Certifications of Principal Executive Officer and Principal Financial Officer Pursuant to Section 302 of
  the Sarbanes-Oxley Act of 2002
290
  
Certificates of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906 of
  the Sarbanes-Oxley Act of 2002
296
  
Examples of Wholesale Energy, Fuel and Emission Allowance Price Fluctuations - 2006 through 2010
302
Unless otherwise specified, references in this Report, individually, to PPL Corporation, PPL Energy Supply, LLC, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company are references to such entities directly or to one or more of their subsidiaries, as the case may be, the financial results of which subsidiaries are consolidated into such Registrants' financial statements in accordance with GAAP.  This presentation has been applied where identification of particular subsidiaries is not material to the matter being disclosed, and to conform narrative disclosures to the presentation of financial information on a consolidated basis.


Item  Page
  PART I 
  
Glossary of Terms and Abbreviations
i
  
Forward-Looking Information
1
1. 
Business
3
1A. 
Risk Factors
20
1B. 
Unresolved Staff Comments
31
2. 
Properties
32
3. 
Legal Proceedings
34
4. 
Mine Safety Disclosures
34
    
  PART II 
5. 
Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
35
6. 
Selected Financial and Operating Data
36
7. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations 
  
Overview
38
   
Business Strategy
38
   
Financial and Operational Developments
39
    
PPL Corporation and Subsidiaries - Earnings
39
    
2014 Outlook
40
    
Other Financial and Operational Developments
41
  
Results of Operations
44
   
PPL Corporation and Subsidiaries - Segment Earnings, Margins and Statement of Income Analysis
45
   
PPL Energy Supply, LLC and Subsidiaries - Earnings, Margins and Statement of Income Analysis
61
   
PPL Electric Utilities Corporation and Subsidiaries - Earnings,  Margins and Statement of Income Analysis
65
   
LG&E and KU Energy LLC and Subsidiaries - Earnings, Margins and Statement of Income Analysis
68
   
Louisville Gas and Electric Company - Earnings, Margins and Statement of Income Analysis
71
   
Kentucky Utilities Company - Earnings, Margins and Statement of Income Analysis
73

 


Financial Condition
75
Liquidity and Capital Resources
75
Risk Management
91
Foreign Currency Translation
96
Related Party Transactions
96
Acquisitions, Developments and Divestitures
96
Environmental Matters
96
Competition
99
New Accounting Guidance
99
Application of Critical Accounting Policies
99
Other Information
108
7A.
Quantitative and Qualitative Disclosures About Market Risk
109
Reports of Independent Registered Public Accounting Firms
110
8.Financial Statements and Supplementary Data
FINANCIAL STATEMENTS
PPL Corporation and Subsidiaries
Consolidated Statements of Income for the years ended December 31, 2013, 2012 and 2011
117
Consolidated Statements of Comprehensive Income for the years ended December 31, 2013, 2012 and 2011
118
Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011
119
Consolidated Balance Sheets at December 31, 2013 and 2012
120
Consolidated Statements of Equity for the years ended December 31, 2013, 2012 and 2011
122
PPL Energy Supply, LLC and Subsidiaries
Consolidated Statements of Income for the years ended December 31, 2013, 2012 and 2011
123
Consolidated Statements of Comprehensive Income for the years ended December 31, 2013, 2012 and 2011
124
Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011
125
Consolidated Balance Sheets at December 31, 2013 and 2012
126
Consolidated Statements of Equity for the years ended December 31, 2013, 2012 and 2011
128
PPL Electric Utilities Corporation and Subsidiaries
Consolidated Statements of Income for the years ended December 31, 2013, 2012 and 2011
130
Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011
131
Consolidated Balance Sheets at December 31, 2013 and 2012
132
Consolidated Statements of Shareowners' Equity for the years ended December 31, 2013, 2012 and 2011
134
LG&E and KU Energy LLC and Subsidiaries
Consolidated Statements of Income for the years ended December 31, 2013, 2012 and 2011
135
Consolidated Statements of Comprehensive Income for the years ended December 31, 2013, 2012 and 2011
136
Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011
137
Consolidated Balance Sheets at December 31, 2013 and 2012
138
Consolidated Statements of Equity for the years ended December 31, 2013, 2012 and 2011
140
Louisville Gas and Electric Company
Statements of Income for the years ended December 31, 2013, 2012 and 2011
142
Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011
143
Balance Sheets at December 31, 2013 and 2012
144
Statements of Equity for the years ended December 31, 2013, 2012 and 2011
146
Kentucky Utilities Company
Statements of Income for the years ended December 31, 2013, 2012 and 2011
148
Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011
149
Balance Sheets at December 31, 2013 and 2012
150
Statements of Equity for the years ended December 31, 2013, 2012 and 2011
152



  COMBINED NOTES TO FINANCIAL STATEMENTS 
  
1.   Summary of Significant Accounting Policies
153
  
2.   Segment and Related Information
167
  
3.   Preferred Securities
170
  
4.   Earnings Per Share
171
  
5.   Income and Other Taxes
172
  
6.   Utility Rate Regulation
185
  
7.   Financing Activities
195
  
8.   Acquisitions, Development and Divestitures
202
  
9.   Discontinued Operations
205
  
10.  Business Acquisitions
205
  
11.  Leases
208
  
12.  Stock-Based Compensation
209
  
13.  Retirement and Postemployment Benefits
214
  
14.  Jointly Owned Facilities
233
  
15.  Commitments and Contingencies
235
  
16.  Related Party Transactions
251
  
17.  Other Income (Expense) - net
253
  
18.  Fair Value Measurements and Credit Concentration
254
  
19.  Derivative Instruments and Hedging Activities
263
  
20.  Goodwill and Other Intangible Assets
275
  
21.  Asset Retirement Obligations
278
  
22.  Variable Interest Entities
280
  
23.  Available-for-Sale Securities
280
  
24.  Accumulated Other Comprehensive Income (Loss)
282
  
25.  New Accounting Guidance Pending Adoption
283
    
  SUPPLEMENTARY DATA 
  Schedule I - Condensed Unconsolidated Financial Statements 
  
     LG&E and KU Energy LLC
285
  
Quarterly Financial, Common Stock Price and Dividend Data - PPL Corporation
289
  
Quarterly Financial Data - PPL Electric Utilities Corporation
290
9. 
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
291
9A. 
Controls and Procedures
291
9B. 
Other Information
292
    
  PART III 
10. 
Directors, Executive Officers and Corporate Governance
293
11. 
Executive Compensation
294
12. 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
295
13. 
Certain Relationships and Related Transactions, and Director Independence
296
14. 
Principal Accounting Fees and Services
296
    
  PART IV 
15. 
Exhibits, Financial Statement Schedules
298
  
Shareowner and Investor Information
299
  
Signatures
301
  
Exhibit Index
307
  
Computation of Ratio of Earnings to Fixed Charges
328
  
Certifications of Principal Executive Officer and Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
334
  
Certificates of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
346
  
PPL Corporation and Subsidiaries Long-term Debt Schedule
352


GLOSSARY OF TERMS AND ABBREVIATIONS

PPL Corporation and its currentsubsidiaries

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

KU - Kentucky Utilities Company, a public utility subsidiary of LG&E and KU Energy LLCLKE engaged in the regulated generation, transmission, distribution and sale of electricity, primarily in Kentucky.  The subsidiary was acquired by PPL in November 2010.

LG&E - Louisville Gas and Electric Company, a public utility subsidiary of LG&E and KU Energy LLCLKE 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 in November 2010.

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

LKS - LG&E and KU Energy LLC.  Within the contextServices Company, a subsidiary of this document, referencesLKE that provides services to LKE also relate to the consolidated entity.and its subsidiaries.

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

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

PPL Capital Funding - PPL Capital Funding, Inc., a 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 public utility subsidiary of PPL that transmitsengaged in the regulated transmission and distributesdistribution of electricity in its Pennsylvania service territoryarea and that provides electricelectricity supply to its retail customers in this territory 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 and other subsidiaries.

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

PPL Energy Supply - PPL Energy Supply, LLC, a subsidiary of PPL Energy Funding and the parent company of PPL Generation, PPL EnergyPlus PPL Global and other subsidiaries.  In January 2011, PPL Energy Supply distributed its membership interest in PPL Global, representing 100% of the outstanding membership interests of PPL Global, to PPL Energy Supply's parent, PPL Energy Funding.

PPL Gas Utilities - PPL Gas Utilities Corporation, a regulated utility that provided natural gas distribution, transmission and storage services, and the competitive sale of propane, which was a subsidiary of PPL until its sale in October 2008.

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 through its subsidiaries, owns and operates a businessWPD, PPL's regulated electricity distribution businesses 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 interestsinterest of PPL Global, to PPL Energy Supply'sits 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, a subsidiary of PPL Generation that owned generating operations in Maine, until their sales in 2009 and 2010.

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

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

i


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 forto PPL and its subsidiaries.

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

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

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

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

Subsidiary Registrant(s) - Registrants that are direct or indirect wholly owned subsidiaries of PPL:  PPL Energy Supply, PPL Electric, LKE, LG&E and KU.

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

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

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

WPD (South Wales) - Western Power Distribution (South Wales) plc, a British regional 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 U.K. subsidiary of PPL Global.  Indirectly, WPDH Limited wholly owns WPD (South Wales)(West Midlands) plc, a British regional electricity distribution utility company.  The company (formerly Central Networks West plc) was acquired and WPD (South West).renamed in April 2011.

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

Other terms and abbreviations

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

2011 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.


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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.

Acid Rain ProgramAct 11 - allowance trading system established byAct 11 of 2012 that became effective on April 16, 2012.  The Pennsylvania legislation authorizes the Clean Air ActPUC to reduce levelsapprove two specific ratemaking mechanisms:  the use of sulfur dioxide.  Under this program, affected power plants are allocated allowances based on their fuel consumption during specified baseline yearsa fully projected future test year in base rate proceedings and, subject to certain conditions, a specific emissions rate.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 existingAEPS.

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 financial 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.

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

Cane Run Unit 7 - an upa natural gas combined-cycle unit under construction in Kentucky, jointly owned by LG&E and KU, which is expected to $6.5 billion Senior Bridge Term Loan Credit Agreement between PPL Capital Funding, as borrower,provide additional electric generating capacity of 640 MW (141 MW and PPL, as guarantor,499 MW to LG&E and a group of banks syndicatedKU) in June 2010, to serve as a backstop in the event alternative financing was not available prior to the closing of PPL's acquisition of E.ON U.S.2015.

CAIR- thethe EPA's Clean Air Interstate Rule.

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

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

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

CTCCPCN - competitive transition charge on customer billsCertificate of Public Convenience and Necessity.  Authority granted by the KPSC pursuant to recover allowable transition costs underKentucky Revised Statute 278.020 to provide utility service to or for the Customer Choice Act.public or the construction of certain plant, equipment, property or facility for furnishing of utility service to the public.

CSAPR - Cross-State Air Pollution Rule.


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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 - Departmentthe flow-through income tax impact related to the state regulatory treatment of Environmental Protection, a state government agency.depreciation-related timing differences.

DNO - Distribution Network Operator.

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

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

DPCR4 - 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.

E.ON AGDSIC - a German corporation and the parentDistribution System Improvement Charge authorized under Act 11, which is an alternative ratemaking mechanism providing more-timely cost recovery of E.ON US Investments.qualifying distribution system capital expenditures.

E.ON US InvestmentsDSM - 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 costs and revenues lost by implementing DSM 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 - E.ON US Investments Corp., a Delaware corporationDistribution 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 former parent of E.ON U.S. LLC.  PPL acquired E.ON U.S. LLC in November 2010 and changed its name to LG&E and KU Energy LLC.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, Kentucky electric utilities are entitled to the current recovery of costs of complying with the Clean Air Act, as amended, and magnetic fields.those federal, state or local environmental requirements that apply to coal combustion wastes and by-products from the production of energy from coal.

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

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.

EPS - earnings per share.

Equity UnitUnits - consists of a Purchase Contractrefers collectively to the 2011 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 Equity Units were issued in June 2010 to help fund PPL's acquisition of LKE.Units.

ESOP - Employee Stock Ownership Plan.

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

EWG - exempt wholesale generator.

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E.W. Brown - a generating station in Kentucky with capacity of 1,594 MW.

FERC - Federal Energy Regulatory Commission, the U.S. 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, which are financial instruments established to manage price risk related to electricity transmission congestion.  Theycongestion that entitle the holder to receive compensation or require the holder to remit payment for certain congestion-related transmission charges that arise whenbased on the transmission grid is congested.level of congestion between two pricing locations, known as source and sink.

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) the 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.

GBP - British pound sterling.

GHG –- greenhouse gas(es).

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

Green River Unit 5 - a natural gas combined-cycle unit proposed to be built in Kentucky, jointly owned by LG&E and KU, which is expected to provide additional electric generating capacity of 700MW (280 MW and 420 MW to LG&E and KU) in 2018.

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

Health Care ReformHMRC - 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.

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

Intermediate and peaking generation - includes the output provided by PPL'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 together own and operate, a natural gas combined-cycle unit in Lebanon, Pennsylvania.

Ironwood Facility - a natural gas-fired power plantgas combined-cycle unit in Lebanon, Pennsylvania with a wintersummer rating of 763662 MW.

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

IRC Sec. 481 - the Internal Revenue Code Section that identifies the tax year in which accounting method change differences are recognized in federal taxable income.

ISO - Independent System Operator.


ITC - intangible transition charge on customer bills to recover intangible transition costs associated with securitizing stranded costs under the Customer Choice Act.

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

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

kV - Kilovolt.

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,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 businessLTIIP - 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 and related tolling agreements.  This business was sold in February 2010.Long Term Infrastructure Improvement Plan.

MACTMATS - - maximum achievable control technology.Mercury and Air Toxics Standards.

MISOMDEQ (Midwest Independent System Operator) - an independent system operator and the regional transmission organization that provides open-access transmission service and monitors the high voltage transmission system in all or partsMontana Department of Illinois, Indiana, Iowa, Michigan, Minnesota, Missouri,Environmental Quality.

MEIC - Montana Nebraska, North Dakota, Ohio, South Dakota, Wisconsin and Manitoba, Canada.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.

NGCC - Natural gas-fired combined-cycle turbine.

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 may receive accrual accounting treatment.

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

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

NYMEX - New York Mercantile Exchange.

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 of power plant stack gas emissions.

OVEC - Ohio Valley Electric Corporation, located in Piketon, Ohio, an entity in which LKE indirectly owns an 8.13% interest.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 Stationplant in Ohio and the Clifty Creek Stationplant in Indiana, with combined nameplatesummer rating capacities of 2,3902,120 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 electricelectricity 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 to retail customers who have not chosen to select an alternative electricity supplier under the Customer Choice Act.

PP&E - property, plant and equipment.

PPL Electric 2001 Mortgage 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.

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

PUC Final OrderPurchase Contract(s) - final order issued byrefers collectively to the PUC on August 27, 1998, approving the settlement of PPL Electric's restructuring proceeding.

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

2010 and 2011 Purchase Contract - a contract that is a componentContracts, which are components of the 2010 and 2011 Equity Unit that requires holders to purchase shares of PPL common stock on or prior to July 1, 2013.Units.

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, used within the U.K. regulatory environment, is also commonly known as RAV.RAB or regulatory asset base.  RAV is based on historical investment costs at time of privatization, plus subsequent allowed additions less annual regulatory depreciation, and represents the value on which DNOs earn a return in accordance with the regulatory cost of capital.  RAV is indexed to Retail Price Index in order to allow for the effects of inflation.  Since the beginning of DPCR5 in April 2010, RAV additions have been based on a percentage of annual total expenditures.

RECs - renewable energy credits.

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

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

RFC - ReliabilityFirstReliabilityFirst 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.

RIIO-ED1 - RIIO represents "Revenues = Incentive + Innovation + Outputs - Electricity Distribution."  RIIO-ED1 refers to the initial eight-year rate review period applicable to WPD commencing April 1, 2015.

RMC - Risk Management Committee.

RTO - Regional Transmission Organization.

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


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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 isprimarily responsible to protect investors and maintain the integrity of the securities markets.

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

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

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 strengthenshas 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.gases using ammonia.

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

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

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

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

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

Treasury Stock Method - A method applied to calculate diluted EPS that assumes any proceeds that could be obtained upon exercise of options and warrants (and their equivalents) would be used to purchase common stock at the average market price during the relevant period.

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.


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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. Combined 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 natural gas supply costsenvironmental expenditures in a timely manner at LG&E and KU;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 other changes in financial or commodity markets and economic conditions;
·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, environmental, healthcare or pension-related legislation;
·state, federal and foreign regulatory developments;
·the outcome of any rate cases or other cost recovery or revenue filings by PPL Electric, at the PUC, by LG&E, KU or KU at the KPSC, VSCC or the TRA, or by WPD at Ofgem in the U.K.;WPD;
·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.
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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

BACKGROUNDGeneral

(All Registrants)

PPL Corporation, headquartered in Allentown, PA,Pennsylvania, is an energy and utility holding company that was incorporated in 1994.  Through subsidiaries, PPL delivers electricity to customers in the U.K., Pennsylvania, Kentucky, Virginia and Tennessee; delivers natural gas to customers in Kentucky; generates electricity from power plants in the northeastern, northwestern and southeastern U.S.,; and markets wholesale or retail energy primarily in the northeastern and northwestern portions of the U.S.  Beginning in 2010, PPL has expanded the rate regulated portion of its business, principally through the 2010 acquisition of LKE and the 2011 acquisition of WPD Midlands, such that it projects nearly all of its 2014 earnings will come from rate-regulated businesses.  See "Acquisitions and Divestitures" below for more information on the acquisitions of regulated businesses.

PPL's principal subsidiaries at December 31, 2013 are shown below (* denotes a Registrant).
PPL Corporation*
PPL Capital Funding
PPL Global
● Engages in the regulated distribution of electricity in the U.K.
LKE*
PPL Electric*
● Engages in the regulated transmission and distribution of electricity in Pennsylvania
PPL Energy Supply*
LG&E*
● Engages in the regulated generation, transmission, distribution and sale of electricity, and distribution and sale of natural gas in Kentucky
KU*
● Engages in the regulated generation, transmission, distribution and sale of electricity, primarily in Kentucky
PPL EnergyPlus
● Performs energy marketing and trading activities
● Purchases fuel
PPL Generation
● Engages in the competitive generation of electricity, primarily in Pennsylvania and Montana
U.K. Regulated
Segment
Kentucky Regulated
Segment
Pennsylvania Regulated Segment
Supply
Segment

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

PPL Energy Supply, LLC, deliversheadquartered in Allentown, Pennsylvania, is an indirect wholly owned subsidiary of PPL formed in 2000 and is an energy company that through its principal subsidiaries is primarily engaged in the competitive generation and marketing of electricity toin two key markets - the northeastern and northwestern U.S.  PPL Energy Supply's principal subsidiaries are PPL EnergyPlus, its marketing and trading subsidiary, and PPL Generation, the owner of its generating facilities in Pennsylvania and Montana.

PPL Electric Utilities Corporation, headquartered in Allentown, Pennsylvania, is a direct wholly owned subsidiary of PPL incorporated in Pennsylvania in 1920 and a regulated public utility that is an electricity transmission and distribution service provider in eastern and central Pennsylvania.


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LG&E and KU Energy LLC, headquartered in Louisville, Kentucky, is a holding company and a wholly owned subsidiary of PPL since 2010.  LKE owns regulated utility operations through its subsidiaries, LG&E and KU, which constitute substantially all of LKE's assets. LG&E and KU are engaged in the generation, transmission, distribution and sale of electricity. LG&E also engages in the distribution and sale of natural gas. LG&E and KU maintain their separate corporate identities and serve customers in Pennsylvania, Kentucky under their respective names. KU also serves customers in Virginia under the Old Dominion Power name and in Tennessee under the KU name. LKE, formed in 2003, is the successor to a Kentucky entity incorporated in 1989.

Louisville Gas and Electric Company, headquartered in Louisville, Kentucky, is a regulated utility engaged in the U.K.generation, transmission, distribution and deliverssale of electricity and distribution and sale of natural gas in Kentucky.  LG&E was incorporated in 1913. LG&E is a wholly owned subsidiary of LKE.

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 in 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. KU is a wholly owned subsidiary of LKE.

Acquisitions and Divestitures

(PPL, LKE, LG&E and KU)

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 to acquire LKE. In October 2010, both the VSCC and the TRA also approved the transfer of control of LKE to PPL. The orders and the settlement agreement approved by the KPSC contained certain 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 LG&E and KU to PPL. The approval included various conditional commitments, such as a continuation of certain existing undertakings with intervenors in prior cases, coordination with intervenors in certain pending matters and an exclusion of any transaction-related costs from wholesale energy and tariff customer rates to the extent that LG&E and KU have agreed to exclude such costs from retail customer rates.

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).  LKELLC.

(PPL)

In April 2011, PPL, through an indirect, wholly owned subsidiary, PPL WEM, acquired 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 in the Midlands area of England and is engagedincluded in regulated uti lity operations through its subsidiaries, KU and LG&E.  PPL acquired LKE for approximately $7.6 billion, including debt assumed through consolidation.the U.K. Regulated segment.  See Note 10 to the Financial Statements for additional information on the acquisition.  The acquisition of LKE substantially reapportions the mix of PPL's regulated and competitive businesses by increasing the regulated portion of its business, strengthens PPL's credit profile and enhances rate-regulated growth opportunities as the regulated businesses make investments to improve infrastructure and customer reliability.  An increase in regulated assets provides earnings stability through regulated returns and the ability to recover costs of capital investments, in contrast to the competitive supply business where earnings and cash flows are subject to market conditions.  In 2011, PPL projects that 50% of its net income will be provided by its regulated businesses and the remainder will be provided by its c ompetitive supply businesses.  As of December 31, 2010, PPL has:information.

·  More than $10 billion in projected annual revenues (up from $8.5 billion recorded by PPL in 2010 including two months of LKE revenue).
·  5.3 million utility customers (including 1.3 million served by the Kentucky-based companies).
·  Approximately 19,000 MW of generation (including 7,700 MW of regulated capacity in the Kentucky-based companies).
·  Approximately 14,000 full-time employees (including about 3,100 in Kentucky).

As of December 31, 2010, PPL's principal subsidiaries are shown below (* denotes a SEC registrant):
(PPL Energy Supply)

In January 2011, PPL Energy Supply distributed its 100%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 itsthese 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.

(PPL and PPL Energy Supply)

In additionSeptember 2013, PPL Montana executed a definitive agreement to PPL Corporation, the other SEC registrants included in this filing are:

PPL Energy Supply, LLC, an indirect wholly owned subsidiary of PPL formed in 2000, is an energy company engaged through its subsidiaries in the generation and marketing of electricity, primarily in the northeastern and northwestern power markets of the U.S. and in the delivery of electricity in the U.K.  PPL Energy Supply's major operating subsidiaries are PPL Generation, PPL EnergyPlus and PPL Global.  As noted above, in January 2011, PPL Energy Supply distributed its 100% membership interest in PPL Global to its parent, PPL Energy Funding.  At December 31, 2010, PPL Energy Supply owned or controlled 11,729sell 633 MW of electric power generation capacity and is implementing capital projects at certain of its existing generationhydroelectric facilities to NorthWestern for $900 million in Pennsylvania and Montana to provide 247 MW of additional generating capacity by 2013, and is in the process of disposing of certain non-core generation facilities with a capacity of 961 MW in 2011.

PPL Electric Utilities Corporation, incorporated in 1920, is a direct subsidiary of PPL and a regulated public utility.  PPL Electric delivers electricity in its Pennsylvania service territory and provides electricity supply to retail customers in that territory as a PLR under the Customer Choice Act.

PPL's utility subsidiaries, and to a lesser extent certain of its non-utility subsidiaries, arecash, subject to extensive regulation by the FERC including:  wholesale sales of power and related transactions, electric transmission service, accounting practices, issuances and sales of securities, acquisitions and sales of utility properties and payments of dividends.  PPLcertain adjustments.  The sale, which is subject to certain FERC regulations as a holding company under PUHCA 2005regulatory approvals and not expected to close before the second half of 2014, includes 11 hydroelectric power facilities and related assets.  See Note 8 to the Financial Statements for additional information on the sale and the Federal Power Act, including with respect to accountingrelated Colstrip operating lease termination and record-keeping, inter-system salessubsequent purchase of non-power goods and services and acquisitions of securitiesthe undivided interests in or mergers with, certain types of electric utility companies or holding companies.the Colstrip units.


4

Segment Information

(PPL)

Following the November 1, 2010 acquisition of LKE, PPL is organized into four segments:reportable segments as depicted in the chart above:  U.K. Regulated, Kentucky Regulated, International Regulated (formerly International Delivery), Pennsylvania Regulated (formerly Pennsylvania Delivery) and Supply.  Other than PPL adding a KentuckyPPL's reportable segments primarily reflect the activities of its related Subsidiary Registrant(s), except that the reportable segments are also allocated certain corporate level financing and other costs that are not included in the results of the applicable Subsidiary Registrant(s).  The U.K. Regulated segment there were no other changes to reportable segments except the renaming of segments and allocating interest expensedoes not have a related to the Equity Units to the Kentucky Regulated segment.Subsidiary Registrant.

(PPL Energy Supply)
A comparison of PPL's three regulated segments is shown below:
           
   U.K. Regulated KY Regulated PA Regulated
           
For the year ended December 31, 2013:         
 Operating Revenues (in billions) $2.4  $3.0  $1.9 
 Net Income Attributable to PPL Shareowners (in millions) $922   $307  $209 
 Electric energy delivered (GWh) 78,219  31,088  36,760 
At December 31, 2013:       
 Regulatory Asset Base (in billions) (a) $9.5  $7.6  $4.2 
 Service area (in square miles) 21,400  9,400  10,000 
 End-users (in millions) 7.7  1.3  1.4 

At December 31, 2010, PPL Energy Supply's segments consisted of Supply and International Regulated (formerly International Delivery).  In 2010, there were no changes to these segments except the renaming of segments.  However, in January of 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.

(PPL Electric)

PPL Electric operates in a single business segment.

(PPL, PPL Energy Supply, and PPL Electric)
(a)Represents RAV for U.K. Regulated, capitalization for KY Regulated and rate base for PA Regulated.

See Note 2 to the Financial Statements for additional financial information about the segments and geographic financial data.segments.

(PPL)(All Registrants except PPL)

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

·
U.K. Regulated Segment (PPL)
Consists of PPL Global which primarily includes WPD's regulated electricity distribution operations and certain costs, such as U.S. income taxes, administrative costs and allocated financing costs.

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 by WPD has more than doubled, totaling 7.7 million across 21,400 square miles in Wales and 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.

  2013  2012  2011 
  Revenue % of Revenue Revenue % of Revenue Revenue % of Revenue
Utility revenues (a) $2,359   98  $2,289   98  $1,618   98 
Energy-related businesses  44   2   47   2   35   2 
Total $ 2,403    100  $ 2,336   100  $ 1,653    100 

(a)Amounts for 2011 are not comparable with 2012 or 2013 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.  Amounts for 2013 and 2012 are comparable as each period includes a full year of WPD Midlands' results.

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

Franchise and Licenses

WPD is authorized by Ofgem to provide electricity distribution services within its concession areas and service territories, subject to certain conditions and obligations.  For instance, WPD is subject to Ofgem regulation with respect to 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.


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Ofgem has formal powers to propose modifications to each distribution license.  In January 2014, Ofgem changed the licenses to include a reduction in customer bills to be recovered in subsequent periods.  WPD is not currently aware of any further planned modification to any of its U.K. regulated businesses' distribution licenses that would result in a material adverse change to the U.K. regulated businesses.  See "Item 7. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview - Distribution Revenue Reduction" for additional information.

A failure by WPD to comply with the terms of a distribution license may lead to the issuance of an enforcement order by Ofgem.  Ofgem has the power to levy fines of up to 10% 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.

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, therefore, regulated monopolies which operate under regulatory price controls.

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 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 provides the amount of revenue that a regulated business can earn and provides for an increase or reduction in revenues based on incentives or penalties for exceeding or underperforming relative to pre-established targets.

This regulatory structure is an incentive-based structure in contrast to the typical U.S. regulatory structure which operates on a cost-recovery based model.  Under the UK regulatory structure, electricity distribution revenues are currently set every five years, but will be extended to eight years in the next price control period beginning in April 2015.  The revenue that DNOs can earn in each price control period is the sum of:  i) the regulator's determination of efficient operating costs, ii) a return on capital from RAV plus an annual adjustment for inflation as determined by Retail Price Index (RPI) for the prior year, iii) a return of capital from 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 is effective for the period from April 1, 2010 through March 31, 2015.  Ofgem allowed an average increase in total revenues, before inflationary adjustments in each of the five years of DPCR5 of 6.9% for WPD (South West) and WPD (South Wales) and 4.5% for WPD Midlands.  The revenue increases include reimbursement for higher operating and capital costs that would be incurred from additional regulatory 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 particular period.  Under-recovered amounts are recovered in the next regulatory year.

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 both are designed to incentivize the DNOs to invest and operate their networks to manage and reduce both the frequency and duration of power outages.  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.

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·Information Quality Incentive (IQI) - The IQI is designed to incentivize the DNOs to provide good quality information in the business plans they submit to Ofgem during the price control review process and to execute the plan as submitted.  The IQI eliminates the distinction between capital expenditure and operating expense and instead focuses on total expenditure.  Total expenditure is allocated 85% to RAV and currently recovered over 20 years through the regulatory depreciation of RAV and 15% to certain expenses which is recovered during the current price control review period, and includes all corporate and non-network capital expenditures.  The IQI 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 for the five-year price control period.

At the beginning of DPCR5, WPD was awarded $301 million in IQI 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.  The following table shows the amount of further incentive revenue, primarily from IIS, that WPD has earned since the beginning of DPCR5:

Incentive EarnedRegulatory Year Ended Incentive
Regulatory Year Ended(in millions)Included in Revenue
March 2011$30 March 2013
March 201283 March 2014
March 2013104 March 2015

In October 2010, Ofgem announced changes to the regulatory framework that will be effective for the U.K. electricity distribution sector, including WPD, beginning April 2015.  The framework, known as RIIO (Revenues = Incentives + Innovation + Outputs), is intended to:

·  encourage DNOs to deliver safe, reliable and sustainable network service at long-term value to customers;
·  enable DNOs to finance the required investment in a timely and efficient way; and
·  remunerate DNOs according to their delivery for customers.

Ofgem published a strategy decision document in March 2013 providing the policies that will apply in RIIO-ED1.  Key components included:

·  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;
·  replacement of the current Low Carbon Network Fund to continue to stimulate innovation;
·  capital return comprised of a 10 year trailing average debt allowance and an equity allowance to be determined by Ofgem with a debt to equity ratio of 65:35; and
·  depreciation of RAV for additions after April 1, 2015 will be extended from 20 years to 45 years, although transitional arrangements will be considered by Ofgem.

In July 2013, WPD filed its business plans with Ofgem for its four DNOs for RIIO-ED1.  In November 2013, Ofgem determined that the 8-year business plans of all four of WPD's DNOs were suitable for accelerated consideration or "fast tracking" and as a result, subject to a final Ofgem determination, merit early settlement of their price controls for the 8-year period starting April 1, 2015.  Fast tracking affords several benefits to the WPD DNOs, including the ability to collect additional revenue equivalent to 2.5% of total annual expenditures during the 8-year price control period (approximately $35 million annually), greater revenue certainty and a higher level of cost savings retention.

In February 2014, Ofgem announced its decision on the consultation related to the cost of equity to be used during the RIIO-ED1 period.  The resulting real cost of equity for WPD was 6.4%, compared to 6.7% proposed in WPD's business plan submittals.  WPD elected to accept this change and remain in the fast-track process.  The change in the cost of equity is not expected to have a significant impact on the results of operations for PPL.  Ofgem expects to announce its fast track final determination in late February 2014.

See "Item 1A. Risk Factors - Risks Related to U.K. Regulated Segment" for additional information on the risks associated with RIIO-ED1.

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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.  Therefore, WPD's customers are energy suppliers.  Ofgem requires that all licensed electricity distributors and suppliers become parties to the Distribution Connection and Use of System Agreement.  This agreement specifies how creditworthiness will be determined and, as a result, whether the supplier needs to collateralize for its payment obligations.

·
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.  TheIn addition, certain financing costs are allocated to the Kentucky Regulated segment also includes interest expense related to the Equity Units issued in June 2010 to partially finance the acquisition of LKE.segment.

(PPL, LKE, LG&E and KU)

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 397,000 customers in Louisville and adjacent areas in Kentucky, covering approximately 700 square miles in nine counties and provides natural gas service to approximately 321,000 customers in its electric service area and eight additional counties in Kentucky.  KU provides electric service to approximately 514,000 customers in 77 counties in central, southeastern and western Kentucky, to approximately 30,00029,000 customers in five counties in southwestern Virginia, and lessfewer than ten customers in Tennessee.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.  KU also sells wholesale electricity to 12 municipalities in Kentucky.  LG&E provides electric service to approximately 395,000 customers in Louisville and adjacent areas in Kentucky, covering approximately 700 square miles in nine counties.   LG&E provides natural gas service to approximately 320,000 customers in its electric service area and eight additional counties in Kentucky.

Details of operating revenues by customer class for the years ended December 31 are shown below.
                   
                   
       
  2013  2012  2011 
     % of    % of    % of
  Revenue Revenue Revenue Revenue Revenue Revenue
LKE                  
Commercial $ 770    26  $ 723    26  $ 719    26 
Industrial   587    20    551    20    533    19 
Residential   1,205    40    1,071    39    1,087    39 
Retail - other   260    9    270    10    269    9 
Wholesale - municipal   110    4    102    4    104    4 
Wholesale - other (a)   44    1    42    1    81    3 
Total $ 2,976    100  $ 2,759    100  $ 2,793    100 
                   
LG&E                  
Commercial $ 405    29  $ 374    28  $ 372    27 
Industrial   186    13    170    13    152    11 
Residential   614    44    548    41    561    41 
Retail - other   119    8    131    10    130    10 
Wholesale - other (a) (b)   86    6    101    8    149    11 
Total $ 1,410    100  $ 1,324    100  $ 1,364    100 
                   
KU                  
Commercial $ 365    22  $ 349    23  $ 347    22 
Industrial   401    25    381    25    381    25 
Residential   591    36    523    34    526    34 
Retail - other   141    9    139    9    139    9 
Wholesale - municipal   110    7    102    7    104    7 
Wholesale - other (a) (b)   27    1    30    2    51    3 
Total $ 1,635    100  $ 1,524    100  $ 1,548    100 

(a)PPL AcquisitionIncludes wholesale power and transmission revenues.
(b)Includes intercompany power sales and transmission revenues, which are eliminated upon consolidation at LKE.

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.  The rate increases for LG&E and KU that took effect on August 1, 2010 (as described below) are not impacted by the settlement.  Under the terms of the settlement, LG&E and KU retain the right to seek approval for the deferral of "extraordinary and uncontrollable costs."  Interim rate adjustments will continue to be permissible during that period through existing fuel, environmental and demand side management recovery mechanisms. & #160;The agreement also substitutes an acquisition savings shared deferral mechanism for the previous requirement that LG&E and KU file a synergies plan with the KPSC post-closing.  This mechanism, which will be in place until the earlier of five years or the first day of the year in which a base rate increase becomes effective, permits LG&E and KU to each earn up to a 10.75% return on equity.  Any earnings above a 10.75% return on equity will be shared with customers on a 50%/50% basis.  The KPSC Order and the settlement agreement contained a number of other commitments by LG&E and KU with regard to operations, workforce, community involvement and other matters.
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In October 2010, both the VSCC and the TRA approved the transfer of control of LKE to PPL.  Certain of these Orders contained additional commitments 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 includes various conditional commitments, such as a continuation of certain existing undertakings with protesters 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 to not seek recovery of the same transaction-related cost from retail customers and agreements to coordinate with protesters in certain open or ongoing matters.

 Franchises and Licenses

LG&E and KU provide electricelectricity delivery service, and LG&E provides natural gas distribution service, in their variousrespective 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 whichthat implemented a hybrid model of cost-based regulation;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.  Approximately 25% of LG&E's annual throughput is purchased by large commercial and industrial customers directly from alternate suppliers for delivery through LG&E's distribution system.  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.

In April 2010, the KPSC commenced a proceeding to investigate the regulatory, financial and operational aspects of natural gas retail competition programs, and the potential benefits to Kentucky consumers.  A number of entities, including LG&E, were parties to the proceeding.  In December 2010, the KPSC issued an Order in the proceeding declining to endorse natural gas competition at the retail level, noting the existence of a number of transition or oversight costs and an uncertain level of economic benefits in such programs.  With respect to existing natural gas transportation programs available to large commercial or industrial users, the Order indicates that the KPSC will review utilities' current tariff structures, user thresholds and other terms and conditions of such programs, as part of such utili ties' next regular natural gas rate cases.

Electric Operations

LKE serves approximately 939,000 electric customers.  LKE's transmission and distribution system territory covers approximately 7,300 square miles.  For the period from acquisition through December 31, 2010, 83% of the Kentucky Regulated segment's operating revenues were derived from electric operations.  Details of electric revenues by customer class for the period from acquisition through December 31, 2010 are shown below.

  Revenue % of Revenue
       
Industrial and commercial $ 187    46 
Residential   163    40 
Municipal   15    4 
Other retail   37    9 
Wholesale   6    1 
Total $ 408    100 

 Power Supply

At December 31, 2010,2013, LKE owned, controlled or had a minority ownership interest in generating capacity (winter(summer rating) of 7,9338,079 MW, of which 3,340 MW related to LG&E and 4,739 MW related to KU, in Kentucky, Indiana, and Ohio.  See "Item 2. Properties - Kentucky Regulated Segment" for a complete list of LKE's generating capacity.  Forfacilities.

The system capacity of LKE's owned or controlled generation is based upon a number of factors, including the period from acquisition through December 31, 2010,operating experience and physical condition of the units, and may be revised periodically to reflect changes in circumstances.

During 2013, LKE's Kentucky power plants generated 6,008 GWhthe following amounts of electricity.

During 2010, approximately 95%
 GWh
Fuel SourceLKE LG&E KU
Coal (a) 34,336   14,568   19,768 
Oil / Gas 503   176   327 
Hydro 300   193   107 
Total (b) 35,139   14,937   20,202 

(a)Includes 854 GWh of power generated by and purchased from OVEC for LKE, 591 GWh for LG&E and 263 GWh for KU.
(b)This generation represents a 2.1% increase for LKE, a 5% decrease for LG&E and a 8.1% increase for KU from 2012 output.

A significant portion of theLG&E's and KU's generated electricity generated by LG&E, and 98% of that generated by KU, was produced by their coal-fired electric generating stations.  The remainder was generated by natural gas and oil-fired combustion turbines and hydroelectric power plants.  Also during 2010, substantially all of the electricity generated 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 and municipal customers.  When LG&E has excess generation capacity after serving its own retail customers 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 and municipal customers and its generation cost is lower than that of LG&E, LG&E purchases electricity from KU.

See "Item 2. Properties - Kentucky Regulated Segment" and Note 8 to the Financial Statements for additional information regarding LG&E's and KU's Cane Run Unit 2 of the Trimble County generating station (TC2).  With limited exceptions LKE took care, custody and control of TC2 on7 which is currently under construction.  In January 22, 2011, and has dispatched the unit to meet customer demand since that date.2014, LG&E and KU filed an application for a CPCN with the KPSC requesting approval to construct a NGCC generating unit at KU's Green River generating site (Green River Unit 5) and a solar generating facility at the E. W. Brown generating site.  As a result of environmental requirements, 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 724 MW.  In addition, KU retired a 12 MW unit at the Haefling plant in December 2013 and the contractor agreed to a further amendment ofremaining 71 MW unit at the construction agreement whereby the contractor will complete certain actions relating to identifying and completing any necessary modifications to allow operation of TC2 on all fuelsTyrone plant in accordance with initial specifications prior to certain dates, and amending the provisions relating to liquidat ed damages. LKE cannot currently estimate the ultimate outcome of these matters.  LKE owns a 75% interest in Unit 2.  Unit 2 is coal-fired and has a capacity of 760 MW, of which LKE's share is 570 MW.February 2013.

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 Fuel Supply

Coal is expected to be the predominant fuel used by LG&E and KU for baseload generation for the foreseeable future, withfuture.  However, natural gas will play a more significant role starting in 2015 when Cane Run Unit 7 is expected to be placed into operation, and in 2018 when the NGCC generating unit at Green River generating site is expected to be placed into operation.  These units are expected to be used for baseload generation.  The natural gas for these generating units will be contracted from suppliers separately from LG&E's natural gas customers. Natural gas and oil beingwill 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 NGCC unit at Cane Run and six simple cycle combustion turbine units.

LG&E and KU have entered into coal supply agreements with various suppliers for coal deliveries through 20162017 and normally augment their coal supply agreements with spot market purchases.purchases, as needed.

For their existing units, LG&E and KU expect for the foreseeable future to purchase most of their coal from western and eastern Kentucky, West Virginia, southern Indiana and southern Illinois and Ohio.  With the installation of flue gas desulfurization systems (sulfur dioxide removal systems, or scrubbers), LG&E and KU expect their use of higher sulfur coal to increase.Illinois.  In 20112014 and beyond, LG&E and KU may purchase certain quantities of ultra-low sulfur content coal from Wyoming for blending at Unit 2 of the Trimble County generating station.TC2.  Coal is delivered to the generating stations primarilyplants by barge, truck and rail.

(PPL, LKE and LG&E)

 Natural Gas Distribution Supply

LG&E purchases, transports, distributes or stores natural gas for 320,000 customers in Kentucky.  Its service area covers over 700 square miles in 17 counties and includes 391 miles of transportation mains, consisting of natural gas transmission lines of 255 miles, natural gas storage lines of 119 miles and natural gas combustion turbine lines of 17 miles.  LG&E's natural gas distribution system includes 4,235 miles of distribution mains. For the period from acquisition through December 31, 2010, 17% of the Kentucky Regulated segment's operating revenues were derived from natural gas operations.  Shown below are details of natural gas revenues by customer class for the period from acquisition through December 31, 2010.

  Revenue % of Revenue
       
Residential $ 56    66 
Industrial and commercial   22    26 
Other retail   5    6 
Wholesale   2    2 
Total $ 85    100 

LG&E's natural gas billings include a weather normalization adjustment mechanism which adjusts the distribution cost component of residential and commercial customer bills based on normal temperatures during the heating season months of November through April, somewhat mitigating the effect of above- or below-normal weather on residential and commercial revenues.

Five underground natural gas storage fields, with a current working natural gas capacity of approximately 15 Bcf, help provide economical and reliableare used in providing natural gas service to ultimate consumers.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 forcedrequired to buypurchase additional natural gas and pipeline transportation services during winter months when customer demand increases and when the prices for natural gas supply and transportation services are typically at their highest.  Several suppliers under contracts of varying duration prov ideprovide competitively priced natural gas.  The underground storage facilities, in combination with its purchasing practices, enable LG&E to offer natural gas sales service at competitive rates.  At December 31, 2010,2013, LG&E had a 12 Bcf inventory balance of natural gas stored underground valued at $60with a carrying value of $48 million.

A number of large commercial and industrial customers purchase their natural gas requirements directly from alternate suppliers for delivery through LG&E's distribution system.  These large commercial and industrial customers account for approximately 25% of LG&E's annual throughput.

Natural Gas Supply

LG&E also has a portfolio of supply arrangements of variousvarying 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 20132015 and 2018.  Total winter capacity under these contracts is 184,900194,900 MMBtu/day and summer on-demand natural gas capacity is 60,00088,000 MMBtu/day.  LG&E has a contract with the otheranother pipeline that expires in 2012.October 2018.  Total winter and summer capacity under this contract is 51,00020,000 MMBtu/day.day during both seasons.

LG&E expects to purchase most of its natural gas distribution supplies from onshore producing regions in South Texas, East Texas, North Louisiana, and Arkansas, as well as gas delivered to its pipeline transporters in Ohio.

(PPL, LKE, LG&E and KU)

 Rates and Regulation

LG&E and KU areis subject to the jurisdiction of the KPSC and the FERC, in virtually all matters related to electric and natural gas utility regulation.  In addition, KU is subject to the jurisdiction of the KPSC, the FERC, the VSCC and the TRA.  LG&E and KU withdrew from the MISO in 2006.  Since exiting from the MISO, LG&E and KU have been operatingoperate under a FERC-approved open access transmission tariff.  LG&E and KU now contract with the Tennessee Valley Authority to act as their transmission reliability coordinatorcoordinator.  LG&E and Southwest Power Pool,KU contract with TranServ International, Inc. to functionact as their independent transmission operator, pursuant to FERC requirements.  Certain operations of LKE are subjectoperator.


10

In February 2013, LG&E and KU submitted a compliance filing to the Occupational Safety and Health Act of 1970 and comparable state statutes.  LKE is subjectFERC reflecting their participation with other utilities in the Southeastern Regional Transmission Planning relating to certain FERC regulations as a holding comp any under PUHCA 2005Order 1000 requirements.  FERC Order 1000, issued in July 2011, establishes certain procedural and the Federal Power Act.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 notes payable)short-term debt) including adjustments for certain adjustments to exclude non-regulatednet investments and environmental compliance costs recovered separately through the environmental cost recovery (ECR) mechanism.other means.  As such, LG&E and KU generally earn a return on regulatory assets are generally earning a return.  See Note 3 to the Financial Statements for additional information on cost recovery mechanisms.assets.

KU's Virginia base rates are calculated based on a return on rate base.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.  In January 2011, KU filed a notice of intent to file a rate case withrates; therefore, no return is earned on the VSCC for the test year ended December 31, 2010.  The case is expected to be filed on or after April 1, 2011.related assets.

KU's rates to municipal customers for wholesale requirements rates for municipal customers 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.rates; therefore, no return is earned on the related assets.

See Note 36 to the Financial Statements for additional information on cost recovery mechanisms.

2010 Kentucky Rate CaseCases

In January 2010, LG&E and KU filed applications withSee "Regulatory Matters - Kentucky Activities" in Note 6 to the KPSC requesting increases in electric base rates of approximately 12%, or annual increases of $95 million and $135 million, respectively.  In addition, LG&E requested an increase in its natural gas base rates of approximately 8%, or $23 million annually.  In June 2010, LG&E and KU and certain intervenors agreed to a stipulation providingFinancial Statements for increases in LG&E's and KU's electric base rates of $74 million and $98 million on an annual basis, and LG&E's natural gas base rates of $17 million on an annual basis, and those parties filed a request with the KPSC to approve such stipulation.  In July 2010, the KPSC issued an Order in the proceeding approving all the provisions of the stipulation, including a return on equity range of 9.75-10. 75%, with rates effective on and after August 1, 2010.

Virginia Rate Case

In June 2009, KU filed an application with the VSCC requesting an increase in electric base rates for its Virginia jurisdictional customers in an amount of $12 million annually or approximately 21%.  The proposed increase reflected a proposed rate of returninformation on rate base of 8.586% based on a return of equity of 12%.  As permitted pursuant to a VSCC Order, KU elected to implement the proposed rates effective November 1, 2009, on an interim basis.  During December 2009, KU and the VSCC Staff agreed to a Stipulation and Recommendation authorizing a base rate revenue increase of $11 million annually and a return on rate base of 7.846% based on a 10.5% return on common equity.  In March 2010, the VSCC issued an Order approving the stipulation, with the increased rates to be put into effect as of April 1, 2010.  As part of the stipulation, KU refunded approximately $1 million in interim rate amounts in excess of the ultimate approved rates.

FERC Wholesale Rate Case

In 2008, KU filed an application with the FERC for increases in electric base rates applicable to wholesale power sale contracts or interchange agreements involving, collectively, twelve Kentucky municipalities.  The application requested a shift from an all-in stated unit charge rate to an unbundled formula rate, including an annual adjustment mechanism.  In 2009, the FERC issued an Order approving a settlement among the parties in the case, incorporating increases of approximately 3% from prior rates and a return on equity of 11%.  In May 2010, KU submitted to the FERC the proposed current annual adjustments to the formula rates, which incorporated certain proposed increases.  Updated rates, including certain further adjustments from a review process involving wholesale requirements customers, bec ame effective as of July 1, 2010.

(PPL and PPL Energy Supply)cases.

·International Regulated Segment
Includes WPD, a regulated electricity distribution company in the U.K.

WPD, headquartered in Bristol, England, operates two of the 15 distribution networks providing electricity service in the U.K. through indirect wholly owned subsidiaries.  WPD (South West) serves 1.5 million end-users in a 5,560 square mile area of southwest England.  WPD (South Wales) serves 1.1 million end-users in a 4,550 square mile area within Wales.

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

  2010  2009  2008 
  Revenue % of Revenue Revenue % of Revenue Revenue % of Revenue
                   
Utility revenues $727    96  $684    96  $824    96 
Energy-related businesses  34    4   32    4   33    4 
Total $ 761    100  $ 716    100  $ 857    100 

WPD's energy-related businesses revenues include ancillary activities that support the distribution business, including telecommunications and real estate.  WPD's telecommunication subsidiary derives revenue 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 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.

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 (South West) and WPD (South Wales) are thus regulated monopolies which operate under regulatory price controls.

Rates and Regulation

The operations of WPD (South West) and WPD (South Wales) are regulated under their distribution licenses under which income is generated subject to a price cap regulatory framework set by the regulatory body, Ofgem, that provides economic incentives to minimize operating, capital and financing costs.  The charges made for the use of the distribution networks are regulated on the basis of the "RPI plus/minus X" formula where RPI is a measure of inflation and X is an efficiency factor established by Ofgem following their review.  Under the review, Ofgem assesses the revenue and capital expenditure plans of companies and determines what they consider an efficient level of that expenditure.  Ofgem also considers the required cost of capital sufficient to encourage the required investment and determines customer s ervice targets.  In December 2009, Ofgem completed its rate review for the 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 significant opportunities to enhance overall returns by improving network efficiency, reliability or customer service.  In October 2010, Ofgem announced a new pricing model that will be effective for the electricity distribution sector, inclu ding WPD, beginning April 2015.  The model, known as RIIO (Revenues = Incentives + Innovation + Outputs), is intended to encourage investment in regulated infrastructure.  Key components of the model 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.

Customers

The majority of WPD's revenue is derived from the delivery of electricity to end-users and thus its customers are the suppliers to those end-users.  It is a requirement of Ofgem 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.

(PPL and PPL Electric)

·Pennsylvania Regulated Segment (PPL)
  
 Includes the regulated electricelectricity delivery operations of PPL Electric.  In addition, certain financing costs are allocated to the Pennsylvania Regulated segment.

(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 to retail customers in this territoryarea as a PLR.PLR under the Customer Choice Act.

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

  2010  2009  2008 
  Revenue % of Revenue Revenue % of Revenue Revenue % of Revenue
                   
Residential $ 1,469    60  $ 1,473    45  $ 1,468    43 
Industrial   123    5    519    16    568    17 
Commercial   588    24    1,173    35    1,165    34 
Other (a) (b)   275   11    127    4    200    6 
Total $ 2,455    100  $ 3,292    100  $ 3,401    100 
   2013  2012  2011 
   Revenue % of Revenue Revenue % of Revenue Revenue % of Revenue
Distribution                  
 Residential $ 1,215    65  $ 1,108    63  $ 1,266    67 
 Industrial   52    3    53    3    62    3 
 Commercial   363    19    366    21    431    23 
 Other (a) (b)   (11)        26    1    (47)   (3)
Transmission   251    13    210    12    180    10 
 Total $ 1,870    100  $ 1,763    100  $ 1,892    100 

(a)Includes regulatory over- or under-recovery reconciliation mechanisms, pole attachment revenues, and street lighting and 2010 transmission revenues, net.lighting.
(b)Included in these amounts for 2013, 2012 and 2011 are $7$4 million, $74$3 million and $111$11 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.


Certain operations of PPL Electric are subject to the Occupational Safety and Health Act of 1970 and comparable state statutes.
11


 Competition

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

The PPL Electric transmission business, operating under a FERC-approved PJM Open Access Transmission Tariff, is subject to competition pursuant to FERC Order 1000 from entities that are not incumbent PJM transmission owners with respect to the construction and distribution businesses.ownership of transmission facilities within PJM.

 Rates and Regulation

Transmission and Distribution

PPL Electric's transmission facilities are within PJM, which operates the electricelectricity 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.  BesidesIn addition to operating the electricelectricity 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 recovered through PJM in accordance with a FERC approved tariff that allows recovery of incurred transmission costs, a return on transmission-related plant and an automatic annual update based on a formula rate mechanism.  As a PLR, PPL Electric is entitled to fully recoveralso purchases transmission services from customers the charges that it pays to PJM for transmission-related services.PJM.  See "PLR" below.

In November 2004, Pennsylvania enactedJuly 2011, FERC issued a Final Rule on Order 1000 directing that Transmission Providers such as PJM, remove from FERC approved tariffs, any provision that grants federal right of first refusal for facilities selected in a regional transmission plan and requiring subsequent compliance filings.  PJM tariff changes are currently under review by the Alternative Energy Portfolio Standard Act (the AEPS), whichFERC.

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

Distribution

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).  All regulatory assets and liabilities are excluded from the return on rate base; therefore, no return is earned on the related assets unless specifically provided for by the PUC.  Currently, PPL Electric's Smart Meter rider is the only regulatory asset earning a return.  Certain operating expenses are also included in PPL Electric's distribution base rates including wages and benefits, other operation and maintenance expenses, depreciation, and taxes.

Pennsylvania's AEPS requires electricelectricity distribution companies and retail electricelectricity generation suppliers to ultimately provide 18%obtain a portion of the electricity sold to retail customers in Pennsylvania from alternative energy sourcessources.  Under the default service procurement plans approved by 2020.  Under this state law,the PUC, PPL Electric purchases all of the alternative energy sources include hydro, wind, solar, waste coal, landfill methane and fuel cells.  If an electric distribution company is unable to meet these targets,generation supply it 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.  PPL Electric's initial compliance obligation covered the period January 1, 2010 to May 31, 2010.  PPL Electric was required to supply about 6.7% of the t otal amount of electricity it delivered to its PLR customers from alternative energy sources during this period.  Under the PUC-approved Competitive Bridge Plan, PPL Electric obtained full requirements service that included the generation or credits that PPL Electric neededneeds to comply with the AEPS in 2010.  AEPS compliance requirements for June 1, 2010 through May 31, 2011 are about 9% of the total amount of electricity delivered to PLR Customers.AEPS.

Act 129 became effective in October 2008.  The law createscreated an energy efficiency and conservation program, anda demand side management program, smart metering technology requirements, establishes new PLR electricitygeneration supply procurement rules, provides remedies for market misconduct, and makes 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, 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.  In January 2013, PPL Electric filed a petition requesting permission to establish a DSIC.  In May 2013, the PUC approved PPL Electric's proposed DSIC with an initial rate effective July 1, 2013, subject to refund after hearings.  The PUC also assigned four technical recovery calculation issues to the Office of Administrative Law Judge for hearing and preparation of a recommended decision.  The case remains pending before the PUC.

12


See "Regulatory IssuesMatters - Pennsylvania Activities" in Note 156 to the Financial Statements for additional information regarding Act 129, Act 11 and other legislative and regulatory impacts and PPL Electric's actions to provide default electricity supply for periods after 2009.impacts.

PLR

The Customer Choice Act requires electric distribution companies,Electric Distribution Companies (EDCs), including PPL Electric, or an alternative supplier approved by the PUC 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 such companiesthe PLR pursuant to regulations established by the PUC.  As part of December 31, 2013, the PUC Final Order, PPL Electric agreed to supply this electricity at predetermined capped rates through 2009.  To mitigate the risk that PPL Electric would not be able to obtain adequate energy supply at the "capped" rates, PPL Electric entered into full-requirement energy supply contracts with PPL EnergyPlus sufficient for PPL Electric to meet its PLR obligation through the endfollowing percentages of 2009.  Under these contracts, PPL EnergyPlus supplied PPL Electric's entire PLRcustomer load at predetermined prices equalwere provided by competitive suppliers:  51% 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 capped generation rates that PPL Electric wa s authorized to charge its customers.  Prior to the expiration of the rate caps, PPL Electric's customers had limited incentive to purchase generation supply from other providers because, in recent years, the contracts between PPL Electric and PPL EnergyPlus provided a below-market priceFinancial Statements for these customers.  As a result, a limited amount of "shopping" occurred.additional information.

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.  Effective January 1, 2010, PPL Electric's cost of electricelectricity generation is based on a competitive solicitation process.  The PUC has approved PPL Electric's default service plan for the period January 2011June 2013 through May 20132015, which includes 144 solicitations for electricity supply beginning January 1, 2011 with a portion extending beyond May 2013.held in April and October, annually.  Pursuant to this plan, PPL Electric had contractedcontracts for all of the 2010 electricity supply for residential, small commercial and small industrial customers, large commercial and large industrial customers who elect to take that service in 2010.  0;In addition,from PPL Electric completed two solicitations in 2009 and four solicitations in 2010 for supply starting January 2011 to May 2015.  TheElectric.  These solicitations include a mix of long-term12- and short-term purchases ranging from five months to five years9-month fixed-price load-following contracts for residential, small commercial and small industrial customers, and 12-month real-time pricing contracts for large commercial and large industrial customers to fulfill PPL Electric's obligation to provide for customer electricity supply as a PLR.  See "Energy Purchase Commitments" in Note 15 to the Financial Statements for additional information regarding PPL Electric's solicitations for 2011 and its actions to provide default electricity supply for periods after 2011.

In addition, severalNumerous 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 costcosts to purchase PLR supply, isincluding 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.

2010 Rate Case

In March 2010, PPL Electric filed a request with the PUC to increase distribution rates by approximately $115 million or approximately 2.4% over PPL Electric's projected 2010 revenues, to be effective January 1, 2011.  In December 2010, the PUC approved a settlement filed by the parties that provides for a rate increase of $77.5 million, or 1.6%, over PPL Electric's projected 2010 revenues.  The approved rates became effective for service rendered on and after January 1, 2011.  In January 2011, the PP&L Industrial Customers Alliance (PPLICA) filed a Petition for Reconsideration of the PUC's order regarding PPLICA's proposal for a special rate schedule for certain large commercial and industrial customers.  Also in January 2011, the PUC granted reconsideration for the purpose of evaluating the me rits of the petition.  PPL Electric cannot predict the outcome of this evaluation.Cases

See "Regulatory Matters - Pennsylvania Activities" in Note 36 to the Financial Statements for additional information on rate mechanisms.cases and the proposed Storm Damage Expense Rider.

(PPL)

·Sale
Supply Segment (PPL)
Consists primarily of Businessesthe activities of PPL Energy Supply's subsidiaries, PPL Generation and PPL EnergyPlus.  PPL Generation owns and operates competitive domestic power plants to generate electricity and acquires and develops competitive domestic generation projects.  PPL EnergyPlus markets and trades electricity, natural gas, and other energy-related products in competitive wholesale and retail markets.  In addition, certain financing and other costs are allocated to the Supply segment.

See Note 9 to the Financial Statements for information on the 2008 sale of PPL's natural gas distribution and propane businesses.

(PPL and PPL Energy Supply)

·Supply Segment
Owns and operates competitive domestic power plants to generate electricity; markets and trades this electricity and other purchased power to competitive 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 eastern and northwestern U.S. markets.  The easternSupply's generation assets are located in the Northeastnortheastern and Mid-Atlantic energy markets, includingnorthwestern U.S. markets.  The northeastern generating capacity is located primarily in Pennsylvania within PJM and ISO New England.  PPL Energy Supply's northwestern generating capacity is located in Montana.  PPL Energy Supply enters into energy and energy-related contracts to hedge the 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 2014 is anticipated to be used to meet its committed contractual sales.  PPL Energy Supply has also entered into commitments of varying quantities and terms for 2015 and beyond.


13

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

   2010  2009  2008   2013  2012  2011 
   Revenue % of Revenue Revenue % of Revenue Revenue % of Revenue  Revenue % of Revenue Revenue % of Revenue Revenue % of Revenue
                    
Electric and Gas            
 Wholesale (a) $ 4,347   85  $ 4,761   90  $ 5,020   91 
EnergyEnergy            
 Retail  415   8   152   3   151   2 Unregulated wholesale energy (a) $ 3,095   67  $ 4,204   76  $ 5,238   82 
 Trading   2       17       (121)   (2)Unregulated retail energy   1,031    22    848    16    727    11 
 Total electric and gas  4,764   93   4,930   93    5,050   91 Total energy  4,126   89   5,052   92    5,965   93 
Energy-related businesses (b)Energy-related businesses (b)   364    7    379    7    478    9 Energy-related businesses (b)   527    11    448    8    464    7 
TotalTotal $ 5,128    100  $ 5,309    100  $ 5,528    100 Total $ 4,653    100  $ 5,500    100  $ 6,429    100 

(a)Included in these amounts for 2013, 2012, and 2011 are $320$51 million, $1,806$78 million and $1,826$26 million of wholesale electricelectricity sales to an affiliate, PPL Electric, which are eliminated in consolidation for PPL.
(b)In addition
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 these amounts,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 has $11 million, $12Energy Supply of $13 million and $8 million of revenuefor 2012 and 2011, which isare not applicable to PPL Energy Supply.included in this table.

The Supply segment's energy-related businesses revenues include activities that primarily support its generation, marketing and trading businesses.  These activities include developing renewable energy projects and providing energy-related products and services to commercial and industrial customers, through its mechanical contracting and services subsidiaries.  The renewable energy business builds, owns, operates and maintains renewable energy facilities throughout the Mid-Atlantic and Northeast regions, and includes solar, wind and landfill gas to energy plants.  At December 31, 2010, the renewable energy business owned and operated 33 MW of renewable capacity.  The revenues of the mechanical contracting and services subsidiaries are included in "Energy-related businesses" on the Statements of Inc ome.

Customer Choice Act

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 entered into full requirements energy supply agreements at predetermined "capped" rates through the end of 2009.

With the expiration of the long-term power purchase agreements between PPL Electric and PPL EnergyPlus, PPL EnergyPlus 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.  The expiration of the long-term supply agreements with PPL Electric also enables PPL Energy Supply 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 opportunity to provide generation supply to additional wholesale customers but also exposes the Supply segment to increased competition (see "Competition" below).

 Power Supply

PPL Energy Supply owned or controlled generating capacity (winter(summer rating) of 11,72910,678 MW at December 31, 2010.  Through subsidiaries, PPL Generation owns and operates power plants in Pennsylvania, Montana, Illinois and Connecticut.2013.  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 listingdetails of PPL Energy Supply's generating capacity.

See Note 9 to the Financial Statements for information on the 2010 sale of the Long Island Generation business, consisting of plants in New York and the 2010 and 2009 sales of hydroelectric facilities located in Maine.  Also, see Note 9 to the Financial Statements for information on the anticipated sale of certain non-core generation facilities consisting of natural gas-fired facilities in Wallingford, Connecticut and University Park, Illinois and aDuring 2013, PPL Energy Supply subsidiary's interest in Safe Harbor Water Power Corporation, which owns a hydroelectric facility in Conestoga, Pennsylvania.owned or controlled power plants that generated the following amounts of electricity.

   GWh
Fuel Source Northeastern Northwestern Total
        
Nuclear  17,018     17,018 
Oil / Gas  9,516     9,516 
Coal  17,150   4,409   21,559 
Hydro  662   3,252   3,914 
Renewables (a)  348     348 
Total  44,694   7,661   52,355 

(a)PPL Energy Supply subsidiaries own or control renewable energy projects located in Pennsylvania, New Jersey, Vermont and New Hampshire with a generating capacity (summer rating) of 42 MW.  PPL EnergyPlus sells the energy, capacity and RECs produced by these plants into the wholesale market as well as to commercial and industrial customers.

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

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.

The system capacity of PPL Energy Supply'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 2010, PPL Energy Supply's power plants, excluding renewable facilities that are discussed separately below, generated the following amounts of electricity.

StateMillions of kWh
Pennsylvania 48,140 
Montana 8,409 
Connecticut 220 
New York (a)
Illinois 164 
Maine 75 
Total 57,008 

(a)15 million kWhs were excluded as tolling agreements were in place for 100% of the output.

This generation represented a 4% increase above 2009 output.  Of this generation, 50% of the electricity generated was from coal-fired stations, 29% from the Susquehanna nuclear station, 14% from oil/natural gas-fired stations and 7% from hydroelectric stations.

Substantially all of PPL Energy Supply's total expected generation in 2011 is anticipated to be used to meet its committed contractual sales.  PPL Energy Supply has also entered into commitments of varying quantities and terms for the years 2012 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 199 to the Financial Statements for information on the strategies PPL Energy Supply employs to optimize the value2011 sale of its wholesale and retail energy portfolio.

PPL Energy Supply subsidiaries own or control renewable energy projects located in Pennsylvania, New Jersey, Vermont and New Hampshire with a generating capacity (winter rating) of 33 MW.  PPL EnergyPlus sells the energy and RECs produced by these plants to commercial, industrial and institutional customers.  During 2010, the projects owned and operated by these PPL Energy Supply subsidiaries generated 154 million kWhs.

PPL EnergyPlus purchases the capacity, energy and RECs from two wind farms in Pennsylvania with a combined capacity of 50 MW.  These contracts extend through 2027.

See "Item 2. Properties - Supply Segment" for additional information regarding PPL Generation's plans for capital projects in Pennsylvania and Montana that are expected to provide 247 MW of additional electric generating capacity by 2013.certain non-core generation facilities.

 Fuel Supply

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

Coal

Pennsylvania

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


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During 2010,2013, PPL Generation purchased 100% of the coal delivered to PPL Generation's wholly owned Pennsylvania stations under short-term and long-term contracts.  These contracts provided PPL Generation 7.0 million tons of coal.  Contracts currently in place are expected to provide 7.95.7 million tons of coal in 2011.  The amountrequired for its wholly owned Pennsylvania plants.  Coal inventory is maintained at levels estimated to be necessary to avoid operational disruptions at coal-fired generating units.  Reliability of coal in inventory variesdeliveries can be affected from time to time depending on market conditionsby a number of factors including fluctuations in demand, coal mine production issues and plant operations.

other supplier or transporter operating difficulties.  PPL Generation, by and through its agent PPL EnergyPlus, has an agreementagreements in place that provideswill provide more than one-third17 million tons of PPL Generation's projected annual coal needs for the Pennsylvania power plants from 20112014 through 2018.  PPL Generation has other contracts that, in total, will provide additional2018 and augments its coal supply for their projected annual needs from 2011 through 2013.agreements with spot market purchases, as needed.

A PPL Generation subsidiary owns a 12.34% interest in the Keystone stationplant and a 16.25% interest in the Conemaugh plant.  PPL Generation owns a 12.34% interest in Keystone Fuels, LLC and a 16.25% interest in the Conemaugh station and in Conemaugh Fuels, LLC.  The Keystone stationplant contracts with Keystone Fuels, LLC for its coal requirements, which provided 4.54.2 million tons of coal to the Keystone stationplant in 2010.2013.  The Conemaugh stationplant requirements are purchased under contract from Conemaugh Fuels, LLC, which provided 4.04.3 million tons of coal to the Conemaugh stationplant in 2010.2013.

All wholly owned PPL Generation coal plants within Pennsylvania coal stations haveare equipped with scrubbers, installed.  Limestone is necessary to operate the scrubbers.which use limestone in their operations.  Acting as agent for PPL Brunner Island, LLC and PPL Montour, LLC,Generation, PPL EnergyPlus has entered into long-termlimestone contracts with limestone suppliers that will provide for those plants' limestone requirements through 2012.2014.  During 2010, 457,0002013, 405,000 tons of limestone were delivered to Brunner Island and Montour under long-termthese contracts.  Annual limestone requirements approximate 600,000range from approximately 400,000-500,000 tons.

Montana

PPL Montana hasowns a 50% leasehold interest in Colstrip Units 1 and 2, and a 30% leasehold interest in Colstrip Unit 3.3 and 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.  PPL Montana, along with the other owners,Colstrip Units 1 and 2 owner, has a long-term purchase and supply agreement with the current supplier for Units 1 and 2, which 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, 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.

These units were originally built with scrubbers and PPL Montana has entered into a long-term contract that commences in January 2011 through December 31, 2030, to purchase the limelimestone 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 2010,2013 and similar contracts are in place to supply 100% of the expected coal requirements through 2012.2014.  In the third quarter of 2012, PPL Energy Supply announced its intention, beginning in April 2015, to place its Corette plant in long-term reserve status, suspending the plant's operation due to expected market conditions and the costs to comply with MATS.

Oil and Natural Gas

Pennsylvania

PPL Generation's Martins Creek Units 3 and 4 burn both oil and natural gas.  During 2010,2013, 100% of the physical gas requirements for the Martins Creek units were purchased on the spot market whileand oil requirements were supplied from inventory.  At December 31, 2010,2013, there were no long-term agreements for oil or natural gas for these units.

Short-term and long-term gas transportation contracts are in place for approximately 30%38% of the maximum daily requirements of the Lower Mt. Bethel combined-cycle facility.  During 2010,2013, 100% of the physical gas requirements for Lower Mt. Bethel 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 theFor PPL's Ironwood facility.facility, 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 began in the fourth quarter 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 contracts for Ironwood.this facility.  During 2010,2013, 100% of the physical gas requirements for Ironwood were purchased on the spot market.


Illinois

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At December 31, 2010, 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% of the expected pipeline transportation requirements of the Wallingford facility, but has no long-term physical supply agreement to purchase natural gas.

Nuclear

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

PPL Susquehanna has 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 20162018 and Unit 2 to operate into the first quarter of 2017.2019.  PPL Susquehanna anticipates entering into additional contracts to ensure continued operation of the nuclear units.

Federal law requires the U.S. government to provide for the permanent disposal of commercial spent nuclear fuel, 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 approxi mately 2017 under current operating conditions.approximately 2017.  If necessary, the on-site spent fuel storage facility can be expanded, assuming appropriate regulatory approvals are obtained, such that, together, the spent fuel pools and the expanded dry fuel storage facility will accommodate all of the spent fuel expected to be discharged through the current licensed life of the plant.

In 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 1997, the Court ruled that the contracts between the utilities and the DOE provide a potentially adequate remedy if the DOE failed to begin accepting spent nuclear fuel by January 31, 1998.  The DOE did not, in fact, begin to accept spent nuclear fuel by that date.  The DOE continues to contest claims that its breach of contract resulted in recoverable damages.  In January 2004, PPL Susquehanna filed suit in the U.S. Court of Federal Claims for unspecified damages suffered as a result of the DOE's breach of its contract to accept and dispose of spent nuclear fuel. &# 160;DiscoveryIn 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 totaling $56 million to "Fuel" on the Statement of Income 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 casesettlement agreement, that are incurred through December 31, 2013.  In exchange, PPL Susquehanna has concluded butwaived any claims against the Court has not yet setUnited States government for costs paid or injuries sustained related to storing spent nuclear fuel at the Susquehanna plant through December 31, 2013.  In January 2014, PPL Susquehanna entered into a datenew agreement with the Department of Energy to extend the settlement agreement on the same terms as the prior agreement for trial.  PPL cannot predictan additional three years to the outcomeend of these proceedings.2016.

 Energy Marketing

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

PPL EnergyPlus purchasestransacts in competitive retail energy markets, and buys and sells capacityelectricity and natural gas supply, to meet the diverse needs of business customers. PPL EnergyPlus sells retail electricity atsupply to business customers in Delaware, the wholesale level at competitive prices under FERC market-based prices.  District of Columbia, Maryland, Montana, New Jersey, Ohio and Pennsylvania and sells retail natural gas supply to business customers in Delaware, Maryland, New Jersey, and Pennsylvania. The company also offers electricity supply to select residential customers in Pennsylvania.  An affiliate of PPL EnergyPlus sells petroleum products to wholesalers and distributors in Delaware, Maryland, New Jersey, Pennsylvania and Virginia.  Although retail energy revenues continue to grow, the net margins related to these activities are not currently a significant component of PPL Energy Supply's margins.

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 Note 19 to the Financial Statements for more information.

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

 Competition

Since the early 1990s, there has been increased competition in U.S. energy markets because of federal and state competitive market initiatives.  WhileAlthough 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
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power and gas industry.industries. 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.  The activity aroundInterest in re-regulation, however, has slowed due to the current environment ofrecent declining power prices.  As such, the competitive markets in which PPL and its subsidiaries participateEnergy Supply participates are highly competitive.

ThePPL Energy Supply segment faces competition in wholesale markets for available energy, capacity and ancillary services.  Competition is impacted by electricity and fuel prices, congestion along the power grid, subsidies provided by state and federal governments for new generation facilities, new market entrants, construction by others of new generating assets, technological advances in power generation, the actions of environmental and other regulatory authorities and other factors.  ThePPL Energy 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,NUGs, competitive subsidiari essubsidiaries 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. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview" and Notes 15 and 19 to the Financial Statements for more information concerning the risks faced with respect to competitive energy markets.

 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 that expire in 2042 for Unit 1 and in 2044 for Unit 2.

In 2008, PPL Susquehanna received NRC approval for its request to increase the generation capacity of the Susquehanna nuclear plant.  The project is being completed in phases over several years.  PPL Susquehanna's share of the total expected capacity increase is estimated to be 195 MW.  The final phase of the Unit 1 uprate was completed in 2010 and yielded 55 MW for PPL Susquehanna.  The final phase of the Unit 2 uprate is scheduled for 2011 and is projected to yield an additional 50 MW for PPL Susquehanna.  PPL Susquehanna's share of the expected remaining expenditures is $15 million.

In 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.  Also in 2008, the COLA was formally docketed and accepted for review by the NRC.  In February 2010,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 2016.  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 toIn 2013, a license renewed by the FERC125 MW expansion project was placed 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 operation of its hydroelectric generating station until 2030.  The total capacity of the Safe Harbor generating station was 423 MW at December 31, 2010, and PPL Holtwood is entitled by contract to one-third of the total capacity.  In September 2010, PPL Energy Supply subsidiaries signed definitive agreements to sell their ownership interests in Safe Harbor and two other non-core generating facilities.  See Note 9 to the Financial Statements for additional information.

In October 2009, the FERC approved the request to expand the Holtwood plant and extended the operating license through August 2030.service.  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 Montana's 11 hydroelectric facilities and one storage reservoir in Montana are licensed by the FERC.  The FERC license for the Mystic facility was relicensed, 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.  See Note 8 to the Financial Statements for additional information on the September 2013 agreement for the sale of the Montana hydroelectric facilities.  Also see Note 11 for information on a pending arbitration related to the conveyance price for the Kerr Dam.

In connection with the relicensing of these generating facilities, applicable law permits the FERC to relicense the original licensee or license a new licensee or allow the U.S. government to 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.  See Note 15 to the Financial Statements for additional information on the Kerr Dam license.

(PPL, PPL Energy Supply and PPL Electric)
·
Other Corporate Functions (PPL)

PPL Services provides corporate functions such as financial, legal, supply chain, human resources and information technology services.  Most of PPL Services' costs are charged directly to the respective PPL subsidiaries for the services provided or indirectly charged to applicable subsidiaries based on an average of the subsidiaries' 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.  PPL's growth in rate-regulated businesses provides the organization with an enhanced corporate level financing alternative, through PPL Capital Funding, that further enables PPL to cost effectively support targeted credit profiles across all of PPL's rated companies.  As a result, PPL plans to further utilize PPL Capital Funding in future financings, in addition to continued direct financing by the operating companies.


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Unlike PPL Services, PPL Capital Funding's costs are not generally charged to any PPL subsidiaries.  Costs are charged directly to PPL.  However, PPL Capital Funding participated significantly in the financing for the acquisitions of LKE and WPD Midlands and certain associated financing costs were charged directly to the Kentucky and U.K. Regulated segments.  The associated 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. The financing costs associated primarily with PPL Capital Funding's securities issuances in 2013 and beyond, with certain exceptions including the remarketing of the debt component of the Equity Units, have not been directly assigned or allocated to any segment.

(All Registrants)

SEASONALITY

The demand for and market prices of electricity and natural gas are affected by weather.  As a result, PPL's, PPL Energy Supply's and PPL Electric'sthe 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 owned, the retail load served and the terms of contracts to purchase or sell electricity.  See "Financial Condition -  Environmental Matters" in "Item 7. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional information regarding climate change.

FINANCIAL CONDITION

See PPL's, PPL Energy Supply's and PPL Electric's "Item"Financial Condition" in Item 7. Combined 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's "Item 7. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations"
 for information concerning projected capital expenditure requirements for the years 2011-2015.2014 through 2018.  See Note 15 to the Financial Statements for additional information concerning the potential impact on capital expenditures from environmental matters.

ENVIRONMENTAL MATTERS

PPL and its subsidiariesThe 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.  The EPA is in the process of proposing and finalizing an unprecedented number of environmental regulations over the next few years that will directly affect the electricelectricity industry.  These initiatives cover all sources - air, water and waste.  See PPL's and PPL Energy Supply's "Financial Condition - Liquidity and Capital Resources"Resources - Forecasted Uses of Cash - Capital Expenditures" in "Item 7. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations - Forecasted Uses of Cash - Capital Expenditures" for information concerning environmental capital expenditures during 2010 andOperations" on projected environmental capital expenditures fo rfor the years 2011-2015.2014-2018.  Also, see "Environmental Matters" in Note 15 to the Financial Statements for additional information.  To comply with air relatedprimarily air-related environmental requirements, PPL's forecast for environmental capital expenditures reflects a best estimate projection of expenditures that may be required within the next five years.  Such projections are a combined $2.1$2.4 billion for PPL, including $2.2 billion for LKE ($1.1 billion each for LG&E and KUKU), and $400$279 million for PPL Energy Supply.  Actual costs (including capital, emission allowance purchases and operational modifications) may be significantly lower or higher depending on the final requirements.  Environmentalcompliance requirements and market conditions.  PPL's and LKE's subsidiaries may also incur capital expenditures and operating expenses, which are not now determinable, but could be significant.  Most environmental compliance costs incurred by LG&E and KU are subject to recovery through a rate recovery mechanism.  See Note 36 to the Financial Statements for additional information.


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

As ofAt December 31, 2010,2013, PPL and its subsidiaries had the following full-time employees.

PPL Energy Supply (a) 4,912 
PPL Electric 2,239 
LKE  
 PPL GenerationKU  2,773945 
 PPL EnergyPlus (a)LG&E  1,923999 
 LKS 1,446 
Total LKE 3,390 
PPL Global (primarily WPD)  2,432 
Total PPL Energy Supply 7,128 
PPL Electric 2,293 
LKE 3,1226,309 
PPL Services and other 1,2661,258 
Total PPL  13,80918,108 

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

Approximately 5,800
At December 31, 2013, the breakdown of the total workforce that is represented by labor unions was:
     
  Number of Employees Percent of Total Workforce
     
PPL  9,713  54%
PPL Energy Supply  3,063  62%
PPL Electric  1,419  63%
LKE  843  25%
LG&E  701  70%
KU  142  15%

There are 4,016 employees or 51%, of PPL's domestic workforceWPD who are members of labor unions with four IBEW locals representing approximately 4,300 employees.  The bargaining agreement with the largest labor union, an IBEW local, which expires in May 2014, covers approximately 1,600 PPL Electric, 1,200 PPL Energy Supply and 400 other employees.  Approximately 830 employees of LKE were represented by an IBEW local and a United Steelworkers of America (USWA) local.  Both LG&E and KU have a three-year labor agreement with the IBEW local.  LG&E's agreement expires in November 2011 and KU's agreement expires in August 2012.  LKE's agreement with the USWA expires in August 2011.  PPL Montana's largest bargaining unit, an IBEW local, represents approximately 270 employees at the Colstrip plant.  The four-year labor agreement expires in April 2012.  PPL Montana's second largest bargaining unit, also an IBEW local, represents approximately 85 employees at hydroelectric facilities and the Corette plant.  This four-year labor agreement expires in April 2012.

Approximately 1,870, or 77%,(or 64% of PPL's U.K. workforce are members of labor unions.workforce).  WPD recognizes four unions, the largest of which represents 40% of its union workforce.  WPD's Electricity Business Agreement, which covers approximately 1,8203,941 union employees, may be amended by agreement between WPD and the unions and is terminablecan be terminated with 12 monthsmonths' notice by either side.

See "Separation Benefits" in Note 13 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 website is www.pplweb.com.  OnUnder the Investor Center pageheading of that 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 website (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 are not the only risks 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. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 15 to the Financial Statements for more information concerning the risks described below and for other risks, uncertainties and factors that could impact our businesses and financial results.

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

We willplan to selectively pursue growth of  generation and transmission and distribution capacity, and to optimize our merchant and regulated generation operations, which involves a number of uncertainties and may not achieve the desired financial results.

We willplan to pursue expansion of our generation and transmission and distribution capacity over the next several years through power uprates at certain ofand to optimize our existing power plants, the potential construction of new power plants, the potential acquisition of existing plants,merchant and regulated generation operations.  We plan to do this through 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 expandinfrastructure, and power uprates at certain of our generating capabilityexisting power plants, the construction of new power plants or modification of existing power plants, and may determine not to proceed with any expansion.the potential closure of certain existing plants.  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 acquisitionor modification of ex istingexisting 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 acquiredmodified 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 operateconditions 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 declinesDeclines in wholesale energy prices, partially resulting from adverse economic conditions, have significantly impactingimpacted our earnings during the second half of 2008 and the first half of 2009.earnings.  The breadth and depth of these negative economic conditions had a wide-ranging impact on the U.S. and internationalU.K. business environment, including our businesses.  As a result of the economic downturn,businesses, and demand for energy commodities has declined significantly.  This reduced demand will continuecontinues to impact the key domestic wholesale energy markets we serve (such as PJM) and our Pennsylvania and Kentucky utility businesses, especially industrial customer demand.businesses.  The combination of lower demand for power and natu ralincreased supply of natural gas and other fuels 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, utility profits, liquidity and overall financial condition.

Disruption in financial markets could adversely affect our financial condition and results of operations.

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, 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.   Additionally, regulations to be adopted to implementRegulations being implemented under the Dodd-Frank Financial Reform Act of 2010and Basel III in Europe may impose costly additional 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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We could be negatively affected by rising interest rates, downgrades to our bond credit ratings, adverse credit market conditions 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 rates; 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 availability of credit.

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.  A ratings downgrade could increase our short-term borrowing costs and negatively affect our ability to fund liquidity needs and access new long-term debt at acceptable interest rates.  See "Item 7. Combined 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 financial impact of a downgrade in our credit ratings.

Our operating revenues could fluctuate on a seasonal basis, especially as a result of severeextreme 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 orand requiring significant repair costs.  Storm outages and damage often directly decrease revenues orand increase expenses, due to reduced usage and higher restoration charges.  In addition, weathercosts.

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 disturbances may affect capital marketssubstantial liabilities and general economic conditionsdamages and impact future growth.costs to replace or repair damaged equipment.

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 changes,levels, and thus may impact consumer demand for electric power. Temperature increases could result in increased overall electricity volumes or peaks and precipitation changes could result in altered availability of water for plant cooling operations.electricity.  These or other meteorological changes could lead to increased operating costs, capital expenses or power purchase costs.  Conversely, climate change could have a number of potential impacts tending to reduce demand. Changes may entail more frequent or more intense storm activity, which, if severe, could temporarily disrupt regional economic conditions and adversely affect electricity demand levels.  Greenhouse gas regulation could increase the cost of electric powe r,electricity, particularly power generated by fossil-fuels,fossil fuels, and such increases could have a depressive effect on the regional economy.economies.  Reduced economic and consumer activity in our service areas --both-- both generally and specific to certain industries and consumers accustomed to previously low-costlower 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 generally.electricity usage.


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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 "Federal Matters" in Note 6 and "Legal Matters," "Regulatory Issues" and in "Environmental Matters - Domestic" in Note 15 to the Financial Statements.  We cannot predict the ultimate outcome of these matters, nor can we reasonably estimate the costs or 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 means to fund our significant capital expenditures, debt interest or maturities 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 domestic 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.

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 contri butioncontribution 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 2010,2013, 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 8,1, 9 and 18 to the Financial Statements for additional information on impairment charges taken and analysis performed 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, and certain other transactions, we have indemnified or guaranteed parties against certain liabilities and with respect to certain transactions.liabilities.  These indemnities and guarantees relate, to, among other things, to liabilities which may arise with respect to the period during which we or our subsidiaries operated thea 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.  See "Guarantees and Other Assurances" in Note 15 to the Financial Statements.

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

The conduct of our physical and commercial operations subjects us to many risks, including risks of potential physical injury, property damage or other financial effects,liability, caused to or caused 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 orand decrease our revenues and thus, have an adverse effect on our financial performance.


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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 orand lead to increased costs, expenses or losses.  Operation of our delivery systems below our expectations may result in lost revenue orand increased expense, including higher maintenance costs which may not be recoverable from customers.  Planned and unplanned outages at our power plants canmay require us to purchase pow erpower 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.

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, gross receipts and franchise, sales and use, employment-related and employment-relatedother taxes.  We also estimate our ability to utilize tax benefits and tax credits.  Due to the revenue needs of the states and 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 ou rour results of operations and cash flows.

(PPLWe are subject to the risk that our workforce and PPL Electric)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 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 dividends or distributions to their parents or to make funds available for such a payment.  The ability of the Registrants' subsidiaries to pay dividends or distributions 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.  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.  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.  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)

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 businesses are rate-regulated and operate under an incentive-based regulatory framework.  Managing operational risk is critical to the U.K. Regulated Segment's financial performance.  Disruption to these distribution networks could reduce profitability both directly by incurring costs for network restoration and also through the system of penalties and rewards that Ofgem administers relating to customer service levels.

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 ten percent of revenue for any breach of a distribution license or, in certain circumstances, such as insolvency, the distribution license itself may be revoked.  Ofgem also has formal powers to propose modifications to each distribution license and there can 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.

Various changes have been implemented 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.

Ofgem is implementing a new regulatory framework to become effective April 1, 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 extending the price review periods from five to eight years.  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.  In addition, if we are unable for any reason to realize the goals of our business plans for these businesses, we may not earn sufficient incentive compensation to maintain prior revenue levels.

We are subject to increased foreign currency exchange rate risks because a majority of our cash flows and reported earnings are currently 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 to PPL or used for repayments of intercompany loans or other general corporate purposes.  In addition, PPL's 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.

Our U.K. distribution business contributes a significant portion of PPL's total annual revenues and exposes us to the following additional risks related to operating outside the U.S., including risks associated with changes in U.K. laws and regulations, taxes, economic conditions and political conditions and policies of the U.K. government and the European Union.  These risks may reduce the results of operations from our U.K. distribution business or affect our ability to access U.K. revenues for payment of distributions or for other corporate purposes in the U.S.

·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;
·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;
·changes in U.S. tax law applicable to taxation of foreign earnings; and
·compliance with U.S. foreign corrupt practices laws.


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(All Registrants except PPL Energy Supply)

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 each of 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 toThe rates we charge our utility customers at ratesmust be approved by one or more federal or state regulatory commissions, including those commissions referred to below.  While suchthe FERC, KPSC, VSCC, TRA and PUC.  Although rate 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.  Therethere 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.  WhileIn 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.  Although our rates are generally reg ulatedregulated 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.  With respect to PPL's November 1, 2010 acquisition of LKE, each of LG&E and KU has agreed with the KPSC, subject to certain limited exceptions such as fuel and environmental cost recoveries, that no base rate increases would take effect for their Kentucky retail customers before January 1, 2013.  Our domestic 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 affecteffect on our business, results of operations, cash flows orand financial condition.

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

VariousIn addition to regulating the rates we charge, various federal and state entities, including but not limited to the FERC, the KPSC, the VSCC, the TRA and PUCregulatory authorities regulate many aspects of theour 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 under the Energy Policy Act of 2005 and other standards of conduct;
·accounting, depreciation and cost allocation methodologies;
·tax matters;
·affiliate restrictions;transactions;
·acquisition and disposal of utility assets and issuance of securities; and
·various other matters.matters, including energy efficiency.

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 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 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 estimablepredictable 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 utilities participate.

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.

The domestic regulated utility businesses are capital intensive and require significant investments in energy generation (in the case of LKE)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:


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·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 partythird-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;business-related activities, and the costs of compliance or alleged non-compliance cannot be predicted with certainty but could be material.  In addition, our costs may increase significantly if the requirements or scope of environmental laws, or 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, operations changes, permit limitations or other restrictions.  At some of our older generating facilities it may be uneconomic for us to install necessary pollution control equipment, which could cause us to retire those units.  Market prices for energy and capacity also affect this cost-effectiveness analysis.  Many of these environmental law considerations are also applicable to the operations of our key suppliers, or customers, such as coal producers and industr ialindustrial power users, and may impact the costs of their products orand 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.  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, delayed or incomplete rate recovery 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.

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 and Northeast/Pocono transmission linelines that PJM has determined isare 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, whether due towhich 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 resul t,result, we cannot predict the ultimate financial or operational impact of this project or other RTEP projects on PPL Electric.
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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 became effective in October 2008.  This law createdwhich contains requirements for energy efficiency and conservation programs and for the use of smart metering technology, imposed newimposes PLR electricity supply procurement rules, providedprovides remedies for market misconduct, and made changes to the existing Alternative Energy Portfolio Standard.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).demand.  Utilities not meeting these requirements of Act 129 requirements are subject to significant penalties that cannot be recovered in rates.  Although we expect to meet these requirements, numerousNumerous factors outside of our control could prevent compliance with these requirements and result in penalties to us.  See "Regul atory Issues - Energy Policy Act of 2005 - Reliability Standards" in Note 15 to the Financial Statements for additional information.

Cost recovery remains subject to political risks.

Although prior initiatives have not resulted in the enactment of such legislation, the possibility remains that certain Pennsylvania legislators could introduce legislation to reinstate 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 b usiness.

(PPL and PPL Energy Supply)

Risks Related to International 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, thus reducing regulatory rate risk in the International Regulated segment until the next rate review which will be effective April 1, 2015.  The regulated income of the International Regulated 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. 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.

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 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.

Risks Related to Supply Segment

(PPL and PPL Energy Supply)

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 could adversely affect our profitability and liquidity or cause the continued operation of certain generation facilities to be uneconomic.

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.

Since 2005, we have spent more than $1.6 billion to install scrubbers and other pollution control equipment in our competitive generation fleet in order to comply with existing and proposed federal and state environmental laws and regulations primarily governing air emissions from coal-fired plants.  Many states and environmental groups, however, have challenged certain federal laws and regulations relating to air emissions as not being sufficiently strict.  In addition, more recently, attention has also been refocused on effluent emissions and the handling of CCRs.  As a result, state and 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.  At some of our older generating facilities it may be uneconomic for us to install necessary pollution control equipment, which could cause us to retire those units.

We may not be 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.

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

Unlike our regulatedrate-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 predeterminedregulated rate structure.  Competition is impactedaffected 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 impactaffect 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 electricelectricity 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 the prices we receive for electricity.electricity and capacity prices.


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We also face competition in the wholesale markets for electricitygeneration 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 competitive subsidiaries of regulated utilities.  In the past, PUHCA significantly restricted mergersutilities and acquisitions and other investments in the electric utility sector.  Entirely new competitors, including financial institutions, have entered the energy markets as a result of the repeal of PUHCA in 2006.  The repeal of PUHCA also may lead to consolidation in our industry, resulting in competitors with significantly greater financial resources than we have.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 transmissioncapacity and related congestion charges and other costs.  Unlike most commodities, the limited ability to store electric powerelectricity 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 time 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 impactingaffecting demand for or the price of 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.

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.

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

We purchase and sell electricity 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 com pliance 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 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.  We currently believe that we have sufficient credit to fulfill our potential collateral obligations under these power contracts.  Our obligation to post collateral could exceed the amount of our facilities or our ability to increase our facilities could be limited by financial markets or other factors. See Note 7 for a discussion of PPL's credit facilities.

We also face credit risk that parties with whom we contract will default in their performance, in which case we may have to sell our electricity into a lower-priced market or make purchases in a higher-priced market than existed at the time of contract.  Whenever feasible, we attempt to mitigate these risks using 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, which could adversely impact our ability to meet our obligations to other parties, which could in turn subject us to claims for damages.

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 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 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 operation s or financial position.

We may experience disruptions in our fuel supply, 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 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.

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

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 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 decrea sedecrease 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 tocould be adversely affected.

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 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 costswholesale power agreements typically include provisions requiring us to complypost 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.  We currently believe that we have sufficient credit to fulfill our potential collateral obligations under these power contracts.  However, our obligation to post collateral could exceed the amount of our facilities or our ability to increase our facilities could be limited by financial markets or other factors.  See Note 7 to the Financial Statements for a discussion of PPL's credit facilities.

We also face credit risk that counterparties with existingwhom we contract in both the wholesale and new environmental laws are expectedretail markets will default in their performance, in which case we may have to continuesell our electricity into a lower-priced market or make purchases in a higher-priced market than existed at the inception of the contract.  Whenever feasible, we attempt to mitigate these risks using 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 significant,no assurance that we will avoid counterparty nonperformance risk, including bankruptcy, which could adversely impact our ability to meet our obligations to other parties, which could in turn subject us to claims for damages.

The full-requirements sales contracts that PPL EnergyPlus is awarded do not provide for specific levels of load and we plan to incur significant capital expenditures for pollution control improvements that, if delayed, wouldactual load significantly below or above our forecasts could adversely affect our profitability and liquidity.energy margins.

Our businessWe generally hedge our full-requirements sales contracts with energy purchases from third parties, and to a lesser extent with our own generation.  If the actual load is subjectsignificantly lower than the expected load, we may be required to extensive federal, stateresell power at a lower price than was contracted for 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 full-requirements sales 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 local statutes, rulesfinancial position.

Unforeseen changes in the price of coal and regulations relatingnatural gas could cause us to environmental protection.  To comply with existingincur excess coal inventories and future environmentalcontract termination costs.

Extraordinarily low natural gas prices during 2012 and 2013 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 of coal needed to operate our base load coal-fired generating facilities, we may experience periods where we hold excess amounts of coal 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 contracts for coal in excess of our generating requirements as occurred in 2012.

We may experience disruptions in our fuel supply, 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 coal, natural gas, oil, water, uranium, lime, limestone and other chemicals), including disruptions as a result of voluntary pollution control measures we may take, we have spentweather, transportation difficulties, global demand and expectsupply dynamics, labor relations, environmental regulations or the financial viability of our fuel suppliers, could adversely affect our ability to spend substantial amountsoperate our facilities, which could result in the future on environmental controllower sales and/or higher costs and compliance.thereby adversely affect our results of operations.


In order to comply with existing and proposed 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 matter and nitrogen oxides with co-benefits for mercury emissions reduction).  The cost to install this equipment was approximately $1.6 billion.  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 would impose more stringent restrictions than are currently in effect, which could require us to significantly increase capital expenditures for additional pollution control equipment.

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We may not be 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 older 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 Financial Statements.

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 in the wholesale market, as well as the natural gas we purchase for use in our electricelectricity generation facilities.  If transmission is disrupted (as a result of weather, natural disasters or other reasons) or not operated efficiently by ISOs and RTOs, 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 aton 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 require.  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 and RTOs in applicable markets will efficiently operate transmission networks and provide related services.

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"Regulatory Issues - FERC Market-Based Rate Authority" in Note 15 to the Financial Statements for information regarding recent court decisions that could impact the FERC's market-based rate authority program, and "PJM RPM Litigation" in Note 15 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.

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 competitive 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 extremely high prices 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 actions 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. See "New Jersey Capacity Legislation" in Note 15 to the 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, 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 productionalternative generation 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 custome rscustomers 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.

We are subject to certain risks associated with nuclear generation, including the risk that our Susquehanna nuclear plant could become subject to increased security or safety requirements that would increase 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 29%33% of our 20102013 competitive 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

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·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 21 to the Financial Statements for additional information on the ARO related to the decommissioning.

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, particularly in response to the 2011 incident in Fukushima, Japan, 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 t oto 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.  See Note 15 to the Financial Statements for a discussion of nuclear insurance.

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.

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ITEM 2. PROPERTIES

U.K. Regulated Segment(PPL)

For a description of WPD's service territory, see "Item 1. Business - General - Segment Information - U.K. Regulated Segment."  WPD has electric distribution lines in public streets and highways pursuant to legislation and rights-of-way secured from property owners.  At December 31, 2013, WPD's distribution system in the U.K. includes 1,600 substations with a total capacity of 68 million kVA, 57,180 circuit miles of overhead lines and 83,890 underground cable miles.

Kentucky Regulated Segment(PPL, LKE, LG&E and KU)

LKE'sLG&E's and KU's properties consist primarily of regulated generation facilities, electric transmission and distribution assets and natural gas transmission and distribution mainsassets in Kentucky.  The capacity of generation units is based on a number of factors, including the operating experience and physical condition of the units, and may be revised periodically to reflect changed circumstances.  The electric generating capacity at December 31, 20102013 was:

    LKE LG&E KU
             
        PPL's Ownership or    Total MW Ownership or   Ownership or   Ownership or
  Total MW Capacity (a)   Lease Interest in MW (a)    Capacity Lease Interest   Lease Interest   Lease Interest
Primary Fuel/PlantPrimary Fuel/Plant Winter Rating Summer Rating % Ownership Winter Rating Summer Rating LocationPrimary Fuel/Plant Summer in MW % Ownership in MW % Ownership in MW
                          
CoalCoal            Coal            
Ghent
  1,897   1,918   100.00   1,897   1,918  Kentucky
Ghent - Units 1- 4
  1,932   1,932        100.00   1,932 
Mill Creek
  1,491   1,472   100.00   1,491   1,472  Kentucky
Mill Creek - Units 1- 4
  1,472   1,472   100.00   1,472      
E.W. Brown
  691   684   100.00   691   684  Kentucky
E.W. Brown - Units 1-3
  682   682        100.00   682 
Cane Run
  563   563   100.00   563   563  Kentucky
Cane Run - Units 4 - 6
  563   563   100.00   563      
Trimble County - Unit 1 (b)
  515   511   75.00   386   383  Kentucky
Trimble County - Unit 1 (a)
  511   383   75.00   383      
Green River
  173   163   100.00   173   163  Kentucky
Trimble County - Unit 2 (a)
  732   549   14.25   104  60.75   445 
OVEC - Clifty Creek (c)
  1,304   1,304   8.13   106   106  Indiana
Green River - Units 3- 4
  161   161        100.00   161 
OVEC - Kyger Creek (c)
  1,086   1,086   8.13   88   88  Ohio
OVEC - Clifty Creek (b)
  1,164   95   5.63   66   2.50   29 
Tyrone
  73   71   100.00   73   71  Kentucky
OVEC - Kyger Creek (b)
  956   78   5.63   54   2.50   24 
   7,793   7,772     5,468   5,448      8,173   5,915     2,642     3,273 
Natural Gas/OilNatural Gas/Oil            Natural Gas/Oil            
Trimble County
  1,080   960   100.00   1,080   960  Kentucky
E.W. Brown Unit 5 (c) (d)
  132   132   53.00   69   47.00   63 
E.W. Brown (d)
  1,039   947   100.00   1,039   947  Kentucky
E.W. Brown Units 6 - 7 (c)
  292   292   38.00   111   62.00   181 
Paddy's Run
  216   193   100.00   216   193  Kentucky
E.W. Brown Units 8 - 11 (d)
  486   486        100.00   486 
Haefling
  42   36   100.00   42   36  Kentucky
Trimble County Units 5 - 6
  314   314   29.00   91   71.00   223 
Zorn
  16   14   100.00   16   14  Kentucky
Trimble County Units 7 - 10
  628   628   37.00   232   63.00   396 
Cane Run
  14   14   100.00   14   14  Kentucky
Paddy's Run Units 11 - 12
  35   35   100.00   35      
   2,407   2,164     2,407   2,164   
Paddy's Run Unit 13
  147   147   53.00   78   47.00   69 
Haefling - Units 1 - 2
  24   24        100.00   24 
Zorn Unit
  14   14   100.00   14      
Cane Run Unit 11
  14   14   100.00   14      
   2,086   2,086      644     1,442 
HydroHydro            Hydro            
Ohio Falls
  34   52   100.00   34   52  Kentucky
Ohio Falls - Units 1-8
  54   54   100.00   54      
Dix Dam
  24   24   100.00   24   24  Kentucky
Dix Dam - Units 1-3
  24   24        100.00   24 
   58   76     58   76      78   78     54     24 
                          
Total
Total
  10,258   10,012     7,933   7,688   
Total
  10,337   8,079     3,340      4,739 

(a)The capacity of generation units is based on a number of factors, including the operating experienceTrimble County Unit 1 and physical conditions of the units,Trimble County Unit 2 are jointly owned with Illinois Municipal Electric Agency and may be revised periodically to reflect changed circumstances.
(b)This unit is jointly owned.Indiana Municipal Power Agency.  Each owner is entitled to its proportionate share of the unit'sunits' total output and funds its proportionate share of capital, fuel and other operating costs.  See Note 14 to the Financial Statements for additional information.
(c)(b)This unit is owned by OVEC.  LKE owns 8.13% of OVEC's equity, which is accounted for as a cost-method investment,LG&E and hasKU have a power purchase agreement that entitles LKELG&E and KU to itstheir proportionate share of the unit's total output and LKE funds itsLG&E and KU fund their proportionate share of fuel and other operating costs.
(d)Includes a leasehold interest.  Clifty Creek is located in Indiana and Kyger Creek is located in Ohio.  See Note 1115 to the Financial Statements for additional information.
(c)Includes a sale-leaseback interest on two combustion turbines. LG&E and KU provided funds to fully defease the lease including the purchase price and have the right to exercise an early 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 interests.
With limited exceptions LKE took care, custody and control of TC2 on January 22, 2011, and has dispatched the unit to meet customer demand since that date.  LG&E and KU and the contractor agreed to a further amendment of the construction agreement whereby the contractor will complete certain actions relating to identifying and completing any necessary modifications to allow operation of TC2 on all fuels in accordance with initial specifications prior to certain dates, and amending the provisions relating to liquidated damages.  LKE cannot currently estimate the ultimate outcome of these matters.  LKE owns a 75% interest in TC2.  TC2 is coal-fired and has a capacity of 760 MW, of which LKE's share is 570 MW.
(d)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 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.


32

For a description of LKE'sLG&E's and KU's service territory,areas, see "Item 1. Business - Background.General - Segment Information - Kentucky Regulated Segment."  At December 31, 2010, LKE's2013, LG&E's transmission system included in the aggregate, 17745 substations (86(32 of which are shared with the distribution system) with a total capacity of approximately 207 million kVA and 4,987 circuit675 pole miles of lines.  TheLG&E's distribution system included 57597 substations (86(32 of which are shared with the transmission system) with a total capacity of approximately 125 million kVA, 18,0433,886 circuit miles of overhead lines and 4,5712,419 underground cable miles.  KU's transmission system included 137 substations (57 of which are shared with the distribution system) with a total capacity of 14 million kVA and 4,079 pole miles of lines.  KU's distribution system included 480 substations (57 of which are shared with the transmission system) with a total capacity of 7 million kVA, 14,116 circuit miles of overhead lines and 2,288 underground wires.cable miles.

LKE'sLG&E's natural gas transmission system included 391includes 4,272 miles of gas distribution mains and 388 miles of gas transmission mains, (consisting of natural gas transmission linesconsisting of 255 miles naturalof gas transmission pipeline, 126 miles of gas transmission storage lines, of 119six miles andof gas combustion turbine lines and one mile of 17 miles) and the natural gas distribution system included 4,235 miles of distribution mains.transmission pipeline in regulator facilities.  Five underground natural gas storage fields, with a currenttotal working natural gas capacity of approximately 15 Bcf, help provide economical and reliableare 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 electricity 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.

(PPLLG&E and PPL Energy Supply)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.  LG&E and KU plan to implement the following capacity increases and decreases at the following plants located in Kentucky.

International Regulated Segment
     LG&E KU  
   Total Net         Year of
   Summer MW         Incremental
   Capacity   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 - (a)
 (563) 100.00  (563)     2015 
 
Green River - Units 3-4 - (a)
 (161)     100.00  (161) 2015 
 
Total Capacity Decreases
 (724)   (563)   (161)  
             
Natural Gas            
 
Cane Run - Unit 7 (b)
 640  22.00  141  78.00  499  2015 
 
Green River - Unit 5 (c)
 700  40.00  280  60.00  420  2018 
              
Solar            
 
E.W. Brown (c)
 10  36.00  4  64.00  6  2016 
 
Total Capacity Increases
 1,350    425    925   

For a description of WPD's service territory, see "Item 1. Business - Background."  At December 31, 2010, WPD had electric distribution lines in public streets and highways pursuant to legislation and rights-of-way secured from property owners.  In 2010, electricity distributed totaled 26,820 GWh based on operating revenues recorded by WPD.  WPD's distribution system in the U.K. includes 649 substations with a total capacity of 25 million kVA, 28,838 circuit miles of overhead lines and 24,131 cable miles of underground conductors.
(a)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.
(b)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.
(c)In January 2014, LG&E and KU filed an application for a CPCN requesting approval from the KPSC to build these units at the existing Green River and E.W. Brown sites. See Note 8 to the Financial Statements for additional information.

Pennsylvania Regulated Segment(PPL and PPL Electric)

Pennsylvania Regulated Segment

For a description of PPL Electric's service territory, see "Item 1. Business - Background.General - Segment Information - Pennsylvania Regulated Segment."  At December 31, 2010,  PPL Electric had electric transmission and distribution lines in public streets and highways pursuant to franchises and rights-of-way secured from property owners.  At December 31, 2013, PPL Electric's transmission system included 377includes 62 substations with a total capacity of 3118 million kVA 33,122and 3,986 pole miles in service.  PPL Electric's distribution system includes 358 substations with a total capacity of 13 million kVA, 37,079 circuit miles of overhead lines and 7,3688,193 underground cable miles of underground conductors.miles.  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 7 to the Financial Statements for additional information.

See Note 8 to the Financial Statements for information on the construction of the Susquehanna-Roseland 500-kilovolt transmission line.Regional Transmission Line Expansion Plan.


33

Supply Segment(PPL and PPL Energy Supply)

Supply Segment

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. PPL Energy Supply's electric generating capacity (summer rating) at December 31, 2010 was:2013 was as follows.

         PPL Energy Supply's  
          Ownership or            
   Total MW Capacity (a)   Lease Interest in MW (a)         PPL Energy Supply's  
Primary Fuel/PlantPrimary Fuel/Plant Winter Rating Summer Rating % Ownership Winter Rating Summer Rating LocationPrimary Fuel/Plant Total MW Capacity % Ownership  Ownership in MW Location
                        
Natural Gas/OilNatural Gas/Oil            Natural Gas/Oil        
Martins Creek
  1,690   1,671   100.00   1,690   1,671  Pennsylvania
Ironwood (b)
  763   660   100.00   763   660  Pennsylvania
Lower Mt. Bethel
  628   559   100.00   628   559  Pennsylvania
Martins Creek
  1,729   100.00   1,729  Pennsylvania 
University Park (c)
  579   528   100.00   579   528  Illinois
Ironwood
  662   100.00   662  Pennsylvania 
Combustion turbines
  420   358   100.00   420   358  Pennsylvania
Lower Mt. Bethel
  555   100.00   555  Pennsylvania 
Wallingford (c)
  241   209   100.00   241   209  Connecticut
Combustion turbines
  363   100.00   363  Pennsylvania 
    4,321   3,985     4,321   3,985       3,309     3,309   
                        
CoalCoal            Coal        
Montour
  1,550   1,517   100.00   1,550   1,517  Pennsylvania
Montour
  1,518   100.00   1,518  Pennsylvania 
Brunner Island
  1,490   1,447   100.00   1,490   1,447  Pennsylvania
Brunner Island
  1,439   100.00   1,439  Pennsylvania 
Colstrip Units 1 & 2 (d)
  614   614   50.00   307   307  Montana
Colstrip Units 1 & 2 (a)
  614   50.00   307  Montana 
Conemaugh (e)
  1,718   1,714   16.25   279   279  Pennsylvania
Conemaugh (a)
  1,742   16.25   283  Pennsylvania 
Colstrip Unit 3 (d)
  740   740   30.00   222   222  Montana
Colstrip Unit 3 (a)
  740   30.00   222  Montana 
Keystone (e)
  1,715   1,719   12.34   212   212  Pennsylvania
Keystone (a)
  1,718   12.34   212  Pennsylvania 
Corette
  153   153   100.00   153   153  Montana
Corette (b)
  148   100.00   148  Montana 
    7,980   7,904     4,213   4,137       7,919     4,129   
                        
NuclearNuclear            Nuclear        
Susquehanna (e)
  2,501   2,449   90.00   2,251   2,204  Pennsylvania
Susquehanna (a)
  2,521   90.00   2,269  Pennsylvania 
                        
HydroHydro            Hydro        
Various
  596   604   100.00   596   604  Montana
Various (c)
  633   100.00   633  Montana 
Safe Harbor Water Power Corp. (c)
  423   423   33.33   141   141  Pennsylvania
Various
  296   100.00   296  Pennsylvania 
Various
  174   174   100.00   174   174  Pennsylvania    929     929   
    1,193   1,201     911   919             
              
Qualifying FacilitiesQualifying Facilities            Qualifying Facilities        
Renewables (f)
  25   23   100.00   25   23  Pennsylvania
Renewables (d)
  34   100.00   34  Pennsylvania 
Renewables (g)
  8   8   100.00   8   8  Various
Renewables
  8   100.00   8  Various 
    33   31     33   31       42     42   
                        
Total
Total
  16,028   15,570     11,729   11,276   
Total
  14,720     10,678   

(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)Facilities not owned by PPL Energy Supply, but there is a tolling agreement or power purchase agreement in place.
(c)
In September 2010, certain PPL Energy Supply subsidiaries signed definitive agreements to sell their ownership interests in these facilities.  The sale is expected to close in the first quarter of 2011.  See Note 9 to the Financial Statements for additional information on the anticipated sale.
(d)Represents the leasehold interest held by PPL Montana.  See Note 11 to the Financial Statements for additional information.
(e)This unit is jointly owned.  Each owner is entitled to theirits proportionate share of the unit's total output and funds theirits proportionate share of fuel and other operating costs.  See Note 14 to the Financial Statements for additional information.
(f)(b)Includes renewable energy facilities owned by a PPL Energy Supply subsidiary.intends to place this plant in long-term reserve status in April 2015.
(g)(c)In 2013, PPL Montana executed a definitive agreement to sell these facilities.  See Note 8 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 mortgagesliens 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 continuously 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.  At December 31, 2010, PPL Energy Supply subsidiaries planned to implement the following incremental capacity increases.

       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 136  136 (100%) 2011 - 2013
 
Great Falls (d)
 Montana 28  28 (100%) 2012 
          
Nuclear         
 
Susquehanna (e)
 Pennsylvania 56  50 (90%) 2011 
           
Natural Gas/Oil         
 
Martins Creek (f)
 Pennsylvania 30  30 (100%) 2011 
          
Landfill Gas         
 
Chrin Landfill
 Pennsylvania 3  3 (100%) 2011 
           
Total
   253  247    

(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)The expected in-service dates are subject to receipt of required approvals, permits and other contingencies.
(c)This project primarily involves the installation of two additional large turbine-generators.
(d)This project primarily involves the reconstruction of a powerhouse.
(e)This project involves the extended upgrade of Units 1 and 2 and is being implemented in two uprates per unit.  The uprates for Unit 1 have been completed.  The first uprate for Unit 2 was completed in 2009 and the second uprate is planned to occur in 2011.
(f)This project involves the replacement of certain rotors and blades for Unit 4.
ITEM 3. LEGAL PROCEEDINGS

See Notes 35, 6 and 15 to the Financial Statements for information regarding legal, tax litigation, regulatory and environmental proceedings and matters.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

34

PART II

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

See "Item 7. Combined 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 all Registrants.

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 31, 2011,2014, there were 70,22364,515 common stock shareowners of record.

Issuer Purchase of Equity Securities during the Fourth Quarter of 2010:
(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
PeriodPurchased(or Unit)Plans of Programsor Programs (1)
October 1 to October 31, 2010$57,495
November 1 to November 30, 2010$57,495
December 1 to December 31, 2010$57,495
Total$57,495

(1)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.
There were no purchases by PPL of its common stock during the fourth quarter of 2013.

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 $4,692$408 million in 20102013 and $943$787 million in 2009.  See Note 24 regarding the distribution of PPL Energy Supply's membership interests in PPL Global to PPL Energy Funding on January 31, 2011.2012.

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 $71$127 million in 20102013 and $274$95 million in 2009.2012.

ITEM 6. SELECTED FINANCIAL AND OPERATING DATALG&E and KU Energy LLC

There is no established public trading market for LKE's membership interests.  PPL Energy Supply, LLCowns 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 of $254 million in 2013 and PPL Electric Utilities Corporation$155 million in 2012.

Item 6Louisville Gas and Electric Company

There is omittedno established public trading market for LG&E's common stock, as PPL Energy SupplyLKE 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 $99 million in 2013 and PPL Electric meet$75 million in 2012.

Kentucky Utilities Company

There is no established public trading market for KU's common stock, as LKE owns 100% of the conditions set forthoutstanding 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 $124 million in General Instructions (I)(1)(a)2013 and (b) of Form 10-K.$100 million in 2012.

35

ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
                         
PPL Corporation (a) (b)PPL Corporation (a) (b) 2010 (c) 2009  2008  2007  2006 PPL Corporation (a) (b) 2013  2012  2011 (c) 2010 (c) 2009 
                         
Income Items - millions          
Income Items (in millions)
Income Items (in millions)
          
Operating revenues
 $ 8,521  $ 7,449  $ 7,857  $ 6,327  $ 5,998 
Operating revenues
 $ 11,860  $ 12,286  $ 12,737  $ 8,521  $ 7,449 
Operating income
  1,866   896   1,703   1,606   1,448 
Operating income
  2,339   3,109   3,101   1,866   896 
Income from continuing operations after income taxes          Income from continuing operations after income taxes          
 
attributable to PPL
  955   414   857   973   807  
attributable to PPL shareowners
  1,128   1,532   1,493   955   414 
Net income attributable to PPL
  938   407   930   1,288   865 
Net income attributable to PPL shareowners
  1,130   1,526   1,495   938   407 
Balance Sheet Items - millions (d)          
Total assets
  32,837   22,165   21,405   19,972   19,747 
Short-term debt
  694   639   679   92   42 
Balance Sheet Items (in millions) (d)
Balance Sheet Items (in millions) (d)
          
Long-term debt (e)
  12,663   7,143   7,838   7,568   7,746 
Total assets
  46,259   43,634   42,648   32,837   22,165 
Long-term debt with affiliate trusts
          89 
Short-term debt
  701   652   578   694   639 
Noncontrolling interests
  268   319   319   320   361 
Long-term debt
  20,907   19,476   17,993   12,663   7,143 
Common equity
  8,210   5,496   5,077   5,556   5,122 
Noncontrolling interests
      18   268   268   319 
Total capitalization (e)
  21,835   13,597   13,913   13,536   13,360 
Common equity
  12,466   10,480   10,828   8,210   5,496 
Capital lease obligations
          10 
Total capitalization
  34,074   30,626   29,667   21,835   13,597 
Financial RatiosFinancial Ratios          Financial Ratios          
Return on average common equity - %
  13.26   7.48   16.88   24.47   17.81 
Ratio of earnings to fixed charges - total enterprise          
Return on average common equity - %
  9.84   13.76   14.93   13.26   7.48 
 
basis (f)
  2.7   1.9   3.1   2.8   2.7 
Ratio of earnings to fixed charges (e)
  2.2   2.9   3.1   2.7   1.9 
Common Stock DataCommon Stock Data          Common Stock Data          
Number of shares outstanding - thousands          Number of shares outstanding - Basic (in thousands)          
  
Year-end
  483,391   377,183   374,581   373,271   385,039  
Year-end
  630,321   581,944   578,405   483,391   377,183 
  
Average
  431,345   376,082   373,626   380,563   380,754  
Weighted-average
  608,983   580,276   550,395   431,345   376,082 
Income from continuing operations after income taxes          Income from continuing operations after income taxes          
 
 available to PPL common shareowners - Basic EPS
 $ 2.21  $ 1.10  $ 2.28  $ 2.53  $ 2.09  
available to PPL common shareowners - Basic EPS
 $ 1.85  $ 2.62  $ 2.70  $ 2.21  $ 1.10 
Income from continuing operations after income taxes          Income from continuing operations after income taxes          
 
available to PPL common shareowners - Diluted EPS
 $ 2.20  $ 1.10  $ 2.28  $ 2.51  $ 2.06  
available to PPL common shareowners - Diluted EPS
 $ 1.76  $ 2.61  $ 2.70  $ 2.20  $ 1.10 
Net income available to PPL common shareowners -          Net income available to PPL common shareowners -          
 
Basic EPS
 $ 2.17  $ 1.08  $ 2.48  $ 3.37  $ 2.26  
Basic EPS
 $ 1.85  $ 2.61  $ 2.71  $ 2.17  $ 1.08 
Net income available to PPL common shareowners -          Net income available to PPL common shareowners -          
 
Diluted EPS
 $ 2.17  $ 1.08  $ 2.47  $ 3.34  $ 2.24  
Diluted EPS
 $ 1.76  $ 2.60  $ 2.70  $ 2.17  $ 1.08 
Dividends declared per share of common stock
 $ 1.40  $ 1.38  $ 1.34  $ 1.22  $ 1.10 
Dividends declared per share of common stock
 $ 1.47  $ 1.44  $ 1.40  $ 1.40  $ 1.38 
Book value per share (d)
 $ 16.98  $ 14.57  $ 13.55  $ 14.88  $ 13.30 
Book value per share (d)
 $ 19.78  $ 18.01  $ 18.72  $ 16.98  $ 14.57 
Market price per share (d)
 $ 26.32  $ 32.31  $ 30.69  $ 52.09  $ 35.84 
Market price per share (d)
 $ 30.09  $ 28.63  $ 29.42  $ 26.32  $ 32.31 
Dividend payout ratio - % (g)
  65   128   54   37   49 
Dividend payout ratio - % (f)
  84   55   52   65   128 
Dividend yield - % (h)
  5.32   4.27   4.37   2.34   3.07 
Dividend yield - % (g)
  4.89   5.03   4.76   5.32   4.27 
Price earnings ratio (g) (h)
  12.13   29.92   12.43   15.60   16.00 
Price earnings ratio (f) (g)
  17.10   11.01   10.89   12.13   29.92 
Sales Data - millions of kWh          
Sales Data - GWhSales Data - GWh          
Domestic - Electric energy supplied - retail (i)
  14,595   38,912   40,374   40,074   38,810 
Domestic - Electric energy supplied - retail (h)
  44,564   42,379   40,147   14,595   38,912 
Domestic - Electric energy supplied - wholesale (i) (j)
  75,489   38,988   42,712   33,515   30,427 
Domestic - Electric energy supplied - wholesale (h)(i)
  61,124   54,958   63,701   74,105   37,772 
Domestic - Electric energy delivered (i)
  42,341   36,717   38,058   37,950   36,683 
Domestic - Electric energy delivered - retail
  67,848   66,931   67,806   42,463   36,689 
International - Electric energy delivered (k)
  26,820   26,358   27,724   31,652   33,352 
U.K. - Electric energy delivered
  78,219   77,467   58,245   26,820   26,358 

(a) The earnings each year were affected by several items that management considers special.  See "Results of Operations - Segment Results" in "Item 7. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations" for a description of special items in 2010, 20092013, 2012 and 2008.2011.  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 2013, 2012 and 2011.
(b) See "Item 1A. Risk Factors" and NoteNotes 1, 6 and 15 to the Financial Statements for a discussion of uncertainties that could affect PPL's future financial condition.
(c) The year2011 includes eight months of WPD Midlands activity following the April 1, 2011 acquisition, as PPL consolidates WPD on a one-month lag.  2010 includes LKE's earnings and sales data fortwo months of LKE activity following the two month period from acquisition through December 31,November 1, 2010 and all balance sheet accounts at December 31, 2010.acquisition.
(d) As of each respective year-end.
(e)The year 2007 excludes amounts related to the natural gas distribution and propane businesses that had been classified as held for sale at December 31, 2007.
(f) 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.
(g)(f) Based on diluted EPS.
(h)(g) Based on year-end market prices.
(i)(h) The domestic trends forelectric energy supplied changes in 2010 reflect the expiration of the PLR contract between PPL Energy PlusEnergyPlus and PPL Electric as of December 31, 2009.  See Note 16 for additional information.
(j)(i) All years include kWh associated with certain non-core generationGWh are included until the transaction closing for facilities that have been classified as Discontinued Operations, the Long Island generation business that was sold in 2010 and PPL Maine's hydroelectric generation business that was sold in two separate transactions in 2009 and 2010.
(k)Years 2007 and earlier include the deliveries associated with the Latin American businesses, until the date of their sale in 2007.were sold.


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ITEM 6. SELECTED FINANCIAL AND OPERATING DATA

PPL CORPORATION AND SUBSIDIARIESEnergy 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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Item 7.  Combined Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview(All Registrants)

This combined Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" is separately filed by PPL Corporation and each of its Subsidiary Registrants.  Information contained herein relating to any individual Registrant is filed by such Registrant solely on its own behalf, and no Registrant makes any representation as to information relating to any other Registrant.  The specific Registrant to which disclosures are applicable is identified in parenthetical headings in italics above the applicable disclosure or within the applicable disclosure for each Registrant's related activities and disclosures.  Within combined disclosures, amounts are disclosed for any Registrant when significant.

The information provided in this Item 77. should be read in conjunction with PPL'sthe Registrants' Consolidated Financial Statements and the accompanying Notes.  TermsCapitalized terms and abbreviations are explaineddefined in the glossary.  Dollars are in millions, except per share data, unless otherwise noted.

PPL, headquartered in Allentown, PA, is an energy and utility holding company that was incorporated in 1994.  Through subsidiaries, PPL generates electricity from power plants in the northeastern, northwestern and southeastern U.S., markets wholesale or retail energy primarily in northeastern and northwestern portions of the U.S., delivers electricity to customers in Pennsylvania, Kentucky, Virginia, Tennessee and the U.K. and delivers natural gas in Kentucky.  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, KU and LG&E.   ;PPL acquired LKE for approximately $7.6 billion, including debt assumed through consolidation.  See Note 10 to the Financial Statements for additional information on the acquisition.  The acquisition of LKE substantially reapportions the mix of PPL's regulated and competitive businesses by increasing the regulated portion of its business, strengthens PPL's credit profile and enhances rate-regulated growth opportunities as the regulated businesses make investments to improve infrastructure and customer reliability.  The increase in regulated assets provides earnings stability through regulated returns and the ability to recover costs of capital investments, in contrast to the competitive supply business where earnings and cash flows are subject to market conditions.  In 2011, PPL projects that 50% of its net income will be provided by its regulated businesses and the remainder will be provided by its competitive supply businesses.  As of December 31, 201 0, PPL has:

·  More than $10 billion in projected annual revenues (up from $8.5 billion recorded by PPL in 2010 including two months of LKE revenue).
·  5.3 million utility customers (including 1.3 million served by the Kentucky-based companies).
·  Approximately 19,000 MW of generation (including 7,700 MW of regulated capacity in the Kentucky-based companies).
·  Approximately 14,000 full-time employees (including about 3,100 in Kentucky).

As of December 31, 2010, PPL's principal subsidiaries are shown below (* denotes a SEC registrant):

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.
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 growth in energy supply margins while limiting volatility in both cash flows and earnings.  More specifically, PPL's strategy for its regulated businesses is to own and operate these businesses at the most efficient cost while maintaining high quality customer service and reliability, as well as grow this part of the business.  PPL's strategy for its competitive electricity generation and marketing businesses 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.
To manage financing costs and access to credit markets, a key objective for PPL's business is to maintain a strong credit profile.  PPL continually focuses on maintaining an appropriate capital structure and liquidity position.  In addition, 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.  See "Item 1A. Risk Factors" for more information concerning these and other material risks PPL faces in its businesses.

Following the November 1, 2010 acquisition of LKE, PPL is organized into four segments:  Kentucky Regulated, International Regulated (formerly International Delivery), Pennsylvania Regulated (formerly Pennsylvania Delivery) and Supply.  Other than PPL adding a Kentucky Regulated segment, there were no other changes to reportable segments except the renaming of segments and allocating interest expense related to the Equity Units to the Kentucky Regulated segment.  Refer to "Item 1. Business - Background" for additional information on PPL's reportable segments.

"Management's Discussion and Analysis of Financial Condition and Results of Operations" provides 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 each Registrant's business strategy, a summary of PPL's earnings, a description of key factors expected to impact future earnings and a discussion of important financial and operational developments.

·"Results of Operations" for PPL provides an overview of PPL's operating results in 2010, 2009 and 2008, including a reviewmore detailed analysis of earnings by segment, and for the Subsidiary Registrants, includes a summary of earnings.  For all Registrants, "Margins" provides explanations of non-GAAP financial measures and "Statement of Income Analysis" addresses significant changes in principal items on the Statements of Income, comparing 2013 with details of results by reportable segment.  It also provides a brief outlook for2012 and 2012 with 2011.

·"Financial Condition - Liquidity and Capital Resources" provides an analysis of PPL'sthe Registrants' liquidity positionpositions and credit profile, including itsprofiles.  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 rating agency actions on PPL's credit ratings.actions.

·"Financial Condition - Risk Management - Energy Marketing & Trading and Other"Management" provides an explanation of PPL'sthe Registrants' 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 PPLthe Registrants and that require itstheir management to make significant estimates, assumptions and other judgments.judgments of inherently uncertain matters.

Overview

For a description of the Registrants and their businesses, see "Item 1. Business."

Business Strategy

(All Registrants except PPL Energy Supply)

The strategy for the regulated businesses of WPD, PPL Electric, LKE, LG&E and KU is to provide efficient, reliable and safe operations and strong customer service, maintain constructive regulatory relationships and achieve timely recovery of costs.  These regulated businesses also focus on providing competitively priced energy to customers and achieving stable, long-term growth in earnings and rate base, or RAV, as applicable.  Both rate base and RAV are expected to grow for the foreseeable future as a result of significant capital expenditure programs to maintain existing assets and improving system reliability and, for LKE, LG&E and KU, to comply with federal and state environmental regulations related to electricity generation facilities.  Future RAV for WPD will also be affected by RIIO-ED1, effective April 1, 2015, as the recovery period for assets placed in service after that date will be extended from 20 to 45 years.


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Recovery of capital project costs is attained through various rate-making mechanisms, including periodic base rate case proceedings, FERC formula rate mechanisms, and other regulatory agency-approved recovery mechanisms.  In Kentucky, the KPSC has adopted a series of regulatory mechanisms (ECR, DSM, GLT, fuel adjustment clause, gas supply clause and recovery on certain construction work-in-progress) that reduce regulatory lag and provide for timely recovery of prudently incurred costs.  In Pennsylvania, the recently approved DSIC mechanism will help PPL Electric reduce regulatory lag and provide for timely recovery of distribution reliability-related capital investment.  In addition, Pennsylvania has several other cost recovery mechanisms in place to reduce regulatory lag and provide for timely recovery of prudently incurred costs.  See "Financial and Operational Developments - Distribution System Improvement Charge" below for additional information on the implementation of the DSIC mechanism in 2013 and "Item 1. Business - Segment Information - U.K. Regulated Segment - Revenues and Regulation" for changes to the regulatory framework in the U.K. applicable to WPD beginning in 2015.

(PPL and PPL Energy Supply)

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

(PPL)

As a result of the acquisition of WPD Midlands in April 2011, PPL increased the proportion of its overall earnings that is 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.

(All Registrants)

To manage financing costs and access to credit markets, and to fund capital expenditures, a key objective of the Registrants is to maintain targeted credit profiles and liquidity positions.  In addition, the Registrants have financial and operational risk management programs that, among other things, are designed to monitor and manage exposure to earnings and cash flow volatility related to, as applicable, changes in energy and fuel prices, interest rates, counterparty credit quality and the operating performance of generating units.  To manage these risks, PPL generally uses contracts such as forwards, options and swaps.

Financial and Operational Developments

Earnings(PPL)

PPL's earnings by reportable segment were as follows.

            % Change
   2013  2012  2011  2013 vs. 2012 2012 vs. 2011
               
U.K. Regulated (a) $ 922  $  803  $  325   15   147 
Kentucky Regulated   307    177    221   73   (20)
Pennsylvania Regulated   209    132    173   58   (24)
Supply (b)   (272)   414    776   (166)  (47)
Corporate and Other (c)   (36)           n/a  n/a 
Net Income Attributable to PPL Shareowners $ 1,130  $ 1,526  $ 1,495   (26)  2 
               
EPS - basic $ 1.85  $ 2.61  $ 2.71   (29)  (4)
EPS - diluted (d) $ 1.76  $ 2.60  $ 2.70   (32)  (4)

(a)2013 and 2012 include a full year of WPD Midlands' results, while 2011, the year WPD Midlands was acquired, includes eight months of its results and was also impacted by certain acquisition related costs.  See Notes 7 and 10 to the Financial Statements for additional information on the acquisition and related financing.
(b)2013 includes a charge of $697 million ($413 million after-tax) for the termination of the operating lease of the Colstrip coal-fired electricity generating facility and an impairment charge of $65 million ($39 million after-tax) for the Corette coal-fired plant and related emission allowances.  See Notes 8 and 18 to the Financial Statements for additional information.
(c)Primarily represents financing and certain other costs incurred at the corporate level that have not been allocated or assigned to the segments, which are presented to reconcile segment information to PPL's consolidated results.  For 2012 and 2011, there were no significant amounts in this category.
(d)See "Equity Units" below for information on the Equity Units' impact on the calculation of 2013 diluted EPS.

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

  2013  2012  2011 
          
U.K. Regulated $ 67  $ 107  $ (157)
Kentucky Regulated   3    (16)     
Supply   (531)   18    142 
Total PPL $ (461) $ 109  $ (15)

The changes in PPL's reportable segments results for 2013 compared with 2012, excluding the impact of special items, were due to the following factors (on an after-tax basis):

·Increase at the U.K. Regulated segment primarily due to higher electricity delivery revenues and lower U.K. income taxes, partially offset by higher operation and maintenance expense and higher depreciation.
·Increase at the Kentucky Regulated segment primarily due to higher base rates that became effective January 1, 2013 and returns from additional environmental capital investments.
·Increase at the Pennsylvania Regulated segment primarily due to higher distribution base rates that became effective January 1, 2013, higher transmission margins from additional capital investments, lower operation and maintenance expense and higher distribution sales volume due to weather, partially offset by higher depreciation.
·Decrease at the Supply segment primarily due to lower baseload energy prices, higher depreciation and higher income taxes, partially offset by higher capacity prices, higher nuclear generation volume and lower operation and maintenance expense.

The changes in PPL's reportable segments' results for 2012 compared with 2011, excluding the impact of special items, were due to the following factors (on an after-tax basis):

·Increase at the U.K. Regulated segment primarily due to four additional months of earnings from the WPD Midlands businesses, higher delivery revenue and lower U.K. income taxes, partially offset by higher U.S. income taxes, higher depreciation and a less favorable currency exchange rate.
·Decrease at the Kentucky Regulated segment primarily due to higher operation and maintenance expense, higher depreciation, higher property taxes and losses from an equity method investment, partially offset by lower income taxes.
·Decrease at the Pennsylvania Regulated segment primarily due to higher operation and maintenance expense, higher income and non-income taxes, lower distribution margins as a result of mild weather early in the year and higher depreciation, partially offset by higher transmission revenue and lower financing costs due to the redemption of $250 million of preferred securities.
·Decrease at the Supply segment primarily due to lower Eastern energy margins resulting from lower baseload energy and capacity prices, lower Western energy margins resulting from an early 2012 contract termination related to the bankruptcy of a large customer, higher operation and maintenance expense, higher depreciation, higher income taxes and higher financing costs.

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

2014 Outlook

(PPL)

Excluding special items, lower earnings are expected in 2014 compared with 2013.  The factors underlying these projections by segment and Subsidiary Registrant are discussed below (on an after-tax basis).

(PPL's U.K. Regulated Segment)

Excluding special items, earnings in 2014 are projected to be comparable with 2013.  Higher electricity delivery revenue and lower pension expense are expected to be offset by higher income taxes, higher depreciation and higher financing costs.


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(PPL's Kentucky Regulated Segment and LKE, LG&E and KU)

Excluding special items, lower earnings are projected in 2014 compared with 2013, primarily driven by higher operation and maintenance expense, higher depreciation and higher financing costs, partially offset by returns on additional environmental capital investments and modest retail load growth.

(PPL's Pennsylvania Regulated Segment and PPL Electric)

Excluding special items, higher earnings are projected in 2014 compared with 2013, primarily driven by higher transmission margins and returns on distribution improvement capital spending, partially offset by higher financing costs and higher income taxes.

(PPL's Supply Segment and PPL Energy Supply)

Excluding special items, lower earnings are projected in 2014 compared with 2013, primarily driven by lower energy and capacity prices, partially offset by lower financing costs and lower income taxes.

(All Registrants)

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 1, 6 and 15 to the Financial Statements (as applicable) for a discussion of the risks, uncertainties and factors that may impact future earnings.

Other Financial and Operational Developments

Economic and Market Conditions

(PPL and PPL Energy Supply)

Continued depressed wholesale market prices for electricity and natural gas have resulted from general weak economic conditions and other factors, including the impact of expanded domestic shale gas development and additional renewable energy sources, primarily wind in the western U.S.  Unregulated Gross Energy Margins associated with PPL Energy Supply's competitive generation and marketing business are impacted by changes in energy and capacity market prices and demand for electricity and natural gas, power plant availability, competition in the markets for retail customers, fuel costs and availability, transmission constraints that impact the locational pricing of electricity at PPL Energy Supply's power plants, fuel transportation costs and the level and price of hedging activities.  As a result of these factors, energy margins were lower in 2013 compared to 2012 and future energy margins are expected to be lower compared to 2013 energy margins.  See "Changes in Non-GAAP Financial Measures - Unregulated Gross Energy Margins in Statement of Income Analysis" below for additional information on energy margins for 2011 through 2013.  As has been PPL Energy Supply's practice in periods of changing business conditions, PPL Energy Supply continues to review its future business and operational plans, including capital and operation and maintenance expenditures, its hedging strategies and potential plant modifications to burn lower cost fuels.

(All Registrants except PPL Electric)

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

(PPL and PPL Energy Supply)

In the third quarter of 2012, PPL Energy Supply announced its intention, beginning in April 2015, to place its Corette plant in long-term reserve status, suspending the plant's operation due to expected market conditions and the costs to comply with MATS.  During the fourth quarter of 2013, PPL Energy Supply determined its Corette plant was impaired and PPL Energy Supply recorded a charge of $65 million, or $39 million after-tax.  See "Application of Critical Accounting Policies - Asset Impairment (Excluding Investments)" for additional information.


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In September 2013, PPL Montana executed a definitive agreement to sell to NorthWestern 633 MW of hydroelectric generation facilities located in Montana for $900 million in cash, subject to certain adjustments.  The sale is subject to closing conditions, including receipt of regulatory approvals by the FERC and the Montana Public Service Commission and certain third-party consents.  The sale is not expected to close before the second half of 2014.  To facilitate the sale, on December 20, 2013, PPL Montana terminated its operating lease arrangement related to partial interests in Units 1, 2 and 3 of the Colstrip coal-fired electricity generating facility and acquired those interests, collectively, for $271 million.  As a result, PPL Energy Supply recorded a charge of $697 million, or $413 million after-tax, for the lease termination.  See Note 8 to the Financial Statements for additional information.

PPL Energy Supply believes its remaining competitive coal-fired generation assets in Pennsylvania are well positioned to meet the current environmental requirements described above based on prior and planned investments.  The current depressed levels of energy and capacity prices in PJM, as well as management's forward view of these prices using its fundamental pricing models recently updated in conjunction with the annual business planning process, continue to put pressure on the recoverability of PPL Energy Supply's investment in its Pennsylvania coal-fired generation assets.  In the fourth quarter of 2013, management tested the Brunner Island and Montour plants for impairment and concluded neither plant was impaired as of December 31, 2013.  The recoverability test is very sensitive to forward energy and capacity price assumptions, as well as forecasted operation and maintenance and capital spending.  Therefore, a further decline in forecasted long-term energy or capacity prices or changes in environmental laws requiring additional capital or operation and maintenance expenditures, could negatively impact PPL Energy Supply's operations of these facilities and potentially result in future impairment charges for some or all of the carrying value of these plants.  The carrying value of the Pennsylvania coal-fired generation assets tested was $2.7 billion as of December 31, 2013 ($1.4 billion for Brunner Island and $1.3 billion for Montour).

(PPL, LKE, LG&E and KU)

As a result of the environmental requirements discussed above, LKE projects $2.2 billion ($1.1 billion each at LG&E and KU) in capital investment over the next five years and the anticipated retirement by 2015 of five coal-fired units (three at LG&E and two at KU) with a combined summer capacity rating of 724 MW (563 MW at LG&E and 161 MW at KU).  KU retired the 71 MW unit at the Tyrone plant in February 2013 and a 12 MW unit at the Haefling plant in December 2013.  The retirement of these coal-fired units is not expected to have a material impact on the financial condition or results of operations of PPL, LKE, LG&E and KU.  See Note 8 to the Financial Statements for additional information regarding the anticipated retirement of these units as well as plans to build two combined-cycle natural gas facilities in Kentucky.

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

(All Registrants)

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

(PPL)

Ofgem Review of Line Loss Calculation

Ofgem is currently consulting on the methodology to be used by all network operators to calculate the final line loss incentives and penalties for the DPCR4, which ended in March 2010.  During 2013, WPD recorded increases of $45 million to the liability with reductions to "Utility" revenue on the Statement of Income.  PPL cannot predict the outcome of this matter.  Based on information received from Ofgem in 2013, WPD currently estimates the potential loss exposure for this matter to be between $74 million and $213 million.  See Note 6 to the Financial Statements for additional information.


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Distribution Revenue Reduction

In December 2013, WPD and other U.K. DNOs, announced agreements with the U.K. Department of Energy and Climate Change and Ofgem to a reduction of £5 per residential customer of electricity distribution revenues that otherwise would have been collected in the regulatory year beginning April 1, 2014.  Full recovery of the revenue reduction, together with the associated carrying cost, will occur during the regulatory year beginning April 1, 2015 for three of the WPD DNOs, and will occur over the eight year RIIO-ED1 regulatory period for the fourth DNO.  PPL projects that, as a result of this change, 2014 earnings for its U.K. Regulated segment will be adversely affected by $29 million and earnings for 2015 and 2016 will be positively affected by $7 million and $12 million.  

RIIO-ED1 - Fast Tracking

In July 2013, WPD filed with Ofgem its 8-year business plans for its four DNOs for RIIO-ED1.  In November 2013, Ofgem determined that the business plans of all four of WPD's DNOs were suitable for accelerated consideration or "fast tracking".  Fast tracking affords several benefits to the WPD DNOs including the ability to collect additional revenue equivalent to 2.5% of total annual expenditures during the 8-year price control period, or approximately $35 million annually, greater revenue certainty and a higher level of cost savings retention.

In February 2014, Ofgem announced its decision on the consultation related to the cost of equity to be used during the RIIO-ED1 period.  The resulting real cost of equity for WPD was 6.4%, compared to 6.7% proposed in WPD's business plan submittals.  WPD elected to accept this change and remain in the fast-track process.  The change in the cost of equity is not expected to have a significant impact on the results of operations for PPL.  Ofgem expects to announce its fast track final determination in late February 2014.

See "Item 1. Business - Background - Segment Information - PennsylvaniaU.K. Regulated Segment" for a discussion of PPL Electric's PLR obligations, PPL Electric's agreement to provide electricity as a PLR at "capped" rates through the end of 2009, and plans for default electricity supply procurement after 2009.

When comparing 2010 with 2009, certain line items on PPL's financial statements were impacted by the Customer Choice Act, Act 129 and other related issues.  Overall, the expiration of generation rate caps and a long-term full requirements contract between PPL EnergyPlus and PPL Electric at the end of 2009 had a significant positive impact on PPL's results of operations, financial condition and cash flows during 2010.

The primary impact of the expiration of these generation rate caps and this contract is reflected in PPL's unregulated gross energy margins.  See "Statement of Income Analysis" for an explanation of this non-GAAP financial measure.  In 2010, PPL sold the majority of its generation supply to unaffiliated parties under various wholesale and retail contracts at prevailing market rates at the time the contracts were executed.  In 2009, the majority of generation produced by PPL's generation plants was sold to PPL Electric's customers as PLR supply under predetermined capped rates.

Regarding PPL's Pennsylvania regulated electric delivery operations, the expiration of generation rate caps, the resulting competitive solicitations for power supply, the migration of customers to alternative suppliers, the Customer Choice Act and Act 129 had minimal impact on Pennsylvania gross delivery margins, as approved recovery mechanisms allow for cost recovery of associated expenses, including the cost of energy provided as a PLR.  However, PPL Electric's 2010 Pennsylvania gross delivery margins were negatively impacted by the expiration of CTC recovery in December 2009.  PPL Electric continues to remain the delivery provider for all customers in its service territory and charge a regulated rate for the service of delivering electricity.  See "Statement of Income Analysis - Margins - Pennsylvania Gros s Delivery Margins" for additional information.

Equity Forward Agreements

In the second quarter of 2013, PPL settled forward sale agreements for 10.5 million shares of PPL common stock by issuing 8.4 million shares and cash settling the remaining 2.1 million shares.  PPL received net cash proceeds of $201 million, which was used to repay short-term debt obligations and for other general corporate purposes.  See "Regulatory Issues - EnactmentNote 7 to the Financial Statements for additional information.  Prior to settlement, incremental shares were included within the calculation of diluted EPS using the treasury stock method.  See Note 4 to the Financial Reform Legislation" in Note 15Statements for informationthe impact on the Dodd-Frank Act.calculation of diluted EPS.

Equity Units

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

In 2013, the If-Converted Method of calculating diluted EPS was applied to the Equity Units prior to settlement.  This resulted in $44 million of interest charges (after-tax) being added back to income available to PPL common shareowners, and 53 million weighted-average incremental shares of PPL common stock being treated as outstanding for purposes of the diluted EPS calculation.  See Note 4 to the Financial Statements for the impact on the calculation of diluted EPS.

During 2014, two events are anticipated related to the 2011 Equity Units.  PPL will receive proceeds of $978 million through the issuance of PPL common stock to settle the 2011 Purchase Contracts and PPL Capital Funding expects to remarket the 4.32% Junior Subordinated Notes due 2019.  See Note 7 to the Financial Statements for additional information.

Tax Litigation

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


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U.K. Tax Rate Change

In July 2013, the U.K. Finance Act 2013 was enacted, which reduces the U.K.'s statutory income tax rate from 23% to 21%, effective April 1, 2014 and from 21% to 20%, effective April 1, 2015.  As a result of these changes, PPL reduced its net deferred tax liabilities and recognized a deferred tax benefit of $97 million during 2013.

Susquehanna Turbine Blade Inspection(PPL and PPL Energy Supply)

In the spring of 2013, PPL Susquehanna made modifications to address the causes of turbine blade cracking at the PPL Susquehanna nuclear plant that was first identified in 2011.  The modifications were made during the Unit 2 refueling outage and an additional planned outage for Unit 1.  In September 2013, data from extensive vibration monitoring equipment installed on the turbine blades identified cracks in a small number of the blades on both units.  Unit 2 completed a blade inspection and replacement outage on September 23, 2013.  Based upon the evaluation of the conditions on Unit 1 and the latest inspection of previously removed blades, PPL Susquehanna will continue to operate Unit 1 and monitor the blades through the vibration monitoring equipment.  The financial impact of the Unit 2 outage was not material.  PPL Susquehanna continues to work with the turbine manufacturer to identify and resolve the issues causing the blade cracking.

Distribution System Improvement Charge (PPL and PPL Electric)

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

Rate Case Proceedings

(PPL and PPL Electric)

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

(PPL, LKE, LG&E and KU)

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

(KU)

In November 2013, the VSCC approved a stipulation providing for increases in annual base electricity rates of $4.7 million.  The approved rates became effective December 1, 2013.  The order does not formally establish a return on equity, but authorizes use of a 10% return on equity for certain annual rate filing purposes.

FERC Formula Rates (KU)

In September 2013, KU filed an application with the FERC to adjust the formula rate under which KU provides wholesale requirements power sales to 12 municipal customers.  Among other changes, the application requests an amended formula whereby KU would charge cost-based rates with a subsequent true-up to actual costs, replacing the current formula which does not include a true-up.  KU's application proposed an authorized return on equity of 10.7%.  Subject to regulatory approval, the new formula rate may become effective during the second quarter of 2014.

Results of Operations

(PPL)

The discussion for PPL provides a review of results by reportable segment.  The "Margins" discussion provides explanations of non-GAAP financial measures (Kentucky Gross Margins, Pennsylvania Gross Delivery Margins and Unregulated Gross Energy Margins) and a reconciliation of non-GAAP financial measures to "Operating Income." The "Statement of Income Analysis" discussion addresses significant changes in principal line items on PPL's Statements of Income, comparing year-to-year changes.  "Segment Earnings, Margins and Statement of Income Analysis" is presented separately for PPL.
44


On April 1, 2011, PPL completed its acquisition of WPD Midlands.  WPD Midlands' results are included within "Segment Results - U.K. Regulated Segment."  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 2013 and 2012, and eight months of WPD Midlands' results of operations are included in PPL's results for 2011.  When discussing PPL's results of operations for 2013 compared with 2012, the results of WPD Midlands are comparable and have not been isolated for purposes of comparability.  For 2012 compared with 2011, WPD Midlands results have been isolated for purposes of comparability.  See Note 10 to the Financial Statements for additional information regarding the acquisition.

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

Earnings         
           
   2010  2009  2008 
           
Net Income Attributable to PPL Corporation $ 938  $ 407  $ 930 
EPS - basic $ 2.17  $ 1.08  $ 2.48 
EPS - diluted $ 2.17  $ 1.08  $ 2.47 
(Subsidiary Registrants)

The discussion for each of PPL Energy Supply, PPL Electric, LKE, LG&E and KU provides a summary of earnings.  The "Margins" discussion includes a reconciliation of non-GAAP financial measures to "Operating Income" and "Statement of Income Analysis" addresses significant changes in principal line items on the Statements of Income comparing year-to-year changes.  "Earnings, Margins and Statement of Income Analysis" are presented separately for PPL Energy Supply, PPL Electric, LKE, LG&E and KU.

PPL Segment Earnings, Margins and Statement of Income Analysis

Segment Earnings

U.K. Regulated Segment

The U.K. Regulated segment consists of PPL Global which primarily includes WPD's regulated electricity distribution operations and certain costs, such as U.S. income taxes, administrative costs, WPD Midlands acquisition-related costs and allocated financing costs.  The U.K. Regulated segment represents 82% of Net Income Attributable to PPL Corporation from year to year were, in part, due to several special items that management considers significant.  DetailsShareowners for 2013 and 34% of these special items are provided within the review of each segment's earnings.

The "Statement of Income Analysis" explains the year-to-year changes in significant earnings components, including certain income statement line items, unregulated gross energy margins by region and Pennsylvania gross delivery margins by component.  As a result of the November 1, 2010, acquisition, LKE's results for the two months endedPPL's assets at December 31, 2010 are included in PPL's results with no comparable amounts for 2009.  When discussing PPL's results of operations for 2010 compared with 2009, 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.
Segment Results2013.

Net Income Attributable to PPL Corporation by segmentShareowners includes the following results (PPL WW and WPD Midlands on a consolidated basis, except for "Unallocated Costs" was:2012 and 2011 acquisition-related adjustments, which are shown separately):

   2010  2009  2008 
           
Kentucky Regulated $ 26       
International Regulated   261  $ 243  $ 290 
Pennsylvania Regulated   115    124    161 
Supply   612    40    479 
Unallocated Costs (a)   (76)      
Total $ 938  $ 407  $ 930 
            % Change
   2013  2012  2011  2013 vs. 2012 2012 vs. 2011
               
Utility revenues (a) $ 2,359  $ 2,289  $ 1,618   3   41 
Energy-related businesses   44    47    35   (6)  34 
 Total operating revenues   2,403    2,336    1,653   3   41 
Other operation and maintenance   470    439    374   7   17 
Depreciation   300    279    211   8   32 
Taxes, other than income   147    147    113       30 
Energy-related businesses   29    34    17   (15)  100 
 Total operating expenses   946    899    715   5   26 
Other Income (Expense) - net   (39)   (51)   13   (24)  (492)
Interest Expense   425    421    336   1   25 
Income Taxes   71    153    98   (54)  56 
WPD Midlands acquisition-related adjustments, net of tax        (9)   (192)  (100)  (95)
Net Income Attributable to PPL Shareowners (b) $ 922  $ 803  $ 325   15   147 

(a)2011 includes $790 million for WPD Midlands.
(b)2011 includes $137 million for WPD Midlands, net of acquisition-related adjustments.

The changes in the results of the U.K. Regulated segment between these periods were due to the factors set forth below, which reflect certain items that management considers special.  WPD Midlands' results for 2012 compared with 2011 and effects of movements in foreign currency exchange rates are on separate lines within the table and not in their respective Statement of Income line items.  See below for additional detail of these special items.

45


   2013 vs. 2012 2012 vs. 2011
U.K.      
 Utility revenues $ 240  $  49 
 Other operation and maintenance   (40)   (26)
 Depreciation   (25)   (8)
 Interest expense   (10)   16 
 Other   1    (4)
 Income taxes        17 
 WPD Midlands, after-tax        224 
U.S.      
 Interest expense and other   (1)   (15)
 Income taxes   1    (25)
Foreign currency exchange, after-tax   (7)   (14)
Special items, after-tax   (40)   264 
Total $ 119  $ 478 

U.K.

·The increase in utility revenues in 2013 compared with 2012 was primarily due to the impact of the April 1, 2013 and 2012 price increases.

The increase in utility revenues in 2012 compared with 2011 was primarily due to the impact of the April 1, 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 other operation and maintenance for 2013 compared with 2012 was primarily due to higher network maintenance costs.

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

·The increase in depreciation expense for both periods was primarily due to PP&E additions.

·The increase in interest expense in 2013 compared with 2012 was primarily due to debt issuances in April 2012 and October 2013.

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

·Income taxes for 2013 compared with 2012 were flat despite higher pre-tax income primarily due to lower U.K. tax rates.

The decrease in income taxes in 2012 compared with 2011 was primarily due to the tax deductibility of interest on acquisition financing of $12 million and a $9 million benefit relating to customer contributions for capital expenditures.

WPD Midlands (2012 vs. 2011)

·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 primarily due to the 2011 Equity Units issued to finance the WPD Midlands acquisition.


46

·The decrease in income taxes for 2013 compared with 2012 was primarily due to a $42 million adjustment related to a ruling obtained from the IRS regarding 2010 includes $22U.K. earnings and profits calculations, partially offset by a $27 million afterincrease attributable to a revision in the expected taxable amount of cash repatriation in 2013.

The increase in income taxes in 2012 compared with 2011 was primarily 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 a U.K./U.S. intercompany tax transaction.

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

   Income Statement         
   Line Item 2013  2012  2011 
 Other Income           
Foreign currency-related economic hedges, net of tax of $15, $18, ($2) (a) (Expense) - net  $(29) $(33) $5 
WPD Midlands acquisition-related adjustments:          
 2011 Bridge Facility costs, net of tax of $0, $0, $14 (b) Interest Expense         (30)
  Other Income          
 Foreign currency loss on 2011 Bridge Facility, net of tax of $0, $0, $19 (c) (Expense) - net         (38)
  Other Income          
 Net hedge gains, net of tax of $0, $0, ($17) (c)(Expense) - net         38 
 Hedge ineffectiveness, net of tax of $0, $0, $3 (d)Interest Expense         (9)
   Other Income          
 U.K. stamp duty tax, net of tax of $0, $0, $0 (e)(Expense) - net         (21)
   Other operation          
 Separation benefits, net of tax of $1, $4, $26 (f)and maintenance   (4)  (11)  (75)
 Other acquisition-related adjustments, net of tax of ($2), ($1), $20(g)   8   2   (57)
Other:          
 Change in U.K. tax rate (h)Income Taxes   84   75    69 
 Windfall tax litigation (i)Income Taxes   43       (39)
 Change in WPD line loss accrual, net of tax of $10, ($23), $0 (j)Utility   (35)  74    
Total  $ 67  $ 107  $ (157)

(a)Represents unrealized gains (losses) on contracts that economically hedge anticipated GBP-denominated earnings.
(b)Represents fees incurred to establish the 2011 Bridge Facility.
(c)Represents the foreign currency loss on 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 terminated interest rate swaps and a charge recorded as a result of certain third-party acquisition-relatedinterest 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 includingand 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 associated with the acquisition of LKE thatwhich are recorded in "Other Income (Expense) –- net" on the Statement of Income.  2010 also includes $52Income; $37 million, after tax,pre-tax, of Bridge Facilitycosts, primarily related to the termination of certain contracts, rebranding and relocation costs that arewere recorded in "Interest Expense"to "Other operation and maintenance" expense on the Statement of Income.  TheseIncome; and $6 million, pre-tax, of costs are considered special items by management.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 2013, enacted in July 2013, reduced the U.K.'s statutory income tax rate from 23% to 21%, effective April 1, 2014 and from 21% to 20%, effective April 1, 2015.  The U.K. Finance Act of 2012, enacted in July 2012, reduced the U.K. statutory income tax rate from 25% to 24% retroactive to April 1, 2012 and from 24% to 23% effective April 1, 2013.  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.  As a result, PPL reduced its net deferred tax liability and recognized a deferred tax benefit in 2013, 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.  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.  In May 2013, the U.S. Supreme Court reversed the Third Circuit's December 2011 ruling.  As a result, PPL recorded a $43 million income tax benefit during 2013.  See Note 105 to the Financial Statements for additional informationinformation.
(j)In November 2012, Ofgem issued additional consultation on the acquisitionfinal DPCR4 line loss close-out that published values for each DNO and related financing.further indicated the preferred methodology that would replace the methodology under WPD's licenses, and 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.  Based on this, WPD Midlands reduced its line loss liability by $97 million, pre-tax in 2012.  In 2013, WPD Midlands increased its line loss accrual by $45 million pre-tax based on additional information provided by Ofgem regarding the calculation.  See Note 6 to the Financial Statements for additional information.


47

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,operations of LG&E and KU, as well as in Virginia and Tennessee.  This segment also includes LKE's results from theLG&E's regulated distribution and sale of natural gas in Kentucky.

  In addition, certain financing costs are allocated to the Kentucky Regulated segment.  The Kentucky Regulated segment represents 27% of Net Income Attributable to PPL CorporationShareowners for the two-month period from acquisition through2013 and 26% of PPL's assets at December 31, 2010 was:2013.

Net Income Attributable to PPL Shareowners includes the following results:

            % Change
   2013  2012  2011  2013 vs. 2012 2012 vs. 2011
              
Utility revenues $ 2,976  $ 2,759  $ 2,793   8   (1)
Fuel   896    872    866   3   1 
Energy purchases   217    195    238   11   (18)
Other operation and maintenance   778    778    751       4 
Depreciation   334    346    334   (3)  4 
Taxes, other than income   48    46    37   4   24 
 Total operating expenses   2,273    2,237    2,226   2     
Other Income (Expense) - net   (7)   (15)   (1)  (53)  1,400 
Other-Than-Temporary Impairments        25        (100) n/a 
Interest Expense   212    219    217   (3)  1 
Income Taxes   179    80    127   124   (37)
Income (Loss) from Discontinued Operations (net of income taxes)   2    (6)   (1)  (133)  500 
Net Income Attributable to PPL Shareowners $ 307  $ 177  $ 221   73   (20)

The changes in the results of the Kentucky Regulated segment between these periods were due to the factors set forth below, which reflect amounts classified as Kentucky Gross Margins and certain items that management considers special on separate lines within the table and not in their respective Statement of Income line items.  See below for additional detail of the special items.

  2013 vs. 2012 2012 vs. 2011
       
Kentucky Gross Margins $ 220  $ (8)
Other operation and maintenance   (5)   (16)
Depreciation   (34)   (10)
Taxes, other than income   (1)   (9)
Other Income (Expense) - net   7    (14)
Interest Expense   7    (2)
Income Taxes   (83)   31 
Special items, after-tax   19    (16)
Total $ 130  $ (44)

·2010 
Operating revenues
External$ 493 
Total Operating revenues 493 
Fuel and energy purchases
External 207 
Other operation and maintenance 139 
Depreciation 49 
Taxes, other than income 2 
Total operating expenses 397 
Other Income (Expense)See "Margins - net (1)
Interest Expense (a) 55 
Income Taxes 16 
Income from Discontinued Operations 2 
Net Income Attributable to PPL Corporation$ 26 Changes in Non-GAAP Financial Measures" for an explanation of Kentucky Gross Margins.

(a)·Includes interest expense allocated
Higher other operation and maintenance in 2012 compared with 2011 primarily due to the Kentucky Regulated segment$11 million of $31expenses 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 2013 compared with 2012 primarily due to environmental costs related to the Equity Units.2005 and 2006 ECR plans now being included in base rates. As a result, $51 million of depreciation associated with those environmental projects is shown as depreciation in 2013.  Depreciation for these ECR plans was included in Kentucky Gross Margins in 2012 and 2011.  This increase was partially offset by lower depreciation due to revised rates that were effective January 1, 2013.  Both events are the result of the 2012 rate case proceedings.

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

·Lower other income (expense) - net in 2012 compared with 2013 and 2011 primarily due to losses from the EEI investment recorded in 2012.  The EEI investment was fully impaired in the fourth quarter of 2012.

·Higher income taxes in 2013 compared with 2012 and lower income taxes in 2012 compared with 2011 are primarily due to the change in pre-tax income.

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

48


   Income Statement           
   Line Item 2013  2012   2011 
Adjusted energy-related economic activity, net, net of tax of $0, $0, $(1) (a) Utility Revenues         $ 1 
Impairments:            
 Other asset impairments, net of tax of $0, $10, $0 (b) Other-Than-Temporary-Impairments     $ (15)    
LKE acquisition-related adjustments:            
   Income Taxes and Other operation           
 Net operating loss carryforward and other tax-related adjustmentsand maintenance       4     
Other:            
 LKE discontinued operations (c) Discontinued Operations $ 2     (5)    (1)
 EEI adjustments, net of tax of $0, $0, $0 (d) Other Income (Expense) - net   1         
Total  $ 3   $ (16)  $   

(a)Recorded by LG&E and is reflected in "Operating Revenues" for LKE and in "Retail and wholesale" for LG&E on the Statements of Income.
(b)KU recorded an impairment of its equity method investment in EEI.  See Note 718 to the Financial Statements for additional information.

The following after-tax amounts, which management considers special items, impacted the Kentucky Regulated segment's earnings.

(c)2010 
Energy-related economic activity, net (a)$ (1)
Other:
Discontinued operations (Note 9) 2 
Total$ 1 

(a)Represents net unrealized losses on contracts that economically hedge anticipated cash flows.

2011 Outlook

Excluding special items, earnings in 2011 are expected to be generally driven by high-performing utilities in Kentucky, which are in a defined service area with a constructive regulatory environment and by the results of electric and natural gas base rate increases that became effective August 1, 2010.  The Kentucky Regulated segment is expected to contribute approximately 20% of PPL's 2011 earnings.
Earnings beyond 2010 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 15 to the Financial Statements for a discussion of the risks, uncertainties and factors that may impact future earnings.
International Regulated Segment

The International Regulated segment primarily includes the electric distribution operations of WPD.  See Note 9 to the Financial Statements for additional information on the sale of PPL's Latin American businesses in 2007.  The International Regulated segment results in 2009 and 2008 reflect the classification of its Latin American businesses as Discontinued Operations.

International Regulated segment Net Income Attributable to PPL Corporation was:

   2010  2009  2008 
           
Utility revenues $ 727  $ 684  $ 824 
Energy-related businesses   34    32    33 
 Total operating revenues   761    716    857 
Other operation and maintenance   182    140    186 
Depreciation   117    115    134 
Taxes, other than income   52    57    66 
Energy-related businesses   17    16    14 
 Total operating expenses   368    328    400 
Other Income (Expense) - net   3    (11)   17 
Interest Expense   135    87    144 
Income Tax Expense      20    45 
Income (Loss) from Discontinued Operations      (27)   5 
Net Income Attributable to PPL Corporation $ 261  $ 243  $ 290 

The after-tax changes in Net Income Attributable to PPL Corporation between these periods were due to the following factors.

  2010 vs. 2009 2009 vs. 2008
U.K.      
 Utility revenues $ 30  $ 10 
 Other operation and maintenance   (34)   16 
 Other income (expense) - net   1    (7)
 Depreciation   (2)   (4)
 Interest expense   (36)   28 
 Income taxes   13    24 
 Foreign currency exchange rates   6    (69)
 Other   5    (3)
Discontinued operations, excluding special item (Note 9)      (5)
U.S. income taxes   (32)   1 
Other   7    (10)
Special items   60    (28)
Total $ 18  $ (47)

·
U.K. utility revenues increased in 2010 compared with 2009, primarily due2012 includes an adjustment recorded by LKE to price increases in April 2010 and 2009, partially offset by lower regulatory recovery due to a revised estimate of network electricity losses.
U.K. utility revenues increased in 2009 compared with 2008, due to higher regulatory recovery primarily due to a revised estimate of network electricity losses and higher prices.
·
U.K. other operation and maintenance increased in 2010 compared with 2009, primarily due to higher pension expense resulting from an increase in amortization of actuarial losses.
U.K. other operation and maintenance decreased in 2009 compared with 2008, primarily due to lower pension cost resulting from an increase in discount rates and lower inflation rates.
·
U.K. interest expense increased in 2010 compared with 2009, primarily due to higher inflation rates on index-linked Senior Unsecured Notes and interest expense related to the March 2010 debt issuance.
U.K. interest expense decreased in 2009 compared with 2008, primarily due to lower inflation rates on index-linked Senior Unsecured Notes and lower debt balances.
·
U.K. income taxes decreased in 2010 compared with 2009, primarily due to realized capital losses that offset a gain relating to a business activity sold in 1999, partially offset by favorable settlements of uncertain tax positions in 2009.
U.K. income taxes decreased in 2009 compared with 2008, 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 settlement of uncertain tax positions and a change in the tax law in 2008.
·Changes in foreign currency exchange rates positively impacted U.K. earnings for 2010 compared with 2009, and negatively impacted U.K. earnings for 2009 compared with 2008.  The weighted-average exchange rates for the British pound sterling were approximately $1.56 in 2010, $1.53 in 2009 and $1.91 in 2008.
·U.S. income taxes increased in 2010 compared with 2009, primarily due to changes in the taxable amount of planned U.K. cash repatriations.

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

   2010  2009  2008 
           
Foreign currency-related economic hedges (a) $ 1  $ 1    
Sales of assets:         
 Latin American businesses (Note 9)      (27)   
Asset impairments      (1)   
Workforce reduction (Note 13)      (2) $ (1)
Other:         
 Change in U.K. tax rate (Note 5)   18       
 U.S. Tax Court ruling (b)   12       
Total $ 31  $ (29) $ (1)

(a)Represents unrealized gains on contracts that economically hedge anticipated earnings denominated in British pounds sterling.indemnification liability.
(b)(d)Represents the net tax benefit recorded as a result of the U.S. Tax Court ruling that the U.K. Windfall Profits Tax is creditable for U.S. tax purposes, excluding the reversal of accrued interest.  See Notes 5 and 15 to the Financial Statements for additional information.Recorded by KU.

2011 Outlook

Excluding special items, earnings in 2011 are projected to be comparable with 2010 earnings as a result of higher electric delivery revenue and a more favorable currency exchange rate offset by higher income taxes, higher depreciation and higher financing costs.

Earnings beyond 2010 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 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 deliveryelectricity transmission and distribution operations of PPL Electric.  In October 2008, PPL sold its natural gas distribution and propane businesses.  See Note 9addition, certain financing costs are allocated to the Financial Statements for additional information.

Pennsylvania Regulated segment.  The Pennsylvania Regulated segment results in 2008 reflect the classificationrepresents 18% of PPL's natural gas distribution and propane businesses as Discontinued Operations.

Pennsylvania Regulated segment Net Income Attributable to PPL Corporation was:Shareowners for 2013 and 15% of PPL's assets at December 31, 2013.

   2010  2009  2008 
Operating revenues         
 External $ 2,448  $ 3,218  $ 3,290 
 Intersegment   7    74    111 
 Total operating revenues   2,455    3,292    3,401 
Energy purchases         
 External   1,075    114    163 
 Intersegment   320    1,806    1,826 
Other operation and maintenance   502    417    410 
Amortization of recoverable transition costs      304    293 
Depreciation   136    128    131 
Taxes, other than income   138    194    203 
 Total operating expenses   2,171    2,963    3,026 
Other Income (Expense) - net   7    10    14 
Interest Expense   99    118    111 
Income Taxes   57    79    102 
Income from Discontinued Operations         3 
Net Income   135    142    179 
Net Income Attributable to Noncontrolling Interests (Note 6)   20    18    18 
Net Income Attributable to PPL Corporation $ 115  $ 124  $ 161 

The after-tax changes in Net Income Attributable to PPL CorporationShareowners includes the following results:

            % Change
   2013  2012  2011  2013 vs. 2012 2012 vs. 2011
Operating revenues             
 External $ 1,866  $ 1,760  $ 1,881  6  (6)
 Intersegment   4    3    11  33  (73)
 Total operating revenues   1,870    1,763    1,892  6  (7)
Energy purchases             
 External   588    550    738  7  (25)
 Intersegment   51    78    26  (35) 200 
Other operation and maintenance   531    576    530  (8) 9 
Depreciation   178    160    146  11  10 
Taxes, other than income   103    105    104  (2) 1 
 Total operating expenses   1,451    1,469    1,544  (1) (5)
Other Income (Expense) - net   6    9    7  (33) 29 
Interest Expense   108    99    98  9  1 
Income Taxes   108    68    68  59  - 
Net Income   209    136    189  54  (28)
Net Income Attributable to Noncontrolling Interests (Note 3)        4    16  (100) (75)
Net Income Attributable to PPL Shareowners $ 209  $ 132  $ 173  58  (24)

The changes in the components of the Pennsylvania Regulated segment's results between these periods were due to the following factors.factors set forth below, which reflect amounts classified as Pennsylvania Gross Delivery Margins on a separate line and not on their respective Statement of Income line items.

  2010 vs. 2009 2009 vs. 2008
       
Pennsylvania gross delivery margins $ 2  $ (18)
Other operation and maintenance   (29)   3 
Interest expense   11    (12)
Income taxes and other   (2)   2 
Discontinued Operations, excluding special item (Note 9)      (9)
Special items   9    (3)
Total $ (9) $ (37)
  2013 vs. 2012 2012 vs. 2011
       
Pennsylvania Gross Delivery Margins $ 114  $ 19 
Other operation and maintenance   23    (50)
Depreciation   (18)   (14)
Taxes, other than income   5    (9)
Other Income (Expense) - net   (3)   2 
Interest Expense   (9)   (1)
Income Taxes   (39)     
Noncontrolling Interests   4    12 
Total $ 77  $ (41)


49

·See "Pennsylvania Gross Delivery Margins by Component""Margins - Changes in the "Statement of Income Analysis" sectionNon-GAAP Financial Measures" for an explanation of margins generated by the regulated electric delivery operations.Pennsylvania Gross Delivery Margins.

·OtherLower other operation and maintenance increased in 2010for 2013 compared with 2009,2012, primarily due to higher payroll-relatedlower storm costs of $17 million and higher contractorlower support group costs of $19 million, partially offset by $14 million increased vegetation management costs.

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 costs.

·Higher depreciation for both periods primarily due to PP&E additions related to vegetation management.the ongoing efforts to ensure the reliability of the delivery system and replace aging infrastructure.

·Interest expense decreasedIncome taxes were higher in 20102013 compared with 2009,2012 primarily due to lower average debt balanceshigher pre-tax income which increased income taxes by $47 million, partially offset by $8 million of income tax return adjustments primarily recorded in 2010 compared with 2009 and the interest2012, largely related to the over-recovery of recoverable transition costs.changes in flow-through regulated tax depreciation.

Income taxes were flat in 2012 compared with 2011 primarily due to lower pre-tax income which decreased income taxes by $22 million, primarily offset by $9 million of depreciation not normalized and $11 million of income tax return adjustments, largely related to changes in flow-through regulated tax depreciation.

·Interest expense increased in 2009 compared with 2008, primarilyLower noncontrolling interests for both periods due to $400 millionPPL Electric's redemption of debt issuancespreference securities in October 2008 that prefunded a portion of August 2009 debt maturities.June 2012.

The following after-tax amounts, which management considers special items, also impacted earnings.

   2009  2008 
        
Sales of assets:      
 Gas & propane businesses (Note 9)    $ (6)
Asset impairments $ (1)   
Workforce reduction (Note 13)   (5)   
Other:      
 Change in tax accounting method related to repairs (Note 5)   (3)   
Total $ (9) $ (6)

2011 Outlook

Excluding special items, higher earnings are projected in 2011 compared with 2010, due to higher distribution revenues resulting from an approved distribution base rate increase effective January 1, 2011.

Earnings beyond 2010 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 15 to the Financial Statements for a discussion of the risks, uncertainties and factors that may impact future earnings.  See "Item 1. Business - Segment Information - Pennsylvania Regulated Segment" for additional information on the 2010 rate case.

Supply Segment

The Supply segment consists primarily consists of the energyPPL Energy Supply's wholesale, retail, marketing and trading activities, as well as the competitive generation operations.  In addition, certain financing and development operationsother costs are allocated to the Supply segment.  The Supply segment represents negative 24% of Net Income Attributable to PPL Energy Supply.Shareowners for 2013 and 25% of PPL's assets at December 31, 2013.  In September 2010, certain2011, PPL Energy Supply subsidiaries signed definitive agreements to sell their entire ownership interests in certain non-core generation facilities.  The sale is expected to close in the first quarter of 2011, subject to the receipt of necessary regulatory approvals and third-party consents.  The operating results of these facilities have been classified as Discontinued Operations.  In 2010 and 2009, PPL Energy Supply subsidiaries also completed the sale of several businesses, which have been classified as Discontinued Operations.  See Note 9 to the Financial Statements for additional informa tion.information.

Supply segment Net Income Attributable to PPL Corporation was:Shareowners includes the following results.

        % Change
  2010  2009  2008   2013  2012  2011  2013 vs. 2012 2012 vs. 2011
Energy revenuesEnergy revenues         Energy revenues          
External (a) $ 4,444  $ 3,124  $ 3,224 External (a) $ 4,075  $ 4,970  $  5,938   (18)  (16)
Intersegment   320    1,806    1,826 Intersegment  51   79   26   (35)  204 
Energy-related businessesEnergy-related businesses   375    391    486 Energy-related businesses   527    461   472   14   (2)
Total operating revenues   5,139    5,321    5,536 Total operating revenues   4,653    5,510   6,436   (16)  (14)
Fuel and energy purchases         
Fuel (a)Fuel (a)  1,049   965   1,080   9   (11)
Energy PurchasesEnergy Purchases          
External (a)   2,440    3,586    3,071 External (a)  1,168   1,810   2,277   (35)  (21)
Intersegment   3    70    108 Intersegment  3   2   4   50   (50)
Other operation and maintenance   934    865    821 
Other operation and maintenance (b)Other operation and maintenance (b)  1,072   1,058   899   1   18 
Loss on lease termination (c)Loss on lease termination (c)  697      n/a  n/a 
DepreciationDepreciation   254    212    179 Depreciation  318   289   245   10   18 
Taxes, other than incomeTaxes, other than income   46    29    19 Taxes, other than income  66   68   72   (3)  (6)
Energy-related businessesEnergy-related businesses   366    380    467 Energy-related businesses   512    450   467   14   (4)
Total operating expenses   4,043    5,142    4,665 Total operating expenses   4,885    4,642   5,044   5   (8)
Other Income (Expense) - netOther Income (Expense) - net   (9)   48    22 Other Income (Expense) - net  33   18   43   83   (58)
Other-Than-Temporary ImpairmentsOther-Than-Temporary Impairments   3    18    36 Other-Than-Temporary Impairments  1   2   6   (50)  (67)
Interest ExpenseInterest Expense   224    182    192 Interest Expense  228   222   192   3   16 
Income TaxesIncome Taxes   228    6    249 Income Taxes  (157)  247   463   (164)  (47)
Income (Loss) from Discontinued OperationsIncome (Loss) from Discontinued Operations   (19)   20    65 Income (Loss) from Discontinued Operations            3  n/a   (100)
Net IncomeNet Income   613    41    481 Net Income  (271)  415   777   (165)  (47)
Net Income Attributable to Noncontrolling Interests (Note 22)   1    1    2 
Net Income Attributable to PPL Corporation $ 612  $ 40  $ 479 
Net Income Attributable to Noncontrolling InterestsNet Income Attributable to Noncontrolling Interests   1    1    1         
Net Income Attributable to PPL ShareownersNet Income Attributable to PPL Shareowners $ (272) $ 414  $ 776   (166)  (47)

(a)Includes the impact from energy-related economic activity.  See "Commodity Price Risk (Non-trading) - Economic Activity" in Note 19 to the Financial Statements for additional information.
(b)2013 includes an impairment charge of $65 million ($39 million after-tax) for the Corette coal-fired plant and related emission allowances.  See Note 18 to the Financial Statements for additional information.
(c)See Note 8 to the Financial Statements for additional information.


50

The after-tax changes in Net Income Attributable to PPL Corporationthe components of the Supply segment's results between these periods were due to the following factors.factors set forth below, which reflect amounts classified as Unregulated Gross Energy Margins and certain items that management considers special on separate lines within the table and not in their respective Statement of Income line items.  See below for additional detail of the special items.

  2010 vs. 2009 2009 vs. 2008
       
Eastern U.S. non-trading margins $ 607  $ (3)
Western U.S. non-trading margins   9    20 
Net energy trading margins   (9)   81 
Other operation and maintenance   (32)   (33)
Depreciation   (25)   (19)
Income taxes and other   94    (7)
Discontinued operations, excluding special items (Note 9)   13    (9)
Special items   (85)   (469)
Total $ 572  $ (439)
  2013 vs. 2012 2012 vs. 2011
       
Unregulated Gross Energy Margins $ (194) $ (197)
Other operation and maintenance   40    (100)
Depreciation   (29)   (44)
Taxes, other than income   5    8 
Other Income (Expense) - net   19    (26)
Interest Expense   (6)   (20)
Other   (5)   5 
Income Taxes   33    136 
Special items, after-tax   (549)   (124)
Total $ (686) $ (362)

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

·OtherLower other operation and maintenance increased in 20102013 compared with 2009,2012 primarily due to increased payroll-relatedlower fossil and hydroelectric costs higher contractor-relatedof $17 million, largely driven by lower outage costs in 2013 and lower pension expense of $11 million.

Higher other operation and maintenance in 2012 compared with 2011 primarily due to higher costs at PPL Susquehanna of $33 million, $20 million due to the Ironwood Acquisition, $7 million of higher fossil and hydroelectric unit costs and $11 million of higher pension expense.

·Higher depreciation in 2013 compared with 2012 primarily due to PP&E additions.

Higher depreciation in 2012 compared with 2011 primarily due to a $24 million impact from PP&E additions and $17 million due to the Ironwood Acquisition.

·Higher other costs at Susquehanna.  Also contributingincome (expense) - net in 2013 compared with 2012, however no individual item was significant in comparison to the increase were higher support group costs, higher expenses at western fossil/hydro plants due to the Corette overhaul and lease expense related to the use of the streambeds in Montana.  See Note 15 to the Financial Statements for additional information on continuing litigation regarding the streambeds in Montana.prior year.

 Other operation and maintenance increasedLower other income (expense) - net in 20092012 compared with 2008,2011 primarily due to increased payroll-related costs, higher contractor-related costs and other costs at generation plants.a $22 million gain on the July 2011 debt redemption.

·Depreciation increasedHigher interest expense in 20102012 compared with 2009,2011 primarily due to the Brunner Island environmental equipment that was placed in service in 2009hedging activity, which increased interest expense by $30 million, and early 2010.

Depreciation increased in 2009 compared with 2008, primarily due$12 million related to the scrubbers at Brunner Island and Montour and portionsdebt assumed as a result of the Susquehanna uprate projects that were placed in service in 2008 and 2009.Ironwood Acquisition, partially offset by $11 million of lower interest on short-term borrowings.

·IncomeLower income taxes decreased in 20102013 compared with 2009, primarily2012 due to a release of valuation allowanceslower pre-tax income, which reduced income taxes by $62 million, and $10 million related to deferredthe impact of prior period tax assets for Pennsylvania net operating loss carryforwards, investmentreturn adjustments, partially offset by $38 million of higher taxes due to state tax credits at Holtwood and Rainbow, a release of tax reserves in 2010, and a tax benefit from the manufacturing deduction.rate changes.

Lower income taxes in 2012 compared with 2011 due to lower 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.

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

51


   2010  2009  2008 
           
Adjusted energy-related economic activity, net (a) $ (121) $ (225) $ 251 
Sales of assets:         
 Maine hydroelectric generation business (Note 9)   15    22    
 Sundance indemnification   1       
 Long Island generation business (b)      (33)   
 Interest in Wyman Unit 4 (Note 9)      (4)   
Impairments:         
 Impacts from emission allowances (c)   (10)   (19)   (25)
 Adjustments - NDT investments (d)         (17)
 Other asset impairments (e)      (4)   (15)
Workforce reduction (Note 13)      (6)   (1)
LKE acquisition-related costs:         
 Monetization of certain full-requirement sales contracts (f)   (125)      
 Anticipated sale of certain non-core generation facilities (g)   (64)      
 Discontinued cash flow hedges and ineffectiveness (Note 19)   (28)      
 Reduction of credit facility (Note 7)   (6)      
Other:         
 Montana hydroelectric litigation (Note 15)   (34)   (3)   
 Health Care Reform - tax impact (Note 13)   (8)      
 Montana basin seepage litigation (Note 15)   2       (5)
 Change in tax accounting method related to repairs (Note 5)      (21)   
 Synfuel tax adjustment (Note 15)         (13)
 Off-site remediation of ash basin leak (Note 15)         1 
Total $ (378) $ (293) $ 176 
   Income Statement         
   Line Item 2013  2012  2011 
Adjusted energy-related economic activity - net, net of tax of $54, ($26), ($52)(a) $ (77) $ 38  $ 72 
Impairments:            
   Other operation and         
 Emission allowances, net of tax of $0, $0, $1maintenance           (1)
   Other operation and         
 RECs, net of tax of $0, $0, $2maintenance           (3)
   Other Income         
 Adjustments - nuclear decommissioning trust investments, net of tax of $0, ($2), $0(Expense) - net      2    
   Other operation and         
 Other asset impairments, net of tax of $0, $0, $0maintenance      (1)   
   Other operation and         
 Corette asset impairment, net of tax of $26, $0, $0 (b)maintenance   (39)      
LKE acquisition-related adjustments:            
 Sale of certain non-core generation facilities, net of tax of $0, $0, $0Discontinued Operations           (2)
Other:            
 Montana hydroelectric litigation, net of tax of $0, $0, ($30)(c)           45 
 Litigation settlement - spent nuclear fuel storage, net of tax of $0, $0, ($24) (d)Fuel           33 
 Change in tax accounting method related to repairsIncome Taxes   (3)      
   Other operation and         
 Counterparty bankruptcy, net of tax of ($1), $5, $5 (e)maintenance   1    (6)   (6)
   Unregulated wholesale         
 Wholesale supply cost reimbursement, net of tax of $0, $0, ($3) (f)energy      1    4 
   Other operation and         
 Ash basin leak remediation adjustment, net of tax of $0, ($1), $0maintenance      1    
 Coal contract modification payments, net of tax of $0, $12, $0 (g)Fuel      (17)   
 Loss on Colstrip operating lease termination, net of tax of $284, $0, $0 (h)Loss on lease termination   (413)      
Total  $  (531) $ 18  $ 142 

(a)See "Reconciliation of Economic Activity" below.
(b)Consists primarilyIn 2012, PPL Energy Supply announced its intention, beginning in April 2015, to place its 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.  During the fourth quarter of the initial impairment charge2013, PPL Energy Supply determined its Corette plant was impaired and recorded in June 2009 when this business was classified as held for sale.  See Note 9 to the Financial Statements for additional information.
(c)2010 and 2009 include impairments of sulfur dioxide emission allowances.  2009 also includes a pre-tax gaincharge of $4$65 million for the plant and related to the settlement of a dispute regarding the sale of certain annual nitrogen oxide allowance put options.  See Note 18 to the Financial Statements for additional information.

2008 consists of charges related to annual nitrogen oxide allowances and put options.emission allowances.  See Note 18 to the Financial Statements for additional information.
(c)In February 2012, the U.S. Supreme Court overturned the Montana state court decisions requiring PPL Montana to make lease payments for the use of certain Montana streambeds.  As a result, in 2011, PPL Montana reversed its total loss accrual.  The amount related to periods prior to 2011 was considered a special item, which consisted of a $65 million net credit to "Other operation and maintenance" and a $10 million net credit to "Interest Expense" on the Statement of Income in 2011.
(d)Represents other-than-temporary impairment charges on securities, including reversalsIn May 2011, PPL Susquehanna entered into a settlement agreement with the U.S. DOE relating to PPL Susquehanna's lawsuit, seeking damages for the Department of previous impairments when securities previously impaired were sold.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.
(e)2008 primarily consistsIn October 2011, a wholesale customer, SMGT, filed for bankruptcy protection under Chapter 11 of a pre-tax chargethe 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 $22 million relatedMontana approved the request to terminate the Holtwood hydroelectric expansion project.  See Note 8 tocontract, effective April 1, 2012.  In June 2013, PPL EnergyPlus received an approval for an administrative claim in the Financial Statements for additional information.amount of $2 million.
(f)See "ComponentsIn January 2012, PPL received $7 million pre-tax, related to electricity delivered to a wholesale customer in 2008 and 2009.  The additional revenue results from several transmission projects approved at PJM for recovery that were not initially anticipated at the time of Monetizationthe electricity auctions and therefore were not included in the auction pricing.  A FERC order was issued in 2011 approving the disbursement of Certain Full-Requirement Sales Contracts" below.these supply costs by the wholesale customer to the suppliers; therefore, PPL accrued its share of this additional revenue in 2011.
(g)Consists primarilyAs a result of an impairmentlower electricity and natural gas prices, coal-fired generation output decreased during 2012.  Contract modification payments were incurred to reduce 2012 and 2013 coal deliveries.
(h)In September 2013, PPL Montana executed a definitive agreement to sell to NorthWestern certain hydroelectric generating facilities located in Montana.  To facilitate the sale of the hydroelectric facilities, on December 20, 2013, PPL Montana terminated its operating lease arrangement related to partial interests in Units 1, 2 and 3 of the Colstrip coal-fired electric generating facility and acquired those interests, collectively, for $271 million.  At lease termination, the existing lease-related assets on the balance sheet were written-off and the acquired Colstrip assets were recorded at fair value as of the acquisition date.  PPL and PPL Energy Supply recorded a charge recorded when these facilities were classified as heldof $697 million ($413 million after-tax) for sale, and allocated goodwill that was written off.the termination of the lease.  See Note 98 to the Financial Statements for additional information.

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."

52


   2010  2009  2008    2013  2012  2011 
Operating RevenuesOperating Revenues         Operating Revenues      
 Unregulated retail electric and gas $ 1  $ 6  $ 5  Unregulated wholesale energy $ (721) $ (311) $ 1,407 
 Wholesale energy marketing   (805)   (229)   1,056  Unregulated retail energy  12   (17)  31 
Operating ExpensesOperating Expenses         Operating Expenses      
 Fuel   29    49    (79) Fuel  (4)  (14)  6 
 Energy Purchases   286    (155)   (553) Energy Purchases   586    442    (1,123)
 Energy-related economic activity (a)   (489)   (329)   429 
 Option premiums (b)   32    (54)   
Energy-related economic activity (a)Energy-related economic activity (a)  (127)  100   321 
Option premiums (b)Option premiums (b)   (4)   (1)   19 
Adjusted energy-related economic activityAdjusted energy-related economic activity   (457)   (383)   429 Adjusted energy-related economic activity  (131)  99   340 
Less: Unrealized economic activity associated with the monetization of certain         
Less: Economic activity realized, associated with the monetization of certainLess: Economic activity realized, associated with the monetization of certain      
full-requirement sales contracts (c)   (251)      full-requirement sales contracts in 2010        35    216 
Adjusted energy-related economic activity, net, pre-taxAdjusted energy-related economic activity, net, pre-tax $ (206) $ (383) $ 429 Adjusted energy-related economic activity, net, pre-tax $ (131) $ 64  $ 124 
                   
Adjusted energy-related economic activity, net, after-taxAdjusted energy-related economic activity, net, after-tax $ (121) $ (225) $ 251 Adjusted energy-related economic activity, net, after-tax $ (77) $ 38  $ 72 

(a)The components of this item are from the table within "Commodity Price Risk (Non-trading) - Economic Activity" inSee Note 19 to the Financial Statements.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.  After-tax amount for 2010 was $19 million and for 2009 was $31 million.
(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"Option premiums are recorded in Note 19 to the Financial Statements for additional information.
(b)Includes unrealized losses of $251 million from the "Reconciliation of Economic Activity" table above.  These amounts are reflected in "Wholesale energy marketing - Unrealized economic activity""Unregulated wholesale energy" and "Energy purchases - Unrealized economic activity"purchases" on the StatementStatements 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.  This economic activity will continue to be realized through May 2013.

2011 Outlook

Excluding special items, lower earnings are projected from the Supply segment in 2011 compared with 2010 as a result of lower energy margins driven by lower energy and capacity prices in the East, higher average fuel costs, and higher operation and maintenance expense.

Earnings beyond 2010 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 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 Measures

TheManagement utilizes the following discussion includes financial information prepared in accordance with GAAP, as well as two non-GAAP financial measures:  "Unregulated Gross Energy Margins" and "Pennsylvania Gross Delivery Margins."  PPL believes that these measures provide additional criteria to make investment decisions.  Theseas indicators of performance measures are used, in conjunction with other information, internally by senior management and the Board of Directors to managefor its operations.  PPL's management also uses "Unregulated Gross Energy Margins" in measuring certain corporate performance goals used in determining variable compensation.businesses.

·"Kentucky Gross Margins" is a single financial performance measure of the Kentucky Regulated segment's, LKE's, LG&E's and KU's electricity generation, transmission and distribution operations as well as LKE's and LG&E's distribution and sale of natural gas.  In calculating this measure, fuel, energy purchases and certain variable costs of production (recorded as "Other operation and maintenance" on the Statements of Income) are deducted from revenues.  In addition, certain other expenses, recorded as "Other operation and maintenance" and "Depreciation" on the Statements of Income, associated with approved cost recovery mechanisms are offset against the recovery of those expenses, which are included in revenues.  These mechanisms allow for direct recovery of these expenses and, in some cases, returns on capital investments and performance incentives.  As a result, this measure represents the net revenues from the electricity and gas operations.

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

·"Unregulated Gross Energy Margins" is a single financial performance measure of PPL'sthe Supply segment's and PPL Energy Supply's competitive energy non-trading and trading activities.activities, which are managed on a geographic basis.  In calculating this measure, the Supply segment's energy revenues, including operating revenues associated with certain businesses classified as discontinued operations, are offset by the cost of fuel, and energy purchases, certain other operation and adjusted formaintenance expenses, primarily ancillary charges, gross receipts tax,  recorded in "Taxes, other related items.than income," and operating expenses associated with certain businesses 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 swingsfluctuations in unrealized gains and losses.  Such factors could result in gains or losses being recorded in either "Wholesale energy marketing""Unregulated wholesale energy", "Unregulated retail energy" or "Energy purchases" on the Statements of Income.  This performance measure includes PLR revenues from energy sales to P PLPPL Electric by PPL EnergyPlus.  In addition,EnergyPlus, which are reflected in "PLR intersegment utility revenue (expense)" in the reconciliation table below (in "Unregulated wholesale energy to affiliate" in PPL excludes fromEnergy Supply's reconciliation table).  "Unregulated Gross Energy Margins" the Supply segment'sexcludes 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'sthe 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

53

delivery period that was hedged.  Adjusted energy-related economic activity includes 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.  Also included in this energy-related economic activity is the ineffective portion of qualifying cash flow hedges, net losses on the monetization of certain full-requirement sales contracts and premium amortization associated with options.  This economic activity is deferred, with the exception of the net losses on the full-requirement sales contracts that were monetized, and included in unregulated gross energy margins over the delivery pe riod that was hedged or upon realization.

·"Pennsylvania Gross Delivery Margins" is a single financial performance measure of PPL's Pennsylvania regulated electric delivery operations, which includes transmission and distribution activities, including PLR supply.  In calculating this measure, Pennsylvania regulated utility revenues and expenses associated with approved recovery mechanisms, including energy provided as a PLR, are offset.  These mechanisms allow for full cost recovery of certain expenses; therefore, certain expenses and revenues offset with minimal impact on earnings.  As a result, this measure represents the net revenues from PPL's Pennsylvania regulated electric delivery operations.

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

Unregulated Gross Energy MarginsReconciliation of Non-GAAP Financial Measures

The following table reconcilestables contain the components from the Statement of Income that are included in the non-GAAP financial measures and a reconciliation to PPL's "Operating Income" to "Unregulated Gross Energy Margins" as defined by PPL.for the years ended December 31.
     2013  2012 
          Unregulated            Unregulated       
     Kentucky PA Gross Gross    
Operating
 Kentucky PA Gross Gross    
Operating
     Gross Delivery Energy    Income Gross Delivery Energy     Income
     Margins Margins Margins Other (a) (b) Margins Margins Margins Other (a) (b)
                          
Operating Revenues                               
 Utility$ 2,976  $ 1,866     $ 2,359 (c)  $ 7,201  $ 2,759  $ 1,760     $ 2,289 (c)  $ 6,808 
 PLR intersegment utility                               
  revenue (expense) (d)     (51) $ 51              (78) $ 78        
 Unregulated wholesale energy        3,758    (714)(e)    3,044          4,416    (290)(e)    4,126 
 Unregulated retail energy (f)        1,019    8 (e)    1,027          865    (21)(e)    844 
 Energy-related businesses           588     588             508     508 
   Total Operating Revenues  2,976    1,815    4,828    2,241     11,860    2,759    1,682    5,359    2,486     12,286 
                                    
Operating Expenses                               
 Fuel  896       1,045    3 (g)    1,944    872       931    34 (g)    1,837 
 Energy purchases  217    588    1,742    (580)(e)     1,967    195    550    2,204    (394)(e)    2,555 
 Other operation and                               
  maintenance  97    82    20    2,626     2,825    101    104    19    2,611     2,835 
 Loss on lease termination (Note 8)           697     697                 
 Depreciation  5            1,156     1,161    51          1,049     1,100 
 Taxes, other than income  1    95    37    231     364         91    34    241     366 
 Energy-related businesses        7    556     563             484     484 
 Intercompany eliminations     (4)   3    1           (3)   3          
   Total Operating Expenses  1,216    761    2,854    4,690     9,521    1,219    742    3,191    4,025     9,177 
Total$ 1,760  $ 1,054  $ 1,974  $(2,449)  $ 2,339  $ 1,540  $ 940  $ 2,168  $ (1,539)  $ 3,109 
     2011   
          Unregulated                    
     Kentucky PA Gross Gross                  
     Gross Delivery Energy    Operating            
     Margins Margins Margins Other (a) Income (b)          
Operating Revenues                               
 Utility$ 2,791  $ 1,881     $ 1,620 (c)  $ 6,292                 
 PLR intersegment utility                               
  revenue (expense) (d)       (26) $ 26                        
 Unregulated wholesale energy        3,743    1,469 (e)    5,212                 
 Unregulated retail energy (f)        696    30 (e)    726                 
 Energy-related businesses           507     507                 
   Total Operating Revenues  2,791    1,855    4,465    3,626     12,737                 
                                    

54


   2010  2009  2008 
          
Operating Income (a) $ 1,866  $ 896  $ 1,703 
Adjustments:         
 Utility (a)   (3,668)   (3,902)   (4,114)
 Energy-related businesses, net (b)   (26)   (27)   (38)
 Other operation and maintenance (a)   1,756    1,418    1,414 
 Amortization of recoverable transition costs (a)      304    293 
 Depreciation (a)   556    455    444 
 Taxes, other than income (a)   238    280    288 
 Revenue adjustments (c)   920    2,217    958 
 Expense adjustments (c)   1,128    90    616 
Unregulated gross energy margins $ 2,770  $ 1,731  $ 1,564 
     2011   
          Unregulated                    
     Kentucky PA Gross Gross                  
     Gross Delivery Energy    Operating            
     Margins Margins Margins Other (a) Income (b)          
Operating Expenses                               
 Fuel  866       1,151    (71)(g)    1,946                 
 Energy purchases  238    738    912    1,365 (e)    3,253                 
 Other operation and                               
  maintenance  90    108    16    2,453     2,667                 
 Depreciation  49            911     960                 
 Taxes, other than income       99    30    197     326                 
 Energy-related businesses           484     484                 
 Intercompany eliminations       (11)   3    8                     
   Total Operating Expenses  1,243    934    2,112    5,347     9,636                 
 Discontinued operations        12    (12)(h)                    
Total$ 1,548  $ 921  $ 2,365  $ (1,733)  $ 3,101                 

(a)Represents amounts excluded from Margins.
(b)As reported on the Statements of Income.
(b)(c)AmountPrimarily represents the net of "Energy-related businesses" revenue and expense as reported on the Statements of Income.WPD's utility revenue.
(c)(d)The components of these adjustments are detailed in the table below.

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

     2010  2009  Change 2009  2008  Change
Revenue                  
 Unregulated retail electric and gas (a) $ 415  $ 152  $ 263  $ 152  $ 151  $ 1 
 Wholesale energy marketing (a)   4,027    2,955    1,072    2,955    3,194    (239)
 Net energy trading margins (a)   2    17    (15)   17    (121)   138 
 Revenue adjustments (b)                  
  Exclude the impact from the                  
   Supply segment's energy-related                  
   economic activity (c)   483    274    209    274    (1,061)   1,335 
  Include PLR revenue from energy supplied                  
   to PPL Electric by PPL EnergyPlus (d)   320    1,806    (1,486)   1,806    1,826    (20)
  Include gains from sale of emission
      allowances/RECs (e)		      2    (2)   2    6    (4)
  Include revenue from Supply segment                  
   discontinued operations (f)   117    135    (18)   135    187    (52)
 Total revenue adjustments   920    2,217    (1,297)   2,217    958    1,259 
       5,364    5,341    23    5,341    4,182    1,159 
Expense                  
 Fuel (a)   1,235    920    315    920    1,057    (137)
 Energy purchases (a)   2,487    2,780    (293)   2,780    2,177    603 
 Expense adjustments (b)                  
  Exclude fuel and energy purchases from the                  
   Kentucky Regulated segment   (207)      (207)         
  Exclude the impact from the                  
   Supply segment's energy-related                  
   economic activity (g)   63    (109)   172    (109)   (632)   523 
  Exclude external PLR energy purchases (h)   (1,068)   (40)   (1,028)   (40)   (52)   12 
  Include expenses from Supply segment                  
   discontinued operations (i)   33    22    11    22    37    (15)
  Include ancillary charges (e)   24    19    5    19    15    4 
  Include gross receipts tax (j)   15       15          
  Other   12    18    (6)   18    16    2 
 Total expense adjustments   (1,128)   (90)   (1,038)   (90)   (616)   526 
       2,594    3,610    (1,016)   3,610    2,618    992 
 Unregulated gross energy margins $ 2,770  $ 1,731  $ 1,039  $ 1,731  $ 1,564  $ 167 

(a)As reported on the Statements of Income.Primarily related to PLR supply sold by PPL EnergyPlus to PPL Electric.
(b)(e)To include/exclude the impact of any revenues and expenses consistent with the way management reviews unregulated gross energy margins internally.
(c)Includes energy-related economic activity, which is subject to fluctuations in value due to market price volatility.  See "Commodity Price Risk (Non-trading) - Economic Activity" inwithin Note 19 to the Financial Statements for additional information.  In addition, 2010Statements.  For 2012, "Unregulated wholesale energy" and 2009 includes"Energy purchases" include a net pre-tax gain of $28 million and a loss of $51 million related to the amortization of option premiums, and in 2010 a realized gain of $293$35 million related to the monetization of certain full-requirement sales contracts.  These amounts are reflected in "Wholesale energy marketing – Realized" on the Statements of Income.
(d)Included in "Utility" on the Statements of Income.
(e)Included in "Other operation and maintenance" on the Statements of Income.
(f)Represents the operating revenues of the Supply segment businesses classified as discontinued operations.  See Note 9 to the Financial Statements for additional information.
(g)See "Commodity Price Risk (Non-trading) - Economic Activity" in Note 19 to the Financial Statements for additional information.  In addition, 2010 and 20092011 includes a net pre-tax gain of $4 million and a loss of $3 million related to the amortization of option premiums, and in 2010 a realized loss of $256$216 million related to the monetization of certain full-requirement sales contracts.contracts and a net pre-tax gain of $19 million related to the amortization of option premiums.
(f)Although retail energy revenues continue to grow, the net margins related to these activities are not currently a significant component of Unregulated Gross Energy Margins.
(g)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.
(h)Represents the net of certain revenues and expenses associated with certain businesses that are classified as discontinued operations.  These amountsrevenues and expenses are not reflected in "Energy purchases – Realized""Operating Income" on the Statements of Income.
(h)Included in "Energy purchases" on the Statements of Income.

(i)Represents fuel costs and energy purchases associated with the anticipated sale of certain non-core generation facilities that are classified as discontinued operations.  See Note 9 to the Financial Statements for additional information.
(j)Included in "Taxes, other than income" on the Statement of Income.
Changes in Non-GAAP Financial Measures

Unregulated Gross Energy Margins By RegionThe following table shows the non-GAAP financial measures by PPL's reportable segment and by component, as applicable, for the year ended December 31 as well as the change between periods.  The factors that gave rise to the changes are described following the table.

Unregulated gross energy margins are generated through non-trading and trading activities.  The non-trading energy business is managed on a geographic basis that is aligned with its generation assets.
           $ Change
    2013  2012  2011  2013 vs. 2012 2012 vs. 2011
                  
Kentucky Regulated               
Kentucky Gross Margins               
 LKE $ 1,760  $ 1,540  $ 1,548  $ 220  $ (8)
  LG&E   791    727    724    64    3 
  KU   969    813    823    156    (10)

    2010  2009  Change 2009  2008  Change
Non-trading:                  
 Eastern U.S. $ 2,429  $ 1,391  $ 1,038  $ 1,391  $ 1,396  $ (5)
 Western U.S.   339    323    16    323    289    34 
Net energy trading   2    17    (15)   17    (121)   138 
Unregulated gross energy margins $ 2,770  $ 1,731  $ 1,039  $ 1,731  $ 1,564  $ 167 
Pennsylvania Regulated               
Pennsylvania Gross Delivery Margins               
 Distribution $ 803  $ 730  $ 741  $ 73  $ (11)
 Transmission   251    210    180    41    30 
 Total $ 1,054  $ 940  $ 921  $ 114  $ 19 

Eastern U.S.
Supply               
Unregulated Gross Energy Margins               
 Eastern U.S. $ 1,756  $  1,867  $  2,015  $ (111) $  (148)
 Western U.S.   218    301    350    (83)   (49)
 Total $ 1,974  $  2,168  $  2,365  $ (194) $  (197)


55

Kentucky Gross Margins

Eastern U.S. non-trading margins were higherKentucky Gross Margins increased in 20102013 compared with 2009, primarily due to significantly higher pricing in 2010 for eastern baseload generation compared with prices realized under the PLR contract with PPL Electric that expired at the end of 2009.  Partially offsetting the increase were lower realized margins from full-requirement sales contracts due to lower customer demand and customer migration.

Eastern U.S. non-trading margins were lower in 2009 compared with 2008, 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,2012, primarily due to higher coal prices.  Partially offsetting thesebase rates of $102 million ($44 million at LG&E and $58 million at KU), environmental cost recoveries added to base rates of $53 million ($3 million at LG&E and $50 million at KU), returns from additional environmental capital investments of $34 million ($16 million at LG&E and $18 million at KU), higher fuel recoveries of $18 million ($7 million at LG&E and $11 million at KU) and higher volumes of $6 million ($9 million higher at KU partially offset by $3 million lower marginsat LG&E).

The increase in base rates was the result of new KPSC rates effective January 1, 2013 at LG&E and KU.  The environmental cost recoveries added to base rates were net gains resulting fromdue to the settlementtransfer of economic positionsthe 2005 and 2006 ECR plans into base rates as a result of the 2012 Kentucky rate cases for LG&E and KU.  This transfer results in depreciation and other operation and maintenance expenses associated with rebalancing portfolios to better align them with current strategies, higher capacity revenue, higher baseload generation output due to unplanned major outagesthe 2005 and 2006 ECR plans being excluded from Kentucky Gross Margins in 2008, and an increase2013, while the recovery of such costs remain in the PLR sales prices in accordance with the PUC Final Order.Kentucky Gross Margins through base rates.

Western U.S.

Western U.S. non-trading margins were higherKentucky Gross Margins decreased in 20102012 compared with 2009,2011, primarily due to $6 million of lower wholesale margins at LG&E, resulting from lower market prices.  Retail margins were $10 million lower at KU, as volumes were impacted by unseasonably mild weather during the first four months of 2012.  Retail margins were $8 million higher average prices, partially offset by lower volumes.at LG&E due to incremental returns on environmental investments, with retail volumes consistent with the prior year.

Western U.S. non-trading margins were higher in 2009 compared with 2008, primarily due to higher wholesale volumes and increased generation from the hydroelectric units.

Net Energy Trading

Net energy trading margins decreased in 2010 compared with 2009, consisting of lower trading margins related to power and gas, partially offset by higher trading margins related to FTRs.

Net energy trading margins increased in 2009 compared with 2008, 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.

Pennsylvania Gross Delivery Margins

The following table reconciles "Operating Income" to "Pennsylvania Gross Delivery Margins" as defined by PPL.

   2010  2009  2008 
          
Operating Income (a) $ 1,866  $ 896  $ 1,703 
Adjustments:         
 Unregulated retail electric and gas (a)   (415)   (152)   (151)
 Wholesale energy marketing (a)   (4,027)   (2,955)   (3,194)
 Net energy trading margins (a)   (2)   (17)   121 
 Energy-related businesses, net (b)   (26)   (27)   (38)
 Fuel (a)   1,235    920    1,057 
 Energy purchases (a)   2,487    2,780    2,177 
 Other operation and maintenance (a)   1,756    1,418    1,414 
 Depreciation (a)   556    455    444 
 Taxes, other than income (a)   238    280    288 
 Revenue adjustments (c)   (1,540)   (2,490)   (2,650)
 Expense adjustments (c)   (1,273)   (256)   (288)
Pennsylvania gross delivery margins $ 855  $ 852  $ 883 

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

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

      2010  2009  Change 2009  2008  Change
Revenue                  
 Utility (a) $ 3,668  $ 3,902  $ (234) $ 3,902  $ 4,114  $ (212)
 Revenue adjustments (b)                  
  Exclude revenue from the Kentucky Regulated                  
   segment (c)   (493)      (493)         
  Exclude WPD utility revenue (c)   (727)   (684)   (43)   (684)   (824)   140 
  Exclude PLR revenue from energy supplied to                  
   PPL Electric by PPL EnergyPlus (c)   (320)   (1,806)   1,486    (1,806)   (1,826)   20 
 Total revenue adjustments   (1,540)   (2,490)   950    (2,490)   (2,650)   160 
        2,128    1,412    716    1,412    1,464    (52)
Expense                  
 Amortization of recoverable transition costs (a)      304    (304)   304    293    11 
 Expense adjustments (b)                  
  Include external PLR energy purchases (d)   1,068    40    1,028    40    52    (12)
  Include gross receipts tax (e)   129    186    (57)   186    198    (12)
  Include Act 129 (f)   54       54          
  Other   22    30    (8)   30    38    (8)
 Total expense adjustments   1,273    256    1,017    256    288    (32)
        1,273    560    713    560    581    (21)
Pennsylvania gross delivery margins $ 855  $ 852  $ 3  $ 852  $ 883  $ (31)

(a)As reported on the Statements of Income.
(b)To include/exclude the impact of any revenues and expenses consistent with the way management reviews Pennsylvania gross delivery margins internally.
(c)Included in "Utility" on the Statements of Income.
(d)Included in "Energy purchases" on the Statements of Income.  Excludes NUG purchases, the sales of which are not included in "Utility" revenue.
(e)Included in "Taxes, other than income" on the Statements of Income.
(f)Included in "Other operation and maintenance" on the Statements of Income.

Pennsylvania Gross Delivery Margins by Component

Pennsylvania gross delivery margins are generated through domestic regulated electric distribution activities, including PLR supply, and transmission activities.

   2010  2009  Change 2009  2008  Change
                   
Distribution $ 679  $ 702  $ (23) $ 702  $ 731  $ (29)
Transmission   176    150    26    150    152    (2)
Pennsylvania gross delivery margins $ 855  $ 852  $ 3  $ 852  $ 883  $ (31)
Distribution

Distribution

The decrease margins increased in 20102013 compared with 2009 was2012, primarily due to margins realized in 2009 relateda $53 million favorable effect of price, largely comprised of higher base rates, effective January 1, 2013, a $15 million impact of weather primarily due to the collectionadverse effect of CTC, which endedmild weather in December 2009,2012 and higher volumes of $5 million.

Distribution margins decreased in 2012 compared with 2011, primarily due to a $14 million impact of weather primarily due to the adverse 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 favorable recovery mechanisms for certain energy related costs.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 reconciliations filed with the PUC.

The decrease in 2009 compared with 2008 was primarily due to lower CTC/ITC margins in 2009, ITC collections ended in 2008.  Lower margins were also attributable to unfavorable economic conditions, including industrial customers scaling back on production.  In addition, weather had an unfavorable impact on sales volumes, offset by favorable price increases.
Transmission

The increase in 2010 compared with 2009 wasTransmission margins increased for both periods, primarily due to increased investment in rate base, an increase in the cost of capital due to an increase in equityplant and the recovery of additional costs through the FERC formula-based rates.

Utility Revenues

The changes in utility revenues were attributable to:

   2010 vs. 2009 2009 vs. 2008
Domestic:      
 PPL Electric retail electric revenue (a) $ (770) $ (72)
 LKE   493    
U.K.:      
 Electric delivery revenue   41    14 
 Foreign currency exchange rates   2    (154)
Total $ (234) $ (212)

(a)See "Pennsylvania Gross Delivery Margins" and "Pennsylvania Gross Delivery Margins by Component" above.

U.K. electric delivery revenues increased in 2010 compared with 2009, primarily due to price increases in April 2010 and 2009, partially offset by lower regulatory recovery due to a revised estimate of network electricity losses.

U.K. electric delivery revenues increased in 2009 compared with 2008, primarily due to price increases in April 2009 and 2008, increased regulatory recovery due to 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.

Energy-Related Businesses

The changes in contributions from energy-related businesses were due to:

  2010 vs. 2009 2009 vs. 2008
       
Domestic Mechanicals (a) $ (7) $ (7)
WPD (b)   2    (4)
Other   4    
Total $ (1) $ (11)

(a)  Primarily attributable to a decline in construction activity caused by the slowdown in the economy.
(b)  Changes in contributions from U.K. energy-related businesses were primarily due to increases in remote metering business activity in 2010 and decreases related to changes in foreign currency exchange rates in 2009.

Other Operation and Maintenance

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

   2010 vs. 2009 2009 vs. 2008
        
LKE $ 139    
Act 129 costs incurred (a)   54    
Montana hydroelectric litigation (Note 15)   48  $ 8 
Defined benefit costs - U.K.  (Note 13)   32    (16)
Other costs at Susquehanna nuclear plant   23    14 
Vegetation management costs (b)   13    (5)
Payroll-related costs - PPL Electric   13    3 
Outage costs at Susquehanna nuclear plant   11    
Other costs at fossil/hydroelectric plants   2    17 
Outage costs at fossil/hydroelectric plants      23 
Workforce reductions (Note 13)   (22)   18 
Impacts from emission allowances (c)   (16)   (9)
Defined benefit costs - U.S. (Note 13)   (3)   18 
U.K. foreign currency exchange rates   (1)   (24)
Impairment of cancelled generation expansion project in 2008 (Note 8)      (22)
Montana basin seepage litigation (Note 15)      (8)
Other - Domestic   31    (7)
Other - U.K.   14    (6)
Total $ 338  $ 4 

(a)Relates to costs associated with a PUC-approved energy efficiency and conservation plan.  These costs are recovered in customer rates.  See "Regulatory Issues - Pennsylvania Activities" in Note 15 to the Financial Statements for additional information on this plan.  These costs are included in "Pennsylvania Gross Delivery Margins" above.
(b)In 2010, PPL Electric increased its vegetation management around its 230- and 500-kV major transmission lines in response to federal reliability requirements for transmission vegetation management.  See "Regulatory Issues - Energy Policy Act of 2005 - Reliability Standards" in Note 15 to the Financial Statements for additional information.
(c)
For the period 2010 compared to 2009, $21 million relates to lower impairment charges of sulfur dioxide emission allowances.  See Note 18 to the Financial Statements for additional information.  Partially offsetting the decrease was a $5 million increase in the charge for the settlement of a dispute regarding the sale of certain annual nitrogen oxide allowance put options.
For the period 2009 compared to 2008, $33 million relates to lower impairment charges of nitrogen oxide allowances partially offset by $37 million of higher impairment charges of sulfur dioxide allowances.  See Note 18 to the Financial Statements for additional information.  Also contributing to the difference was a $13 million decrease in the charge for the settlement of a dispute regarding the sale of certain annual nitrogen oxide allowance put options.
Depreciation

The changes in depreciation expense were due to:

  2010 vs. 2009 2009 vs. 2008
       
Additions to PP&E (a) $ 52  $ 43 
LKE   49    
U.K. foreign currency exchange rates      (25)
Other      (7)
Total $ 101  $ 11 

(a)  Additions included Susquehanna generation uprates and the completion of Brunner Island environmental projects in 2008 through 2010 as well as the Montour scrubber project in 2008.

Taxes, Other Than Income

The changes in taxes, other than income were due to:

   2010 vs. 2009 2009 vs. 2008
        
Pennsylvania gross receipts tax (a) $ (42) $ (12)
U.K. foreign currency exchange rates      (12)
Domestic property tax expense (b)   1    10 
Domestic sales and use tax   2    4 
LKE   2    
Other (c)   (5)   2 
Total $ (42) $ (8)

(a)The decrease in 2010 compared with 2009 was primarily due to a decrease 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.  The decrease in 2009 compared with 2008 was primarily due to a decrease in the tax rate in 2009.
(b)The increase in 2009 compared with 2008 was primarily due to a $7 million property tax credit recorded by PPL Montana in 2008.
(c)The decrease in 2010 compared with 2009 primarily relates to lower WPD real estate tax expense due to reductions in tax rates.

Other Income (Expense) - net

See Note 17 to the Financial Statements for details.

Other-Than-Temporary Impairments

Other-than-temporary impairments decreased by $15 million in 2010 compared with 2009 and by $18 million in 2009 compared with 2008.  The decrease for both periods was primarily due to stronger returns on NDT investments caused by improved market conditions within the financial markets.

Interest Expense

The changes in interest expense were due to:

   2010 vs. 2009 2009 vs. 2008
        
Bridge Facility costs related to the acquisition of LKE (Notes 7 and 10) $ 80    
PPL Capital Funding Junior Subordinated Notes (a)   27    
Inflation adjustment on U.K. Index-linked Senior Unsecured Notes   23  $ (29)
LKE (Note 7)   20    
Hedging activities   15    (30)
Repayment of transition bonds      (13)
Capitalized interest   14    13 
Amortization of debt issuance costs   13    3 
Montana hydroelectric litigation (Note 15)   10    
Other long-term debt interest expense   6    2 
Short-term debt interest expense   (1)   6 
U.K. foreign currency exchange rates   (3)   (17)
Other   2    5 
Total $ 206  $ (60)

(a)Interest related to the June 2010 issuance to support the LKE acquisition.  See Notes 7 and 10 for additional information.

Income Taxes

The changes in income taxes were due to:

   2010 vs. 2009 2009 vs. 2008
        
Higher (lower) pre-tax book income $ 258  $ (287)
State valuation allowance adjustments   (52)   (13)
Federal income tax credits   (10)   (17)
Domestic manufacturing deduction   (8)   13 
Federal and state tax reserve adjustments   (55)   (11)
Federal and state tax return adjustments   (25)   23 
U.S. income tax on foreign earnings net of foreign tax credit   50    5 
U.K. Finance Act adjustments   (18)   8 
U.K. capital loss benefit      (46)
Foreign tax reserve adjustments   (17)   12 
Foreign tax return adjustments      17 
Health Care Reform   8    
LKE   27    
Other      5 
Total $ 158  $ (291)

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

Discontinued Operations

See Note 9 to the Financial Statements for information related to various 2010 and 2009 sales, including the anticipated sale of certain non-core generation facilities expected to occur in the first quarter of 2011.

Financial Condition

Liquidity and Capital Resources

PPL expects to continue to have adequate liquidity available through operating cash flows, cash and cash equivalents and its credit facilities.  Additionally, subject to market conditions, PPL currently plans to access capital markets in 2011.

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;
·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 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 affecting PPL's cash flows.

At December 31, PPL had the following:

  2010  2009  2008 
          
Cash and cash equivalents $ 925  $ 801  $ 1,100 
Short-term investments (a) (b)   163       150 
  $ 1,088  $ 801  $ 1,250 
Short-term debt $ 694  $ 639  $ 679 

(a)2010 amount represents tax-exempt bonds issued by Louisville/Jefferson County, Kentucky on behalf of LG&E that were subsequently purchased by LG&E.  Such bonds were remarketed to unaffiliated investors in January 2011.  See Note 7 to the Financial Statements for further discussion.
(b)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.

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

  2010  2009  2008 
          
Net cash provided by operating activities $ 2,033  $ 1,852  $ 1,589 
Net cash used in investing activities   (8,229)   (880)   (1,627)
Net cash provided by (used in) financing activities   6,307    (1,271)   721 
Effect of exchange rates on cash and cash equivalents   13       (13)
Net Increase (Decrease) in Cash and Cash Equivalents $ 124  $ (299) $ 670 

Operating Activities

Net cash provided by operating activities increased by 10%, or $181 million in 2010 compared with 2009.  The expiration of the long-term power purchase agreements between PPL Electric and PPL EnergyPlus at the end of 2009 enabled PPL EnergyPlus to sell power at higher market prices and had a positive impact on net income, and specifically on "unregulated gross energy margins" which increased over $600 million, after-tax, in 2010 compared with 2009, and therefore, was the primary driver to the above increase.  The positive impact of additional earnings was partially offset by a reduction in the amount of counterparty collateral received and by additional defined benefit plan contributions.

Net cash provided by operating activities increased by 17%, or $263 million in 2009 compared with 2008, primarily as a result of cash collateral received from counterparties and the benefit of lower income tax payments due to the change in method of accounting for certain expenditures for tax purposes.  These increases were partially offset by a decrease in accounts payable and the unfavorable impact of foreign currency exchange rates in 2009 compared with 2008.

A significant portion of PPL's operating cash flows is derived from its Supply segment 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 while preserving upside potential of power price increases over the medium term.  See Note 19 to the Financial Statements for further discussion.  Despite its hedging practices, PPL expects its future cash flows from operating activities from its Supply segment to be more influenced by commodity prices than during the past years when long-term supply contracts were in place between PPL EnergyPlus and PPL Electric.  In the near-term, PPL expects its Supply segment operating cash flows to decline as a result of lower commodity prices.  PPL expects to see an increase in cash flows from operating activities in the near-term from its Pennsylvania Regulated segment due to its $77.5 million, or 1.6% rate increase that became effective on January 1, 2011.  Finally, the acquisition of LKE (i.e. Kentucky Regulated segment) is expected to provide additional cash flows from operating activities through its regulated rate base that has been added to PPL's portfolio.

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, 2010 positions, it would have had to post additional collateral of approximately $441 million with 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.

Investing Activities

The primary use of cash in investing activities in 2010 was for the acquisition of LKE.  In 2009 and 2008, the primary use of cash in investing activities was capital expenditures.  See "Forecasted Uses of Cash" for detail regarding capital expenditures in 2010 and projected expenditures for the years 2011 through 2015.

Net cash used in investing activities increased by $7.3 billion in 2010 compared with 2009, primarily as a result of $6.8 billion used for the acquisition of LKE.  Net cash used in investing activities also increased, to a lesser extent, due to an increase of $372 million in capital expenditures, a decrease of $154 million from proceeds from the sale of other investments, and a change of $133 million from restricted cash and cash equivalents.  See Note 10 to the Financial Statements for a discussion of the acquisition of LKE.  The increase 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 proceeds of $81 million from the sale of the maj ority of the Maine hydroelectric generation business in 2009, compared to proceeds of $162 million received in 2010 from the sales of the Long Island generation business and the remaining Maine hydroelectric generation business assets.

Net cash used in investing activities decreased by 46%, or $747 million, in 2009 compared with 2008, primarily as a result of a change of $289 million from 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.  See Note 1 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 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 fr om 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.

Financing Activities

Net cash provided by financing activities was $6.3 billion in 2010 compared with $1.3 billion of cash used in financing activities in 2009.  The change from 2009 to 2010 primarily reflects increased issuances of long-term debt and equity related to the acquisition of LKE in 2010, as well as fewer retirements of long-term debt in 2010.

Net cash used in financing activities was $1.3 billion in 2009 compared with $721 million of cash provided by financing activities in 2008.  The change from 2008 to 2009 primarily reflects fewer issuances and increased retirements of long-term debt in 2009, as well as the net repayment of short-term borrowings in 2009.

In 2010, cash provided by financing activities primarily consisted of net debt issuances of $4.7 billion and $2.4 billion of net proceeds from the issuance of common stock, partially offset by common stock dividends paid of $566 million and debt issuance and credit facility costs paid of $175 million.

In 2009, cash used in financing activities primarily consisted of net debt retirements of $770 million and common stock dividends paid of $517 million, partially offset by $60 million of common stock sale proceeds.

In 2008, cash provided by financing activities primarily consisted of 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.

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 2010 was:

   Issuances (a) Retirements
        
PPL Capital Funding Junior Subordinated Notes (b) $ 1,150  $(19)
PPL Capital Funding Senior Unsecured Notes     (1)
LG&E and KU Energy LLC Senior Unsecured Notes   870    
LG&E First Mortgage Bonds   531    
KU First Mortgage Bonds   1,489    
WPD Senior Unsecured Notes   597    
Other long-term debt   5    
LG&E short-term debt   163    
PPL Energy Supply short-term debt (net change)   65    
WPD short-term debt (net change)     (158)
 Total $ 4,870  $(178)
Net increase $4,692    

(a)Issuances are net of pricing discounts, where applicable and exclude the impact of debt issuance costs.
(b)Issuance is related to the Equity Units.  Retirement reflects amount paid to repurchase $20 million aggregate principal amount of junior subordinated notes.

See Note 7 to the Financial Statements for more detailed information regarding PPL's financing activities in 2010.

Forecasted Sources of Cash

PPL expects to continue to have significant sources of cash available in the near term, including various credit facilities, a commercial paper program and operating leases.  PPL currently plans to issue up to $750 million in long-term debt securities in 2011, subject to market conditions, in addition to remarketing certain bonds at LG&E to unaffiliated investors as discussed below.  Additionally, PPL's cash flows will include a full year of LKE's cash flows in 2011 and forward.

Credit Facilities

At December 31, 2010, PPL's total committed borrowing capacity under credit facilities and the use of this borrowing capacity were:

   Committed   Letters of Unused
   Capacity Borrowed Credit Issued (a) Capacity
          
LG&E Credit Facility (b) $ 400  $ 163     $ 237 
KU Credit Facility (b)   400     
$
 198    202 
PPL Energy Supply Domestic Credit Facilities (c)   3,500    350    185    2,965 
PPL Electric Credit Facilities (d)   350       13    337 
 Total Domestic Credit Facilities (e) $ 4,650  $ 513  $ 396  $ 3,741 
              
WPDH Limited Credit Facility (f) ₤ 150  ₤ 115   n/a ₤ 35 
WPD (South West) Credit Facility (g)   210      n/a   210 
 Total WPD Credit Facilities (h) ₤ 360  ₤ 115   n/a ₤ 245 

(a)The borrower under each of these facilities has a reimbursement obligation to the extent any letters of credit are drawn upon.
(b)Borrowings under LG&E's and KU's credit facilities generally bear interest at LIBOR-based rates plus a spread, depending upon the respective company's senior unsecured long-term debt rating.  LG&E and KU also each have the capability to request the lenders to issue up to $400 million of letters of credit under its respective facility, which issuances reduce available borrowing capacity.  Additionally, subject to certain conditions, LG&E and KU may each request that its respective facility's capacity be increased by up to $100 million.  Both facilities expire in 2014.

The credit facilities each contain a financial covenant requiring the respective borrower's debt to total capitalization not to exceed 70% and other customary covenants.  At December 31, 2010, LG&E's and KU's debt to total capitalization percentages, as calculated in accordance with the credit facilities, were 43% and 41%.  The credit facilities also contain standard representations and warranties that must be made for LG&E or KU to borrow under them.

LG&E repaid its $163 million borrowing in January 2011 with proceeds received from the remarketing of certain tax exempt bonds.
(c)PPL Energy Supply has the ability to borrow $3.0 billion under its credit facilities.  Such borrowings generally bear interest at LIBOR-based rates plus a spread, depending upon the company's senior unsecured long-term debt rating.  PPL Energy Supply also has the capability to cause the lenders to issue up to $3.5 billion of letters of credit under these facilities, which issuances reduce available borrowing capacity.  Subject to 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 contain a financial covenant requiring debt to total capitalization not to exceed 65%.  At December 31, 2010 and 2009, PPL Energy Supply's consolidated debt to total capitalization percentages, as calculated in accordance with its credit facilities, were 44% and 46%.  The credit facilities also contain standard representations and warranties that must be made for PPL Energy Supply to borrow under them.

The committed capacity expires as follows:  $300 million in 2011, $200 million in 2013 and $3.0 billion in 2014.
(d)Borrowings under PPL Electric's $200 million syndicated credit facility generally bear interest at LIBOR-based rates plus a spread, depending upon the company's senior secured long-term debt rating.  PPL Electric also has the capability to request the lenders to issue up to $200 million of letters of credit under this facility, which issuances reduce available borrowing capacity.  Subject to 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 not to exceed 70%.  At December 31, 2010, PPL Electric's consolidated debt to total capitalization percentage, as calculated in accordance with its credit facility, was 43%.  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 revenues to a special purpose, wholly owned subsidiary on an ongoing basis.  The subsidiary pledges these assets to secure loans of up to an aggregate of $150 million from a commercial paper conduit sponsored by a financial institution.  At December 31, 2010, based on accounts receivable and unbilled revenue pledged, $150 million was available for borrowing.

The committed capacity expires as follows:  $150 million in 2011 and $200 million in 2014.  PPL Electric intends to renew its existing $150 million asset-backed credit facility in 2011 in order to maintain its current total committed capacity level.
(e)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 12% of the total committed capacity.
(f)Borrowings under WPDH Limited's credit facility bear interest at LIBOR-based rates plus a spread, depending upon the company's long-term credit 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, 2010 and 2009, WPDH Limited's interest coverage ratios, as calculated in accordance with its credit facility, were 3.5 and 4.3.  At December 31, 2010 and 2009, WPDH Limited's RAB, as calculated in accordance with the credit facility, exceeded its total net debt by £364 million, or 27%, and £325 million, or 25%.
(g)Borrowings under WPD (South West)'s credit facility bear interest at LIBOR-based rates plus a margin.  This credit facility 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, 2010 and 2009, WPD (South West)'s interest coverage ratios, as calculated in accordance with its credit facility, were 3.6 and 5.3.  At December 31, 2010 and 2009, WPD (South West)'s total net debt, as calculated in accordance with the credit facility, was 75% and 67% of RAB.
(h)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 under the facilities expires as follows:  £210 million in 2012 and £150 million in 2013.

At December 31, 2010, the unused capacity of WPD's credit facilities was approximately $381 million.

In addition to the financial covenants noted in the table above, the credit agreements governing the 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, 2010, 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 Electric maintains a 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 $200 million syndicated credit facility, which expires in December 2014, based on available capacity.

PPL Electric did not issue any commercial paper during 2010.  Based on its current cash position and anticipated cash flows, PPL Electric currently does not plan to issue any commercial paper during 2011, but it may do so from time to time, subject to market conditions, to facilitate short-term cash flow needs.

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

Long-Term Debt and Equity Securities

In January 2011, LG&E remarketed to unaffiliated investors $163 million of tax-exempt bonds issued by Louisville/Jefferson County, Kentucky on behalf of LG&E.  The proceeds from the remarketing were used for the repayment of short-term debt under its syndicated credit facility.

In addition to the remarketing, PPL and its subsidiaries currently plan to issue up to $750 million in long-term debt securities in 2011, subject to market conditions.  PPL expects to use the proceeds from the issuance of long-term debt securities primarily to refund PPL Energy Supply's 2011 debt maturity, to fund capital expenditures and for general corporate purposes.

PPL currently plans to issue new shares of common stock in 2011 in an aggregate amount up to $300 million under various employee stock-based compensation plans and its DRIP.

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 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.  Work on the project is progressing on schedule, and PPL Electric is receiving reimbursements under the grant for costs incurred.  The project is scheduled to be completed by the end of September 2012.

Forecasted Uses of Cash

In addition to expenditures required for normal operating activities, such as purchased power, payroll, fuel and taxes, PPL currently expects to incur future cash outflows for capital expenditures, various contractual obligations, payment of dividends on its common and preferred securities and possibly the purchase or redemption of a portion of debt securities.

Capital Expenditures

The table below shows PPL's actual spending for the year 2010 and current capital expenditure projections for the years 2011 through 2015.

    Actual Projected
    2010  2011  2012  2013  2014  2015 
Construction expenditures (a) (b)                  
 Generating facilities $ 582  $ 781  $ 641  $ 554  $ 364  $501 
 Transmission and distribution facilities   702    1,035    1,241    1,553    1,488    1,145 
 Environmental   60    381    614    789    1,054    1,045 
 Other   162    193    223    177    179    395 
  Total Construction Expenditures   1,506    2,390    2,719    3,073    3,085    3,086 
Nuclear fuel   138    152    159    161    158    160 
  Total Capital Expenditures $ 1,644  $ 2,542  $ 2,878  $ 3,234  $ 3,243  $ 3,246 

(a)Construction expenditures include capitalized interest and AFUDC, which are expected to be approximately $290 million for the years 2011 through 2015.
(b)Includes expenditures for certain intangible assets.

PPL's capital expenditure projections for the years 2011 through 2015 total approximately $15.1 billion.  Capital expenditure plans are revised periodically to reflect changes in operational, market and regulatory conditions.  For the years presented, this table includes projected costs related to the planned 817 MW of incremental capacity increases, PPL Electric's asset optimization program focused on the replacement of aging transmission and distribution assets, the PJM-approved regional transmission line expansion project, and LKE's and Energy Supply's environmental projects related to anticipated new EPA air compliance standards.  See Note 8 to the Financial Statements for information on the PJM-approved regional transmission line expansion project and the other significant development projects.

PPL plans to fund its capital expenditures in 2011 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, 2010, the estimated contractual cash obligations of PPL were:

   Total Less Than 1 Year 1-3 Years 4-5 Years After 5 Years
                 
Long-term Debt (a) $ 12,604  $ 502  $ 1,137  $ 1,610  $ 9,355 
Interest on Long-term Debt (b)   11,794    636    1,205    1,113    8,840 
Operating Leases (c)   891    122    237    218    314 
Purchase Obligations (d)   8,605    2,908    2,537    1,336    1,824 
Other Long-term Liabilities               
 Reflected on the Balance               
 Sheet under GAAP (e) (f)   480    260    185    35    
Total Contractual Cash Obligations $ 34,374  $ 4,428  $ 5,301  $ 4,312  $ 20,333 

(a)Reflects principal maturities only based on stated maturity 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 the REPS, as well as discussion of variable-rate remarketable bonds issued on behalf of PPL Energy Supply, LG&E and KU.  PPL does not have any significant capital lease obligations.
(b)Assumes interest payments through 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 herein are subject to change, as certain purchase obligations included are estimates based on projected obligated quantities and/or projected pricing under the contracts.  Purchase orders made in the ordinary course of business are excluded from the amounts presented.  The payments also include obligations related to nuclear fuel and the installation of the scrubbers, which are also reflected in the Capital Expenditures table presented above.
(e)The amounts reflected represent WPD's contractual deficit pension funding requirements arising from an actuarial valuation performed in March 2010.  The U.K. electricity regulator currently allows a recovery of a substantial portion of the contributions relating to the plan deficit; however, WPD cannot be certain that this will continue beyond the current review period, which extends to March 31, 2015.  Based on the current funded status of PPL's U.S. qualified pension plans, no cash contributions are required.  See Note 13 to the Financial Statements for a discussion of expected contributions.  The amount also represents currently projected cash flows for LKE's construction commitments.
(f)At December 31, 2010, total unrecognized tax benefits of $251 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 2010, PPL increased the annualized dividend rate on its common stock from $1.38 to $1.40 per share, effective with the April 1, 2010 dividend payment.  Future dividends will be declared at the discretion of the Board of Directors and will depend upon future 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 or its 4.625% Junior Subordinated Notes due 2018 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.

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 redeeming outstanding debt securities and may decide to take action depending upon prevailing market conditions and available cash.

Credit Ratings

Moody's, S&P and Fitch periodically review the credit ratings on the debt and preferred securities of PPL and its subsidiaries.  Based on their respective independent reviews, the rating agencies may make certain ratings revisions or ratings affirmations.

A credit rating reflects an assessment by the rating agency of the creditworthiness associated with an issuer and particular securities that it issues.  The credit ratings of PPL and its subsidiaries are based on information provided by PPL and other sources.  The ratings of Moody's, S&P and Fitch are not a recommendation to buy, sell or hold any securities of PPL or its subsidiaries.  Such ratings may be subject to revisions or withdrawal by the agencies at any time and should be evaluated independently of each other and any other rating that may be assigned to the securities.  A downgrade in PPL's or its subsidiaries' credit ratings could result in higher borrowing costs and reduced access to capital markets.

In prior periodic reports, PPL described its then-current debt ratings in connection with, and to facilitate, an understanding of its liquidity position.  As a result of the passage of the Dodd-Frank Act and the attendant uncertainties relating to the extent to which issuers of non-asset backed securities may disclose credit ratings without being required to obtain rating agency consent to the inclusion of such disclosure, or incorporation by reference of such disclosure, in a registrant's registration statement or section 10(a) prospectus, PPL is limiting its credit rating disclosure to a description of the actions taken by the rating agencies with respect to PPL's ratings, but without stating what ratings have been assigned to PPL or its subsidiaries, or their securities.  The ratings assigned by the rating agencies to PPL and its subsidiaries and their respective securities may be found, without charge, on each of the respective ratings agencies' websites, which ratings together with all other information contained on such rating agency websites is hereby explicitly not incorporated by reference in this report.

The rating agencies took the following actions related to PPL and its subsidiaries in 2010.

Moody's

In April 2010, Moody's took the following actions:

·Revised the outlook for PPL, PPL Capital Funding and PPL Electric;
·Lowered the issuer rating of PPL and the senior unsecured debt rating of PPL Capital Funding;
·Lowered the rating of PPL Capital Funding's junior subordinated notes and PPL Electric's preferred securities;
·Lowered the issuer rating of PPL Electric;
·Affirmed the senior secured debt rating and commercial paper rating of PPL Electric; and
·Affirmed the senior unsecured notes rating and the outlook of PPL Energy Supply.

Moody's stated in its press release that the revisions in the ratings for PPL, PPL Capital Funding, and PPL Electric, while reflective of PPL's then-announced agreement to acquire LKE, are driven more by weakening financial metrics and the outlooks that had been in place for PPL and PPL Electric for the past year.

In August 2010, Moody's affirmed all of PPL Energy Supply's ratings.

In October 2010, Moody's affirmed the ratings for PPL and PPL Capital Funding following PPL's receipt of FERC approval of its then-pending acquisition of LKE.

In November 2010, Moody's took the following actions:

·Assigned a senior unsecured debt rating to LG&E and KU Energy LLC; and
·  Assigned a senior secured debt rating to LG&E and KU.

S&P

In April 2010, S&P took the following actions:

·Revised the outlook of PPL, PPL Energy Supply and PPL Capital Funding;
·Revised the outlook of WPDH Limited, WPD (South Wales) and WPD (South West); and
·Affirmed its credit ratings for PPL, PPL Capital Funding, PPL Energy Supply, PPL Electric, WPDH Limited, WPD (South Wales) and WPD (South West).

S&P stated in its press release that the change to the outlook for PPL and PPL Energy Supply considers the greater regulated mix that will result from PPL acquiring LKE, resulting in a pro forma "strong" consolidated business risk profile.  S&P also stated that the revision in the outlook for WPD 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 October 2010, S&P took the following actions:

·Revised the outlook of PPL, PPL Capital Funding, PPL Energy Supply, and PPL Electric;
·Raised the issuer rating of PPL and PPL Energy Supply;
·Raised the senior unsecured and junior subordinated debt ratings of PPL Capital Funding;
·Raised the senior unsecured debt rating of PPL Energy Supply; and
·Affirmed its credit ratings for PPL Electric.

S&P stated in its press release that the upgrades reflect S&P's opinion of an improved credit profile of the consolidated company following the closing of PPL's then-pending acquisition of LKE.

In November 2010, S&P affirmed its credit rating and revised the outlook for PPL Montana's Pass Through Certificates due 2020.

Also in November 2010, S&P took the following actions:

·Assigned a senior unsecured debt rating to LG&E and KU Energy LLC; and
·Assigned a senior secured debt rating to LG&E and KU.

Fitch

In January 2010, as a result of implementing its revised guidelines for rating preferred stock and hybrid securities, Fitch lowered the rating of PPL Capital Funding's junior subordinated notes and lowered the ratings of PPL Electric's preferred stock and preference stock.  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 such deferral will be activated.

In April 2010, Fitch affirmed its credit ratings for PPL, PPL Capital Funding, PPL Energy Supply and PPL Electric and retained the outlook for these entities following PPL's then-announced agreement to acquire LKE.

In May 2010, Fitch affirmed its rating and issued an outlook for PPL Montana's Pass Through Certificates due 2020.

In October 2010, Fitch affirmed its credit ratings for and revised the outlook of WPDH Limited, WPD (South Wales) and WPD (South West).

In November 2010, Fitch took the following actions:

·Assigned an outlook, issuer ratings and senior unsecured debt rating to LG&E and KU Energy LLC; and
·Assigned an outlook, issuer ratings and senior secured debt rating to LG&E and KU.

Ratings Triggers

As 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 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 £1.3 billion (approximately $2.0 billion) at December 31, 2010.

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 requiring 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 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, 2010.  At December 31, 2010, if PPL's and PPL Energy Supply's cre dit ratings had been below investment grade, PPL would have been required to prepay or post an additional $455 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

PPL guarantees certain consolidated affiliate financing arrangements that enable certain transactions.  Some of the guarantees contain financial and other covenants that, if not met, would limit or restrict the consolidated affiliates' access to funds under these financing arrangements, require early maturity of such arrangements or limit the consolidated affiliates' ability to enter into certain transactions.  At this time, PPL believes that these covenants will not limit access to relevant funding sources.  See Note 15 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 15 to the Financial Statements for a discussion of these agreements.

Risk Management - Energy Marketing & Trading and Other

Market Risk

See Notes 1, 18, and 19 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 generation assets, full-requirement sales contracts and retail activities.  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 transaction s are considered non-trading activity.  The net fair value of economic positions at December 31, 2010 and 2009 was a net liability of $400 million and $77 million.  See Note 19 to the Financial Statements for additional information on economic activity.

To hedge the impact of market price volatility on PPL's energy-related assets, liabilities and other contractual arrangements, PPL 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 times through 2017.

The following table sets forth the net fair value of PPL's non-trading commodity derivative contracts.  See Notes 18 and 19 to the Financial Statements for additional information.

   Gains (Losses)
   2010  2009 
        
Fair value of contracts outstanding at the beginning of the period $ 1,280  $ 402 
Contracts realized or otherwise settled during the period   (478)   189 
Fair value of new contracts entered into during the period   (5)   143 
Changes in fair value attributable to changes in valuation techniques   (23)   
Fair value of LKE derivative contracts at the acquisition date   (24)   
Other changes in fair value   197    546 
Fair value of contracts outstanding at the end of the period $ 947  $ 1,280 

The following table segregates the net fair value of PPL's non-trading commodity derivative contracts at December 31, 2010 based on whether the fair value was determined by prices quoted in active markets for identical instruments or other more subjective means.

   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 other observable inputs $ 351  $ 592  $ 8     $ 951 
Prices based on significant unobservable inputs   3    (29)   (4) $ 26    (4)
Fair value of contracts outstanding at the end of the period $ 354  $ 563  $ 4  $ 26  $ 947 

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 signi ficant 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.

Commodity Price Risk (Trading)

PPL's trading contracts mature at various times through 2015.  The following table sets forth changes in the net fair value of PPL's trading commodity derivative contracts.  See Notes 18 and 19 to the Financial Statements for additional information.

  Gains (Losses)
  2010  2009 
       
Fair value of contracts outstanding at the beginning of the period $ (6) $ (75)
Contracts realized or otherwise settled during the period   (12)   2 
Fair value of new contracts entered into during the period   39    31 
Other changes in fair value   (17)   36 
Fair value of contracts outstanding at the end of the period $ 4  $ (6)

PPL will reverse unrealized losses of approximately $2 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, 2010 based on whether the fair value was determined by prices quoted in active markets for identical instruments or other more subjective means.

   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 other observable inputs $ (1) $ 2  $ 3     $ 4 
Fair value of contracts outstanding at the end of the period $ (1) $ 2  $ 3     $ 4 

VaR Models

PPL utilizes a VaR model 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 using a Monte Carlo simulation technique based on a five-day holding period at a 95% confidence level.  Given the company's conservative hedging program, PPL's non-trading VaR exposure is expected to be limited in the short term.  At December 31, 2010 and December 31, 2009, the VaR for PPL's portfolios using end-of-month results for the period was as follows.

  Trading VaR Non-Trading VaR
  2010  2009  2010  2009 
95% Confidence Level, Five-Day Holding Period            
 Period End $ 1  $ 3  $ 5  $ 8 
 Average for the Period   4    4    7    9 
 High   9    8    12    11 
 Low   1    1    4    8 

The trading portfolio includes all speculative positions, regardless of the delivery period.  All positions not considered speculative are considered non-trading.  PPL's non-trading portfolio includes PPL's 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, 2010.

Interest Rate Risk

PPL and its subsidiaries have issued debt to finance their operations, which exposes them to interest rate risk.  PPL utilizes various financial derivative 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, 2010 and 2009, PPL's potential annual exposure to increased interest expense, based on a 10% increase in interest rates, was insignificant.

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, 2010 would increase the fair value of its debt portfolio by $420 million, compared with $285 million at December 31, 2009.

PPL had the following interest rate hedges outstanding at:

  December 31, 2010 December 31, 2009
        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) $ 500  $ (19) $ (28) $ 425�� $ 24  $ (24)
 Cross-currency swaps (d)   302    35    (18)   302    8    (41)
Fair value hedges                  
 Interest rate swaps (e)   349    20    (3)   750    31    (12)
Economic hedges                  
 Interest rate swaps (c)   179    (34)   (7)         

(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 such cash flow hedges are recorded in equity and any changes in the fair value of such economic hedges are recorded in regulatory assets and liabilities.  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.
(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 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 utilizes various risk management instruments to adjust the mix of fixed and floating interest rates in its 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.  Sensitivities represent a 10% adverse movement in interest rates.

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.

PPL had the following foreign currency hedges outstanding at:

  December 31, 2010 December 31, 2009
      Effect of a 10%     Effect of a 10%
    Fair Value, Adverse Movement   Fair Value, Adverse Movement
  Exposure Net - Asset in Foreign Currency Exposure Net - Asset in Foreign Currency
  Hedged (Liability) Exchange Rates (a) Hedged (Liability) Exchange Rates (a)
                   
Net investment hedges (b) £ 35  $ 7  $ (5) £ 40  $ 13  $ (6)
Economic hedges (c)   89    4    (10)   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 its net investment in WPD, PPL executed forward contracts to sell British pounds sterling.  The contracts outstanding at December 31, 2010 were settled in January 2011.
(c)To economically hedge the translation of 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 outstanding at December 31, 2010 have termination dates ranging from January 2011 through December 2011.

NDT Funds - Securities Price Risk

In connection with certain NRC requirements, PPL Susquehanna maintains trust funds to fund certain costs of decommissioning the Susquehanna nuclear station.  At December 31, 2010, 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 exposed to changes in interest rates.  PPL actively monitors the investment performance and periodically reviews asset alloc ation in accordance with its nuclear decommissioning trust policy statement.  At December 31, 2010, a hypothetical 10% increase in interest rates and a 10% decrease in equity prices would have resulted in an estimated $45 million reduction in the fair value of the trust assets, compared with $40 million at December 31, 2009.  See Notes 18 and 23 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.

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 from 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, which is reflected in accounts receivable on the Balance Sheets.  See Note 15 to the Financial Statements for additional information.

In 2007, 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.  Pursuant to this plan, PPL Electric had contracted for all of the electric supply for customers who elected this service in 2010.

In June 2009, the PUC approved PPL Electric's procurement plan for the period January 2011 through May 2013.  Through 2010, PPL Electric has conducted six of its 14 planned competitive solicitations.

Under the standard Supply Master Agreement (the Agreement) for the competitive 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, 2010, all 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.  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 15, 16, 18 and 19 to the Financial Statements for additional information on the competitive solicitations, the Agreement, credit concentration and credit risk.

Foreign Currency Translation

At December 31, 2010, 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 $63 million for 2010, which primarily reflected a $180 million reduction to PP&E offset by a reduction of $117 million to net liabilities.  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 these 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 net liabilities.  At December 31, 2008, the British pound sterling had weakened in relation to the U.S. do llar 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 net liabilities.

Related Party Transactions

PPL is not aware of any material ownership interests or operating responsibility by senior management of PPL, PPL Energy Supply or PPL Electric in outside partnerships, including leasing transactions with variable interest entities, or other entities doing business with PPL.  See Note 16 to the Financial Statements for additional information on related party transactions.

Acquisitions, Development and Divestitures

See Note 10 to the Financial Statements for information on the acquisition of LKE.

With limited exceptions LKE took care, custody and control of TC2 on January 22, 2011, and has dispatched the unit to meet customer demand since that date.  LG&E and KU and the contractor agreed to a further amendment of the construction agreement whereby the contractor will complete certain actions relating to identifying and completing any necessary modifications to allow operation of TC2 on all fuels in accordance with initial specifications prior to certain dates, and amending the provisions relating to liquidated damages.  LKE cannot currently estimate the ultimate outcome of these matters.  In addition, incremental capacity increases of 247 MW are currently planned, primarily at existing generating facilities.   See "Item 2. Properties" for additional information.

Development projects are continuously reexamined based on market conditions and other factors to determine whether to proceed with the projects, sell, cancel or expand them, execute tolling agreements or pursue other options.

See Notes 8 and 9 to the Financial Statements for additional information on the more significant activities.

Environmental Matters

See "Item 1. Business - Environmental Matters" and Note 15 to the Financial Statements for a discussion of environmental matters.

Competition

See "Item 1. Business - Competition" under each of PPL's reportable segments and "Item 1A. Risk Factors" for a discussion of competitive factors affecting PPL.

New Accounting Guidance

See Note 1 to the Financial Statements for a discussion of new accounting guidance adopted.

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).  PPL'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.

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.

2)      Defined Benefits

PPL and certain of its subsidiaries sponsor various defined benefit pension and other postretirement plans applicable to the majority of the employees of PPL and its subsidiaries.  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 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 13 to the Financial Statements for additional information about the plans and the accounting for defined benefits.

PPL 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 OCI or regulatory assets and liabilities for 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 an analysis of the expected benefit payment stream for its plans.  This information is first matched against a spot-rate yield curve.  A portfolio of 604 Aa-graded non-callable (or callable with make-whole provisions) bonds, with a total amount outstanding in excess of $667 billion, serves as the base from which those with the lowest and highest yields are eliminated to develop the ultimate yield curve.  The results of this analysis are considered together with other economic data and movements in various bond indices to determine the discount rate assumption.  At December 31, 2010, PPL decreased the discount rate for its U.S. pension plans from 6.00% to 5.42% as a result of this assessment and decreased the discou nt rate for its other postretirement benefit plans from 5.81% to 5.14%.

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, 2010, the discount rate for the U.K. pension plans was decreased from 5.55% to 5.54% 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, 2010, PPL's expected return on plan assets decreased from 8.00% to 7.25% for its U.S. pension plans and decreased from 7.00% to 6.56% for its other postretirement benefit plans.  The expected long-term rates of return for PPL's U.K. pension plans have been developed by PPL 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 decreased from 7.91% to 7.86% at December 31, 2010.

In selecting rates of compensation increase, PPL considers past experience in light of movements in inflation rates.  At December 31, 2010, PPL's rate of compensation increase changed from 4.75% to 4.88% for its U.S. pension plans and 4.75% to 4.90% for its other postretirement benefit plans.  For the U.K. plans, PPL's rate of compensation increase remained at 4.00% at December 31, 2010.

In selecting health care cost trend rates, PPL considers past performance and forecasts of health care costs.  At December 31, 2010, PPL's health care cost trend rates were 9.00% for 2011, 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 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, 2010, defined benefit plan liabilities were as follows.

Pension liabilities$ 1,505 
Other postretirement benefit liabilities 307 

The following chart reflects the sensitivities in the December 31, 2010 Balance Sheet associated with a change in certain assumptions based on PPL'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)% $ 256  $ (188) $ 68 
Rate of Compensation Increase  0.25%   43    (32)   11 
Health Care Cost Trend Rate (a)  1.00%   14    (8)   6 

(a)Only impacts other postretirement benefits.

In 2010, PPL recognized net periodic defined benefit costs charged to operating expense of $102 million.  This amount represents a $32 million increase from 2009.  This increase in expense was primarily attributable to amortization of actuarial losses of the WPD pension plans in the U.K.

The following chart reflects the sensitivities in the 2010 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
       
Discount Rate  (0.25)% $ 14 
Expected Return on Plan Assets  (0.25)%   12 
Rate of Compensation Increase  0.25%   6 
Health Care Cost Trend Rate (a)  1.00%   2 

(a)Only impacts other postretirement benefits.

3)      Asset Impairment

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 value 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 manner in which an asset is being used or in its physical condition;
·a significant adverse change in legal factors or in the business climate;
·an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of an asset;
·a current-period operating or cash flow loss combined with a history of losses or a forecast that demonstrates continuing losses; or
·a current expectation that, more likely than not, an asset will be sold or otherwise disposed of before the end of its previously estimated useful life.

For a long-lived asset classified 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 value 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 value 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, 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 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 of fair value.  However, when market prices are unavailable, PPL 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 2010, impairments of certain long-lived assets were recorded.  See Note 18 to the Financial Statements for a discussion of impairments related to certain sulfur dioxide emission allowances and certain non-core generation facilities.

Goodwill is tested for impairment at the reporting unit level.  Reporting units have been determined to be at or one level below operating segments.  A goodwill impairment test is performed annually or more frequently if events or changes in circumstances indicate that the carrying value 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 tested for impairment using a two-step approach.  The first step of the goodwill impairment test compares the estimated fair value of a reporting unit with its carrying amount, including goodwill.  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 requires a calculation of the implied fair value of goodwill.  The implied fair value of goodwill is determined in the same manner as the amount of goodwill in a business combination.  That is, the estimated fair value of a reporting unit is allocated to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the estimated fair value of the reporting unit was the price paid to acquire the reporting unit.  The excess of the estimated fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill.  The implied fair value of the reporting unit's goodwill is then compared with the carrying amount of that goodwill.  If the carrying amount exceeds the impl ied 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 2010, no goodwill was required to be impaired.  Management used both discounted cash flows and market multiples, which required significant assumptions, to estimate the fair value of each reporting unit.  For the discounted cash flows approach, a decrease in the forecasted cash flows of 10%, or an increase in the discount rate by 25 basis points, would not have resulted in an impairment of goodwill.  For the market multiples approach, which is based on either current or forward trading multiples of comparable companies or precedent transactions, a 10% decrease in the multiples would not have resulted in an impairment of goodwill.

In 2010 and 2009, $5 million and $3 million of goodwill allocated to discontinued operations was written off.

4)      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 2010, a significant adjustment to the contingency accrual related to the Montana hydroelectric streambed litigation was recorded.  See Note 15 to the Financial Statements for additional information.

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.  See Note 15 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, the triggering events for subsequently reducing 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 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 actual payments are made, 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.

5)      Asset Retirement Obligations

PPL 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.  A conditional ARO must be recognized when incurred if the fair value of the ARO can be reasonably estimated.  An equivalent amount is recorded as an increase in the value of the capitalized asset and allocated to expense over the useful life of the asset.  Until the obligation is settled, the liability is increased, through the recognition of accretion expense in the income statement, for changes in the obligation due to the passage of time.  In the case of LG&E and KU, estimated costs of removal for all assets are recovered in rates as a component of depreciation.  Since costs of removal are coll ected in rates prior to payment of such costs, the accrual for these costs of removal is classified as a regulatory liability.  The regulatory liability is relieved as costs are incurred.  The depreciation and accretion expense related to an ARO is recorded as a regulatory asset.  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 the ARO and the related capitalized asset, are reviewed periodically to ensure that any material changes are incorporated into the latest e stimate of the ARO.  Any change to the capitalized asset, positive or negative, is amortized over the remaining life of the associated long-lived asset.  See Note 21 to the Financial Statements for a discussion of the remeasurement of the ARO for the decommissioning of the Susquehanna nuclear units in the third quarter of 2010, which resulted in a $103 million reduction in the ARO primarily due to a decrease in estimated inflation rates.

At December 31, 2010, AROs totaling $448 million were recorded on the Balance Sheet, of which $13 million is included in "Other current liabilities."  Of the total amount, $270 million, or 60%, relates to the nuclear decommissioning ARO.  The most significant assumptions surrounding AROs are the forecasted retirement costs, the discount rates and the inflation rates.  A variance in any of these inputs could have a significant impact on the ARO liabilities.

The following table reflects the sensitivities related to the nuclear decommissioning ARO liability associated with a change in these assumptions as of December 31, 2010.  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 Cost 10% $27
Discount Rate (0.25)% $25
Inflation Rate 0.25% $26

6)      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 ben efit 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 de-recognized, 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, 2010, it was reasonably possible that during the next 12 months the total amount of unrecognized tax benefits could increase by as much as $28 million or decrease by up to $226 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.

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.  Management also considers the uncertainty posed by political risk (e.g. the potential for legislative extension of generation rate caps) 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 income tax disclosures, including the release of $72 million of valuation allowances associated with state net operating loss carryforwards in 2010.

7)      Regulatory Assets and Liabilities

Certain of PPL's subsidiaries are subject to cost-based rate regulation.  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 generally represent obligations to regulated customers for previous collections of costs that are expected to be refunded to customers in the future, or in certain cases, regulatory liabilities are recorded based on the understanding with the regulator that current rates are being set to recover c osts 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 flexibilit y in the manner and timing of the depreciation of PP&E and amortization of regulatory assets.

At December 31, 2010 and 2009, PPL had regulatory assets of $1.2 billion and $542 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.  At December 31, 2010 and 2009, PPL had regulatory liabilities of $1.1 billion and $84 million.  The significant increase in regulatory assets and liabilities was primarily due to the acquisition of LKE in November 2010.

See "Business Combinations – Purchase Price Allocation" below for discussion of regulatory assets established by purchase accounting.  See Note 3 to the Financial Statements for additional information on regulatory assets and liabilities.

8)      Business Combinations – Purchase Price Allocation

On November 1, 2010 (acquisition date), PPL completed the acquisition of all of the limited liability company interests of LKE.  In accordance with accounting guidance on business combinations, the identifiable assets acquired and the liabilities assumed were measured at fair value at the acquisition date.  Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.  The excess of the purchase price over the estimated fair value of the identifiable net assets was recorded as goodwill.

The determination and allocation of fair value to the identifiable assets acquired and liabilities assumed was based on various assumptions and valuation methodologies requiring considerable management judgment, including estimates based on key assumptions of the acquisition, and historical and current market data.  The most significant variables in these valuations were the discount rates, the number of years on which to base cash flow projections, as well as the assumptions and estimates used to determine cash inflows and outflows.  Although the assumptions were reasonable based on information available at the date of acquisition, actual results may differ from the forecasted amounts and the difference could be material.

For purposes of measuring the fair value of the majority of PP&E and regulatory assets acquired and regulatory liabilities assumed, PPL determined that fair value was equal to net book value at the acquisition date, because LKE's operations are conducted in a regulated environment and the regulatory commissions allow for earning a rate of return on and recovery of the book value of a majority of the regulated asset bases at rates determined to be fair and reasonable.  As there is no current prospect for deregulation in LKE's operating territory, it is expected that these operations will remain in a regulated environment for the foreseeable future; therefore, management has concluded that the use of these assets in the regulatory environment represents their highest and best use and a market participant would measure the fair value of these assets using the regulatory rate of return as the discount rate, thus resulting in fair value equal to book value.

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 sheet with offsetting regulatory assets or liabilities.  Prior to the acquisition, LKE recovered in customer rates the cost of 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 rate making impact of the fair value adjustments.  LKE's customer rates will continue to reflect these items (e.g. coal, purchased power, emission allowances) at their original contracted prices.

PPL also considered whether a separate fair value should be assigned to LKE's rights to operate within its various electric and natural gas distribution service territories 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.

Goodwill related to the LKE acquisition of $996 million was recorded at LG&E and KU.  For purposes of goodwill impairment testing, the goodwill must be assigned to the reporting units that are 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 expected going-concern element of LKE's existing business.  This going-concern element reflects 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 th ose 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 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.

See Note 10 to the Financial Statements for additional information regarding the acquisition.

Other Information

PPL's Audit Committee has approved the independent auditor to provide audit and audit-related 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.

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 Energy Supply's Consolidated Financial Statements and the accompanying Notes.  Terms and abbreviations are explained in the glossary.  Dollars are in millions unless otherwise noted.

PPL Energy Supply is an energy company with headquarters in Allentown, Pennsylvania.  Through its subsidiaries, PPL Energy Supply is primarily engaged in the generation and marketing of electricity in two key markets - the northeastern and northwestern U.S. - and, through 2010, in the delivery of electricity in the U.K.  PPL Energy Supply's overall strategy is to achieve disciplined growth in energy supply margins while limiting volatility in both cash flows and earnings and to achieve stable, long-term growth in its regulated international electricity delivery business through efficient operations and strong customer and regulatory relations.  More specifically, PPL Energy Supply's strategy for its competitive electricity generation and marketing business is to match energy supply with load, or customer dema nd, 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 regulated international electricity delivery business is to own and operate this business at the most efficient cost while maintaining high quality customer service and reliability.

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.  See Note 24 for additional information.  Certain information for periods subsequent to 2010 has been adjusted to eliminate amounts related to PPL Global.

To manage financing costs and access to credit markets, a key objective for PPL Energy Supply's business is to maintain a strong credit profile.  PPL Energy Supply continually focuses on maintaining an appropriate capital structure and liquidity position.  In addition, 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.  See "Item 1A. Risk Factors" for more information concerning these and other material risks PPL Energy Supply faces in its businesses.

Refer to "Item 1. Business - Background" for descriptions of PPL Energy Supply's reportable segments, which are International Regulated (formerly International Delivery) and Supply.  In 2010, there were no changes to these segments other than renaming the International Regulated segment.

"Management's Discussion and Analysis of Financial Condition and Results of Operations" provides information concerning PPL Energy Supply's performance in implementing the strategies and managing the risks and challenges mentioned above.  Specifically:

·"Results of Operations" provides an overview of PPL Energy Supply's operating results in 2010, 2009 and 2008, including a review of earnings, with details of results by reportable segment.  It also provides a brief outlook for 2011.

·"Financial Condition - Liquidity and Capital Resources" provides an analysis of PPL Energy Supply's liquidity position and credit profile, including its sources of cash (including bank credit facilities and sources of operating cash flow) and uses of cash (including contractual 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 rating agency actions on PPL Energy Supply's credit ratings.

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

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

See "Item 1. Business - Background - Segment Information - Pennsylvania Regulated Segment" for a discussion of the Customer Choice Act.

When comparing 2010 with 2009, certain line items on PPL Energy Supply's financial statements were impacted by the expiration of the full-requirement energy supply contracts.  Overall, the expiration of generation rate caps had a significant positive impact on PPL Energy Supply's results of operations, financial condition and cash flows during 2010.

The primary impact of the expiration of generation rate caps and this contract is reflected in PPL Energy Supply's unregulated gross energy margins.  See "Statement of Income Analysis" for an explanation of this non-GAAP financial measure.  In 2010, PPL Energy Supply sold the majority of its generation supply under various wholesale and retail contracts at prevailing market rates at the time the contracts were executed.  In 2009, the majority of generation produced by PPL Energy Supply's generation plants was sold to PPL Electric's customers as PLR supply under predetermined capped rates.

See "Regulatory Issues - Enactment of Financial Reform Legislation" in Note 15 for information on the Dodd-Frank Act.

Results of Operations

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 foreign currency exchange rate.

Earnings         
          
  2010  2009  2008 
          
Net Income Attributable to PPL Energy Supply $ 861  $ 246  $ 768 

The changes in Net Income Attributable to PPL Energy Supply from year to year were, in part, due to several special items that management considers significant.  Details of these special items are provided within the review of each segment's earnings.

The year-to-year changes in significant earnings components, including unregulated gross energy margins by region and significant income statement line items, are explained in the "Statement of Income Analysis."

Segment Results

Net Income Attributable to PPL Energy Supply by segment was:

   2010  2009  2008 
           
International Regulated $ 261  $ 243  $ 290��
Supply   600    3    478 
Total $ 861  $ 246  $ 768 

International Regulated Segment

The International Regulated segment primarily includes the electric distribution operations of WPD.  See Note 9 to the Financial Statements for additional information on the sale of PPL's Latin American businesses in 2007.  The International Regulated segment results in 2009 and 2008 reflect the classification of its Latin American businesses as Discontinued Operations.

International Regulated segment Net Income Attributable to PPL Energy Supply was:

   2010  2009  2008 
           
Utility revenues $ 727  $ 684  $ 824 
Energy-related businesses   34    32    33 
 Total operating revenues   761    716    857 
Other operation and maintenance   182    140    186 
Depreciation   117    115    134 
Taxes, other than income   52    57    66 
Energy-related businesses   17    16    14 
 Total operating expenses   368    328    400 
Other Income (Expense) - net   3    (11)   17 
Interest Expense   135    87    144 
Income Tax Expense      20    45 
Income (Loss) from Discontinued Operations      (27)   5 
 Net Income Attributable to PPL Energy Supply $ 261  $ 243  $ 290 

The after-tax changes in Net Income Attributable to PPL Energy Supply between these periods were due to the following factors.

  2010 vs. 2009 2009 vs. 2008
U.K.      
 Utility revenues $ 30  $ 10 
 Other operation and maintenance   (34)   16 
 Other income (expense) - net   1    (7)
 Depreciation   (2)   (4)
 Interest expense   (36)   28 
 Income taxes   13    24 
 Foreign currency exchange rates   6    (69)
 Other   5    (3)
Discontinued operations, excluding special item (Note 9)      (5)
U.S. income taxes   (32)   1 
Other   7    (10)
Special items   60    (28)
Total $ 18  $ (47)

·
U.K. utility revenues increased in 2010 compared with 2009, primarily due to price increases in April 2010 and 2009, partially offset by lower regulatory recovery due to a revised estimate of network electricity losses.
U.K. utility revenues increased in 2009 compared with 2008, due to higher regulatory recovery primarily due to a revised estimate of network electricity losses and higher prices.
·
U.K. other operation and maintenance increased in 2010 compared with 2009, primarily due to higher pension expense resulting from an increase in amortization of actuarial losses.
U.K. other operation and maintenance decreased in 2009 compared with 2008, primarily due to lower pension cost resulting from an increase in discount rates and lower inflation rates.
·
U.K. interest expense increased in 2010 compared with 2009, primarily due to higher inflation rates on index-linked Senior Unsecured Notes and interest expense related to the March 2010 debt issuance.
U.K. interest expense decreased in 2009 compared with 2008, primarily due to lower inflation rates on index-linked Senior Unsecured Notes and lower debt balances.
·
U.K. income taxes decreased in 2010 compared with 2009, primarily due to realized capital losses that offset a gain relating to a business activity sold in 1999, partially offset by favorable settlements of uncertain tax positions in 2009.
U.K. income taxes decreased in 2009 compared with 2008, 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 settlement of uncertain tax positions and a change in the tax law in 2008.
·Changes in foreign currency exchange rates positively impacted U.K. earnings for 2010 compared with 2009, and negatively impacted U.K. earnings for 2009 compared with 2008.  The weighted-average exchange rates for the British pound sterling were approximately $1.56 in 2010, $1.53 in 2009 and $1.91 in 2008.
·U.S. income taxes increased in 2010 compared with 2009, primarily due to changes in the taxable amount of planned U.K. cash repatriations.

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

   2010  2009  2008 
           
Foreign currency-related economic hedges (a) $ 1  $ 1    
Sales of assets:         
 Latin American businesses (Note 9)      (27)   
Asset impairments      (1)   
Workforce reduction (Note 13)      (2) $ (1)
Other:         
 Change in U.K. tax rate (Note 5)   18       
 U.S. Tax Court ruling (b)   12       
Total $ 31  $ (29) $ (1)

(a)Represents unrealized gains on contracts that economically hedge anticipated earnings denominated in British pounds sterling.
(b)Represents the net tax benefit recorded as a result of the U.S. Tax Court ruling that the U.K. Windfall Profits Tax is creditable for U.S. tax purposes, excluding the reversal of accrued interest.  See Notes 5 and 15 to the Financial Statements for additional information.

2011 Outlook

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.  See Note 24 to the Financial Statements for additional information.
Supply Segment

The Supply segment primarily consists of the energy marketing and trading activities, as well as the competitive generation and development operations of PPL Energy Supply.  In September 2010, certain PPL Energy Supply subsidiaries signed definitive agreements to sell their entire ownership interests in certain non-core generation facilities.  The sale is expected to close in the first quarter of 2011, subject to the receipt of necessary regulatory approvals and third-party consents.  The operating results of these facilities have been classified as Discontinued Operations.  In 2010 and 2009, PPL Energy Supply subsidiaries also completed the sale of several businesses, which have been classified as Discontinued Operations.  See Note 9 to the Financial Statements for additional informa tion.

Supply segment Net Income Attributable to PPL Energy Supply was:

   2010  2009  2008 
           
Energy revenues (a) $ 4,764  $ 4,930  $ 5,050 
Energy-related businesses   364    379    478 
 Total operating revenues   5,128    5,309    5,528 
Fuel and energy purchases (a)   2,449    3,657    3,178 
Other operation and maintenance   979    921    876 
Depreciation   236    195    165 
Taxes, other than income   47    29    20 
Energy-related businesses   356    372    464 
 Total operating expenses   4,067    5,174    4,703 
Other Income (Expense) - net (b)   32    46    43 
Other-Than-Temporary Impairments   3    18    36 
Interest Expense   208    176    162 
Income Taxes   262    3    256 
Income (Loss) from Discontinued Operations   (19)   20    66 
Net Income   601    4    480 
Net Income Attributable to Noncontrolling Interests (Note 22)   1    1    2 
 Net Income Attributable to PPL Energy Supply $ 600  $ 3  $ 478 

(a)Includes impact from energy-related economic activity.  See "Commodity Price Risk (Non-trading) - Economic Activity" in Note 19 to the Financial Statements for additional information.
(b)Includes interest income from affiliates.

The after-tax changes in Net Income Attributable to PPL Energy Supply between these periods were due to the following factors.

  2010 vs. 2009 2009 vs. 2008
       
Eastern U.S. non-trading margins $ 607  $ (3)
Western U.S. non-trading margins   9    20 
Net energy trading margins   (9)   81 
Other operation and maintenance   (26)   (33)
Depreciation   (24)   (18)
Income taxes and other   81    (44)
Discontinued operations, excluding special items (Note 9)   13    (9)
Special items   (54)   (469)
Total $ 597  $ (475)

·See "Unregulated Gross Energy Margins" in the "Statement of Income Analysis" section for an explanation of non-trading margins and net energy trading margins.

·Other operation and maintenance increased in 2010 compared with 2009, primarily due to increased payroll-related costs, higher contractor-related costs and other costs at Susquehanna.  Also contributing to the increase were higher support group costs, higher expenses at western fossil/hydro plants due to the Corette overhaul and lease expense related to the use of the streambeds in Montana.  See Note 15 to the Financial Statements for additional information on continuing litigation regarding the streambeds in Montana.

Other operation and maintenance increased in 2009 compared with 2008, primarily due to increased payroll-related costs, higher contractor-related costs and other costs at generation plants.

·Depreciation increased in 2010 compared with 2009, primarily due to the Brunner Island environmental equipment that was placed in service in 2009 and early 2010.

Depreciation increased in 2009 compared with 2008, primarily due to the scrubbers at Brunner Island and Montour and portions of the Susquehanna uprate projects that were placed in service in 2008 and 2009.

·
Income taxes decreased in 2010 compared with 2009, primarily due to a release of valuation allowances related to deferred tax assets for Pennsylvania net operating loss carryforwards, investment tax credits at Holtwood and Rainbow, a release of tax reserves in 2010, and a tax benefit from the manufacturing deduction.
Income taxes increased in 2009 compared with 2008, in part due to lower domestic manufacturing deductions in 2009.
The following after-tax amounts, which management considers special items, also impacted the Supply segment's earnings.

   2010  2009  2008 
           
Adjusted energy-related economic activity, net (a) $ (121) $ (225) $ 251 
Sales of assets:         
 Maine hydroelectric generation business (Note 9)   15    22    
 Sundance indemnification   1       
 Long Island generation business (b)      (33)   
 Interest in Wyman Unit 4 (Note 9)      (4)   
Impairments:         
 Impacts from emission allowances (c)   (10)   (19)   (25)
 Adjustments - NDT investments (d)         (17)
 Other asset impairments (e)      (4)   (15)
Workforce reduction (Note 13)      (6)   (1)
LKE acquisition-related costs:         
 Monetization of certain full-requirement sales contracts (f)   (125)      
 Anticipated sale of certain non-core generation facilities (g)   (64)      
 Reduction of credit facility (Note 7)   (6)      
Other:         
 Montana hydroelectric litigation (Note 15)   (34)   (3)   
 Health Care Reform - tax impact (Note 13)   (5)      
 Montana basin seepage litigation (Note 15)   2       (5)
 Change in tax accounting method related to repairs (Note 5)      (21)   
 Synfuel tax adjustment (Note 15)         (13)
 Off-site remediation of ash basin leak (Note 15)         1 
Total $ (347) $ (293) $ 176 

(a)See "Reconciliation of Economic Activity" below.
(b)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.
(c)2010 and 2009 include impairments of sulfur dioxide emission allowances.  2009 also includes a pre-tax gain of $4 million related to the settlement of a dispute regarding the sale of certain annual nitrogen oxide allowance put options.  See Note 18 to the Financial Statements for additional information.

2008 consists of charges related to annual nitrogen oxide allowances and put options.  See Note 18 to the Financial Statements for additional information.
(d)Represents other-than-temporary impairment charges on securities, including reversals of previous impairments when securities previously impaired were sold.
(e)2008 primarily consists of a pre-tax charge of $22 million related to the Holtwood hydroelectric expansion project.  See Note 8 to the Financial Statements for additional information.
(f)See "Components of Monetization of Certain Full-Requirement Sales Contracts" below.
(g)Consists primarily of an impairment charge recorded when these facilities were classified as held for sale, and allocated goodwill that was written off.  See Note 9 to the Financial Statements for additional information.

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."

    2010  2009  2008 
Operating Revenues         
  Unregulated retail electric and gas $ 1  $ 6  $ 5 
  Wholesale energy marketing   (805)   (229)   1,056 
Operating Expenses         
  Fuel   29    49    (79)
  Energy Purchases   286    (155)   (553)
  Energy-related economic activity (a)   (489)   (329)   429 
  Option premiums (b)   32    (54)   
Adjusted energy-related economic activity   (457)   (383)   429 
Less:  Unrealized economic activity associated with the monetization of certain         
 full-requirement sales contracts (c)   (251)      
Adjusted energy-related economic activity, net, pre-tax $ (206) $ (383) $ 429 
            
Adjusted energy-related economic activity, net, after-tax $ (121) $ (225) $ 251 

(a)The components of this item are from the table within "Commodity Price Risk (Non-trading) - Economic Activity" in Note 19 to the Financial Statements.
(b)Adjustment for the net deferral and amortization of option premiums over the delivery period of the item that was hedged or upon realization.  After-tax amount for 2010 was $19 million and for 2009 was $31 million.
(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 from the "Reconciliation of Economic Activity" table above.  These amounts 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.  This economic activity will continue to be realized through May 2013.

2011 Outlook

Excluding special items, lower earnings are projected from the Supply segment in 2011 compared with 2010 as a result of lower energy margins driven by lower energy and capacity prices in the East, higher average fuel costs, and higher operation and maintenance expense.

Earnings beyond 2010 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 15 to the Financial Statements for a discussion of the risks, uncertainties and factors that may impact future earnings.

Statement of Income Analysis --

Unregulated Gross Energy Margins

Non-GAAP Financial MeasureEastern U.S.

The following discussion includes financial information preparedEastern margins decreased in accordance2013 compared with GAAP, as well as a non-GAAP financial measure, "Unregulated Gross Energy Margins."  "Unregulated Gross Energy Margins" is a single financial performance measure2012 primarily due to $435 million of PPL Energy Supply's competitivelower baseload energy non-trading and trading activities.  In calculating this measure, the Supply segment's energy revenues areprices, partially offset by the cost$198 million of fuelhigher capacity prices and energy purchases, and adjusted for other related items.  This performance measure is relevant to PPL Energy Supply$100 million of increased nuclear generation volume.

Eastern margins decreased in 2012 compared with 2011 primarily due to $121 million of lower baseload energy prices and $54 million of lower capacity prices.

Western U.S.

Western margins decreased in 2013 compared with 2012 primarily due to $69 million of lower wholesale energy prices and $15 million of lower net economic availability of coal and hydroelectric units.

Western  margins decreased in 2012 compared with 2011 primarily due to $34 million of lower wholesale volumes, including $31 million related to the volatility in the individual revenuebankruptcy of SMGT, $9 million of higher average fuel prices and expense lines on the Statements$9 million of lower wholesale energy prices.


56

Statement 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 signific ant swings 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.  In addition, PPL Energy Supply excludes from "Unregulated Gross Energy Margins" 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 Energy Supply's competitive generation assets, full-requirement 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 this energy-related economic activity is the ineffective portion of qualifying cash flow hedges, net losses on the monetization of certain full-requirement sales contracts and premium amortization associated with options.  This economic activity is deferred, with the exception of the net losses on 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.  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 and the Board of Directors of PPL to manage its competitive energy non-trading and trading activities.  PPL's management also uses "Unregulated Gross Energy Margins" in measuring certain PPL corporate performance goals used in determining variable compensation.Analysis --

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.  The following table reconciles "Operating Income" to "Unregulated Gross Energy Margins" as defined by PPL Energy Supply.

   2010  2009  2008 
          
Operating Income (a) $ 1,454  $ 523  $ 1,282 
Adjustments:         
 Utility (a)   (727)   (684)   (824)
 Energy-related businesses, net (b)   (25)   (23)   (33)
 Other operation and maintenance (a)   1,161    1,061    1,062 
 Depreciation (a)   353    310    299 
 Taxes, other than income (a)   99    86    86 
 Revenue adjustments (c)   600    411    (868)
 Expense adjustments (c)   (145)   47    560 
Unregulated gross energy margins $ 2,770  $ 1,731  $ 1,564 
Utility Revenues      
          
The increase (decrease) in utility revenues was due to:
     2013 vs. 2012 2012 vs. 2011
Domestic:      
 PPL Electric (a) $106  $ (121)
 LKE (b)  217    (34)
 Total Domestic  323   (155)
          
U.K.:      
 Price (c)   264    78 
 Volume (d)  5    (13)
 Recovery of allowed revenues (e)  (43)   (6)
 WPD Midlands line loss accrual adjustments (f)  (142)   
 Foreign currency exchange rates  (27)   (11)
 Other  13    (10)
 WPD Midlands (g)      633 
 Total U.K.  70   671 
Total $393  $ 516 

(a)As reported on the Statements of Income.See "Pennsylvania Gross Delivery Margins" for further information.
(b)Amount represents the net of "Energy-related businesses" revenue and expense as reported on the Statements of Income.See "Kentucky Gross Margins" for further information.
(c)The components of these adjustments are detailedincrease in the table below.

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

     2010  2009  Change 2009  2008  Change
Revenue                  
 Wholesale energy marketing (a) $ 4,027  $ 2,955  $ 1,072  $ 2,955  $ 3,194  $ (239)
 Wholesale energy marketing to affiliate (a)   320    1,806    (1,486)   1,806    1,826    (20)
 Unregulated retail electric and gas (a)   415    152    263    152    151    1 
 Net energy trading margins (a)   2    17    (15)   17    (121)   138 
 Revenue adjustments (b)                  
  Exclude impact from energy-related                  
   economic activity (c)   483    274    209    274    (1,061)   1,335 
  Include gains from sale of emission allowances/RECs (d)      2    (2)   2    6    (4)
  Include revenue from Supply segment                  
   discontinued operations (e)   117    135    (18)   135    187    (52)
 Total revenue adjustments   600    411    189    411    (868)   1,279 
       5,364    5,341    23    5,341    4,182    1,159 
Expense                  
 Fuel (a)   1,096    920    176    920    1,057    (137)
 Energy purchases (a)   1,350    2,667    (1,317)   2,667    2,013    654 
 Energy purchases from affiliate (a)   3    70    (67)   70    108    (38)
 Expense adjustments (b)                  
  Exclude impact from energy-related                  
   economic activity (f)   63    (109)   172    (109)   (632)   523 
  Include expenses from Supply segment                  
   discontinued operations (g)   33    22    11    22    37    (15)
  Include ancillary charges (d)   24    19    5    19    15    4 
  Include gross receipts tax (h)   15       15          
  Other   10    21    (11)   21    20    1 
 Total expense adjustments   145    (47)   192    (47)   (560)   513 
       2,594    3,610    (1,016)   3,610    2,618    992 
  Unregulated gross energy margins $ 2,770  $ 1,731  $ 1,039  $ 1,731  $ 1,564  $ 167 

(a)As reported on the Statements of Income.2013 compared with 2012 was due to price increases effective April 1, 2013 and April 1, 2012.  The increase in 2012 compared with 2011 was due to price increases effective April 1, 2012 and April 1, 2011.
(b)(d)To include/excludeThe increase in 2013 compared with 2012 was primarily due to the impactfavorable effect of any revenuesweather.  The decrease in 2012 compared with 2011 was primarily due to the downturn in the economy and expenses consistent with the way management reviews unregulated gross energy margins internally.unfavorable effect of weather.
(c)(e)The decrease in 2013 compared with 2012 was primarily due to over-recovered revenues as a result of price and weather related volume effects that are not expected to reverse within the regulatory year ending March 31, 2014.  Therefore, a liability was recorded and utility revenue reduced for the amount of the over-recovery in 2013.  These amounts are expected to be refunded within the regulatory year beginning April 1, 2014.
(f)The decrease was due to a $97 million increase in revenue in 2012 and a $45 million reduction in revenue in 2013 from adjusting a loss accrual based on information provided by Ofgem regarding the calculation of line loss incentives and penalties for all network operators, primarily related to DPCR4.  See "Commodity Price Risk (Non-trading) – Economic Activity" in Note 196 to the Financial Statements for additional information.  In addition, 2010
(g)Amounts in 2013 compared with 2012 are comparable and 2009have not been isolated for purposes of comparability.  Amounts in 2012 were not comparable with 2011, as 2011 includes eight months of WPD Midlands' results.  The increase in 2012 compared with 2011 was primarily due to four additional months of utility revenue in 2012 of $446 million.  The comparable eight month period was higher in 2012 compared to 2011 due to a pre-tax gain$125 million price increase effective April 1, 2012 and the $97 million line loss accrual adjustment in 2012 discussed above.

Certain Operating Revenues and Expenses Included in "Margins"

The following Statement of Income line items are included above within "Margins" and are not discussed separately.

  2013 vs. 2012  2012 vs. 2011 
       
Unregulated wholesale energy $ (1,082) $ (1,086)
Unregulated retail energy   183    118 
Fuel   107    (109)
Energy purchases   (588)   (698)

Other Operation and Maintenance
         
       
The increase (decrease) in other operation and maintenance was due to:
         
    2013 vs. 2012 2012 vs. 2011
Domestic:      
 LKE coal plant operations and maintenance (a) $ (15) $ 21 
 Act 129 costs incurred  (b)   (24)   (6)
 Vegetation management  (c)   14    10 
 PPL Electric payroll-related costs (d)   4    17 
 Montana hydroelectric litigation (e)      65 
 PPL Susquehanna (f)   (3)   33 
 Fossil and hydroelectric plants (g)   43    1 
 Ironwood Acquisition (h)      20 
 PUC-reportable storm costs, net of insurance recoveries   (21)   14 
 PPL EnergyPlus (i)   (18)   17 
 Stock based compensation   2    17 
 Other   (10)   21 

57


    2013 vs. 2012 2012 vs. 2011
U.K.:      
 Network maintenance (j)   32    11 
 Third-party engineering (k)   12    (3)
 Pension (l)   8    21 
 Separation benefits (m)   (11)   
 Employee-related expenses   (7)   
 Foreign currency exchange rates   (4)   (2)
 Acquisition-related adjustments   (8)   
 WPD Midlands (n)      (85)
 Other   (4)   (4)
   $ (10) $ 168 
(a)The decrease in 2013 compared with 2012 was primarily due to $21 million of $28 million and a loss of $51 millionlower costs related to the amortizationtiming and scope of option premiums, andscheduled outages, partially offset by increased generation costs.  The increase in 2010 a realized gain2012 compared with 2011 was primarily due to $11 million of $293 millionexpenses related to an increase scope of scheduled outages, as well as $5 million of increased maintenance at the monetization of certain full-requirement sales contracts.  These amounts are reflected in "Wholesale energy marketing – Realized"Ghent plant on the Statementscrubber system and primary fuel combustion system.
(b)Relates to costs associated with PPL Electric's PUC-approved energy efficiency and conservation plan with programs starting in 2010.  These costs are recovered in customer rates.  The decrease in both periods primarily results from the number of Income.programs and timing of such programs.  Phase 1 of Act 129 closed in May 2013.  Phase 2 programs began in June 2013.
(c)PPL Electric incurred higher vegetation management costs in both periods due to increased activities related to maintaining and increasing system reliability for both the transmission and distribution systems.  The amount for 2012 compared to the 2011 period was also higher due to increased costs to comply with federal transmission reliability requirements.
(d)IncludedPPL Electric Utilities incurred higher payroll costs of $17 million in "Other operation and maintenance" on the Statements of Income.2012 compared with 2011 due to less project costs being capitalized.
(e)RepresentsIn February 2012, the operating revenuesU.S. Supreme Court overturned the Montana state court decisions requiring PPL Montana to make lease payments for the use of the Supply segment businesses classified as discontinued operations.certain Montana streambeds.  As a result, in 2011, PPL Montana reversed its total loss accrual.  See Note 915 to the Financial Statements for additional information.
(f)See "Commodity Price Risk (Non-trading) – Economic Activity" in Note 192012 compared with 2011 was higher due to the Financial Statements for additional information.  In addition, 2010outage and 2009 include a pre-tax gain of $4 million and a loss of $3 million related to the amortization of option premiums, and in 2010 a realized loss of $256 million related to the monetization of certain full-requirement sales contracts.  These amounts are reflected in "Energy purchases – Realized" on the Statement of Income.project costs.
(g)Represents fuelIn 2012, PPL Energy Supply announced its intention, beginning in April 2015, to place its Corette plant in long-term reserve status, suspending the plant's operations due to expected market conditions and the costs to comply with MATS.  During the fourth quarter of 2013, PPL Energy Supply determined its Corette plant was impaired and energy purchases associated withrecorded a charge of $65 million for the anticipated sale of certain non-core generation facilities that are classified as discontinued operations.plant and related emission allowances.  See Note 918 to the Financial Statements for additional information.
(h)IncludedAmounts in "Taxes, other than income"2013 compared with 2012 are comparable and have not been isolated for purposes of comparability.  Amounts in 2012 compared with 2011 were not comparable as 2012 includes nine months of expense and, therefore, have been isolated for purposes of comparability.  See Note 10 to the Financial Statements for information on the acquisition.
(i)2013 compared with 2012 was lower primarily due to SMGT filing under Chapter 11 of the U.S. Bankruptcy Code.  $11 million of receivables billed to SMGT were fully reserved in 2012.  For 2012 compared with 2011, no individual item was significant in comparison to the prior year.
(j)The increases in both periods were primarily due to higher vegetation management costs.
(k)These costs are offset by revenues reflected in "Utility" on the Statement of Income.
(l)The increases in both periods were due to higher pension costs resulting from increased amortization of actuarial losses.
(m)The decrease in 2013 compared with 2012 was primarily due to costs incurred in 2012 related to the WPD Midlands reorganization.
(n)Amounts in 2012 compared with 2011 were not comparable as 2011 includes eight months of WPD Midlands' results and therefore, have been isolated for purposes of comparability.  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 primarily due to $86 million of lower separation benefits, $34 million of lower acquisition related costs, and $26 million of lower pension expense.
Loss on Lease Termination

A $697 million charge was recorded in 2013 for the termination of the Colstrip operating lease to facilitate the sale of the Montana hydroelectric generating facilities.  See Note 8 to the Financial Statements for additional information.

Depreciation

The increase (decrease) in depreciation was due to:

  2013 vs. 2012 2012 vs. 2011
       
Additions to PP&E, net $ 89  $ 65 
LKE lower depreciation rates effective January 1, 2013 (a)   (22)   
WPD Midlands (b)        55 
Ironwood Acquisition (c)      17 
Other   (6)   3 
Total $ 61  $ 140 

(a)A result of the 2012 rate case.
(b)Amounts in 2013 compared with 2012 are comparable and have not been isolated for purposes of comparability.  Amounts in 2012 were not comparable with 2011, which includes eight months of WPD Midlands' results and therefore, have been isolated for purposes of comparability. The increase in 2012 compared with 2011 is primarily due to four additional months of expense in 2012 of $49 million.

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(c)Amounts in 2013 compared with 2012 are comparable and have not been isolated for purposes of comparability.  Amounts in 2012 compared with 2011 were not comparable as 2012 includes nine months of expenses and therefore, have been isolated for purposes of comparability.  See Note 10 to the Financial Statements for information on the acquisition.

Taxes, Other Than Income

The increase (decrease) in taxes, other than income was due to:

   2013 vs. 2012 2012 vs. 2011
        
Domestic property tax expense (a) $ 3  $ 14 
State capital stock tax (b)   (5)   (11)
WPD Midlands (c)        33 
Other        4 
Total $ (2) $ 40 

(a)The increase in 2012 compared with 2011 is primarily due to the fully amortized PURTA refund to the customers in 2011 pursuant to PUC regulations.  This tax is included in "Pennsylvania Gross Delivery Margins" above.
(b)The decrease in 2012 compared with 2011 was due to changes in the statutory rate from the prior year.
(c)Amounts in 2013 compared with 2012 are comparable and have not been isolated for purposes of comparability.  Amounts in 2012 compared with 2011 were not comparable as 2011 includes eight months of WPD Midlands' results and therefore, have been isolated for purposes of comparability.  The increase in 2012 compared with 2011 is primarily due to four additional months of expense in 2012 of $30 million.

Other Income (Expense) - net      
       
The increase (decrease) in other income (expense) - net was due to:
       
  2013 vs. 2012 2012 vs. 2011
       
Economic foreign currency exchange contracts (Note 19) $ 14  $ (62)
Net hedge gains associated with the 2011 Bridge Facility (a)      (55)
Foreign currency loss on 2011 Bridge Facility      57 
Gain on redemption of debt (b)      (22)
WPD Midlands acquisition-related adjustments in 2011 (Note 10)      55 
Losses from equity method investments   8    (9)
Charitable contributions   (15)   (1)
Other   9    (6)
Total $ 16  $ (43)

(a)Represents a gain on foreign currency contracts in 2011 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.

Other-Than-Temporary Impairments

Other-than-temporary impairments decreased by $26 million in 2013 compared with 2012 and increased by $21 million in 2012 compared with 2011 primarily due to a $25 million pre-tax impairment of the EEI investment in 2012.  See Notes 1 and 18 to the Financial Statements for additional information.

Interest Expense

The increase (decrease) in interest expense was due to:

   2013 vs. 2012 2012 vs. 2011
        
2011 Bridge Facility costs related to the acquisition of WPD Midlands (Notes 7 and 10)      $ (44)
2011 Equity Units (a) $ (2)   12 
Long-term debt interest expense (b)   31    3 
Short-term debt interest expense (c)   3    (12)
Inflation adjustment on U.K. Index-linked Senior Unsecured Notes   4    (12)
WPD Midlands (d)      80 
Ironwood Acquisition (e)        12 
Hedging activities and ineffectiveness   4    29 
Capitalized interest (f)   6    (6)
Montana hydroelectric litigation (g)      10 
Loss on extinguishment of debt (h)   10      
Other   (11)   (9)
Total $ 45  $ 63 

(a)Interest related to the issuance in April 2011 to support the WPD Midlands acquisition.

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(b)2013 increased due to debt issuances by PPL Capital Funding in March 2013, June 2012 and October 2012, by PPL Electric in July 2013 and August 2012, and WPD (East Midlands) in April 2012.  Partially offsetting these increases was PPL Energy Supply's debt maturity in July 2013.
(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.
(d)Amounts in 2013 compared with 2012 are comparable and have not been isolated for purposes of comparability.  Amounts in 2012 compared with 2011 were not comparable as 2011 includes eight months of WPD Midlands' results and therefore, have been isolated for purposes of comparability.  The increase in 2012 compared with 2011 is primarily due to four additional months of expense in 2012 of $74 million.
(e)Amounts in 2013 compared with 2012 are comparable and have not been isolated for purposes of comparability.  Amounts in 2012 compared with 2011 were not comparable as 2012 includes nine months of expense and therefore, have been isolated for purposes of comparability.  See Note 10 to the Financial Statements for information on the acquisition.
(f)Includes AFUDC.
(g)In February 2012, the U.S. Supreme Court overturned the Montana state court decisions requiring PPL Montana to make lease payments for the use of certain Montana streambeds.  As a result, in 2011, PPL Montana reversed its total loss accrual including accrued interest.  See Note 15 to the Financial Statements for additional information.
(h)In May 2013, PPL Capital Funding remarketed and exchanged junior subordinate notes that were originally issued in June 2010 as a component of PPL's 2010 Equity Units.

See Note 7 to the Financial Statements for information on 2013 long-term debt activity.

Income Taxes

The increase (decrease) in income taxes was due to:

   2013 vs. 2012 2012 vs. 2011
        
Change in pre-tax income $ (335) $ (296)
State valuation allowance adjustments (a)   11    (23)
State deferred tax rate change (b)   34    7 
Federal and state tax reserve adjustments  (c)   (42)   (40)
Federal and state tax return adjustments (d)   (21)   33 
U.S. income tax on foreign earnings net of foreign tax credit (e)   (17)   57 
U.K. Finance Act adjustments (f)   (22)   2 
Foreign valuation allowance adjustments (g)        (147)
Foreign tax reserve adjustments (g)   3    134 
Foreign tax return adjustments   2    (6)
Depreciation not normalized (a)   3    9 
Net operating loss carryforward adjustments (h)   9    (9)
WPD Midlands (i)        146 
Other   10    (13)
Total $ (365) $ (146)

(a)The valuation allowances recorded on PPL's state deferred tax assets primarily relate to Pennsylvania net operating loss carryforwards.  Pennsylvania requires that each corporation file a separate income tax return and has significant annual limitations on the deduction for net operating loss carryforwards.  Currently, Pennsylvania allows an annual maximum deduction equal to the greater of $3 million or 20% of taxable income.  Recent legislation increased the annual maximum deduction to the greater of $5 million or 30% of taxable income for tax years beginning in 2015.

During 2013, PPL recorded $24 million state deferred income tax expense related to a deferred tax valuation allowance primarily due to a decrease in projected future taxable income over the remaining carryforward period of Pennsylvania net operating losses.

During 2012, PPL recorded $9 million state deferred income tax expense related to a deferred tax valuation allowance primarily due to a decrease in projected future taxable income over the remaining carryforward period of Pennsylvania net operating losses.

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 a $43 million 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 was extended to January 1, 2013 for property that had a cost in excess of $1 million, had a production period longer than one year and had a tax life of at least ten years.  PPL's tax deduction for 100% bonus regulated tax depreciation was zero in 2013 and was significantly lower in 2012 than in 2011.

(b)Changes in state apportionment resulted in an increase to the future estimated state tax rate at December 31, 2013 and reductions to the future estimated state tax rate at December 31, 2012 and 2011.  PPL recorded a $15 million deferred tax expense in 2013, a $19 million deferred tax benefit in 2012 and a $26 million deferred tax benefit in 2011 related to its state deferred tax liabilities.
(c)In May 2013, the U.S. Supreme Court reversed the December 2011 ruling of the U.S. Court of Appeals for the Third Circuit on the creditability of U.K. Windfall Profits Tax for tax purposes.  As a result of this decision, PPL recorded a tax benefit of $44 million during 2013.  PPL recorded $39 million tax expense related to the U.S. Court of Appeals for the Third Circuit's ruling in 2011.  See Note 5 to the Financial Statements for additional information.

PPL recorded a tax benefit of $7 million during 2013 and $6 million during 2012 and 2011 to federal and state income tax reserves related to stranded cost securitization.  The reserve balance at December 31, 2013 related to stranded costs securitization is zero.

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(d)During 2012, PPL recorded $16 million in 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 $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.
(e)During 2013, PPL recorded $25 million income tax expense resulting from increased taxable dividends offset by a $19 million income tax benefit associated with a ruling obtained from the IRS impacting the recalculation of 2010 U.K. earnings and profits that was reflected on an amended 2010 U.S. tax return.

During 2012, PPL recorded a $23 million adjustment to federal income tax expense related to the recalculation of 2010 U.K. earnings and profits.

During 2011, PPL recorded a $28 million federal income tax benefit related to U.K. pension contributions.
(f)The U.K.'s Finance Act 2013, enacted in July 2013, reduced the U.K. statutory income tax rate from 23% to 21% effective April 1, 2014 and from 21% to 20% effective April 1, 2015.  As a result, PPL reduced its net deferred tax liabilities and recognized a $97 million deferred tax benefit in 2013 related to both rate decreases.

The U.K.'s Finance Act 2012, enacted in July 2012, reduced the U.K. statutory income tax rate from 25% to 24% retroactive to April 1, 2012 and from 24% to 23% effective April 1, 2013.  As a result, PPL reduced its net deferred tax liabilities and recognized a $75 million deferred tax benefit in 2012 related to both rate decreases.  WPD Midlands' portion of the deferred tax benefit is $43 million.

The U.K.'s Finance Act 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.
(g)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.
(h)During 2012, PPL recorded adjustments to deferred taxes related to net operating loss carryforwards of LKE based on income tax return adjustments.
(i)Amounts in 2013 compared with 2012 are comparable and have not been isolated for purposes of comparability.  Amounts in 2012 compared with 2011 were not comparable as 2011 includes eight months of WPD Midlands' results and therefore, have been isolated for purposes of comparability.  The increase in 2012 compared with 2011 was primarily due to higher pre-tax income.

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

Noncontrolling Interests

"Net Income Attributable to Noncontrolling Interests" decreased by $4 million in 2013 compared with 2012 and $12 million in 2012 compared with 2011 primarily due to PPL Electric's June 2012 redemption of all 2.5 million shares of its preference stock.

PPL Energy Supply:  Earnings, Margins and Statement of Income Analysis

Earnings

   2013  2012  2011 
           
Net Income (Loss) Attributable to PPL Energy Supply Member $ (230) $ 474  $ 768 
Special items, gains (losses), after-tax   (531)   18    142 

Excluding special items, pre-tax earnings in 2013 compared with 2012 decreased primarily due to lower baseload energy prices and higher depreciation, partially offset by higher capacity prices, higher nuclear generation volume, lower operation and maintenance expense and lower income taxes.

Excluding special items, pre-tax earnings in 2012 compared with 2011 decreased primarily due to lower Eastern energy margins resulting from lower baseload energy and capacity prices, lower Western energy margins resulting from an early 2012 contract termination related to the bankruptcy of SMGT, higher operation and maintenance expense, higher depreciation, partially offset by lower financing costs and income taxes.

The table below quantifies the changes in the components of Net Income Attributable to PPL Energy Supply Member between these periods, which reflect amounts classified as Unregulated Gross Energy Margins By Regionand certain items that management considers special on separate lines within the table and not in their respective Statement of Income line items.  See PPL's "Results of Operations - Segment Earnings - Supply Segment" for the details of special items.

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  2013 vs. 2012 2012 vs. 2011
       
Unregulated Gross Energy Margins $ (194) $ (197)
Other operation and maintenance   23    (53)
Depreciation   (33)   (41)
Taxes, other than income   6    6 
Other Income (Expense) - net   15    (5)
Interest Expense   (3)   16 
Other   (3)   2 
Income Taxes   34    102 
Special items, after-tax   (549)   (124)
Total $ (704) $ (294)

Unregulated gross energy margins are generated through non-trading and trading activities.  The non-trading energy business is managed on a geographic basis that is aligned with its generation assets.Margins

    2010  2009  Change 2009  2008  Change
Non-trading:                  
 Eastern U.S. $ 2,429  $ 1,391  $ 1,038  $ 1,391  $ 1,396  $ (5)
 Western U.S.   339    323    16    323    289    34 
Net energy trading   2    17    (15)   17    (121)   138 
Unregulated gross energy margins $ 2,770  $ 1,731  $ 1,039  $ 1,731  $ 1,564  $ 167 

Eastern U.S.

Eastern U.S. non-trading margins were higher in 2010 compared with 2009, primarily due to significantly higher pricing in 2010"Unregulated Gross Energy Margins" is a non-GAAP financial performance measure that management utilizes as an indicator of the performance of its business.  See PPL's "Results of Operations - Margins" for eastern baseload generation compared with prices realized underinformation on why management believes this measure is useful and for explanations of the PLR contract with PPL Electric that expired atunderlying drivers of the end of 2009.  Partially offsetting the increase were lower realized margins from full-requirement sales contracts due to lower customer demand and customer migration.

Eastern U.S. non-trading margins were lower in 2009 compared with 2008, 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, primarily due to higher coal prices.  Partially offsetting these lower margins were net gains resulting from the settlement of economic positions associated with rebalancing portfolios to better align them with current strategies, higher capacity revenue, higher baseload generation output due to unplanned major outages in 2008, and an increase in the PLR sales prices in accordance with the PUC Final Order.

Western U.S.

Western U.S. non-trading margins were higher in 2010 compared with 2009, primarily due to higher average prices, partially offset by lower volumes.

Western U.S. non-trading margins were higher in 2009 compared with 2008, primarily due to higher wholesale volumes and increased generation from the hydroelectric units.

Net Energy Trading

Net energy trading margins decreased in 2010 compared with 2009, consisting of lower trading margins related to power and gas, partially offset by higher trading margins related to FTRs.

Net energy trading margins increased in 2009 compared with 2008, 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.

Utility Revenueschanges between periods.

The changesfollowing tables contain the components from the Statements of Income that are included in utility revenues were attributable to:this non-GAAP financial measure and a reconciliation to "Operating Income" for the years ended December 31.

  2010 vs. 2009 2009 vs. 2008
       
U.K. electric delivery revenue $ 41  $ 14 
U.K. foreign currency exchange rates   2    (154)
Total $ 43  $ (140)
      2013  2012 
      Unregulated       Unregulated      
      Gross Energy    Operating Gross Energy     Operating
      Margins Other (a) Income (b) Margins Other (a) Income (b)
Operating Revenues��                   
 Unregulated wholesale energy $ 3,758  $  (714)(c)  $  3,044  $ 4,416  $  (290)(c)  $  4,126 
 Unregulated wholesale energy                    
  to affiliate   51          51    78          78 
 Unregulated retail energy (d)   1,019    12 (c)    1,031    865    (17)(c)    848 
 Energy-related businesses        527     527         448     448 
   Total Operating Revenues   4,828    (175)    4,653    5,359    141     5,500 
                         
Operating Expenses                    
 Fuel   1,045    4 (e)    1,049    931    34 (e)    965 
 Energy purchases   1,742    (574)(c)    1,168    2,204    (386)(c)    1,818 
 Energy purchases from affiliate   3          3    3          3 
 Other operation and maintenance 20    1,052     1,072    19    1,022     1,041 
 Loss on lease termination (Note 8)    697     697           
 Depreciation        318     318         285     285 
 Taxes, other than income   37    29     66    34    35     69 
 Energy-related businesses   7    505     512         432     432 
   Total Operating Expenses   2,854    2,031     4,885    3,191    1,422     4,613 
Total $ 1,974  $ (2,206)  $ (232) $ 2,168  $ (1,281)  $ 887 

U.K. electric delivery revenues increased in 2010 compared with 2009, primarily due to price increases in April 2010 and 2009, partially offset by lower regulatory recovery due to a revised estimate of network electricity losses.
      2011   
      Unregulated              
      Gross Energy    Operating        
      Margins Other (a) Income (b)      
Operating Revenues                    
 Unregulated wholesale energy $ 3,743  $  1,469 (c)  $  5,212           
 Unregulated wholesale energy                    
  to affiliate   26          26           
 Unregulated retail energy (e)   696    31 (c)    727           
 Energy-related businesses        464     464           
   Total Operating Revenues   4,465    1,964     6,429           
                         
Operating Expenses                    
 Fuel   1,151    (71)(e)    1,080           
 Energy purchases   912    1,371 (c)    2,283           
 Energy purchases from affiliate   3          3           
 Other operation and maintenance 16    913     929           
 Depreciation        244     244           
 Taxes, other than income   30    41     71           
 Energy-related businesses        458     458           
   Total Operating Expenses   2,112    2,956     5,068           
 Discontinued Operations   12    (12)(f)                
Total $ 2,365  $ (1,004)  $ 1,361           


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(a)Represents amounts excluded from Margins.
(b)As reported on the Statements of Income.
(c)Includes energy-related economic activity, which is subject to fluctuations in value due to market price volatility.  See "Commodity Price Risk (Non-trading) - Economic Activity" within Note 19 to the Financial Statements.  For 2012, "Unregulated wholesale energy" and "Energy purchases" 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.
(d)Although retail energy revenues continue to grow, the net margins related to these activities are not currently a significant component of Unregulated Gross Energy Margins.
(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 certain revenues and expenses associated with certain businesses that are classified as discontinued operations.  These revenues and expenses are not reflected in "Operating Income" on the Statements of Income.

U.K. electric delivery revenues increasedStatement of Income Analysis --

Certain Operating Revenues and Expenses Included in 2009 compared with 2008, primarily due to price increases in April 2009"Unregulated Gross Energy Margins"

The following Statement of Income line items are included above within "Unregulated Gross Energy Margins" and 2008, increased regulatory recovery due to 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.are not discussed separately.

  2013 vs. 2012  2012 vs. 2011 
       
Unregulated wholesale energy $(1,082) $(1,086)
Unregulated wholesale energy to affiliate  (27)  52 
Unregulated retail energy  183   121 
Fuel  84   (115)
Energy purchases  (650)  (465)

Energy-Related Businesses

The changes in contributions from energy-related businesses were due to:

  2010 vs. 2009 2009 vs. 2008
       
Domestic mechanical business (a) $ (8) $ (6)
WPD (b)   2    (4)
Other   8    
Total $ 2  $ (10)

(a)  Primarily attributable to a decline in construction activity caused by the slowdown in the economy.
(b)  Changes in contributions from U.K. energy-related businesses were primarily due to increases in remote metering business activity in 2010 and decreases related to changes in foreign currency exchange rates in 2009.
The $10 million net increase in contributions from energy-related businesses in 2012 compared with 2011 primarily relates to the mechanical services businesses, due to improved margins on construction and energy service projects in 2012.

Other Operation and Maintenance

The changesincrease (decrease) in other operation and maintenance expenses werewas due to:

  2010 vs. 2009 2009 vs. 2008
       
Montana hydroelectric litigation (Note 15) $ 48  $ 8 
Defined benefit costs - U.K. (Note 13)   32    (16)
Other costs at Susquehanna nuclear plant   23    14 
Outage costs at Susquehanna nuclear plant   8    
Uncollectible accounts   3    (8)
Other costs at fossil/hydroelectric plants   2    17 
Outage costs at eastern fossil/hydroelectric plants      23 
Impacts from emission allowances (a)   (16)   (9)
Workforce reductions (Note 13)   (13)   13 
Allocation of certain corporate support group costs   (5)   16 
Defined benefit costs - U.S. (Note 13)   (2)   11 
U.K. foreign currency exchange rates   (1)   (24)
Impairment of cancelled generation expansion project in 2008 (Note 8)      (22)
Montana basin seepage litigation (Note 15)      (8)
Trademark royalty fees from a PPL subsidiary (Note 16)      (7)
Other - Domestic   7    (3)
Other - U.K.   14    (6)
Total $ 100  $ (1)
   2013 vs. 2012 2012 vs. 2011
        
Fossil and hydroelectric plants (a) $ 43  $ 1 
PPL EnergyPlus (b)   (18)   17 
PPL Susquehanna (c)   (3)   33 
Montana hydroelectric litigation (d)      65 
Ironwood Acquisition (e)      20 
Trademark royalties (f)      (34)
Other   9    10 
Total $ 31  $ 112 

(a)ForIn 2012, PPL Energy Supply announced its intention, beginning in April 2015, to place its Corette coal-fired plant in Montana in long-term reserve status, suspending the period 2010 comparedplant's operations due to 2009, $21expected market conditions and the costs to comply with MATS.  During the fourth quarter of 2013, PPL Energy Supply determined its Corette plant was impaired and recorded a charge of $65 million relates to lower impairment charges of sulfur dioxidefor the plant and related emission allowances.  See Note 18 to the Financial Statements for additional information.  Partially offsetting
(b)2013 compared with 2012 was lower primarily due to SMGT filing under Chapter 11 of the decreaseU.S. Bankruptcy Code.  $11 million of receivables billed to SMGT were fully reserved in 2012.  For 2012 compared with 2011, no individual item was a $5 million increasesignificant in comparison to the chargeprior year.
(c)2012 compared with 2011 was higher primarily due to outage and project costs.
(d)In February 2012, the U.S. Supreme Court overturned the Montana state court decisions requiring PPL Montana to make lease payments for the settlement of a dispute regarding the saleuse of certain annual nitrogen oxide allowance put options.Montana streambeds.  As a result, in 2011, PPL Montana reversed its total loss accrual.  See Note 15 to the Financial Statements for additional information.
(e)Amounts in 2013 compared with 2012 are comparable and have not been isolated for purposes of comparability.  Amounts in 2012 compared with 2011 were not comparable as 2012 includes nine months of expense and therefore, have been isolated for purposes of comparability.  See Note 10 to the Financial Statements for information on the acquisition.
(f)In 2011, PPL Energy Supply was charged trademark royalties by an affiliate.  The agreement was terminated in December 2011.

ForLoss on Lease Termination

A $697 million charge was recorded in 2013 for the period 2009 comparedtermination of the Colstrip operating lease to 2008, $33 million relates to lower impairment chargesfacilitate the sale of nitrogen oxide allowances partially offset by $37 million of higher impairment charges of sulfur dioxide allowances.the Montana hydroelectric generating facilities.  See Note 188 to the Financial Statements for additional information.  Also contributing to the difference was a $13 million decrease in the charge for the settlement of a dispute regarding the sale of certain annual nitrogen oxide allowance put options.

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Depreciation

The changesDepreciation increased by $33 million in depreciation expense were2013 compared with 2012, primarily due to:to net PP&E additions.

  2010 vs. 2009 2009 vs. 2008
       
Additions to PP&E (a) $ 43  $ 40 
U.K. foreign currency exchange rates      (25)
Other      (4)
Total $ 43  $ 11 

(a)Additions included Susquehanna generation uprates and the completion of Brunner Island environmental projects in 2008 through 2010 as well as the Montour scrubber project in 2008.
Depreciation increased by $41 million in 2012 compared with 2011, primarily due to $16 million attributable to net PP&E additions and $17 million attributable to the Ironwood Acquisition in April 2012.

Taxes, Other Than Income

The changes in taxes,Taxes, other than income weredecreased by $2 million in 2012 compared with 2011, primarily due to:

  2010 vs. 2009 2009 vs. 2008
        
Pennsylvania gross receipts tax (a) $ 15    
Domestic property tax expense (b)   1  $ 10 
U.K. foreign currency exchange rates      (12)
Other (c)   (3)   2 
   $ 13  $ 

(a)The increase in 2010 compared with 2009 was primarily due to an increase in retail electricity sales by PPL EnergyPlus.  This tax is included in "Unregulated Gross Energy Margins" above.
(b)The increase in 2009 compared with 2008 was primarily due to a $7 million property tax credit recorded by PPL Montana in 2008.
(c)The decrease in 2010 compared with 2009 primarily relates to lower WPD real estate tax expense due to reductions in tax rates.
to a $7 million decrease in state capital stock tax offset by a $4 million increase in state gross receipts tax.

Other Income (Expense) - net

See Note 17 to the Financial Statements for details.

Other-Than-Temporary Impairments

Other-than-temporary impairments decreased by $15 million in 2010 compared with 2009 and by $18 million in 2009 compared with 2008.  The decrease for both periods was primarily due to stronger returns on NDT investments caused by improved market conditions within the financial markets.

Interest Income from AffiliatesPennsylvania Gross Delivery Margins

Interest income from affiliatesDistribution

Distribution margins increased by $7 million in 20102013 compared with 2009,2012, primarily due to loans to LKE subsidiaries, which have been fully repaid asa $53 million favorable effect of December 31, 2010.

Interest income from affiliates decreased by $12price, largely comprised of higher base rates, effective January 1, 2013, a $15 million in 2009 compared with 2008,impact of weather primarily due to the declineadverse effect of mild weather in 2012 and higher volumes of $5 million.

Distribution margins decreased in 2012 compared with 2011, primarily due to a $14 million impact of weather primarily due to the average balance outstandingadverse 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 reconciliations filed with the PUC.

Transmission

Transmission margins increased for both periods, primarily due to increased investment in plant and the floating interest rate onrecovery of additional costs through the collateral depositFERC formula-based rates.

Unregulated Gross Energy Margins

Eastern U.S.

Eastern margins decreased in 2013 compared with 2012 primarily due to $435 million of lower baseload energy prices, partially offset by $198 million of higher capacity prices and $100 million of increased nuclear generation volume.

Eastern margins decreased in 2012 compared with 2011 primarily due to $121 million of lower baseload energy prices and $54 million of lower capacity prices.

Western U.S.

Western margins decreased in 2013 compared with 2012 primarily due to $69 million of lower wholesale energy prices and $15 million of lower net economic availability of coal and hydroelectric units.

Western  margins decreased in 2012 compared with 2011 primarily due to $34 million of lower wholesale volumes, including $31 million related to the PLR contract.bankruptcy of SMGT, $9 million of higher average fuel prices and $9 million of lower wholesale energy prices.


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Statement of Income Analysis --

Utility Revenues      
          
The increase (decrease) in utility revenues was due to:
     2013 vs. 2012 2012 vs. 2011
Domestic:      
 PPL Electric (a) $106  $ (121)
 LKE (b)  217    (34)
 Total Domestic  323   (155)
          
U.K.:      
 Price (c)   264    78 
 Volume (d)  5    (13)
 Recovery of allowed revenues (e)  (43)   (6)
 WPD Midlands line loss accrual adjustments (f)  (142)   
 Foreign currency exchange rates  (27)   (11)
 Other  13    (10)
 WPD Midlands (g)      633 
 Total U.K.  70   671 
Total $393  $ 516 

(a)See "Pennsylvania Gross Delivery Margins" for further information.
(b)See "Kentucky Gross Margins" for further information.
(c)The increase in 2013 compared with 2012 was due to price increases effective April 1, 2013 and April 1, 2012.  The increase in 2012 compared with 2011 was due to price increases effective April 1, 2012 and April 1, 2011.
(d)The increase in 2013 compared with 2012 was primarily due to the favorable effect of weather.  The decrease in 2012 compared with 2011 was primarily due to the downturn in the economy and the unfavorable effect of weather.
(e)The decrease in 2013 compared with 2012 was primarily due to over-recovered revenues as a result of price and weather related volume effects that are not expected to reverse within the regulatory year ending March 31, 2014.  Therefore, a liability was recorded and utility revenue reduced for the amount of the over-recovery in 2013.  These amounts are expected to be refunded within the regulatory year beginning April 1, 2014.
(f)The decrease was due to a $97 million increase in revenue in 2012 and a $45 million reduction in revenue in 2013 from adjusting a loss accrual based on information provided by Ofgem regarding the calculation of line loss incentives and penalties for all network operators, primarily related to DPCR4.  See Note 6 to the Financial Statements for additional information.
(g)Amounts in 2013 compared with 2012 are comparable and have not been isolated for purposes of comparability.  Amounts in 2012 were not comparable with 2011, as 2011 includes eight months of WPD Midlands' results.  The increase in 2012 compared with 2011 was primarily due to four additional months of utility revenue in 2012 of $446 million.  The comparable eight month period was higher in 2012 compared to 2011 due to a $125 million price increase effective April 1, 2012 and the $97 million line loss accrual adjustment in 2012 discussed above.

Certain Operating Revenues and Expenses Included in "Margins"

The following Statement of Income line items are included above within "Margins" and are not discussed separately.

  2013 vs. 2012  2012 vs. 2011 
       
Unregulated wholesale energy $ (1,082) $ (1,086)
Unregulated retail energy   183    118 
Fuel   107    (109)
Energy purchases   (588)   (698)

Other Operation and Maintenance
         
       
The increase (decrease) in other operation and maintenance was due to:
         
    2013 vs. 2012 2012 vs. 2011
Domestic:      
 LKE coal plant operations and maintenance (a) $ (15) $ 21 
 Act 129 costs incurred  (b)   (24)   (6)
 Vegetation management  (c)   14    10 
 PPL Electric payroll-related costs (d)   4    17 
 Montana hydroelectric litigation (e)      65 
 PPL Susquehanna (f)   (3)   33 
 Fossil and hydroelectric plants (g)   43    1 
 Ironwood Acquisition (h)      20 
 PUC-reportable storm costs, net of insurance recoveries   (21)   14 
 PPL EnergyPlus (i)   (18)   17 
 Stock based compensation   2    17 
 Other   (10)   21 

57


    2013 vs. 2012 2012 vs. 2011
U.K.:      
 Network maintenance (j)   32    11 
 Third-party engineering (k)   12    (3)
 Pension (l)   8    21 
 Separation benefits (m)   (11)   
 Employee-related expenses   (7)   
 Foreign currency exchange rates   (4)   (2)
 Acquisition-related adjustments   (8)   
 WPD Midlands (n)      (85)
 Other   (4)   (4)
   $ (10) $ 168 
(a)The decrease in 2013 compared with 2012 was primarily due to $21 million of lower costs related to the timing and scope of scheduled outages, partially offset by increased generation costs.  The increase in 2012 compared with 2011 was primarily due to $11 million of expenses related to an increase 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)Relates to costs associated with PPL Electric's PUC-approved energy efficiency and conservation plan with programs starting in 2010.  These costs are recovered in customer rates.  The decrease in both periods primarily results from the number of programs and timing of such programs.  Phase 1 of Act 129 closed in May 2013.  Phase 2 programs began in June 2013.
(c)PPL Electric incurred higher vegetation management costs in both periods due to increased activities related to maintaining and increasing system reliability for both the transmission and distribution systems.  The amount for 2012 compared to the 2011 period was also higher due to increased costs to comply with federal transmission reliability requirements.
(d)PPL Electric Utilities incurred higher payroll costs of $17 million in 2012 compared with 2011 due to less project costs being capitalized.
(e)In February 2012, the U.S. Supreme Court overturned the Montana state court decisions requiring PPL Montana to make lease payments for the use of certain Montana streambeds.  As a result, in 2011, PPL Montana reversed its total loss accrual.  See Note 15 to the Financial Statements for additional information.
(f)2012 compared with 2011 was higher due to outage and project costs.
(g)In 2012, PPL Energy Supply announced its intention, beginning in April 2015, to place its Corette plant in long-term reserve status, suspending the plant's operations due to expected market conditions and the costs to comply with MATS.  During the fourth quarter of 2013, PPL Energy Supply determined its Corette plant was impaired and recorded a charge of $65 million for the plant and related emission allowances.  See Note 18 to the Financial Statements for additional information.
(h)Amounts in 2013 compared with 2012 are comparable and have not been isolated for purposes of comparability.  Amounts in 2012 compared with 2011 were not comparable as 2012 includes nine months of expense and, therefore, have been isolated for purposes of comparability.  See Note 10 to the Financial Statements for information on the acquisition.
(i)2013 compared with 2012 was lower primarily due to SMGT filing under Chapter 11 of the U.S. Bankruptcy Code.  $11 million of receivables billed to SMGT were fully reserved in 2012.  For 2012 compared with 2011, no individual item was significant in comparison to the prior year.
(j)The increases in both periods were primarily due to higher vegetation management costs.
(k)These costs are offset by revenues reflected in "Utility" on the Statement of Income.
(l)The increases in both periods were due to higher pension costs resulting from increased amortization of actuarial losses.
(m)The decrease in 2013 compared with 2012 was primarily due to costs incurred in 2012 related to the WPD Midlands reorganization.
(n)Amounts in 2012 compared with 2011 were not comparable as 2011 includes eight months of WPD Midlands' results and therefore, have been isolated for purposes of comparability.  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 primarily due to $86 million of lower separation benefits, $34 million of lower acquisition related costs, and $26 million of lower pension expense.
Loss on Lease Termination

A $697 million charge was recorded in 2013 for the termination of the Colstrip operating lease to facilitate the sale of the Montana hydroelectric generating facilities.  See Note 8 to the Financial Statements for additional information.

Depreciation

The increase (decrease) in depreciation was due to:

  2013 vs. 2012 2012 vs. 2011
       
Additions to PP&E, net $ 89  $ 65 
LKE lower depreciation rates effective January 1, 2013 (a)   (22)   
WPD Midlands (b)        55 
Ironwood Acquisition (c)      17 
Other   (6)   3 
Total $ 61  $ 140 

(a)A result of the 2012 rate case.
(b)Amounts in 2013 compared with 2012 are comparable and have not been isolated for purposes of comparability.  Amounts in 2012 were not comparable with 2011, which includes eight months of WPD Midlands' results and therefore, have been isolated for purposes of comparability. The increase in 2012 compared with 2011 is primarily due to four additional months of expense in 2012 of $49 million.

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(c)Amounts in 2013 compared with 2012 are comparable and have not been isolated for purposes of comparability.  Amounts in 2012 compared with 2011 were not comparable as 2012 includes nine months of expenses and therefore, have been isolated for purposes of comparability.  See Note 10 to the Financial Statements for information on the acquisition.

Taxes, Other Than Income

The increase (decrease) in taxes, other than income was due to:

   2013 vs. 2012 2012 vs. 2011
        
Domestic property tax expense (a) $ 3  $ 14 
State capital stock tax (b)   (5)   (11)
WPD Midlands (c)        33 
Other        4 
Total $ (2) $ 40 

(a)The increase in 2012 compared with 2011 is primarily due to the fully amortized PURTA refund to the customers in 2011 pursuant to PUC regulations.  This tax is included in "Pennsylvania Gross Delivery Margins" above.
(b)The decrease in 2012 compared with 2011 was due to changes in the statutory rate from the prior year.
(c)Amounts in 2013 compared with 2012 are comparable and have not been isolated for purposes of comparability.  Amounts in 2012 compared with 2011 were not comparable as 2011 includes eight months of WPD Midlands' results and therefore, have been isolated for purposes of comparability.  The increase in 2012 compared with 2011 is primarily due to four additional months of expense in 2012 of $30 million.

Other Income (Expense) - net      
       
The increase (decrease) in other income (expense) - net was due to:
       
  2013 vs. 2012 2012 vs. 2011
       
Economic foreign currency exchange contracts (Note 19) $ 14  $ (62)
Net hedge gains associated with the 2011 Bridge Facility (a)      (55)
Foreign currency loss on 2011 Bridge Facility      57 
Gain on redemption of debt (b)      (22)
WPD Midlands acquisition-related adjustments in 2011 (Note 10)      55 
Losses from equity method investments   8    (9)
Charitable contributions   (15)   (1)
Other   9    (6)
Total $ 16  $ (43)

(a)Represents a gain on foreign currency contracts in 2011 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.

Other-Than-Temporary Impairments

Other-than-temporary impairments decreased by $26 million in 2013 compared with 2012 and increased by $21 million in 2012 compared with 2011 primarily due to a $25 million pre-tax impairment of the EEI investment in 2012.  See Notes 1 and 18 to the Financial Statements for additional information.

Interest Expense

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

  2010 vs. 2009 2009 vs. 2008
        
Interest on WPD debt issuance (Note 7) $ 25    
Inflation adjustment on U.K. Index-linked Senior Unsecured Notes   23  $ (29)
Capitalized interest   12    12 
Amortization of debt issuance costs   12    6 
Montana hydroelectric litigation (Note 15)   10    
Hedging activities   3    (3)
U.K. foreign currency exchange rates   (3)   (17)
Other long-term debt interest expense   (1)   (15)
Short-term debt interest expense   (1)   6 
Other      (3)
Total $ 80  $ (43)
   2013 vs. 2012 2012 vs. 2011
        
2011 Bridge Facility costs related to the acquisition of WPD Midlands (Notes 7 and 10)      $ (44)
2011 Equity Units (a) $ (2)   12 
Long-term debt interest expense (b)   31    3 
Short-term debt interest expense (c)   3    (12)
Inflation adjustment on U.K. Index-linked Senior Unsecured Notes   4    (12)
WPD Midlands (d)      80 
Ironwood Acquisition (e)        12 
Hedging activities and ineffectiveness   4    29 
Capitalized interest (f)   6    (6)
Montana hydroelectric litigation (g)      10 
Loss on extinguishment of debt (h)   10      
Other   (11)   (9)
Total $ 45  $ 63 

(a)Interest related to the issuance in April 2011 to support the WPD Midlands acquisition.

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(b)2013 increased due to debt issuances by PPL Capital Funding in March 2013, June 2012 and October 2012, by PPL Electric in July 2013 and August 2012, and WPD (East Midlands) in April 2012.  Partially offsetting these increases was PPL Energy Supply's debt maturity in July 2013.
(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.
(d)Amounts in 2013 compared with 2012 are comparable and have not been isolated for purposes of comparability.  Amounts in 2012 compared with 2011 were not comparable as 2011 includes eight months of WPD Midlands' results and therefore, have been isolated for purposes of comparability.  The increase in 2012 compared with 2011 is primarily due to four additional months of expense in 2012 of $74 million.
(e)Amounts in 2013 compared with 2012 are comparable and have not been isolated for purposes of comparability.  Amounts in 2012 compared with 2011 were not comparable as 2012 includes nine months of expense and therefore, have been isolated for purposes of comparability.  See Note 10 to the Financial Statements for information on the acquisition.
(f)Includes AFUDC.
(g)In February 2012, the U.S. Supreme Court overturned the Montana state court decisions requiring PPL Montana to make lease payments for the use of certain Montana streambeds.  As a result, in 2011, PPL Montana reversed its total loss accrual including accrued interest.  See Note 15 to the Financial Statements for additional information.
(h)In May 2013, PPL Capital Funding remarketed and exchanged junior subordinate notes that were originally issued in June 2010 as a component of PPL's 2010 Equity Units.

See Note 7 to the Financial Statements for information on 2013 long-term debt activity.

Income Taxes

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

  2010 vs. 2009 2009 vs. 2008
       
Higher (lower) pre-tax book income $ 350  $ (288)
State valuation allowance adjustments   (52)   
Federal income tax credits   (10)   (17)
Domestic manufacturing deduction   (8)   13 
Federal and state tax reserve adjustments   (46)   (14)
Federal and state tax return adjustments   (21)   27 
U.S. income tax on foreign earnings net of foreign tax credit   50    5 
U.K. Finance Act adjustments   (18)   8 
U.K. capital loss benefit      (46)
Foreign tax reserve adjustments   (17)   12 
Foreign tax return adjustments      17 
Health Care Reform   5    
Other   6    5 
  $ 239  $ (278)
   2013 vs. 2012 2012 vs. 2011
        
Change in pre-tax income $ (335) $ (296)
State valuation allowance adjustments (a)   11    (23)
State deferred tax rate change (b)   34    7 
Federal and state tax reserve adjustments  (c)   (42)   (40)
Federal and state tax return adjustments (d)   (21)   33 
U.S. income tax on foreign earnings net of foreign tax credit (e)   (17)   57 
U.K. Finance Act adjustments (f)   (22)   2 
Foreign valuation allowance adjustments (g)        (147)
Foreign tax reserve adjustments (g)   3    134 
Foreign tax return adjustments   2    (6)
Depreciation not normalized (a)   3    9 
Net operating loss carryforward adjustments (h)   9    (9)
WPD Midlands (i)        146 
Other   10    (13)
Total $ (365) $ (146)

(a)The valuation allowances recorded on PPL's state deferred tax assets primarily relate to Pennsylvania net operating loss carryforwards.  Pennsylvania requires that each corporation file a separate income tax return and has significant annual limitations on the deduction for net operating loss carryforwards.  Currently, Pennsylvania allows an annual maximum deduction equal to the greater of $3 million or 20% of taxable income.  Recent legislation increased the annual maximum deduction to the greater of $5 million or 30% of taxable income for tax years beginning in 2015.

During 2013, PPL recorded $24 million state deferred income tax expense related to a deferred tax valuation allowance primarily due to a decrease in projected future taxable income over the remaining carryforward period of Pennsylvania net operating losses.

During 2012, PPL recorded $9 million state deferred income tax expense related to a deferred tax valuation allowance primarily due to a decrease in projected future taxable income over the remaining carryforward period of Pennsylvania net operating losses.

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 a $43 million 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 was extended to January 1, 2013 for property that had a cost in excess of $1 million, had a production period longer than one year and had a tax life of at least ten years.  PPL's tax deduction for 100% bonus regulated tax depreciation was zero in 2013 and was significantly lower in 2012 than in 2011.

(b)Changes in state apportionment resulted in an increase to the future estimated state tax rate at December 31, 2013 and reductions to the future estimated state tax rate at December 31, 2012 and 2011.  PPL recorded a $15 million deferred tax expense in 2013, a $19 million deferred tax benefit in 2012 and a $26 million deferred tax benefit in 2011 related to its state deferred tax liabilities.
(c)In May 2013, the U.S. Supreme Court reversed the December 2011 ruling of the U.S. Court of Appeals for the Third Circuit on the creditability of U.K. Windfall Profits Tax for tax purposes.  As a result of this decision, PPL recorded a tax benefit of $44 million during 2013.  PPL recorded $39 million tax expense related to the U.S. Court of Appeals for the Third Circuit's ruling in 2011.  See Note 5 to the Financial Statements for additional information.

PPL recorded a tax benefit of $7 million during 2013 and $6 million during 2012 and 2011 to federal and state income tax reserves related to stranded cost securitization.  The reserve balance at December 31, 2013 related to stranded costs securitization is zero.

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(d)During 2012, PPL recorded $16 million in 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 $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.
(e)During 2013, PPL recorded $25 million income tax expense resulting from increased taxable dividends offset by a $19 million income tax benefit associated with a ruling obtained from the IRS impacting the recalculation of 2010 U.K. earnings and profits that was reflected on an amended 2010 U.S. tax return.

During 2012, PPL recorded a $23 million adjustment to federal income tax expense related to the recalculation of 2010 U.K. earnings and profits.

During 2011, PPL recorded a $28 million federal income tax benefit related to U.K. pension contributions.
(f)The U.K.'s Finance Act 2013, enacted in July 2013, reduced the U.K. statutory income tax rate from 23% to 21% effective April 1, 2014 and from 21% to 20% effective April 1, 2015.  As a result, PPL reduced its net deferred tax liabilities and recognized a $97 million deferred tax benefit in 2013 related to both rate decreases.

The U.K.'s Finance Act 2012, enacted in July 2012, reduced the U.K. statutory income tax rate from 25% to 24% retroactive to April 1, 2012 and from 24% to 23% effective April 1, 2013.  As a result, PPL reduced its net deferred tax liabilities and recognized a $75 million deferred tax benefit in 2012 related to both rate decreases.  WPD Midlands' portion of the deferred tax benefit is $43 million.

The U.K.'s Finance Act 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.
(g)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.
(h)During 2012, PPL recorded adjustments to deferred taxes related to net operating loss carryforwards of LKE based on income tax return adjustments.
(i)Amounts in 2013 compared with 2012 are comparable and have not been isolated for purposes of comparability.  Amounts in 2012 compared with 2011 were not comparable as 2011 includes eight months of WPD Midlands' results and therefore, have been isolated for purposes of comparability.  The increase in 2012 compared with 2011 was primarily due to higher pre-tax income.

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

Discontinued OperationsNoncontrolling Interests

See Note 9"Net Income Attributable to Noncontrolling Interests" decreased by $4 million in 2013 compared with 2012 and $12 million in 2012 compared with 2011 primarily due to PPL Electric's June 2012 redemption of all 2.5 million shares of its preference stock.

PPL Energy Supply:  Earnings, Margins and Statement of Income Analysis

Earnings

   2013  2012  2011 
           
Net Income (Loss) Attributable to PPL Energy Supply Member $ (230) $ 474  $ 768 
Special items, gains (losses), after-tax   (531)   18    142 

Excluding special items, pre-tax earnings in 2013 compared with 2012 decreased primarily due to lower baseload energy prices and higher depreciation, partially offset by higher capacity prices, higher nuclear generation volume, lower operation and maintenance expense and lower income taxes.

Excluding special items, pre-tax earnings in 2012 compared with 2011 decreased primarily due to lower Eastern energy margins resulting from lower baseload energy and capacity prices, lower Western energy margins resulting from an early 2012 contract termination related to the Financial Statements for information related to various 2010bankruptcy of SMGT, higher operation and 2009 sales, includingmaintenance expense, higher depreciation, partially offset by lower financing costs and income taxes.

The table below quantifies the anticipated sale of certain non-core generation facilities expected to occurchanges in the first quartercomponents of 2011.

Financial Condition

Liquidity and Capital Resources

Net Income Attributable to PPL Energy Supply expects to continue to have adequate liquidity available through operating cash flows, cashMember between these periods, which reflect amounts classified as Unregulated Gross Energy Margins and cash equivalentscertain items that management considers special on separate lines within the table and its credit facilities.  Additionally, subject to market conditions, PPL Energynot in their respective Statement of Income line items.  See PPL's "Results of Operations - Segment Earnings - Supply currently plans to access debt capital markets in 2011.Segment" for the details of special items.

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  2013 vs. 2012 2012 vs. 2011
       
Unregulated Gross Energy Margins $ (194) $ (197)
Other operation and maintenance   23    (53)
Depreciation   (33)   (41)
Taxes, other than income   6    6 
Other Income (Expense) - net   15    (5)
Interest Expense   (3)   16 
Other   (3)   2 
Income Taxes   34    102 
Special items, after-tax   (549)   (124)
Total $ (704) $ (294)

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:Margins

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

The following tables contain the components from the Statements of Income that are included in this non-GAAP financial measure and a reconciliation to "Operating Income" for the years ended December 31.

      2013  2012 
      Unregulated       Unregulated      
      Gross Energy    Operating Gross Energy     Operating
      Margins Other (a) Income (b) Margins Other (a) Income (b)
Operating Revenues��                   
 Unregulated wholesale energy $ 3,758  $  (714)(c)  $  3,044  $ 4,416  $  (290)(c)  $  4,126 
 Unregulated wholesale energy                    
  to affiliate   51          51    78          78 
 Unregulated retail energy (d)   1,019    12 (c)    1,031    865    (17)(c)    848 
 Energy-related businesses        527     527         448     448 
   Total Operating Revenues   4,828    (175)    4,653    5,359    141     5,500 
                         
Operating Expenses                    
 Fuel   1,045    4 (e)    1,049    931    34 (e)    965 
 Energy purchases   1,742    (574)(c)    1,168    2,204    (386)(c)    1,818 
 Energy purchases from affiliate   3          3    3          3 
 Other operation and maintenance 20    1,052     1,072    19    1,022     1,041 
 Loss on lease termination (Note 8)    697     697           
 Depreciation        318     318         285     285 
 Taxes, other than income   37    29     66    34    35     69 
 Energy-related businesses   7    505     512         432     432 
   Total Operating Expenses   2,854    2,031     4,885    3,191    1,422     4,613 
Total $ 1,974  $ (2,206)  $ (232) $ 2,168  $ (1,281)  $ 887 

      2011   
      Unregulated              
      Gross Energy    Operating        
      Margins Other (a) Income (b)      
Operating Revenues                    
 Unregulated wholesale energy $ 3,743  $  1,469 (c)  $  5,212           
 Unregulated wholesale energy                    
  to affiliate   26          26           
 Unregulated retail energy (e)   696    31 (c)    727           
 Energy-related businesses        464     464           
   Total Operating Revenues   4,465    1,964     6,429           
                         
Operating Expenses                    
 Fuel   1,151    (71)(e)    1,080           
 Energy purchases   912    1,371 (c)    2,283           
 Energy purchases from affiliate   3          3           
 Other operation and maintenance 16    913     929           
 Depreciation        244     244           
 Taxes, other than income   30    41     71           
 Energy-related businesses        458     458           
   Total Operating Expenses   2,112    2,956     5,068           
 Discontinued Operations   12    (12)(f)                
Total $ 2,365  $ (1,004)  $ 1,361           


62

·(a)changes in market prices for electricity;Represents amounts excluded from Margins.
·(b)changes in commodity prices that may increaseAs reported on the costStatements of producing power or decrease the amount PPL Energy Supply receives from selling power;Income.
·(c)operationalIncludes energy-related economic activity, which is subject to fluctuations in value due to market price volatility.  See "Commodity Price Risk (Non-trading) - Economic Activity" within Note 19 to the Financial Statements.  For 2012, "Unregulated wholesale energy" and credit risks associated with selling"Energy purchases" 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 marketing products ina net pre-tax gain of $19 million related to the wholesale power markets;amortization of option premiums.
·(d)potential ineffectivenessAlthough retail energy revenues continue to grow, the net margins related to these activities are not currently a significant component of the trading, marketing and risk management policy and programs used to mitigate PPLUnregulated Gross Energy Supply's risk exposure to adverse electricity and fuel prices, interest rates and counterparty credit;Margins.
·(e)reliance on transmission and distribution facilities that PPL Energy Supply does not own or controlIncludes economic activity related to deliver its electricity and natural gas;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)unavailabilityRepresents the net of generating units (due to unscheduled or longer-than-anticipated generation outages, weather and natural disasters) and the resulting loss ofcertain revenues and additional costsexpenses associated with certain businesses that are classified as discontinued operations.  These revenues and expenses are not reflected in "Operating Income" on the Statements of replacement electricity;
·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.Income.

See "Item 1A. Risk Factors" for further discussionStatement of risks and uncertainties affecting PPL Energy Supply's cash flows.Income Analysis --

At December 31, PPLCertain Operating Revenues and Expenses Included in "Unregulated Gross Energy Supply had the following:Margins"

  2010  2009  2008 
          
Cash and cash equivalents $ 661  $ 245  $ 464 
Short-term investments (a)         150 
  $ 661  $ 245  $ 614 
Short-term debt $ 531  $ 639  $ 584 
The following Statement of Income line items are included above within "Unregulated Gross Energy Margins" and are not discussed separately.

  2013 vs. 2012  2012 vs. 2011 
       
Unregulated wholesale energy $(1,082) $(1,086)
Unregulated wholesale energy to affiliate  (27)  52 
Unregulated retail energy  183   121 
Fuel  84   (115)
Energy purchases  (650)  (465)

Energy-Related Businesses

The $10 million net increase in contributions from energy-related businesses in 2012 compared with 2011 primarily relates to the mechanical services businesses, due to improved margins on construction and energy service projects in 2012.

Other Operation and Maintenance

The increase (decrease) in other operation and maintenance was due to:

   2013 vs. 2012 2012 vs. 2011
        
Fossil and hydroelectric plants (a) $ 43  $ 1 
PPL EnergyPlus (b)   (18)   17 
PPL Susquehanna (c)   (3)   33 
Montana hydroelectric litigation (d)      65 
Ironwood Acquisition (e)      20 
Trademark royalties (f)      (34)
Other   9    10 
Total $ 31  $ 112 

(a)2008 amount represents tax-exempt bonds issued by the PEDFA in December 2008 on behalf ofIn 2012, PPL Energy Supply announced its intention, beginning in April 2015, to place its Corette coal-fired plant in Montana in long-term reserve status, suspending the plant's operations due to expected market conditions and purchased by a subsidiarythe costs to comply with MATS.  During the fourth quarter of 2013, PPL Energy Supply upon issuance.  Such bonds were refunded in April 2009.  See Note 7 to the Financial Statements for further discussion.

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

  2010  2009  2008 
          
Net cash provided by operating activities $ 1,840  $ 1,413  $ 1,039 
Net cash used in investing activities   (825)   (551)   (1,696)
Net cash provided by (used in) financing activities   (612)   (1,081)   779 
Effect of exchange rates on cash and cash equivalents   13       (13)
Net Increase (Decrease) in Cash and Cash Equivalents $ 416  $ (219) $ 109 

Operating Activities

Net cash provided by operating activities increased by 30%, or $427 million, in 2010 compared with 2009.  The expiration of the long-term power purchase agreements between PPL Electric and PPL EnergyPlus at the end of 2009 enabled PPL EnergyPlus to sell power at higher market prices and had a positive impact on net income, and specifically on "unregulated gross energy margins" which increased over $600 million, after-tax, in 2010 compared with 2009, and therefore, was the primary driver to the above increase.  The positive impact of additional earnings was partially offset by a reduction in the amount of counterparty collateral received and by additional defined benefit plan contributions.  In addition, changes in working capital in 2010 compared with 2009 offset the $300 million impact of cash collateral rec eived from PPL Electric in 2009 as discussed below.

Net cash provided by operating activities increased by 36%, or $374 million, in 2009 compared with 2008, 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 the change in method of accounting for certain expenditures for tax purposes.  These increases were partially offset by a decrease in accounts payable and the unfavorable impact of foreign currency exchange rates in 2009 compared with 2008.

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 baseload generation fleet, the primary objective of which is to provide a reasonable level of near-term cash flow and earnings certainty while preserving upside potential of power price increases over the medium term.  See Note 19 to the Financial Statements for further discussion.  Despite its hedging practices, PPL Energy Supply expects its future cash flows to be more influenced by commodity prices than during the past years when long-term supply contracts were in place between PPL EnergyPlus and PPL Electric. In the near-term, PPL Energy Supply expects its Supply segment operating cash flows to decline as a result of lower commodity prices.  In addition, 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.  See Note 24 to the Financial Statements for additional information.  As a result, PPL Energy Supply's cash from operating activities will also decline in future periods, as compared with prior periods.

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, 2010 positions, it would have had to post additional collateral of approximately $348 million with respect to electricity and fuel contracts.  PPL Energy Supply has in place risk management programs that a re 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 capital expenditures in 2010 and projected expenditures for the years 2011 through 2015.

Net cash used in investing activities increased 50%, or $274 million in 2010 compared with 2009, primarily as a result of a decrease of $154 million from proceeds from the sale of other investments, a change of $135 million from restricted cash and cash equivalents, and an increase of $102 million in capital expenditures.  The increase 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 and a change of $28 million in other investing activities.  PPL Energy Supply received proceeds of $81 million from the sale of the majority of the Maine hydroelectric generation business in 2009, compared to proceeds of $162 million received in 2010 from the sales of the Long Island genera tion business and the remaining Maine hydroelectric generation business assets.

Net cash used in investing activities decreased 68%, or $1.1 billion in 2009 compared with 2008, primarily as a result of a change of $371 million from restricted cash and cash equivalents, a change of $249 million from purchases and sales of other investments, a change of $244 million from purchases and sales of intangible assets, a decrease of $207 million in capital expenditures and $81 million of proceeds received in 2009 from the sale of the majority of the Maine hydroelectric generation business.  See Note 1 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 PEDFA on behalf of PPL Energy Supply and Note 9 to the Financia l Statements for a discussion of the sale of the majority of the Maine hydroelectric generation business.

Financing Activities

Net cash used in financing activities was $612 million in 2010 compared with $1.1 billion in 2009 and net cash provided by financing activities of $779 million in 2008.  The change from 2009 to 2010 primarily reflects more long-term debt issuances, increased contributions from and distributions to Member, and less short-term borrowings in 2010.  The change from 2008 to 2009 primarily reflects no issuances of long-term debt in 2009, reduced contributions from Member, increased distributions to Member and less short-term borrowings in 2009.

In 2010, cash used in financing activities primarily consisted of $4.7 billion in distributions to Member, partially offset by $3.6 billion in contributions from 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 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 the acquisition of LKE and pay certain acquisition-related fees and expenses.

In 2009, cash used in financing activities primarily consisted of $943 million in distributions to Member and net debt retirements of $177 million, partially offset by $50 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.

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 2010 was:

  Issuances (a) Retirements
        
WPD Senior Unsecured Notes $ 597    
Other long-term debt   5    
PPL Energy Supply short-term debt (net change)   65    
WPD short-term debt (net change)    $ (158)
 Total $ 667  $ (158)
Net increase $ 509    

(a)Issuances are netdetermined its Corette plant was impaired and recorded a charge of pricing discounts, where applicable and exclude the impact of debt issuance costs.

See Note 7 to the Financial Statements for more detailed information regarding PPL Energy Supply's financing activities in 2010.

Forecasted Sources of Cash

PPL Energy Supply expects to continue to have significant sources of cash available in the near term, including various credit facilities, 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 $500 million in long-term debt securities in 2011, subject to market conditions.

Credit Facilities

At December 31, 2010, PPL Energy Supply's total committed borrowing capacity under credit facilities and the use of this borrowing capacity were:

      Letters of  
   Committed   Credit Unused
   Capacity Borrowed  Issued (a)  Capacity
          
PPL Energy Supply Domestic Credit Facilities (b) $ 3,500  $ 350  $ 185  $ 2,965 
              
WPDH Limited Credit Facility (c) ₤ 150  ₤ 115   n/a ₤ 35 
WPD (South West) Credit Facility (d)   210      n/a   210 
 Total WPD Credit Facilities (e) ₤ 360  ₤ 115   n/a ₤ 245 

(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 $3.0 billion under its credit facilities.  Such borrowings generally bear interest at LIBOR-based rates plus a spread, depending upon the company's senior unsecured long-term debt rating.  PPL Energy Supply also has the capability to cause the lenders to issue up to $3.5 billion of letters of credit under these facilities, which issuances reduce available borrowing capacity.  Subject to 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 contain a financial covenant requiring debt to total capitalization not to exceed 65%.  At December 31, 2010 and 2009, PPL Energy Supply's consolidated debt to total capitalization percentages, as calculated in accordance with its credit facilities, were 44% and 46%.  The credit facilities also contain standard representations and warranties that must be made for PPL Energy Supply to borrow under them.

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 14% of the total committed capacity.  The committed capacity expires as follows:  $300 million in 2011, $200 million in 2013 and $3.0 billion in 2014.
(c)Borrowings under WPDH Limited's credit facility bear interest at LIBOR-based rates plus a spread, depending upon the company's public long-term credit 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, 2010 and 2009, WPDH Limited's interest coverage ratios, as calculated in accordance with its credit facility, were 3.5 and 4.3.  At December 31, 2010 and 2009, WPDH Limited's RAB, as calculated in accordance with the credit facility, exceeded its total net debt by £364 million, or 27%, and £325 million, or 25%.
(d)Borrowings under WPD (South West)'s credit facility bear interest at LIBOR-based rates plus a margin.  This credit facility 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, 2010 and 2009, WPD (South West)'s interest coverage ratios, as calculated in accordance with its credit facility, were 3.6 and 5.3.  At December 31, 2010 and 2009, WPD (South West)'s total net debt, as calculated in accordance with the credit facility, was 75% and 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 under the facilities expires as follows:  £210 million in 2012 and £150 million in 2013.

At December 31, 2010, the unused capacity of WPD's credit facilities was approximately $381 million.

In January 2011, PPL Energy Supply distributed its 100% membership interest in PPL Global to its parent, PPL Energy Funding.  See Note 24 to the Financial Statements for additional information.

In addition to the financial covenants noted in the table above, the credit agreements governing the 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, 2010, 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.

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 11 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 $500 million in long-term debt securities in 2011.  PPL Energy Supply expects to use the proceeds from this issuance primarily to refund PPL Energy Supply's 2011 debt maturity.

From time to time, as determined by its Board of Directors, PPL Energy Supply's Member, PPL Energy Funding, makes capital contributions to PPL Energy Supply.  PPL Energy Supply uses these contributions for general corporate purposes.

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 2010 and current capital expenditure projections for the years 2011 through 2015.  (Amounts related to PPL Global have been excluded for periods subsequent to 2010.  See Note 24 to the Financial Statements for additional information.)

  Actual Projected
  2010  2011  2012  2013  2014  2015 
Construction expenditures (a) (b)                  
 Generating facilities $ 550  $ 625  $ 513  $ 398  $ 202  $ 366 
 Distribution facilities and other - WPD   286                
 Environmental   40    48    53    99    147    64 
 Other   21    31    32    32    29    23 
  Total Construction Expenditures   897    704    598    529    378    453 
Nuclear fuel   138    152    159    161    158    160 
Total Capital Expenditures $ 1,035  $ 856  $ 757  $ 690  $ 536  $ 613 

(a)Construction expenditures include capitalized interest, which is expected to be approximately $203$65 million for the years 2011 through 2015.
(b)Includes expenditures for certain intangible assets.

PPL Energy Supply's capital expenditure projections for the years 2011 through 2015 total approximately $3.5 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 247 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 2011 with cash on hand and cash from operations.

Contractual Obligations

PPL Energy Supply has assumed various financial obligations and commitments in the ordinary course of conducting its business.  At December 31, 2010, the estimated contractual cash obligations of PPL Energy Supply were:  (Amounts related to PPL Global have been excluded for periods subsequent to 2010.  See Note 24 to the Financial Statements for additional information.)

  Total Less Than 1 Year 1-3 Years 4-5 Years After 5 Years
                 
Long-term Debt (a) $ 3,272  $ 500  $ 737  $ 600  $ 1,435 
Interest on Long-term Debt (b)   1,862    204    343    222    1,093 
Operating Leases (c)   828    105    213    204    306 
Purchase Obligations (d)   4,908    1,197    1,554    754    1,403 
Total Contractual Cash Obligations $ 10,870  $ 2,006  $ 2,847  $ 1,780  $4,237 

(a)Reflects principal maturities only based on stated maturity dates, except for PPL Energy Supply's 5.70% Reset Put Securities (REPS).plant and related emission allowances.  See Note 7 to the Financial Statements for a discussion of the remarketing feature related to the REPS, as well as discussion of variable-rate remarketable bonds issued on behalf of PPL Energy Supply.  PPL Energy Supply does not have any significant capital lease obligations.
(b)Assumes interest payments through 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.
(c)See Note 1118 to the Financial Statements for additional information.
(d)(b)The payments reflected herein are subject2013 compared with 2012 was lower primarily due to change, as certain purchase obligations included are estimates based on projected obligated quantities and/or projected pricingSMGT filing under the contracts.  Purchase orders made in the ordinary course of business are excluded from the amounts presented.  The payments also include obligations related to nuclear fuel and the installationChapter 11 of the scrubbers, whichU.S. Bankruptcy Code.  $11 million of receivables billed to SMGT were fully reserved in 2012.  For 2012 compared with 2011, no individual item was significant in comparison to the prior year.
(c)2012 compared with 2011 was higher primarily due to outage and project costs.
(d)In February 2012, the U.S. Supreme Court overturned the Montana state court decisions requiring PPL Montana to make lease payments for the use of certain Montana streambeds.  As a result, in 2011, PPL Montana reversed its total loss accrual.  See Note 15 to the Financial Statements for additional information.
(e)Amounts in 2013 compared with 2012 are also reflectedcomparable and have not been isolated for purposes of comparability.  Amounts in 2012 compared with 2011 were not comparable as 2012 includes nine months of expense and therefore, have been isolated for purposes of comparability.  See Note 10 to the Capital Expenditures table presented above.Financial Statements for information on the acquisition.
(f)In 2011, PPL Energy Supply was charged trademark royalties by an affiliate.  The agreement was terminated in December 2011.

At December 31, 2010, total unrecognized tax benefitsLoss on Lease Termination

A $697 million charge was recorded in 2013 for the termination of $183 million were excluded from this table as PPL Energy Supply cannot reasonably estimate the amount and periodColstrip operating lease to facilitate the sale of future payments.the Montana hydroelectric generating facilities.  See Note 58 to the Financial Statements for additional information.

63


Distributions to MemberDepreciation

From timeDepreciation increased by $33 million in 2013 compared with 2012, primarily due to time, as determined by its Board of Managers, PPL Energy Supply makes return of capital distributions to its Member.net PP&E additions.

Purchase or Redemption of Debt SecuritiesDepreciation increased by $41 million in 2012 compared with 2011, primarily due to $16 million attributable to net PP&E additions and $17 million attributable to the Ironwood Acquisition in April 2012.

PPL Energy Supply will continue to evaluate purchasing or redeeming outstanding debt securities and may decide to take action depending upon prevailing market conditions and available cash.Taxes, Other Than Income

Credit RatingsTaxes, other than income decreased by $2 million in 2012 compared with 2011, primarily due to a $7 million decrease in state capital stock tax offset by a $4 million increase in state gross receipts tax.

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.Other Income (Expense) - net

A credit rating reflects an assessment by the rating agency of the creditworthiness associated with an issuer and particular securities that it issues.  The credit ratings of PPL Energy Supply and its subsidiaries are based on information provided by PPL Energy Supply and other sources.  The ratings of Moody's, S&P and Fitch are not a recommendation to buy, sell or hold any securities of PPL Energy Supply or its subsidiaries.  Such ratings may be subject to revisions or withdrawal by the agencies at any time and should be evaluated independently of each other and any other rating that may be assigned to the securities.  A downgrade in PPL Energy Supply's or its subsidiaries' credit ratings could result in higher borrowing costs and reduced access to capital markets.

In prior periodic reports, PPL Energy Supply described its then-current debt ratings in connection with, and to facilitate, an understanding of its liquidity position.  As a result of the passage of the Dodd-Frank Act and the attendant uncertainties relating to the extent to which issuers of non-asset backed securities may disclose credit ratings without being required to obtain rating agency consent to the inclusion of such disclosure, or incorporation by reference of such disclosure, in a registrant's registration statement or section 10(a) prospectus, PPL Energy Supply is limiting its credit rating disclosure to a description of the actions taken by the rating agencies with respect to PPL Energy Supply's ratings, but without stating what ratings have been assigned to PPL Energy Supply or its subsidiaries, or their securities.   The ratings assigned by the rating agencies to PPL Energy Supply and its subsidiaries and their respective securities may be found, without charge, on each of the respective ratings agencies' websites, which ratings together with all other information contained on such rating agency websites is, hereby, explicitly not incorporated by reference in this report.

The rating agencies took the following actions related to PPL Energy Supply and its subsidiaries in 2010.

Moody's

Following PPL's then-announced agreement to acquire LKE, Moody's affirmed its senior unsecured notes credit rating and outlook for PPL Energy Supply in April 2010.

In August 2010, Moody's affirmed all of PPL Energy Supply's ratings.

S&P

Following PPL's then-announced agreement to acquire LKE, S&P took the following actions in April 2010:

·Revised the outlook of PPL Energy Supply;
·Revised the outlook of WPDH Limited, WPD (South Wales) and WPD (South West); and
·Affirmed its credit ratings for PPL Energy Supply, WPDH Limited, WPD (South Wales) and WPD (South West).

S&P stated in its press release that the change to the outlook for PPL Energy Supply considers the greater regulated mix that will result from PPL acquiring LKE, resulting in a pro forma "strong" consolidated business risk profile for PPL.  S&P also stated that the revision in the outlook for WPD 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 October 2010, S&P took the following actions:

·Revised the outlook of PPL Energy Supply;
·Raised the issuer rating of PPL Energy Supply; and
·  Raised the senior unsecured debt rating of PPL Energy Supply.

In November 2010, S&P affirmed its credit rating and revised the outlook for PPL Montana's Pass Through Certificates due 2020.

Fitch

Following PPL's then-announced agreement to acquire LKE, Fitch affirmed its credit ratings and outlook for PPL Energy Supply in April 2010.

In May 2010, Fitch affirmed its rating and issued an outlook for PPL Montana's Pass Through Certificates due 2020.

In October 2010, Fitch affirmed its credit ratings for and revised the outlook of WPDH Limited, WPD (South Wales) and WPD (South West).

Ratings Triggers

As 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 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 £1.3 billion (approximately $2.0 billion) at December 31, 2010.

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 requiring 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 1917 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, 2010.  At December 31, 2010, 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 $347 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.details.

Guarantees for Subsidiaries

PPL Energy Supply guarantees certain consolidated affiliate financing arrangements that enable certain transactions.  Some of the guarantees contain financial and other covenants that, if not met, would limit or restrict the consolidated affiliates' access to funds under these financing arrangements, require early maturity of such arrangements or limit the consolidated affiliates' ability to enter into certain transactions.  At this time, PPL Energy Supply believes that these covenants will not limit access to relevant funding sources.  See Note 15 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 15 to the Financial Statements for a discussion of these agreements.

Risk Management - Energy Marketing & Trading and Other

Market Risk

See Notes 1, 18, and 19 to the Financial Statements for information about PPL Energy Supply'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 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 generation assets, full-requirement sales contracts and retail activities.  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.  (See Note 19 to the Financial Statements for additional information on hedge and economic activity).  The net fair value of economic positions at December 31, 2010 and 2009 was a net liability of $389 million and $77 million.

To hedge the impact of market price volatility on PPL Energy Supply's energy-related assets, liabilities and other contractual arrangements, PPL Energy Supply 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 times through 2017.

The following table sets forth the net fair value of PPL Energy Supply's non-trading commodity derivative contracts.  See Notes 18 and 19 to the Financial Statements for additional information.

  Gains (Losses)
  2010  2009 
       
Fair value of contracts outstanding at the beginning of the period $ 1,280  $ 402 
Contracts realized or otherwise settled during the period   (490)   189 
Fair value of new contracts entered into during the period   (5)   143 
Changes in fair value attributable to changes in valuation techniques (a)   (23)   
Other changes in fair value   196    546 
Fair value of contracts outstanding at the end of the period $ 958  $ 1,280 

(a)Amount represents the reduction of valuation reserves related to capacity and FTR contracts upon the adoption of fair value accounting guidance.

The following table segregates the net fair value of PPL Energy Supply's non-trading commodity derivative contracts at December 31, 2010 based on whether the fair value was determined by prices quoted in active markets for identical instruments or other more subjective means.

   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 other observable inputs $ 362  $ 592  $ 8     $ 962 
Prices based on significant unobservable inputs   3    (29)   (4) $ 26    (4)
Fair value of contracts outstanding at the end of the period $ 365  $ 563  $ 4  $ 26  $ 958 

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 abili ty 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.

Commodity Price Risk (Trading)

PPL Energy Supply's trading contracts mature at various times through 2015.  The following table sets forth changes in the net fair value of PPL Energy Supply's trading commodity derivative contracts.  See Notes 18 and 19 to the Financial Statements for additional information.

  Gains (Losses)
   2010  2009 
        
Fair value of contracts outstanding at the beginning of the period $ (6) $ (75)
Contracts realized or otherwise settled during the period   (12)   2 
Fair value of new contracts entered into during the period   39    31 
Other changes in fair value   (17)   36 
Fair value of contracts outstanding at the end of the period $ 4  $ (6)

PPL Energy Supply will reverse unrealized gains of approximately $2 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, 2010 based on whether the fair value was determined by prices quoted in active markets for identical instruments or other more subjective means.

  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 other observable inputs $ (1) $ 2  $ 3     $ 4 
Fair value of contracts outstanding at the end of the period $ (1) $ 2  $ 3     $ 4 

VaR Models

PPL Energy Supply utilizes a VaR model 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 using a Monte Carlo simulation technique based on a five-day holding period at a 95% confidence level.  Given the company's conservative hedging program, PPL's non-trading VaR exposure is expected to be limited in the short term.  At December 31, 2010 and December 31, 2009, the VaR for PPL Energy Supply's portfolios using end-of-month results for the period was as follows.

  Trading VaR Non-Trading VaR
   2010  2009  2010  2009 
95% Confidence Level, Five-Day Holding Period            
 Period End $ 1  $ 3  $ 5  $ 8 
 Average for the Period   4    4    7    9 
 High   9    8    12    11 
 Low   1    1    4    8 

The trading portfolio includes all speculative positions, regardless of the delivery period.  All positions not considered speculative are considered non-trading.  PPL Energy Supply's non-trading portfolio includes PPL Energy Supply's 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, 2010.

Interest Rate Risk

PPL Energy Supply and its subsidiaries have issued debt to finance their operations, which exposes them to interest rate risk.  PPL and PPL Energy Supply utilize various financial derivative instruments to adjust the mix of fixed and floating interest rates in PPL Energy Supply's debt portfolio, adjust the duration of its debt portfolio and lock in 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, 2010 and 2009, PPL Energy Supply's potential annual exposure to increased interest expense, based on a 10% increase in interest rates, was not significant.

PPL Energy Supply is also exposed to changes in the fair value of its domestic and international debt portfolios.  PPL Energy Supply estimated that a 10% decrease in interest rates at December 31, 2010 would increase the fair value of its debt portfolio by $198 million, compared with $187 million at December 31, 2009.

PPL Energy Supply had the following interest rate hedges outstanding at:

  December 31, 2010 December 31, 2009
         Effect of a       Effect of a
        10% Adverse      10% Adverse
   Exposure Fair Value, Movement Exposure Fair Value, Movement
   Hedged Net - Asset (a) in Rates (b) Hedged Net - Asset (a) in Rates (b)
Cash flow hedges                  
 Interest rate swaps (c)                  
 Cross-currency swaps (d) $ 302  $ 35  $ (18) $ 302  $ 8  $ (41)
Fair value hedges                  
 Interest rate swaps (e)                  

(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.  Sensitivities represent a 10% adverse movement in interest rates.
(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.  Sensitivities represent 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 Energy Supply enters into financial instruments to protect against foreign currency translation risk of expected earnings.

PPL Energy Supply had the following foreign currency hedges outstanding at:

  December 31, 2010 December 31, 2009
        Effect of a 10%       Effect of a 10%
     Fair Value, Adverse Movement    Fair Value, Adverse Movement
  Exposure Net - Asset in Foreign Currency Exposure Net - Asset in Foreign Currency
  Hedged (Liability) Exchange Rates (a) Hedged (Liability) Exchange Rates (a)
                   
Net investment hedges (b) £ 35  $ 7  $ (5) £ 40  $ 13  $ (6)
Economic hedges (c)   89    4    (10)   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 contracts outstanding at December 31, 2010 were settled in January 2011.
(c)To economically hedge the translation of 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 outstanding at December 31, 2010 have termination dates ranging from January 2011 through December 2011.

NDT Funds - Securities Price Risk

In connection with certain NRC requirements, PPL Susquehanna maintains trust funds to fund certain costs of decommissioning the Susquehanna nuclear station.  At December 31, 2010, 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 exposed to changes in interest rates.  PPL actively monitors the investment performance and periodically revie ws asset allocation in accordance with its nuclear decommissioning trust policy statement.  At December 31, 2010, a hypothetical 10% increase in interest rates and a 10% decrease in equity prices would have resulted in an estimated $45 million reduction in the fair value of the trust assets, compared with $40 million at December 31, 2009.  See Notes 18 and 23 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, r egulatory 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, which is reflected in accounts receivable on the Balance Sheets .  See Note 15 to the Financial Statements for additional information.

See "Overview" in this Item 7 and Notes 16, 18 and 19 to the Financial Statements for additional information on credit concentration and credit risk.

Foreign Currency Translation

At December 31, 2010, 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 $63 million for 2010, which primarily reflected a $180 million reduction to PP&E offset by a reduction of $117 million to net liabilities.  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 these 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 net liabilities.  At December 31, 2008, the British pound sterling had weakened in relation to the U.S. do llar 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 net liabilities.

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.  See Note 16 to the Financial Statements for additional information on related party transactions.

Acquisitions, Development and Divestitures

Incremental capacity increases of 247 MW are currently planned, primarily at existing generating facilities.  See "Item 2. Properties - Supply Segment" for additional information.

Development projects are continuously reexamined based on market conditions and other factors to determine whether to proceed with the projects, sell, cancel or expand them, execute tolling agreements or pursue other options.

See Notes 8 and 9 to the Financial Statements for additional information on the more significant activities.

Environmental Matters

See "Item 1. Business - Environmental Matters" and Note 15 to the Financial Statements for a discussion of environmental matters.

Competition

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

New Accounting Guidance

See Note 1 to the Financial Statements for a discussion of new accounting guidance adopted.

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).  PPL'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.

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.

2)      Defined Benefits

PPL Energy Supply subsidiaries sponsor various defined benefit pension and other postretirement plans and participate in and are allocated a significant portion of the liability and net periodic defined benefit costs of 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 13 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 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 and PPL Energy Supply start with an analysis of the expected benefit payment stream for their plans.  This information is first matched against a spot-rate yield curve.  A portfolio of 604 Aa-graded non-callable (or callable with make-whole provisions) bonds, with a total amount outstanding in excess of $667 billion, serves as the base from which those with the lowest and highest yields are eliminated to develop the ultimate yield curve.  The results of this analysis are considered together with other economic data and movements in various bond indices to determine the discount rate assumption.  At December 31, 2010, PPL Services and PPL Energy Supply decreased the discount rate for their U.S. pension plans from 6.00% to 5.41% and 5.47%, respectively, as a result of this assessment.  PPL Services decreased the discount rate for its other postretirement benefit plans from 5.81% to 5.16% and PPL Energy Supply decreased the discount rate for its other postretirement benefit plans from 5.55% to 4.95%.

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, 2010, the discount rate for the U.K. pension plans was decreased from 5.55% to 5.54% 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, 2010, PPL Services' expected return on plan assets decreased from 8.00% to 7.25% for its U.S. pension plans and decreased from 7.00% to 6.45% for PPL's other postretirement benefit plans.  The expected long-term rates of return for PPL and PPL Energy Supply's U.K. pension plans have been developed by PPL 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 and PPL Energy Supply's expected return on plan assets decreased from 7.91% to 7.86% at December 31, 2010.

In selecting a rate of compensation increase, PPL Energy Supply considers past experience in light of movements in inflation rates.  At December 31, 2010, PPL Services and PPL Energy Supply's rate of compensation increase remained at 4.75% 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, 2010.

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, 2010, PPL Services' and PPL Energy Supply's health care cost trend rates were 9.00% for 2011, 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.  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, 2010, defined benefit plan liabilities were as follows.

Pension liabilities$619 
Other postretirement benefit liabilities73 

The following chart reflects the sensitivities in the December 31, 2010 Balance Sheet associated with a change in certain assumptions based on PPL Services' and PPL Energy Supply's primary defined benefit plans.

   Increase (Decrease)
   Change in  Impact on defined   
Actuarial assumption  assumption  benefit liabilities  Impact on OCI
          
Discount Rate  (0.25)% $149  $ (149)
Rate of Compensation Increase  0.25%  23    (23)
Health Care Cost Trend Rate (a)  1.00%  1    (1)

(a)Only impacts other postretirement benefits.

In 2010, PPL Energy Supply was allocated and recognized net periodic defined benefit costs charged to operating expense of $52 million.  This amount represents a $29 million increase from 2009.  This increase in expense was primarily attributable to amortization of actuarial losses of the WPD pension plans in the U.K.

The following chart reflects the sensitivities in the 2010 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
       
Discount Rate  (0.25)% $ 12 
Expected Return on Plan Assets  (0.25)%   9 
Rate of Compensation Increase  0.25%   4 
Health Care Cost Trend Rate (a)  1.00%   1 

(a)Only impacts other postretirement benefits.

3)  Asset Impairment

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 value 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 manner in which an asset is being used or in its physical condition;
·a significant adverse change in legal factors or in the business climate;
·an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of an asset;
·a current-period operating or cash flow loss combined with a history of losses or a forecast that demonstrates continuing losses; or
·a current expectation that, more likely than not, an asset will be sold or otherwise disposed of before the end of its previously estimated useful life.

For a long-lived asset classified 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 value 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 value 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, 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 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 of fair value.  However, when market prices are unavailable, PPL 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 2010, impairments of certain long-lived assets were recorded.  See Note 18 to the Financial Statements for a discussion of impairments related to certain sulfur dioxide emission allowances and certain non-core generation facilities.

Goodwill is tested for impairment at the reporting unit level.  Reporting units have been determined to be at or one level below operating segments.  A goodwill impairment test is performed annually or more frequently if events or changes in circumstances indicate that the carrying value 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 tested for impairment using a two-step approach.  The first step of the goodwill impairment test compares the estimated fair value of a reporting unit with its carrying amount, including goodwill.  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 requires a calculation of the implied fair value of goodwill.  The implied fair value of goodwill is determined in the same manner as the amount of goodwill in a business combination.  That is, the estimated fair value of a reporting unit is allocated to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the estimated fair value of the reporting unit was the price paid to acquire the reporting unit.  The excess of the estimated fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill.  The implied fair value of the reporting unit's goodwill is then compared with the carrying amount of that goodwill.  If the carrying amount exceeds the impl ied 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 2010, no goodwill was required to be impaired.  Management used both discounted cash flows and market multiples, which required significant assumptions, to estimate the fair value of each reporting unit.  For the discounted cash flows approach, a decrease in the forecasted cash flows of 10%, or an increase in the discount rate by 25 basis points, would not have resulted in an impairment of goodwill.  For the market multiples approach, which is based on either current or forward trading multiples of comparable companies or precedent transactions, a 10% decrease in the multiples would not have resulted in an impairment of goodwill.

In 2010 and 2009, $5 million and $3 million of goodwill allocated to discontinued operations was written off.

4)      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 2010, a significant adjustment to the contingency accrual related to the Montana hydroelectric streambed litigation was recorded.  See Note 15 to the Financial Statements for additional information.

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.  See Note 15 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, the triggering events for subsequently reducing 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 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 actual payments are made, 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.

5)      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 is increased, through the recognition of accretion expense in the income statement, for changes in the obligation due to the passage of time.  See Note 21 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 the ARO and the related capitalized asset, are reviewed periodically to ensure that any material changes are incorporated into the latest e stimate of the ARO.  Any change to the capitalized asset, positive or negative, is amortized over the remaining life of the associated long-lived asset.  See Note 21 to the Financial Statements for a discussion of the remeasurement of the ARO for the decommissioning of the Susquehanna nuclear units in the third quarter of 2010, which resulted in a $103 million reduction in the ARO primarily due to a decrease in estimated inflation rates.

At December 31, 2010, AROs totaling $345 million were recorded on the Balance Sheet, of which $13 million is included in "Other current liabilities."  Of the total amount, $270 million, or 78%, relates to the nuclear decommissioning ARO.  The most significant assumptions surrounding AROs are the forecasted retirement costs, the discount rates and the inflation rates.  A variance in any of these inputs could have a significant impact on the ARO liabilities.

The following table reflects the sensitivities related to the nuclear decommissioning ARO liability associated with a change in these assumptions as of December 31, 2010.  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 Cost 10% $27
Discount Rate (0.25)% $25
Inflation Rate 0.25% $26

6)      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 ben efit 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 de-recognized, 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, 2010, 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 $181 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.

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.  Management also considers the uncertainty posed by political risk (e.g. the potential for legislative extension of generation rate caps) 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 income tax disclosures, including the release of $52 million of valuation allowances associated with state net operating loss carryforwards in 2010.

Other Information

PPL's Audit Committee has approved the independent auditor to provide audit and audit-related 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. See "Item 14. Principal Accounting Fees and Services" for more information.
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.  Terms and abbreviations are explained 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.  Because PPL Electric's electricity delivery business is rate-regulated, it is subject to regulatory risk with respect to costs that may be recovered and investment returns that may be collected through customer rates.

To manage financing costs and access to credit markets, a key objective for PPL Electric's business 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.

"Management's Discussion and Analysis of Financial Condition and Results of Operations" provides information concerning PPL Electric's performance in implementing the strategies and managing the risks and challenges mentioned above.  Specifically:

·"Results of Operations" provides an overview of PPL Electric's operating results in 2010, 2009 and 2008, including a review of earnings.  It also provides a brief outlook for 2011.

·"Financial Condition - Liquidity and Capital Resources" provides an analysis of PPL Electric's liquidity position and credit profile, including its sources of cash (including bank credit facilities and sources of operating cash flow) and uses of cash (including contractual 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 rating agency actions on PPL Electric's credit ratings.

·"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.

See "Item 1. Business - Background - Segment Information - Pennsylvania Regulated Segment" for a discussion of PPL Electric's PLR obligations, PPL Electric's agreement to provide electricity as a PLR at "capped" rates through the end of 2009, and plans for default electricity supply procurement after 2009.

When comparing 2010 with 2009, certain line items on PPL Electric's financial statements were impacted by the Customer Choice Act, Act 129 and other related issues.  The expiration of generation rate caps, the resulting competitive solicitations for power supply, the migration of customers to alternative suppliers, the Customer Choice Act and Act 129 had minimal impact on Pennsylvania gross delivery margins, as approved recovery mechanisms allow for cost recovery of associated expenses, including the cost of energy provided as a PLR.  However, PPL Electric's 2010 Pennsylvania gross delivery margins were negatively impacted by the expiration of CTC recovery in December 2009.  PPL Electric continues to remain the delivery provider for all customers in its service territory and charge a regulated rate for the se rvice of delivering electricity.

See "Statement of Income Analysis - Pennsylvania Gross Delivery Margins" for additional information.

Results of Operations
          
Earnings         
          
  2010  2009  2008 
Net Income Available to PPL Corporation $ 115  $ 124  $ 158 

The after-tax changes in Net Income Available to PPL Corporation between these periods were due to the following factors, including several special items that management considers significant.  Details of these special items are provided below.

  2010 vs. 2009 2009 vs. 2008
       
Pennsylvania gross delivery margins $ 2  $ (18)
Other operation and maintenance   (29)   3 
Interest expense   11    (12)
Income taxes and other   (2)   2 
Special items   9    (9)
  $ (9) $ (34)

·See "Pennsylvania Gross Delivery Margins by Component" in the "Statement of Income Analysis" section for an explanation of margins generated by the regulated electric delivery operations.

·Other operation and maintenance increased in 2010 compared with 2009, primarily due to higher payroll-related costs and higher contractor costs related to vegetation management.

·Interest expense decreased in 2010 compared with 2009, primarily due to lower average debt balances in 2010 compared with 2009 and the interest related to the over-recovery of recoverable transition costs.

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 earnings.

2009 
Asset impairments$ (1)
Workforce reduction (Note 13) (5)
Other:
Change in tax accounting method related to repairs (Note 5) (3)
Total$ (9)

2011 Outlook

Excluding special items, higher earnings are projected in 2011 compared with 2010, due to higher distribution revenues resulting from an approved distribution base rate increase effective January 1, 2011.
Earnings beyond 2010 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 15 to the Financial Statements for a discussion of the risks, uncertainties and factors that may impact future earnings.  See "Item 1. Business - Segment Information - Pennsylvania Regulated Segment" for additional information on the 2010 rate case.
Statement of Income Analysis --

Pennsylvania Gross Delivery Margins

Non-GAAP Financial Measure

The following discussion includes financial information prepared in accordance with GAAP, as well as a 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, including PLR supply.  In calculating this measure, Pennsylvania regulated utility revenues and expenses associated with approved recovery mechanisms, including energy provided as a PLR, are offset.  These mechanisms allow for full cost recovery of certain expenses; therefore, certain expenses and revenues offset with minimal impact on earnings.  As a result, this measure represents the net revenues from PPL Electric's Pennsylv ania regulated electric delivery operations.  This performance measure is used, in conjunction with other information, internally by senior management and PPL's Board of Directors to manage its Pennsylvania regulated electric delivery operations.  PPL Electric believes that "Pennsylvania Gross Delivery Margins" provides another criterion to make investment decisions.

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.  The following table reconciles "Operating Income" to "Pennsylvania Gross Delivery Margins" as defined by PPL Electric.

  2010  2009  2008 
          
Operating Income (a) $ 284  $ 329  $ 375 
Adjustments:         
 Other operation and maintenance (a)   502    417    410 
 Depreciation (a)   136    128    131 
 Taxes, other than income (a)   138    194    203 
 Expense adjustments (b)   (205)   (216)   (236)
Pennsylvania gross delivery margins $ 855  $ 852  $ 883 

(a)As reported on the Statements of Income.
(b)The components of these adjustments are detailed in the table below.

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

  2010  2009  Change 2009  2008  Change
Revenue                  
 Retail electric (a) $ 2,448  $ 3,218  $ (770) $ 3,218  $ 3,290  $ (72)
 Wholesale electric to affiliate (a)   7    74    (67)   74    111    (37)
      2,455    3,292    (837)   3,292    3,401    (109)
Expense                  
 Energy purchases (a)   1,075    114    961    114    163    (49)
 Energy purchases from affiliate (a)   320    1,806    (1,486)   1,806    1,826    (20)
 Amortization of recoverable transition costs (a)      304    (304)   304    293    11 
 Expense adjustments (b)                  
  Include gross receipts tax (c)   129    186    (57)   186    198    (12)
  Include Act 129 (d)   54       54          
  Other   22    30    (8)   30    38    (8)
 Total expense adjustments   205    216    (11)   216    236    (20)
      1,600    2,440    (840)   2,440    2,518    (78)
Pennsylvania gross delivery margins $ 855  $ 852  $ 3  $ 852  $ 883  $ (31)

(a)As reported on the Statements of Income.
(b)To include/exclude the impact of any revenues and expenses consistent with the way management reviews Pennsylvania gross delivery margins internally.
(c)Included in "Taxes, other than income" on the Statements of Income.
(d)Included in "Other operation and maintenance" on the Statement of Income.

Pennsylvania Gross Delivery Margins by Component

Pennsylvania gross delivery margins are generated through domestic regulated electric distribution activities, including PLR supply, and transmission activities.

  2010  2009  Change 2009  2008  Change
Distribution $ 679  $ 702  $ (23) $ 702  $ 731  $ (29)
Transmission   176    150    26    150    152    (2)
Pennsylvania gross delivery margins $ 855  $ 852  $ 3  $ 852  $ 883  $ (31)
Distribution

Distribution

The decrease margins increased in 20102013 compared with 2009 was2012, primarily due to margins realized in 2009 relateda $53 million favorable effect of price, largely comprised of higher base rates, effective January 1, 2013, a $15 million impact of weather primarily due to the collectionadverse effect of CTC, which endedmild weather in December 2009,2012 and higher volumes of $5 million.

Distribution margins decreased in 2012 compared with 2011, primarily due to a $14 million impact of weather primarily due to the adverse 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 favorable recovery mechanisms for certain energy related costs.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 reconciliations filed with the PUC.

The decrease in 2009 compared with 2008 was primarily due to lower CTC/ITC margins in 2009, ITC collections ended in 2008.  Lower margins were also attributable to unfavorable economic conditions, including industrial customers scaling back on production.  In addition, weather had an unfavorable impact on sales volumes, offset by favorable price increases.
Transmission

The increase in 2010 compared with 2009 wasTransmission margins increased for both periods, primarily due to increased investment in rate base, an increase in the cost of capital due to an increase in equityplant and the recovery of additional costs through the FERC formula-based rates.

Other Operation and MaintenanceUnregulated Gross Energy Margins

The changes in other operation and maintenance expenses were due to:Eastern U.S.

  2010 vs. 2009 2009 vs. 2008
       
Act 129 costs incurred (a) $ 54    
Vegetation management costs (b)   13  $ (5)
Payroll-related costs   13    3 
Contractor-related expenses   7    (2)
Allocation of certain corporate support group costs   6    
PUC-reportable storm costs, net of insurance recovery   5    (8)
Uncollectible accounts   3    7 
Customer education programs   3    (2)
Ancillary charges (c)   (11)   1 
Workforce reduction (Note 13)   (9)   9 
Employee benefits   (4)   5 
Other   5    (1)
Total $ 85  $ 7 
Eastern margins decreased in 2013 compared with 2012 primarily due to $435 million of lower baseload energy prices, partially offset by $198 million of higher capacity prices and $100 million of increased nuclear generation volume.

Eastern margins decreased in 2012 compared with 2011 primarily due to $121 million of lower baseload energy prices and $54 million of lower capacity prices.

Western U.S.

Western margins decreased in 2013 compared with 2012 primarily due to $69 million of lower wholesale energy prices and $15 million of lower net economic availability of coal and hydroelectric units.

Western  margins decreased in 2012 compared with 2011 primarily 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 energy prices.


56

Statement of Income Analysis --

Utility Revenues      
          
The increase (decrease) in utility revenues was due to:
     2013 vs. 2012 2012 vs. 2011
Domestic:      
 PPL Electric (a) $106  $ (121)
 LKE (b)  217    (34)
 Total Domestic  323   (155)
          
U.K.:      
 Price (c)   264    78 
 Volume (d)  5    (13)
 Recovery of allowed revenues (e)  (43)   (6)
 WPD Midlands line loss accrual adjustments (f)  (142)   
 Foreign currency exchange rates  (27)   (11)
 Other  13    (10)
 WPD Midlands (g)      633 
 Total U.K.  70   671 
Total $393  $ 516 

(a)See "Pennsylvania Gross Delivery Margins" for further information.
(b)See "Kentucky Gross Margins" for further information.
(c)The increase in 2013 compared with 2012 was due to price increases effective April 1, 2013 and April 1, 2012.  The increase in 2012 compared with 2011 was due to price increases effective April 1, 2012 and April 1, 2011.
(d)The increase in 2013 compared with 2012 was primarily due to the favorable effect of weather.  The decrease in 2012 compared with 2011 was primarily due to the downturn in the economy and the unfavorable effect of weather.
(e)The decrease in 2013 compared with 2012 was primarily due to over-recovered revenues as a result of price and weather related volume effects that are not expected to reverse within the regulatory year ending March 31, 2014.  Therefore, a liability was recorded and utility revenue reduced for the amount of the over-recovery in 2013.  These amounts are expected to be refunded within the regulatory year beginning April 1, 2014.
(f)The decrease was due to a $97 million increase in revenue in 2012 and a $45 million reduction in revenue in 2013 from adjusting a loss accrual based on information provided by Ofgem regarding the calculation of line loss incentives and penalties for all network operators, primarily related to DPCR4.  See Note 6 to the Financial Statements for additional information.
(g)Amounts in 2013 compared with 2012 are comparable and have not been isolated for purposes of comparability.  Amounts in 2012 were not comparable with 2011, as 2011 includes eight months of WPD Midlands' results.  The increase in 2012 compared with 2011 was primarily due to four additional months of utility revenue in 2012 of $446 million.  The comparable eight month period was higher in 2012 compared to 2011 due to a $125 million price increase effective April 1, 2012 and the $97 million line loss accrual adjustment in 2012 discussed above.

Certain Operating Revenues and Expenses Included in "Margins"

The following Statement of Income line items are included above within "Margins" and are not discussed separately.

  2013 vs. 2012  2012 vs. 2011 
       
Unregulated wholesale energy $ (1,082) $ (1,086)
Unregulated retail energy   183    118 
Fuel   107    (109)
Energy purchases   (588)   (698)

Other Operation and Maintenance
         
       
The increase (decrease) in other operation and maintenance was due to:
         
    2013 vs. 2012 2012 vs. 2011
Domestic:      
 LKE coal plant operations and maintenance (a) $ (15) $ 21 
 Act 129 costs incurred  (b)   (24)   (6)
 Vegetation management  (c)   14    10 
 PPL Electric payroll-related costs (d)   4    17 
 Montana hydroelectric litigation (e)      65 
 PPL Susquehanna (f)   (3)   33 
 Fossil and hydroelectric plants (g)   43    1 
 Ironwood Acquisition (h)      20 
 PUC-reportable storm costs, net of insurance recoveries   (21)   14 
 PPL EnergyPlus (i)   (18)   17 
 Stock based compensation   2    17 
 Other   (10)   21 

57


    2013 vs. 2012 2012 vs. 2011
U.K.:      
 Network maintenance (j)   32    11 
 Third-party engineering (k)   12    (3)
 Pension (l)   8    21 
 Separation benefits (m)   (11)   
 Employee-related expenses   (7)   
 Foreign currency exchange rates   (4)   (2)
 Acquisition-related adjustments   (8)   
 WPD Midlands (n)      (85)
 Other   (4)   (4)
   $ (10) $ 168 
(a)The decrease in 2013 compared with 2012 was primarily due to $21 million of lower costs related to the timing and scope of scheduled outages, partially offset by increased generation costs.  The increase in 2012 compared with 2011 was primarily due to $11 million of expenses related to an increase 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)Relates to costs associated with aPPL Electric's PUC-approved energy efficiency and conservation plan.plan with programs starting in 2010.  These costs are recovered in customer rates.  The decrease in both periods primarily results from the number of programs and timing of such programs.  Phase 1 of Act 129 closed in May 2013.  Phase 2 programs began in June 2013.
(c)PPL Electric incurred higher vegetation management costs in both periods due to increased activities related to maintaining and increasing system reliability for both the transmission and distribution systems.  The amount for 2012 compared to the 2011 period was also higher due to increased costs to comply with federal transmission reliability requirements.
(d)PPL Electric Utilities incurred higher payroll costs of $17 million in 2012 compared with 2011 due to less project costs being capitalized.
(e)In February 2012, the U.S. Supreme Court overturned the Montana state court decisions requiring PPL Montana to make lease payments for the use of certain Montana streambeds.  As a result, in 2011, PPL Montana reversed its total loss accrual.  See "Regulatory Issues - Pennsylvania Activities" in Note 15 to the Financial Statements for additional information.
(f)2012 compared with 2011 was higher due to outage and project costs.
(g)In 2012, PPL Energy Supply announced its intention, beginning in April 2015, to place its Corette plant in long-term reserve status, suspending the plant's operations due to expected market conditions and the costs to comply with MATS.  During the fourth quarter of 2013, PPL Energy Supply determined its Corette plant was impaired and recorded a charge of $65 million for the plant and related emission allowances.  See Note 18 to the Financial Statements for additional information.
(h)Amounts in 2013 compared with 2012 are comparable and have not been isolated for purposes of comparability.  Amounts in 2012 compared with 2011 were not comparable as 2012 includes nine months of expense and, therefore, have been isolated for purposes of comparability.  See Note 10 to the Financial Statements for information on this plan.  the acquisition.
(i)2013 compared with 2012 was lower primarily due to SMGT filing under Chapter 11 of the U.S. Bankruptcy Code.  $11 million of receivables billed to SMGT were fully reserved in 2012.  For 2012 compared with 2011, no individual item was significant in comparison to the prior year.
(j)The increases in both periods were primarily due to higher vegetation management costs.
(k)These costs are offset by revenues reflected in "Utility" on the Statement of Income.
(l)The increases in both periods were due to higher pension costs resulting from increased amortization of actuarial losses.
(m)The decrease in 2013 compared with 2012 was primarily due to costs incurred in 2012 related to the WPD Midlands reorganization.
(n)Amounts in 2012 compared with 2011 were not comparable as 2011 includes eight months of WPD Midlands' results and therefore, have been isolated for purposes of comparability.  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 primarily due to $86 million of lower separation benefits, $34 million of lower acquisition related costs, and $26 million of lower pension expense.
Loss on Lease Termination

A $697 million charge was recorded in 2013 for the termination of the Colstrip operating lease to facilitate the sale of the Montana hydroelectric generating facilities.  See Note 8 to the Financial Statements for additional information.

Depreciation

The increase (decrease) in depreciation was due to:

  2013 vs. 2012 2012 vs. 2011
       
Additions to PP&E, net $ 89  $ 65 
LKE lower depreciation rates effective January 1, 2013 (a)   (22)   
WPD Midlands (b)        55 
Ironwood Acquisition (c)      17 
Other   (6)   3 
Total $ 61  $ 140 

(a)A result of the 2012 rate case.
(b)Amounts in 2013 compared with 2012 are comparable and have not been isolated for purposes of comparability.  Amounts in 2012 were not comparable with 2011, which includes eight months of WPD Midlands' results and therefore, have been isolated for purposes of comparability. The increase in 2012 compared with 2011 is primarily due to four additional months of expense in 2012 of $49 million.

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(c)Amounts in 2013 compared with 2012 are comparable and have not been isolated for purposes of comparability.  Amounts in 2012 compared with 2011 were not comparable as 2012 includes nine months of expenses and therefore, have been isolated for purposes of comparability.  See Note 10 to the Financial Statements for information on the acquisition.

Taxes, Other Than Income

The increase (decrease) in taxes, other than income was due to:

   2013 vs. 2012 2012 vs. 2011
        
Domestic property tax expense (a) $ 3  $ 14 
State capital stock tax (b)   (5)   (11)
WPD Midlands (c)        33 
Other        4 
Total $ (2) $ 40 

(a)The increase in 2012 compared with 2011 is primarily due to the fully amortized PURTA refund to the customers in 2011 pursuant to PUC regulations.  This tax is included in "Pennsylvania Gross Delivery Margins" above.
(b)The decrease in 2012 compared with 2011 was due to changes in the statutory rate from the prior year.
(c)Amounts in 2013 compared with 2012 are comparable and have not been isolated for purposes of comparability.  Amounts in 2012 compared with 2011 were not comparable as 2011 includes eight months of WPD Midlands' results and therefore, have been isolated for purposes of comparability.  The increase in 2012 compared with 2011 is primarily due to four additional months of expense in 2012 of $30 million.

Other Income (Expense) - net      
       
The increase (decrease) in other income (expense) - net was due to:
       
  2013 vs. 2012 2012 vs. 2011
       
Economic foreign currency exchange contracts (Note 19) $ 14  $ (62)
Net hedge gains associated with the 2011 Bridge Facility (a)      (55)
Foreign currency loss on 2011 Bridge Facility      57 
Gain on redemption of debt (b)      (22)
WPD Midlands acquisition-related adjustments in 2011 (Note 10)      55 
Losses from equity method investments   8    (9)
Charitable contributions   (15)   (1)
Other   9    (6)
Total $ 16  $ (43)

(a)Represents a gain on foreign currency contracts in 2011 that hedged the repayment of the 2011 Bridge Facility borrowing.
(b)In 2010,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.

Other-Than-Temporary Impairments

Other-than-temporary impairments decreased by $26 million in 2013 compared with 2012 and increased by $21 million in 2012 compared with 2011 primarily due to a $25 million pre-tax impairment of the EEI investment in 2012.  See Notes 1 and 18 to the Financial Statements for additional information.

Interest Expense

The increase (decrease) in interest expense was due to:

   2013 vs. 2012 2012 vs. 2011
        
2011 Bridge Facility costs related to the acquisition of WPD Midlands (Notes 7 and 10)      $ (44)
2011 Equity Units (a) $ (2)   12 
Long-term debt interest expense (b)   31    3 
Short-term debt interest expense (c)   3    (12)
Inflation adjustment on U.K. Index-linked Senior Unsecured Notes   4    (12)
WPD Midlands (d)      80 
Ironwood Acquisition (e)        12 
Hedging activities and ineffectiveness   4    29 
Capitalized interest (f)   6    (6)
Montana hydroelectric litigation (g)      10 
Loss on extinguishment of debt (h)   10      
Other   (11)   (9)
Total $ 45  $ 63 

(a)Interest related to the issuance in April 2011 to support the WPD Midlands acquisition.

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(b)2013 increased due to debt issuances by PPL Capital Funding in March 2013, June 2012 and October 2012, by PPL Electric increasedin July 2013 and August 2012, and WPD (East Midlands) in April 2012.  Partially offsetting these increases was PPL Energy Supply's debt maturity in July 2013.
(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.
(d)Amounts in 2013 compared with 2012 are comparable and have not been isolated for purposes of comparability.  Amounts in 2012 compared with 2011 were not comparable as 2011 includes eight months of WPD Midlands' results and therefore, have been isolated for purposes of comparability.  The increase in 2012 compared with 2011 is primarily due to four additional months of expense in 2012 of $74 million.
(e)Amounts in 2013 compared with 2012 are comparable and have not been isolated for purposes of comparability.  Amounts in 2012 compared with 2011 were not comparable as 2012 includes nine months of expense and therefore, have been isolated for purposes of comparability.  See Note 10 to the Financial Statements for information on the acquisition.
(f)Includes AFUDC.
(g)In February 2012, the U.S. Supreme Court overturned the Montana state court decisions requiring PPL Montana to make lease payments for the use of certain Montana streambeds.  As a result, in 2011, PPL Montana reversed its vegetation management around its 230- and 500-kV major transmission lines in response to federal reliability requirements for transmission vegetation management.total loss accrual including accrued interest.  See "Regulatory Issues - Energy Policy Act of 2005 - Reliability Standards" in Note 15 to the Financial Statements for additional information.
(h)In May 2013, PPL Capital Funding remarketed and exchanged junior subordinate notes that were originally issued in June 2010 as a component of PPL's 2010 Equity Units.

See Note 7 to the Financial Statements for information on 2013 long-term debt activity.

Income Taxes

The increase (decrease) in income taxes was due to:

   2013 vs. 2012 2012 vs. 2011
        
Change in pre-tax income $ (335) $ (296)
State valuation allowance adjustments (a)   11    (23)
State deferred tax rate change (b)   34    7 
Federal and state tax reserve adjustments  (c)   (42)   (40)
Federal and state tax return adjustments (d)   (21)   33 
U.S. income tax on foreign earnings net of foreign tax credit (e)   (17)   57 
U.K. Finance Act adjustments (f)   (22)   2 
Foreign valuation allowance adjustments (g)        (147)
Foreign tax reserve adjustments (g)   3    134 
Foreign tax return adjustments   2    (6)
Depreciation not normalized (a)   3    9 
Net operating loss carryforward adjustments (h)   9    (9)
WPD Midlands (i)        146 
Other   10    (13)
Total $ (365) $ (146)

(a)The valuation allowances recorded on PPL's state deferred tax assets primarily relate to Pennsylvania net operating loss carryforwards.  Pennsylvania requires that each corporation file a separate income tax return and has significant annual limitations on the deduction for net operating loss carryforwards.  Currently, Pennsylvania allows an annual maximum deduction equal to the greater of $3 million or 20% of taxable income.  Recent legislation increased the annual maximum deduction to the greater of $5 million or 30% of taxable income for tax years beginning in 2015.

During 2013, PPL recorded $24 million state deferred income tax expense related to a deferred tax valuation allowance primarily due to a decrease in projected future taxable income over the remaining carryforward period of Pennsylvania net operating losses.

During 2012, PPL recorded $9 million state deferred income tax expense related to a deferred tax valuation allowance primarily due to a decrease in projected future taxable income over the remaining carryforward period of Pennsylvania net operating losses.

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 a $43 million 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 was extended to January 1, 2013 for property that had a cost in excess of $1 million, had a production period longer than one year and had a tax life of at least ten years.  PPL's tax deduction for 100% bonus regulated tax depreciation was zero in 2013 and was significantly lower in 2012 than in 2011.

(b)Changes in state apportionment resulted in an increase to the future estimated state tax rate at December 31, 2013 and reductions to the future estimated state tax rate at December 31, 2012 and 2011.  PPL recorded a $15 million deferred tax expense in 2013, a $19 million deferred tax benefit in 2012 and a $26 million deferred tax benefit in 2011 related to its state deferred tax liabilities.
(c)Prior to 2010, these charges were assessed to load serving entities (LSE), and PPL Electric was consideredIn May 2013, the LSE.  In 2010, PPL Electric was not billed directly for these charges.  The individual PLR generation suppliers incurred these costs and billed PPL Electric as partU.S. Supreme Court reversed the December 2011 ruling of the bundledU.S. Court of Appeals for the Third Circuit on the creditability of U.K. Windfall Profits Tax for tax purposes.  As a result of this decision, PPL recorded a tax benefit of $44 million during 2013.  PPL recorded $39 million tax expense related to the U.S. Court of Appeals for the Third Circuit's ruling in 2011.  See Note 5 to the Financial Statements for additional information.

PPL recorded a tax benefit of $7 million during 2013 and $6 million during 2012 and 2011 to federal and state income tax reserves related to stranded cost securitization.  The reserve balance at December 31, 2013 related to stranded costs securitization is zero.

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(d)During 2012, PPL recorded $16 million in 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 $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.
(e)During 2013, PPL recorded $25 million income tax expense resulting from increased taxable dividends offset by a $19 million income tax benefit associated with a ruling obtained from the IRS impacting the recalculation of 2010 U.K. earnings and profits that was reflected on an amended 2010 U.S. tax return.

During 2012, PPL recorded a $23 million adjustment to federal income tax expense related to the recalculation of 2010 U.K. earnings and profits.

During 2011, PPL recorded a $28 million federal income tax benefit related to U.K. pension contributions.
(f)The U.K.'s Finance Act 2013, enacted in July 2013, reduced the U.K. statutory income tax rate from 23% to 21% effective April 1, 2014 and from 21% to 20% effective April 1, 2015.  As a result, PPL reduced its net deferred tax liabilities and recognized a $97 million deferred tax benefit in 2013 related to both rate decreases.

The U.K.'s Finance Act 2012, enacted in July 2012, reduced the U.K. statutory income tax rate from 25% to 24% retroactive to April 1, 2012 and from 24% to 23% effective April 1, 2013.  As a result, PPL reduced its net deferred tax liabilities and recognized a $75 million deferred tax benefit in 2012 related to both rate decreases.  WPD Midlands' portion of the deferred tax benefit is $43 million.

The U.K.'s Finance Act 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.
(g)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.
(h)During 2012, PPL recorded adjustments to deferred taxes related to net operating loss carryforwards of LKE based on income tax return adjustments.
(i)Amounts in 2013 compared with 2012 are comparable and have not been isolated for purposes of comparability.  Amounts in 2012 compared with 2011 were not comparable as 2011 includes eight months of WPD Midlands' results and therefore, have been isolated for purposes of comparability.  The increase in 2012 compared with 2011 was primarily due to higher pre-tax income.

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

Noncontrolling Interests

"Net Income Attributable to Noncontrolling Interests" decreased by $4 million in 2013 compared with 2012 and $12 million in 2012 compared with 2011 primarily due to PPL Electric's June 2012 redemption of all 2.5 million shares of its preference stock.

PPL Energy Supply:  Earnings, Margins and Statement of Income Analysis

Earnings

   2013  2012  2011 
           
Net Income (Loss) Attributable to PPL Energy Supply Member $ (230) $ 474  $ 768 
Special items, gains (losses), after-tax   (531)   18    142 

Excluding special items, pre-tax earnings in 2013 compared with 2012 decreased primarily due to lower baseload energy prices and higher depreciation, partially offset by higher capacity prices, higher nuclear generation volume, lower operation and maintenance expense and lower income taxes.

Excluding special items, pre-tax earnings in 2012 compared with 2011 decreased primarily due to lower Eastern energy margins resulting from lower baseload energy and capacity prices, lower Western energy margins resulting from an early 2012 contract termination related to the bankruptcy of SMGT, higher operation and maintenance expense, higher depreciation, partially offset by lower financing costs and income taxes.

The table below quantifies the changes in the components of Net Income Attributable to PPL Energy Supply Member between these periods, which reflect amounts classified as Unregulated Gross Energy Margins and certain items that management considers special on separate lines within the table and not in their respective Statement of Income line items.  See PPL's "Results of Operations - Segment Earnings - Supply Segment" for the details of special items.

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  2013 vs. 2012 2012 vs. 2011
       
Unregulated Gross Energy Margins $ (194) $ (197)
Other operation and maintenance   23    (53)
Depreciation   (33)   (41)
Taxes, other than income   6    6 
Other Income (Expense) - net   15    (5)
Interest Expense   (3)   16 
Other   (3)   2 
Income Taxes   34    102 
Special items, after-tax   (549)   (124)
Total $ (704) $ (294)

Margins

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

The following tables contain the components from the Statements of Income that are included in this non-GAAP financial measure and a reconciliation to "Operating Income" for the years ended December 31.

      2013  2012 
      Unregulated       Unregulated      
      Gross Energy    Operating Gross Energy     Operating
      Margins Other (a) Income (b) Margins Other (a) Income (b)
Operating Revenues��                   
 Unregulated wholesale energy $ 3,758  $  (714)(c)  $  3,044  $ 4,416  $  (290)(c)  $  4,126 
 Unregulated wholesale energy                    
  to affiliate   51          51    78          78 
 Unregulated retail energy (d)   1,019    12 (c)    1,031    865    (17)(c)    848 
 Energy-related businesses        527     527         448     448 
   Total Operating Revenues   4,828    (175)    4,653    5,359    141     5,500 
                         
Operating Expenses                    
 Fuel   1,045    4 (e)    1,049    931    34 (e)    965 
 Energy purchases   1,742    (574)(c)    1,168    2,204    (386)(c)    1,818 
 Energy purchases from affiliate   3          3    3          3 
 Other operation and maintenance 20    1,052     1,072    19    1,022     1,041 
 Loss on lease termination (Note 8)    697     697           
 Depreciation        318     318         285     285 
 Taxes, other than income   37    29     66    34    35     69 
 Energy-related businesses   7    505     512         432     432 
   Total Operating Expenses   2,854    2,031     4,885    3,191    1,422     4,613 
Total $ 1,974  $ (2,206)  $ (232) $ 2,168  $ (1,281)  $ 887 

      2011   
      Unregulated              
      Gross Energy    Operating        
      Margins Other (a) Income (b)      
Operating Revenues                    
 Unregulated wholesale energy $ 3,743  $  1,469 (c)  $  5,212           
 Unregulated wholesale energy                    
  to affiliate   26          26           
 Unregulated retail energy (e)   696    31 (c)    727           
 Energy-related businesses        464     464           
   Total Operating Revenues   4,465    1,964     6,429           
                         
Operating Expenses                    
 Fuel   1,151    (71)(e)    1,080           
 Energy purchases   912    1,371 (c)    2,283           
 Energy purchases from affiliate   3          3           
 Other operation and maintenance 16    913     929           
 Depreciation        244     244           
 Taxes, other than income   30    41     71           
 Energy-related businesses        458     458           
   Total Operating Expenses   2,112    2,956     5,068           
 Discontinued Operations   12    (12)(f)                
Total $ 2,365  $ (1,004)  $ 1,361           


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(a)Represents amounts excluded from Margins.
(b)As reported on the Statements of Income.
(c)Includes energy-related economic activity, which is subject to fluctuations in value due to market price volatility.  See "Commodity Price Risk (Non-trading) - Economic Activity" within Note 19 to the Financial Statements.  For 2012, "Unregulated wholesale energy" and "Energy purchases" include a net pre-tax loss of PLR supply.  Such costs$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.
(d)Although retail energy revenues continue to grow, the net margins related to these activities are not currently a significant component of Unregulated Gross Energy Margins.
(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 certain revenues and expenses associated with certain businesses that are classified as discontinued operations.  These revenues and expenses are not reflected in energy purchases."Operating Income" on the Statements of Income.

Statement of Income Analysis --

Certain Operating Revenues and Expenses Included in "Unregulated Gross Energy Margins"

The following Statement of Income line items are included above within "Unregulated Gross Energy Margins" and are not discussed separately.

  2013 vs. 2012  2012 vs. 2011 
       
Unregulated wholesale energy $(1,082) $(1,086)
Unregulated wholesale energy to affiliate  (27)  52 
Unregulated retail energy  183   121 
Fuel  84   (115)
Energy purchases  (650)  (465)

Energy-Related Businesses

The $10 million net increase in contributions from energy-related businesses in 2012 compared with 2011 primarily relates to the mechanical services businesses, due to improved margins on construction and energy service projects in 2012.

Other Operation and Maintenance

The increase (decrease) in other operation and maintenance was due to:

   2013 vs. 2012 2012 vs. 2011
        
Fossil and hydroelectric plants (a) $ 43  $ 1 
PPL EnergyPlus (b)   (18)   17 
PPL Susquehanna (c)   (3)   33 
Montana hydroelectric litigation (d)      65 
Ironwood Acquisition (e)      20 
Trademark royalties (f)      (34)
Other   9    10 
Total $ 31  $ 112 

(a)In 2012, PPL Energy Supply announced its intention, beginning in April 2015, to place its Corette coal-fired plant in Montana in long-term reserve status, suspending the plant's operations due to expected market conditions and the costs to comply with MATS.  During the fourth quarter of 2013, PPL Energy Supply determined its Corette plant was impaired and recorded a charge of $65 million for the plant and related emission allowances.  See Note 18 to the Financial Statements for additional information.
(b)2013 compared with 2012 was lower primarily due to SMGT filing under Chapter 11 of the U.S. Bankruptcy Code.  $11 million of receivables billed to SMGT were fully reserved in 2012.  For 2012 compared with 2011, no individual item was significant in comparison to the prior year.
(c)2012 compared with 2011 was higher primarily due to outage and project costs.
(d)In February 2012, the U.S. Supreme Court overturned the Montana state court decisions requiring PPL Montana to make lease payments for the use of certain Montana streambeds.  As a result, in 2011, PPL Montana reversed its total loss accrual.  See Note 15 to the Financial Statements for additional information.
(e)Amounts in 2013 compared with 2012 are comparable and have not been isolated for purposes of comparability.  Amounts in 2012 compared with 2011 were not comparable as 2012 includes nine months of expense and therefore, have been isolated for purposes of comparability.  See Note 10 to the Financial Statements for information on the acquisition.
(f)In 2011, PPL Energy Supply was charged trademark royalties by an affiliate.  The agreement was terminated in December 2011.

Loss on Lease Termination

A $697 million charge was recorded in 2013 for the termination of the Colstrip operating lease to facilitate the sale of the Montana hydroelectric generating facilities.  See Note 8 to the Financial Statements for additional information.

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Depreciation

Depreciation increased by $33 million in 2013 compared with 2012, primarily due to net PP&E additions.

Depreciation increased by $41 million in 2012 compared with 2011, primarily due to $16 million attributable to net PP&E additions and $17 million attributable to the Ironwood Acquisition in April 2012.

Taxes, Other Than Income

Taxes, other than income decreased by $56$2 million in 20102012 compared with 2009.  The decrease was primarily due to lower Pennsylvania gross receipts tax expense due to a decrease in electricity revenue as customers chose alternate suppliers in 2010.

Taxes, other than income decreased by $9 million in 2009 compared with 2008.  The decrease was2011, primarily due to a $12$7 million decrease in Pennsylvaniastate capital stock tax offset by a $4 million increase in state gross receipts tax expense, which reflects a decrease in the tax rate in 2009.
Depreciation

Depreciation increased by $8 million in 2010 compared with 2009, primarily due to PP&E additions.tax.

Other Income (Expense) - net

See Note 17 to the Financial Statements for details.

Interest Income from AffiliateAffiliates

Interest income from affiliateaffiliates decreased by $5$6 million in 20092012 compared with 2008.  This decrease2011, primarily due to lower average loan balances with PPL Energy Funding.

Interest Expense

The increase (decrease) in interest expense was due to:

   2013 vs. 2012 2012 vs. 2011
        
Long-term debt interest expense (a) $ (5) $ (11)
Short-term debt interest expense (b)   (2)   (10)
Ironwood Acquisition (c)     12 
Capitalized interest (d)   10      
Net amortization of debt discounts, premiums and issuance costs (e)   (1)   (9)
Montana hydroelectric litigation (f)        10 
Other   1    2 
Total $ 3  $ (6)

(a)The decrease in 2013 compared with 2012 was primarily due to the July 2013 debt maturity.  The decrease in 2012 compared with 2011 was primarily due to the debt redemption in July 2011, along with the repayment and subsequent issuance of debt in the fourth quarter of 2011.
(b)The decrease in 2012 compared with 2011 was primarily due to lower interest rates on 2012 short-term borrowings coupled with lower fees on credit facilities.
(c)The change in 2013 compared with 2012 is comparable and has not been isolated for purposes of comparability.  Amounts in 2012 compared with 2011 were not comparable as 2012 includes nine months of expense and therefore, have been isolated for purposes of comparability.
(d)The increase in 2013 compared with 2012 was primarily due to the Rainbow hydroelectric redevelopment project.
(e)The decrease in 2012 compared with 2011 includes the impact of accelerating the amortization of deferred financing fees of $7 million in 2011, due to the July 2011 redemption.
(f)In February 2012, the U.S. Supreme Court overturned the Montana state court decisions requiring PPL Montana to make lease payments for the use of certain Montana streambeds.  As a result, in 2011, PPL Montana reversed its total loss accrual including accrued interest.  See Note 15 to the Financial Statements for additional information.

Income Taxes

The increase (decrease) in income taxes was due to:

  2013 vs. 2012 2012 vs. 2011
       
Change in pre-tax income $ (448) $ (191)
State valuation allowance adjustments (a)   2    (20)
State deferred tax rate change (b)   34    7 
Federal income tax credits   4      
Federal and state tax reserve adjustments (c)   8    (4)
Federal and state tax return adjustments (d)   (5)   26 
Total $ (405) $ (182)


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(a)The valuation allowances recorded on PPL Energy Supply's state deferred tax assets primarily relate to Pennsylvania net operating loss carryforwards.  Pennsylvania requires that each corporation file a separate income tax return and has significant annual limitations on the deduction for net operating loss carryforwards.  Currently, Pennsylvania allows an annual maximum deduction equal to the greater of $3 million or 20% of taxable income.  Recent legislation increased the annual maximum deduction to the greater of $5 million or 30% of taxable income for tax years beginning in 2015.

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 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.
(b)Changes in state apportionment resulted in an increase to the future estimated state tax rate at December 31, 2013 and reductions to the future estimated state tax rate at December 2012 and 2011.  PPL Energy Supply recorded a $15 million deferred tax expense in 2013, a $19 million deferred tax benefit in 2012 and a $26 million deferred tax benefit in 2011 related to its state deferred tax liabilities.
(c)During 2013, PPL Energy Supply reversed $3 million in tax benefits related to a 2008 change in method of accounting for certain expenditure for tax purposes and recorded $4 million in federal tax expense related to differences in over (under) payment interest rates applied to audit claims as a result of the U.S. Supreme Court decision related to Windfall Profits Tax.
(d)During 2011, PPL Energy Supply recorded $22 million in federal and state tax benefits related to the filing of the 2010 federal and state income tax returns.  Of that amount, $7 million in tax benefits related to an additional domestic manufacturing deduction resulting from revised bonus depreciation amounts.

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

PPL Electric:  Earnings, Margins and Statement of Income Analysis

Earnings

   2013  2012  2011 
           
Net Income Available to PPL $ 209  $ 132  $  173 

Excluding special items, pre-tax earnings in 2013 compared with 2012 increased primarily due to higher distribution base rates that became effective January 1, 2013, higher transmission margins from additional capital investments, lower operation and maintenance expense and higher distribution sales volume due to weather, partially offset by higher depreciation.

Excluding special items, pre-tax earnings in 2012 compared with 2011 decreased primarily due to higher operation and maintenance expense, higher income and non-income taxes, lower distribution margins as a result of a reduced average balance outstandingmild weather early in the year, higher depreciation, partially offset by higher transmission revenue and lower financing costs due to the redemption of $250 million of preferred securities.

The table below quantifies the changes in the components of Net Income Available to PPL between these periods, which reflect amounts classified as Pennsylvania Gross Delivery Margins on a note receivableseparate line within the table and not in their respective Statement of Income line items.

  2013 vs. 2012 2012 vs. 2011
       
Pennsylvania Gross Delivery Margins $ 114  $ 19 
Other operation and maintenance   23    (50)
Depreciation   (18)   (14)
Taxes, other than income   5    (9)
Other Income (Expense) - net   (3)   2 
Interest Expense   (9)   (1)
Income Taxes   (39)     
Distributions on preference stock   4    12 
Total $ 77  $ (41)

Margins

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

The following tables contain the components from an affiliatethe Statements of Income that are included in this non-GAAP financial measure and a lower average rate on this notereconciliation to "Operating Income."

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      2013  2012 
      PA Gross       PA Gross      
      Delivery    Operating Delivery     Operating
      Margins Other (a) Income (b) Margins Other (a) Income (b)
                   
Operating Revenues                    
 Retail electric $ 1,866        $ 1,866  $ 1,760        $ 1,760 
 Electric revenue from affiliate   4          4    3          3 
   Total Operating Revenues   1,870          1,870    1,763          1,763 
                         
Operating Expenses                    
 Energy purchases   588          588    550          550 
 Energy purchases from affiliate   51        51    78        78 
 Other operation and                        
  maintenance   82  $  449     531    104  $  472     576 
 Depreciation      178     178       160     160 
 Taxes, other than income   95    8     103    91    14     105 
   Total Operating Expenses   816    635     1,451    823    646     1,469 
Total $ 1,054  $ (635)  $ 419  $ 940  $ (646)  $ 294 

      2011   
      PA Gross              
      Delivery    Operating        
      Margins Other (a) Income (b)      
                   
Operating Revenues                    
 Retail electric $ 1,881        $ 1,881           
 Electric revenue from affiliate   11          11           
   Total Operating Revenues   1,892          1,892           
                         
Operating Expenses                    
 Energy purchases   738          738           
 Energy purchases from affiliate   26        26           
 Other operation and                      
  maintenance   108  $  422     530           
 Depreciation      146     146           
 Taxes, other than income   99    5     104           
   Total Operating Expenses   971    573     1,544           
Total $ 921  $ (573)  $ 348           

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

Statement of Income Analysis --

Certain Operating Revenues and Expenses Included in "Pennsylvania Gross Delivery Margins"

The following Statement of Income line items are included above within "Pennsylvania Gross Delivery Margins" and are not discussed separately.

  2013 vs. 2012  2012 vs. 2011 
       
Retail electric $106  $(121)
Electric revenue from affiliate  1   (8)
Energy purchases  38   (188)
Energy purchases from affiliate  (27)  52 

Other Operation and Maintenance

The increase (decrease) in other operation and maintenance was due to:

66


  2013 vs. 2012 2012 vs. 2011
       
Act 129 costs incurred (a) $ (24) $ (6)
Vegetation management (b)   14    10 
Payroll-related costs (c)   4    17 
Allocation of certain corporate support group costs   (19)   11 
PUC-reportable storm costs, net of insurance recovery   (18)   7 
Other   (2)   7 
Total $ (45) $ 46 

(a)Relates to costs associated with PPL Electric's PUC-approved energy efficiency and conservation plan with programs starting in 2010.  These costs are recovered in customer rates.  The decrease in both periods primarily results from the number of programs and the timing of such programs. Phase 1 of Act 129 closed in May 2013.  Phase 2 programs began in June 2013.
(b)PPL Electric incurred higher vegetation management costs in both periods due to increased activities related to maintaining and increasing system reliability for both the transmission and distribution systems.  The 2012 compared with 2011 period was also higher due to activities related to compliance with federal transmission reliability requirements.
(c)Higher payroll costs of $17 million in 2012 compared with 2011 due to less project costs being capitalized.

Depreciation

Depreciation increased by $18 million in 2013 compared with 2012, and by $14 million in 2012 compared with 2011, primarily due to a floating interest rate.net PP&E additions.

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.

Financing Costs

The changesincrease (decrease) in financing costs which includes "Interest Expense", "Interest Expense with Affiliate" and "Distributions on Preferred Securities," werewas due to:

  2010 vs. 2009 2009 vs. 2008
       
Long-term debt interest expense (a) $ (16) $ 24 
Repayment of transition bonds      (13)
Interest on PLR contract collateral (Note 16)   (2)   (8)
Distributions on preferred securities   2    
Recoverable transition costs   (3)   3 
Other   2    1 
Total $ (17) $ 7 
  2013 vs. 2012 2012 vs. 2011
       
Long-term debt interest expense (a) $ 12  $ 1 
Distributions on Preference Stock (b)   (4)   (12)
Other   (3)     
Total $ 5  $ (11)

(a)The decrease in 2010 compared with 2009increase was primarily due to long-term debt retirements in the third quarter of 2009.  The increase in 2009 compared with 2008 was primarily due to $400 million of debt issuances in October 2008 that prefunded a portionAugust 2012 and July 2013.
(b)The decrease was due to the June 2012 redemption of August 2009 debt maturities.all 2.5 million shares of preference stock.

Income Taxes

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

 2010 vs. 2009 2009 vs. 2008 2013 vs. 2012 2012 vs. 2011
          
Lower pre-tax book income $ (13) $ (19)
Change in pre-tax income $ 47  $ (22)
Federal and state tax reserve adjustments(a)   (5)   (2)  (1)  1 
Federal and state tax return adjustments(b)   (5)   (2)  (8)  11 
Depreciation not normalized (c)  2   9 
Other   1            1 
 $ (22) $ (23)
Total $ 40  $   

(a)PPL Electric recorded a tax benefit of $7 million during 2013 and $6 million during 2012 and 2011 to federal and state income tax reserves related to stranded costs securitization.  The reserve balance at December 31, 2013 related to stranded costs securitization is zero.
(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.  The tax benefit primarily related to the flow-through impact of Pennsylvania regulated 100% bonus tax depreciation.

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(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 was extended to January 1, 2013 for property that had a cost in excess of $1 million, had a production period longer that one year and had a tax life of at least ten years.  The PPL Electric's tax deduction for 100% bonus depreciation was zero in 2013 and was significantly lower in 2012 than in 2011.

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

Financial ConditionLKE:  Earnings, Margins and Statement of Income Analysis

Earnings

    2013  2012  2011 
            
 Net Income $ 347  $ 219  $ 265 
 Special items, gains (losses), after-tax   3    (16)     

Excluding special items, earnings in 2013 compared with 2012 increased primarily due to higher electricity and gas base rates that went into effect January 1, 2013 and returns from additional environmental capital investments.

Excluding special items, earnings in 2012 compared with 2011 decreased primarily due to higher operation and maintenance expense, higher depreciation, higher property taxes and losses from an equity method investment, partially offset by lower income taxes.

The table below quantifies the changes in the components of Net Income between these periods, which reflect amounts classified as Margins and certain items that management considers special on separate lines within the table and not in their respective Statement of Income line items.  See PPL's "Results of Operations - Segment Earnings - Kentucky Regulated segment" for details of the special items.

  2013 vs. 2012 2012 vs. 2011
     
Margins $ 220  $ (8)
Other operation and maintenance   (5)   (16)
Depreciation   (34)   (10)
Taxes, other than income   (1)   (9)
Other Income (Expense) - net   7    (14)
Interest Expense   6    (4)
Income Taxes   (84)   31 
Special items, after-tax   19    (16)
Total $ 128  $ (46)

Margins

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

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

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      2013    2012 
           Operating        Operating
      Margins Other (a) Income (b)   Margins Other (a) Income (b)
                   
Operating Revenues $ 2,976     $  2,976    $ 2,759     $  2,759 
Operating Expenses                    
 Fuel   896       896      872         872 
 Energy purchases   217       217      195         195 
 Other operation and maintenance   97  $  681    778      101  $  677    778 
 Depreciation   5    329    334      51    295    346 
 Taxes, other than income   1    47    48           46    46 
   Total Operating Expenses   1,216    1,057    2,273      1,219    1,018    2,237 
Total $ 1,760  $ (1,057) $ 703    $ 1,540  $ (1,018) $ 522 

      2011  
           Operating 
      Margins Other (a) Income (b) 
            
Operating Revenues $ 2,791  $  2  $  2,793  
Operating Expenses          
 Fuel   866         866  
 Energy purchases   238         238  
 Other operation and maintenance   90    661    751  
 Depreciation   49    285    334  
 Taxes, other than income        37    37  
   Total Operating Expenses   1,243    983    2,226  
Total $ 1,548  $ (981) $ 567  

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

Statement of Income Analysis --

Certain Operating Revenues and Expenses Included in "Margins"

The following Statement of Income line items are included above within "Margins" and are not discussed separately.

  2013 vs. 2012  2012 vs. 2011 
       
Operating Revenues $217  $(34)
Fuel  24   6 
Energy purchases  22   (43)

Other Operation and Maintenance     
       
The increase (decrease) in other operation and maintenance was due to:
   
 2013 vs. 2012  2012 vs. 2011
       
Coal plant operations and maintenance (a)$ (15) $21 
Administrative and general (b)  9   (7)
Distribution maintenance (c)  3   7 
Other  3   6 
Total$    $ 27 

(a)2013 was lower than 2012 due to $21 million of lower costs related to the timing and scope of scheduled plant outages, partially offset by increased generation costs.

2012 was higher than 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)2013 was higher than 2012 primarily due to increases in software maintenance and property and liability insurance expenses.

2012 was lower than 2011 primarily due to a decrease in pension expense resulting from pension funding and lower interest cost.
(c)2012 was higher than 2011 primarily due to a $6 million credit to establish a regulatory asset recorded when approved in 2011 related to 2009 storm costs.


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Depreciation

The increase (decrease) in depreciation was due to:

  2013 vs. 2012 2012 vs. 2011
       
Lower depreciation rates effective January 1, 2013 (a)$ (22)     
Additions to PP&E  10  $ 12 
Total$ (12) $ 12 

(a)A result of the 2012 rate case.

Taxes, Other Than Income

Taxes, other than income increased $9 million in 2012 compared with 2011 due to an increase in property taxes resulting from property additions, higher assessed values and changes in property classifications to categories with higher tax rates.

Other Income (Expense) - net

Other income (expense) - net increased $8 million in 2013 compared with 2012 and decreased $14 million in 2012 compared with 2011 primarily due to losses from the EEI investment recorded in 2012.  The EEI investment was fully impaired in the fourth quarter of 2012.

Other-Than-Temporary Impairments

Other-than-temporary impairments decreased $25 million in 2013 compared with 2012 and increased $25 million in 2012 compared with 2011 due to the $25 million pre-tax impairment of the EEI investment in 2012.  See Notes 1 and 18 to the Financial Statements for additional information.

Interest Expense

Interest expense decreased $6 million in 2013 compared with 2012 primarily due to amortization of a fair market value adjustment of $7 million.

Interest expense increased $4 million in 2012 compared with 2011 primarily due to LKE's issuance of $250 million of senior notes in September 2011, resulting in an $8 million increase in interest expense.  This increase was partially offset by lower interest rates.

Income Taxes  
        
The increase (decrease) in income taxes was due to:
    
   2013 vs. 2012 2012 vs. 2011
        
Change in pre-tax income $ 86  $ (34)
Net operating loss carryforward adjustments (a)   9    (9)
Other   5    (4)
Total $ 100  $ (47)

(a)Adjustments recorded in 2012 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) increased $8 million in 2013 compared with 2012 and decreased $5 million in 2012 compared with 2011 primarily due to an adjustment in 2012 to the estimated liability for indemnifications related to the termination of the WKE lease.

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LG&E:  Earnings, Margins and Statement of Income Analysis

Earnings

    2013  2012  2011 
            
 Net Income $ 163  $ 123  $ 124 
 Special items, gains (losses), after-tax         1 

Earnings in 2013 compared with 2012 increased primarily due to higher electricity and gas base rates that went into effect January 1, 2013 and returns from additional environmental capital investments.

The table below quantifies the changes in the components of Net Income between these periods, which reflect amounts classified as Margins and certain items that management considers special on separate lines within the table and not in their respective Statement of Income line items.  See PPL's "Results of Operations - Segment Earnings - Kentucky Regulated segment" for details of the special items.

  2013 vs. 2012 2012 vs. 2011
     
Margins $ 64  $ 3 
Other operation and maintenance   (10)   3 
Depreciation   3    (4)
Taxes, other than income   (1)   (5)
Other Income (Expense) - net   1    (1)
Interest Expense   8    2 
Income Taxes   (25)   2 
Special items, after-tax      (1)
Total $ 40  $ (1)

Margins

"Margins" is a non-GAAP financial performance measure that management utilizes as an indicator of the performance of its business.  See PPL's "Results of Operations - Margins" for an explanation of why management believes this measure is useful and the underlying drivers of the changes between periods.  Within PPL's discussion, LG&E's Margins are included in "Kentucky Gross Margins."

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

      2013    2012 
           Operating        Operating
      Margins Other (a) Income (b)   Margins Other (a) Income (b)
                   
Operating Revenues $ 1,410     $ 1,410    $ 1,324       $ 1,324 
Operating Expenses                    
 Fuel   367       367      374       374 
 Energy purchases   205       205      175       175 
 Other operation and maintenance   45  $ 328    373      45  $ 318    363 
 Depreciation   2    146    148      3    149    152 
 Taxes, other than income        24    24           23    23 
   Total Operating Expenses   619    498    1,117      597    490    1,087 
Total $ 791  $ (498) $ 293    $ 727  $ (490) $ 237 

      2011    
           Operating         
      Margins Other (a) Income (b)       
                   
Operating Revenues $ 1,363  $  1  $  1,364           
Operating Expenses                   
 Fuel   350         350           
 Energy purchases   245         245           
 Other operation and maintenance   42    321    363           
 Depreciation   2    145    147           
 Taxes, other than income        18    18           
   Total Operating Expenses   639    484    1,123           
Total $ 724  $ (483) $ 241           


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

Statement of Income Analysis --

Certain Operating Revenues and Expenses Included in "Margins"

The following Statement of Income line items are included above within "Margins" and are not discussed separately.

  2013 vs. 2012  2012 vs. 2011 
��      
Retail and wholesale $104  $(34)
Electric revenue from affiliate  (18)  (6)
Fuel  (7)  24 
Energy purchases  32   (46)
Energy purchases from affiliate  (2)  (24)

Other Operation and Maintenance     
       
The increase (decrease) in other operation and maintenance was due to:
   
  2013 vs. 2012 2012 vs. 2011
       
Administrative and general (a)$ 6  $ (5)
Distribution maintenance  3    (1)
Coal plant operations and maintenance  (1)   2 
Other  2    4 
Total$ 10  $   

(a)2013 was higher than 2012 primarily due to increases in software maintenance and property and liability insurance expenses.

2012 was lower than 2011 primarily due to a decrease in pension expense resulting from pension funding and lower interest cost.

Depreciation

The increase (decrease) in depreciation was due to:

  2013 vs. 2012 2012 vs. 2011
       
Lower depreciation rates effective January 1, 2013 (a)$ (8)   
Additions to PP&E  4  $ 5 
Total$ (4) $ 5 

(a)A result of the 2012 rate case.

Taxes, Other Than Income

Taxes, other than income increased $5 million in 2012 compared with 2011 due to an increase in property taxes resulting from property additions, higher assessed values and changes in property classifications to categories with higher tax rates.

Interest Expense

Interest expense decreased $8 million in 2013 compared with 2012 primarily due to amortization of a fair market value adjustment of $7 million.

Income Taxes

Income taxes increased $25 million in 2013 compared with 2012 due to the change in pre-tax income.

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

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KU:  Earnings, Margins and Statement of Income Analysis

Earnings

    2013  2012  2011 
            
 Net Income $ 228  $ 137  $ 178 
 Special items, gains (losses), after tax   1    (15)     

Excluding special items, earnings in 2013 compared with 2012 increased primarily due to higher electricity base rates that went into effect January 1, 2013 and returns from additional environmental capital investments.

Excluding special items, earnings in 2012 compared with 2011 decreased primarily due to higher operation and maintenance expense, higher depreciation, higher property taxes and losses from an equity method investment.

The table below quantifies the changes in the components of Net Income between these periods, which reflect amounts classified as Margins and certain items that management considers special on separate lines within the table and not in their respective Statement of Income line items.  See PPL's "Results of Operations - Segment Earnings - Kentucky Regulated segment" for details of these special items.

  2013 vs. 2012 2012 vs. 2011
     
Margins $ 156  $ (10)
Other operation and maintenance   (1)   (16)
Depreciation   (39)   (6)
Taxes, other than income        (4)
Other Income (Expense) - net   4    (7)
Interest Expense   (1)   1 
Income Taxes   (44)   16 
Special items, after-tax   16    (15)
Total $ 91  $ (41)

Margins

"Margins" is a non-GAAP financial performance measure that management utilizes as an indicator of the performance of its business.  See PPL's "Results of Operations - Margins" for an explanation of why management believes this measure is useful and the underlying drivers of the changes between periods.  Within PPL's discussion, KU's Margins are included in "Kentucky Gross Margins."

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

      2013    2012 
           Operating        Operating
      Margins Other (a) Income (b)   Margins Other (a) Income (b)
                   
Operating Revenues $ 1,635     $ 1,635    $ 1,524     $ 1,524 
Operating Expenses                    
 Fuel   529       529      498       498 
 Energy purchases   81       81      109       109 
 Other operation and maintenance   52  $ 330    382      55  $ 329    384 
 Depreciation   3    183    186      49    144    193 
 Taxes, other than income   1    23    24           23    23 
   Total Operating Expenses   666    536    1,202      711    496    1,207 
Total $ 969  $ (536) $ 433    $ 813  $ (496) $ 317 


73


      2011  
           Operating 
      Margins Other (a) Income (b) 
            
Operating Revenues $ 1,548     $  1,548  
Operating Expenses          
 Fuel   516       516  
 Energy purchases   112       112  
 Other operation and maintenance   49  $  313    362  
 Depreciation   48    138    186  
 Taxes, other than income        19    19  
   Total Operating Expenses   725    470    1,195  
Total $ 823  $ (470) $ 353  

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

Statement of Income Analysis --

Certain Operating Revenues and Expenses Included in "Margins"

The following Statement of Income line items are included above within "Margins" and are not discussed separately.

  2013 vs. 2012  2012 vs. 2011 
       
Retail and wholesale $113      
Electric revenue from affiliate  (2) 
$
(24)
Fuel  31   (18)
Energy purchases  (10)  3 
Energy purchases from affiliate  (18)  (6)

Other Operation and Maintenance     
       
The increase (decrease) in other operation and maintenance was due to:
   
 2013 vs. 2012  2012 vs. 2011
       
Coal plant operations and maintenance (a)$ (14) $ 17 
Administrative and general (b)  7    (5)
Distribution maintenance (c)       8 
Other  5    2 
Total$ (2) $ 22 

(a)2013 was lower than 2012 due to $21 million of lower costs related to the timing and scope of scheduled plant outages, partially offset by increased generation costs.

2012 was higher than 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.
(b)2013 was higher than 2012 primarily due to increases in software maintenance and property and liability insurance expenses.

2012 was lower than 2011 primarily due to a decrease in pension expense resulting from pension funding and lower interest cost.
(c)2012 was higher than 2011 primarily due to a $6 million credit to establish a regulatory asset recorded when approved in 2011 related to 2009 storm costs.

Depreciation

The increase (decrease) in depreciation was due to:

  2013 vs. 2012 2012 vs. 2011
       
Lower depreciation rates effective January 1, 2013 (a)$ (13)   
Additions to PP&E  6  $ 7 
Total$ (7) $ 7 

(a)A result of the 2012 rate case.


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Other Income (Expense) - net

Other income (expense) - net increased $5 million in 2013 compared with 2012 and decreased $7 million in 2012 compared with 2011 primarily due to losses from the EEI investment recorded in 2012.  The EEI investment was fully impaired in the fourth quarter of 2012.

Other-Than-Temporary Impairments

Other-than-temporary impairments decreased $25 million in 2013 compared with 2012 and increased $25 million in 2012 compared with 2011 due to the $25 million pre-tax impairment of the EEI investment in 2012.  See Notes 1 and 18 to the Financial Statements for additional information.

Income Taxes

Income taxes increased $54 million in 2013 compared with 2012 and decreased $26 million in 2012 compared with 2011 primarily due to the change in pre-tax income.

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

Financial Condition

The remainder of this Item 7 in this Form 10-K is presented on a combined basis, providing information, as applicable, for all Registrants.

Liquidity and Capital Resources

PPL Electric continues to focus on maintaining a strong credit profile and liquidity position.  PPL Electric expects(All Registrants)

The Registrants expect 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, PPL Electric currently plans to access debt capital markets in 2011, subject to market conditions.conditions, the Registrants and their subsidiaries may borrow in the capital markets, and PPL Energy Supply, PPL Electric, LKE, LG&E and KU anticipate receiving equity contributions from their parent or member in 2014.

PPL Electric'sThe Registrants' 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'sthe Registrants' current and past business activities;
·deteriorationchanges 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'sthe Registrants' or their rated subsidiaries' credit ratings that could adversely affect itstheir ability to access capital and increase the cost of credit facilities and any new debt.

(All Registrants except PPL Electric)

·costs of compliance with existing and new environmental laws focused on electricity generation facilities, and for PPL and PPL Energy Supply with new security and safety requirements for nuclear facilities;
·changes in electricity, fuel and other commodity prices;
·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;
·reliance on transmission and distribution facilities that PPL, PPL Energy Supply, LKE, LG&E and KU do not own or control to deliver electricity and natural gas; and
·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.


75

(All Registrants except PPL Energy Supply)

·unusual or extreme weather that may damage transmission and distribution facilities or affect energy sales to customers; and
·the ability to recover and the timeliness and adequacy of recovery of costs associated with regulated utility businesses.

(All Registrants)

See "Item 1A. Risk Factors" for further discussion of risks and uncertainties affecting PPL Electric'sthat could affect the Registrants' cash flows.

At December 31, PPL ElectricThe Registrants had the following:following at:

 2010  2009  2008    PPL        
            Energy PPL      
 PPL (a) Supply Electric LKE LG&E KU
            
December 31, 2013            
Cash and cash equivalents $ 1,102  $  239  $  25  $  35  $  8  $  21 
Notes receivable from affiliates      150   70     
Short-term debt  701       20   245   20   150 
            
December 31, 2012            
Cash and cash equivalents $ 204  $ 485  $ 483   901   413   140   43   22   21 
Short-term debt       $ 95   652   356       125   55   70 
Notes payable with affiliates        25         
            
December 31, 2011            
Cash and cash equivalents  1,202   379   320   59   25   31 
Notes receivable from affiliates    198     15     
Short-term investments  16               
Short-term debt  578   400           

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

  2010  2009  2008 
          
Net cash provided by operating activities $ 212  $ 294  $ 648 
Net cash provided by (used in) investing activities   (403)   6    (226)
Net cash provided by (used in) financing activities   (90)   (298)   28 
Net Increase (Decrease) in Cash and Cash Equivalents $ (281) $ 2  $ 450 

Operating Activities
(a)At December 31, 2013, PPL's cash and cash equivalents included $637 million denominated in GBP.  If these amounts were 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.

Net cash provided by (used in) operating, investing and financing activities for the years ended December 31 and the changes between periods were as follows.

    PPL         
    Energy PPL      
  PPL Supply Electric LKE LG&E KU
2013                   
Operating activities $ 2,857  $ 410  $ 523  $ 911  $ 356  $ 495 
Investing activities   (4,295)   (631)   (1,080)   (1,493)   (567)   (853)
Financing activities   1,631    47    442    574    197    358 
                   
2012                   
Operating activities $ 2,764  $ 784  $ 389  $ 747  $ 308  $ 500 
Investing activities   (3,123)   (469)   (613)   (756)   (289)   (480)
Financing activities   48    (281)   44    (7)   (22)   (30)
                   
2011                   
Operating activities $ 2,507  $ 776  $ 420  $ 781  $ 325  $ 444 
Investing activities   (7,952)   (668)   (477)   (277)   (42)   (279)
Financing activities   5,767    (390)   173    (456)   (260)   (137)
                   
2013 vs. 2012 Change                  
Operating activities $ 93  $ (374) $ 134  $ 164  $ 48  $ (5)
Investing activities   (1,172)   (162)   (467)   (737)   (278)   (373)
Financing activities   1,583    328    398    581    219    388 
                   
2012 vs. 2011 Change                  
Operating activities $ 257  $ 8  $ (31) $ (34) $ (17) $ 56 
Investing activities   4,829    199    (136)   (479)   (247)   (201)
Financing activities   (5,719)   109    (129)   449    238    107 


76

Operating Activities

The components of the change in cash provided by (used in) operating activities decreasedwere as follows.

      PPL            
      Energy PPL         
   PPL Supply Electric LKE LG&E KU
2013 vs. 2012                  
Change - Cash Provided (Used):                  
 Net income $ (400) $ (704) $ 73  $ 128  $ 40  $ 91 
 Non-cash components   534    313    31    90    (30)   (68)
 Working capital   (332)   65    12    (31)   12    (15)
 Defined benefit plan funding   44    (38)   (34)   (98)   (21)   (44)
 Other operating activities   247    (10)   52    75    47    31 
Total $ 93  $ (374) $ 134  $ 164  $ 48  $ (5)
                    
2012 vs. 2011                  
Change - Cash Provided (Used):                  
 Net income $ 19  $ (294) $ (53) $ (46) $ (1) $ (41)
 Non-cash components   241    180    34    (48)   5    41 
 Working capital   (178)   30    (79)   (66)   (65)   11 
 Defined benefit plan funding   60    77    54    100    43    29 
 Other operating activities   115    15    13    26    1    16 
Total $ 257  $ 8  $ (31) $ (34) $ (17) $ 56 

(PPL and PPL Energy Supply)

A significant portion of PPL's Supply segment and PPL Energy Supply's operating cash flows is derived from its competitive baseload generation activities.  PPL employs a formal hedging program for its baseload generation fleet, the objective of which is to provide a reasonable level of near-term cash flow and earnings certainty while preserving upside potential over the medium term to benefit from power price increases.  See Note 19 to the Financial Statements for further discussion.  Despite PPL's hedging practices, future cash flows from operating activities from its Supply segment are influenced by 28%energy and capacity prices and, therefore, will fluctuate from period to period.

PPL's and PPL Energy Supply's contracts for the sale and purchase of electricity and fuel often require cash collateral or cash equivalents (e.g. letters of credit), or $82reductions or terminations of a portion of the entire contract through cash settlement, in the event of a downgrade of PPL's or its subsidiaries' or PPL Energy Supply'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' or PPL Energy Supply's or its subsidiaries' ratings were lowered to below "investment grade" and there was a 10% adverse movement in energy prices, PPL and PPL Energy Supply estimate that, based on their December 31, 2013 positions, they would have been required to post additional collateral of approximately $406 million for PPL and approximately $318 million for PPL Energy Supply with respect to electricity and fuel contracts.  PPL and PPL Energy Supply had adequate liquidity sources at December 31, 2013 if they would have been required to post this additional collateral.  PPL and PPL Energy Supply have in 2010place risk management programs that are designed to monitor and manage 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 generating units.

(PPL)

PPL's net income for 2013 includes a $271 million payment made in December 2013 related to terminating the operating lease arrangement for interests in the Colstrip facility in Montana and acquiring the previously leased interests.  A portion of this payment was used to satisfy the lessors' principal, interest and make whole premium for the redemption of their 8.903% Pass Through Certificates due 2020, which did not represent obligations of PPL or its subsidiaries and, therefore, were not included in PPL's financial statements.  Net income for 2013 also includes a non-cash charge of $426 million associated with the lease termination.  See Note 8 to the Financial Statements for additional information on the transaction.  Non-cash components of net income in 2013 compared with 2009.  The expiration2012 also included $209 million for the impact of non-cash hedging activities (primarily unrealized losses in 2013), $124 million for changes to the WPD line loss accrual and the $65 million charge for the impairment of the generation rate caps at the end of 2009 had little impact on net income, while increased transmission revenue was almost completelyCorette facility, offset by decreased distribution revenue.  However, higher tree trimming and payroll costs and additional defined benefit plan contributions were the primary drivers toa $352 million decline in deferred income taxes.  In 2013 compared with 2012, the decrease in cash from changes in components of working capital was primarily due to increases in accounts receivable (primarily due to extended payment terms at LG&E and KU, higher rates and colder weather in 2013 at LG&E, KU and PPL Electric and increases at PPL Energy Supply's mechanical contracting business) and changes to certain tax-related accounts.  The increase in cash provided by other operating activities.  Also impactingactivities was partially due to net proceeds of $104 million for the 2010 operatingsettlement in 2013 of forward starting interest rate swaps.


77

For PPL, in 2012 compared with 2011, non-cash components of net income primarily consisted of $341 million related to non-cash hedging activities (primarily unrealized gains recorded in 2011) and $139 million related to increased depreciation, partially offset by a $158 million decline in deferred income taxes.  The decrease in cash flowsfrom changes in components of working capital was primarily due to changes in prepayments (primarily due to the eliminationreceipt in 2011 of the CTC chargea tax refund) and changes in net regulatory assets/liabilities (primarily due to higher collection on PPL Electric's Generation Supply Charge for its PLR customers in 2011), partially offset by a reduction of approximately $300 million that was received in 2009.  This amount offsets the benefit of not paying the $300$156 million in returns of counterparty collateral.  Included in the change in cash collateralfrom operating activities is the impact of having an additional four months of WPD Midlands operations in 2012.  WPD Midlands' cash from operating activities increased by $190 million in 2012 compared with 2011.

(PPL Energy Supply)

PPL Energy Supply's net income for 2013 includes a $271 million payment made in December 2013 related to terminating the operating lease arrangement for interests in the Colstrip facility in Montana and acquiring the previously leased interests.  A portion of this payment was used to satisfy the lessors' principal, interest and make whole premium for the redemption of their 8.903% Pass Through Certificates due 2020, which did not represent obligations of PPL Energy Supply as discussed below.or its subsidiaries and, therefore, were not included in PPL Energy Supply's financial statements.  Net income for 2013 also includes a non-cash charge of $426 million associated with the lease termination.  See Note 8 to the Financial Statements for additional information on the transaction.  Non-cash components of net income in 2013 compared with 2012 also included $212 million for the impact of non-cash hedging activities (primarily unrealized losses in 2013) and the $65 million charge for the impairment of the Corette facility, offset by a $448 million decline in deferred income taxes.

NetFor PPL Energy Supply, in 2012 compared with 2011, non-cash components of net income primarily consisted of $242 million related to non-cash hedging activities (primarily unrealized gains in 2011) and the $74 million reduction in the provision for the Montana hydroelectric litigation recorded in 2011, partially offset by a $165 million decline in deferred income taxes.  The increase in cash providedfrom changes in components of working capital was primarily due to a reduction of $156 million in returns of counterparty collateral, partially offset by increases in accounts receivable (primarily affiliate receivables).

(PPL Electric)

For PPL Electric, in 2013 compared with 2012, the increase in net income resulted primarily due to higher distribution base rates that became effective January 1, 2013 and higher transmission margins from additional capital investments.  The change in other operating activities decreasedwas partially due to changes to certain tax-related accounts.

For PPL Electric, in 2012 compared with 2011, the decrease in cash from changes in components of working capital was primarily due to changes from regulatory assets and liabilities, net (primarily due to higher collection on the generation supply charge from its PLR customers in 2011) and from prepayments (due to the receipt in 2011 of a tax refund), partially offset by 55%, or $354accounts payable changes in 2011 (due to lower PLR prices and lower energy purchases (due to warmer weather in 2011 compared with 2010).

(LKE)

In 2013, LKE's non-cash components of net income included a $121 million increase in deferred income taxes primarily due to utilization of net operating losses.  The decrease in cash from working capital was driven primarily by increases in accounts receivable and unbilled revenues due to extended payment terms, higher rates and colder December weather in 2013, offset by an increase in accounts payable due to timing of fuel purchase commitments and payments.  The increase in cash from LKE's other operating activities was driven primarily by $86 million in 2009proceeds from the settlement of interest rate swaps.

In 2012, LKE's non-cash components of net income included an $85 million reduction in deferred income taxes due primarily to the utilization of a capital loss carry forward in 2011.  The decrease in cash from changes in components of working capital was 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.


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(LG&E)

In 2013, LG&E's increase in cash from changes in components of working capital was driven primarily by an increase in accounts payable due to timing of fuel purchase commitments and payments and an increase in accrued taxes due to decreased payments for property taxes in 2013, partially offset by increases in accounts receivable and unbilled revenues due to extended payment terms, higher rates and colder December weather in 2013, and higher fuel and underground gas storage inventory in 2013 attributable to an increase in fuel and natural gas prices. The increase in cash from LG&E's other operating activities was driven primarily by $43 million in proceeds from the settlement of interest rate swaps.

In 2012, LG&E's decrease in cash from changes in components of working capital was 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 2008,2010 driven by lower gas prices.

(KU)

In 2013, KU's decrease in cash from changes in components of working capital was driven primarily by increases in accounts receivable and unbilled revenues due to extended payment terms, higher rates and colder December weather in 2013, offset by an increase in accounts payable due to timing of fuel purchase commitments and payments.  The increase in cash from KU's other operating activities was driven primarily by $43 million in proceeds from the settlement of interest rate swaps.

In 2012, KU's increase in cash from changes in components of working capital was driven primarily by lower income tax payments as a result of the repaymentlower taxable income in 2012, partially offset by PPL Electric of $300 millionchanges in cash collateral relatedreceivables and unbilled revenues due 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 revenuesmilder December weather in 2011 than in 2012 and higher payments of interest and income taxes.

PPL Electric expects an increase in cash flows from operations in the near-term from its $77.5 million, or 1.6%, rate increase that became effective on January 1, 2011.2010.

Investing Activities

(All Registrants)

The primary usecomponents of the change in cash provided by (used in) investing activities were as follows.

       PPL            
       Energy PPL         
    PPL Supply Electric LKE LG&E KU
2013 vs. 2012                  
Change - Cash Provided (Used):                  
 Expenditures for PP&E $ (1,107) $ 65  $ (279) $ (666) $ (291) $ (375)
 Acquisitions & divestitures, net   84    84                     
 Notes receivable with affiliates                  
  activity, net        (198)   (150)   (85)          
 Restricted cash and cash                  
  equivalent activity   (116)   (126)        12    13      
 Investment activity, net   (20)                         
 Other investing activities   (13)   13    (38)   2         2 
Total $ (1,172) $ (162) $ (467) $ (737) $ (278) $ (373)
                     
2012 vs. 2011                  
Change - Cash Provided (Used):                  
 Expenditures for PP&E $ (618) $ 13  $ (143) $ (291) $ (90) $ (201)
 Acquisitions & divestitures, net   5,298    (465)                    
 Notes receivable with affiliates                  
  activity, net        396         (31)          
 Restricted cash and cash                  
  equivalent activity   239    232         6    6      
 Investment activity, net   (145)   (2)        (163)   (163)     
 Other investing activities   55    25    7                
Total $ 4,829  $ 199  $ (136) $ (479) $ (247) $ (201)

(PPL)

For PPL, in 2013 compared with 2012, the change in "Expenditures for PP&E" was due to increases for projects to enhance system reliability at WPD and PPL Electric, the Susquehanna-Roseland transmission project at PPL Electric, environmental air projects at LG&E's Mill Creek and KU's Ghent plants, construction of Cane Run Unit 7 for both LG&E and KU and coal combustion residuals projects at KU's Ghent and E.W. Brown plants.  The change in "Restricted cash and cash equivalent activity" was primarily related to margin deposit returns in 2012 at PPL Energy Supply.


79

For PPL, in 2012 compared with 2011, the change in "Expenditures for PP&E" was due to increases from having four additional months of WPD Midlands expenditures in 2012, the Susquehanna-Roseland transmission project and construction of a new data center at PPL Electric, coal combustion residuals projects at KU's Ghent and E.W. Brown plants, environmental air projects at LG&E's Mill Creek and KU's Ghent plants, and construction of Cane Run Unit 7 for both LG&E and KU.  The change in "Restricted cash and cash equivalent activity" was primarily related to margin deposits posted in 2011 that were returned in 2012 at PPL Energy Supply.  The change in "Investment activity, net" was primarily due to the sale in 2011 by LG&E of tax-exempt revenue bonds that were repurchased from the remarketing agent in 2008.

(PPL Energy Supply)

For PPL Energy Supply, in 2013 compared with 2012, the change in "Acquisitions & divestitures, net" related to the disbursement in 2012 for the Ironwood Acquisition.  See Note 10 to the Financial Statement for additional information.  The change in "Notes receivable with affiliates, net" resulted from proceeds received in 2012 from repayments.  The change in "Restricted cash and cash equivalent activity" was primarily related to margin deposit returns in 2012.

For PPL Energy Supply, in 2012 compared with 2011, the change in "Restricted cash and cash equivalent activity" was primarily related to margin deposits posted in 2011 that were returned in 2012.

(PPL Electric)

For PPL Electric, in 2013 compared with 2012, the change in "Expenditures for PP&E" was due to increases for projects to enhance system reliability and the Susquehanna-Roseland transmission project.

For PPL Electric, in 2012 compared with 2011, the change in "Expenditures for PP&E" was due to increases for the Susquehanna-Roseland transmission project and a new data center.

(LKE, LG&E and KU)

For LKE, LG&E and KU, in 2013 compared with 2012, cash used in investing activities is capital expenditures.changed as a result of an increase in expenditures for PP&E, primarily due to environmental air projects at LG&E's Mill Creek and KU's Ghent plants, construction of Cane Run Unit 7 for both LG&E and KU and coal combustion residuals projects at KU's Ghent and E.W. Brown plants.  See "Forecasted Uses of Cash" for detail regarding projected capital expenditures in 2010 and projected expenditures for the years 20112014 through 2015.2018.

NetFor LKE, LG&E and KU, in 2012 compared with 2011, cash used in investing activities was $403 millionchanged as a result of an increase in 2010 compared with cash provided by investing activitiesexpenditures for PP&E, primarily due to coal combustion residuals projects at KU's Ghent and E.W. Brown plants, environmental air projects at LG&E's Mill Creek and KU's Ghent plants, and construction of $6 million in 2009.Cane Run Unit 7 for both LG&E and KU.  The change in investment activity was due to LG&E's sale of tax-exempt revenue bonds in 2011 that were repurchased from 2009 to 2010 primarily reflects an increase of $113 million in capital expenditures in 2010 and the receipt of $300 million from an affiliate as repayment of a demand loan in 2009.

Net cash provided by investing activities was $6 million in 2009 compared with cash used in investing activities of $226 millionremarketing agent in 2008.  The change from 2008 to 2009 primarily reflects the receipt of $300 million from an affiliate as repayment of a demand loan.

Financing Activities

Net(All Registrants)

The components of the change in cash used inprovided by (used in) financing activities was $90 millionwere as follows.

       PPL            
       Energy PPL         
    PPL Supply Electric LKE LG&E KU
2013 vs. 2012                  
Change - Cash Provided (Used):                  
 Debt issuance/retirement, net $ 176  $  (738) $  99  $  496  $  248  $  248 
 Stock issuances/redemptions, net   1,515       250                
 Dividends   (45)      (32)        (24)   (24)
 Capital contributions/distributions,                  
  net      1,393    55    144    86    157 
 Changes in net short-term debt (a)   (25)   (312)   20    (55)   (90)   10 
 Other financing activities   (38)   (15)   6    (4)   (1)   (3)
Total $ 1,583  $ 328  $ 398  $ 581  $ 219  $ 388 

80


       PPL            
       Energy PPL         
    PPL Supply Electric LKE LG&E KU
2012 vs. 2011                  
Change - Cash Provided (Used):                  
 Debt issuance/retirement, net $ (3,420) $ 241  $ 62  $ (248)          
 Stock issuances/redemptions, net   (2,475)      (250)               
 Dividends   (87)      (3)      $ 8  $ 24 
 Capital contributions/distributions,                  
  net      (44)   50    378           
 Changes in net short-term debt (a)   199    (94)        313    230    80 
 Other financing activities   64    6    12    6         3 
Total $ (5,719) $ 109  $ (129) $ 449  $ 238  $ 107 

(a)Includes net increase (decrease) in notes payable with affiliates.

(PPL)

For PPL, in 20102013 compared with $2982012, the change in "Stock issuances/redemptions, net" primarily resulted from the July 2013 settlement of the 2010 Equity Units and the April and May 2013 settlements of forward sale agreements.  Also, the 2012 activity included the June 2012 redemption of the remaining PPL Electric preference stock.  The 2013 net stock issuances/redemptions proceeds of $1.3 billion were primarily contributed to PPL Energy Supply to fund a $300 million debt maturity, to repay short-term debt, terminate the operating lease arrangement for interests in 2009.the Colstrip facility in Montana and acquire the previously leased interests for $271 million and fund a $437 million repayment of outstanding debt related to the acquisition of the previously leased Lower Mt. Bethel facility.  In addition, an $18 million distribution was made to the equity investors of LMB Funding, L.P., which was accounted for as a redemption of noncontrolling interests and reflected in "Other financing activities" in the table above.  See Notes 7, 8 and 22 to the Financial Statements for additional information on these 2013 equity, debt and lease transactions.

For PPL, in 2012 compared with 2011, the changes in "Debt issuances/retirements, net" and "Stock issuances/redemptions, net" were primarily due to cash received in 2011 from securities issued to fund the WPD Midlands acquisition.

(PPL Energy Supply)

For PPL Energy Supply, in 2013 compared with 2012, the change in "Debt issuance/retirement, net" was due to the 2013 repayment of a $300 million debt maturity and $437 million repayment of outstanding debt related to the acquisition of the previously leased Lower Mt. Bethel facility.  In addition, an $18 million distribution was made to the equity investors of LMB Funding, L.P.,  which was accounted for as a redemption of noncontrolling interests and reflected in "Other financing activities" in the table above.  See Notes 7 and 22 to the Financial Statements for additional information on these 2013 debt and lease transactions.  The change in "Capital Contributions/distributions, net" included net proceeds from 20092013 of $1.1 billion that were contributed to 2010 primarily reflectsPPL Energy Supply to fund the debt maturities discussed above, to repay short-term debt and terminate the operating lease arrangement for interests in the Colstrip facility in Montana and acquire the previously leased interests.

For PPL Energy Supply, in 2012 compared with 2011, the change in "Debt issuance/retirement, net" was due to 2011 including the early redemption at par of $250 million 7.00% Senior Notes due 2046.

(PPL Electric)

For PPL Electric, in 2013 compared with 2012, and 2012 compared with 2011, the changes in "Stock issuances/redemptions, net" related to the June 2012 redemption of the remaining preference stock.

(LKE)

For LKE, in 2013 compared with 2012, the change in "Debt issuance/retirement, net" was due to the issuance of long-term debt by LG&E and KU in November 2013.  The change in "Capital contributions/distributions, net" resulted from an increase in equity contributions received from PPL.  The increase in cash provided by financing activities resulted from the long-term debt issuance noted above, the proceeds of which were used for capital expenditures related to environmental air projects, construction of Cane Run Unit 7 and for other general corporate purposes.  See Note 7 to the Financial Statements for additional information on these transactions.


81

For LKE, in 2012 compared with 2011, the change in "Debt issuance/retirement, net" and "Capital contributions/distributions, net" was due to the issuance of long-term debt by LKE in 2011, the proceeds of which were used for distributions to PPL, whereas there were no debt activity, decreasedissuances in 2012.  The "Changes in net short-term debt" resulted from the issuance of short-term debt in 2012 and the repayment of short-term debt during 2011.

(LG&E)

For LG&E, in 2013 compared with 2012, the change in "Debt issuance/retirement, net" was due to the issuance of long-term debt in November 2013, the proceeds of which were used for the repayment of short-term debt, capital expenditures related to environmental air projects, construction of Cane Run Unit 7 and for other general corporate purposes.  The change in "Capital contributions/distributions, net" resulted from an increase in equity contributions received from LKE.  The "Changes in net short-term debt" resulted from the repayment of short-term debt in 2013 and the issuance of short-term debt in 2012.  See Note 7 to the Financial Statements for additional information on these transactions.

For LG&E, in 2012 compared with 2011, the "Changes in net short-term debt" resulted from the issuance of short-term debt during 2012 and the repayment of short-term debt in 2011.

(KU)

For KU, in 2013 compared with 2012, the change in "Debt issuance/retirement, net" was due to the issuance of long-term debt in November 2013, the proceeds of which were used for capital expenditures related to environmental air projects, construction of Cane Run Unit 7 and for other general corporate purposes.  The change in "Capital contributions/distributions, net" resulted from an increase in equity contributions received from LKE.  See Note 7 to the Financial Statements for additional information on these transactions.

For KU, in 2012 compared with 2011, the "Changes in net short-term debt" resulted from the issuance of short-term debt during 2012.  The change in "Dividends" resulted from higher common stock dividends paid to PPL, and the redemption of preferred stockLKE in 2010.  PPL Electric had net debt retirements of $392 million in 2009 compared with no activity in 2010, received $345 million less of contributions from PPL in 2010 compared to 2009, paid $203 million less of common stock dividends to PPL in 2010 compared to 2009, and paid $54 million to redeem preferred stock in 2010.2011.

Net cash used in financing activities was $298 million in 2009 compared with net cash provided by financing activities of $28 million in 2008.  The change from 2008 to 2009 primarily reflects less issuances and increased retirements 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 million in 2009 compared with net debt issuances of $148 million 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.(All Registrants)

See "Long-term Debt and Equity Securities" below for additional information on current year activity.  See "Forecasted Sources of Cash" for a discussion of PPL Electric'sthe Registrants' plans to issue debt and equity securities, as well as a discussion of credit facility capacity available to PPL Electric.the Registrants.  Also see "Forecasted Uses of Cash" for a discussion of PPL Electric'sPPL's plans to pay dividends on its common and preferred securities in the future, as well as the Registrants' maturities of PPL Electric's long-term debt.

Long-term Debt and Equity Securities (All Registrants)

Long-term debt and equity securities activity for 2013 included:

           
    Debt  Net Stock
    Issuances (a)  Retirements  Issuances (b)
            
PPL $ 2,038  $ 747  $ 1,337 
PPL Energy Supply        747    
PPL Electric   348         
LKE   496         
LG&E   248         
KU   248         
Non-cash Transactions:         
PPL (c) $ 1,317  $ 1,317    
PPL Energy Supply   167    167    

(a)Issuances are net of pricing discounts, where applicable and exclude the impact of debt issuance costs.
(b)Net stock issuances include activity related to various stock and incentive compensation plans and other equity transactions.  See Overview - "Financial and Operational Developments" for information regarding issuance s from the equity forward agreements and the 2010 Equity Units.  The activity is net of $74 million for the repurchase of PPL common stock.
(c)The transaction primarily includes $1.150 billion relating to the remarketing of Junior Subordinated Notes that were issued as a component of PPL's 2010 Equity Units and simultaneously exchanged for Senior Notes.

See Note 7 to the Financial Statements for additional information about long-term debt and equity securities.


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Auction Rate Securities(LKE, LG&E and KU)

At December 31, 2013, LG&E's and KU's tax-exempt revenue bonds in the form of auction rate securities total $231 million ($135 million at LG&E and $96 million at KU). These bonds continue to experience failed auctions and the interest rate continues to be set by a formula pursuant to the relevant indentures.  For the period ended December 31, 2013, the weighted-average rate on LG&E's and KU's auction rate bonds in total was 0.16% (0.15% at LG&E and 0.18% at KU).

Forecasted Sources of Cash

PPL Electric expects(All Registrants)

The Registrants expect to continue to have significant sources ofadequate liquidity available from operating cash available in the near term, including variousflows, cash and cash equivalents, credit facilities and a commercial paper program.  PPL Electric currently plans to issue up to $250 million in long-term debt securities in 2011,issuances.  Additionally, subject to market conditions.conditions, the Registrants and their subsidiaries may borrow in the capital markets, and PPL Energy Supply, PPL Electric, LKE, LG&E and KU anticipate receiving equity contributions from their parent or member in 2014.

Credit Facilities

At December 31, 2010, PPL Electric's2013, the total committed borrowing capacity under its credit facilities and the use of this borrowing capacity were:

      Letters of  
   Committed   Credit Unused
   Capacity Borrowed  Issued (a) Capacity
          
Syndicated Credit Facility (b) $ 200     $ 13  $ 187 
Asset-backed Credit Facility (c)   150      n/a   150 
Total PPL Electric Credit Facilities (d) $ 350     $ 13  $ 337 
External

         Letters of   
         Credit   
         Issued   
         and   
       Commercial  
   Committed   Paper Unused
   Capacity Borrowed Backup Capacity
          
PPL Capital Funding Credit Facility $ 300  $ 270       $ 30 
PPL Energy Supply Credit Facilities   3,150       $ 167    2,983 
PPL Electric Credit Facility   300         21    279 
              
LKE Credit Facility   75    75           
LG&E Credit Facility   500         20    480 
KU Credit Facilities   598         348    250 
Total LKE Consolidated   1,173    75    368    730 
 Total Domestic Credit Facilities  (a) (b) (c) $ 4,923  $ 345  $ 556  $ 4,022 
              
Total WPD Credit Facilities (c) (d) (e) (f) £ 1,055  £ 103       £ 952 

(a)PPL Electric has a reimbursement obligation to the extent any lettersThe syndicated credit facilities, as well as KU's letter of credit are drawn upon.
(b)Borrowings under PPL Electric's syndicated credit facility, generally bear interest at LIBOR-based rates plus a spread, depending upon the company's senior secured long-term debt rating.  PPL Electric also has the capability to request the lenders to issue up to $200 million of letters of credit under this facility, which issuances reduce available borrowing capacity.  Subject to certain conditions, PPL Electric may request that the facility's capacity be increased by up to $100 million.

This syndicated credit facility containseach contain a financial covenant requiring debt to total capitalization not to exceed 70%.  At December 31, 2010,65% for PPL Electric's consolidated debt to total capitalization percentages,Energy Supply and 70% for PPL, PPL Electric, LKE, 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 facility, was 43%.  The syndicated credit facility also contains standard representations and warranties that must be made for PPL Electric to borrow under it.facilities.

(b)The commitments under the domestic credit facilityfacilities are provided by a diverse bank group, with no one bank and its affiliates providing an aggregate commitment of more than 6%the following percentages of the total committed capacity.capacity:  PPL - 8%, PPL Energy Supply - 10%, PPL Electric - 6%, LKE - 12%, LG&E - 6% and KU - 22%.
(c)ThisEach company pays customary fees under its respective syndicated credit facility, relates toas does KU under its letter of credit facility, and borrowings generally bear interest at LIBOR-based rates plus an asset-backed commercial paper program through which PPL Electric obtains financing by selling and contributing its eligible accounts receivable and unbilled revenues to a special purpose, wholly owned subsidiary on an ongoing basis.  The subsidiary pledges these assets to secure loans of up to an aggregate of $150 million from a commercial paper conduit sponsored by a financial institution.  At December 31, 2010, based on accounts receivable and unbilled revenue pledged, $150 million was available for borrowing.applicable margin.
(d)The committed capacity expires as follows:  $150 million in 2011 and $200 million in 2014.  PPL Electric intends to renew its existing $150 million asset-backed credit facility in 2011 in orderfacilities contain financial covenants 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 currentRAV, calculated in accordance with the credit facility.
(e)Under the syndicated credit 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.
(f)The total amount borrowed at December 31, 2013 was a USD-denominated borrowing of $166 million, which equated to £103 million at the time of borrowing and bore interest at 1.87%.  At December 31, 2013, the unused capacity of WPD's committed credit facilities was approximately $1.6 billion.

The commitments under WPD's credit facilities are provided by a diverse bank group with no one bank providing more than 13% of the total committed capacity level.capacity.

In addition to the financial covenantcovenants 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 Electric monitorsThe Registrants monitor compliance with the covenants on a regular basis.  At December 31, 2010, PPL Electric was2013, the Registrants were in material compliance with these covenants.  At this time, PPL Electric believesthe Registrants believe that these covenants and other borrowing conditions will not limit access to these funding sources.


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See Note 7 to the Financial Statements for further discussion of PPL Electric'sthe Registrants' credit facilities.

Intercompany (All Registrants except PPL)
  Committed    Unused
  Capacity Borrowed Capacity
          
PPL Energy Supply Credit Facility $200     $200 
PPL Electric Credit Facility  100      100 
LKE Credit Facility  225      225 
LG&E Money Pool (a)  500      500 
KU Money Pool (a)  500      500 
(a)LG&E and KU participate in an intercompany agreement whereby LKE, LG&E and/or KU make available funds up to $500 million at an interest rate based on a market index of commercial paper issues.
Commercial Paper (All Registrants)

PPL Energy Supply, PPL Electric, maintains aLG&E and KU maintain commercial paper program for up to $200 millionprograms to provide an additional financing source to fund its short-term liquidity needs, if and whenas necessary.  Commercial paper issuances are currently supported by PPL Electric's $200 million syndicated credit facility, which expiresthe respective Registrant's Syndicated Credit Facility.

When outstanding, the amounts are reflected in December 2014, based"Short-term debt" on available capacity.the Balance Sheets.  The following amounts were outstanding at:

  December 31, 2013 December 31, 2012
      Commercial   Commercial
      Paper Unused Paper
   Capacity Issuances Capacity Issuances
              
PPL Energy Supply $ 750     $ 750  $ 356 
PPL Electric   300  $ 20    280    
              
LG&E   350    20    330    55 
KU   350    150    200    70 
Total LKE   700    170    530    125 
 Total PPL $ 1,750  $ 190  $ 1,560  $ 481 

Long-term Debt and Equity Securities

(PPL)

PPL Electric did not issue any commercial paper during 2010.  Based onand its current cash positionsubsidiaries currently plan to incur, subject to market conditions, up to approximately $350 million of long-term indebtedness in 2014.  In addition, PPL will receive proceeds of $978 million through the issuance of PPL common stock to settle the 2011 Purchase Contracts, and anticipated cash flows, PPL ElectricCapital Funding expects to remarket the 4.32% Junior Subordinated Notes due 2019 related to the 2011 Equity Units.  The proceeds will be used to fund capital expenditures and for other general corporate purposes.  In January 2014, PPL Capital Funding elected to conduct an optional remarketing of the 2019 Notes that will occur between January 30, 2014 and April 15, 2014.  See Note 7 to the Financial Statements for additional information.

PPL currently does not plan to issue any commercial paper during 2011, but itadditional shares of common stock in 2014.

(PPL Energy Supply)

Subject to market conditions, PPL Energy Supply may do so from timeissue long-term debt securities in 2014 to time,fund its current debt maturity obligations or for general corporate purposes, if necessary.

(PPL Electric)

PPL Electric currently plans to issue, subject to market conditions, up to facilitate short-term cash flow needs.approximately $350 million of long-term indebtedness in 2014, the proceeds of which will be used to fund capital expenditures and for other general corporate purposes.


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(LKE, LG&E and KU)

LKE, LG&E and KU currently do not plan to issue long-term debt securities in 2014.

Contributions from PPLParent/Member (All Registrants except PPL)

From time to time, PPL mayEnergy Supply's and LKE's members or the parents of PPL Electric, LG&E and KU make capital contributions to PPL Electric.  PPL Electric may usesubsidiaries.  The proceeds from these contributions for general corporate purposes.

Long-Term Debt and Equity Securities

Subject to market conditions, PPL Electric currently plans to issue up to $250 million in long-term debt securities in 2011. PPL Electric expects to use the proceeds from the issuance of long-term debt securities primarilyare used to fund capital expenditures and for other general corporate purposes.

The Economic Stimulus Package

In April 2010, PPL Electric entered into an agreement withpurposes and,  in the DOE, in which the agency iscase of LKE, to provide funding for one-half of a $38 million smart grid project.  The project would use smart grid technologymake contributions 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.  Work on the project is progressing on schedule, and PPL Electric is receiving reimbursements under the grant for costs incurred.  The project is scheduled to be completed by the end of September 2012.its subsidiaries.

Forecasted Uses of Cash

(All Registrants)

In addition to expenditures required for normal operating activities, such as purchased power, payroll, fuel and taxes, PPL Electricthe Registrants currently expectsexpect to incur future cash outflows for capital expenditures, various contractual obligations, payment of dividends on its common stock, distributions by PPL Energy Supply and preferred securitiesLKE to their members, 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 2010 andRegistrants' current capital expenditure projections for the years 20112014 through 2015.2018.  Expenditures for the domestic regulated utilities are expected to be recovered through rates, pending regulatory approval.

  Actual Projected
    2010  2011  2012  2013  2014  2015 
Construction expenditures (a) (b)                  
 Transmission and distribution facilities $ 368  $ 401  $ 576  $ 841  $ 795  $ 641 
 Other   43    51    53    27    26    26 
 Total Capital Expenditures $ 411  $ 452  $ 629  $ 868  $ 821  $ 667 
       Projected
    Total 2014  2015  2016  2017  2018 
PPL                  
Construction expenditures (a) (b) (c)                  
 Generating facilities $ 2,751  $ 528  $ 511  $  754  $  517  $  441 
 Distribution facilities   9,238    1,886    1,780    1,832    1,864    1,876 
 Transmission facilities   3,286    707    615    618    701    645 
 Environmental   2,433    688    620    348    371    406 
 Other   714    170    150    137    136    121 
  Total Construction Expenditures   18,422    3,979    3,676    3,689    3,589    3,489 
Nuclear fuel   726    127    139    150    154    156 
  Total Capital Expenditures $ 19,148  $ 4,106  $ 3,815  $  3,839  $ 3,743  $ 3,645 
PPL Energy Supply                  
Construction expenditures (a) (b) (c)                  
 Generating facilities $ 1,238  $ 280  $ 253  $  245  $  224  $  236 
 Environmental   279    85    102    24    42    26 
 Other   88    33    14    13    13    15 
  Total Construction Expenditures   1,605    398    369    282    279    277 
Nuclear fuel   726    127    139    150    154    156 
  Total Capital Expenditures $ 2,331  $ 525  $ 508  $  432  $ 433  $ 433 
PPL Electric (a) (b) (c)
                  
 Distribution facilities $ 1,861  $ 324  $ 334  $  350  $  422  $  431 
 Transmission facilities   2,852    631    551    525    574    571 
  Total Capital Expenditures $ 4,713  $ 955  $ 885  $ 875  $ 996  $ 1,002 
LKE (c)
                  
 Generating facilities $ 1,512  $ 248  $ 258  $ 509  $ 293  $ 204 
 Distribution facilities   1,192    223    250    250    244    225 
 Transmission facilities   434    77    64    93    127    73 
 Environmental   2,155    603    518    325    329    380 
 Other   329    70    76    63    64    56 
  Total Capital Expenditures $ 5,622  $ 1,221  $ 1,166  $ 1,240  $ 1,057  $ 938 
LG&E (c)
                  
 Generating facilities $ 719  $ 105  $ 122  $ 260  $ 139  $ 93 
 Distribution facilities   754    144    165    166    153    126 
 Transmission facilities   170    40    24    34    48    24 
 Environmental   1,062    289    312    200    115    146 
 Other   150    32    34    29    28    27 
  Total Capital Expenditures $ 2,855  $ 610  $ 657  $ 689  $ 483  $ 416 

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       Projected
    Total 2014  2015  2016  2017  2018 
KU (c)
                  
 Generating facilities $ 793  $ 143  $ 136  $ 249  $ 154  $ 111 
 Distribution facilities   438    79    85    84    91    99 
 Transmission facilities   264    37    40    59    79    49 
 Environmental   1,093    314    206    125    214    234 
 Other   174    37    41    31    36    29 
  Total Capital Expenditures $ 2,762  $ 610  $ 508  $ 548  $ 574  $ 522 

(a)Construction expenditures include capitalized interest and AFUDC, which isare expected to betotal approximately $79$174 million for the years 2011 through 2015.PPL; $73 million for PPL Energy Supply and $57 million for PPL Electric.
(b)Includes expenditures for certain intangible assets.
(c)The 2014 total excludes amounts included in accounts payable as of December 31, 2013.

PPL Electric's capital expenditure projections for the years 2011 through 2015 total approximately $3.4 billion.  Capital expenditure plans are revised periodically to reflect changes in operational, market and regulatory conditions.  TheFor the years presented, this table includes projected costs forrelated to the planned 1,340 MW of new capacity at LKE (421 MW at LG&E and 919 MW at KU) and PPL Electric's asset optimization program focused on the replacement ofto replace aging transmission and distribution assets as well as the Susquehanna-Roseland and Northeast/Pocono projects.  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 PJM-approved regional transmission line expansion project.final requirements and market conditions; most environmental compliance costs incurred by LG&E and KU in serving KPSC jurisdictional customers are generally eligible for recovery through the ECR mechanism).  See Note 6 to the Financial Statements for information on LG&E's and KU's ECR mechanism and CPCN filing, and Note 8 to the Financial Statements for additional information.information on significant development plans.  See "Item 2. Properties" for information on planned projects to expand capacity.

PPL Electric plansThe Registrants plan to fund its capital expenditures in 20112014 with cash on hand, cash from operations and proceeds from the issuance of debt securities.sources noted below.

Energy
SourcePPLSupplyPPL ElectricLKELG&EKU
Cash on handXXXXXX
Cash from operationsXXXXXX
Issuance of common stockX
Issuance of long-term debt securitiesXX
Equity contributions from parent/memberXXXXX
Short-term debtXXXXXX
X = Expected funding source.

Contractual Obligations

PPL Electric hasThe Registrants have assumed various financial obligations and commitments in the ordinary course of conducting its business.  At December 31, 2010, the2013, estimated contractual cash obligations of PPL Electric were:were as follows.

  Total 2014  2015 - 2016 2017 - 2018 After 2018
PPLPPL          
Long-term Debt (a)Long-term Debt (a) $ 20,935  $ 314  $ 2,118  $ 757  $ 17,746 
Interest on Long-term Debt (b)Interest on Long-term Debt (b)  17,550   960   1,838   1,736   13,016 
Operating Leases (c)Operating Leases (c)  201   59   70   30   42 
Purchase Obligations (d)Purchase Obligations (d)  7,060   2,379   2,476   981   1,224 
Other Long-term LiabilitiesOther Long-term Liabilities          
  Total Less Than 1 Year 1-3 Years 4-5 Years After 5 YearsReflected on the Balance          
            Sheet under GAAP (e) (f)   1,048    303    637    108      
Total Contractual Cash ObligationsTotal Contractual Cash Obligations $ 46,794  $ 4,015  $ 7,139  $ 3,612  $ 32,028 
PPL Energy SupplyPPL Energy Supply          
Long-term Debt (a)Long-term Debt (a) $ 1,474    $ 400  $ 110  $ 964 Long-term Debt (a) $ 2,547  $ 304  $ 658  $ 407  $ 1,178 
Interest on Long-term Debt (b)Interest on Long-term Debt (b)  1,369  $ 88   177   119   985 Interest on Long-term Debt (b)  1,025   137   209   147   532 
Purchase Obligations (c)   1,480    937    383    160    
Total Contractual Cash          
Operating Leases (c)Operating Leases (c)  83   31   36   13   3 
Purchase Obligations (d)Purchase Obligations (d)  2,559   738   826   643   352 
Other Long-term LiabilitiesOther Long-term Liabilities          
 Obligations $ 4,323  $ 1,025  $ 960  $ 389  $ 1,949 Reflected on the Balance          
Sheet under GAAP (e) (f)   30    30             
Total Contractual Cash ObligationsTotal Contractual Cash Obligations $ 6,244  $ 1,240  $ 1,729  $ 1,210  $ 2,065 

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   Total 2014  2015 - 2016 2017 - 2018 After 2018
PPL Electric               
Long-term Debt (a) $ 2,324  $ 10  $ 100       $ 2,214 
Interest on Long-term Debt (b)   2,119    108    209  $ 204    1,598 
Purchase Obligations (d)   257    76    91    45    45 
Other Long-term Liabilities               
 Reflected on the Balance               
 Sheet under GAAP (e) (f)   19    19                
Total Contractual Cash Obligations $ 4,719  $ 213  $ 400  $ 249  $ 3,857 
LKE               
Long-term Debt (a) $ 4,585       $ 900       $ 3,685 
Interest on Long-term Debt (b)   3,302  $ 159    309  $ 319    2,515 
Operating Leases (c)   79    16    22    12    29 
Coal and Natural Gas Purchase               
  Obligations (g)   2,049    799    959    191    100 
Unconditional Power Purchase               
  Obligations (h)   862    26    52    56    728 
Construction Obligations (i)   1,270    684    543    43      
Pension Benefit Plan Obligations (e) 38    38          
Other Obligations   50    31    16    3      
Total Contractual Cash Obligations $ 12,235  $ 1,753  $ 2,801  $ 624  $ 7,057 
LG&E               
Long-term Debt (a) $ 1,359       $ 250       $ 1,109 
Interest on Long-term Debt (b)   1,247  $ 47    92  $ 101    1,007 
Operating Leases (c)   31    6    9    4    12 
Coal and Natural Gas Purchase               
  Obligations (g)   1,178    413    585    94    86 
Unconditional Power Purchase               
  Obligations (h)   597    18    36    39    504 
Construction Obligations (i)   639    368    270    1      
Pension Benefit Plan Obligations (e) 8    8          
Other Obligations   18    13    5           
Total Contractual Cash Obligations $ 5,077  $ 873  $ 1,247  $ 239  $ 2,718 
KU               
Long-term Debt (a) $ 2,101       $ 250       $ 1,851 
Interest on Long-term Debt (b)   1,826  $ 75    151  $ 160    1,440 
Operating Leases (c)   45    10    13    7    15 
Coal and Natural Gas Purchase               
  Obligations (g)   871    386    374    97    14 
Unconditional Power Purchase               
  Obligations (h)   265    8    16    17    224 
Construction Obligations (i)   631    316    273    42      
Pension Benefit Plan Obligations (e) 2    2          
Other Obligations   30    16    11    3      
Total Contractual Cash Obligations $ 5,771  $ 813  $ 1,088  $ 326  $ 3,544 

(a)Reflects principal maturities only based on stated maturity dates.dates, except for PPL Electric doesEnergy Supply's 5.70% REset Put Securities (REPS).  See Note 7 to the Financial Statements for a discussion of the remarketing feature related to the REPS, as well as discussion of variable-rate remarketable bonds issued on behalf of PPL Energy Supply, LG&E and KU.  The Registrants do not have any significant capital or operating lease obligations.
(b)Assumes interest payments through stated maturity.
(c)Thematurity, except for PPL Energy Supply's REPS, for which interest is reflected to the put date.  For PPL, PPL Energy Supply, LKE, LG&E and KU the  payments reflected herein are subject to change, as payments for debt that is or becomes variable-rate debt have been estimated and for PPL, 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 amounts include agreements to purchase goods or services that are enforceable and legally binding and specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction.  Primarily includes as applicable, the purchase obligation reflected is an estimate based on projected obligated quantitiesobligations of electricity, coal, nuclear fuel and projected pricing under the contract.  Purchase orders madelimestone as well as certain construction expenditures, which are also included in the ordinary course of businessCapital Expenditures table presented above.  Financial swaps (for PPL and PPL Energy Supply) and open purchase orders that are provided on demand with no firm commitment are excluded from the amounts presented.

At December 31, 2010, total unrecognized tax benefits of $62 million were excluded from this table as
(e)The amounts for PPL include WPD's contractual deficit pension funding requirements arising from actuarial valuations performed in March 2013.  The U.K. electricity regulator currently allows a recovery of a substantial portion of the contributions relating to the plan deficit.  The amounts also include contributions made or committed to be made in 2014 for PPL's and LKE's U.S. pension plans (for PPL Energy Supply, PPL Electric, LG&E and KU includes their share of these amounts).  Based on the current funded status of these plans, except for WPD's plans, no cash contributions are required.  See Note 13 to the Financial Statements for a discussion of expected contributions.
(f)At December 31, 2013, total unrecognized tax benefits of $22 million for PPL and $15 million for PPL Energy Supply were excluded from this table as management cannot reasonably estimate the amount and period of future payments.  See Note 5 to the Financial Statements for additional information.
(g)Represents contracts to purchase coal, natural gas and natural gas transportation.  See Note 15 to the Financial Statements for additional information.
(h)Represents future minimum payments under OVEC power purchase agreements through June 2040.  See Note 15 to the Financial Statements for additional information.
(i)Represents construction commitments, including commitments for the LG&E's Mill Creek and KU's Ghent and E.W. Brown environmental air projects, LG&E's and KU's Cane Run Unit 7, KU's E.W. Brown landfill and LG&E's Ohio Falls refurbishment which are also reflected in the Capital Expenditures table presented above.

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Dividends/Distributions

(PPL)

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 February 2014, PPL declared its quarterly common stock dividend, payable April 1, 2014, at 37.25 cents per share (equivalent to $1.49 per annum).  Future dividends will be declared at the discretion of the Board of Directors and will depend upon future earnings, cash flows, financial and legal requirements and other relevant factors at the time.  As discussed in Note 7 to the Financial Statements, for additional information.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 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.

Dividends(All Registrant except PPL)

From time to time, as determined by itstheir respective Board of Directors or Board of Managers, the Registrants other than PPL pay dividends or distributions, as applicable, to their respective shareholders or members.  Certain of the credit facilities of PPL Energy Supply, PPL Electric, pays dividends on its common stock to its parent, PPL.LKE, LG&E and KU include minimum debt covenant ratios that could effectively restrict the payment of dividends.

As discussed in(All Registrants except PPL Energy Supply)

See Note 7 to the Financial Statements PPL Electric may not pay dividendsfor these and other restrictions related to distributions on its common stock, except in certain circumstances, unless full dividends have been paid on the 6.25% Series Preference Stockcapital interests 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, ifRegistrants and as declared by its Board of Directors.their subsidiaries.

Purchase or Redemption of Debt Securities

PPL ElectricThe Registrants will continue to evaluate purchasing or redeeming 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 onof the debt of the Registrants and preferred securities of PPL Electric.their subsidiaries.  Based on their respective independent reviews, the rating agencies may make certain ratings revisions or ratings affirmations.

A credit rating reflects an assessment by the rating agency of the creditworthiness associated with an issuer and particular securities that it issues.  The credit ratings of PPL Electricthe Registrants and their subsidiaries are based on information provided by PPL Electricthe Registrants 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.the Registrants or their subsidiaries.  Such ratings may be subject to revisions or withdrawal by the agencies at any time and should be evaluated independently of each other and any other rating that may be assigned to the securities.  The credit ratings of the Registrants and their subsidiaries affect their liquidity, access to capital markets and cost of borrowing under their credit facilities.

The following table sets forth the Registrants' and their subsidiaries' credit ratings for outstanding debt securities or commercial paper programs as of December 31, 2013.

Senior UnsecuredSenior SecuredCommercial Paper
IssuerMoody'sS&PFitchMoody'sS&PFitchMoody'sS&PFitch
PPL
PPL WEMBaa3 BBB-
WPD (East Midlands)Baa1BBB
WPD (West Midlands)Baa1BBB
PPL WWBaa3 BBB-BBB
WPD (South Wales)Baa1BBBA-
WPD (South West)Baa1BBBA-P-2
PPL Capital FundingBaa3 BBB-BBB

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Senior UnsecuredSenior SecuredCommercial Paper
IssuerMoody'sS&PFitchMoody'sS&PFitchMoody'sS&PFitch
PPL and PPL Energy Supply
PPL Energy SupplyBaa2BBBBBB-P-2A-2F3
PPL and PPL Electric
PPL ElectricA3A-A-P-2A-2F2
PPL and LKE
LKEBaa2 BBB-BBB+
LG&EA2A-A+P-2A-2F2
KUA2A-A+P-2A-2F2

A downgrade in PPL Electric'sthe Registrants' or their subsidiaries' credit ratings could result in higher borrowing costs and reduced access to capital markets.  The Registrants and their subsidiaries have no credit rating triggers that would result in the reduction of access to capital markets or the acceleration of maturity dates of outstanding debt.

In prior periodic reports, PPL Electric described its then-current debt ratings in connection with, and to facilitate, an understanding of its liquidity position.  As a result of the passage of the Dodd-Frank Act and the attendant uncertainties relatingaddition to the extent to which issuers of non-asset backed securities may disclose credit ratings without being required to obtain rating agency consent to the inclusion of such disclosure, or incorporation by reference of such disclosure, in a registrant's registration statement or section 10(a) prospectus, PPL Electric is limiting its credit rating disclosure to a description of the actions taken bynoted above, the rating agencies with respect to PPL Electric's ratings, but without stating what ratings have been assigned to PPL Electric or its securities.  The ratings assigned by the rat ing agencies to PPL Electric and its respective securities may be found, without charge, on each of the respective ratings agencies' websites, which ratings together with all other information contained on such rating agency websites is, hereby, explicitly not incorporated by reference in this report.

The rating agencies tooktaken the following actions related to PPL Electric in 2010.the Registrants and their subsidiaries.

Moody's(PPL)

In April 2010,March 2013, Moody's, tookS&P and Fitch assigned ratings of Ba1, BB+ and BB+ to PPL Capital Funding's $450 million 5.90% Junior Subordinated Notes due 2073.  Fitch also assigned a stable outlook to these notes.

In May 2013, Moody's, S&P and Fitch assigned ratings of Baa3, BBB- and BBB to PPL Capital Funding's $250 million 1.90% Senior Notes due 2018, $600 million 3.40% Senior Notes due 2023 and $300 million 4.70% Senior Notes due 2043.  Fitch also assigned a stable outlook to these notes.

In September 2013, Fitch affirmed the following actions:ratings with a stable outlook:

·Revised the outlooklong-term issuer default and senior unsecured ratings for PPL Electric;
·Lowered the rating of PPL Electric's preferred securities;
·Lowered the issuer rating of PPL Electric;WW, WPD (South Wales) and WPD (South West); and
·Affirmed the senior secured ratingshort-term issuer default ratings for WPD (South Wales) and commercial paper rating of PPL Electric.WPD (South West).

In September 2013, Moody's stated inand S&P assigned ratings of Baa1 and BBB to WPD (East Midlands') £65 million 1.676% Index-Linked Senior Notes due 2052.

In October 2013, Moody's and S&P assigned ratings of Baa1 and BBB to WPD (West Midlands') £400 million 3.875% Senior Notes due 2024.

In November 2013, Moody's placed the ratings of PPL on review for upgrade.

In December 2013, Fitch affirmed the following ratings with a stable outlook:

·the long-term and short-term issuer default ratings for PPL and PPL Capital Funding; and
·the senior unsecured debt and junior subordinated notes ratings for PPL Capital Funding.

In January 2014, Moody's affirmed its press release that the revision in the ratingratings and revised its outlook to stable for PPL Electric, while reflective of PPL's then-announced agreement to acquire LKE, is driven more by weakening financial metrics and the outlooks that had been in place for PPL.  

(PPL and PPL Electric for the past year.Energy Supply)

S&PIn February 2013, Moody's upgraded its rating, from B2 to Ba1, and revised its outlook from under review to stable for PPL Ironwood.

In April 2010,2013, Fitch affirmed its rating and outlook on PPL Montana's pass-through certificates due 2020.

In July 2013, Moody's withdrew its rating and outlook for PPL Ironwood.

In July 2013, S&P lowered its rating, from BBB- to BB+, retained its negative outlook  and assigned a recovery rating of 1 to PPL Montana's pass-through certificates due 2020.


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In August 2013, Moody's affirmed its rating and revised its outlook from stable to negative on PPL Montana's pass-through certificates due 2020.

In September 2013, S&P affirmed its credit rating forand revised its outlook from negative to stable on PPL Electric following PPL's then-announced agreement to acquire LKE.Montana's pass-through certificates due 2020.

In October 2010, S&P affirmedDecember 2013, Fitch downgraded its creditlong-term issuer default rating, from BBB to BBB-, short-term issuer default and commercial paper ratings, from F2 to F3, and retained its negative outlook for PPL Electric and revised the outlook on PPL Electric.

FitchEnergy Supply.

In January 2010, as2014, S&P withdrew its rating, outlook and recovery rating on PPL Montana's pass-through certificates due 2020.

(PPL and PPL Electric)

In July 2013, Moody's, S&P and Fitch assigned ratings of A3, A- and A- to PPL Electric's $350 million 4.75% First Mortgage Bonds due 2043.  Fitch assigned a resultstable outlook and S&P assigned a recovery rating of implementing its revised guidelines for rating preferred stock and hybrid securities, Fitch lowered1+ to these notes.

In November 2013, Moody's placed the ratings of PPL Electric's preferred stock and preference stock.  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 notchElectric on review for many instruments that provide for the ability to defer interest or dividend payments.  Fitch stated that it has no reason to believe that such deferral will be activated.upgrade.

In April 2010,December 2013, Fitch affirmed its credit ratingslong-term issuer default rating, short-term issuer default rating, secured debt and commercial paper rating with a stable outlook for PPL ElectricElectric.

In January 2014, Moody's upgraded its issuer rating, from Baa2 to Baa1, and senior secured rating, from A3 to A2, affirmed its commercial paper rating and revised its outlook to stable for PPL Electric.

(PPL, LKE, LG&E and KU)

In July 2013, S&P confirmed its ratings for KU's 2000 Series A Solid Waste Disposal Facility Revenue Bonds and KU's 2004 Series A, 2006 Series B and 2008 Series A Environmental Facilities Revenue Bonds.

In November 2013, Moody's, S&P and Fitch assigned ratings of A2, A- and A+ to LG&E's $250 million 4.65% First Mortgage Bonds due 2043 and KU's $250 million 4.65% First Mortgage Bonds due 2043.  Fitch assigned a stable outlook and S&P assigned a recovery rating of 1+ to both notes.

In November 2013, Moody's placed the ratings of LKE, LG&E and KU on review for upgrade.

In December 2013, Fitch affirmed the following PPL's then-announced agreementratings with a stable outlook:

·the long-term and short-term issuer default ratings for LKE, LG&E and KU;
·the senior unsecured debt rating for LKE; and
·the secured debt, secured pollution control bonds and commercial paper ratings for LG&E and KU.

In January 2014, Moody's affirmed its ratings and revised its outlook to acquirestable for LKE.

Off-Balance Sheet ArrangementsIn January 2014, Moody's upgraded its issuer ratings, from Baa1 to A3, and senior secured ratings, from A2 to A1, affirmed its commercial paper ratings and revised its outlook to stable for LG&E and KU.

In February 2014, Moody's affirmed its ratings for KU's 2000 Series A Solid Waste Disposal Facility Revenue Bonds, KU's 2004 Series A and 2008 Series A Environmental Facilities Revenue Bonds and KU's 2006 Series B Environmental Facilities Revenue Refunding Bonds.

Ratings Triggers

(PPL)

As discussed in Note 7 to the Financial Statements, certain of WPD's senior unsecured notes may be put by the holders to the issuer for redemption if the long-term credit ratings assigned to the notes 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 licenses under which WPD (East Midlands), WPD (South West), WPD (South Wales) and WPD (West Midlands) operate and would be a trigger event in that company.  These notes totaled £3.8 billion (approximately $6.2 billion) nominal value at December 31, 2013.


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(All Registrants except PPL Electric)

Various derivative and non-derivative contracts, including contracts for the sale and purchase of electricity and fuel, commodity transportation and storage, interest rate and foreign currency instruments (for PPL), contain provisions that require the posting of additional collateral, or permit the counterparty to terminate the contract, if PPL's, PPL Energy Supply's, LKE's, LG&E's or KU's or their subsidiaries' credit rating, as applicable, were to fall below investment grade. See Note 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, 2013.

Guarantees for Subsidiaries(PPL and PPL Energy Supply)

PPL Electric hasand PPL Energy Supply guarantee certain consolidated affiliate financing arrangements.  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, accelerate maturity of such arrangements or limit the consolidated affiliates' ability to enter into certain transactions.  At this time, PPL and PPL Energy Supply believe that these covenants will not limit access to relevant funding sources.  See Note 15 to the Financial Statements for additional information about guarantees.

Off-Balance Sheet Arrangements (All Registrants)

The Registrants have 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

(All Registrants)

See Notes 1, 18, and 19 to the Financial Statements for information about the Registrants' risk management objectives, valuation techniques and accounting designations.

The forward-looking information presented below provides estimates of what may occur in the future, assuming certain adverse market conditions and model assumptions.  Actual future results may differ materially from those presented.  These disclosures are not precise indicators of expected future losses, but only indicators of possible losses under normal market conditions at a given confidence level.

Commodity Price Risk (Non-trading)

(PPL, LKE, LG&E, and Volumetric Risk - PLR ContractsKU)

LG&E's and KU's retail electric and natural gas rates and municipal wholesale electric rates are set by regulatory commissions and the fuel costs incurred are directly recoverable from customers.  As a result, LG&E and KU are subject to commodity price risk for only a small portion of on-going business operations.  LG&E and KU sell excess economic generation to maximize the value of the physical assets at times when the assets are not required to serve LG&E's or KU's customers.  See Note 19 to the Financial Statements for additional information.

(PPL and PPL Electric)

PPL Electric is exposed to market price and volumetric risks from its obligation as PLR.  The PUC has approved a cost recovery mechanism that allows PPL Electric to pass through to customers the cost associated with fulfilling its PLR obligation.  This cost recovery mechanism substantially eliminates PPL Electric's exposure to market price risk.  PPL Electric also mitigates its exposure to volumetric risk by entering into full requirementfull-requirement energy supply contracts for the majority of its customers.PLR obligations.  These supply contracts transfer the volumetric risk associated with the PLR obligation to the energy suppliers.


Interest Rate Risk
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(PPL and PPL Energy Supply)

PPL ElectricEnergy Supply segregates its non-trading activities into two categories:  hedge activity and economic activity.  Transactions that are accounted for as hedge activity qualify for hedge accounting treatment.  The economic activity category includes transactions that address a specific risk, but were not eligible for hedge accounting or for which hedge accounting was not elected.  This activity includes the changes in fair value of positions used to hedge a portion of the economic value of PPL Energy Supply's competitive generation assets and full-requirement sales and retail contracts.  This economic activity is subject to changes in fair value due to market price volatility of the input and output commodities (e.g., fuel and power).  Although they do not receive hedge accounting treatment, these transactions are considered non-trading activity.  See Note 19 to the Financial Statements for additional information.

To hedge the impact of market price volatility on PPL Energy Supply's energy-related assets, liabilities and other contractual arrangements, PPL Energy Supply both sells and purchases physical energy at the wholesale level under FERC market-based tariffs throughout the U.S. and enters into financial exchange-traded and over-the-counter contracts.  PPL Energy Supply's non-trading commodity derivative contracts range in maturity through 2019.

The following tables sets forth the changes in the net fair value of non-trading commodity derivative contracts at December 31.  See Notes 18 and 19 to the Financial Statements for additional information.

   Gains (Losses)
   2013  2012 
        
Fair value of contracts outstanding at the beginning of the period $ 473  $ 1,082 
Contracts realized or otherwise settled during the period   (452)   (1,005)
Fair value of new contracts entered into during the period (a)   58    7 
Other changes in fair value   28    389 
Fair value of contracts outstanding at the end of the period $ 107  $ 473 

(a)Represents the fair value of contracts at the end of the quarter of their inception.

The following table segregates the net fair value of non-trading commodity derivative contracts at December 31, 2013 based on the level of observability of the information used to determine the fair value.

   Net Asset (Liability)
   Maturity       Maturity   
   Less Than Maturity Maturity in Excess Total Fair
   1 Year 1-3 Years 4-5 Years of 5 Years Value
Source of Fair Value               
Prices based on significant observable inputs (Level 2) $ 125  $ (50) $ 7  $ 4  $ 86 
Prices based on significant unobservable inputs (Level 3)   (13)   27    7         21 
Fair value of contracts outstanding at the end of the period $ 112  $ (23) $ 14  $ 4  $ 107 

PPL Energy Supply sells electricity, capacity and related services and buys fuel on a forward basis to hedge the value of energy from its generation assets.  If PPL Energy Supply were unable to deliver firm capacity and energy or to accept the delivery of fuel under its agreements, under certain circumstances it could be required to pay liquidating damages.  These damages would be based on the difference between the market price and the contract price of the commodity.  Depending on price changes in the wholesale energy markets, such damages could be significant.  Extreme weather conditions, unplanned power plant outages, transmission disruptions, nonperformance by counterparties (or their counterparties) with which it has issuedenergy 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.

Commodity Price Risk (Trading)

PPL Energy Supply's trading commodity derivative contracts range in maturity through 2020.  The following table sets forth changes in the net fair value of trading commodity derivative contracts at December 31.  See Notes 18 and 19 to the Financial Statements for additional information.

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  Gains (Losses)
  2013  2012 
       
Fair value of contracts outstanding at the beginning of the period $ 29  $ (4)
Contracts realized or otherwise settled during the period   (13)   20 
Fair value of new contracts entered into during the period (a)   3    17 
Other changes in fair value   (8)   (4)
Fair value of contracts outstanding at the end of the period $ 11  $ 29 

(a)Represents the fair value of contracts at the end of the quarter of their inception.

The following table segregates the net fair value of trading commodity derivative contracts at December 31, 2013 based on the level of observability of the information used to determine the fair value.

   Net Asset (Liability)
   Maturity       Maturity   
   Less Than Maturity Maturity in Excess Total Fair
   1 Year 1-3 Years 4-5 Years of 5 Years Value
Source of Fair Value               
Prices quoted in active markets for identical instruments $ (1)                $ (1)
Prices based on significant observable inputs (Level 2)   (3) $ 9  $ 3         9 
Prices based on significant unobservable inputs (Level 3)   2    (1)   (3) $ 5    3 
Fair value of contracts outstanding at the end of the period $ (2) $ 8       $ 5  $ 11 

VaR Models

A VaR model is utilized to measure commodity price risk in unregulated gross energy margins for the trading and non-trading portfolios.  VaR is a statistical model that attempts to estimate the value of potential loss over a given holding period under normal market conditions at a given confidence level.  VaR is calculated using a Monte Carlo simulation technique based on a five-day holding period at a 95% confidence level.  Given the company's disciplined hedging program, the non-trading VaR exposure is expected to be limited in the short-term.  The VaR for portfolios using end-of-month results for 2013 was as follows.

   Trading Non-Trading
95% Confidence Level, Five-Day Holding Period      
 Period End $ 11  $ 5 
 Average for the Period   6    7 
 High   11    10 
 Low   2    4 

The trading portfolio includes all proprietary trading positions, regardless of the delivery period.  All positions not considered proprietary trading are considered non-trading.  The non-trading portfolio includes the entire portfolio, including generation, with delivery periods through the next 12 months.  Both the trading and non-trading VaR computations exclude FTRs due to the absence of reliable spot and forward markets.  The fair value of the trading and non-trading FTR positions was insignificant at December 31, 2013.

Interest Rate Risk (All Registrants)

The Registrants and their subsidiaries issue debt to finance itstheir operations, which exposes itthem to interest rate risk.  PPL Electric had no potential annualThe Registrants and their subsidiaries utilize various financial derivative instruments to adjust the mix of fixed and floating interest rates in their debt portfolios, adjust the duration of their debt portfolios and lock in benchmark interest rates in anticipation of future financing, when appropriate.  Risk limits under the risk management program are designed to balance risk exposure to increasedvolatility in interest expense based onand changes in the fair value of the debt portfolios due to changes in the absolute level of interest rates.

The following interest rate hedges were outstanding at December 31.

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   2013  2012 
         Effect of a         Effect of a
     Fair Value, 10% Adverse Maturities   Fair Value, 10% Adverse
    Exposure Net - Asset Movement Ranging  Exposure Net - Asset Movement
   Hedged (Liability) (a) in Rates (b) Through Hedged (Liability) (a) in Rates (b)
PPL                    
Cash flow hedges                    
 Interest rate swaps (c) $ 1,325  $ 91  $ (44) 2044  $ 1,165  $ (7) $ (34)
 Cross-currency swaps (d) 1,262    (31)   (177) 2028    1,262    10    (179)
Economic hedges                    
 Interest rate swaps (e)   179    (37)   (4) 2033    179    (58)   (3)
LKE                    
Cash flow hedges                    
 Interest rate swaps (c)             300   14   (18)
Economic hedges                    
 Interest rate swaps (e)   179    (37)   (4) 2033   179   (58)  (3)
LG&E                    
Cash flow hedges                    
 Interest rate swaps (c)             150   7   (9)
Economic hedges                    
 Interest rate swaps (e)   179    (37)   (4) 2033   179   (58)  (3)
KU                    
Cash flow hedges                    
 Interest rate swaps (c)             150   7   (9)

(a)Includes accrued interest, if applicable.
(b)Effects of adverse movements decrease assets or increase liabilities, as applicable, which could result in an asset becoming a liability.  Sensitivities represent a 10% adverse movement in interest rates, except for cross-currency swaps which also includes foreign currency exchange rates.
(c)Changes in the fair value of such cash flow hedges are recorded in equity or as regulatory assets or liabilities, if recoverable through regulated rates, and reclassified into earnings in the same period during which the item being hedged affects earnings.
(d)Cross-currency swaps are utilized to hedge the principal and interest payments of WPD's U.S. dollar-denominated senior notes.  Changes in the fair value of these instruments are recorded in equity and reclassified into earnings in the same period during which the item being hedged affects earnings.
(e)Realized changes in the fair value of such economic hedges are recoverable through regulated rates and any subsequent changes in the fair value of these derivatives are included in regulatory assets or liabilities.

The Registrants are exposed to a potential increase in interest expense and to changes in the fair value of their debt portfolios.  The estimated impact of a 10% increaseadverse movement in interest rates at December 31 2010.  Such amount was not significantis shown below.

      PPL Energy  PPL         
   PPL Supply  Electric LKE LG&E KU
                    
2013                 
Increase to interest expense of 10% Not  Not  Not   Not   Not   Not 
 increase in interest rates Significant  Significant  Significant  Significant  Significant  Significant 
Increase in fair value of 10% decrease                  
 in interest rates $ 732  $ 48  $ 120  $ 146  $ 45  $ 85 
                    
2012                 
Increase to interest expense of 10% Not  Not  Not   Not   Not   Not 
 increase in interest rates��Significant  Significant  Significant  Significant  Significant  Significant 
Increase in fair value of 10% decrease                  
 in interest rates $ 611  $ 52  $ 93  $ 113  $ 27  $ 67 

Foreign Currency Risk (PPL)

PPL is exposed to foreign currency risk, primarily through investments in U.K. affiliates.  In addition, PPL's domestic operations may make purchases of equipment in currencies other than U.S. dollars.  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.

The following foreign currency hedges were outstanding at December 31.

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   2013  2012 
         Effect of a 10%         Effect of a 10%
      Fair Value, Adverse Movement Maturities    Fair Value, Adverse Movement
   Exposure Net - Asset in Foreign Currency Ranging Exposure Net - Asset in Foreign Currency
   Hedged (Liability) Exchange Rates (a) Through Hedged (Liability) Exchange Rates (a)
                      
Net investment                    
 hedges (b) £ 301  $ (20) $ (49) 2015  £ 162  $ (2) $ (26)
Economic                    
 hedges (c)   1,425    (86)   (222) 2015    1,265    (42)   (192)

(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 executes forward contracts to sell GBP.  The positions outstanding exclude the amount of intercompany loans classified as net investment hedges.  See Note 19 to the Financial Statements for additional information.
(c)To economically hedge the translation of expected earnings denominated in GBP to U.S. dollars, PPL enters into a combination of average rate forwards and average rate options to sell GBP.

NDT Funds - Securities Price Risk (PPL and PPL Energy Supply)

In connection with certain NRC requirements, PPL Susquehanna maintains trust funds to fund certain costs of decommissioning the PPL Susquehanna nuclear plant (Susquehanna).  At December 31, 2009.2013, these funds were invested primarily in domestic equity securities and fixed-rate, fixed-income securities and are reflected at fair value on the Balance Sheets.  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 Electric estimated thatactively monitors the investment performance and periodically reviews asset allocation in accordance with its nuclear decommissioning trust policy statement.  At December 31, 2013, a hypothetical 10% increase in interest rates and a 10% decrease in interest rates at December 31, 2010equity prices would increasehave resulted in an estimated $66 million reduction in the fair value of its debt portfolio by $66 million,the trust assets, compared with $69$49 million at December 31, 2009.2012.  See Notes 18 and 23 to the Financial Statements for additional information regarding the NDT funds.

(All Registrants)

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 Electricthe Registrants would incur a loss as a result of nonperformance by counterparties of their contractual obligations.  PPL Electric requiresThe Registrants maintain credit policies and procedures with respect to counterparty credit (including requirements that counterparties maintain specified credit ratingsratings) and requiresrequire other assurances in the form of credit support or collateral in certain circumstances in order to limit counterparty credit risk.  However, PPL Electric hasthe Registrants, as applicable, have concentrations of suppliers and customers among electric utilities, financial institutions and customers.other energy marketing and trading companies.  These concentrations may impact PPL Electric'sthe Registrants' overall exposure to credit risk, positively or negatively, as counterparties may be similarly affected by changes in economic, regulatory or other conditions.

(PPL and PPL Energy Supply)

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 2007,this case, PPL Energy Supply would have to sell into a lower-priced market or purchase in 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 has also established a reserve with respect to certain receivables from SMGT, which is reflected in accounts receivable on the Balance Sheets.

(PPL and PPL Electric)

In 2013, 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.  Pursuant to this plan, PPL Electric had contracted for all of the electric supply for customers who elected this service in 2010.

In June 2009, the PUC approved PPL Electric'sPLR procurement plan for the period January 2011of June 2013 through May 2013.  Through 2010,2015.  To date, PPL Electric has conducted sixtwo of its 14four planned competitive solicitations.

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Under the standard Supply Master Agreement (the Agreement) for the competitive 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, 2010, all2013, 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 an insignificant amount of collateral 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 15, 16, 18 and 19 to the Financial Statements for additional information on the competitive solicitations,solicitation process, the Agreement, credit concentration and credit risk.

Foreign Currency Translation (PPL)

The value of the British pound sterling fluctuates in relation to the U.S. dollar.  In 2013, changes in this exchange rate resulted in a foreign currency translation gain of $150 million, which primarily reflected a $330 million increase to PP&E and goodwill offset by an increase of $180 million to net liabilities.  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.  The impact of foreign currency translation is recorded in AOCI.

(All Registrants)

Related Party Transactions

PPL Electric isThe Registrants are 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.the Registrants.  See Note 16 to the Financial Statements for additional information on related party transactions.transactions for PPL Energy Supply, PPL Electric, LKE, LG&E and KU.

Environmental MattersAcquisitions, Development and Divestitures

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

See Notes 8, 9 and 10 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, PPL Energy Supply's, LKE's, LG&E's and KU's air emissions, water discharges and the management of hazardous and solid waste, as well as other aspects of the Registrants' businesses.  The cost of compliance or alleged non-compliance cannot be predicted with certainty but could be material.  In addition, costs may increase significantly if the requirements or scope of environmental laws or regulations, or similar rules, are expanded or changed.  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 the Registrants' services.

The following is a discussion of the more significant environmental matters.  See Note 15 to the Financial Statements and "Item 1. Business - Environmental Matters" and Note 15 to the Financial Statements for a discussion ofadditional information on environmental matters.

GHG Regulations
In June 2013, President Obama released his Climate Action Plan which reiterates the goal of reducing greenhouse gas emissions in the U.S. "in the range of" 17% below 2005 levels by 2020 through such actions as regulating power plant emissions, promoting increased use of renewables and clean energy technology, and establishing tighter energy efficiency standards.  Also, by Presidential Memorandum the EPA was directed to issue a revised proposal for new power plants (a prior proposal was issued in 2012) by September 20, 2013, with a final rule to be issued in a timely fashion thereafter, and to issue proposed standards for existing power plants by June 1, 2014 with a final rule by June 1, 2015.  The EPA was further directed to require that states develop implementation plans for existing plants by June 2016.

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The EPA's revised proposal for new power plants was published in the Federal Register on January 8, 2014, with comments due on March 10, 2014.  The proposed limits for coal plants can only be achieved through capture and sequestration, a technology which is not presently commercially viable and, therefore, effectively preclude the construction of new coal plants.  The proposed standards for new gas plants may also not be consistently achievable.  Regulation of existing plants could have a significant industry-wide impact depending on the structure and stringency of the final rule and state implementation plans.

The Administration's recent increase in its estimate of the "social cost of carbon" (which is used to calculate benefits associated with proposed regulations) from $23.80 to $38 per metric ton in 2015 may lead to more costly regulatory requirements.  The White House Office of Management and Budget (OMB) has opened this issue for public comment.

Additionally, the Climate Action Plan goal to prepare the U.S. for the impacts of climate change could affect PPL, PPL Electric, LKE, LG&E and KU and others in the industry as it could result in requirements to modify electricity delivery systems to improve the ability to withstand major storms and substantial capital investment may be needed to meet those requirements.

Climate Change
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, as applicable, to the Registrants' generation assets, electricity delivery systems, as well as impacts on the Registrants' customers.  In addition, changed weather patterns could potentially reduce annual rainfall in areas where PPL, PPL Energy Supply, LKE, LG&E and KU have hydroelectric generating facilities or where river water is used to cool their fossil and nuclear (as applicable) powered generators.  The Registrants cannot currently predict whether their businesses will experience these potential risks or estimate the cost of their related consequences.

(All Registrants except PPL Electric)

Coal Combustion Residuals (CCRs)
In June 2010, the EPA proposed two approaches to regulating the disposal and management of CCRs (as either hazardous or non-hazardous waste) under existing federal law.  Under a litigation settlement agreement involving certain environmental groups, the EPA has agreed to issue its final rulemaking by the end of 2014.  Regulations could impact handling, disposal and/or beneficial use of CCRs.  The financial and operational impact is expected to be material if CCRs are regulated as hazardous waste, and significant if regulated as non-hazardous.

In July 2013, the U.S. House of Representatives passed House Bill H.R. 2218, the Coal Residuals and Reuse Management Act of 2013, which would preempt the EPA from regulating CCRs under RCRA and set rules governing state programs.  It remains uncertain whether similar legislation will be passed by the U.S. Senate.  Recent ash spills that have occurred within the utility industry are adding increased pressure to regulate both active and legacy sites.

Effluent Limitation Guidelines (ELGs)
In June 2013, the EPA published proposed regulations to revise discharge limitations for steam electric generation wastewater permits.  The proposed limitations are based on the EPA review of available treatment technologies and their capacity for reducing pollutants and include new requirements for fly ash and bottom ash transport water and metal cleaning waste waters, as well as new limits for scrubber wastewater and landfill leachate.  The EPA's proposed ELG regulations also contain some requirements that would affect the inspection and operation of CCR facilities, if finalized.  The proposal contains several alternative approaches, some of which could significantly impact PPL's, PPL Energy Supply's, LKE's, LG&E's and KU's coal-fired plants.  The final regulation is expected to be issued in May 2014 but may be delayed.  At the present time, PPL, PPL Energy Supply, LKE, LG&E and KU are unable to predict the outcome of this matter or estimate a range of reasonably possible costs, but the costs could be significant.

316(b) Cooling Water Intake Structure Rule
In April 2011, the EPA published a draft regulation under Section 316(b) of the Clean Water Act, which regulates cooling water intakes for power plants.  The draft rule has two provisions: requiring installation of Best Technology Available (BTA) to reduce mortality of aquatic organisms that are pulled into the plant cooling water system (entrainment), and imposing standards for reduction of mortality of aquatic organisms trapped on water intake screens (impingement).  The final rule is now expected by April 17, 2014.  The proposed regulation would apply to nearly all PPL-owned steam electric generation plants in Pennsylvania, Kentucky, and Montana, potentially even including those equipped with closed-cycle cooling systems.  PPL's, PPL Energy Supply's, LKE's, LG&E's and KU's compliance costs could be significant, especially if the final rule requires closed-cycle systems at plants that do not currently have them or conversions of once-through systems to closed-cycle.

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MATS
In February 2013, the EPA finalized MATS requiring fossil-fuel fired plants to reduce emissions of mercury and other hazardous air pollutants by April 16, 2015.  The rule is being challenged by industry groups and states.  The EPA has subsequently proposed changes to the rule with respect to new sources to address the concern that the rule effectively precludes construction of any new coal-fired plants.  PPL, PPL Energy Supply, LKE, LG&E and KU are generally well-positioned to comply with MATS, primarily due to recent investments in environmental controls at PPL Energy Supply and approved ECR plans to install additional controls at some of  LG&E's and KU's Kentucky plants.  Additionally, PPL Energy Supply is evaluating chemical additive systems for mercury control at Brunner Island, and modifications to existing controls at Colstrip for improved particulate matter reductions.  In September 2012, PPL Energy Supply announced its intention to place its Corette plant in long-term reserve status beginning in April 2015 due to expected market conditions and costs to comply with MATS.  The Corette plant asset group was determined to be impaired in December 2013.  See "Application of Critical Accounting Policies - Asset Impairment (Excluding Investments)" for additional information.  Also, PPL has received approval for one-year compliance extensions for certain plants in Kentucky and Pennsylvania.  Other extension requests are under consideration from LG&E, KU and PPL Energy Supply.

LG&E's and KU's anticipated retirements of generating units at the Cane Run and Green River plants are in response to MATS and other environmental regulations.

CSAPR and CAIR
In 2011, the EPA finalized its CSAPR regulating emissions of nitrogen oxides and sulfur dioxide through new allowance trading programs which were to be implemented in two phases (2012 and 2014).  Like its predecessor, the CAIR, CSAPR targeted sources in the eastern U.S.  In December 2011, the U.S. District Court for the District of Columbia Circuit (D.C. Circuit Court) stayed implementation of CSAPR, leaving CAIR in place.  Subsequently, in August 2012, the D. C. Circuit Court vacated CSAPR and remanded it back to the EPA for further rulemaking, again leaving CAIR in place in the interim.  In June 2013 the U.S. Supreme Court granted the EPA's petition for review of the D.C. Circuit Court's decision to vacate CSAPR.  Oral arguments before the U.S. Supreme Court were held in December 2013.  Prior to a revised transport rule from the EPA, coal-fired generating plants could face tighter emission limitations on nitrogen oxides through state action.

PPL, PPL Energy Supply, LKE, LG&E and KU plants in Pennsylvania and Kentucky will continue to comply with CAIR through optimization of existing controls, balanced with emission allowance purchases.  The D. C. Circuit Court's August 2012 decision leaves plants in CSAPR-affected states potentially exposed to more stringent emission reductions for nitrogen oxides and sulfur dioxide due to regional haze implementation (see Regional Haze discussion below), and/or petitions to the EPA by downwind states under Section 126 of the Clean Air Act requesting the EPA to require plants that allegedly contribute to downwind non-attainment to take action to reduce emissions.

Regional Haze
Under the EPA's regional haze programs (developed to eliminate man-made visibility degradation by 2064), states are required to make reasonable progress every decade, including the application of Best Available Retrofit Technology (BART) on power plants commissioned between 1962 and 1977.  For the eastern U.S., the EPA had determined that region-wide reductions under the CSAPR trading program could be utilized by state programs to satisfy BART requirements for sulfur dioxide and nitrogen oxides.  However, the August 2012 decision by the D.C. Circuit Court to vacate and remand CSAPR exposes power plants located in the eastern U.S., including PPL Energy Supply's plants in Pennsylvania and LG&E's and KU's plants in Kentucky, to further reductions in those pollutants in accordance with BART requirements.

The EPA signed its final Federal Implementation Plan (FIP) of the Regional Haze Rules for Montana in September 2012, with tighter emissions limits for PPL Energy Supply's Colstrip Units 1 & 2 based on the installation of new controls (no limits or additional controls were specified for PPL Energy Supply's Colstrip Units 3 & 4), and tighter emission limits for PPL Energy Supply's Corette plant (which are not based on additional controls).  The cost of the potential additional controls for Colstrip Units 1 & 2, if required, could be significant.  PPL Energy Supply expects to meet the tighter permit limits at Corette without any significant changes to operations, although other requirements have led to the planned suspension of operations at Corette beginning in April 2015 (see "MATS" discussion above).  Both PPL and environmental groups have appealed the final FIP rules to the U.S. Court of Appeals for the Ninth Circuit.


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National Ambient Air Quality Standards (LKE, LG&E and KU)
During 2010 and 2012, the EPA issued new ambient air standards for sulfur dioxide and particulates, respectively.  In 2013, the EPA preliminarily designated Jefferson County, Kentucky, as a partial non-attainment area for sulfur dioxide.  Final designations of non-attainment areas may occur in 2014.  Existing environmental plans for LG&E's and KU's Kentucky plants, including announced retirements of certain plants and ECR-approved new or upgraded scrubbers or baghouses at other plants, may aid in achievement of eventual ambient air requirements.  However, depending upon the specifics of final non-attainment designations and consequent compliance plans, additional controls may be required, the financial impact of which could be significant.

(All Registrants)

Competition

See "Competition" under each of PPL's reportable segments in "Item 1. Business - Segment Information - Pennsylvania Regulated Segment - Competition"Information" and "Item 1A. Risk Factors" for a discussion of competitive factors affecting PPL Electric.the Registrants.

New Accounting Guidance

See NoteNotes 1 and 25 to the Financial Statements for a discussion of new accounting guidance adopted.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 an understanding of the reported financial condition or results of operations, and require management to make estimates or other judgments of matters that are 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 with PPL's Audit Committee these critical accounting policies, the following disclosures regarding their application and the estimates and assumptions regarding them, with PPL's Audit Committee.them.

1)      Price Risk Management (All Registrants except PPL Electric)

See "Price Risk Management" in Note 1 to the Financial Statements, as well as "Risk Management" above.

Defined Benefits

PPL Electric participates in and is allocated a significant portion(All Registrants)

Certain of the liabilityRegistrants' subsidiaries sponsor or participate in, as applicable, various qualified funded and net periodicnon-qualified unfunded defined benefit pension plans and both funded and unfunded other postretirement costsbenefit plans.  These plans are applicable to the majority of plans sponsored by PPL Services basedthe Registrants' employees (based on participation in those plans.  PPL Electric recordseligibility for their applicable plans).  The Registrants and certain of their subsidiaries record an asset or liability to recognize the funded status of all defined benefit plans with an offsetting entry to AOCI or in the case of PPL Electric, LG&E and KU, regulatory assets.assets and liabilities for 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 13 to the Financial Statements for additional information about the plans and the accounting for defined benefits.

A summary of plan sponsors by Registrant and whether a Registrant or its subsidiaries sponsor (S) or participate in and receives allocations (P) from those plans is shown in the table below.

PPL Energy
Plan SponsorPPLSupplyPPL ElectricLKELG&EKU
PPL ServicesSPP
WPD (a)S
PPL MontanaS
LKESPP
LG&ES

(a)Does not sponsor or participate in other postretirement benefits plans.


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Management 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.  The amountAOCI, or in the case of PPL Electric, LG&E and KU, regulatory assets isand liabilities, for 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 expectationsusing a best-estimate of expected returns, volatilities and periodic portfolio rebalancing among the diversifiedcorrelations for each asset classes.class.  Each plan's specific current and expected asset allocations are also considered in developing a reasonable return assumption.  These projected returns reduce the net benefit costs PPL recordsthe Registrants record 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.

(PPL)

In selecting athe discount rate for its U.S. defined benefitU.K. pension plans, PPL ServicesWPD starts with ana cash flow analysis of the expected benefit payment stream for its plans.  This information is firstThese plan-specific cash flows are matched against a spot-rate yield curve.  A portfoliocurve to determine the assumed discount rate, which uses an iBoxx British pounds sterling denominated corporate bond index as its base. From this base, those bonds with the lowest and highest yields are eliminated to develop an appropriate subset of 604 Aa-gradedbonds.  An individual bond matching approach, which is used for the U.S. pension plans as discussed below, is not used for the U.K. pension plans because the universe of bonds in the U.K. is not deep enough to adequately support such an approach.

(All Registrants)

In selecting the discount rates for U.S. defined benefit plans, the plan sponsors 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, with a total amount outstanding in excess of $667 billion, servesserving 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 ultimate yield curve.  The resultstiming of this analysiseach plan's cash flows and parameters are considered together with other economic dataestablished as to the percentage of each individual bond issue that could be hypothetically purchased and movements in various bond indicesthe surplus reinvestment rates to determine the discount rate assumption.  At December 31, 2010, PPL Services decreased the discount rate for its U.S. pension plans from 6.00% to 5.41% as a result of this assessment and de creased the discount rate for its other postretirement benefit plans from 5.81% to 5.16%.

The expected long-term rates of return for PPL Services' U.S. defined benefit pension and other postretirement benefits 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, 2010, PPL Services' expected return on plan assets decreased from 8.00% to 7.25% for its U.S. pension plan and decreased from 7.00% to 6.45% for its other postretirement bene fit plan.be assumed.

In selecting a rate of compensation increase, PPL Services considersplan sponsors consider past experience in light of movements in inflation rates.  At December 31, 2010, PPL Services'

The following table provides the weighted-average assumptions used for discount rate, expected return on plan assets and rate of compensation increase remained at 4.75% for its U.S. plan.December 31.

Assumption / Registrant  2013   2012 
Discount rate      
 Pension - PPL (U.S.)  5.12%  4.22%
 Pension - PPL (U.K.)  4.41%  4.27%
 Pension - PPL Energy Supply  5.18%  4.25%
 Pension - LKE  5.18%  4.24%
 Pension - LG&E  5.13%  4.20%
 Other Postretirement - PPL  4.91%  4.00%
 Other Postretirement - PPL Energy Supply  4.51%  3.77%
 Other Postretirement - LKE  4.91%  3.99%
        

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Assumption / Registrant  2013   2012 
Expected return on plan assets      
 Pension - PPL (U.S.)  7.00%  7.03%
 Pension - PPL (U.K.)  7.19%  7.16%
 Pension - PPL Energy Supply  7.00%  7.00%
 Pension - LKE  7.00%  7.10%
 Pension - LG&E  7.00%  7.10%
 Other Postretirement - PPL  5.96%  5.94%
 Other Postretirement - LKE  6.75%  6.76%
       
Rate of compensation increase      
 Pension - PPL (U.S.)  3.97%  3.98%
 Pension - PPL (U.K.)  4.00%  4.00%
 Pension - PPL Energy Supply  3.94%  3.95%
 Pension - LKE  4.00%  4.00%
 Other Postretirement - PPL  3.96%  3.97%
 Other Postretirement - PPL Energy Supply  3.94%  3.95%
 Other Postretirement - LKE  4.00%  4.00%

In selecting health care cost trend rates, for PPL Services' other postretirement benefit plans, PPL Services considersplan sponsors consider past performance and forecasts of health care costs.  At December 31, 2010, PPL Services'2013, the health care cost trend rates for all plans were 9.00%7.6% for 2011,2014, gradually declining to 5.50% for 2019.an ultimate trend rate of 5.0% in 2020.

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 theAOCI or regulatory assets allocated to PPL Electric.  Whileand liabilities.  At December 31, 2013, the charts belowdefined benefit plans were recorded in the Registrants' financial statements as follows.

         PPL Energy               
  PPL  Supply PPL Electric LKE  LG&E  KU 
                          
Balance Sheet:                      
 Regulatory assets/liabilities $ 483      $ 257  $ 226   $ 164   $ 62  
 Pension liabilities   1,294   $ 112    96    155     19     11  
 Other postretirement                      
   benefit liabilities   216     47    41    119     73     42  
 AOCI (pre-tax)   (2,561)    (319)      19          
                          
Statement of Income:                      
 Defined benefits costs $ 169   $ 51  $ 21  $ 40   $ 18     11  
 Increase (decrease) from                      
    prior year   3     8    (1)               

The following tables reflect changes in certain assumptions based on the Registrants' primary defined benefit plans.  The tables reflect either an increase or decrease in each assumption, theassumption. The inverse of this change would impact the accrued defined benefit liabilities or assets, reported annual net periodic defined benefit costs and AOCI or regulatory assets and liabilities 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, 2010, defined benefit plan liabilities were as follows.assumption.

Pension liabilities$ 259 
Other postretirement benefit liabilitiesActuarial assumption   57 
Discount Rate(0.25%)
Expected Return on Plan Assets(0.25%)
Rate of Compensation Increase0.25%
Health Care Cost Trend Rate (a)1%

   Increase (Decrease)
   Change in  Impact on defined  Impact on
Actuarial assumption  assumption  benefit liabilities  regulatory assets
          
Discount Rate  (0.25)% $ 35  $ 35 
Rate of Compensation Increase  0.25%   6    6 
Health Care Cost Trend Rate (a)  1.00%   1    1 

(a)Only impacts other postretirement benefits.

In 2010, PPL Electric was allocated net periodic defined benefit costs charged to operating expense of $20 million.  This amount represents a $4 million decrease compared with the charge recognized during 2009.
   Increase (Decrease)
   Defined Benefit   Regulatory Defined Benefit
Actuarial assumption Liabilities AOCI (pre-tax) Assets/Liabilities Costs
PPL            
 Discount rate $462  $ (390) $ 72  $ 39 
 Expected return on plan assets  n/a  n/a   n/a    27 
 Rate of compensation increase  67    (56)   11    13 
 Health care cost trend rate (a)  6    (1)   5    1 
              

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Actuarial assumption  Change in assumption  Impact on defined benefit costs
       
Discount Rate  (0.25)% $ 1 
Expected Return on Plan Assets  (0.25)%   2 
Rate of Compensation Increase  0.25%   1 
Health Care Cost Trend Rate (a)  1.00%   1 
   Increase (Decrease)
   Defined Benefit   Regulatory Defined Benefit
Actuarial assumption Liabilities AOCI (pre-tax) Assets/Liabilities Costs
PPL Energy Supply            
 Discount rate  48    (48)      5 
 Expected return on plan assets  n/a  n/a   n/a    4 
 Rate of compensation increase  7    (7)      2 
              
PPL Electric            
 Discount rate   38       38    4 
 Expected return on plan assets  n/a      n/a    3 
 Rate of compensation increase   6       6    2 
LKE            
 Discount rates  49    (15)   34    6 
 Expected return on plan assets  n/a  n/a   n/a    3 
 Rate of compensation increase  9    (4)   5    2 
 Health care cost trend rate (a)  5    (1)   4      
              
LG&E            
 Discount rates  19   n/a    19    3 
 Expected return on plan assets  n/a  n/a   n/a    1 
 Rate of compensation increase  2   n/a    2    1 
 Health care cost trend rate (a)  1   n/a    1      
              
KU            
 Discount rates  15   n/a    15    2 
 Expected return on plan assets  n/a  n/a   n/a    1 
 Rate of compensation increase  3   n/a    3    1 
 Health care cost trend rate (a)  3   n/a    3      

(a)Only impacts other postretirement benefits.

2)      Asset Impairment (Excluding Investments)

(All Registrants except PPL Electric)

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, 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 amount to its estimated fair value.  Management must make significant judgments to estimate future cash flows, including the useful lives of the assets, the forward prices for revenue and fuel components in the markets where the assets are utilized, the amount of capital and operations and maintenance spending and management's intended use of 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 an 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 materially different results than those identified and recorded in the financial statements.


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(PPL and PPL Energy Supply)

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.  PPL Energy Supply has been monitoring the plant for potential impairment since this announcement and until the fourth quarter of 2013, no impairment was indicated as various price scenarios allowed for recovery of the asset.  During the fourth quarter, in connection with the completion of its annual business planning process, management updated its fundamental view for long-term power and gas prices.  Based upon this fundamental view, management has altered its expectations regarding the probability that the Corette plant will operate subsequent to initially placing it in long-term reserve status.  It is now less likely that the plant will restart after operations are suspended no later than April 2015.  As a result, based on an undiscounted cash flow analysis, the carrying amount for Corette was no longer recoverable.  PPL Energy Supply performed an internal analysis using an income approach based on discounted cash flows to assess the fair value of the Corette asset group.  Assumptions used in the fair value assessment were forward energy prices, expectations for demand for energy in Corette's market and expected operation and maintenance and capital expenditures that were consistent with assumptions used in the business planning process.  Through this analysis, PPL Energy Supply determined the fair value of the asset group to be negligible.  This resulted in PPL and PPL Energy Supply recording an impairment charge of $65 million, or $39 million after-tax for the Corette plant and related excess emission allowances.

The current depressed levels of energy and capacity prices in PJM, as well as management's forward view of these prices using its fundamental pricing models recently updated in conjunction with the annual business planning process, continue to put pressure on the recoverability of PPL Energy Supply's investment in its Pennsylvania coal-fired generation assets.  In the fourth quarter of 2013, management tested the Brunner Island and Montour plants for impairment and concluded neither plant was impaired as of December 31, 2013.  The recoverability test is very sensitive to forward energy and capacity price assumptions, as well as forecasted operation and maintenance and capital spending.  Therefore, a further decline in forecasted long-term energy or capacity prices or changes in environmental laws requiring additional capital or operation and maintenance expenditures, could negatively impact PPL Energy Supply's operations of these facilities and potentially result in future impairment charges for some or all of the carrying value of these plants.  The carrying value of the Pennsylvania coal-fired generation assets tested was $2.7 billion as of December 31, 2013 ($1.4 billion for Brunner Island and $1.3 billion for Montour).

See Note 15 to the Financial Statements for additional information on MATS and other environmental requirements for coal-fired generation plants.

(All Registrants, except PPL Electric)

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 the carrying amount to its fair value less cost to sell.  A gain is recognized in future periods 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, PPL, PPL Energy Supply, LKE, LG&E and KU consider 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 determining the present value of the cash flow streams using risk adjusted discount rates.

Goodwill is tested for impairment at the reporting unit level.  PPL has determined its reporting units to be at the same level as its reportable segments.  PPL Energy Supply, LKE, LG&E and KU each operate within a single reportable segment and single reporting unit.  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 reporting 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, PPL, PPL Energy Supply, LKE, LG&E and KU 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 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 that the fair value of a reporting unit is less than the carrying amount, the two-step quantitative impairment test is not necessary.


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When the two-step quantitative impairment test is elected or required as a result of the step zero assessment, in step one, PPL, PPL Energy Supply, LKE, LG&E and KU determine whether a potential impairment exists 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 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 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.

PPL (for its U.K. Regulated and Kentucky Regulated segments), and individually, LKE, LG&E and KU elected to perform the qualitative step zero evaluation of goodwill in the fourth quarter of 2013.  These evaluations considered the excess of fair value over the carrying value of each reporting unit that was calculated during step one of the quantitative impairment tests performed in the fourth quarter of 2012, and the relevant events and circumstances that occurred since those tests were performed including:

·current year financial performance versus the prior year,
·changes in planned capital expenditures,
·the consistency of forecasted free cash flows,
·earnings quality and sustainability,
·changes in market participant discount rates,
·changes in long-term growth rates,
·changes in PPL's market capitalization, and
·the overall economic and regulatory environments in which these regulated entities operate.

Based on the overall favorable results of these evaluations, management did not conclude it was more likely than not that the fair value of these reporting units were less than their carrying values.  As such, the two-step quantitative impairment test was not performed.

PPL (for its Supply segment) and PPL Energy Supply elected to bypass step zero as depressed wholesale market prices for electricity and natural gas have negatively impacted the fair value of these reporting units.  Therefore, the goodwill for these reporting units was tested for impairment using the quantitative test in the fourth quarter of 2013, and no impairment was recognized.  Management used both discounted cash flows and market multiples, which required significant assumptions, to estimate the fair value of the reporting units.  A decrease in the forecasted cash flows of 10%, an increase in the discount rate by 0.25%, or a 10% decrease in the market multiples would not have resulted in an impairment of goodwill for these reporting units.

Loss Accruals(All Registrants)

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,consulted, 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
104

For PPL, see Note 6 to the Financial Statements for a discussion of the Ofgem Review of Line Loss Calculation, including the increases of $45 million to this liability recorded in 2010.2013 by WPD.

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.  See Note 15Accounting guidance defines "reasonably possible" as cases in which "the future event or events occurring is more than remote, but less than likely to the Financial Statements for disclosure of other potential loss contingencies that have not met the criteria for accrual.occur."

When an estimated loss is accrued, the triggering events for subsequently reducingadjusting the loss accrual are identified, where applicable.  The triggering events generally occur when new information becomes known, the contingency has been resolved and the actual loss is paidsettled 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 reductionadjustment 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 actual payments are made, a better estimate of the loss is determined or the loss is no longer considered probable.

·Actions or decisions by certain regulators could result in a better estimate of a previously recorded loss accrual.

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, operationbusiness unit management and other parties.

3)See Notes 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.

Asset Retirement Obligations

(All Registrants, except PPL Electric)

ARO liabilities are required to be recognized for legal obligations associated with the retirement of long-lived assets.  The initial obligation is measured at its estimated fair value.  An ARO must be recognized when incurred if the fair value of the ARO can be reasonably estimated.  An equivalent amount is recorded as an increase in the value of the capitalized asset and amortized 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 statement of income, for changes in the obligation due to the passage of time.

(PPL, LKE, LG&E and KU)

In the case of LG&E and KU, because costs of removal are collected in rates, the depreciation and accretion expenses related to an ARO are recorded as a regulatory asset, such that there is no earnings impact.

(All Registrants, except PPL Electric)

See Note 21 to the Financial Statements for additional information on 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 the ARO and the related capitalized asset, are reviewed periodically to ensure that any material changes are incorporated into the latest estimate of the ARO.  Any change to the capitalized asset, positive or negative, is generally amortized over the remaining life of the associated long-lived asset.


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At December 31, 2013, the total recorded balances and information on the most significant recorded AROs were as follows.

      Most Significant AROs
   Total        
   ARO Amount     
   Recorded Recorded % of Total Description
             
           Nuclear decommissioning, ash ponds,
PPL $ 705  $ 533   76  landfills and natural gas mains
PPL Energy Supply   404    342   85  Nuclear decommissioning
LKE   252    191   76  Ash ponds, landfills and natural gas mains
LG&E   74    46   62  Ash ponds, landfills and natural gas mains
KU   178    145   81  Ash ponds and landfills

The most significant assumptions surrounding AROs are the forecasted retirement costs (including the settlement dates and the timing of cash flows), the discount rates and the inflation rates.  At December 31, 2013, a 10% change to retirement cost, a 0.25% decrease in the discount rate or a 0.25% increase in the inflation rate would not have a significant impact on the ARO liabilities of the Registrants.  For PPL and PPL Energy Supply, there would be 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 these changes in assumptions.  As noted above, these factors do not impact the Statements of Income of LKE, LG&E and KU.
Income Taxes(All Registrants)

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 ofvaluation allowances on deferred tax assets, liabilities and valuation allowances.assets.

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 ben efitbenefit 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 atas of 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 de-recognized,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, 2010,2013, it was reasonably possible that during the next 12 months the total amount of unrecognized tax benefits could increase or decrease by as much as $28 million or decrease by up to $42 million.  This changethe following.

IncreaseDecrease
PPL$22 
PPL Energy Supply15 

These changes 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 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.  In addition, for PPL, this change could also relate to the creditability of foreign taxes and the timing and utilization of foreign tax credits.  For PPL Electric, LKE, LG&E and KU, no significant changes in unrecognized tax benefits are projected over the next 12 months.


106

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.  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 income tax disclosures.

4)      Regulatory Assets and Liabilities

(PPL)

WPD operates in an incentive-based regulatory structure under distribution licenses granted by Ofgem.  WPD's electricity distribution revenues are set every five years (changing to every eight years beginning on April 1, 2015) 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.

(All Registrants except PPL Electric's electricity delivery business isEnergy Supply)

PPL Electric, LG&E and KU, are subject to cost-based rate regulation.  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 generally represent obligations to regulated customersare recognized for previous collections of costs that areamounts expected to be refunded to customers in the future.returned through future regulated customer rates.  In certain cases, regulatory liabilities are recorded based on thean understanding or agreement with the regulator that current rates are beinghave 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, thenthe regulatory asset write-offs would be required to be recognized in operating income.written-off.  Additionally, the regulatory agencies can provide flexibilit yflexibility in the manner and timing of the depreciation of PP&E and amortizationrecovery of regulatory assets.

At December 31, 2010 and 2009, PPL Electric had2013, regulatory assets of $620 million and $542 million.regulatory liabilities were recorded as reflected in the table below.  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.  At December 31, 2010 and 2009, PPL Electric had regulatory liabilities of $32 million and $84 million.

     PPL         
  PPL Electric LKE LG&E KU
                
Regulatory assets $ 1,279  $ 778  $ 501  $ 320  $ 181 
Regulatory liabilities   1,138    91    1,047    491    556 

See Note 36 to the Financial Statements for additional information on regulatory assets and liabilities.


Other Information
107

Revenue Recognition - Unbilled Revenue (PPL Electric, LKE, LG&E and KU)

Revenues related to the sale of energy are recorded when service is rendered or 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, estimates are recorded for unbilled revenues at the end of each reporting period.  Such unbilled revenue amounts reflect estimates of the deliveries to customers since the date of the last reading of their meters.  The unbilled revenue estimates reflect consideration of factors including daily load models, estimated usage for each customer class, the effect of current and different rate schedules, the meter read schedule, the billing schedule, actual weather data and where applicable, the impact of weather normalization or other regulatory provisions of rate structures.  At December 31, unbilled revenues recorded on the Balance Sheets were as follows.

  2013  2012 
       
PPL Electric $116  $110 
LKE  180   156 
LG&E  85   72 
KU  95   84 

Other Information(All Registrants)

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. See "Item 14. Principal Accounting Fees and Services" for more information.

108

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 Electricthe Registrants in "Item 7. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations." 
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109
 

Report of Independent Registered Public Accounting Firm

To theThe 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, 20102013 and 2009,2012, 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, 2010.  Our audits also included the financial statement schedule listed in the index at Item 15(a).2013. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.  We did not audit the financial statements of LG&E and KU Energy LLC (LKE), a wholly-owned subsidiary, which statements reflect total assets of $10,719 million as of December 31, 2010, and total revenues of $493 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, 20102013 and 2009,2012, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2010,2013, 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.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), PPL Corporation'sCorporation and subsidiaries' internal control over financial reporting as of December 31, 2010,2013, based on criteria established in Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 25, 201124, 2014, expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP


Philadelphia, Pennsylvania
February 24, 2014

110

Philadelphia, Pennsylvania
February 25, 2011

Report of Independent Registered Public Accounting Firm

To theThe Board of Directors and Shareowners of PPL Corporation

We have audited PPL Corporation'sCorporation and subsidiaries' internal control over financial reporting as of December 31, 2010,2013, based on criteria established in Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). PPL Corporation'sCorporation and subsidiaries' 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'scompany'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.

As set forth in Item 9A, Management's Report on Internal Control over Financial Reporting, management's assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of LG&E and KU Energy LLC (LKE), which is included in the 2010 consolidated financial statements of the Company and constituted 32.6% and 47.3% of total assets and net assets, respectively, as of December 31, 2010 and 5.8% and 5.0% of revenues and net income, respectively, for the year then ended.  Our audit of internal control over financial reporting of PPL Corporation and subsidiaries also did not include an evaluation of the internal control over financial reporting of LKE.

In our opinion, PPL Corporation and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010,2013, 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, 20102013 and 2009,2012, 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, 20102013, and our report dated February 25, 201124, 2014, expressed an unqualified opinion thereon.


/s/ Ernst & Young LLP


Philadelphia, Pennsylvania
February 25, 201124, 2014

111

Report of Independent Registered Public Accounting Firm

To the Member of LG&E and KU Energy LLC

In our opinion, the consolidated balance sheet and the related consolidated statements of income, retained earnings, comprehensive income, cash flows and capitalization present fairly, in all material respects, the financial position of LG&E and KU Energy LLC and its subsidiaries at December 31, 2010 and the results of their operations and their cash flows 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 LG&E and KU Energy LLC'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 auditing standards of the Public Company Accounti ng 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 2 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

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, 20102013 and 2009,2012, 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, 2010.2013. 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 th ethe 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, 20102013 and 2009,2012, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2010,2013, in conformity with U.S. generally accepted accounting principles.


/s/ Ernst & Young LLP


Philadelphia, Pennsylvania
February 25, 201124, 2014

112

Report of Independent Registered Public Accounting Firm

To theThe Board of Directors and Shareowners of PPL Electric Utilities Corporation

We have audited the accompanying consolidated balance sheets of PPL Electric Utilities Corporation and subsidiaries as of December 31, 20102013 and 2009,2012, and the related consolidated statements of income, shareowners' equity, and cash flows for each of the three years in the period ended December 31, 2010.2013. 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 th ethe 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, 20102013 and 2009,2012, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2010,2013, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP


Philadelphia, Pennsylvania
February 24, 2014

113

Report of Independent Registered Public Accounting Firm

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, 2013 and 2012, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2013. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2).  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, 2013 and 2012, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2013, 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


Philadelphia, PennsylvaniaLouisville, Kentucky
February 25, 201124, 2014

114

Report of Independent Registered Public Accounting Firm
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)
 
  2010  2009  2008 
Operating Revenues      
 
Utility
 $ 3,668  $ 3,902  $ 4,114 
 
Unregulated retail electric and gas
   415    152    151 
 Wholesale energy marketing         
  
Realized
   4,832    3,184    2,138 
  
Unrealized economic activity (Note 19)
   (805)   (229)   1,056 
 
Net energy trading margins
   2    17    (121)
 
Energy-related businesses
   409    423    519 
 
Total Operating Revenues
   8,521    7,449    7,857 
          
Operating Expenses         
 Operation         
  
Fuel
   1,235    920    1,057 
  Energy purchases         
   
Realized
   2,773    2,625    1,624 
   
Unrealized economic activity (Note 19)
   (286)   155    553 
  
Other operation and maintenance
��  1,756    1,418    1,414 
  
Amortization of recoverable transition costs
      304    293 
 
Depreciation
   556    455    444 
 
Taxes, other than income
   238    280    288 
 
Energy-related businesses
   383    396    481 
 
Total Operating Expenses
   6,655    6,553    6,154 
             
Operating Income
   1,866    896    1,703 
             
Other Income (Expense) - net
   (31)   47    53 
          
Other-Than-Temporary Impairments
   3    18    36 
             
Interest Expense
   593    387    447 
             
Income from Continuing Operations Before Income Taxes
   1,239    538    1,273 
             
Income Taxes
   263    105    396 
             
Income from Continuing Operations After Income Taxes
   976    433    877 
             
Income (Loss) from Discontinued Operations (net of income taxes)
   (17)   (7)   73 
             
Net Income
   959    426    950 
             
Net Income Attributable to Noncontrolling Interests
   21    19    20 
             
Net Income Attributable to PPL Corporation
 $ 938  $ 407  $ 930 
             
Amounts Attributable to PPL Corporation:         
 
Income from Continuing Operations After Income Taxes
 $ 955  $ 414  $ 857 
 
Income (Loss) from Discontinued Operations (net of income taxes)
   (17)   (7)   73 
 
Net Income
 $ 938  $ 407  $ 930 
             
Earnings Per Share of Common Stock:         
 Income from Continuing Operations After Income Taxes Available to PPL         
  Corporation Common Shareowners:         
  
Basic
 $ 2.21  $ 1.10  $ 2.28 
  
Diluted
 $ 2.20  $ 1.10  $ 2.28 
 Net Income Available to PPL Corporation Common Shareowners:         
  
Basic
 $ 2.17  $ 1.08  $ 2.48 
  
Diluted
 $ 2.17  $ 1.08  $ 2.47 
             
Dividends Declared Per Share of Common Stock
 $ 1.40  $ 1.38  $ 1.34 
             
Weighted-Average Shares of Common Stock Outstanding (in thousands)         
  
Basic
   431,345    376,082    373,626 
  
Diluted
   431,569    376,406    374,901 
             
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.

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, 2013 and 2012, and the related statements of income, equity and cash flows for each of the three years in the period ended December 31, 2013. 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, 2013 and 2012, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP


Louisville, Kentucky
February 24, 2014

115

Report of Independent Registered Public Accounting Firm
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
PPL Corporation and Subsidiaries
(Millions of Dollars)
  2010  2009  2008 
Cash Flows from Operating Activities         
 
Net income
 $ 959  $ 426  $ 950 
 Adjustments to reconcile net income to net cash provided by operating activities         
  
Pre-tax gain from the sale of the Maine hydroelectric generation business
   (25)   (38)   
  
Depreciation
   567    471    461 
  
Amortization
   213    389    383 
  
Defined benefit plans - expense
   102    70    20 
  
Defined benefit plans - funding
   (396)   (185)   (120)
  
Deferred income taxes and investment tax credits
   241    104    43 
  
Impairment of assets
   120    127    105 
  
Unrealized (gains) losses on derivatives, and other hedging activities
   542    329    (279)
  
Provision for Montana hydroelectric litigation
   66    8    
  
Other
   57    13    65 
 Change in current assets and current liabilities         
  
Accounts receivable
  
 (100)
   76    118 
  
Accounts payable
   216    (150)   85 
  
Unbilled revenue
   (100)   2    (85)
  
Prepayments
   (318)   (17)   67 
  
Counterparty collateral
   (18)   334    1 
  
Price risk management assets and liabilities
   (24)   (231)   (77)
  
Other
   (12)   92    (118)
 Other operating activities         
  
Other assets
   (45)   12    21 
  
Other liabilities
   (12)   20    (51)
   
Net cash provided by operating activities
   2,033    1,852    1,589 
Cash Flows from Investing Activities         
 
Expenditures for property, plant and equipment
   (1,597)   (1,225)   (1,418)
 
Proceeds from the sale of the Long Island generation business
   124       
 
Proceeds from the sale of the Maine hydroelectric generation business
   38    81    
 
Proceeds from the sale of the gas and propane businesses
         303 
 
Acquisition of LKE, net of cash acquired
   (6,812)      
 
Expenditures for intangible assets
   (92)   (88)   (332)
 
Purchases of nuclear plant decommissioning trust investments
   (128)   (227)   (224)
 
Proceeds from the sale of nuclear plant decommissioning trust investments
   114    201    197 
 
Purchases of other investments
         (290)
 
Proceeds from the sale of other investments
      154    195 
 
Net (increase) decrease in restricted cash and cash equivalents
   85    218    (71)
 
Other investing activities
   39    6    13 
   
Net cash used in investing activities
   (8,229)   (880)   (1,627)
Cash Flows from Financing Activities         
 
Issuance of long-term debt
   4,642    298    1,338 
 
Retirement of long-term debt
   (20)   (1,016)   (671)
 
Repurchase of common stock
         (38)
 
Issuance of equity, net of issuance costs
   2,441    60    19 
 
Payment of common stock dividends
   (566)   (517)   (491)
 
Redemption of preferred stock of a subsidiary
   (54)      
 
Debt issuance and credit facility costs
   (175)   (21)   (10)
 
Net increase (decrease) in short-term debt (Note 7)
   70    (52)   588 
 
Other financing activities
   (31)   (23)   (14)
   
Net cash provided by (used in) financing activities
   6,307    (1,271)   721 
Effect of Exchange Rates on Cash and Cash Equivalents
   13       (13)
Net Increase (Decrease) in Cash and Cash Equivalents
   124    (299)   670 
Cash and Cash Equivalents at Beginning of Period
   801    1,100    430 
Cash and Cash Equivalents at End of Period
 $ 925  $ 801  $ 1,100 
             
Supplemental Disclosures of Cash Flow Information         
 Cash paid during the period for:         
  
Interest - net of amount capitalized
 $ 458  $ 460  $ 423 
  
Income taxes - net
 $ 313  $ 16  $ 300 
             
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.

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, 2013 and 2012, and the related statements of income, equity and cash flows for each of the three years in the period ended December 31, 2013. 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, 2013 and 2012, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP


Louisville, Kentucky
February 24, 2014

116
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
PPL Corporation and Subsidiaries
(Millions of Dollars, shares in thousands)
  2010  2009 
Assets      
          
Current Assets      
 
Cash and cash equivalents
 $ 925  $ 801 
 
Short-term investments
   163    
 
Restricted cash and cash equivalents
   28    105 
 Accounts receivable (less reserve:  2010, $55; 2009, $37)      
  
Customer
   652    409 
  
Other
   90    59 
 
Unbilled revenues
   789    594 
 
Fuel, materials and supplies
   643    357 
 
Prepayments
   435    102 
 
Price risk management assets
   1,918    2,157 
 
Other intangibles
   70    25 
 
Assets held for sale
   374    127 
 
Regulatory assets
   85    11 
 
Other current assets
   16    5 
 
Total Current Assets
   6,188    4,752 
          
Investments      
 
Nuclear plant decommissioning trust funds
   618    548 
 
Other investments
   75    65 
 
Total Investments
   693    613 
          
Property, Plant and Equipment      
 
Regulated utility plant - electric and gas
   15,994    9,430 
 
Less:  accumulated depreciation - regulated utility plant
   3,002    2,828 
  
Regulated utility plant - electric and gas, net
   12,992    6,602 
 Non-regulated property, plant and equipment      
  
Generation
   10,165    10,493 
  
Nuclear fuel
   578    506 
  
Other
   403    389 
 
Less:  accumulated depreciation - non-regulated property, plant and equipment
   5,440    5,383 
  
Non-regulated property, plant and equipment, net
   5,706    6,005 
 
Construction work in progress
   2,160    567 
 
Property, Plant and Equipment, net (a)
   20,858    13,174 
Other Noncurrent Assets      
 
Regulatory assets
   1,145    531 
 
Goodwill
   1,761    806 
 
Other intangibles (a)
   966    615 
 
Price risk management assets
   655    1,274 
 
Other noncurrent assets
   571    400 
 
Total Other Noncurrent Assets
   5,098    3,626 
       
Total Assets
 $ 32,837  $ 22,165 
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)
            
     2013  2012  2011 
Operating Revenues      
 
Utility
 $ 7,201  $ 6,808  $ 6,292 
 
Unregulated wholesale energy
   3,044    4,126    5,212 
 
Unregulated retail energy
   1,027    844    726 
 
Energy-related businesses
   588    508    507 
 
Total Operating Revenues
   11,860    12,286    12,737 
          
Operating Expenses         
 Operation         
  
Fuel
   1,944    1,837    1,946 
  
Energy purchases
   1,967    2,555    3,253 
  
Other operation and maintenance
   2,825    2,835    2,667 
  
Loss on lease termination (Note 8)
   697       
 
Depreciation
   1,161    1,100    960 
 
Taxes, other than income
   364    366    326 
 
Energy-related businesses
   563    484    484 
 
Total Operating Expenses
   9,521    9,177    9,636 
             
Operating Income
   2,339    3,109    3,101 
             
Other Income (Expense) - net
   (23)   (39)   4 
          
Other-Than-Temporary Impairments
   1    27    6 
             
Interest Expense
   1,006    961    898 
             
Income from Continuing Operations Before Income Taxes
   1,309    2,082    2,201 
             
Income Taxes
   180    545    691 
             
Income from Continuing Operations After Income Taxes
   1,129    1,537    1,510 
             
Income (Loss) from Discontinued Operations (net of income taxes)
   2    (6)   2 
             
Net Income
   1,131    1,531    1,512 
             
Net Income Attributable to Noncontrolling Interests
   1    5    17 
             
Net Income Attributable to PPL Shareowners
 $ 1,130  $ 1,526  $ 1,495 
             
Amounts Attributable to PPL Shareowners:         
 
Income from Continuing Operations After Income Taxes
 $ 1,128  $ 1,532  $ 1,493 
 
Income (Loss) from Discontinued Operations (net of income taxes)
   2    (6)   2 
 
Net Income
 $ 1,130  $ 1,526  $ 1,495 
             
Earnings Per Share of Common Stock:   
 Income from Continuing Operations After Income Taxes Available to PPL   
 Common Shareowners:         
  
Basic
 $ 1.85  $ 2.62  $ 2.70 
  
Diluted
 $ 1.76  $ 2.61  $ 2.70 
 Net Income Available to PPL Common Shareowners:         
  
Basic
 $ 1.85  $ 2.61  $ 2.71 
  
Diluted
 $ 1.76  $ 2.60  $ 2.70 
             
Dividends Declared Per Share of Common Stock
 $ 1.47  $ 1.44  $ 1.40 
             
Weighted-Average Shares of Common Stock Outstanding (in thousands)
         
  
Basic
   608,983    580,276    550,395 
  
Diluted
   663,073    581,626    550,952 
             
The accompanying Notes to Financial Statements are an integral part of the financial statements.
117

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31,
PPL Corporation and Subsidiaries
(Millions of Dollars)
            
    2013  2012  2011 
            
Net income
 $ 1,131  $ 1,531  $ 1,512 
            
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, $2, ($2)
   138    94    (48)
 
Available-for-sale securities, net of tax of ($72), ($31), ($6)
   67    29    9 
 
Qualifying derivatives, net of tax of ($41), ($32), ($139)
   45    39    202 
 
Equity investees' other comprehensive income (loss), net of tax of $0, ($1), $0
        2      
 Defined benefit plans:         
  
Prior service costs, net of tax of ($1), $0, ($1)
   2    1    (3)
  
Net actuarial gain (loss), net of tax of ($73), $343, $58
   71    (965)   (152)
Reclassifications to net income - (gains) losses, net of tax expense (benefit):         
 
Available-for-sale securities, net of tax of $4, $1, $5
   (6)   (7)   (7)
 
Qualifying derivatives, net of tax of $80, $278, $246
   (83)   (434)   (370)
 
Equity investees' other comprehensive (income) loss, net of tax of $0, $0, $0
             3 
 Defined benefit plans:         
  
Prior service costs, net of tax of ($4), ($5), ($5)
   6    10    10 
  
Net actuarial loss, net of tax of ($49), ($29), ($19)
   135    79    47 
Total other comprehensive income (loss) attributable to PPL Shareowners
   375    (1,152)   (309)
            
Comprehensive income (loss)
   1,506    379    1,203 
 
Comprehensive income attributable to noncontrolling interests
   1    5    17 
            
Comprehensive income (loss) attributable to PPL Shareowners
 $ 1,505  $ 374  $ 1,186 
            
The accompanying Notes to Financial Statements are an integral part of the financial statements.

118
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
PPL Corporation and Subsidiaries
(Millions of Dollars)
     2013  2012  2011 
Cash Flows from Operating Activities         
 
Net income
 $ 1,131  $ 1,531  $ 1,512 
 Adjustments to reconcile net income to net cash provided by (used in) operating activities         
  
Depreciation
   1,161    1,100    961 
  
Amortization
   222    186    254 
  
Defined benefit plans - expense
   176    166    205 
  
Deferred income taxes and investment tax credits
   72    424    582 
  
Impairment of assets
   65    28    13 
  
Unrealized (gains) losses on derivatives, and other hedging activities
   236    27    (314)
  
Loss on lease termination (Note 8)
   426           
  
Other
   80    (27)   (38)
 Change in current assets and current liabilities         
  
Accounts receivable
   (165)   7    (89)
  
Accounts payable
   25    (29)   (36)
  
Unbilled revenues
   27    (19)   64 
  
Prepayments
   14    (5)   294 
  
Counterparty collateral
   (81)   (34)   (190)
  
Taxes payable
   20    24    (104)
  
Uncertain tax positions
   (114)   (4)   6 
  
Regulatory assets and liabilities, net
   18    (2)   106 
  
Accrued interest
   (3)   32    109 
  
Other
   (91)   12      
 Other operating activities         
  
Defined benefit plans - funding
   (563)   (607)   (667)
  
Other assets
   7    (33)   (62)
  
Other liabilities
   194    (13)   (99)
   
Net cash provided by (used in) operating activities
   2,857    2,764    2,507 
Cash Flows from Investing Activities         
 
Expenditures for property, plant and equipment
   (4,212)   (3,105)   (2,487)
 
Expenditures for intangible assets
   (95)   (71)   (102)
 
Proceeds from the sale of certain non-core generation facilities
             381 
 
Ironwood Acquisition, net of cash acquired
        (84)     
 
Acquisition of WPD Midlands
             (5,763)
 
Purchases of nuclear plant decommissioning trust investments
   (159)   (154)   (169)
 
Proceeds from the sale of nuclear plant decommissioning trust investments
   144    139    156 
 
Proceeds from the sale of other investments
        20    163 
 
Net (increase) decrease in restricted cash and cash equivalents
   (20)   96    (143)
 
Other investing activities
   47    36    12 
   
Net cash provided by (used in) investing activities
   (4,295)   (3,123)   (7,952)
Cash Flows from Financing Activities         
 
Issuance of long-term debt
   2,038    1,223    5,745 
 
Retirement of long-term debt
   (747)   (108)   (1,210)
 
Repurchase of common stock
   (74)          
 
Issuance of common stock
   1,411    72    2,297 
 
Payment of common stock dividends
   (878)   (833)   (746)
 
Redemption of preference stock of a subsidiary
        (250)     
 
Debt issuance and credit facility costs
   (49)   (17)   (102)
 
Contract adjustment payments on Equity Units
   (82)   (94)   (72)
 
Net increase (decrease) in short-term debt
   49    74    (125)
 
Other financing activities
   (37)   (19)   (20)
   
Net cash provided by (used in) financing activities
   1,631    48    5,767 
Effect of Exchange Rates on Cash and Cash Equivalents
   8    10    (45)
Net Increase (Decrease) in Cash and Cash Equivalents
   201    (301)   277 
Cash and Cash Equivalents at Beginning of Period
   901    1,202    925 
Cash and Cash Equivalents at End of Period
 $ 1,102  $  901  $  1,202 
             
Supplemental Disclosures of Cash Flow Information         
 Cash paid (received) during the period for:         
  
Interest - net of amount capitalized
 $ 916  $ 847  $ 696 
  
Income taxes - net
 $ 128  $ 73  $ (76)
             
The accompanying Notes to Financial Statements are an integral part of the financial statements.
119

CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
PPL Corporation and Subsidiaries
(Millions of Dollars, shares in thousands)
     2013  2012 
Assets      
          
Current Assets      
 
Cash and cash equivalents
 $ 1,102  $ 901 
 
Restricted cash and cash equivalents
   83    54 
 Accounts receivable (less reserve:  2013, $64; 2012, $64)      
  
Customer
   923    745 
  
Other
   97    79 
 
Unbilled revenues
   835    857 
 
Fuel, materials and supplies
   702    673 
 
Prepayments
   153    166 
 
Deferred taxes
   246    30 
 
Price risk management assets
   942    1,525 
 
Regulatory assets
   33    19 
 
Other current assets
   37    19 
 
Total Current Assets
   5,153    5,068 
          
Investments      
 
Nuclear plant decommissioning trust funds
   864    712 
 
Other investments
   43    47 
 
Total Investments
   907    759 
          
Property, Plant and Equipment      
 
Regulated utility plant
   27,755    25,196 
 
Less:  accumulated depreciation - regulated utility plant
   4,873    4,164 
  
Regulated utility plant, net
   22,882    21,032 
 Non-regulated property, plant and equipment      
  
Generation
   11,881    11,295 
  
Nuclear fuel
   591    524 
  
Other
   834    726 
 
Less:  accumulated depreciation - non-regulated property, plant and equipment
   6,172    5,942 
  
Non-regulated property, plant and equipment, net
   7,134    6,603 
 
Construction work in progress
   3,071    2,397 
 
Property, Plant and Equipment, net (a)
   33,087    30,032 
          
Other Noncurrent Assets      
 
Regulatory assets
   1,246    1,483 
 
Goodwill
   4,225    4,158 
 
Other intangibles
   947    925 
 
Price risk management assets
   337    572 
 
Other noncurrent assets
   357    637 
 
Total Other Noncurrent Assets
   7,112    7,775 
       
Total Assets
 $ 46,259  $ 43,634 

(a)At December 31, 2010 and  December 31, 2009,2012, includes $424$428 million of PP&E, consisting primarily of "Generation," including leasehold improvements and $11 million of "Other intangibles" from the consolidation of a VIE.VIE that was the owner/lessor of the Lower Mt. Bethel plant.  See Note 22 for additional information.

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

120


CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,PPL Corporation and Subsidiaries(Millions of Dollars, shares in thousands)
 2010  2009    2013  2012 
Liabilities and EquityLiabilities and Equity     Liabilities and Equity     
              
Current LiabilitiesCurrent Liabilities     Current Liabilities     
Short-term debt
 $ 694  $ 639 
Long-term debt
   502   
Short-term debt
 $ 701  $ 652 
Accounts payable
   1,028   619 
Long-term debt due within one year
   315   751 
Taxes
   134   92 
Accounts payable
   1,308   1,252 
Interest
   166   112 
Taxes
   114   90 
Dividends
   174   135 
Interest
   325   325 
Price risk management liabilities
   1,144   1,502 
Dividends
   232   210 
Counterparty collateral
   338   356 
Price risk management liabilities
   829   1,065 
Regulatory liabilities
   109   74 
Regulatory liabilities
   90   61 
Other current liabilities
   925    653 
Other current liabilities
   998    1,219 
Total Current Liabilities
   5,214    4,182 
Total Current Liabilities
   4,912    5,625 
              
Long-term Debt
Long-term Debt
   12,161    7,143 
Long-term Debt
   20,592    18,725 
              
Deferred Credits and Other Noncurrent LiabilitiesDeferred Credits and Other Noncurrent Liabilities     Deferred Credits and Other Noncurrent Liabilities     
Deferred income taxes
   2,563   2,115 
Deferred income taxes
   3,928   3,387 
Investment tax credits
   237   38 
Investment tax credits
   342   328 
Price risk management liabilities
   470   582 
Price risk management liabilities
   415   629 
Accrued pension obligations
   1,496   1,283 
Accrued pension obligations
   1,286   2,076 
Asset retirement obligations
   435   416 
Asset retirement obligations
   687   536 
Regulatory liabilities
   1,031   10 
Regulatory liabilities
   1,048   1,010 
Other deferred credits and noncurrent liabilities
   752    581 
Other deferred credits and noncurrent liabilities
   583    820 
Total Deferred Credits and Other Noncurrent Liabilities
   6,984    5,025 
Total Deferred Credits and Other Noncurrent Liabilities
   8,289    8,786 
              
Commitments and Contingent Liabilities (Note 15)     
Commitments and Contingent Liabilities (Notes 5, 6 and 15)Commitments and Contingent Liabilities (Notes 5, 6 and 15)     
              
EquityEquity     Equity     
PPL Corporation Shareowners' Common Equity     PPL Shareowners' Common Equity     
 
Common stock - $0.01 par value (a)
   5   4  
Common stock - $0.01 par value (a)
   6   6 
 
Capital in excess of par value
   4,602   2,280  
Additional paid-in capital
   8,316   6,936 
 
Earnings reinvested
   4,082   3,749  
Earnings reinvested
   5,709   5,478 
 
Accumulated other comprehensive loss
   (479)   (537) 
Accumulated other comprehensive loss
   (1,565)   (1,940)
 
Total PPL Corporation Shareowners' Common Equity
   8,210   5,496  
Total PPL Shareowners' Common Equity
   12,466   10,480 
Noncontrolling Interests
   268    319 
Noncontrolling Interests
        18 
Total Equity
   8,478    5,815 
Total Equity
   12,466    10,498 
              
Total Liabilities and Equity
Total Liabilities and Equity
 $ 32,837  $ 22,165 
Total Liabilities and Equity
 $ 46,259  $ 43,634 

(a)780,000 shares authorized; 483,391630,321 and 377,183581,944 shares issued and outstanding at December 31, 20102013 and December 31, 2009.2012.

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

121

CONSOLIDATED STATEMENTS OF EQUITY
PPL Corporation and Subsidiaries
(Millions of Dollars)
 
   PPL Corporation Shareowners      
    Common                  
     stock           Accumulated      
    shares     Capital in     other  Non-   
    outstanding  Common  excess of par  Earnings  comprehensive  controlling   
    (a)  stock  value  reinvested  loss  interests  Total
                       
December 31, 2007
 373,271  $ 4  $ 2,185  $ 3,435  $ (68) $ 320  $ 5,876 
Common stock issued (b)
  2,158       29             29 
Common stock repurchased (c)
  (848)      (38)            (38)
Stock-based compensation
        20             20 
Net income
           930       20    950 
Dividends, dividend equivalents,                    
 redemptions and distributions (d)
           (503)      (20)   (523)
Divestitures
                 (1)   (1)
Other comprehensive loss
              (917)      (917)
December 31, 2008
  374,581  $ 4  $ 2,196  $ 3,862  $ (985) $ 319  $ 5,396 
                       
                       
                       
Common stock issued (b)
  2,649     $ 83           $ 83 
Common stock repurchased
  (47)      (1)            (1)
Stock-based compensation
        2             2 
Net income
         $ 407     $ 19    426 
Dividends, dividend equivalents,                    
 redemptions and distributions (d)
           (521)      (19)   (540)
Other comprehensive income
            $ 449       449 
Cumulative effect adjustment (e)
           1    (1)      
December 31, 2009 (f)
  377,183  $ 4  $ 2,280  $ 3,749  $ (537) $ 319  $ 5,815 
                       
                       
Common stock issued (b)
  106,208  $ 1  $ 2,490           $ 2,491 
Purchase Contracts (g)
        (176)            (176)
Stock-based compensation
        8             8 
Net income
         $ 938     $ 21    959 
Dividends, dividend equivalents,                    
 redemptions and distributions (d)
           (605)      (72)   (677)
Other comprehensive income
            $ 58       58 
December 31, 2010 (f)
  483,391  $ 5  $ 4,602  $ 4,082  $ (479) $ 268  $ 8,478 
                       
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, 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 (f)
        10             10 
Net income
           1,495       17    1,512 
Dividends, dividend equivalents,                      
 redemptions and distributions (g)
           (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 (f)
          18               18 
Net income
           $ 1,526       $ 5    1,531 
Dividends, dividend equivalents,                      
 redemptions and distributions (g)
          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 
                       
Common stock issued (c)
  50,807       $ 1,437               $ 1,437 
Common stock repurchased (e)
  (2,430)        (74)                  (74)
Cash settlement of equity forward                    
 agreements (e)
        (13)            (13)
Stock-based compensation (f)
            30                   30 
Net income
               $ 1,130       $ 1    1,131 
Dividends, dividend equivalents,                                
 redemptions and distributions (g)
                 (899)        (19)   (918)
Other comprehensive income (loss)
                    $ 375         375 
December 31, 2013 (b)
  630,321  $ 6  $ 8,316  $ 5,709  $ (1,565) $    $ 12,466 

(a)Shares in thousands.  Each share entitles the holder to one vote on any question presented toat any shareowners' meeting.
(b)2010 includes the June 2010 issuance of 103.5 million shares of common stock.  See Note 7 for additional information.  Each year includes shares of common stock issued through various stock and incentive compensation plans.
(c)In 2008, PPL repurchased 802,816 shares of PPL common stock for $38 million under a repurchase plan that was authorized by PPL's Board of Directors in June 2007.
(d)"Earnings reinvested" includes dividends and dividend equivalents on PPL Corporation common stock and restricted stock units.  "Noncontrolling interests" includes dividends, redemptions and distributions to noncontrolling interests, which for 2010 includes $54 million paid to redeem PPL Electric's preferred stock.  The amount paid to redeem the preferred stock includes a $3 million premium.
(e)Recorded in connection with the adoption of accounting guidance related to the recognition and presentation of other-than-temporary impairments.
(f)See "General - Comprehensive Income" in Note 124 for disclosure of balances of each component of AOCI.
(g)(c)Includes $157All years presented include shares of common stock issued through various stock and incentive compensation plans.  2011 includes the April issuance of common stock and 2013 includes the April and July issuances of common stock.  See Note 7 for additional information.
(d)Represents $123 million for the 2011 Purchase Contracts and $19$20 million of related fees and expenses, net of tax.  See Note 7 for additional information.
(e)See Note 7 for additional information.
(f)2013, 2012 and 2011 include $50 million, $47 million and $33 million of stock-based compensation expense related to new and existing unvested equity awards, and $(20) million, $(29) million and $(23) million related primarily to the reclassification from "Stock-based compensation" to "Common stock issued" for the issuance of common stock after applicable equity award vesting periods and tax adjustments related to stock-based compensation.
(g)"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 December 2013, a distribution to noncontrolling interests was made related to the purchase of the Lower Mt. Bethel plant.  See Note 22 for additional information.  In June 2012, PPL Electric redeemed all of its outstanding preference stock at par value, which was classified as noncontrolling interest.  See Note 3 for additional information.

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

122
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31,
PPL Corporation and Subsidiaries
(Millions of Dollars)
 
    2010  2009  2008 
            
Net income
 $ 959  $ 426  $ 950 
            
Other comprehensive income (loss):         
Amounts arising during the period - gains (losses), net of tax (expense) benefit:         
 
Foreign currency translation adjustments, net of tax of ($1), $4, ($11)
   (59)   101    (500)
 
Available-for-sale securities, net of tax of ($31), ($50), $55
   29    49    (50)
 
Qualifying derivatives, net of tax of ($148), ($356), ($120)
   219    492    240 
 
Equity investees' other comprehensive income (loss), net of tax of $0, $0, $0
      1    (3)
 Defined benefit plans:         
  
Prior service costs, net of tax of ($14), ($1), $0
   17    1    
  
Net actuarial loss, net of tax of $50, $147, $294
   (80)   (340)   (577)
  
Transition obligation, net of tax of ($4), $0, $0
   8       
Reclassifications to net income - (gains) losses, net of tax expense (benefit):         
 
Available-for-sale securities, net of tax of $3, $3, ($2)
   (5)   (4)   2 
 
Qualifying derivatives, net of tax of $84, ($92), $17
   (126)   131    (69)
 Defined benefit plans:         
  
Prior service costs, net of tax of ($7), ($8), ($9)
   12    13    18 
  
Net actuarial loss, net of tax of ($14), ($4), ($11)
   41    4    20 
  
Transition obligation, net of tax of ($1), ($1), ($1)
   2    1    2 
Total other comprehensive income (loss) attributable to PPL Corporation
   58    449    (917)
            
Comprehensive income
   1,017    875    33 
 
Comprehensive income attributable to noncontrolling interests
   21    19    20 
            
Comprehensive income attributable to PPL Corporation
 $ 996  $ 856  $ 13 
            
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)
             
     2013  2012  2011 
Operating Revenues         
 
Unregulated wholesale energy
 $ 3,044  $ 4,126  $ 5,212 
 
Unregulated wholesale energy to affiliate
   51    78    26 
 
Unregulated retail energy
   1,031    848    727 
 
Energy-related businesses
   527    448    464 
 
Total Operating Revenues
   4,653    5,500    6,429 
             
Operating Expenses         
 Operation         
  
Fuel
   1,049    965    1,080 
  
Energy purchases
   1,168    1,818    2,283 
  
Energy purchases from affiliate
   3    3    3 
  
Other operation and maintenance
   1,072    1,041    929 
  
Loss on lease termination (Note 8)
   697       
 
Depreciation
   318    285    244 
 
Taxes, other than income
   66    69    71 
 
Energy-related businesses
   512    432    458 
 
Total Operating Expenses
   4,885    4,613    5,068 
             
Operating Income (Loss)
   (232)   887    1,361 
             
Other Income (Expense) - net
   30    18    23 
             
Other-Than-Temporary Impairments
   1    1    6 
             
Interest Income from Affiliates
   3    2    8 
             
Interest Expense
   171    168    174 
             
Income (Loss) from Continuing Operations Before Income Taxes
   (371)   738    1,212 
             
Income Taxes
   (142)   263    445 
             
Income (Loss) from Continuing Operations After Income Taxes
   (229)   475    767 
             
Income (Loss) from Discontinued Operations (net of income taxes)
             2 
             
Net Income (Loss)
   (229)   475    769 
             
Net Income (Loss) Attributable to Noncontrolling Interests
   1    1    1 
             
Net Income (Loss) Attributable to PPL Energy Supply Member
 $ (230) $ 474  $ 768 
             
Amounts Attributable to PPL Energy Supply Member:         
 
Income (Loss) from Continuing Operations After Income Taxes
 $ (230) $ 474  $ 766 
 
Income (Loss) from Discontinued Operations (net of income taxes)
             2 
 
Net Income (Loss)
 $ (230) $ 474  $ 768 
             
The accompanying Notes to Financial Statements are an integral part of the financial statements.
123
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31,
PPL Energy Supply, LLC and Subsidiaries
(Millions of Dollars)
            
     2010  2009  2008 
Operating Revenues         
 Wholesale energy marketing         
  
Realized
 $ 4,832  $ 3,184  $ 2,138 
  
Unrealized economic activity (Note 19)
   (805)   (229)   1,056 
 
Wholesale energy marketing to affiliate
   320    1,806    1,826 
 
Utility
   727    684    824 
 
Unregulated retail electric and gas
   415    152    151 
 
Net energy trading margins
   2    17    (121)
 
Energy-related businesses
   398    411    511 
 
Total Operating Revenues
   5,889    6,025    6,385 
             
Operating Expenses         
 Operation         
  
Fuel
   1,096    920    1,057 
  Energy purchases         
   
Realized
   1,636    2,512    1,460 
   
Unrealized economic activity (Note 19)
   (286)   155    553 
  
Energy purchases from affiliate
   3    70    108 
  
Other operation and maintenance
   1,161    1,061    1,062 
 
Depreciation
   353    310    299 
 
Taxes, other than income
   99    86    86 
 
Energy-related businesses
   373    388    478 
 
Total Operating Expenses
   4,435    5,502    5,103 
             
Operating Income
   1,454    523    1,282 
             
Other Income (Expense) - net
   26    33    46 
             
Other-Than-Temporary Impairments
   3    18    36 
             
Interest Income from Affiliates
   9    2    14 
             
Interest Expense
   343    263    306 
             
Income from Continuing Operations Before Income Taxes
   1,143    277    1,000 
             
Income Taxes
   262    23    301 
             
Income from Continuing Operations After Income Taxes
   881    254    699 
             
Income (Loss) from Discontinued Operations (net of income taxes)
   (19)   (7)   71 
             
Net Income
   862    247    770 
             
Net Income Attributable to Noncontrolling Interests
   1    1    2 
             
Net Income Attributable to PPL Energy Supply
 $ 861  $ 246  $ 768 
             
Amounts Attributable to PPL Energy Supply:         
 
Income from Continuing Operations After Income Taxes
 $ 880  $ 253  $ 697 
 
Income (Loss) from Discontinued Operations (net of income taxes)
   (19)   (7)   71 
 
Net Income
 $ 861  $ 246  $ 768 
             
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)
           
    2013  2012  2011 
            
Net income (loss)
 $ (229) $ 475  $ 769 
            
Other comprehensive income (loss):         
Amounts arising during the period - gains (losses), net of tax (expense) benefit:         
 
Available-for-sale securities, net of tax of ($72), ($31), ($6)
   67    29    9 
 
Qualifying derivatives, net of tax of $0, ($46), ($164)
        68    267 
 Defined benefit plans:         
  
Prior service costs, net of tax of ($1), $0, ($2)
   2    1    (2)
  
Net actuarial gain (loss), net of tax of ($49), $56, $13
   71    (82)   (22)
Reclassifications to net income - (gains) losses, net of tax expense (benefit):         
 
Available-for-sale securities, net of tax of $4, $1, $5
   (6)   (7)   (7)
 
Qualifying derivatives, net of tax of $84, $291, $242
   (123)   (463)   (353)
 
Equity investees' other comprehensive (income) loss, net of tax of $0, $0, $0
             3 
 Defined benefit plans:         
  
Prior service costs, net of tax of ($3), ($2), ($3)
   4    5    4 
  
Net actuarial loss, net of tax of ($10), ($2), ($2)
   14    10    4 
Total other comprehensive income (loss) attributable to         
 
PPL Energy Supply Member
   29    (439)   (97)
            
Comprehensive income (loss)
   (200)   36    672 
 
Comprehensive income attributable to noncontrolling interests
   1    1    1 
            
Comprehensive income (loss) attributable to PPL Energy Supply Member
 $ (201) $ 35  $ 671 
            
The accompanying Notes to Financial Statements are an integral part of the financial statements.

124
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
PPL Energy Supply, LLC and SubsidiariesPPL Energy Supply, LLC and Subsidiaries  PPL Energy Supply, LLC and Subsidiaries  
(Millions of Dollars)(Millions of Dollars)  (Millions of Dollars)  
   2010  2009  2008    2013  2012  2011 
Cash Flows from Operating ActivitiesCash Flows from Operating Activities      Cash Flows from Operating Activities      
Net income
 $ 862  $ 247  $ 770 
Adjustments to reconcile net income to net cash provided by operating activities       
 Pre-tax gain from the sale of the Maine hydroelectric generation business   (25)  (38)  
Net income (Loss)
 $ (229) $ 475  $ 769 
 
Depreciation
   365   327   317 Adjustments to reconcile net income to net cash provided by (used in) operating activities       
 
Amortization
   160   75   66  
Depreciation
   318   285   245 
 
Defined benefit plans - expense
   52   23   6  
Amortization
   156   119   137 
 
Defined benefit plans - funding
   (302)  (136)  (103) 
Defined benefit plans - expense
   51   43   36 
 
Deferred income taxes and investment tax credits
   (31)  141   165  
Deferred income taxes and investment tax credits
   (296)  152   317 
 
Impairment of assets
   120   123   93  
Impairment of assets
   65   3   13 
 
Unrealized (gains) losses on derivatives, and other hedging activities
   536   330   (285) 
Unrealized (gains) losses on derivatives, and other hedging activities
   171   (41)  (283)
 
Provision for Montana hydroelectric litigation
   66   8    
Loss on lease termination (Note 8)
   426         
 
Other
   41   14   63  
Other
   2   19   (65)
Change in current assets and current liabilities       Change in current assets and current liabilities       
 
Accounts receivable
   (18)  77   141  
Accounts receivable
   23   (54)  38 
 
Accounts payable
   20   (178)  72  
Accounts payable
   (56)  (22)  (73)
 
Unbilled revenue
   (88)  9   (89) 
Unbilled revenues
   83   33   14 
 
Collateral on PLR energy supply from affiliate
     300    
Fuel, materials and supplies
   (31)  (29)  (10)
 
Taxes
   87   (16)  (65) 
Counterparty collateral
   (81)  (34)  (190)
 
Counterparty collateral
   (18)  334   1  
Taxes payable
   (31)  (27)  27 
 
Price risk management assets and liabilities
   (27)  (223)  (88) 
Other
   (14)  (39)  (8)
 
Other
   35   7   18 Other operating activities       
Other operating activities        
Defined benefit plans - funding
   (113)  (75)  (152)
 
Other assets
   (71)  15   15  
Other assets
   (4)  (41)  (30)
 
Other liabilities
   76    (26)   (58) 
Other liabilities
   (30)   17    (9)
 
Net cash provided by operating activities
   1,840    1,413    1,039  
Net cash provided by (used in) operating activities
   410    784    776 
Cash Flows from Investing ActivitiesCash Flows from Investing Activities       Cash Flows from Investing Activities       
Expenditures for property, plant and equipment
   (1,009)  (907)  (1,114)
Expenditures for property, plant and equipment
   (583)  (648)  (661)
Proceeds from the sale of the Long Island generation business
   124     
Proceeds from the sale of certain non-core generation facilities
           381 
Proceeds from the sale of the Maine hydroelectric generation business
   38   81   
Ironwood Acquisition, net of cash acquired
       (84)    
Expenditures for intangible assets
   (82)  (78)  (325)
Expenditures for intangible assets
   (42)  (45)  (57)
Purchases of nuclear plant decommissioning trust investments
   (128)  (227)  (224)
Purchases of nuclear plant decommissioning trust investments
   (159)  (154)  (169)
Proceeds from the sale of nuclear plant decommissioning trust investments
   114   201   197 
Proceeds from the sale of nuclear plant decommissioning trust investments
   144   139   156 
Purchases of other investments
       (197)
Net (increase) decrease in notes receivable from affiliates
       198   (198)
Proceeds from the sale of other investments
     154   102 
Net (increase) decrease in restricted cash and cash equivalents
   (22)  104   (128)
Repayment of long-term notes receivable from affiliates
   (1,816)    
Other investing activities
   31    21    8 
Issuance of long-term notes receivable to affiliates
   1,816      
Net cash provided by (used in) investing activities
   (631)   (469)   (668)
Net (increase) decrease in restricted cash and cash equivalents
   84   219   (152)
Other investing activities
   34    6    17 
 
Net cash used in investing activities
   (825)   (551)   (1,696)
Cash Flows from Financing ActivitiesCash Flows from Financing Activities       Cash Flows from Financing Activities       
Issuance of long-term debt
   602     849 
Issuance of long-term debt
           500 
Retirement of long-term debt
     (220)  (266)
Retirement of long-term debt
   (747)  (9)  (750)
Contributions from Member
   3,625   50   421 
Contributions from member
   1,577   563   461 
Distributions to Member
   (4,692)  (943)  (750)
Distributions to member
   (408)  (787)  (316)
Net increase (decrease) in short-term debt (Note 7)
   (93)  43   534 
Cash included in net assets of subsidiary distributed to member
           (325)
Other financing activities
   (54)   (11)   (9)
Net increase (decrease) in short-term debt
   (356)  (44)  50 
 
Net cash provided by (used in) financing activities
   (612)   (1,081)   779 
Other financing activities
   (19)   (4)   (10)
Effect of Exchange Rates on Cash and Cash Equivalents
   13       (13)
 
Net cash provided by (used in) financing activities
   47    (281)   (390)
Net Increase (Decrease) in Cash and Cash Equivalents
Net Increase (Decrease) in Cash and Cash Equivalents
  416   (219)  109 
Net Increase (Decrease) in Cash and Cash Equivalents
  (174)  34   (282)
Cash and Cash Equivalents at Beginning of Period
   245    464    355 
Cash and Cash Equivalents at Beginning of Period
   413    379    661 
Cash and Cash Equivalents at End of Period
 $ 661  $ 245  $ 464 
Cash and Cash Equivalents at End of Period
 $ 239  $ 413  $ 379 
                
Supplemental Disclosures of Cash Flow InformationSupplemental Disclosures of Cash Flow Information      Supplemental Disclosures of Cash Flow Information      
Cash paid (received) during the period for:      Cash paid (received) during the period for:      
 
Interest - net of amount capitalized
 $ 275  $ 274  $ 271  
Interest - net of amount capitalized
 $ 157  $ 150  $ 165 
 
Income taxes - net
 $ 278  $ (91) $ 149  
Income taxes - net
 $ 189  $ 128  $ 69 
                
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.The accompanying Notes to Financial Statements are an integral part of the financial statements.  
125

CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
PPL Energy Supply, LLC and Subsidiaries(Millions of Dollars)
 2010  2009    2013  2012 
AssetsAssets    Assets    
            
Current AssetsCurrent Assets    Current Assets    
Cash and cash equivalents
 $ 661  $ 245 
Restricted cash and cash equivalents
   19   99 
Accounts receivable (less reserve:  2010, $20; 2009, $21)     
Cash and cash equivalents
 $ 239  $ 413 
 
Customer
  225   168 
Restricted cash and cash equivalents
   68   46 
 
Other
  24   31 Accounts receivable (less reserve:  2013, $21; 2012, $23)       
Unbilled revenues
   486   402  
Customer
  233   183 
Accounts receivable from affiliates
   124   165  
Other
  97   31 
Fuel, materials and supplies
   297   325 
Accounts receivable from affiliates
  45   125 
Prepayments
   89   56 
Unbilled revenues
   286   369 
Price risk management assets
   1,907   2,147 
Fuel, materials and supplies
   358   327 
Other intangibles
   11   25 
Prepayments
   20   15 
Assets held for sale
   374   127 
Price risk management assets
   860   1,511 
Other current assets
   11    1 
Other current assets
   27    10 
Total Current Assets
   4,228    3,791 
Total Current Assets
   2,233    3,030 
            
InvestmentsInvestments    Investments    
Nuclear plant decommissioning trust funds
   618   548 
Nuclear plant decommissioning trust funds
   864   712 
Other investments
   37    58 
Other investments
   37    41 
Total Investments
   655    606 
Total Investments
   901    753 
          
Property, Plant and EquipmentProperty, Plant and Equipment    Property, Plant and Equipment    
Regulated utility plant - electric and gas
  4,269   4,234 Non-regulated property, plant and equipment    
Less:  accumulated depreciation - regulated utility plant
   888    823  
Generation
  11,891   11,305 
 
Regulated utility plant - electric and gas, net
   3,381    3,411  
Nuclear fuel
  591   524 
Non-regulated property, plant and equipment     
Other
  288   294 
 
Generation
  10,169   10,493 
Less:  accumulated depreciation - non-regulated property, plant and equipment
   6,046    5,817 
 
Nuclear fuel
  578   506  
Non-regulated property, plant and equipment, net
  6,724   6,306 
 
Other
  314   307 
Construction work in progress
   450    987 
Less:  accumulated depreciation - non-regulated property, plant and equipment
   5,401    5,346 
Property, Plant and Equipment, net (a)
   7,174    7,293 
 
Non-regulated property, plant and equipment, net
  5,660   5,960       
Construction work in progress
   594    422 
Property, Plant and Equipment, net (a)
   9,635    9,793 
      
Other Noncurrent AssetsOther Noncurrent Assets    Other Noncurrent Assets    
Goodwill
   765   806 
Goodwill
   86   86 
Other intangibles (a)
   464   477 
Other intangibles
   266   252 
Price risk management assets
   651   1,234 
Price risk management assets
   328   557 
Other noncurrent assets
   398    317 
Other noncurrent assets
   86    404 
Total Other Noncurrent Assets
   2,278    2,834 
Total Other Noncurrent Assets
   766    1,299 
            
Total Assets
Total Assets
 $ 16,796  $ 17,024 
Total Assets
 $ 11,074  $ 12,375 

(a)At December 31, 2010 and  December 31, 2009,2012, includes $424$428 million of PP&E, consisting primarily of "Generation," including leasehold improvements and $11 million of "Other intangibles" from the consolidation of a VIE.VIE that was the owner/lessor of the Lower Mt. Bethel plant.  See Note 22 for additional information.

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)
      2010   2009 
Liabilities and Equity      
          
Current Liabilities      
 
Short-term debt
 $ 531  $ 639 
 
Long-term debt
   500    
 
Accounts payable
   592    537 
 
Accounts payable to affiliates
   43    51 
 
Taxes
   119    33 
 
Interest
   110    86 
 
Price risk management liabilities
   1,112    1,502 
 
Counterparty collateral
   338    356 
 
Other current liabilities
   624    481 
 
Total Current Liabilities
   3,969    3,685 
          
Long-term Debt
   5,089    5,031 
       
Deferred Credits and Other Noncurrent Liabilities      
 
Deferred income taxes
   1,548    1,481 
 
Investment tax credits
   81    30 
 
Price risk management liabilities
   438    582 
 
Accrued pension obligations
   619    883 
 
Asset retirement obligations
   332    416 
 
Other deferred credits and noncurrent liabilities
   211    330 
 
Total Deferred Credits and Other Noncurrent Liabilities
   3,229    3,722 
          
Commitments and Contingent Liabilities (Note 15)      
       
Equity      
 
Member's equity
   4,491    4,568 
 
Noncontrolling interests
   18    18 
 
Total Equity
   4,509    4,586 
          
Total Liabilities and Equity
 $ 16,796  $ 17,024 
          
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
126
 

CONSOLIDATED STATEMENTS OF EQUITY
PPL Energy Supply, LLC and Subsidiaries
(Millions of Dollars)
         
     Non-   
  Member's controlling   
  equity interests Total
          
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
 $ 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 (a)
 $ 4,568  $ 18  $ 4,586 
          
Net income
 $ 861  $ 1  $ 862 
Other comprehensive income
   129       129 
Contributions from member
   3,625       3,625 
Distributions
   (4,692)   (1)   (4,693)
December 31, 2010 (a)
 $ 4,491  $ 18  $ 4,509 

CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
PPL Energy Supply, LLC and Subsidiaries
(Millions of Dollars)
      2013   2012 
Liabilities and Equity      
          
Current Liabilities      
 
Short-term debt
    $ 356 
 
Long-term debt due within one year
 $ 304    751 
 
Accounts payable
   393    438 
 
Accounts payable to affiliates
   4    31 
 
Taxes
   31    62 
 
Interest
   22    31 
 
Price risk management liabilities
   750    1,010 
 
Deferred income taxes
   9    158 
 
Other current liabilities
   269    319 
 
Total Current Liabilities
   1,782    3,156 
          
Long-term Debt
   2,221    2,521 
       
Deferred Credits and Other Noncurrent Liabilities      
 
Deferred income taxes
   1,114    1,232 
 
Investment tax credits
   205    186 
 
Price risk management liabilities
   320    556 
 
Accrued pension obligations
   111    293 
 
Asset retirement obligations
   393    365 
 
Other deferred credits and noncurrent liabilities
   130    218 
 
Total Deferred Credits and Other Noncurrent Liabilities
   2,273    2,850 
          
Commitments and Contingent Liabilities (Note 15)      
       
Equity      
 
Member's equity
   4,798    3,830 
 
Noncontrolling interests
        18 
 
Total Equity
   4,798    3,848 
          
Total Liabilities and Equity
 $ 11,074  $ 12,375 
          
The accompanying Notes to Financial Statements are an integral part of the financial statements.

127

CONSOLIDATED STATEMENTS OF EQUITY
PPL Energy Supply, LLC and Subsidiaries
(Millions of Dollars)
          
     Non-   
  Member's controlling   
  equity interests Total
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 
          
Net income (loss)
 $ (230) 
$
 1  $ (229)
Other comprehensive income (loss)
   29         29 
Contributions from member
   1,577         1,577 
Distributions (c)
   (408)   (19)   (427)
December 31, 2013 (a)
 $ 4,798  $    $ 4,798 

(a)See "General – Comprehensive Income" in Note 124 for disclosure of balances of each component of AOCI.
(b)See Note 9 for additional information.
(c)In December 2013, a distribution to noncontrolling interests was made related to the purchase of the Lower Mt. Bethel plant.  See Note 22 for additional information.

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)
          
    2010  2009  2008 
            
Net income
 $ 862  $ 247  $ 770 
            
Other comprehensive income (loss):         
Amounts arising during the period - gains (losses), net of tax (expense) benefit:         
 
Foreign currency translation adjustments, net of tax of ($1), $4, ($11)
   (59)   101    (500)
 
Available-for-sale securities, net of tax of ($31), ($50), $55
   29    49    (50)
 
Qualifying derivatives, net of tax of ($207), ($330), ($125)
   305    454    249 
 
Equity investee's other comprehensive income (loss), net of tax of $0, $0, $0
      1    (3)
 Defined benefit plans:         
  
Prior service costs, net of tax of ($8), $0, $0
   12    1    (1)
  
Net actuarial loss, net of tax of $36, $136, $243
   (63)   (326)   (500)
  
Transition obligation, net of tax of ($3), $0, $0
   6       
Reclassifications to net income - (gains) losses, net of tax expense (benefit):         
 
Available-for-sale securities, net of tax of $3, $3, ($2)
   (5)   (4)   2 
 
Qualifying derivatives, net of tax of $99, ($91), $19
   (145)   131    (73)
 Defined benefit plans:         
  
Prior service costs, net of tax of ($5), ($6), ($5)
   9    9    12 
  
Net actuarial loss, net of tax of ($14), ($3), ($5)
   39    4    12 
  
Transition obligation, net of tax of ($1), ($1), ($1)
   1    1    2 
Total other comprehensive income (loss) attributable to PPL Energy Supply
   129    421    (850)
            
Comprehensive income (loss)
   991    668    (80)
 
Comprehensive income attributable to noncontrolling interests
   1    1    2 
            
Comprehensive income (loss) attributable to PPL Energy Supply
 $ 990  $ 667  $ (82)
            
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
128
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31,
PPL Electric Utilities Corporation and Subsidiaries
(Millions of Dollars)
           
    2010  2009  2008 
Operating Revenues         
 
Retail electric
 $ 2,448  $ 3,218  $ 3,290 
 
Retail and wholesale electric to affiliate
   7    74    111 
 
Total Operating Revenues
   2,455    3,292    3,401 
            
Operating Expenses         
 Operation         
  
Energy purchases
   1,075    114    163 
  
Energy purchases from affiliate
   320    1,806    1,826 
  
Other operation and maintenance
   502    417    410 
  
Amortization of recoverable transition costs
      304    293 
 
Depreciation
   136    128    131 
 
Taxes, other than income
   138    194    203 
 
Total Operating Expenses
   2,171    2,963    3,026 
            
Operating Income
   284    329    375 
            
Other Income (Expense) - net
   5    6    5 
            
Interest Income from Affiliate
   2    4    9 
            
Interest Expense
   99    116    101 
            
Interest Expense with Affiliate
      2    10 
            
Income Before Income Taxes
   192    221    278 
            
Income Taxes
   57    79    102 
            
Net Income
   135    142    176 
            
Distributions on Preferred Securities
   20    18    18 
            
Net Income Available to PPL Corporation
 $ 115  $ 124  $ 158 
            
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 Electric Utilities Corporation and Subsidiaries
(Millions of Dollars)
    2010  2009  2008 
Cash Flows from Operating Activities         
 
Net income
 $ 135  $ 142  $ 176 
 Adjustments to reconcile net income to net cash provided by operating activities         
  
Depreciation
   136    128    131 
  
Amortization
   (23)   324    313 
  
Defined benefit plans - expense
   20    24    6 
  
Defined benefit plans - funding
   (55)   (28)   (9)
  
Deferred income taxes and investment tax credits
   198    (22)   1 
  
Other
   4       6 
 Change in current assets and current liabilities         
  
Accounts receivable
   (32)   1    (22)
  
Accounts payable
   31    (9)   (1)
  
Unbilled revenue
   58    (3)   3 
  
Prepayments
   (112)   (17)   9 
  
Regulatory assets and liabilities
   (85)   31    (6)
  
Taxes
   (38)   (4)   21 
  
Collateral on PLR energy supply from affiliate
      (300)   
  
Other
   (32)   26    9 
 Other operating activities         
  
Other assets
   5    (3)   23 
  
Other liabilities
   2    4    (12)
   
Net cash provided by operating activities
   212    294    648 
             
Cash Flows from Investing Activities         
 
Expenditures for property, plant and equipment
   (401)   (288)   (268)
 
Expenditures for intangible assets
   (10)   (10)   (7)
 
Purchases of investments
         (90)
 
Proceeds from the sale of investments
         90 
 
Net (increase) decrease in notes receivable from affiliate
      300    (23)
 
Net decrease in restricted cash and cash equivalents
      1    69 
 
Other investing activities
   8    3    3 
   
Net cash provided by (used in) investing activities
   (403)   6    (226)
             
Cash Flows from Financing Activities         
 
Issuance of long-term debt
      298    489 
 
Retirement of long-term debt
      (595)   (395)
 
Contributions from PPL
   55    400    
 
Redemption of preferred stock
   (54)      
 
Payment of common stock dividends to PPL
   (71)   (274)   (98)
 
Net increase (decrease) in short-term debt
      (95)   54 
 
Dividends on preferred securities
   (17)   (18)   (18)
 
Other financing activities
   (3)   (14)   (4)
   
Net cash provided by (used in) financing activities
   (90)   (298)   28 
             
Net Increase (Decrease) in Cash and Cash Equivalents
   (281)   2    450 
Cash and Cash Equivalents at Beginning of Period
   485    483    33 
Cash and Cash Equivalents at End of Period
 $ 204  $ 485  $ 483 
             
Supplemental Disclosures of Cash Flow Information         
 Cash paid (received) during the period for:         
   
Interest - net of amount capitalized
 $ 87  $ 116  $ 88 
   
Income taxes - net
 $ (33) $ 106  $ 59 
             
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
PPL Electric Utilities Corporation and Subsidiaries
(Millions of Dollars, shares in thousands)
    2010  2009 
Assets      
          
Current Assets      
 
Cash and cash equivalents
 $ 204  $ 485 
 
Restricted cash and cash equivalents
   2    1 
 Accounts receivable (less reserve: 2010, $17; 2009, $16)      
  
Customer
   268    240 
  
Other
   24    19 
 
Unbilled revenues
   134    192 
 
Materials and supplies
   47    33 
 
Accounts receivable from affiliates
   8    7 
 
Prepayments
   136    24 
 
Regulatory assets
   63    11 
 
Other current assets
   2    24 
 
Total Current Assets
   888    1,036 
          
Property, Plant and Equipment      
 
Regulated utility plant - electric
   5,494    5,197 
 
Less: accumulated depreciation - regulated utility plant - electric
   2,088    2,008 
 
Other
   2    2 
 
Construction work in progress
   177    118 
 
Property, Plant and Equipment, net
   3,585    3,309 
          
Other Noncurrent Assets      
 
Regulatory assets
   557    531 
 
Intangibles
   147    139 
 
Other noncurrent assets
   76    77 
 
Total Other Noncurrent Assets
   780    747 
          
Total Assets
 $ 5,253  $ 5,092 
          
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
 

CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
PPL Electric Utilities Corporation and Subsidiaries
(Millions of Dollars, shares in thousands)
    2010  2009 
Liabilities and Equity      
          
Current Liabilities      
 
Accounts payable
   221    53 
 
Accounts payable to affiliates
   73    186 
 
Taxes
   23    61 
 
Interest
   17    17 
 
Regulatory liabilities
   18    74 
 
Customer rate mitigation prepayments
   12    36 
 
Other current liabilities
   114    91 
 
Total Current Liabilities
   478    518 
          
Long-term Debt
   1,472    1,472 
          
Deferred Credits and Other Noncurrent Liabilities      
 
Deferred income taxes
   932    761 
 
Investment tax credits
   7    8 
 
Accrued pension obligations
   259    245 
 
Regulatory liabilities
   14    10 
 
Other deferred credits and noncurrent liabilities
   147    182 
 
Total Deferred Credits and Other Noncurrent Liabilities
   1,359    1,206 
          
Commitments and Contingent Liabilities (Note 15)      
          
Shareowners' Equity      
 
Preferred securities
   250    301 
 
Common stock - no par value (a)
   364    364 
 
Additional paid-in capital
   879    824 
 
Earnings reinvested
   451    407 
 
Total Equity
   1,944    1,896 
          
Total Liabilities and Equity
 $ 5,253  $ 5,092 























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129

CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31,
PPL Electric Utilities Corporation and Subsidiaries
(Millions of Dollars)
            
    2013  2012  2011 
Operating Revenues         
 
Retail electric
 $ 1,866  $ 1,760  $ 1,881 
 
Electric revenue from affiliate
   4    3    11 
 
Total Operating Revenues
   1,870    1,763    1,892 
            
Operating Expenses         
 Operation         
  
Energy purchases
   588    550    738 
  
Energy purchases from affiliate
   51    78    26 
  
Other operation and maintenance
   531    576    530 
 
Depreciation
   178    160    146 
 
Taxes, other than income
   103    105    104 
 
Total Operating Expenses
   1,451    1,469    1,544 
            
Operating Income
   419    294    348 
            
Other Income (Expense) - net
   6    9    7 
            
Interest Expense
   108    99    98 
            
Income Before Income Taxes
   317    204    257 
            
Income Taxes
   108    68    68 
            
Net Income (a)
   209    136    189 
            
Distributions on Preference Stock
        4    16 
            
Net Income Available to PPL
 $ 209  $ 132  $ 173 

(a)Net income approximates comprehensive income.

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

130

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
PPL Electric Utilities Corporation and Subsidiaries
(Millions of Dollars)
     2013  2012  2011 
Cash Flows from Operating Activities         
 
Net income
 $ 209  $ 136  $ 189 
 Adjustments to reconcile net income to net cash provided by (used in) operating activities               
  
Depreciation
   178    160    146 
  
Amortization
   19    18    8 
  
Defined benefit plans - expense
   21    22    18 
  
Deferred income taxes and investment tax credits
   127    114    106 
  
Other
   (9)   (9)   (7)
 Change in current assets and current liabilities               
  
Accounts receivable
   (29)   3    (5)
  
Accounts payable
   12    38    (60)
  
Unbilled revenues
   (6)   (8)   36 
  
Prepayments
   36    2    58 
  
Regulatory assets and liabilities
   19    (1)   107 
  
Taxes payable
   49    12    (23)
  
Other
   (28)   (5)   7 
 Other operating activities               
  
Defined benefit plans - funding
   (93)   (59)   (113)
  
Other assets
   8    (3)   (28)
  
Other liabilities
   10    (31)   (19)
   
Net cash provided by (used in) operating activities
   523    389    420 
             
Cash Flows from Investing Activities         
 
Expenditures for property, plant and equipment
   (903)   (624)   (481)
 
Expenditures for intangible assets
   (39)   (9)   (9)
 
Net (increase) decrease in notes receivable from affiliate
   (150)          
 
Other investing activities
   12    20    13 
   
Net cash provided by (used in) investing activities
   (1,080)   (613)   (477)
             
Cash Flows from Financing Activities         
 
Issuance of long-term debt
   348    249    645 
 
Retirement of long-term debt
             (458)
 
Contributions from PPL
   205    150    100 
 
Redemption of preference stock
        (250)     
 
Payment of common stock dividends to parent
   (127)   (95)   (92)
 
Net increase (decrease) in short-term debt
   20           
 
Other financing activities
   (4)   (10)   (22)
   
Net cash provided by (used in) financing activities
   442    44    173 
             
Net Increase (Decrease) in Cash and Cash Equivalents
   (115)   (180)   116 
Cash and Cash Equivalents at Beginning of Period
   140    320    204 
Cash and Cash Equivalents at End of Period
 $ 25  $ 140  $ 320 
             
Supplemental Disclosures of Cash Flow Information         
 Cash paid (received) during the period for:         
   
Interest - net of amount capitalized
 $ 87  $ 81  $ 75 
   
Income taxes - net
 $ (45) $ (42) $ (44)
             
The accompanying Notes to Financial Statements are an integral part of the financial statements.

131

CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
PPL Electric Utilities Corporation and Subsidiaries
(Millions of Dollars, shares in thousands)
     2013  2012 
Assets      
          
Current Assets      
 
Cash and cash equivalents
 $ 25  $ 140 
 Accounts receivable (less reserve: 2013, $18; 2012, $18)      
  
Customer
   284    249 
  
Other
   5    5 
 
Accounts receivable from affiliates
   4    29 
 
Notes receivable from affiliate
   150    
 
Unbilled revenues
   116    110 
 
Materials and supplies
   35    39 
 
Prepayments
   40    76 
 
Deferred income taxes
   85    45 
 
Other current assets
   22    4 
 
Total Current Assets
   766    697 
          
Property, Plant and Equipment      
 
Regulated utility plant
   6,886    6,286 
 
Less: accumulated depreciation - regulated utility plant
   2,417    2,316 
  
Regulated utility plant, net
   4,469    3,970 
 
Other, net
   2    2 
 
Construction work in progress
   591    370 
 
Property, Plant and Equipment, net
   5,062    4,342 
          
Other Noncurrent Assets      
 
Regulatory assets
   772    853 
 
Intangibles
   211    171 
 
Other noncurrent assets
   35    55 
 
Total Other Noncurrent Assets
   1,018    1,079 
          
Total Assets
 $ 6,846  $ 6,118 
          
The accompanying Notes to Financial Statements are an integral part of the financial statements.

132


CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
PPL Electric Utilities Corporation and Subsidiaries
(Millions of Dollars, shares in thousands)
     2013  2012 
Liabilities and Equity      
          
Current Liabilities      
 
Short-term debt
 $ 20    
 
Long-term debt due within one year
   10      
 
Accounts payable
   295  $ 259 
 
Accounts payable to affiliates
   57    63 
 
Taxes
   51    12 
 
Interest
   34    26 
 
Regulatory liabilities
   76    52 
 
Other current liabilities
   82    93 
 
Total Current Liabilities
   625    505 
          
Long-term Debt
   2,305    1,967 
          
Deferred Credits and Other Noncurrent Liabilities      
 
Deferred income taxes
   1,399    1,233 
 
Investment tax credits
   2    3 
 
Accrued pension obligations
   96    237 
 
Regulatory liabilities
   15    8 
 
Other deferred credits and noncurrent liabilities
   55    103 
 
Total Deferred Credits and Other Noncurrent Liabilities
   1,567    1,584 
          
Commitments and Contingent Liabilities (Notes 6 and 15)      
          
Stockholder's Equity      
 
Common stock - no par value (a)
   364    364 
 
Additional paid-in capital
   1,340    1,135 
 
Earnings reinvested
   645    563 
 
Total Equity
   2,349    2,062 
          
Total Liabilities and Equity
 $ 6,846  $ 6,118 

(a)170,000 shares authorized; 66,368 shares issued and outstanding at December 31, 20102013 and December 31, 2009.2012.

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

133

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, 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 contributions 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 
                    
Net income (b)
            $ 135  $ 135 
Redemption of preferred stock (c)
   $ (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 
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, 2010
  66,368  $ 250  $ 364  $ 879  $ 451  $ 1,944 
Net income
                      189    189 
Capital contributions from PPL
                 100         100 
Cash dividends declared on preference stock
                      (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 preference stock (b)
     $ (250)      $ 6    (6)   (250)
Capital contributions from PPL
                 150         150 
Cash dividends declared on preference stock
                      (4)   (4)
Cash dividends declared on common stock
                      (95)   (95)
December 31, 2012
  66,368  $    $ 364  $ 1,135  $ 563  $ 2,062 
                    
Net income
                    $ 209  $ 209 
Capital contributions from PPL
               $ 205         205 
Cash dividends declared on common stock
                      (127)   (127)
December 31, 2013
  66,368  $    $ 364  $ 1,340  $ 645  $ 2,349 

(a)Shares in thousands.  All common shares of PPL Electric stock are owned by PPL.
(b)PPL Electric's net income approximates comprehensive income.
(c)In June 2012, PPL Electric redeemed all five series of its outstanding preferredpreference stock.  See Note 63 for additional information.

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

134

CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31,
LG&E and KU Energy LLC and Subsidiaries
(Millions of Dollars)   
              
     2013   2012  2011 
           
Operating Revenues
 $ 2,976   $ 2,759  $ 2,793 
           
Operating Expenses          
 Operation          
  
Fuel
   896     872    866 
  
Energy purchases
   217     195    238 
  
Other operation and maintenance
   778     778    751 
 
Depreciation
   334     346    334 
 
Taxes, other than income
   48     46    37 
 
Total Operating Expenses
   2,273     2,237    2,226 
              
Operating Income
   703     522    567 
              
Other Income (Expense) - net
   (7)    (15)   (1)
           
Other-Than-Temporary Impairments
         25      
              
Interest Expense
   144     150    146 
              
Interest Expense with Affiliate
   1     1    1 
              
Income (Loss) from Continuing Operations Before Income          
 
Taxes
   551     331    419 
              
Income Taxes
   206     106    153 
              
Income (Loss) from Continuing Operations After Income          
 
Taxes
   345     225    266 
              
Income (Loss) from Discontinued Operations (net of income          
 
taxes)
   2     (6)   (1)
              
Net Income (Loss)
 $ 347   $ 219  $ 265 
              
              
The accompanying Notes to Financial Statements are an integral part of the financial statements.

135

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31,
LG&E and KU Energy LLC and Subsidiaries
(Millions of Dollars)
              
      2013  2012  2011 
              
Net income (loss)
 $ 347  $ 219  $ 265 
              
Other comprehensive income (loss):         
 Amounts arising during the period - gains (losses), net of tax         
  (expense) benefit:         
   Equity investee's other comprehensive income (loss), net         
    
of tax of  $0, ($1), $0
        1      
   Defined benefit plans:         
    
Prior service costs, net of tax of $0, $0, $1
             (2)
    
Net actuarial gain (loss), net of tax of ($18), $13, ($1)
   28    (21)     
 Reclassification to net income - (gains) losses, net of tax         
  expense (benefit):         
   Defined benefit plans:         
    
Net actuarial loss, net of tax of $0, $0, $1
        1      
Total other comprehensive income (loss)
   28    (19)   (2)
              
Comprehensive income (loss) attributable to member
 $ 375  $ 200  $ 263 
              
The accompanying Notes to Financial Statements are an integral part of the financial statements.

136
CONSOLIDATED STATEMENTS OF CASH FLOWS
LG&E and KU Energy LLC and Subsidiaries
(Millions of Dollars)
  2013  2012  2011 
Cash Flows from Operating Activities         
 
Net income
 $ 347  $ 219  $ 265 
 Adjustments to reconcile net income to net cash         
  provided by (used in) operating activities         
   
Depreciation
   334    346    334 
   
Amortization
   22    27    27 
   
Defined benefit plans - expense
   48    40    51 
   
Deferred income taxes and investment tax credits
   254    133    218 
   
Impairment of assets
        25    
   
Other
   5    2    (9)
 Change in current assets and current liabilities         
  
Accounts receivable
   (91)   (9)   17 
  
Accounts payable
   40    1    (32)
  
Accounts payable to affiliates
   1    (1)     
  
Unbilled revenues
   (24)   (10)   24 
  
Fuel, materials and supplies
   (1)   8    15 
  
Income tax receivable
   1    2    37 
  
Taxes payable
   13    1    (2)
  
Other
   22         (1)
 Other operating activities         
  
Defined benefit plans - funding
   (168)   (70)   (170)
  
Settlement of interest rate swaps
   86           
  
Other assets
        (5)   (11)
  
Other liabilities
   22    38    18 
   
Net cash provided by (used in) operating activities
   911    747    781 
Cash Flows from Investing Activities         
 
Expenditures for property, plant and equipment
   (1,434)   (768)   (477)
 
Proceeds from the sale of other investments
             163 
 
Net (increase) decrease in notes receivable from affiliates
   (70)   15    46 
 
Net (increase) decrease in restricted cash and cash equivalents
   9    (3)   (9)
 
Other investing activities
   2           
   
Net cash provided by (used in) investing activities
   (1,493)   (756)   (277)
Cash Flows from Financing Activities         
 
Net increase (decrease) in notes payable with affiliates
   (25)   25      
 
Issuance of long-term debt
   496         250 
 
Retirement of long-term debt
             (2)
 
Net increase (decrease) in short-term debt
   120    125    (163)
 
Debt issuance and credit facility costs
   (6)   (2)   (8)
 
Distributions to member
   (254)   (155)   (533)
 
Contributions from member
   243           
   
Net cash provided by (used in) financing activities
   574    (7)   (456)
Net Increase (Decrease) in Cash and Cash Equivalents
   (8)   (16)   48 
Cash and Cash Equivalents at Beginning of Period
   43    59    11 
Cash and Cash Equivalents at End of Period
 $ 35  $ 43  $ 59 
              
Supplemental Disclosures of Cash Flow Information         
 Cash paid (received) during the period for:         
  
Interest - net of amount capitalized
 $ 137  $ 139  $ 126 
  
Income taxes - net
 $ (67) $ (45) $ (98)
              
The accompanying Notes to Financial Statements are an integral part of the financial statements.
137

CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
LG&E and KU Energy LLC and Subsidiaries
(Millions of Dollars)
          
     2013  2012 
Assets      
          
Current Assets      
 
Cash and cash equivalents
 $ 35  $ 43 
 Accounts receivable (less reserve: 2013, $22; 2012, $19)      
  
Customer
   224    133 
  
Other
   20    20 
 
Unbilled revenues
   180    156 
 
Accounts receivable from affiliates
        1 
 
Notes receivable from affiliates
   70      
 
Fuel, materials and supplies
   278    276 
 
Prepayments
   21    28 
 
Price risk management assets from affiliates
        14 
 
Deferred income taxes
   159    13 
 
Regulatory assets
   27    19 
 
Other current assets
   3    4 
 
Total Current Assets
   1,017    707 
          
Property, Plant and Equipment      
 
Regulated utility plant
   8,526    8,073 
 
Less: accumulated depreciation - regulated utility plant
   778    519 
  
Regulated utility plant, net
   7,748    7,554 
 
Other, net
   3    3 
 
Construction work in progress
   1,793    750 
 
Property, Plant and Equipment, net
   9,544    8,307 
          
Other Noncurrent Assets      
 
Regulatory assets
   474    630 
 
Goodwill
   996    996 
 
Other intangibles
   221    271 
 
Other noncurrent assets
   98    108 
 
Total Other Noncurrent Assets
   1,789    2,005 
          
Total Assets
 $ 12,350  $ 11,019 
          
The accompanying Notes to Financial Statements are an integral part of the financial statements.

138


CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
LG&E and KU Energy LLC and Subsidiaries
(Millions of Dollars)
     2013  2012 
Liabilities and Equity      
          
Current Liabilities      
 
Short-term debt
 $ 245  $ 125 
 
Notes payable with affiliates
        25 
 
Accounts payable
   346    283 
 
Accounts payable to affiliates
   3    1 
 
Customer deposits
   50    48 
 
Taxes
   39    26 
 
Price risk management liabilities
   4    5 
 
Regulatory liabilities
   14    9 
 
Interest
   23    21 
 
Other current liabilities
   111    100 
 
Total Current Liabilities
   835    643 
          
Long-term Debt
   4,565    4,075 
       
Deferred Credits and Other Noncurrent Liabilities      
 
Deferred income taxes
   965    541 
 
Investment tax credits
   135    138 
 
Price risk management liabilities
   32    53 
 
Accrued pension obligations
   152    414 
 
Asset retirement obligations
   245    125 
 
Regulatory liabilities
   1,033    1,002 
 
Other deferred credits and noncurrent liabilities
   238    242 
 
Total Deferred Credits and Other Noncurrent Liabilities
   2,800    2,515 
          
Commitments and Contingent Liabilities (Notes 6 and 15)      
          
Member's equity
   4,150    3,786 
 
Total Equity
   4,150    3,786 
          
Total Liabilities and Equity
 $ 12,350  $ 11,019 
          
The accompanying Notes to Financial Statements are an integral part of the financial statements.

139

CONSOLIDATED STATEMENTS OF EQUITY
LG&E and KU Energy LLC and Subsidiaries
(Millions of Dollars)
Member's
Equity
December 31, 2010 (a)
$ 4,011 
Net income
 265 
Distributions to member
 (533)
Other comprehensive income (loss)
 (2)
December 31, 2011 (a)
$ 3,741 
Net income
$ 219 
Distributions to member
 (155)
Other comprehensive income (loss)
 (19)
December 31, 2012 (a)
$ 3,786 
Net income
$ 347 
Contributions from member
 243 
Distributions to member
 (254)
Other comprehensive income (loss)
 28 
December 31, 2013 (a)
$ 4,150 

(a)      See Note 24 for disclosure of balances of each component of AOCI.

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

140






















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141


STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31,
Louisville Gas and Electric Company
(Millions of Dollars)   
             
     2013  2012  2011 
Operating Revenues         
 
Retail and wholesale
 $ 1,351  $ 1,247  $ 1,281 
 
Electric revenue from affiliate
   59    77    83 
 
Total Operating Revenues
   1,410    1,324    1,364 
             
Operating Expenses         
 Operation         
  
Fuel
   367    374    350 
  
Energy purchases
   195    163    209 
  
Energy purchases from affiliate
   10    12    36 
  
Other operation and maintenance
   373    363    363 
 
Depreciation
   148    152    147 
 
Taxes, other than income
   24    23    18 
 
Total Operating Expenses
   1,117    1,087    1,123 
             
Operating Income
   293    237    241 
             
Other Income (Expense) - net
   (2)   (3)   (2)
             
Interest Expense
   34    42    44 
             
Income Before Income Taxes
   257    192    195 
             
Income Taxes
   94    69    71 
             
Net Income (a)
 $ 163  $ 123  $ 124 

(a)Net income equals comprehensive income.

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

142

STATEMENTS OF CASH FLOWS
Louisville Gas and Electric Company
(Millions of Dollars)
  2013  2012  2011 
Cash Flows from Operating Activities         
 
Net income
 $ 163  $ 123  $ 124 
 Adjustments to reconcile net income to net cash provided         
  by (used in) operating activities         
   
Depreciation
   148    152    147 
   
Amortization
   6    11    12 
   
Defined benefit plans - expense
   18    18    21 
   
Deferred income taxes and investment tax credits
   26    69    51 
   
Other
   9    (13)   1 
 Change in current assets and current liabilities         
  
Accounts receivable
   (23)   (2)   25 
  
Accounts payable
   16         (24)
  
Accounts payable to affiliates
   1    (3)   6 
  
Unbilled revenues
   (13)   (7)   16 
  
Fuel, materials and supplies
   (12)        20 
  
Taxes payable
   9    (7)   3 
  
Other
   8    (7)   (7)
 Other operating activities         
  
Defined benefit plans - funding
   (48)   (27)   (70)
  
Settlement of interest rate swaps
   43           
  
Other assets
   (1)   (21)   (7)
  
Other liabilities
   6    22    7 
   
Net cash provided by (used in) operating activities
   356    308    325 
Cash Flows from Investing Activities         
 
Expenditures for property, plant and equipment
   (577)   (286)   (196)
 
Proceeds from the sale of other investments
             163 
 Net (increase) decrease in restricted cash and cash         
  
equivalents
   10    (3)   (9)
   
Net cash provided by (used in) investing activities
   (567)   (289)   (42)
Cash Flows from Financing Activities         
 
Net increase (decrease) in notes payable with affiliates
             (12)
 
Issuance of long-term debt
   248           
 
Net increase (decrease) in short-term debt
   (35)   55    (163)
 
Debt issuance and credit facility costs
   (3)   (2)   (2)
 
Payment of common stock dividends to parent
   (99)   (75)   (83)
 
Contributions from parent
   86           
   
Net cash provided by (used in) financing activities
   197    (22)   (260)
Net Increase (Decrease) in Cash and Cash Equivalents
   (14)   (3)   23 
Cash and Cash Equivalents at Beginning of Period
   22    25    2 
Cash and Cash Equivalents at End of Period
 $ 8  $ 22  $ 25 
              
Supplemental Disclosures of Cash Flow Information         
 Cash paid (received) during the period for:         
  
Interest - net of amount capitalized
 $ 36  $ 39  $ 40 
  
Income taxes - net
 $ 51  $ 5  $ 20 
              
The accompanying Notes to Financial Statements are an integral part of the financial statements.

143

BALANCE SHEETS AT DECEMBER 31,
Louisville Gas and Electric Company
(Millions of Dollars, shares in thousands)
          
     2013  2012 
Assets      
          
Current Assets      
 
Cash and cash equivalents
 $ 8  $ 22 
 Accounts receivable (less reserve: 2013, $2; 2012, $1)      
  
Customer
   102    59 
  
Other
   9    16 
 
Unbilled revenues
   85    72 
 
Accounts receivable from affiliates
        14 
 
Fuel, materials and supplies
   154    142 
 
Prepayments
   7    7 
 
Price risk management assets from affiliates
        7 
 
Regulatory assets
   17    19 
 
Other current assets
   3    1 
 
Total Current Assets
   385    359 
          
Property, Plant and Equipment      
 
Regulated utility plant
   3,383    3,187 
 
Less: accumulated depreciation - regulated utility plant
   332    220 
  
Regulated utility plant, net
   3,051    2,967 
 
Construction work in progress
   651    259 
 
Property, Plant and Equipment, net
   3,702    3,226 
          
Other Noncurrent Assets      
 
Regulatory assets
   303    400 
 
Goodwill
   389    389 
 
Other intangibles
   120    144 
 
Other noncurrent assets
   35    44 
 
Total Other Noncurrent Assets
   847    977 
          
Total Assets
 $ 4,934  $ 4,562 
          
The accompanying Notes to Financial Statements are an integral part of the financial statements.

144


BALANCE SHEETS AT DECEMBER 31,
Louisville Gas and Electric Company
(Millions of Dollars, shares in thousands)
     2013  2012 
Liabilities and Equity      
          
Current Liabilities      
 
Short-term debt
 $ 20  $ 55 
 
Accounts payable
   166    117 
 
Accounts payable to affiliates
   24    23 
 
Customer deposits
   24    23 
 
Taxes
   11    2 
 
Price risk management liabilities
   4    5 
 
Regulatory liabilities
   9    4 
 
Interest
   6    5 
 
Other current liabilities
   32    34 
 
Total Current Liabilities
   296    268 
          
Long-term Debt
   1,353    1,112 
       
Deferred Credits and Other Noncurrent Liabilities      
 
Deferred income taxes
   582    544 
 
Investment tax credits
   38    40 
 
Price risk management liabilities
   32    53 
 
Accrued pension obligations
   19    102 
 
Asset retirement obligations
   68    56 
 
Regulatory liabilities
   482    471 
 
Other deferred credits and noncurrent liabilities
   104    106 
 
Total Deferred Credits and Other Noncurrent Liabilities
   1,325    1,372 
          
Commitments and Contingent Liabilities (Notes 6 and 15)      
          
Stockholder's Equity      
 
Common stock - no par value (a)
   424    424 
 
Additional paid-in capital
   1,364    1,278 
 
Earnings reinvested
   172    108 
Total Equity
   1,960    1,810 
          
Total Liabilities and Equity
 $ 4,934  $ 4,562 

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

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

145

STATEMENTS OF EQUITY
Louisville Gas and Electric Company            
(Millions of Dollars)            
           
   Common            
   stock            
   shares     Additional      
   outstanding  Common  paid-in  Earnings   
   (a)  stock  capital  reinvested  Total
                
December 31, 2010
  21,294  $424  $1,278  $19  $1,721 
Net income
           124    124 
Cash dividends declared on common stock
           (83)   (83)
December 31, 2011
 21,294  $ 424  $ 1,278  $ 60  $ 1,762 
                
                
Net income
         $ 123  $ 123 
Cash dividends declared on common stock
           (75)   (75)
December 31, 2012
  21,294  $ 424  $ 1,278  $ 108  $ 1,810 
                
                
Net income
         $ 163  $ 163 
Capital contributions from LKE
        86       86 
Cash dividends declared on common stock
           (99)   (99)
December 31, 2013
  21,294  $ 424  $ 1,364  $ 172  $ 1,960 

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

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

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147


STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31,
Kentucky Utilities Company
(Millions of Dollars)   
             
     2013  2012  2011 
Operating Revenues         
 
Retail and wholesale
 $ 1,625  $ 1,512  $ 1,512 
 
Electric revenue from affiliate
   10    12    36 
 
Total Operating Revenues
   1,635    1,524    1,548 
             
Operating Expenses         
 Operation         
  
Fuel
   529    498    516 
  
Energy purchases
   22    32    29 
  
Energy purchases from affiliate
   59    77    83 
  
Other operation and maintenance
   382    384    362 
 
Depreciation
   186    193    186 
 
Taxes, other than income
   24    23    19 
 
Total Operating Expenses
   1,202    1,207 ��  1,195 
             
Operating Income
   433    317    353 
             
Other Income (Expense) - net
   (3)   (8)   (1)
             
Other-Than-Temporary Impairments
        25      
             
Interest Expense
   70    69    70 
             
Income Before Income Taxes
   360    215    282 
             
Income Taxes
   132    78    104 
             
Net Income (a)
 $ 228  $ 137  $ 178 
             

(a)Net income approximates comprehensive income.

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

148

STATEMENTS OF CASH FLOWS
Kentucky Utilities Company
(Millions of Dollars)
  2013  2012  2011 
Cash Flows from Operating Activities         
 
Net income
 $ 228  $ 137  $ 178 
 Adjustments to reconcile net income to net cash provided         
  by (used in) operating activities         
   
Depreciation
   186    193    186 
   
Amortization
   14    14    13 
   
Defined benefit plans - expense
   18    11    14 
   
Deferred income taxes and investment tax credits
   69    99    108 
   
Impairment of assets
        25      
   
Other
   (3)   10    (10)
 Change in current assets and current liabilities         
  
Accounts receivable
   (37)   (17)   22 
  
Accounts payable
   23    1    2 
  
Accounts payable to affiliates
   (8)        (12)
  
Unbilled revenues
   (11)   (3)   8 
  
Fuel, materials and supplies
   10    7    (5)
  
Taxes payable
   7    15    (14)
  
Other
   10    6    (3)
 Other operating activities         
  
Defined benefit plans - funding
   (65)   (21)   (50)
  
Settlement of interest rate swaps
   43           
  
Other assets
   1    (3)   (2)
  
Other liabilities
   10    26    9 
   
Net cash provided by (used in) operating activities
   495    500    444 
Cash Flows from Investing Activities         
 
Expenditures for property, plant and equipment
   (855)   (480)   (279)
 
Other investing activities
   2           
   
Net cash provided by (used in) investing activities
   (853)   (480)   (279)
Cash Flows from Financing Activities         
 
Net increase (decrease) in notes payable with affiliates
             (10)
 
Issuance of long-term debt
   248           
 
Net increase (decrease) in short-term debt
   80    70      
 
Debt issuance and credit facility costs
   (3)        (3)
 
Payment of common stock dividends to parent
   (124)   (100)   (124)
 
Contributions from parent
   157           
   
Net cash provided by (used in) financing activities
   358    (30)   (137)
Net Increase (Decrease) in Cash and Cash Equivalents
        (10)   28 
Cash and Cash Equivalents at Beginning of Period
   21    31    3 
Cash and Cash Equivalents at End of Period
 $ 21  $ 21  $ 31 
              
Supplemental Disclosures of Cash Flow Information         
 Cash paid (received) during the period for:         
  
Interest - net of amount capitalized
 $ 61  $ 62  $ 60 
  
Income taxes - net
 $ 47  $ (39) $ 16 
              
The accompanying Notes to Financial Statements are an integral part of the financial statements.

149

BALANCE SHEETS AT DECEMBER 31,
Kentucky Utilities Company
(Millions of Dollars, shares in thousands)
          
     2013  2012 
Assets      
          
Current Assets      
 
Cash and cash equivalents
 $ 21  $ 21 
 Accounts receivable (less reserve: 2013, $4; 2012, $2)      
  
Customer
   122    74 
  
Other
   9    13 
 
Unbilled revenues
   95    84 
 
Accounts receivable from affiliates
        7 
 
Fuel, materials and supplies
   124    134 
 
Prepayments
   4    10 
 
Price risk management assets from affiliates
        7 
 
Regulatory assets
   10      
 
Other current assets
   6    6 
 
Total Current Assets
   391    356 
          
Property, Plant and Equipment      
 
Regulated utility plant
   5,143    4,886 
 
Less: accumulated depreciation - regulated utility plant
   446    299 
  
Regulated utility plant, net
   4,697    4,587 
 
Other, net
   1    1 
 
Construction work in progress
   1,139    490 
 
Property, Plant and Equipment, net
   5,837    5,078 
          
Other Noncurrent Assets      
 
Regulatory assets
   171    230 
 
Goodwill
   607    607 
 
Other intangibles
   101    127 
 
Other noncurrent assets
   56    57 
 
Total Other Noncurrent Assets
   935    1,021 
          
Total Assets
 $ 7,163  $ 6,455 
          
The accompanying Notes to Financial Statements are an integral part of the financial statements.

150


BALANCE SHEETS AT DECEMBER 31,
Kentucky Utilities Company
(Millions of Dollars, shares in thousands)
     2013  2012 
Liabilities and Equity      
          
Current Liabilities      
 
Short-term debt
 $ 150  $ 70 
 
Accounts payable
   159    147 
 
Accounts payable to affiliates
   25    33 
 
Customer deposits
   26    25 
 
Taxes
   33    26 
 
Regulatory liabilities
   5    5 
 
Interest
   11    10 
 
Other current liabilities
   36    33 
 
Total Current Liabilities
   445    349 
          
Long-term Debt
   2,091    1,842 
       
Deferred Credits and Other Noncurrent Liabilities      
 
Deferred income taxes
   658    587 
 
Investment tax credits
   97    98 
 
Accrued pension obligations
   11    104 
 
Asset retirement obligations
   177    69 
 
Regulatory liabilities
   551    531 
 
Other deferred credits and noncurrent liabilities
   89    92 
 
Total Deferred Credits and Other Noncurrent Liabilities
   1,583    1,481 
          
Commitments and Contingent Liabilities (Notes 6 and 15)      
          
Stockholder's Equity      
 
Common stock - no par value (a)
   308    308 
 
Additional paid-in capital
   2,505    2,348 
 
Accumulated other comprehensive income (loss)
   1    1 
 
Earnings reinvested
   230    126 
 
Total Equity
   3,044    2,783 
          
Total Liabilities and Equity
 $ 7,163  $ 6,455 

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

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

151

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, 2010
  37,818  $308  $2,348  $35     $ 2,691 
Net income
           178       178 
Cash dividends declared on common stock
           (124)      (124)
December 31, 2011
 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 (b)
 37,818  $ 308  $ 2,348  $ 126  $ 1  $ 2,783 
                  
                  
Net income
         $ 228     $ 228 
Capital contributions from LKE
        157          157 
Cash dividends declared on common stock
           (124)      (124)
December 31, 2013 (b)
 37,818  $308  $2,505  $230  $1  $3,044 

(a)      Shares in thousands.  All common shares of KU stock are owned by LKE.
(b)      See Note 24 for disclosure of balances of each component of AOCI.

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

152

COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  Summary of Significant Accounting Policies

(All Registrants)

General

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

Business and Consolidation

(PPL)

PPL is an energy and utility holding company that, through its subsidiaries, is primarily engaged in:  1) the regulated distribution of electricity in the U.K.; 2) the regulated generation, transmission, distribution and distributionsale 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 distributionsale of electricity in Pennsylvania; and 4) the competitive generation and marketing of electricity in portions of the northeastern and northwestern U.S.  Headquartered in Allentown, PA, PPL's principal subsidiaries are PPL Global, LKE (including its principal subsidiaries, LG&E and KU), PPL Electric and PPL Energy Supply (including its principal subsidiaries, PPL EnergyPlus and PPL Electric.Generation).  PPL's corporate level financing subsidiary is PPL Capital Funding.

WPD, a subsidiary of PPL Global, through indirect wholly owned subsidiaries operates regulated distribution networks providing electricity service in the U.K.  WPD serves end-users in Wales and southwest and central England.  Its principal subsidiaries are WPD (South Wales), WPD (South West), WPD (East Midlands) and WPD (West Midlands).

On NovemberApril 1, 2010,2011, PPL, acquiredthrough its indirect, wholly owned subsidiary PPL WEM, completed its acquisition of all of the limited liability company interestsoutstanding ordinary share capital of E.ON U.S. LLCCentral 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 a wholly owned subsidiarysubsidiaries 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 cost-based regulated utility operations through its subsidiaries, KU and LG&E.  The acquisition of LKE substantially reapportions the mix of PPL's regulated and competitive businesses by increasing the regulated portion of its business, strengthens PPL's credit profile and enhances rate-regulated growth opportunities as the regulated businesses make investments to improve infrastructure and customer reliability.  The increase in regulated assets provides earnings stability through regulated returns and the ability to recover costs of capital i nvestments, in contrast to the competitive supply business where earnings and cash flows are subject to market conditions.  LKE'sWPD Midlands' operating results for the two months ended December 31, 2010 are included in PPL's results of operations with no comparable amounts for 2009.  LKE's net assets acquiredthe full year of 2013 and obligations assumed at the acquisition date were recorded at fair value and2012, but as PPL is consolidating WPD Midlands on a one-month lag, eight months of operating results are included in PPL's balance sheet at December 31, 2010.  results of operations for 2011.

See Note 10 for additional information onregarding the acquisition of LKE.

(PPL Energy Supply)WPD Midlands.

PPL Energy Funding isconsolidates WPD, including WPD Midlands, on a one-month lag.  Material intervening events, such as debt issuances that occur in the parent of PPL Energy Supply.  On January 31, 2011, PPL Energy Supply distributed its membership interestlag period, are recognized in PPL Global, representing 100% of the outstanding membership interests of PPL Global, to PPL Energy Supply's 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 consolidatedcurrent period financial statements.  The distribution was made based on the book value of the assets and liabilities of PPL Global with financial effect as of January 1, 2011.  PPL Global owns and operates WPD's electricity distribution businesses in the U.K.  See Note 24 for additional information related to the distribution.  Notes to PPL Energy Supply's Financial Statements may include PP L Global information for years subsequent to 2010.Events that are significant but not material are disclosed.

(PPL and PPL Energy Supply)

PPL Energy Supply is an energy company conducting business primarily through its principal subsidiaries PPL Generation and PPL EnergyPlus.  PPL Generation owns and operates a portfolio of competitive domestic power generating assets.  These power plants are primarily located in Pennsylvania and Montana 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 competitive retail markets, primarily in the northeastern and northwestern U.S.

In 2010,On April 13, 2012, an indirect, wholly owned subsidiary of PPL Energy Supply completed the sale of its Long Island generation business and related tolling agreements and its remaining three hydroelectric facilities in Maine.Ironwood Acquisition.  See Note 910 for additional information on these sales.information.

(PPL and PPL Electric)

PPL Electric is a cost-based rate-regulated utility 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.

153


(PPL, LKE, LG&E and KU)

LKE is a utility holding company with cost-based rate-regulated utility operations through its subsidiaries, LG&E and KU.  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 under the KU name.

(PPL, PPL Energy Supply and PPL Electric)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 Statements of Cash Flows do not separately report the cash flows of the Discontinued Operations.

(All Registrants)

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.  Entities for which a controlling financial interest is not demonstrated through voting interests are evaluated based on accounting guidance for VIEs.  PPL, PPL Energy Supply and PPL ElectricThe Registrants consolidate a VIE when they are determined to have a controlling interest in the VIE, and thus are the primary beneficiary of the entity.  See "New Accounting Guidance Adopted - Consolidation of Variable Interest Entities" within this note for additional informationFor PPL and PPL Energy Supply, see Note 22 for information regarding a significantpreviously consolidated VIE.  Investments in entities in which a company has the ability to ex erciseexercise 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.

PPL and PPL Energy Supply 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 period financial statements.  Events that are significant but not material are disclosed.

The consolidated financial statements of PPL, and 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.

Regulation

(PPL and PPL Electric)(PPL)

WPD operates in an incentive-based regulatory structure under distribution licenses granted by Ofgem.  Electricity distribution revenues are set by Ofgem for a given time period through price control reviews that are not directly based on cost recovery.  The price control formula that governs WPD's allowed revenue is designed to provide economic incentives to minimize operating, capital and financing costs.  As a result, 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.

(All Registrants except PPL Energy Supply)

PPL Electric, LG&E KU and PPL ElectricKU are cost-based rate-regulated utilities for which rates are set by regulators to enable PPL Electric, LG&E KU and PPL ElectricKU to recover the costs of providing electric or gas service, as applicable, and to provide a reasonable return to shareholders.  Rates are generally established based on a historical or future test period as 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.  Regulatory assets are recognized for the effect of transactions or events where future recovery of underlying costs is probable in regulated customer rates.  The effect of such accounting is to defer certain or qualifying costs that would otherwise c urrentlycurrently be charged to expense.  Likewise, regulatoryRegulatory liabilities are recognized for obligationsamounts expected to be returned through future regulated customer rates or be consumed in the business operations for the effect of transactions or events that would otherwise currently be reflected as income, or inrates.  In certain cases, regulatory liabilities are recorded based on thean understanding or agreement with the regulator that current rates include recovery ofhave 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 butand not yet expended for the intended purpose.  The accounting for regulatory assets and regulatory 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 36 for additional details regarding regulatory assets and liabilities.

(PPL and PPL Energy Supply)

WPD operates under distribution licenses granted by and price controls set by Ofgem.  The price control formula that governs WPD's allowed revenue is designed to provide economic incentives to minimize operating, capital and financing costs.  The price control formula is normally determined every five years.  Ofgem completed a review in December 2009 that became effective April 1, 2010 and will continue through March 31, 2015.

WPD is not subject to accounting for the effects of certain types of regulation as prescribed by GAAP.matters.

Accounting Records (All Registrants except PPL and PPL Electric)Energy Supply)

The system of accounts for LG&E, KU and PPL Electricdomestic regulated entities is maintained in accordance with the Uniform System of Accounts prescribed by the FERC and adopted by the applicable state regulatory commissions.

154


(All Registrants)

Use of Estimates(PPL, PPL Energy Supply and PPL Electric)

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 20092012 and 20082011 financial statements have been changed to conform to the current presentation.  The changes in classification did not affect "Net Income Attributable to PPL Corporation" or "PPL Corporation Shareowners' Common Equity," "Net Income Attributable to PPL Energy Supply" or PPL Energy Supply's "Member's equity" or "Net Income Available to PPL Corporation" or PPL Electric's "Shareowners' Equity."

The classification on the Statements of Cash Flows has not been changed for the classification of amounts to Discontinued Operations.

Comprehensive Income(PPL and PPL Energy Supply)

Comprehensive income, which includesRegistrants' 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's Statements of Comprehensive Income.

AOCI, which is presented on the Balance Sheets of PPL and included in Member's Equity on the Balance Sheets of PPL Energy Supply, consisted of these after-tax gains (losses) at December 31.

    2010   2009 
PPL      
Foreign currency translation adjustments $ (195) $ (136)
Unrealized gains on available-for-sale securities   86    62 
Net unrealized gains on qualifying derivatives   695    602 
Equity investees' AOCI   (2)   (2)
Defined benefit plans:      
 Prior service cost   (32)   (61)
 Actuarial loss   (1,032)   (993)
 Transition asset (obligation)   1    (9)
   $ (479) $ (537)
        
PPL Energy Supply      
Foreign currency translation adjustments $ (195) $ (136)
Unrealized gains on available-for-sale securities   86    62 
Net unrealized gains on qualifying derivatives   732    573 
Equity investee's AOCI   (2)   (2)
Defined benefit plans:      
 Prior service cost   (23)   (44)
 Actuarial loss   (953)   (930)
 Transition obligation      (7)
   $ (355) $ (484)
or equity.

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.

Price Risk Management

(All Registrants except PPL and PPL Energy Supply)Electric)

PPL and PPL Energy Supply enter into 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 andpurposes at PPL Energy Supply enter into interestSupply.  Interest rate 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 exchange contracts are used to hedge foreign currency 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.

Certain of PPL and PPL Energy Supply's energy and energy-related contracts meet the definition of a 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, PPLmarkets are periodically reviews these contractsassessed to assessdetermine whether a market mechanism hasmechanisms have evolved which couldthat would facilitate net settlement.  Certain derivative energy contracts have been excluded from the requirements of derivative accounting treatment because they meet the definition of NPNS.NPNS has been elected.  These contracts are accounted for using accrual accounting.  All other contracts that have been classified as derivative contracts are reflected on the balance sheetsheets at their fair value.  These contracts are recorded as "Price risk manag ementmanagement assets" and "Price risk management liabilities" on the Balance Sheets.  DerivativeThe portion of derivative positions that deliver within a year are included in "Current Assets" and "Current Liabilities.Liabilities," PPL and PPL Energy Supply recordwhile the portion of derivative positions that deliver beyond a year are recorded in "Other Noncurrent Assets" and "Deferred Credits and Other Noncurrent Liabilities."  Every tradePPL considers intra-month transactions to be spot activity, which is entered into the risk management system with annot accounted for as a derivative.

Energy and energy-related contracts are assigned a strategy and accounting classification.  Processes exist that allow for subsequent review and validation of the tradecontract information.  These strategies are discussed inSee Note 19 for more detail in Note 19.  PPL'sinformation.  The accounting department provides the traders and the risk management department with guidelines on appropriate accounting classifications for various tradecontract types and strategies.  Some examples of these guidelines include, but are not limited to:


 
155

·Physical coal, limestone, lime, uranium, electric transmission, gas transportation, gas storage and renewable energy credit contracts not traded on an exchange 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 the NPNS exception.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 lockeffectively hedge the volatility in the future cash flows for energy-related commodities.

·Certain purchased option contracts or net purchased option collars may receive cash flow hedge accounting treatment.  Those that are not eligible are marked to fair value through earnings.

·Derivative transactions that do not qualify for NPNS or cash flow hedge accounting treatment, or for which NPNS or cash flow hedge treatment is not elected, are marked torecorded at fair value through earnings.

A similar process is also followed by PPL'sthe treasury department as it relates to interest rate and foreign currency derivatives.  The followingExamples of accounting guidelines are provided to the treasury department staff:staff include, but are not 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.

·Derivative transactions that do not qualify for cash flow or net investment hedge accounting treatment are marked to fair value through earnings or through regulatory assets/liabilites if approved by the appropriate regulatory body.earnings.  These transactions generally include hedges offoreign currency swaps and options to hedge GBP earnings translation risk associated with PPL's U.K. subsidiaries that report their financial statements in a currency other than the U.S. dollar.GBP.  As such, these transactions reduce earnings volatility due solely to changes in foreign currency exchange rates.

Therefore, on the date the derivative contract is executed, PPL may designate the derivative as NPNS, a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value hedge), a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge), a foreign currency fair value or cash flow hedge (foreign currency hedge) or a hedge of a net investment in a foreign operation (net investment hedge).  Other derivatives may be linked to certain risk management strategies, but hedge accounting treatment is not permitted or elected.  Finally, some derivatives have been entered into for proprietary trading purposes. As such, similar derivatives may receive different accounting treatment, depending o n the intended use of such derivative instrument.

Changes in the fair value of derivatives are recorded in either OCI or in current-period earnings, except that LG&E records the change in fair value of its interest rate swap contracts as a regulatory asset or liability since such costs are either currently being recovered in customer rates or are probable of future recovery.
·Derivative transactions may be marked to fair value through regulatory assets/liabilities at PPL Electric, LG&E and KU 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 natureclassification of the hedged items.

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 right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) under master netting arrangements.

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 theirreflects its net realized and unrealized gains and losses associated with all derivatives that are held for trading purposes in the "Net energy trading margins" line"Unregulated wholesale energy" on the Statements of Income.

See Notes 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.  These contracts haveHowever, NPNS has been excluded from the requirements of derivative accounting treatment because they meet the definition of NPNS and are accountedelected for using accrual accounting.these contracts.  See Notes 18 and 19 for additional information.

Revenue

Utility Revenue(PPL)

(PPL)

TheFor the years ended December 31, the Statements of Income "Utility" line item contains rate-regulated revenue from the following:

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    2010   2009   2008 
          
Domestic electric revenue (a) $ 2,856  $ 3,218  $ 3,290 
U.K. electric revenue (b)   727    684    824 
Domestic natural gas revenue (c)   85       
 Total $ 3,668  $ 3,902  $ 4,114 
    2013   2012   2011 
Domestic electric and gas revenue (a) $ 4,842  $  4,519  $  4,674 
U.K. electric revenue (b)   2,359    2,289    1,618 
 Total $ 7,201  $  6,808  $  6,292 

(a)Represents revenue from the regulated generation, transmission and/or distribution of electricity in Pennsylvania, Kentucky, Virginia and Tennessee, including regulated wholesale revenue.
(b)Represents electric distribution revenue from the operation of WPD's distribution networks.
(c)Represents  2011 includes eight months of revenue from the distribution and sale of natural gas in Kentucky.for WPD Midlands.

(PPL Energy Supply)

The Statements of Income "Utility" line item contains electric revenue from the operation of WPD's distribution network.

(PPL Electric)

Since most of PPL Electric's operations are regulated, it is not meaningful to use a "Utility" caption.  Therefore, PPL Electric's revenue is presented according to specific types of revenue.

Revenue Recognition

(PPL, PPL Energy Supply and PPL Electric)All Registrants)

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.

PPL Energy Supply records energy marketing activity inadjusted 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."following month.

Certain PPL subsidiaries participate in RTOs, primarily in PJM.the PJM RTO, as well as in other RTOs and 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'sPPL Energy Supply's generation subsidiaries.  PPL Electric is a transmission owner and PLR in PJM.  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 pric eprice 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 "Unregulated wholesale energy" 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 each 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 "Unregulated wholesale energy" and "Unregulated retail energy."  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 "Unregulated wholesale energy" 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 revenue or expense (see Note 19), unless hedge accounting is applied or NPNS is elected.  If derivatives meet cash flow hedging criteria, changes in fair value are recorded in AOCI.  The unrealized and realized results of derivative and non-derivative contracts that are designated as proprietary trading activities are reported net on the Statements of Income within "Unregulated wholesale energy marketing and energy purchases.energy."

"Energy-related businesses" revenue primarily includes revenue from thePPL Energy Supply's mechanical contracting and engineering subsidiaries, as well as WPD's telecommunications and property subsidiaries.  The mechanical contracting and engineeringThese subsidiaries record revenue 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 within "Unbilled revenues" on the Balance Sheets, and billings in excess of costs and estimated earnings on uncompleted contracts are recorded within "Other current liabilities" on the Balance Sheets.  The amount of costs and estimated earnings in excess of billings was $9$14 million and $5$12 million at December 31, 20102013 and 2009,2012, and the amount of billings in excess of costs and estimated earnings was $70$75 million and $69$70 million at December 31, 20102013 and 2009.2012.

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Accounts Receivable

(PPL, PPL Energy Supply and PPL Electric)All Registrants)

Accounts receivable are reported inon the Balance Sheets at the gross outstanding amount adjusted for an allowance for doubtful accounts.  For PPL, seeAccounts receivable that are acquired are initially recorded at fair value on the date of acquisition.  See Note 10 for information related to the acquisition of LKE.  The initial accounts receivable acquired in the transaction were recorded at fair value on November 1, 2010.WPD Midlands.

(PPL, Electric's customers may elect to procure generation supply from an alternative supplier.  As a result ofPPL Energy Supply and PPL Electric)

In accordance with a PUC-approved purchase of accounts receivable program, beginning in the first quarter of 2010, PPL Electric has purchasedpurchases certain accounts receivable from alternative suppliers (including PPL EnergyPlus) at a nominal discount, which reflects a provision for uncollectible accounts.  Additionally, PPL Electric receives a nominal fee for administering the program.  The alternative suppliers (including PPL EnergyPlus) 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.  The purchased accounts recei vable have substantially the same risk profileDuring 2013, 2012 and payment terms as PPL Electric's other customer accounts receivable.  During 2010, PPL and2011, PPL Electric purchased $607$985 million, $848 million and $875 million of accounts receivable from unaffiliated third parties.  During 2010,2013, 2012 and 2011, PPL Electric purchased $212$294 million, $313 million and $264 million of accounts receivable from PPL EnergyPlus.

Allowance for Doubtful Accounts(All Registrants)

(PPL, PPL Energy Supply and PPL Electric)
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 (a)
 Deductions (b) 
Balance at
End of Period
PPL (c)                    
2010  $ 37   $ 42 (d)   7 (d) $ 31   $ 55 (d)
2009    40     30         33     37  
2008    40     29         29     40  
                     
PPL Energy Supply (c)                    
2010  $ 21   $ 1       $ 2   $ 20  
2009    26     1         6     21  
2008    22     5         1     26  
                     
PPL Electric                    
2010  $ 16   $ 30       $ 29   $ 17  
2009    14     29         27     16  
2008    18     24         28     14  
     Additions         
  Balance at   Charged to     Balance at
  Beginning of Period Charged to Income Other Accounts Deductions (a) End of Period
PPL                    
2013  $ 64   $ 39   $ 4 (d)  $ 43   $ 64  
2012    54     55 (b)          45     64  
2011    55     65 (b)          66 (c)    54  
                     
PPL Energy Supply                    
2013  $ 23   $ 1         $ 3   $ 21  
2012    15     12 (b)          4     23  
2011    20     14 (b)          19 (c)    15  
                     
PPL Electric                    
2013  $ 18   $ 32         $ 32   $ 18  
2012    17     32           31     18  
2011    17     33           33     17  
LKE                    
2013  $ 19   $ 4   $ 4 (d)  $ 5   $ 22  
2012    17     9           7     19  
2011    17     15           15     17  
                     
LG&E                    
2013  $ 1   $ 2   $ 1 (d)  $ 2   $ 2  
2012    2     2           3     1  
2011    2     5           5     2  
                     
KU                    
2013  $ 2   $ 3   $ 3 (d)  $ 4   $ 4  
2012    2     4           4     2  
2011    6     6           10     2  

(a)Primarily related to a reserve against auncollectible accounts written off.
(b)Includes amounts related to the SMGT bankruptcy.  See Note 15 for additional information.

158

(c)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 recordedand the related allowance for liquidated damages associated withdoubtful accounts were reversed and the construction of Unit 2 of the Trimble County generation facility, andsettlement recorded.
(d)Primarily related to capital projects, thus the provision was recorded as an adjustment to construction work in progress.
(b)  Primarily related to uncollectible accounts written off.

(c)  See Note 15 for information on allowance for doubtful accounts related to California ISO sales.
(d)  Includes amounts associated with two months of LKE activity.  See Note 10 for additional information related to the acquisition of LKE.
Cash

Cash (PPL, PPL Energy Supply and PPL Electric)All Registrants)

Cash Equivalents

All highly liquid debt instruments purchasedinvestments with original maturities of three months or less are considered to be cash equivalents.

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."  See Note 18assets" for total restricted cash.  For PPL, theall Registrants.

(All Registrants except KU)

At December 31, 2010 balancethe balances of restricted cash and cash equivalents included $19 million of cash collateral posted to counterparties related to interest rate swap contracts,  $14 million of margin deposits posted to counterpa rties in connection with trading activities, $6 million of funds required by law to be held by WPD's captive insurance company to meet claims and $13 million of funds deposited with a trustee to defease PPL Electric's 1945 First Mortgage Bonds, as discussed in Note 7.  For PPL Energy Supply, the December 31, 2010 balance included $11 million of margin deposits posted to counterparties in connection with trading activities and $6 million of funds required by law to be held by WPD's captive insurance company to meet claims.  For PPL and PPL Energy Supply, the December 31, 2009 balance consisted primarily of margin deposits posted by counterparties to PPL Energy Supply in connection with trading activities.  For PPL Electric, the December 31, 2010 and December 31, 2009 balances of restricted cash and cash equivalents, including the noncurrent portion, consisted primarily of funds deposited with a trustee to defease PPL Electric's 1945 First Mortgage Bonds, as di scussed in Note 7.following.

     PPL PPL Energy Supply PPL Electric LKE LG&E
     2013  2012  2013  2012  2013  2012  2013  2012  2013  2012 
                                  
Margin deposits posted to                              
 counterparties $  67  $  43  $  67  $  43                   
Cash collateral posted to                              
 counterparties   22    32              $  22  $  32  $  22  $  32 
Low carbon network fund (a)   27    14                         
Funds deposited with a trustee (b)   12    13        $  12  $  13             
Ironwood debt service reserves   17    17    17    17                   
Other   11    16    1    3                     
  Total $  156  $  135  $  85  $  63  $  12  $  13  $  22  $  32  $  22  $  32 

(a)Funds received by WPD, which are to be spent on approved initiatives to support a low carbon environment.
(b)Funds deposited with a trustee to defease PPL Electric's 1945 First Mortgage Bonds.

Fair Value Measurements (PPL, PPL Energy Supply and PPL Electric)All Registrants)

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.


159

·
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.  PPL and its subsidiaries recognize transfers between levels at end-of-reporting-period values.  See Notes 13, 18, and 19 for additional information on fair value measurements.

Investments

(PPL, PPL Energy Supply and PPL Electric)All Registrants)

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.  Investments 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""Other current assets" on the Balance Sheet of PPL and in "Current Assets - Other" on the Balance Sheet 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, 200 9, 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.

Accounting guidance effective April 1, 2009 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, if any, 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 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 18 and 23 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 "Other noncurrent assets" 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.


160

KU owns 20% of the common stock of EEI, which is accounted for as an equity method investment.  During 2012, KU recorded 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, 2013 and 2012.  See Note 18 for additional information.

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 "Other noncurrent assets" on the LKE, LG&E and KU 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 120 MW for LG&E and approximately 53 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 AssetsAsset Retirement Obligations

Property, Plant(All Registrants, except PPL Electric)

ARO liabilities are required to be recognized for legal obligations associated with the retirement of long-lived assets.  The initial obligation is measured at its estimated fair value.  An ARO must be recognized when incurred if the fair value of the ARO can be reasonably estimated.  An equivalent amount is recorded as an increase in the value of the capitalized asset and Equipmentamortized 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 statement of income, for changes in the obligation due to the passage of time.

(PPL, LKE, LG&E and KU)

In the case of LG&E and KU, because costs of removal are collected in rates, the depreciation and accretion expenses related to an ARO are recorded as a regulatory asset, such that there is no earnings impact.

(All Registrants, except PPL Electric)

See Note 21 to the Financial Statements for additional information on 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 the ARO and the related capitalized asset, are reviewed periodically to ensure that any material changes are incorporated into the latest estimate of the ARO.  Any change to the capitalized asset, positive or negative, is generally amortized over the remaining life of the associated long-lived asset.


105

At December 31, 2013, the total recorded balances and information on the most significant recorded AROs were as follows.

      Most Significant AROs
   Total        
   ARO Amount     
   Recorded Recorded % of Total Description
             
           Nuclear decommissioning, ash ponds,
PPL $ 705  $ 533   76  landfills and natural gas mains
PPL Energy Supply   404    342   85  Nuclear decommissioning
LKE   252    191   76  Ash ponds, landfills and natural gas mains
LG&E   74    46   62  Ash ponds, landfills and natural gas mains
KU   178    145   81  Ash ponds and landfills

The most significant assumptions surrounding AROs are the forecasted retirement costs (including the settlement dates and the timing of cash flows), the discount rates and the inflation rates.  At December 31, 2013, a 10% change to retirement cost, a 0.25% decrease in the discount rate or a 0.25% increase in the inflation rate would not have a significant impact on the ARO liabilities of the Registrants.  For PPL and PPL Energy Supply, there would be 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 these changes in assumptions.  As noted above, these factors do not impact the Statements of Income of LKE, LG&E and KU.
Income Taxes (All Registrants)

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 valuation allowances on deferred tax assets.

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

IncreaseDecrease
PPL$22 
PPL Energy Supply15 

These changes 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 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.  In addition, for PPL, this change could also relate to the creditability of foreign taxes and the timing and utilization of foreign tax credits.  For PPL Electric, LKE, LG&E and KU, no significant changes in unrecognized tax benefits are projected over the next 12 months.


106

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.  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 income tax disclosures.

Regulatory Assets and Liabilities

(PPL)

WPD operates in an incentive-based regulatory structure under distribution licenses granted by Ofgem.  WPD's electricity distribution revenues are set every five years (changing to every eight years beginning on April 1, 2015) 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.

(All Registrants except PPL Energy Supply)

PPL Electric, LG&E and KU, are subject to cost-based rate regulation.  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 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, the regulatory asset would be written-off.  Additionally, the regulatory agencies can provide flexibility in the manner and timing of recovery of regulatory assets.

At December 31, 2013, regulatory assets and regulatory liabilities were recorded as reflected in the table below.  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.

     PPL         
  PPL Electric LKE LG&E KU
                
Regulatory assets $ 1,279  $ 778  $ 501  $ 320  $ 181 
Regulatory liabilities   1,138    91    1,047    491    556 

See Note 6 to the Financial Statements for additional information on regulatory assets and liabilities.


107

Revenue Recognition - Unbilled Revenue (PPL Electric, LKE, LG&E and KU)

Revenues related to the sale of energy are recorded when service is rendered or 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, estimates are recorded for unbilled revenues at the end of each reporting period.  Such unbilled revenue amounts reflect estimates of the deliveries to customers since the date of the last reading of their meters.  The unbilled revenue estimates reflect consideration of factors including daily load models, estimated usage for each customer class, the effect of current and different rate schedules, the meter read schedule, the billing schedule, actual weather data and where applicable, the impact of weather normalization or other regulatory provisions of rate structures.  At December 31, unbilled revenues recorded on the Balance Sheets were as follows.

  2013  2012 
       
PPL Electric $116  $110 
LKE  180   156 
LG&E  85   72 
KU  95   84 

Other Information(All Registrants)

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.

108

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Reference is made to "Risk Management" for the Registrants in "Item 7. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations." 

109

Report of Independent Registered Public Accounting Firm

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, 2013 and 2012, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2013. 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. 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 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 Corporation and subsidiaries at December 31, 2013 and 2012, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2013, 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 and subsidiaries' internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 24, 2014, expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP


Philadelphia, Pennsylvania
February 24, 2014

110

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareowners of PPL Corporation

We have audited PPL Corporation and subsidiaries' internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). PPL Corporation and subsidiaries' 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 and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, 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, 2013 and 2012, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2013, and our report dated February 24, 2014, expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP


Philadelphia, Pennsylvania
February 24, 2014

111

Report of Independent Registered Public Accounting Firm

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, 2013 and 2012, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2013. 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, 2013 and 2012, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP


Philadelphia, Pennsylvania
February 24, 2014

112

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareowners of PPL Electric Utilities Corporation

We have audited the accompanying consolidated balance sheets of PPL Electric Utilities Corporation and subsidiaries as of December 31, 2013 and 2012, and the related consolidated statements of income, shareowners' equity, and cash flows for each of the three years in the period ended December 31, 2013. 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, 2013 and 2012, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP


Philadelphia, Pennsylvania
February 24, 2014

113

Report of Independent Registered Public Accounting Firm

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, 2013 and 2012, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2013. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2).  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, 2013 and 2012, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2013, 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 24, 2014

114

Report of Independent Registered Public Accounting Firm

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, 2013 and 2012, and the related statements of income, equity and cash flows for each of the three years in the period ended December 31, 2013. 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, 2013 and 2012, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP


Louisville, Kentucky
February 24, 2014

115

Report of Independent Registered Public Accounting Firm

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, 2013 and 2012, and the related statements of income, equity and cash flows for each of the three years in the period ended December 31, 2013. 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, 2013 and 2012, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP


Louisville, Kentucky
February 24, 2014

116
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)
            
     2013  2012  2011 
Operating Revenues      
 
Utility
 $ 7,201  $ 6,808  $ 6,292 
 
Unregulated wholesale energy
   3,044    4,126    5,212 
 
Unregulated retail energy
   1,027    844    726 
 
Energy-related businesses
   588    508    507 
 
Total Operating Revenues
   11,860    12,286    12,737 
          
Operating Expenses         
 Operation         
  
Fuel
   1,944    1,837    1,946 
  
Energy purchases
   1,967    2,555    3,253 
  
Other operation and maintenance
   2,825    2,835    2,667 
  
Loss on lease termination (Note 8)
   697       
 
Depreciation
   1,161    1,100    960 
 
Taxes, other than income
   364    366    326 
 
Energy-related businesses
   563    484    484 
 
Total Operating Expenses
   9,521    9,177    9,636 
             
Operating Income
   2,339    3,109    3,101 
             
Other Income (Expense) - net
   (23)   (39)   4 
          
Other-Than-Temporary Impairments
   1    27    6 
             
Interest Expense
   1,006    961    898 
             
Income from Continuing Operations Before Income Taxes
   1,309    2,082    2,201 
             
Income Taxes
   180    545    691 
             
Income from Continuing Operations After Income Taxes
   1,129    1,537    1,510 
             
Income (Loss) from Discontinued Operations (net of income taxes)
   2    (6)   2 
             
Net Income
   1,131    1,531    1,512 
             
Net Income Attributable to Noncontrolling Interests
   1    5    17 
             
Net Income Attributable to PPL Shareowners
 $ 1,130  $ 1,526  $ 1,495 
             
Amounts Attributable to PPL Shareowners:         
 
Income from Continuing Operations After Income Taxes
 $ 1,128  $ 1,532  $ 1,493 
 
Income (Loss) from Discontinued Operations (net of income taxes)
   2    (6)   2 
 
Net Income
 $ 1,130  $ 1,526  $ 1,495 
             
Earnings Per Share of Common Stock:   
 Income from Continuing Operations After Income Taxes Available to PPL   
 Common Shareowners:         
  
Basic
 $ 1.85  $ 2.62  $ 2.70 
  
Diluted
 $ 1.76  $ 2.61  $ 2.70 
 Net Income Available to PPL Common Shareowners:         
  
Basic
 $ 1.85  $ 2.61  $ 2.71 
  
Diluted
 $ 1.76  $ 2.60  $ 2.70 
             
Dividends Declared Per Share of Common Stock
 $ 1.47  $ 1.44  $ 1.40 
             
Weighted-Average Shares of Common Stock Outstanding (in thousands)
         
  
Basic
   608,983    580,276    550,395 
  
Diluted
   663,073    581,626    550,952 
             
The accompanying Notes to Financial Statements are an integral part of the financial statements.
117

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31,
PPL Corporation and Subsidiaries
(Millions of Dollars)
            
    2013  2012  2011 
            
Net income
 $ 1,131  $ 1,531  $ 1,512 
            
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, $2, ($2)
   138    94    (48)
 
Available-for-sale securities, net of tax of ($72), ($31), ($6)
   67    29    9 
 
Qualifying derivatives, net of tax of ($41), ($32), ($139)
   45    39    202 
 
Equity investees' other comprehensive income (loss), net of tax of $0, ($1), $0
        2      
 Defined benefit plans:         
  
Prior service costs, net of tax of ($1), $0, ($1)
   2    1    (3)
  
Net actuarial gain (loss), net of tax of ($73), $343, $58
   71    (965)   (152)
Reclassifications to net income - (gains) losses, net of tax expense (benefit):         
 
Available-for-sale securities, net of tax of $4, $1, $5
   (6)   (7)   (7)
 
Qualifying derivatives, net of tax of $80, $278, $246
   (83)   (434)   (370)
 
Equity investees' other comprehensive (income) loss, net of tax of $0, $0, $0
             3 
 Defined benefit plans:         
  
Prior service costs, net of tax of ($4), ($5), ($5)
   6    10    10 
  
Net actuarial loss, net of tax of ($49), ($29), ($19)
   135    79    47 
Total other comprehensive income (loss) attributable to PPL Shareowners
   375    (1,152)   (309)
            
Comprehensive income (loss)
   1,506    379    1,203 
 
Comprehensive income attributable to noncontrolling interests
   1    5    17 
            
Comprehensive income (loss) attributable to PPL Shareowners
 $ 1,505  $ 374  $ 1,186 
            
The accompanying Notes to Financial Statements are an integral part of the financial statements.

118
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
PPL Corporation and Subsidiaries
(Millions of Dollars)
     2013  2012  2011 
Cash Flows from Operating Activities         
 
Net income
 $ 1,131  $ 1,531  $ 1,512 
 Adjustments to reconcile net income to net cash provided by (used in) operating activities         
  
Depreciation
   1,161    1,100    961 
  
Amortization
   222    186    254 
  
Defined benefit plans - expense
   176    166    205 
  
Deferred income taxes and investment tax credits
   72    424    582 
  
Impairment of assets
   65    28    13 
  
Unrealized (gains) losses on derivatives, and other hedging activities
   236    27    (314)
  
Loss on lease termination (Note 8)
   426           
  
Other
   80    (27)   (38)
 Change in current assets and current liabilities         
  
Accounts receivable
   (165)   7    (89)
  
Accounts payable
   25    (29)   (36)
  
Unbilled revenues
   27    (19)   64 
  
Prepayments
   14    (5)   294 
  
Counterparty collateral
   (81)   (34)   (190)
  
Taxes payable
   20    24    (104)
  
Uncertain tax positions
   (114)   (4)   6 
  
Regulatory assets and liabilities, net
   18    (2)   106 
  
Accrued interest
   (3)   32    109 
  
Other
   (91)   12      
 Other operating activities         
  
Defined benefit plans - funding
   (563)   (607)   (667)
  
Other assets
   7    (33)   (62)
  
Other liabilities
   194    (13)   (99)
   
Net cash provided by (used in) operating activities
   2,857    2,764    2,507 
Cash Flows from Investing Activities         
 
Expenditures for property, plant and equipment
   (4,212)   (3,105)   (2,487)
 
Expenditures for intangible assets
   (95)   (71)   (102)
 
Proceeds from the sale of certain non-core generation facilities
             381 
 
Ironwood Acquisition, net of cash acquired
        (84)     
 
Acquisition of WPD Midlands
             (5,763)
 
Purchases of nuclear plant decommissioning trust investments
   (159)   (154)   (169)
 
Proceeds from the sale of nuclear plant decommissioning trust investments
   144    139    156 
 
Proceeds from the sale of other investments
        20    163 
 
Net (increase) decrease in restricted cash and cash equivalents
   (20)   96    (143)
 
Other investing activities
   47    36    12 
   
Net cash provided by (used in) investing activities
   (4,295)   (3,123)   (7,952)
Cash Flows from Financing Activities         
 
Issuance of long-term debt
   2,038    1,223    5,745 
 
Retirement of long-term debt
   (747)   (108)   (1,210)
 
Repurchase of common stock
   (74)          
 
Issuance of common stock
   1,411    72    2,297 
 
Payment of common stock dividends
   (878)   (833)   (746)
 
Redemption of preference stock of a subsidiary
        (250)     
 
Debt issuance and credit facility costs
   (49)   (17)   (102)
 
Contract adjustment payments on Equity Units
   (82)   (94)   (72)
 
Net increase (decrease) in short-term debt
   49    74    (125)
 
Other financing activities
   (37)   (19)   (20)
   
Net cash provided by (used in) financing activities
   1,631    48    5,767 
Effect of Exchange Rates on Cash and Cash Equivalents
   8    10    (45)
Net Increase (Decrease) in Cash and Cash Equivalents
   201    (301)   277 
Cash and Cash Equivalents at Beginning of Period
   901    1,202    925 
Cash and Cash Equivalents at End of Period
 $ 1,102  $  901  $  1,202 
             
Supplemental Disclosures of Cash Flow Information         
 Cash paid (received) during the period for:         
  
Interest - net of amount capitalized
 $ 916  $ 847  $ 696 
  
Income taxes - net
 $ 128  $ 73  $ (76)
             
The accompanying Notes to Financial Statements are an integral part of the financial statements.
119

CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
PPL Corporation and Subsidiaries
(Millions of Dollars, shares in thousands)
     2013  2012 
Assets      
          
Current Assets      
 
Cash and cash equivalents
 $ 1,102  $ 901 
 
Restricted cash and cash equivalents
   83    54 
 Accounts receivable (less reserve:  2013, $64; 2012, $64)      
  
Customer
   923    745 
  
Other
   97    79 
 
Unbilled revenues
   835    857 
 
Fuel, materials and supplies
   702    673 
 
Prepayments
   153    166 
 
Deferred taxes
   246    30 
 
Price risk management assets
   942    1,525 
 
Regulatory assets
   33    19 
 
Other current assets
   37    19 
 
Total Current Assets
   5,153    5,068 
          
Investments      
 
Nuclear plant decommissioning trust funds
   864    712 
 
Other investments
   43    47 
 
Total Investments
   907    759 
          
Property, Plant and Equipment      
 
Regulated utility plant
   27,755    25,196 
 
Less:  accumulated depreciation - regulated utility plant
   4,873    4,164 
  
Regulated utility plant, net
   22,882    21,032 
 Non-regulated property, plant and equipment      
  
Generation
   11,881    11,295 
  
Nuclear fuel
   591    524 
  
Other
   834    726 
 
Less:  accumulated depreciation - non-regulated property, plant and equipment
   6,172    5,942 
  
Non-regulated property, plant and equipment, net
   7,134    6,603 
 
Construction work in progress
   3,071    2,397 
 
Property, Plant and Equipment, net (a)
   33,087    30,032 
          
Other Noncurrent Assets      
 
Regulatory assets
   1,246    1,483 
 
Goodwill
   4,225    4,158 
 
Other intangibles
   947    925 
 
Price risk management assets
   337    572 
 
Other noncurrent assets
   357    637 
 
Total Other Noncurrent Assets
   7,112    7,775 
       
Total Assets
 $ 46,259  $ 43,634 

(a)At December 31, 2012, includes $428 million of PP&E, consisting primarily of "Generation," including leasehold improvements from the consolidation of a VIE that was 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.

120


CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
PPL Corporation and Subsidiaries
(Millions of Dollars, shares in thousands)
     2013  2012 
Liabilities and Equity      
          
Current Liabilities      
 
Short-term debt
 $ 701  $ 652 
 
Long-term debt due within one year
   315    751 
 
Accounts payable
   1,308    1,252 
 
Taxes
   114    90 
 
Interest
   325    325 
 
Dividends
   232    210 
 
Price risk management liabilities
   829    1,065 
 
Regulatory liabilities
   90    61 
 
Other current liabilities
   998    1,219 
 
Total Current Liabilities
   4,912    5,625 
          
Long-term Debt
   20,592    18,725 
          
Deferred Credits and Other Noncurrent Liabilities      
 
Deferred income taxes
   3,928    3,387 
 
Investment tax credits
   342    328 
 
Price risk management liabilities
   415    629 
 
Accrued pension obligations
   1,286    2,076 
 
Asset retirement obligations
   687    536 
 
Regulatory liabilities
   1,048    1,010 
 
Other deferred credits and noncurrent liabilities
   583    820 
 
Total Deferred Credits and Other Noncurrent Liabilities
   8,289    8,786 
          
Commitments and Contingent Liabilities (Notes 5, 6 and 15)      
          
Equity      
 PPL Shareowners' Common Equity      
  
Common stock - $0.01 par value (a)
   6    6 
  
Additional paid-in capital
   8,316    6,936 
  
Earnings reinvested
   5,709    5,478 
  
Accumulated other comprehensive loss
   (1,565)   (1,940)
  
Total PPL Shareowners' Common Equity
   12,466    10,480 
 
Noncontrolling Interests
        18 
 
Total Equity
   12,466    10,498 
          
Total Liabilities and Equity
 $ 46,259  $ 43,634 

(a)780,000 shares authorized; 630,321 and 581,944 shares issued and outstanding at December 31, 2013 and 2012.

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

121

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, 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 (f)
        10             10 
Net income
           1,495       17    1,512 
Dividends, dividend equivalents,                      
 redemptions and distributions (g)
           (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 (f)
          18               18 
Net income
           $ 1,526       $ 5    1,531 
Dividends, dividend equivalents,                      
 redemptions and distributions (g)
          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 
                       
Common stock issued (c)
  50,807       $ 1,437               $ 1,437 
Common stock repurchased (e)
  (2,430)        (74)                  (74)
Cash settlement of equity forward                    
 agreements (e)
        (13)            (13)
Stock-based compensation (f)
            30                   30 
Net income
               $ 1,130       $ 1    1,131 
Dividends, dividend equivalents,                                
 redemptions and distributions (g)
                 (899)        (19)   (918)
Other comprehensive income (loss)
                    $ 375         375 
December 31, 2013 (b)
  630,321  $ 6  $ 8,316  $ 5,709  $ (1,565) $    $ 12,466 

(a)Shares in thousands.  Each share entitles the holder to one vote on any question presented at any shareowners' meeting.
(b)See Note 24 for disclosure of balances of each component of AOCI.
(c)All years presented include shares of common stock issued through various stock and incentive compensation plans.  2011 includes the April issuance of common stock and 2013 includes the April and July issuances of common stock.  See Note 7 for additional information.
(d)Represents $123 million for the 2011 Purchase Contracts and $20 million of related fees and expenses, net of tax.  See Note 7 for additional information.
(e)See Note 7 for additional information.
(f)2013, 2012 and 2011 include $50 million, $47 million and $33 million of stock-based compensation expense related to new and existing unvested equity awards, and $(20) million, $(29) million and $(23) million related primarily to the reclassification from "Stock-based compensation" to "Common stock issued" for the issuance of common stock after applicable equity award vesting periods and tax adjustments related to stock-based compensation.
(g)"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 December 2013, a distribution to noncontrolling interests was made related to the purchase of the Lower Mt. Bethel plant.  See Note 22 for additional information.  In June 2012, PPL Electric redeemed all of its outstanding preference stock at par value, which was classified as noncontrolling interest.  See Note 3 for additional information.

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

122
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31,
PPL Energy Supply, LLC and Subsidiaries
(Millions of Dollars)
             
     2013  2012  2011 
Operating Revenues         
 
Unregulated wholesale energy
 $ 3,044  $ 4,126  $ 5,212 
 
Unregulated wholesale energy to affiliate
   51    78    26 
 
Unregulated retail energy
   1,031    848    727 
 
Energy-related businesses
   527    448    464 
 
Total Operating Revenues
   4,653    5,500    6,429 
             
Operating Expenses         
 Operation         
  
Fuel
   1,049    965    1,080 
  
Energy purchases
   1,168    1,818    2,283 
  
Energy purchases from affiliate
   3    3    3 
  
Other operation and maintenance
   1,072    1,041    929 
  
Loss on lease termination (Note 8)
   697       
 
Depreciation
   318    285    244 
 
Taxes, other than income
   66    69    71 
 
Energy-related businesses
   512    432    458 
 
Total Operating Expenses
   4,885    4,613    5,068 
             
Operating Income (Loss)
   (232)   887    1,361 
             
Other Income (Expense) - net
   30    18    23 
             
Other-Than-Temporary Impairments
   1    1    6 
             
Interest Income from Affiliates
   3    2    8 
             
Interest Expense
   171    168    174 
             
Income (Loss) from Continuing Operations Before Income Taxes
   (371)   738    1,212 
             
Income Taxes
   (142)   263    445 
             
Income (Loss) from Continuing Operations After Income Taxes
   (229)   475    767 
             
Income (Loss) from Discontinued Operations (net of income taxes)
             2 
             
Net Income (Loss)
   (229)   475    769 
             
Net Income (Loss) Attributable to Noncontrolling Interests
   1    1    1 
             
Net Income (Loss) Attributable to PPL Energy Supply Member
 $ (230) $ 474  $ 768 
             
Amounts Attributable to PPL Energy Supply Member:         
 
Income (Loss) from Continuing Operations After Income Taxes
 $ (230) $ 474  $ 766 
 
Income (Loss) from Discontinued Operations (net of income taxes)
             2 
 
Net Income (Loss)
 $ (230) $ 474  $ 768 
             
The accompanying Notes to Financial Statements are an integral part of the financial statements.
123
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31,
PPL Energy Supply, LLC and Subsidiaries
(Millions of Dollars)
           
    2013  2012  2011 
            
Net income (loss)
 $ (229) $ 475  $ 769 
            
Other comprehensive income (loss):         
Amounts arising during the period - gains (losses), net of tax (expense) benefit:         
 
Available-for-sale securities, net of tax of ($72), ($31), ($6)
   67    29    9 
 
Qualifying derivatives, net of tax of $0, ($46), ($164)
        68    267 
 Defined benefit plans:         
  
Prior service costs, net of tax of ($1), $0, ($2)
   2    1    (2)
  
Net actuarial gain (loss), net of tax of ($49), $56, $13
   71    (82)   (22)
Reclassifications to net income - (gains) losses, net of tax expense (benefit):         
 
Available-for-sale securities, net of tax of $4, $1, $5
   (6)   (7)   (7)
 
Qualifying derivatives, net of tax of $84, $291, $242
   (123)   (463)   (353)
 
Equity investees' other comprehensive (income) loss, net of tax of $0, $0, $0
             3 
 Defined benefit plans:         
  
Prior service costs, net of tax of ($3), ($2), ($3)
   4    5    4 
  
Net actuarial loss, net of tax of ($10), ($2), ($2)
   14    10    4 
Total other comprehensive income (loss) attributable to         
 
PPL Energy Supply Member
   29    (439)   (97)
            
Comprehensive income (loss)
   (200)   36    672 
 
Comprehensive income attributable to noncontrolling interests
   1    1    1 
            
Comprehensive income (loss) attributable to PPL Energy Supply Member
 $ (201) $ 35  $ 671 
            
The accompanying Notes to Financial Statements are an integral part of the financial statements.

124
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
PPL Energy Supply, LLC and Subsidiaries   
(Millions of Dollars)   
     2013  2012  2011 
Cash Flows from Operating Activities         
 
Net income (Loss)
 $ (229) $ 475  $ 769 
 Adjustments to reconcile net income to net cash provided by (used in) operating activities         
  
Depreciation
   318    285    245 
  
Amortization
   156    119    137 
  
Defined benefit plans - expense
   51    43    36 
  
Deferred income taxes and investment tax credits
   (296)   152    317 
  
Impairment of assets
   65    3    13 
  
Unrealized (gains) losses on derivatives, and other hedging activities
   171    (41)   (283)
  
Loss on lease termination (Note 8)
   426           
  
Other
   2    19    (65)
 Change in current assets and current liabilities         
  
Accounts receivable
   23    (54)   38 
  
Accounts payable
   (56)   (22)   (73)
  
Unbilled revenues
   83    33    14 
  
Fuel, materials and supplies
   (31)   (29)   (10)
  
Counterparty collateral
   (81)   (34)   (190)
  
Taxes payable
   (31)   (27)   27 
  
Other
   (14)   (39)   (8)
 Other operating activities         
  
Defined benefit plans - funding
   (113)   (75)   (152)
  
Other assets
   (4)   (41)   (30)
  
Other liabilities
   (30)   17    (9)
   
Net cash provided by (used in) operating activities
   410    784    776 
Cash Flows from Investing Activities         
 
Expenditures for property, plant and equipment
   (583)   (648)   (661)
 
Proceeds from the sale of certain non-core generation facilities
             381 
 
Ironwood Acquisition, net of cash acquired
        (84)     
 
Expenditures for intangible assets
   (42)   (45)   (57)
 
Purchases of nuclear plant decommissioning trust investments
   (159)   (154)   (169)
 
Proceeds from the sale of nuclear plant decommissioning trust investments
   144    139    156 
 
Net (increase) decrease in notes receivable from affiliates
        198    (198)
 
Net (increase) decrease in restricted cash and cash equivalents
   (22)   104    (128)
 
Other investing activities
   31    21    8 
   
Net cash provided by (used in) investing activities
   (631)   (469)   (668)
Cash Flows from Financing Activities         
 
Issuance of long-term debt
             500 
 
Retirement of long-term debt
   (747)   (9)   (750)
 
Contributions from member
   1,577    563    461 
 
Distributions to member
   (408)   (787)   (316)
 
Cash included in net assets of subsidiary distributed to member
             (325)
 
Net increase (decrease) in short-term debt
   (356)   (44)   50 
 
Other financing activities
   (19)   (4)   (10)
   
Net cash provided by (used in) financing activities
   47    (281)   (390)
Net Increase (Decrease) in Cash and Cash Equivalents
   (174)   34    (282)
 
Cash and Cash Equivalents at Beginning of Period
   413    379    661 
 
Cash and Cash Equivalents at End of Period
 $ 239  $ 413  $ 379 
             
Supplemental Disclosures of Cash Flow Information         
 Cash paid (received) during the period for:         
   
Interest - net of amount capitalized
 $ 157  $ 150  $ 165 
   
Income taxes - net
 $ 189  $ 128  $ 69 
             
The accompanying Notes to Financial Statements are an integral part of the financial statements.   
125

CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
PPL Energy Supply, LLC and Subsidiaries
(Millions of Dollars)
     2013  2012 
Assets      
          
Current Assets      
 
Cash and cash equivalents
 $ 239  $ 413 
 
Restricted cash and cash equivalents
   68    46 
 Accounts receivable (less reserve:  2013, $21; 2012, $23)        
  
Customer
   233    183 
  
Other
   97    31 
 
Accounts receivable from affiliates
   45    125 
 
Unbilled revenues
   286    369 
 
Fuel, materials and supplies
   358    327 
 
Prepayments
   20    15 
 
Price risk management assets
   860    1,511 
 
Other current assets
   27    10 
 
Total Current Assets
   2,233    3,030 
        
Investments      
 
Nuclear plant decommissioning trust funds
   864    712 
 
Other investments
   37    41 
 
Total Investments
   901    753 
        
Property, Plant and Equipment      
 Non-regulated property, plant and equipment      
  
Generation
   11,891    11,305 
  
Nuclear fuel
   591    524 
  
Other
   288    294 
 
Less:  accumulated depreciation - non-regulated property, plant and equipment
   6,046    5,817 
  
Non-regulated property, plant and equipment, net
   6,724    6,306 
 
Construction work in progress
   450    987 
 
Property, Plant and Equipment, net (a)
   7,174    7,293 
        
Other Noncurrent Assets      
 
Goodwill
   86    86 
 
Other intangibles
   266    252 
 
Price risk management assets
   328    557 
 
Other noncurrent assets
   86    404 
 
Total Other Noncurrent Assets
   766    1,299 
        
Total Assets
 $ 11,074  $ 12,375 

(a)At December 31, 2012, includes $428 million of PP&E, consisting primarily of "Generation," including leasehold improvements from the consolidation of a VIE that was 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.

126


CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
PPL Energy Supply, LLC and Subsidiaries
(Millions of Dollars)
      2013   2012 
Liabilities and Equity      
          
Current Liabilities      
 
Short-term debt
    $ 356 
 
Long-term debt due within one year
 $ 304    751 
 
Accounts payable
   393    438 
 
Accounts payable to affiliates
   4    31 
 
Taxes
   31    62 
 
Interest
   22    31 
 
Price risk management liabilities
   750    1,010 
 
Deferred income taxes
   9    158 
 
Other current liabilities
   269    319 
 
Total Current Liabilities
   1,782    3,156 
          
Long-term Debt
   2,221    2,521 
       
Deferred Credits and Other Noncurrent Liabilities      
 
Deferred income taxes
   1,114    1,232 
 
Investment tax credits
   205    186 
 
Price risk management liabilities
   320    556 
 
Accrued pension obligations
   111    293 
 
Asset retirement obligations
   393    365 
 
Other deferred credits and noncurrent liabilities
   130    218 
 
Total Deferred Credits and Other Noncurrent Liabilities
   2,273    2,850 
          
Commitments and Contingent Liabilities (Note 15)      
       
Equity      
 
Member's equity
   4,798    3,830 
 
Noncontrolling interests
        18 
 
Total Equity
   4,798    3,848 
          
Total Liabilities and Equity
 $ 11,074  $ 12,375 
          
The accompanying Notes to Financial Statements are an integral part of the financial statements.

127

CONSOLIDATED STATEMENTS OF EQUITY
PPL Energy Supply, LLC and Subsidiaries
(Millions of Dollars)
          
     Non-   
  Member's controlling   
  equity interests Total
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 
          
Net income (loss)
 $ (230) 
$
 1  $ (229)
Other comprehensive income (loss)
   29         29 
Contributions from member
   1,577         1,577 
Distributions (c)
   (408)   (19)   (427)
December 31, 2013 (a)
 $ 4,798  $    $ 4,798 

(a)See Note 24 for disclosure of balances of each component of AOCI.
(b)See Note 9 for additional information.
(c)In December 2013, a distribution to noncontrolling interests was made related to the purchase 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.


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129

CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31,
PPL Electric Utilities Corporation and Subsidiaries
(Millions of Dollars)
            
    2013  2012  2011 
Operating Revenues         
 
Retail electric
 $ 1,866  $ 1,760  $ 1,881 
 
Electric revenue from affiliate
   4    3    11 
 
Total Operating Revenues
   1,870    1,763    1,892 
            
Operating Expenses         
 Operation         
  
Energy purchases
   588    550    738 
  
Energy purchases from affiliate
   51    78    26 
  
Other operation and maintenance
   531    576    530 
 
Depreciation
   178    160    146 
 
Taxes, other than income
   103    105    104 
 
Total Operating Expenses
   1,451    1,469    1,544 
            
Operating Income
   419    294    348 
            
Other Income (Expense) - net
   6    9    7 
            
Interest Expense
   108    99    98 
            
Income Before Income Taxes
   317    204    257 
            
Income Taxes
   108    68    68 
            
Net Income (a)
   209    136    189 
            
Distributions on Preference Stock
        4    16 
            
Net Income Available to PPL
 $ 209  $ 132  $ 173 

(a)Net income approximates comprehensive income.

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

130

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
PPL Electric Utilities Corporation and Subsidiaries
(Millions of Dollars)
     2013  2012  2011 
Cash Flows from Operating Activities         
 
Net income
 $ 209  $ 136  $ 189 
 Adjustments to reconcile net income to net cash provided by (used in) operating activities               
  
Depreciation
   178    160    146 
  
Amortization
   19    18    8 
  
Defined benefit plans - expense
   21    22    18 
  
Deferred income taxes and investment tax credits
   127    114    106 
  
Other
   (9)   (9)   (7)
 Change in current assets and current liabilities               
  
Accounts receivable
   (29)   3    (5)
  
Accounts payable
   12    38    (60)
  
Unbilled revenues
   (6)   (8)   36 
  
Prepayments
   36    2    58 
  
Regulatory assets and liabilities
   19    (1)   107 
  
Taxes payable
   49    12    (23)
  
Other
   (28)   (5)   7 
 Other operating activities               
  
Defined benefit plans - funding
   (93)   (59)   (113)
  
Other assets
   8    (3)   (28)
  
Other liabilities
   10    (31)   (19)
   
Net cash provided by (used in) operating activities
   523    389    420 
             
Cash Flows from Investing Activities         
 
Expenditures for property, plant and equipment
   (903)   (624)   (481)
 
Expenditures for intangible assets
   (39)   (9)   (9)
 
Net (increase) decrease in notes receivable from affiliate
   (150)          
 
Other investing activities
   12    20    13 
   
Net cash provided by (used in) investing activities
   (1,080)   (613)   (477)
             
Cash Flows from Financing Activities         
 
Issuance of long-term debt
   348    249    645 
 
Retirement of long-term debt
             (458)
 
Contributions from PPL
   205    150    100 
 
Redemption of preference stock
        (250)     
 
Payment of common stock dividends to parent
   (127)   (95)   (92)
 
Net increase (decrease) in short-term debt
   20           
 
Other financing activities
   (4)   (10)   (22)
   
Net cash provided by (used in) financing activities
   442    44    173 
             
Net Increase (Decrease) in Cash and Cash Equivalents
   (115)   (180)   116 
Cash and Cash Equivalents at Beginning of Period
   140    320    204 
Cash and Cash Equivalents at End of Period
 $ 25  $ 140  $ 320 
             
Supplemental Disclosures of Cash Flow Information         
 Cash paid (received) during the period for:         
   
Interest - net of amount capitalized
 $ 87  $ 81  $ 75 
   
Income taxes - net
 $ (45) $ (42) $ (44)
             
The accompanying Notes to Financial Statements are an integral part of the financial statements.

131

CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
PPL Electric Utilities Corporation and Subsidiaries
(Millions of Dollars, shares in thousands)
     2013  2012 
Assets      
          
Current Assets      
 
Cash and cash equivalents
 $ 25  $ 140 
 Accounts receivable (less reserve: 2013, $18; 2012, $18)      
  
Customer
   284    249 
  
Other
   5    5 
 
Accounts receivable from affiliates
   4    29 
 
Notes receivable from affiliate
   150    
 
Unbilled revenues
   116    110 
 
Materials and supplies
   35    39 
 
Prepayments
   40    76 
 
Deferred income taxes
   85    45 
 
Other current assets
   22    4 
 
Total Current Assets
   766    697 
          
Property, Plant and Equipment      
 
Regulated utility plant
   6,886    6,286 
 
Less: accumulated depreciation - regulated utility plant
   2,417    2,316 
  
Regulated utility plant, net
   4,469    3,970 
 
Other, net
   2    2 
 
Construction work in progress
   591    370 
 
Property, Plant and Equipment, net
   5,062    4,342 
          
Other Noncurrent Assets      
 
Regulatory assets
   772    853 
 
Intangibles
   211    171 
 
Other noncurrent assets
   35    55 
 
Total Other Noncurrent Assets
   1,018    1,079 
          
Total Assets
 $ 6,846  $ 6,118 
          
The accompanying Notes to Financial Statements are an integral part of the financial statements.

132


CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
PPL Electric Utilities Corporation and Subsidiaries
(Millions of Dollars, shares in thousands)
     2013  2012 
Liabilities and Equity      
          
Current Liabilities      
 
Short-term debt
 $ 20    
 
Long-term debt due within one year
   10      
 
Accounts payable
   295  $ 259 
 
Accounts payable to affiliates
   57    63 
 
Taxes
   51    12 
 
Interest
   34    26 
 
Regulatory liabilities
   76    52 
 
Other current liabilities
   82    93 
 
Total Current Liabilities
   625    505 
          
Long-term Debt
   2,305    1,967 
          
Deferred Credits and Other Noncurrent Liabilities      
 
Deferred income taxes
   1,399    1,233 
 
Investment tax credits
   2    3 
 
Accrued pension obligations
   96    237 
 
Regulatory liabilities
   15    8 
 
Other deferred credits and noncurrent liabilities
   55    103 
 
Total Deferred Credits and Other Noncurrent Liabilities
   1,567    1,584 
          
Commitments and Contingent Liabilities (Notes 6 and 15)      
          
Stockholder's Equity      
 
Common stock - no par value (a)
   364    364 
 
Additional paid-in capital
   1,340    1,135 
 
Earnings reinvested
   645    563 
 
Total Equity
   2,349    2,062 
          
Total Liabilities and Equity
 $ 6,846  $ 6,118 

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

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

133

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, 2010
  66,368  $ 250  $ 364  $ 879  $ 451  $ 1,944 
Net income
                      189    189 
Capital contributions from PPL
                 100         100 
Cash dividends declared on preference stock
                      (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 preference stock (b)
     $ (250)      $ 6    (6)   (250)
Capital contributions from PPL
                 150         150 
Cash dividends declared on preference stock
                      (4)   (4)
Cash dividends declared on common stock
                      (95)   (95)
December 31, 2012
  66,368  $    $ 364  $ 1,135  $ 563  $ 2,062 
                    
Net income
                    $ 209  $ 209 
Capital contributions from PPL
               $ 205         205 
Cash dividends declared on common stock
                      (127)   (127)
December 31, 2013
  66,368  $    $ 364  $ 1,340  $ 645  $ 2,349 

(a)Shares in thousands.  All common shares of PPL Electric stock are owned by PPL.
(b)In June 2012, PPL Electric redeemed all of its outstanding preference stock.  See Note 3 for additional information.

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

134

CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31,
LG&E and KU Energy LLC and Subsidiaries
(Millions of Dollars)   
              
     2013   2012  2011 
           
Operating Revenues
 $ 2,976   $ 2,759  $ 2,793 
           
Operating Expenses          
 Operation          
  
Fuel
   896     872    866 
  
Energy purchases
   217     195    238 
  
Other operation and maintenance
   778     778    751 
 
Depreciation
   334     346    334 
 
Taxes, other than income
   48     46    37 
 
Total Operating Expenses
   2,273     2,237    2,226 
              
Operating Income
   703     522    567 
              
Other Income (Expense) - net
   (7)    (15)   (1)
           
Other-Than-Temporary Impairments
         25      
              
Interest Expense
   144     150    146 
              
Interest Expense with Affiliate
   1     1    1 
              
Income (Loss) from Continuing Operations Before Income          
 
Taxes
   551     331    419 
              
Income Taxes
   206     106    153 
              
Income (Loss) from Continuing Operations After Income          
 
Taxes
   345     225    266 
              
Income (Loss) from Discontinued Operations (net of income          
 
taxes)
   2     (6)   (1)
              
Net Income (Loss)
 $ 347   $ 219  $ 265 
              
              
The accompanying Notes to Financial Statements are an integral part of the financial statements.

135

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31,
LG&E and KU Energy LLC and Subsidiaries
(Millions of Dollars)
              
      2013  2012  2011 
              
Net income (loss)
 $ 347  $ 219  $ 265 
              
Other comprehensive income (loss):         
 Amounts arising during the period - gains (losses), net of tax         
  (expense) benefit:         
   Equity investee's other comprehensive income (loss), net         
    
of tax of  $0, ($1), $0
        1      
   Defined benefit plans:         
    
Prior service costs, net of tax of $0, $0, $1
             (2)
    
Net actuarial gain (loss), net of tax of ($18), $13, ($1)
   28    (21)     
 Reclassification to net income - (gains) losses, net of tax         
  expense (benefit):         
   Defined benefit plans:         
    
Net actuarial loss, net of tax of $0, $0, $1
        1      
Total other comprehensive income (loss)
   28    (19)   (2)
              
Comprehensive income (loss) attributable to member
 $ 375  $ 200  $ 263 
              
The accompanying Notes to Financial Statements are an integral part of the financial statements.

136
CONSOLIDATED STATEMENTS OF CASH FLOWS
LG&E and KU Energy LLC and Subsidiaries
(Millions of Dollars)
  2013  2012  2011 
Cash Flows from Operating Activities         
 
Net income
 $ 347  $ 219  $ 265 
 Adjustments to reconcile net income to net cash         
  provided by (used in) operating activities         
   
Depreciation
   334    346    334 
   
Amortization
   22    27    27 
   
Defined benefit plans - expense
   48    40    51 
   
Deferred income taxes and investment tax credits
   254    133    218 
   
Impairment of assets
        25    
   
Other
   5    2    (9)
 Change in current assets and current liabilities         
  
Accounts receivable
   (91)   (9)   17 
  
Accounts payable
   40    1    (32)
  
Accounts payable to affiliates
   1    (1)     
  
Unbilled revenues
   (24)   (10)   24 
  
Fuel, materials and supplies
   (1)   8    15 
  
Income tax receivable
   1    2    37 
  
Taxes payable
   13    1    (2)
  
Other
   22         (1)
 Other operating activities         
  
Defined benefit plans - funding
   (168)   (70)   (170)
  
Settlement of interest rate swaps
   86           
  
Other assets
        (5)   (11)
  
Other liabilities
   22    38    18 
   
Net cash provided by (used in) operating activities
   911    747    781 
Cash Flows from Investing Activities         
 
Expenditures for property, plant and equipment
   (1,434)   (768)   (477)
 
Proceeds from the sale of other investments
             163 
 
Net (increase) decrease in notes receivable from affiliates
   (70)   15    46 
 
Net (increase) decrease in restricted cash and cash equivalents
   9    (3)   (9)
 
Other investing activities
   2           
   
Net cash provided by (used in) investing activities
   (1,493)   (756)   (277)
Cash Flows from Financing Activities         
 
Net increase (decrease) in notes payable with affiliates
   (25)   25      
 
Issuance of long-term debt
   496         250 
 
Retirement of long-term debt
             (2)
 
Net increase (decrease) in short-term debt
   120    125    (163)
 
Debt issuance and credit facility costs
   (6)   (2)   (8)
 
Distributions to member
   (254)   (155)   (533)
 
Contributions from member
   243           
   
Net cash provided by (used in) financing activities
   574    (7)   (456)
Net Increase (Decrease) in Cash and Cash Equivalents
   (8)   (16)   48 
Cash and Cash Equivalents at Beginning of Period
   43    59    11 
Cash and Cash Equivalents at End of Period
 $ 35  $ 43  $ 59 
              
Supplemental Disclosures of Cash Flow Information         
 Cash paid (received) during the period for:         
  
Interest - net of amount capitalized
 $ 137  $ 139  $ 126 
  
Income taxes - net
 $ (67) $ (45) $ (98)
              
The accompanying Notes to Financial Statements are an integral part of the financial statements.
137

CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
LG&E and KU Energy LLC and Subsidiaries
(Millions of Dollars)
          
     2013  2012 
Assets      
          
Current Assets      
 
Cash and cash equivalents
 $ 35  $ 43 
 Accounts receivable (less reserve: 2013, $22; 2012, $19)      
  
Customer
   224    133 
  
Other
   20    20 
 
Unbilled revenues
   180    156 
 
Accounts receivable from affiliates
        1 
 
Notes receivable from affiliates
   70      
 
Fuel, materials and supplies
   278    276 
 
Prepayments
   21    28 
 
Price risk management assets from affiliates
        14 
 
Deferred income taxes
   159    13 
 
Regulatory assets
   27    19 
 
Other current assets
   3    4 
 
Total Current Assets
   1,017    707 
          
Property, Plant and Equipment      
 
Regulated utility plant
   8,526    8,073 
 
Less: accumulated depreciation - regulated utility plant
   778    519 
  
Regulated utility plant, net
   7,748    7,554 
 
Other, net
   3    3 
 
Construction work in progress
   1,793    750 
 
Property, Plant and Equipment, net
   9,544    8,307 
          
Other Noncurrent Assets      
 
Regulatory assets
   474    630 
 
Goodwill
   996    996 
 
Other intangibles
   221    271 
 
Other noncurrent assets
   98    108 
 
Total Other Noncurrent Assets
   1,789    2,005 
          
Total Assets
 $ 12,350  $ 11,019 
          
The accompanying Notes to Financial Statements are an integral part of the financial statements.

138


CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
LG&E and KU Energy LLC and Subsidiaries
(Millions of Dollars)
     2013  2012 
Liabilities and Equity      
          
Current Liabilities      
 
Short-term debt
 $ 245  $ 125 
 
Notes payable with affiliates
        25 
 
Accounts payable
   346    283 
 
Accounts payable to affiliates
   3    1 
 
Customer deposits
   50    48 
 
Taxes
   39    26 
 
Price risk management liabilities
   4    5 
 
Regulatory liabilities
   14    9 
 
Interest
   23    21 
 
Other current liabilities
   111    100 
 
Total Current Liabilities
   835    643 
          
Long-term Debt
   4,565    4,075 
       
Deferred Credits and Other Noncurrent Liabilities      
 
Deferred income taxes
   965    541 
 
Investment tax credits
   135    138 
 
Price risk management liabilities
   32    53 
 
Accrued pension obligations
   152    414 
 
Asset retirement obligations
   245    125 
 
Regulatory liabilities
   1,033    1,002 
 
Other deferred credits and noncurrent liabilities
   238    242 
 
Total Deferred Credits and Other Noncurrent Liabilities
   2,800    2,515 
          
Commitments and Contingent Liabilities (Notes 6 and 15)      
          
Member's equity
   4,150    3,786 
 
Total Equity
   4,150    3,786 
          
Total Liabilities and Equity
 $ 12,350  $ 11,019 
          
The accompanying Notes to Financial Statements are an integral part of the financial statements.

139

CONSOLIDATED STATEMENTS OF EQUITY
LG&E and KU Energy LLC and Subsidiaries
(Millions of Dollars)
Member's
Equity
December 31, 2010 (a)
$ 4,011 
Net income
 265 
Distributions to member
 (533)
Other comprehensive income (loss)
 (2)
December 31, 2011 (a)
$ 3,741 
Net income
$ 219 
Distributions to member
 (155)
Other comprehensive income (loss)
 (19)
December 31, 2012 (a)
$ 3,786 
Net income
$ 347 
Contributions from member
 243 
Distributions to member
 (254)
Other comprehensive income (loss)
 28 
December 31, 2013 (a)
$ 4,150 

(a)      See Note 24 for disclosure of balances of each component of AOCI.

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

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141


STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31,
Louisville Gas and Electric Company
(Millions of Dollars)   
             
     2013  2012  2011 
Operating Revenues         
 
Retail and wholesale
 $ 1,351  $ 1,247  $ 1,281 
 
Electric revenue from affiliate
   59    77    83 
 
Total Operating Revenues
   1,410    1,324    1,364 
             
Operating Expenses         
 Operation         
  
Fuel
   367    374    350 
  
Energy purchases
   195    163    209 
  
Energy purchases from affiliate
   10    12    36 
  
Other operation and maintenance
   373    363    363 
 
Depreciation
   148    152    147 
 
Taxes, other than income
   24    23    18 
 
Total Operating Expenses
   1,117    1,087    1,123 
             
Operating Income
   293    237    241 
             
Other Income (Expense) - net
   (2)   (3)   (2)
             
Interest Expense
   34    42    44 
             
Income Before Income Taxes
   257    192    195 
             
Income Taxes
   94    69    71 
             
Net Income (a)
 $ 163  $ 123  $ 124 

(a)Net income equals comprehensive income.

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

142

STATEMENTS OF CASH FLOWS
Louisville Gas and Electric Company
(Millions of Dollars)
  2013  2012  2011 
Cash Flows from Operating Activities         
 
Net income
 $ 163  $ 123  $ 124 
 Adjustments to reconcile net income to net cash provided         
  by (used in) operating activities         
   
Depreciation
   148    152    147 
   
Amortization
   6    11    12 
   
Defined benefit plans - expense
   18    18    21 
   
Deferred income taxes and investment tax credits
   26    69    51 
   
Other
   9    (13)   1 
 Change in current assets and current liabilities         
  
Accounts receivable
   (23)   (2)   25 
  
Accounts payable
   16         (24)
  
Accounts payable to affiliates
   1    (3)   6 
  
Unbilled revenues
   (13)   (7)   16 
  
Fuel, materials and supplies
   (12)        20 
  
Taxes payable
   9    (7)   3 
  
Other
   8    (7)   (7)
 Other operating activities         
  
Defined benefit plans - funding
   (48)   (27)   (70)
  
Settlement of interest rate swaps
   43           
  
Other assets
   (1)   (21)   (7)
  
Other liabilities
   6    22    7 
   
Net cash provided by (used in) operating activities
   356    308    325 
Cash Flows from Investing Activities         
 
Expenditures for property, plant and equipment
   (577)   (286)   (196)
 
Proceeds from the sale of other investments
             163 
 Net (increase) decrease in restricted cash and cash         
  
equivalents
   10    (3)   (9)
   
Net cash provided by (used in) investing activities
   (567)   (289)   (42)
Cash Flows from Financing Activities         
 
Net increase (decrease) in notes payable with affiliates
             (12)
 
Issuance of long-term debt
   248           
 
Net increase (decrease) in short-term debt
   (35)   55    (163)
 
Debt issuance and credit facility costs
   (3)   (2)   (2)
 
Payment of common stock dividends to parent
   (99)   (75)   (83)
 
Contributions from parent
   86           
   
Net cash provided by (used in) financing activities
   197    (22)   (260)
Net Increase (Decrease) in Cash and Cash Equivalents
   (14)   (3)   23 
Cash and Cash Equivalents at Beginning of Period
   22    25    2 
Cash and Cash Equivalents at End of Period
 $ 8  $ 22  $ 25 
              
Supplemental Disclosures of Cash Flow Information         
 Cash paid (received) during the period for:         
  
Interest - net of amount capitalized
 $ 36  $ 39  $ 40 
  
Income taxes - net
 $ 51  $ 5  $ 20 
              
The accompanying Notes to Financial Statements are an integral part of the financial statements.

143

BALANCE SHEETS AT DECEMBER 31,
Louisville Gas and Electric Company
(Millions of Dollars, shares in thousands)
          
     2013  2012 
Assets      
          
Current Assets      
 
Cash and cash equivalents
 $ 8  $ 22 
 Accounts receivable (less reserve: 2013, $2; 2012, $1)      
  
Customer
   102    59 
  
Other
   9    16 
 
Unbilled revenues
   85    72 
 
Accounts receivable from affiliates
        14 
 
Fuel, materials and supplies
   154    142 
 
Prepayments
   7    7 
 
Price risk management assets from affiliates
        7 
 
Regulatory assets
   17    19 
 
Other current assets
   3    1 
 
Total Current Assets
   385    359 
          
Property, Plant and Equipment      
 
Regulated utility plant
   3,383    3,187 
 
Less: accumulated depreciation - regulated utility plant
   332    220 
  
Regulated utility plant, net
   3,051    2,967 
 
Construction work in progress
   651    259 
 
Property, Plant and Equipment, net
   3,702    3,226 
          
Other Noncurrent Assets      
 
Regulatory assets
   303    400 
 
Goodwill
   389    389 
 
Other intangibles
   120    144 
 
Other noncurrent assets
   35    44 
 
Total Other Noncurrent Assets
   847    977 
          
Total Assets
 $ 4,934  $ 4,562 
          
The accompanying Notes to Financial Statements are an integral part of the financial statements.

144


BALANCE SHEETS AT DECEMBER 31,
Louisville Gas and Electric Company
(Millions of Dollars, shares in thousands)
     2013  2012 
Liabilities and Equity      
          
Current Liabilities      
 
Short-term debt
 $ 20  $ 55 
 
Accounts payable
   166    117 
 
Accounts payable to affiliates
   24    23 
 
Customer deposits
   24    23 
 
Taxes
   11    2 
 
Price risk management liabilities
   4    5 
 
Regulatory liabilities
   9    4 
 
Interest
   6    5 
 
Other current liabilities
   32    34 
 
Total Current Liabilities
   296    268 
          
Long-term Debt
   1,353    1,112 
       
Deferred Credits and Other Noncurrent Liabilities      
 
Deferred income taxes
   582    544 
 
Investment tax credits
   38    40 
 
Price risk management liabilities
   32    53 
 
Accrued pension obligations
   19    102 
 
Asset retirement obligations
   68    56 
 
Regulatory liabilities
   482    471 
 
Other deferred credits and noncurrent liabilities
   104    106 
 
Total Deferred Credits and Other Noncurrent Liabilities
   1,325    1,372 
          
Commitments and Contingent Liabilities (Notes 6 and 15)      
          
Stockholder's Equity      
 
Common stock - no par value (a)
   424    424 
 
Additional paid-in capital
   1,364    1,278 
 
Earnings reinvested
   172    108 
Total Equity
   1,960    1,810 
          
Total Liabilities and Equity
 $ 4,934  $ 4,562 

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

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

145

STATEMENTS OF EQUITY
Louisville Gas and Electric Company            
(Millions of Dollars)            
           
   Common            
   stock            
   shares     Additional      
   outstanding  Common  paid-in  Earnings   
   (a)  stock  capital  reinvested  Total
                
December 31, 2010
  21,294  $424  $1,278  $19  $1,721 
Net income
           124    124 
Cash dividends declared on common stock
           (83)   (83)
December 31, 2011
 21,294  $ 424  $ 1,278  $ 60  $ 1,762 
                
                
Net income
         $ 123  $ 123 
Cash dividends declared on common stock
           (75)   (75)
December 31, 2012
  21,294  $ 424  $ 1,278  $ 108  $ 1,810 
                
                
Net income
         $ 163  $ 163 
Capital contributions from LKE
        86       86 
Cash dividends declared on common stock
           (99)   (99)
December 31, 2013
  21,294  $ 424  $ 1,364  $ 172  $ 1,960 

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

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

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STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31,
Kentucky Utilities Company
(Millions of Dollars)   
             
     2013  2012  2011 
Operating Revenues         
 
Retail and wholesale
 $ 1,625  $ 1,512  $ 1,512 
 
Electric revenue from affiliate
   10    12    36 
 
Total Operating Revenues
   1,635    1,524    1,548 
             
Operating Expenses         
 Operation         
  
Fuel
   529    498    516 
  
Energy purchases
   22    32    29 
  
Energy purchases from affiliate
   59    77    83 
  
Other operation and maintenance
   382    384    362 
 
Depreciation
   186    193    186 
 
Taxes, other than income
   24    23    19 
 
Total Operating Expenses
   1,202    1,207 ��  1,195 
             
Operating Income
   433    317    353 
             
Other Income (Expense) - net
   (3)   (8)   (1)
             
Other-Than-Temporary Impairments
        25      
             
Interest Expense
   70    69    70 
             
Income Before Income Taxes
   360    215    282 
             
Income Taxes
   132    78    104 
             
Net Income (a)
 $ 228  $ 137  $ 178 
             

(a)Net income approximates comprehensive income.

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

148

STATEMENTS OF CASH FLOWS
Kentucky Utilities Company
(Millions of Dollars)
  2013  2012  2011 
Cash Flows from Operating Activities         
 
Net income
 $ 228  $ 137  $ 178 
 Adjustments to reconcile net income to net cash provided         
  by (used in) operating activities         
   
Depreciation
   186    193    186 
   
Amortization
   14    14    13 
   
Defined benefit plans - expense
   18    11    14 
   
Deferred income taxes and investment tax credits
   69    99    108 
   
Impairment of assets
        25      
   
Other
   (3)   10    (10)
 Change in current assets and current liabilities         
  
Accounts receivable
   (37)   (17)   22 
  
Accounts payable
   23    1    2 
  
Accounts payable to affiliates
   (8)        (12)
  
Unbilled revenues
   (11)   (3)   8 
  
Fuel, materials and supplies
   10    7    (5)
  
Taxes payable
   7    15    (14)
  
Other
   10    6    (3)
 Other operating activities         
  
Defined benefit plans - funding
   (65)   (21)   (50)
  
Settlement of interest rate swaps
   43           
  
Other assets
   1    (3)   (2)
  
Other liabilities
   10    26    9 
   
Net cash provided by (used in) operating activities
   495    500    444 
Cash Flows from Investing Activities         
 
Expenditures for property, plant and equipment
   (855)   (480)   (279)
 
Other investing activities
   2           
   
Net cash provided by (used in) investing activities
   (853)   (480)   (279)
Cash Flows from Financing Activities         
 
Net increase (decrease) in notes payable with affiliates
             (10)
 
Issuance of long-term debt
   248           
 
Net increase (decrease) in short-term debt
   80    70      
 
Debt issuance and credit facility costs
   (3)        (3)
 
Payment of common stock dividends to parent
   (124)   (100)   (124)
 
Contributions from parent
   157           
   
Net cash provided by (used in) financing activities
   358    (30)   (137)
Net Increase (Decrease) in Cash and Cash Equivalents
        (10)   28 
Cash and Cash Equivalents at Beginning of Period
   21    31    3 
Cash and Cash Equivalents at End of Period
 $ 21  $ 21  $ 31 
              
Supplemental Disclosures of Cash Flow Information         
 Cash paid (received) during the period for:         
  
Interest - net of amount capitalized
 $ 61  $ 62  $ 60 
  
Income taxes - net
 $ 47  $ (39) $ 16 
              
The accompanying Notes to Financial Statements are an integral part of the financial statements.

149

BALANCE SHEETS AT DECEMBER 31,
Kentucky Utilities Company
(Millions of Dollars, shares in thousands)
          
     2013  2012 
Assets      
          
Current Assets      
 
Cash and cash equivalents
 $ 21  $ 21 
 Accounts receivable (less reserve: 2013, $4; 2012, $2)      
  
Customer
   122    74 
  
Other
   9    13 
 
Unbilled revenues
   95    84 
 
Accounts receivable from affiliates
        7 
 
Fuel, materials and supplies
   124    134 
 
Prepayments
   4    10 
 
Price risk management assets from affiliates
        7 
 
Regulatory assets
   10      
 
Other current assets
   6    6 
 
Total Current Assets
   391    356 
          
Property, Plant and Equipment      
 
Regulated utility plant
   5,143    4,886 
 
Less: accumulated depreciation - regulated utility plant
   446    299 
  
Regulated utility plant, net
   4,697    4,587 
 
Other, net
   1    1 
 
Construction work in progress
   1,139    490 
 
Property, Plant and Equipment, net
   5,837    5,078 
          
Other Noncurrent Assets      
 
Regulatory assets
   171    230 
 
Goodwill
   607    607 
 
Other intangibles
   101    127 
 
Other noncurrent assets
   56    57 
 
Total Other Noncurrent Assets
   935    1,021 
          
Total Assets
 $ 7,163  $ 6,455 
          
The accompanying Notes to Financial Statements are an integral part of the financial statements.

150


BALANCE SHEETS AT DECEMBER 31,
Kentucky Utilities Company
(Millions of Dollars, shares in thousands)
     2013  2012 
Liabilities and Equity      
          
Current Liabilities      
 
Short-term debt
 $ 150  $ 70 
 
Accounts payable
   159    147 
 
Accounts payable to affiliates
   25    33 
 
Customer deposits
   26    25 
 
Taxes
   33    26 
 
Regulatory liabilities
   5    5 
 
Interest
   11    10 
 
Other current liabilities
   36    33 
 
Total Current Liabilities
   445    349 
          
Long-term Debt
   2,091    1,842 
       
Deferred Credits and Other Noncurrent Liabilities      
 
Deferred income taxes
   658    587 
 
Investment tax credits
   97    98 
 
Accrued pension obligations
   11    104 
 
Asset retirement obligations
   177    69 
 
Regulatory liabilities
   551    531 
 
Other deferred credits and noncurrent liabilities
   89    92 
 
Total Deferred Credits and Other Noncurrent Liabilities
   1,583    1,481 
          
Commitments and Contingent Liabilities (Notes 6 and 15)      
          
Stockholder's Equity      
 
Common stock - no par value (a)
   308    308 
 
Additional paid-in capital
   2,505    2,348 
 
Accumulated other comprehensive income (loss)
   1    1 
 
Earnings reinvested
   230    126 
 
Total Equity
   3,044    2,783 
          
Total Liabilities and Equity
 $ 7,163  $ 6,455 

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

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

151

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, 2010
  37,818  $308  $2,348  $35     $ 2,691 
Net income
           178       178 
Cash dividends declared on common stock
           (124)      (124)
December 31, 2011
 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 (b)
 37,818  $ 308  $ 2,348  $ 126  $ 1  $ 2,783 
                  
                  
Net income
         $ 228     $ 228 
Capital contributions from LKE
        157          157 
Cash dividends declared on common stock
           (124)      (124)
December 31, 2013 (b)
 37,818  $308  $2,505  $230  $1  $3,044 

(a)      Shares in thousands.  All common shares of KU stock are owned by LKE.
(b)      See Note 24 for disclosure of balances of each component of AOCI.

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

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COMBINED NOTES TO FINANCIAL STATEMENTS

1.  Summary of Significant Accounting Policies

(All Registrants)

General

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

Business and Consolidation

(PPL)

PPL is an energy and utility holding company that, through its subsidiaries, is primarily engaged in:  1) the regulated distribution of electricity in the U.K.; 2) the regulated generation, transmission, distribution and sale of electricity and the regulated distribution and sale of natural gas, primarily in Kentucky; 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 northwestern U.S.  Headquartered in Allentown, PA, PPL's principal subsidiaries are PPL Global, LKE (including its principal subsidiaries, LG&E and KU), PPL Electric and PPL Energy Supply (including its principal subsidiaries, PPL EnergyPlus and PPL Generation).  PPL's corporate level financing subsidiary is PPL Capital Funding.

WPD, a subsidiary of PPL Global, through indirect wholly owned subsidiaries operates regulated distribution networks providing electricity service in the U.K.  WPD serves end-users in Wales and southwest and central England.  Its principal subsidiaries are WPD (South Wales), WPD (South West), WPD (East Midlands) and WPD (West Midlands).

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 2013 and 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.

See Note 10 for additional information regarding the acquisition of WPD Midlands.

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.

(PPL and PPL Energy Supply)

PPL Energy Supply is an energy company conducting business primarily through its principal subsidiaries PPL Generation and PPL EnergyPlus.  PPL Generation owns and operates a portfolio of competitive domestic power generating assets.  These power plants are located in Pennsylvania and Montana 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 competitive retail markets, primarily in the northeastern and northwestern U.S.

On April 13, 2012, an indirect, wholly owned subsidiary of PPL Energy Supply completed the Ironwood Acquisition.  See Note 10 for additional information.

(PPL and PPL Electric)

PPL Electric is a cost-based rate-regulated utility 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.

153


(PPL, LKE, LG&E and KU)

LKE is a utility holding company with cost-based rate-regulated utility operations through its subsidiaries, LG&E and KU.  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 under the KU name.

(PPL, PPL Energy Supply and 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 Statements of Cash Flows do not separately report the cash flows of the Discontinued Operations.

(All Registrants)

The financial statements of the Registrants include each company's own accounts as well as the accounts of all entities in which the company has a controlling financial interest.  Entities for which a controlling financial interest is not demonstrated through voting interests are evaluated based on accounting guidance for VIEs.  The Registrants consolidate a VIE when they are determined to have a controlling interest in the VIE, and thus are the primary beneficiary of the entity.  For PPL and PPL Energy Supply, see Note 22 for information regarding a previously 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 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.

Regulation

(PPL)

WPD operates in an incentive-based regulatory structure under distribution licenses granted by Ofgem.  Electricity distribution revenues are set by Ofgem for a given time period through price control reviews that are not directly based on cost recovery.  The price control formula that governs WPD's allowed revenue is designed to provide economic incentives to minimize operating, capital and financing costs.  As a result, 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.

(All Registrants except PPL Energy Supply)

PPL Electric, LG&E and KU are cost-based rate-regulated utilities for which rates are set by regulators to enable PPL Electric, LG&E and KU to recover the costs of providing electric or gas service, as applicable, and to provide a reasonable return to shareholders.  Rates are generally established based on a historical or future 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.  Regulatory assets are recognized for the effect of transactions or events where future recovery of underlying costs is probable in regulated customer rates.  The effect of such accounting is to defer certain or qualifying costs that would otherwise currently be charged to expense.  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.  The accounting for regulatory assets and regulatory 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.

Accounting Records(All Registrants except PPL Energy Supply)

The system of accounts for domestic regulated entities is maintained in accordance with the Uniform System of Accounts prescribed by the FERC and adopted by the applicable state regulatory commissions.

154


(All Registrants)

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

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."  The Registrants continuously assess potential loss contingencies for environmental remediation, litigation claims, regulatory penalties and other events.  Loss accruals for environmental remediation are discounted when appropriate.

The accrual of contingencies that might result in gains is not recorded, unless realization is assured.

Changes in Classification

The classification of certain amounts in the 2012 and 2011 financial statements have been changed to conform to the current presentation.  The changes in classification did not affect the Registrants' net income or equity.

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.

Price Risk Management

(All Registrants except PPL Electric)

Energy and energy-related contracts are used to hedge the variability of expected cash flows associated with the generating units and marketing activities, as well as for trading purposes at PPL Energy Supply.  Interest rate contracts are used to hedge exposures to changes in the fair value of debt instruments and to hedge exposures to variability in expected cash flows associated with existing floating-rate debt instruments or forecasted fixed-rate issuances of debt.  Foreign currency exchange contracts are used to hedge foreign currency exposures, primarily associated with PPL's investments in U.K. subsidiaries.  Similar derivatives may receive different accounting treatment, depending on management's intended use and documentation.

Certain energy and energy-related contracts meet the definition of a 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 NPNS has been elected.  These contracts are accounted for using accrual accounting.  All other contracts that have been classified as derivative contracts are reflected on the balance sheets at fair value.  These contracts are recorded as "Price risk management assets" and "Price risk management liabilities" on the Balance Sheets.  The portion of derivative positions that deliver within a year are included in "Current Assets" and "Current Liabilities," while the portion of derivative positions that deliver beyond a year are recorded in "Other Noncurrent Assets" and "Deferred Credits and Other Noncurrent Liabilities."  PPL considers intra-month transactions to be spot activity, which is not accounted for as a derivative.

Energy and energy-related contracts are assigned a strategy and accounting classification.  Processes exist that allow for subsequent review and validation of the contract information.  See Note 19 for more information.  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 these guidelines include, but are not limited to:


155

·Physical coal, limestone, lime, uranium, electric transmission, gas transportation, gas storage and renewable energy credit contracts not traded on an exchange 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 effectively hedge the volatility in the future cash flows for energy-related commodities.

·Certain purchased option contracts or net purchased option collars may receive cash flow hedge treatment.

·Derivative transactions that do not qualify for NPNS or cash flow hedge treatment, or for which NPNS or cash flow hedge treatment is not elected, are recorded at fair value through earnings.

A similar process is also followed by the treasury department as it relates to interest rate and foreign currency derivatives.  Examples of accounting guidelines provided to the treasury department staff include, but are not 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.

·Derivative transactions that do not qualify for cash flow or net investment hedge 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 at PPL Electric, LG&E and KU 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 classification 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 "Unregulated wholesale energy" on the Statements of Income.

See Notes 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.  However, NPNS has been elected for these contracts.  See Notes 18 and 19 for additional information.

Revenue

Utility Revenue(PPL)

For the years ended December 31, the Statements of Income "Utility" line item contains rate-regulated revenue from the following:

156


    2013   2012   2011 
Domestic electric and gas revenue (a) $ 4,842  $  4,519  $  4,674 
U.K. electric revenue (b)   2,359    2,289    1,618 
 Total $ 7,201  $  6,808  $  6,292 

(a)Represents revenue from regulated generation, transmission and/or distribution in Pennsylvania, Kentucky, Virginia and Tennessee, including regulated wholesale revenue.
(b)Represents electric distribution revenue from the operation of WPD's distribution networks.  2011 includes eight months of revenue for WPD Midlands.

Revenue Recognition

(All Registrants)

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.  Any difference between estimated and actual revenues is adjusted the following month.

Certain PPL subsidiaries participate primarily in the PJM RTO, as well as in other RTOs and ISOs.  In PJM, PPL EnergyPlus is a marketer, a load-serving entity and a seller for PPL 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 RTO at the respective market price for that hour; if the net result is an obligation, the participant is charged with a spot-market purchase at the respective market price for that hour.  PPL Energy Supply records the hourly net sales in its Statements of Income as "Unregulated wholesale energy" 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 each 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 "Unregulated wholesale energy" and "Unregulated retail energy."  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 the Statements of Income within "Unregulated wholesale energy" 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 revenue or expense (see Note 19), unless hedge accounting is applied or NPNS is elected.  If derivatives meet cash flow hedging criteria, changes in fair value are recorded in AOCI.  The unrealized and realized results of derivative and non-derivative contracts that are designated as proprietary trading activities are reported net on the Statements of Income within "Unregulated wholesale energy."

"Energy-related businesses" revenue primarily includes revenue from PPL Energy Supply's mechanical contracting and engineering subsidiaries.  These subsidiaries record revenue 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 within "Unbilled revenues" on the Balance Sheets, and billings in excess of costs and estimated earnings on uncompleted contracts are recorded within "Other current liabilities" on the Balance Sheets.  The amount of costs and estimated earnings in excess of billings was $14 million and $12 million at December 31, 2013 and 2012, and the amount of billings in excess of costs and estimated earnings was $75 million and $70 million at December 31, 2013 and 2012.

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Accounts Receivable

(All Registrants)

Accounts receivable are reported on 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 acquisition of WPD Midlands.

(PPL, PPL Energy Supply and PPL Electric)

PP&E isIn accordance with a PUC-approved purchase of accounts receivable program, PPL Electric purchases certain accounts receivable from alternative suppliers (including PPL EnergyPlus) at a discount, which reflects a provision for uncollectible accounts.  The alternative suppliers have no continuing involvement or interest in the purchased accounts receivable.  The purchased accounts receivable are initially recorded at original cost, unless impaired.  The original cost for PP&E acquiredfair value using a market approach based on the purchase price paid and are classified as Level 2 in the LKE acquisition is its fair value hierarchy.  During 2013, 2012 and 2011, PPL Electric purchased $985 million, $848 million and $875 million of accounts receivable from unaffiliated third parties.  During 2013, 2012 and 2011, PPL Electric purchased $294 million, $313 million and $264 million of accounts receivable from PPL EnergyPlus.

Allowance for Doubtful Accounts(All Registrants)

Accounts receivable collectability is evaluated using a combination of factors, including past due status based on November 1, 2010, which approximated net book value ascontractual terms, trends in write-offs, the age of the acquisition date.  See Note 10receivable, counterparty creditworthiness and economic conditions.  Specific events, such as bankruptcies, are also considered.  Adjustments to the allowance for additional informationdoubtful accounts are made when necessary based on the acquisitionresults of LKE.  If impaired,analysis, the asset isaging of receivables and historical and industry trends.

Accounts receivable are 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 records costs associated with planned major maintenance projectsoff in the period in which the costsreceivable is deemed uncollectible.  Recoveries of accounts receivable previously written off are incurred.  No costsrecorded when it is known they will be received.

The changes in the allowance for doubtful accounts were:

     Additions         
  Balance at   Charged to     Balance at
  Beginning of Period Charged to Income Other Accounts Deductions (a) End of Period
PPL                    
2013  $ 64   $ 39   $ 4 (d)  $ 43   $ 64  
2012    54     55 (b)          45     64  
2011    55     65 (b)          66 (c)    54  
                     
PPL Energy Supply                    
2013  $ 23   $ 1         $ 3   $ 21  
2012    15     12 (b)          4     23  
2011    20     14 (b)          19 (c)    15  
                     
PPL Electric                    
2013  $ 18   $ 32         $ 32   $ 18  
2012    17     32           31     18  
2011    17     33           33     17  
LKE                    
2013  $ 19   $ 4   $ 4 (d)  $ 5   $ 22  
2012    17     9           7     19  
2011    17     15           15     17  
                     
LG&E                    
2013  $ 1   $ 2   $ 1 (d)  $ 2   $ 2  
2012    2     2           3     1  
2011    2     5           5     2  
                     
KU                    
2013  $ 2   $ 3   $ 3 (d)  $ 4   $ 4  
2012    2     4           4     2  
2011    6     6           10     2  

(a)Primarily related to uncollectible accounts written off.
(b)Includes amounts related to the SMGT bankruptcy.  See Note 15 for additional information.

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(c)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.
(d)Primarily related to capital projects, thus the provision was recorded as an adjustment to construction work in progress.

Cash

(All Registrants)

Cash Equivalents

All highly liquid investments with original maturities of three months or less are accruedconsidered to be cash equivalents.

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 advancerestricted cash and cash equivalents is reported as an investing activity on the Statements of Cash Flows.  On the period in whichBalance Sheets, the workcurrent portion of restricted cash and cash equivalents is performedshown as "Restricted cash and cash equivalents" for PPL and PPL Energy Supply orand included in "Other current assets" for PPL Electric.  PPL, through its subsidiariesElectric, LKE, LG&E and KU accrues costs of removal net of estimated salvage value through depreciation whichwhile the noncurrent portion 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 Note 3"Other noncurrent assets" for additional information.all Registrants.

(PPL and PPL Electric)All Registrants except KU)

AFUDCAt December 31, the balances of restricted cash and cash equivalents included the following.

     PPL PPL Energy Supply PPL Electric LKE LG&E
     2013  2012  2013  2012  2013  2012  2013  2012  2013  2012 
                                  
Margin deposits posted to                              
 counterparties $  67  $  43  $  67  $  43                   
Cash collateral posted to                              
 counterparties   22    32              $  22  $  32  $  22  $  32 
Low carbon network fund (a)   27    14                         
Funds deposited with a trustee (b)   12    13        $  12  $  13             
Ironwood debt service reserves   17    17    17    17                   
Other   11    16    1    3                     
  Total $  156  $  135  $  85  $  63  $  12  $  13  $  22  $  32  $  22  $  32 

(a)Funds received by WPD, which are to be spent on approved initiatives to support a low carbon environment.
(b)Funds deposited with a trustee to defease PPL Electric's 1945 First Mortgage Bonds.

Fair Value Measurements (All Registrants)

The 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.

The Registrants classify fair value measurements within one of three levels in the fair value hierarchy.  The level assigned to a fair value measurement is capitalized as partbased 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.


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·
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, the Registrants' assessment of the significance of a particular input may affect how the assets and liabilities are classified within the fair value hierarchy.

Investments

(All Registrants)

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 costsof 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.  Investments 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 "Other current assets" on the Balance Sheets.

Investments in Debt and Equity Securities

Investments in debt securities are classified as held-to-maturity and measured at amortized cost based rate regulated projectswhen there is an intent and ability to hold the securities to maturity.  Debt and equity securities held principally to capitalize on fluctuations in their value with the intention of selling them in the near-term are classified as trading.  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.

The 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 require that when a debt security is in an unrealized loss position and:

·there is an intent or a requirement to sell the security before recovery, the other-than-temporary impairment is recognized currently in earnings; or
·there is no intent or requirement to sell the security before recovery, the portion of the other-than-temporary impairment that is considered a credit loss, if any, is recognized currently in earnings and the remainder of the other-than-temporary impairment is reported in OCI, net of tax.

Unrealized gains and losses on available-for-sale equity securities are reported, net of tax, in OCI.  When an equity security's decline in fair value below amortized cost is determined to be an other-than-temporary impairment, the unrealized loss is recognized currently in earnings.  See Notes 18 and 23 for additional information on investments in debt and equity securities.

Equity Method Investment(PPL, LKE and KU)

Investments in entities over which a return on such costs is recovered afterPPL, LKE and KU have the project is placed in service.  The debt component of AFUDC is creditedability to "Interest Expense" andexercise significant influence, but not control, are accounted for using the equity componentmethod of accounting and are reported in "Other Investments" on PPL's Balance Sheet and in "Other noncurrent assets" on LKE's and KU's Balance Sheets.  In accordance with the accounting guidance for equity method investments, the recoverability of the investment is credited to "Other Income (Expense) - net"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.


(PPL and PPL Energy Supply)

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Nuclear fuel-related costs, including fuel, conversion, enrichment, fabrication and assemblies, are capitalized as PP&E.  Such costs are amortized over the period the fuel is spent using the unit-of-production method and included in "Fuel" on the Statements of Income.

PPL and PPL Energy Supply capitalize interest costs as part of construction costs for projects not subjected to cost-based rate regulation.

The following capitalized interest was excluded from "Interest Expense" on the Statements of Income.

     PPL
  PPL Energy Supply
       
2010  $ 30  $ 33 
2009    44    45 
2008    57    56 

(PPL, PPL Energy Supply and PPL Electric)

Included in PP&E on the balance sheet are capitalized costs of software projects that were developed or obtained for internal use.  These capitalized costs are amortized ratably over the expected livesKU owns 20% of the projects when they become operational, generally notcommon stock of EEI, which is accounted for as an equity method investment.  During 2012, KU recorded 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 exceed five years.  Following are capitalized software costs and the accumulated amortization.

  December 31, 2010 December 31, 2009
  Gross    Gross   
  Carrying Accumulated Carrying Accumulated
  Amount Amortization Amount Amortization
             
PPL (a) $213  $70  $97  $52 
PPL Energy Supply  30   20   24   19 
PPL Electric  54   24   37   15 

(a)The December 31, 2010 gross carrying amount includes $84 million from the acquisition of LKE.

Amortization expense of capitalized software costs was as follows:

     PPL   
  PPL Energy Supply PPL Electric
          
2010  $21  $3  $9 
2009   13   2   5 
2008   8   2   3 

The amortization of capitalized software is included in "Depreciation" on the Statements of Income.

Depreciation(PPL, PPL Energy Supply and PPL Electric)

Depreciation is computed overzero, the estimated useful lives of property using various methods including the straight-line, composite and group methods.  When a component of PP&E is retired that was depreciated under the composite or group method, the original cost is charged to accumulated depreciation.  When all or a significant portion of an operating unit that was depreciated under the composite or group method is retired or sold, the property and the related accumulated depreciation account is reduced and any gain or loss is included in income, unless otherwise required by regulators.

Following are the weighted-average rates of depreciationfair value at December 31.

  2010  2009 
     PPL       PPL   
     Energy PPL    Energy PPL
  PPL Supply Electric PPL Supply Electric
                   
Regulated utility plant (a)  3.27   2.31   2.27   2.24   2.24   2.24 
Non-regulated  PP&E - Generation  2.76   2.76      2.48   2.48    

(a)For PPL, the 2010 weighted-average depreciation rate was impacted by the acquisition of LKE.  In accordance with purchase accounting guidelines, the original cost for PP&E acquired in the LKE acquisition is its fair value on November 1, 2010, which approximated net book value as of the acquisition date.  This resulting lower original cost basis of LKE's PP&E was used in the calculation of the weighted-average depreciation rate for PPL for 2010.  Therefore, the consolidation of LKE results in a significantly higher weighted-average rate compared to PPL's historical rates.  Excluding LKE, PPL's 2010 weighted-average depreciation rate was 2.28%.

Goodwill31, 2013 and Other Intangible Assets(PPL, PPL Energy Supply and PPL Electric)

Goodwill represents the excess of the purchase price paid over the fair value of the identifiable net assets acquired in the acquisition of a business.

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 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 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.

PPL and its subsidiaries account for emission allowances as intangible assets.  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.  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.

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 operation and maintenance" on the Statements of Income.

See Note 20 for additional information on goodwill and other intangible assets.

Asset Impairment(PPL, PPL Energy Supply and PPL Electric)

PPL and its subsidiaries 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.

For a long-lived asset classified as held and used, an impairment exists when the carrying amount 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 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.2012.  See Note 18 for a discussion of impairment charges recorded associated with long-lived assets classified as held and used.additional information.

For a long-lived asset classified as heldCost Method Investment(LKE, LG&E and KU)

LG&E and KU each have an investment in OVEC, which is accounted for sale, an impairment exists whenusing 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 lossmethod.  The investment is recorded in "Other noncurrent assets" on the LKE, LG&E and KU 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 adjustLG&E and KU and 11 other companies affiliated with the carrying amountvarious owners.  LG&E and KU own 5.63% and 2.5% of the asset (disposal group)OVEC's common stock.  Pursuant to its fair value less costa power purchase agreement, LG&E and KU are contractually entitled to sell.  See Notes 9their ownership percentage of OVEC's output, which is approximately 120 MW for LG&E and 18approximately 53 MW for a discussion of impairment charges recorded associated with long-lived assets classified as held for sale.KU.

GoodwillLG&E's and KU's combined investment in OVEC is reviewed 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 after a portion of goodwill has been allocatednot significant.  The direct exposure to a business to be disposed of.  PPL's reporting units are significant businesses that have discrete financial information, and the operating results are regularly reviewed by segment management.  PPL's reporting units are at or one level below its operating segments.  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 determined in the same m anner as the amount of goodwill in a business combination.  That is, the 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 loss is recognized for an amount equal to that difference.

The goodwill recognized 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, although entirelythe value of the power purchase contract was recorded at LG&E and KU, was assigned to the reporting units expected to benefit from the acquisition,as an intangible asset with an offsetting regulatory liability, both of which are being amortized using the new Kentucky Regulated segmentunits-of-production method until March 2026, the expiration date of the agreement.  See Notes 15 and the Supply segment.  See Note 1020 for additional information regardingdiscussion on the acquisition.power purchase agreement.

Asset Retirement Obligations

(PPL, PPL Energy Supply andAll Registrants, except PPL Electric)

PPL and its subsidiaries recognize variousARO liabilities are required to be recognized for legal obligations associated with the retirement of long-lived assets as liabilities in the financial statements.  Initially, thisassets.  The initial obligation is measured at its estimated fair value.  An ARO must be recognized when incurred if the fair value of the ARO can be reasonably estimated.  An equivalent amount is recorded as an increase in the value of the capitalized asset and allocatedamortized 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 statement of income, for changes in the obligation due to the passage of time.

(PPL, LKE, LG&E and KU)

In the case of LG&E and KU, because costs of removal are collected in rates, the depreciation and accretion expenses related to an ARO are recorded as a regulatory asset, such that there is no earnings impact.

(All Registrants, except PPL Electric)

See Note 21 to the Financial Statements for additional information on 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 the ARO and the related capitalized asset, are reviewed periodically to ensure that any material changes are incorporated into the latest estimate of the ARO.  Any change to the capitalized asset, positive or negative, is generally amortized over the remaining life of the associated long-lived asset.


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At December 31, 2013, the total recorded balances and information on the most significant recorded AROs were as follows.

      Most Significant AROs
   Total        
   ARO Amount     
   Recorded Recorded % of Total Description
             
           Nuclear decommissioning, ash ponds,
PPL $ 705  $ 533   76  landfills and natural gas mains
PPL Energy Supply   404    342   85  Nuclear decommissioning
LKE   252    191   76  Ash ponds, landfills and natural gas mains
LG&E   74    46   62  Ash ponds, landfills and natural gas mains
KU   178    145   81  Ash ponds and landfills

The most significant assumptions surrounding AROs are the forecasted retirement costs (including the settlement dates and the timing of cash flows), the discount rates and the inflation rates.  At December 31, 2013, a 10% change to retirement cost, a 0.25% decrease in the discount rate or a 0.25% increase in the inflation rate would not have a significant impact on the ARO liabilities of the Registrants.  For PPL and PPL Energy Supply, there would be 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 these changes in assumptions.  As noted above, these factors do not impact the Statements of Income of LKE, LG&E and KU.
Income Taxes (All Registrants)

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 valuation allowances on deferred tax assets.

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

IncreaseDecrease
PPL$22 
PPL Energy Supply15 

These changes 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 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.  In addition, for PPL, this change could also relate to the creditability of foreign taxes and the timing and utilization of foreign tax credits.  For PPL Electric, LKE, LG&E and KU, no significant changes in unrecognized tax benefits are projected over the next 12 months.


106

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.  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 income tax disclosures.

Regulatory Assets and Liabilities

(PPL)

WPD operates in an incentive-based regulatory structure under distribution licenses granted by Ofgem.  WPD's electricity distribution revenues are set every five years (changing to every eight years beginning on April 1, 2015) 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.

(All Registrants except PPL Energy Supply)

PPL Electric, LG&E and KU, are subject to cost-based rate regulation.  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 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, the regulatory asset would be written-off.  Additionally, the regulatory agencies can provide flexibility in the manner and timing of recovery of regulatory assets.

At December 31, 2013, regulatory assets and regulatory liabilities were recorded as reflected in the table below.  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.

     PPL         
  PPL Electric LKE LG&E KU
                
Regulatory assets $ 1,279  $ 778  $ 501  $ 320  $ 181 
Regulatory liabilities   1,138    91    1,047    491    556 

See Note 6 to the Financial Statements for additional information on regulatory assets and liabilities.


107

Revenue Recognition - Unbilled Revenue (PPL Electric, LKE, LG&E and KU)

Revenues related to the sale of energy are recorded when service is rendered or 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, estimates are recorded for unbilled revenues at the end of each reporting period.  Such unbilled revenue amounts reflect estimates of the deliveries to customers since the date of the last reading of their meters.  The unbilled revenue estimates reflect consideration of factors including daily load models, estimated usage for each customer class, the effect of current and different rate schedules, the meter read schedule, the billing schedule, actual weather data and where applicable, the impact of weather normalization or other regulatory provisions of rate structures.  At December 31, unbilled revenues recorded on the Balance Sheets were as follows.

  2013  2012 
       
PPL Electric $116  $110 
LKE  180   156 
LG&E  85   72 
KU  95   84 

Other Information(All Registrants)

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.

108

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Reference is made to "Risk Management" for the Registrants in "Item 7. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations." 

109

Report of Independent Registered Public Accounting Firm

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, 2013 and 2012, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2013. 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. 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 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 Corporation and subsidiaries at December 31, 2013 and 2012, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2013, 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 and subsidiaries' internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 24, 2014, expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP


Philadelphia, Pennsylvania
February 24, 2014

110

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareowners of PPL Corporation

We have audited PPL Corporation and subsidiaries' internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). PPL Corporation and subsidiaries' 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 and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, 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, 2013 and 2012, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2013, and our report dated February 24, 2014, expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP


Philadelphia, Pennsylvania
February 24, 2014

111

Report of Independent Registered Public Accounting Firm

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, 2013 and 2012, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2013. 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, 2013 and 2012, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP


Philadelphia, Pennsylvania
February 24, 2014

112

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareowners of PPL Electric Utilities Corporation

We have audited the accompanying consolidated balance sheets of PPL Electric Utilities Corporation and subsidiaries as of December 31, 2013 and 2012, and the related consolidated statements of income, shareowners' equity, and cash flows for each of the three years in the period ended December 31, 2013. 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, 2013 and 2012, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP


Philadelphia, Pennsylvania
February 24, 2014

113

Report of Independent Registered Public Accounting Firm

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, 2013 and 2012, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2013. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2).  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, 2013 and 2012, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2013, 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 24, 2014

114

Report of Independent Registered Public Accounting Firm

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, 2013 and 2012, and the related statements of income, equity and cash flows for each of the three years in the period ended December 31, 2013. 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, 2013 and 2012, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP


Louisville, Kentucky
February 24, 2014

115

Report of Independent Registered Public Accounting Firm

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, 2013 and 2012, and the related statements of income, equity and cash flows for each of the three years in the period ended December 31, 2013. 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, 2013 and 2012, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP


Louisville, Kentucky
February 24, 2014

116
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)
            
     2013  2012  2011 
Operating Revenues      
 
Utility
 $ 7,201  $ 6,808  $ 6,292 
 
Unregulated wholesale energy
   3,044    4,126    5,212 
 
Unregulated retail energy
   1,027    844    726 
 
Energy-related businesses
   588    508    507 
 
Total Operating Revenues
   11,860    12,286    12,737 
          
Operating Expenses         
 Operation         
  
Fuel
   1,944    1,837    1,946 
  
Energy purchases
   1,967    2,555    3,253 
  
Other operation and maintenance
   2,825    2,835    2,667 
  
Loss on lease termination (Note 8)
   697       
 
Depreciation
   1,161    1,100    960 
 
Taxes, other than income
   364    366    326 
 
Energy-related businesses
   563    484    484 
 
Total Operating Expenses
   9,521    9,177    9,636 
             
Operating Income
   2,339    3,109    3,101 
             
Other Income (Expense) - net
   (23)   (39)   4 
          
Other-Than-Temporary Impairments
   1    27    6 
             
Interest Expense
   1,006    961    898 
             
Income from Continuing Operations Before Income Taxes
   1,309    2,082    2,201 
             
Income Taxes
   180    545    691 
             
Income from Continuing Operations After Income Taxes
   1,129    1,537    1,510 
             
Income (Loss) from Discontinued Operations (net of income taxes)
   2    (6)   2 
             
Net Income
   1,131    1,531    1,512 
             
Net Income Attributable to Noncontrolling Interests
   1    5    17 
             
Net Income Attributable to PPL Shareowners
 $ 1,130  $ 1,526  $ 1,495 
             
Amounts Attributable to PPL Shareowners:         
 
Income from Continuing Operations After Income Taxes
 $ 1,128  $ 1,532  $ 1,493 
 
Income (Loss) from Discontinued Operations (net of income taxes)
   2    (6)   2 
 
Net Income
 $ 1,130  $ 1,526  $ 1,495 
             
Earnings Per Share of Common Stock:   
 Income from Continuing Operations After Income Taxes Available to PPL   
 Common Shareowners:         
  
Basic
 $ 1.85  $ 2.62  $ 2.70 
  
Diluted
 $ 1.76  $ 2.61  $ 2.70 
 Net Income Available to PPL Common Shareowners:         
  
Basic
 $ 1.85  $ 2.61  $ 2.71 
  
Diluted
 $ 1.76  $ 2.60  $ 2.70 
             
Dividends Declared Per Share of Common Stock
 $ 1.47  $ 1.44  $ 1.40 
             
Weighted-Average Shares of Common Stock Outstanding (in thousands)
         
  
Basic
   608,983    580,276    550,395 
  
Diluted
   663,073    581,626    550,952 
             
The accompanying Notes to Financial Statements are an integral part of the financial statements.
117

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31,
PPL Corporation and Subsidiaries
(Millions of Dollars)
            
    2013  2012  2011 
            
Net income
 $ 1,131  $ 1,531  $ 1,512 
            
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, $2, ($2)
   138    94    (48)
 
Available-for-sale securities, net of tax of ($72), ($31), ($6)
   67    29    9 
 
Qualifying derivatives, net of tax of ($41), ($32), ($139)
   45    39    202 
 
Equity investees' other comprehensive income (loss), net of tax of $0, ($1), $0
        2      
 Defined benefit plans:         
  
Prior service costs, net of tax of ($1), $0, ($1)
   2    1    (3)
  
Net actuarial gain (loss), net of tax of ($73), $343, $58
   71    (965)   (152)
Reclassifications to net income - (gains) losses, net of tax expense (benefit):         
 
Available-for-sale securities, net of tax of $4, $1, $5
   (6)   (7)   (7)
 
Qualifying derivatives, net of tax of $80, $278, $246
   (83)   (434)   (370)
 
Equity investees' other comprehensive (income) loss, net of tax of $0, $0, $0
             3 
 Defined benefit plans:         
  
Prior service costs, net of tax of ($4), ($5), ($5)
   6    10    10 
  
Net actuarial loss, net of tax of ($49), ($29), ($19)
   135    79    47 
Total other comprehensive income (loss) attributable to PPL Shareowners
   375    (1,152)   (309)
            
Comprehensive income (loss)
   1,506    379    1,203 
 
Comprehensive income attributable to noncontrolling interests
   1    5    17 
            
Comprehensive income (loss) attributable to PPL Shareowners
 $ 1,505  $ 374  $ 1,186 
            
The accompanying Notes to Financial Statements are an integral part of the financial statements.

118
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
PPL Corporation and Subsidiaries
(Millions of Dollars)
     2013  2012  2011 
Cash Flows from Operating Activities         
 
Net income
 $ 1,131  $ 1,531  $ 1,512 
 Adjustments to reconcile net income to net cash provided by (used in) operating activities         
  
Depreciation
   1,161    1,100    961 
  
Amortization
   222    186    254 
  
Defined benefit plans - expense
   176    166    205 
  
Deferred income taxes and investment tax credits
   72    424    582 
  
Impairment of assets
   65    28    13 
  
Unrealized (gains) losses on derivatives, and other hedging activities
   236    27    (314)
  
Loss on lease termination (Note 8)
   426           
  
Other
   80    (27)   (38)
 Change in current assets and current liabilities         
  
Accounts receivable
   (165)   7    (89)
  
Accounts payable
   25    (29)   (36)
  
Unbilled revenues
   27    (19)   64 
  
Prepayments
   14    (5)   294 
  
Counterparty collateral
   (81)   (34)   (190)
  
Taxes payable
   20    24    (104)
  
Uncertain tax positions
   (114)   (4)   6 
  
Regulatory assets and liabilities, net
   18    (2)   106 
  
Accrued interest
   (3)   32    109 
  
Other
   (91)   12      
 Other operating activities         
  
Defined benefit plans - funding
   (563)   (607)   (667)
  
Other assets
   7    (33)   (62)
  
Other liabilities
   194    (13)   (99)
   
Net cash provided by (used in) operating activities
   2,857    2,764    2,507 
Cash Flows from Investing Activities         
 
Expenditures for property, plant and equipment
   (4,212)   (3,105)   (2,487)
 
Expenditures for intangible assets
   (95)   (71)   (102)
 
Proceeds from the sale of certain non-core generation facilities
             381 
 
Ironwood Acquisition, net of cash acquired
        (84)     
 
Acquisition of WPD Midlands
             (5,763)
 
Purchases of nuclear plant decommissioning trust investments
   (159)   (154)   (169)
 
Proceeds from the sale of nuclear plant decommissioning trust investments
   144    139    156 
 
Proceeds from the sale of other investments
        20    163 
 
Net (increase) decrease in restricted cash and cash equivalents
   (20)   96    (143)
 
Other investing activities
   47    36    12 
   
Net cash provided by (used in) investing activities
   (4,295)   (3,123)   (7,952)
Cash Flows from Financing Activities         
 
Issuance of long-term debt
   2,038    1,223    5,745 
 
Retirement of long-term debt
   (747)   (108)   (1,210)
 
Repurchase of common stock
   (74)          
 
Issuance of common stock
   1,411    72    2,297 
 
Payment of common stock dividends
   (878)   (833)   (746)
 
Redemption of preference stock of a subsidiary
        (250)     
 
Debt issuance and credit facility costs
   (49)   (17)   (102)
 
Contract adjustment payments on Equity Units
   (82)   (94)   (72)
 
Net increase (decrease) in short-term debt
   49    74    (125)
 
Other financing activities
   (37)   (19)   (20)
   
Net cash provided by (used in) financing activities
   1,631    48    5,767 
Effect of Exchange Rates on Cash and Cash Equivalents
   8    10    (45)
Net Increase (Decrease) in Cash and Cash Equivalents
   201    (301)   277 
Cash and Cash Equivalents at Beginning of Period
   901    1,202    925 
Cash and Cash Equivalents at End of Period
 $ 1,102  $  901  $  1,202 
             
Supplemental Disclosures of Cash Flow Information         
 Cash paid (received) during the period for:         
  
Interest - net of amount capitalized
 $ 916  $ 847  $ 696 
  
Income taxes - net
 $ 128  $ 73  $ (76)
             
The accompanying Notes to Financial Statements are an integral part of the financial statements.
119

CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
PPL Corporation and Subsidiaries
(Millions of Dollars, shares in thousands)
     2013  2012 
Assets      
          
Current Assets      
 
Cash and cash equivalents
 $ 1,102  $ 901 
 
Restricted cash and cash equivalents
   83    54 
 Accounts receivable (less reserve:  2013, $64; 2012, $64)      
  
Customer
   923    745 
  
Other
   97    79 
 
Unbilled revenues
   835    857 
 
Fuel, materials and supplies
   702    673 
 
Prepayments
   153    166 
 
Deferred taxes
   246    30 
 
Price risk management assets
   942    1,525 
 
Regulatory assets
   33    19 
 
Other current assets
   37    19 
 
Total Current Assets
   5,153    5,068 
          
Investments      
 
Nuclear plant decommissioning trust funds
   864    712 
 
Other investments
   43    47 
 
Total Investments
   907    759 
          
Property, Plant and Equipment      
 
Regulated utility plant
   27,755    25,196 
 
Less:  accumulated depreciation - regulated utility plant
   4,873    4,164 
  
Regulated utility plant, net
   22,882    21,032 
 Non-regulated property, plant and equipment      
  
Generation
   11,881    11,295 
  
Nuclear fuel
   591    524 
  
Other
   834    726 
 
Less:  accumulated depreciation - non-regulated property, plant and equipment
   6,172    5,942 
  
Non-regulated property, plant and equipment, net
   7,134    6,603 
 
Construction work in progress
   3,071    2,397 
 
Property, Plant and Equipment, net (a)
   33,087    30,032 
          
Other Noncurrent Assets      
 
Regulatory assets
   1,246    1,483 
 
Goodwill
   4,225    4,158 
 
Other intangibles
   947    925 
 
Price risk management assets
   337    572 
 
Other noncurrent assets
   357    637 
 
Total Other Noncurrent Assets
   7,112    7,775 
       
Total Assets
 $ 46,259  $ 43,634 

(a)At December 31, 2012, includes $428 million of PP&E, consisting primarily of "Generation," including leasehold improvements from the consolidation of a VIE that was 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.

120


CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
PPL Corporation and Subsidiaries
(Millions of Dollars, shares in thousands)
     2013  2012 
Liabilities and Equity      
          
Current Liabilities      
 
Short-term debt
 $ 701  $ 652 
 
Long-term debt due within one year
   315    751 
 
Accounts payable
   1,308    1,252 
 
Taxes
   114    90 
 
Interest
   325    325 
 
Dividends
   232    210 
 
Price risk management liabilities
   829    1,065 
 
Regulatory liabilities
   90    61 
 
Other current liabilities
   998    1,219 
 
Total Current Liabilities
   4,912    5,625 
          
Long-term Debt
   20,592    18,725 
          
Deferred Credits and Other Noncurrent Liabilities      
 
Deferred income taxes
   3,928    3,387 
 
Investment tax credits
   342    328 
 
Price risk management liabilities
   415    629 
 
Accrued pension obligations
   1,286    2,076 
 
Asset retirement obligations
   687    536 
 
Regulatory liabilities
   1,048    1,010 
 
Other deferred credits and noncurrent liabilities
   583    820 
 
Total Deferred Credits and Other Noncurrent Liabilities
   8,289    8,786 
          
Commitments and Contingent Liabilities (Notes 5, 6 and 15)      
          
Equity      
 PPL Shareowners' Common Equity      
  
Common stock - $0.01 par value (a)
   6    6 
  
Additional paid-in capital
   8,316    6,936 
  
Earnings reinvested
   5,709    5,478 
  
Accumulated other comprehensive loss
   (1,565)   (1,940)
  
Total PPL Shareowners' Common Equity
   12,466    10,480 
 
Noncontrolling Interests
        18 
 
Total Equity
   12,466    10,498 
          
Total Liabilities and Equity
 $ 46,259  $ 43,634 

(a)780,000 shares authorized; 630,321 and 581,944 shares issued and outstanding at December 31, 2013 and 2012.

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

121

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, 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 (f)
        10             10 
Net income
           1,495       17    1,512 
Dividends, dividend equivalents,                      
 redemptions and distributions (g)
           (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 (f)
          18               18 
Net income
           $ 1,526       $ 5    1,531 
Dividends, dividend equivalents,                      
 redemptions and distributions (g)
          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 
                       
Common stock issued (c)
  50,807       $ 1,437               $ 1,437 
Common stock repurchased (e)
  (2,430)        (74)                  (74)
Cash settlement of equity forward                    
 agreements (e)
        (13)            (13)
Stock-based compensation (f)
            30                   30 
Net income
               $ 1,130       $ 1    1,131 
Dividends, dividend equivalents,                                
 redemptions and distributions (g)
                 (899)        (19)   (918)
Other comprehensive income (loss)
                    $ 375         375 
December 31, 2013 (b)
  630,321  $ 6  $ 8,316  $ 5,709  $ (1,565) $    $ 12,466 

(a)Shares in thousands.  Each share entitles the holder to one vote on any question presented at any shareowners' meeting.
(b)See Note 24 for disclosure of balances of each component of AOCI.
(c)All years presented include shares of common stock issued through various stock and incentive compensation plans.  2011 includes the April issuance of common stock and 2013 includes the April and July issuances of common stock.  See Note 7 for additional information.
(d)Represents $123 million for the 2011 Purchase Contracts and $20 million of related fees and expenses, net of tax.  See Note 7 for additional information.
(e)See Note 7 for additional information.
(f)2013, 2012 and 2011 include $50 million, $47 million and $33 million of stock-based compensation expense related to new and existing unvested equity awards, and $(20) million, $(29) million and $(23) million related primarily to the reclassification from "Stock-based compensation" to "Common stock issued" for the issuance of common stock after applicable equity award vesting periods and tax adjustments related to stock-based compensation.
(g)"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 December 2013, a distribution to noncontrolling interests was made related to the purchase of the Lower Mt. Bethel plant.  See Note 22 for additional information.  In June 2012, PPL Electric redeemed all of its outstanding preference stock at par value, which was classified as noncontrolling interest.  See Note 3 for additional information.

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

122
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31,
PPL Energy Supply, LLC and Subsidiaries
(Millions of Dollars)
             
     2013  2012  2011 
Operating Revenues         
 
Unregulated wholesale energy
 $ 3,044  $ 4,126  $ 5,212 
 
Unregulated wholesale energy to affiliate
   51    78    26 
 
Unregulated retail energy
   1,031    848    727 
 
Energy-related businesses
   527    448    464 
 
Total Operating Revenues
   4,653    5,500    6,429 
             
Operating Expenses         
 Operation         
  
Fuel
   1,049    965    1,080 
  
Energy purchases
   1,168    1,818    2,283 
  
Energy purchases from affiliate
   3    3    3 
  
Other operation and maintenance
   1,072    1,041    929 
  
Loss on lease termination (Note 8)
   697       
 
Depreciation
   318    285    244 
 
Taxes, other than income
   66    69    71 
 
Energy-related businesses
   512    432    458 
 
Total Operating Expenses
   4,885    4,613    5,068 
             
Operating Income (Loss)
   (232)   887    1,361 
             
Other Income (Expense) - net
   30    18    23 
             
Other-Than-Temporary Impairments
   1    1    6 
             
Interest Income from Affiliates
   3    2    8 
             
Interest Expense
   171    168    174 
             
Income (Loss) from Continuing Operations Before Income Taxes
   (371)   738    1,212 
             
Income Taxes
   (142)   263    445 
             
Income (Loss) from Continuing Operations After Income Taxes
   (229)   475    767 
             
Income (Loss) from Discontinued Operations (net of income taxes)
             2 
             
Net Income (Loss)
   (229)   475    769 
             
Net Income (Loss) Attributable to Noncontrolling Interests
   1    1    1 
             
Net Income (Loss) Attributable to PPL Energy Supply Member
 $ (230) $ 474  $ 768 
             
Amounts Attributable to PPL Energy Supply Member:         
 
Income (Loss) from Continuing Operations After Income Taxes
 $ (230) $ 474  $ 766 
 
Income (Loss) from Discontinued Operations (net of income taxes)
             2 
 
Net Income (Loss)
 $ (230) $ 474  $ 768 
             
The accompanying Notes to Financial Statements are an integral part of the financial statements.
123
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31,
PPL Energy Supply, LLC and Subsidiaries
(Millions of Dollars)
           
    2013  2012  2011 
            
Net income (loss)
 $ (229) $ 475  $ 769 
            
Other comprehensive income (loss):         
Amounts arising during the period - gains (losses), net of tax (expense) benefit:         
 
Available-for-sale securities, net of tax of ($72), ($31), ($6)
   67    29    9 
 
Qualifying derivatives, net of tax of $0, ($46), ($164)
        68    267 
 Defined benefit plans:         
  
Prior service costs, net of tax of ($1), $0, ($2)
   2    1    (2)
  
Net actuarial gain (loss), net of tax of ($49), $56, $13
   71    (82)   (22)
Reclassifications to net income - (gains) losses, net of tax expense (benefit):         
 
Available-for-sale securities, net of tax of $4, $1, $5
   (6)   (7)   (7)
 
Qualifying derivatives, net of tax of $84, $291, $242
   (123)   (463)   (353)
 
Equity investees' other comprehensive (income) loss, net of tax of $0, $0, $0
             3 
 Defined benefit plans:         
  
Prior service costs, net of tax of ($3), ($2), ($3)
   4    5    4 
  
Net actuarial loss, net of tax of ($10), ($2), ($2)
   14    10    4 
Total other comprehensive income (loss) attributable to         
 
PPL Energy Supply Member
   29    (439)   (97)
            
Comprehensive income (loss)
   (200)   36    672 
 
Comprehensive income attributable to noncontrolling interests
   1    1    1 
            
Comprehensive income (loss) attributable to PPL Energy Supply Member
 $ (201) $ 35  $ 671 
            
The accompanying Notes to Financial Statements are an integral part of the financial statements.

124
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
PPL Energy Supply, LLC and Subsidiaries   
(Millions of Dollars)   
     2013  2012  2011 
Cash Flows from Operating Activities         
 
Net income (Loss)
 $ (229) $ 475  $ 769 
 Adjustments to reconcile net income to net cash provided by (used in) operating activities         
  
Depreciation
   318    285    245 
  
Amortization
   156    119    137 
  
Defined benefit plans - expense
   51    43    36 
  
Deferred income taxes and investment tax credits
   (296)   152    317 
  
Impairment of assets
   65    3    13 
  
Unrealized (gains) losses on derivatives, and other hedging activities
   171    (41)   (283)
  
Loss on lease termination (Note 8)
   426           
  
Other
   2    19    (65)
 Change in current assets and current liabilities         
  
Accounts receivable
   23    (54)   38 
  
Accounts payable
   (56)   (22)   (73)
  
Unbilled revenues
   83    33    14 
  
Fuel, materials and supplies
   (31)   (29)   (10)
  
Counterparty collateral
   (81)   (34)   (190)
  
Taxes payable
   (31)   (27)   27 
  
Other
   (14)   (39)   (8)
 Other operating activities         
  
Defined benefit plans - funding
   (113)   (75)   (152)
  
Other assets
   (4)   (41)   (30)
  
Other liabilities
   (30)   17    (9)
   
Net cash provided by (used in) operating activities
   410    784    776 
Cash Flows from Investing Activities         
 
Expenditures for property, plant and equipment
   (583)   (648)   (661)
 
Proceeds from the sale of certain non-core generation facilities
             381 
 
Ironwood Acquisition, net of cash acquired
        (84)     
 
Expenditures for intangible assets
   (42)   (45)   (57)
 
Purchases of nuclear plant decommissioning trust investments
   (159)   (154)   (169)
 
Proceeds from the sale of nuclear plant decommissioning trust investments
   144    139    156 
 
Net (increase) decrease in notes receivable from affiliates
        198    (198)
 
Net (increase) decrease in restricted cash and cash equivalents
   (22)   104    (128)
 
Other investing activities
   31    21    8 
   
Net cash provided by (used in) investing activities
   (631)   (469)   (668)
Cash Flows from Financing Activities         
 
Issuance of long-term debt
             500 
 
Retirement of long-term debt
   (747)   (9)   (750)
 
Contributions from member
   1,577    563    461 
 
Distributions to member
   (408)   (787)   (316)
 
Cash included in net assets of subsidiary distributed to member
             (325)
 
Net increase (decrease) in short-term debt
   (356)   (44)   50 
 
Other financing activities
   (19)   (4)   (10)
   
Net cash provided by (used in) financing activities
   47    (281)   (390)
Net Increase (Decrease) in Cash and Cash Equivalents
   (174)   34    (282)
 
Cash and Cash Equivalents at Beginning of Period
   413    379    661 
 
Cash and Cash Equivalents at End of Period
 $ 239  $ 413  $ 379 
             
Supplemental Disclosures of Cash Flow Information         
 Cash paid (received) during the period for:         
   
Interest - net of amount capitalized
 $ 157  $ 150  $ 165 
   
Income taxes - net
 $ 189  $ 128  $ 69 
             
The accompanying Notes to Financial Statements are an integral part of the financial statements.   
125

CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
PPL Energy Supply, LLC and Subsidiaries
(Millions of Dollars)
     2013  2012 
Assets      
          
Current Assets      
 
Cash and cash equivalents
 $ 239  $ 413 
 
Restricted cash and cash equivalents
   68    46 
 Accounts receivable (less reserve:  2013, $21; 2012, $23)        
  
Customer
   233    183 
  
Other
   97    31 
 
Accounts receivable from affiliates
   45    125 
 
Unbilled revenues
   286    369 
 
Fuel, materials and supplies
   358    327 
 
Prepayments
   20    15 
 
Price risk management assets
   860    1,511 
 
Other current assets
   27    10 
 
Total Current Assets
   2,233    3,030 
        
Investments      
 
Nuclear plant decommissioning trust funds
   864    712 
 
Other investments
   37    41 
 
Total Investments
   901    753 
        
Property, Plant and Equipment      
 Non-regulated property, plant and equipment      
  
Generation
   11,891    11,305 
  
Nuclear fuel
   591    524 
  
Other
   288    294 
 
Less:  accumulated depreciation - non-regulated property, plant and equipment
   6,046    5,817 
  
Non-regulated property, plant and equipment, net
   6,724    6,306 
 
Construction work in progress
   450    987 
 
Property, Plant and Equipment, net (a)
   7,174    7,293 
        
Other Noncurrent Assets      
 
Goodwill
   86    86 
 
Other intangibles
   266    252 
 
Price risk management assets
   328    557 
 
Other noncurrent assets
   86    404 
 
Total Other Noncurrent Assets
   766    1,299 
        
Total Assets
 $ 11,074  $ 12,375 

(a)At December 31, 2012, includes $428 million of PP&E, consisting primarily of "Generation," including leasehold improvements from the consolidation of a VIE that was 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.

126


CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
PPL Energy Supply, LLC and Subsidiaries
(Millions of Dollars)
      2013   2012 
Liabilities and Equity      
          
Current Liabilities      
 
Short-term debt
    $ 356 
 
Long-term debt due within one year
 $ 304    751 
 
Accounts payable
   393    438 
 
Accounts payable to affiliates
   4    31 
 
Taxes
   31    62 
 
Interest
   22    31 
 
Price risk management liabilities
   750    1,010 
 
Deferred income taxes
   9    158 
 
Other current liabilities
   269    319 
 
Total Current Liabilities
   1,782    3,156 
          
Long-term Debt
   2,221    2,521 
       
Deferred Credits and Other Noncurrent Liabilities      
 
Deferred income taxes
   1,114    1,232 
 
Investment tax credits
   205    186 
 
Price risk management liabilities
   320    556 
 
Accrued pension obligations
   111    293 
 
Asset retirement obligations
   393    365 
 
Other deferred credits and noncurrent liabilities
   130    218 
 
Total Deferred Credits and Other Noncurrent Liabilities
   2,273    2,850 
          
Commitments and Contingent Liabilities (Note 15)      
       
Equity      
 
Member's equity
   4,798    3,830 
 
Noncontrolling interests
        18 
 
Total Equity
   4,798    3,848 
          
Total Liabilities and Equity
 $ 11,074  $ 12,375 
          
The accompanying Notes to Financial Statements are an integral part of the financial statements.

127

CONSOLIDATED STATEMENTS OF EQUITY
PPL Energy Supply, LLC and Subsidiaries
(Millions of Dollars)
          
     Non-   
  Member's controlling   
  equity interests Total
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 
          
Net income (loss)
 $ (230) 
$
 1  $ (229)
Other comprehensive income (loss)
   29         29 
Contributions from member
   1,577         1,577 
Distributions (c)
   (408)   (19)   (427)
December 31, 2013 (a)
 $ 4,798  $    $ 4,798 

(a)See Note 24 for disclosure of balances of each component of AOCI.
(b)See Note 9 for additional information.
(c)In December 2013, a distribution to noncontrolling interests was made related to the purchase 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.


128
























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129

CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31,
PPL Electric Utilities Corporation and Subsidiaries
(Millions of Dollars)
            
    2013  2012  2011 
Operating Revenues         
 
Retail electric
 $ 1,866  $ 1,760  $ 1,881 
 
Electric revenue from affiliate
   4    3    11 
 
Total Operating Revenues
   1,870    1,763    1,892 
            
Operating Expenses         
 Operation         
  
Energy purchases
   588    550    738 
  
Energy purchases from affiliate
   51    78    26 
  
Other operation and maintenance
   531    576    530 
 
Depreciation
   178    160    146 
 
Taxes, other than income
   103    105    104 
 
Total Operating Expenses
   1,451    1,469    1,544 
            
Operating Income
   419    294    348 
            
Other Income (Expense) - net
   6    9    7 
            
Interest Expense
   108    99    98 
            
Income Before Income Taxes
   317    204    257 
            
Income Taxes
   108    68    68 
            
Net Income (a)
   209    136    189 
            
Distributions on Preference Stock
        4    16 
            
Net Income Available to PPL
 $ 209  $ 132  $ 173 

(a)Net income approximates comprehensive income.

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

130

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
PPL Electric Utilities Corporation and Subsidiaries
(Millions of Dollars)
     2013  2012  2011 
Cash Flows from Operating Activities         
 
Net income
 $ 209  $ 136  $ 189 
 Adjustments to reconcile net income to net cash provided by (used in) operating activities               
  
Depreciation
   178    160    146 
  
Amortization
   19    18    8 
  
Defined benefit plans - expense
   21    22    18 
  
Deferred income taxes and investment tax credits
   127    114    106 
  
Other
   (9)   (9)   (7)
 Change in current assets and current liabilities               
  
Accounts receivable
   (29)   3    (5)
  
Accounts payable
   12    38    (60)
  
Unbilled revenues
   (6)   (8)   36 
  
Prepayments
   36    2    58 
  
Regulatory assets and liabilities
   19    (1)   107 
  
Taxes payable
   49    12    (23)
  
Other
   (28)   (5)   7 
 Other operating activities               
  
Defined benefit plans - funding
   (93)   (59)   (113)
  
Other assets
   8    (3)   (28)
  
Other liabilities
   10    (31)   (19)
   
Net cash provided by (used in) operating activities
   523    389    420 
             
Cash Flows from Investing Activities         
 
Expenditures for property, plant and equipment
   (903)   (624)   (481)
 
Expenditures for intangible assets
   (39)   (9)   (9)
 
Net (increase) decrease in notes receivable from affiliate
   (150)          
 
Other investing activities
   12    20    13 
   
Net cash provided by (used in) investing activities
   (1,080)   (613)   (477)
             
Cash Flows from Financing Activities         
 
Issuance of long-term debt
   348    249    645 
 
Retirement of long-term debt
             (458)
 
Contributions from PPL
   205    150    100 
 
Redemption of preference stock
        (250)     
 
Payment of common stock dividends to parent
   (127)   (95)   (92)
 
Net increase (decrease) in short-term debt
   20           
 
Other financing activities
   (4)   (10)   (22)
   
Net cash provided by (used in) financing activities
   442    44    173 
             
Net Increase (Decrease) in Cash and Cash Equivalents
   (115)   (180)   116 
Cash and Cash Equivalents at Beginning of Period
   140    320    204 
Cash and Cash Equivalents at End of Period
 $ 25  $ 140  $ 320 
             
Supplemental Disclosures of Cash Flow Information         
 Cash paid (received) during the period for:         
   
Interest - net of amount capitalized
 $ 87  $ 81  $ 75 
   
Income taxes - net
 $ (45) $ (42) $ (44)
             
The accompanying Notes to Financial Statements are an integral part of the financial statements.

131

CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
PPL Electric Utilities Corporation and Subsidiaries
(Millions of Dollars, shares in thousands)
     2013  2012 
Assets      
          
Current Assets      
 
Cash and cash equivalents
 $ 25  $ 140 
 Accounts receivable (less reserve: 2013, $18; 2012, $18)      
  
Customer
   284    249 
  
Other
   5    5 
 
Accounts receivable from affiliates
   4    29 
 
Notes receivable from affiliate
   150    
 
Unbilled revenues
   116    110 
 
Materials and supplies
   35    39 
 
Prepayments
   40    76 
 
Deferred income taxes
   85    45 
 
Other current assets
   22    4 
 
Total Current Assets
   766    697 
          
Property, Plant and Equipment      
 
Regulated utility plant
   6,886    6,286 
 
Less: accumulated depreciation - regulated utility plant
   2,417    2,316 
  
Regulated utility plant, net
   4,469    3,970 
 
Other, net
   2    2 
 
Construction work in progress
   591    370 
 
Property, Plant and Equipment, net
   5,062    4,342 
          
Other Noncurrent Assets      
 
Regulatory assets
   772    853 
 
Intangibles
   211    171 
 
Other noncurrent assets
   35    55 
 
Total Other Noncurrent Assets
   1,018    1,079 
          
Total Assets
 $ 6,846  $ 6,118 
          
The accompanying Notes to Financial Statements are an integral part of the financial statements.

132


CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
PPL Electric Utilities Corporation and Subsidiaries
(Millions of Dollars, shares in thousands)
     2013  2012 
Liabilities and Equity      
          
Current Liabilities      
 
Short-term debt
 $ 20    
 
Long-term debt due within one year
   10      
 
Accounts payable
   295  $ 259 
 
Accounts payable to affiliates
   57    63 
 
Taxes
   51    12 
 
Interest
   34    26 
 
Regulatory liabilities
   76    52 
 
Other current liabilities
   82    93 
 
Total Current Liabilities
   625    505 
          
Long-term Debt
   2,305    1,967 
          
Deferred Credits and Other Noncurrent Liabilities      
 
Deferred income taxes
   1,399    1,233 
 
Investment tax credits
   2    3 
 
Accrued pension obligations
   96    237 
 
Regulatory liabilities
   15    8 
 
Other deferred credits and noncurrent liabilities
   55    103 
 
Total Deferred Credits and Other Noncurrent Liabilities
   1,567    1,584 
          
Commitments and Contingent Liabilities (Notes 6 and 15)      
          
Stockholder's Equity      
 
Common stock - no par value (a)
   364    364 
 
Additional paid-in capital
   1,340    1,135 
 
Earnings reinvested
   645    563 
 
Total Equity
   2,349    2,062 
          
Total Liabilities and Equity
 $ 6,846  $ 6,118 

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

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

133

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, 2010
  66,368  $ 250  $ 364  $ 879  $ 451  $ 1,944 
Net income
                      189    189 
Capital contributions from PPL
                 100         100 
Cash dividends declared on preference stock
                      (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 preference stock (b)
     $ (250)      $ 6    (6)   (250)
Capital contributions from PPL
                 150         150 
Cash dividends declared on preference stock
                      (4)   (4)
Cash dividends declared on common stock
                      (95)   (95)
December 31, 2012
  66,368  $    $ 364  $ 1,135  $ 563  $ 2,062 
                    
Net income
                    $ 209  $ 209 
Capital contributions from PPL
               $ 205         205 
Cash dividends declared on common stock
                      (127)   (127)
December 31, 2013
  66,368  $    $ 364  $ 1,340  $ 645  $ 2,349 

(a)Shares in thousands.  All common shares of PPL Electric stock are owned by PPL.
(b)In June 2012, PPL Electric redeemed all of its outstanding preference stock.  See Note 3 for additional information.

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

134

CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31,
LG&E and KU Energy LLC and Subsidiaries
(Millions of Dollars)   
              
     2013   2012  2011 
           
Operating Revenues
 $ 2,976   $ 2,759  $ 2,793 
           
Operating Expenses          
 Operation          
  
Fuel
   896     872    866 
  
Energy purchases
   217     195    238 
  
Other operation and maintenance
   778     778    751 
 
Depreciation
   334     346    334 
 
Taxes, other than income
   48     46    37 
 
Total Operating Expenses
   2,273     2,237    2,226 
              
Operating Income
   703     522    567 
              
Other Income (Expense) - net
   (7)    (15)   (1)
           
Other-Than-Temporary Impairments
         25      
              
Interest Expense
   144     150    146 
              
Interest Expense with Affiliate
   1     1    1 
              
Income (Loss) from Continuing Operations Before Income          
 
Taxes
   551     331    419 
              
Income Taxes
   206     106    153 
              
Income (Loss) from Continuing Operations After Income          
 
Taxes
   345     225    266 
              
Income (Loss) from Discontinued Operations (net of income          
 
taxes)
   2     (6)   (1)
              
Net Income (Loss)
 $ 347   $ 219  $ 265 
              
              
The accompanying Notes to Financial Statements are an integral part of the financial statements.

135

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31,
LG&E and KU Energy LLC and Subsidiaries
(Millions of Dollars)
              
      2013  2012  2011 
              
Net income (loss)
 $ 347  $ 219  $ 265 
              
Other comprehensive income (loss):         
 Amounts arising during the period - gains (losses), net of tax         
  (expense) benefit:         
   Equity investee's other comprehensive income (loss), net         
    
of tax of  $0, ($1), $0
        1      
   Defined benefit plans:         
    
Prior service costs, net of tax of $0, $0, $1
             (2)
    
Net actuarial gain (loss), net of tax of ($18), $13, ($1)
   28    (21)     
 Reclassification to net income - (gains) losses, net of tax         
  expense (benefit):         
   Defined benefit plans:         
    
Net actuarial loss, net of tax of $0, $0, $1
        1      
Total other comprehensive income (loss)
   28    (19)   (2)
              
Comprehensive income (loss) attributable to member
 $ 375  $ 200  $ 263 
              
The accompanying Notes to Financial Statements are an integral part of the financial statements.

136
CONSOLIDATED STATEMENTS OF CASH FLOWS
LG&E and KU Energy LLC and Subsidiaries
(Millions of Dollars)
  2013  2012  2011 
Cash Flows from Operating Activities         
 
Net income
 $ 347  $ 219  $ 265 
 Adjustments to reconcile net income to net cash         
  provided by (used in) operating activities         
   
Depreciation
   334    346    334 
   
Amortization
   22    27    27 
   
Defined benefit plans - expense
   48    40    51 
   
Deferred income taxes and investment tax credits
   254    133    218 
   
Impairment of assets
        25    
   
Other
   5    2    (9)
 Change in current assets and current liabilities         
  
Accounts receivable
   (91)   (9)   17 
  
Accounts payable
   40    1    (32)
  
Accounts payable to affiliates
   1    (1)     
  
Unbilled revenues
   (24)   (10)   24 
  
Fuel, materials and supplies
   (1)   8    15 
  
Income tax receivable
   1    2    37 
  
Taxes payable
   13    1    (2)
  
Other
   22         (1)
 Other operating activities         
  
Defined benefit plans - funding
   (168)   (70)   (170)
  
Settlement of interest rate swaps
   86           
  
Other assets
        (5)   (11)
  
Other liabilities
   22    38    18 
   
Net cash provided by (used in) operating activities
   911    747    781 
Cash Flows from Investing Activities         
 
Expenditures for property, plant and equipment
   (1,434)   (768)   (477)
 
Proceeds from the sale of other investments
             163 
 
Net (increase) decrease in notes receivable from affiliates
   (70)   15    46 
 
Net (increase) decrease in restricted cash and cash equivalents
   9    (3)   (9)
 
Other investing activities
   2           
   
Net cash provided by (used in) investing activities
   (1,493)   (756)   (277)
Cash Flows from Financing Activities         
 
Net increase (decrease) in notes payable with affiliates
   (25)   25      
 
Issuance of long-term debt
   496         250 
 
Retirement of long-term debt
             (2)
 
Net increase (decrease) in short-term debt
   120    125    (163)
 
Debt issuance and credit facility costs
   (6)   (2)   (8)
 
Distributions to member
   (254)   (155)   (533)
 
Contributions from member
   243           
   
Net cash provided by (used in) financing activities
   574    (7)   (456)
Net Increase (Decrease) in Cash and Cash Equivalents
   (8)   (16)   48 
Cash and Cash Equivalents at Beginning of Period
   43    59    11 
Cash and Cash Equivalents at End of Period
 $ 35  $ 43  $ 59 
              
Supplemental Disclosures of Cash Flow Information         
 Cash paid (received) during the period for:         
  
Interest - net of amount capitalized
 $ 137  $ 139  $ 126 
  
Income taxes - net
 $ (67) $ (45) $ (98)
              
The accompanying Notes to Financial Statements are an integral part of the financial statements.
137

CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
LG&E and KU Energy LLC and Subsidiaries
(Millions of Dollars)
          
     2013  2012 
Assets      
          
Current Assets      
 
Cash and cash equivalents
 $ 35  $ 43 
 Accounts receivable (less reserve: 2013, $22; 2012, $19)      
  
Customer
   224    133 
  
Other
   20    20 
 
Unbilled revenues
   180    156 
 
Accounts receivable from affiliates
        1 
 
Notes receivable from affiliates
   70      
 
Fuel, materials and supplies
   278    276 
 
Prepayments
   21    28 
 
Price risk management assets from affiliates
        14 
 
Deferred income taxes
   159    13 
 
Regulatory assets
   27    19 
 
Other current assets
   3    4 
 
Total Current Assets
   1,017    707 
          
Property, Plant and Equipment      
 
Regulated utility plant
   8,526    8,073 
 
Less: accumulated depreciation - regulated utility plant
   778    519 
  
Regulated utility plant, net
   7,748    7,554 
 
Other, net
   3    3 
 
Construction work in progress
   1,793    750 
 
Property, Plant and Equipment, net
   9,544    8,307 
          
Other Noncurrent Assets      
 
Regulatory assets
   474    630 
 
Goodwill
   996    996 
 
Other intangibles
   221    271 
 
Other noncurrent assets
   98    108 
 
Total Other Noncurrent Assets
   1,789    2,005 
          
Total Assets
 $ 12,350  $ 11,019 
          
The accompanying Notes to Financial Statements are an integral part of the financial statements.

138


CONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
LG&E and KU Energy LLC and Subsidiaries
(Millions of Dollars)
     2013  2012 
Liabilities and Equity      
          
Current Liabilities      
 
Short-term debt
 $ 245  $ 125 
 
Notes payable with affiliates
        25 
 
Accounts payable
   346    283 
 
Accounts payable to affiliates
   3    1 
 
Customer deposits
   50    48 
 
Taxes
   39    26 
 
Price risk management liabilities
   4    5 
 
Regulatory liabilities
   14    9 
 
Interest
   23    21 
 
Other current liabilities
   111    100 
 
Total Current Liabilities
   835    643 
          
Long-term Debt
   4,565    4,075 
       
Deferred Credits and Other Noncurrent Liabilities      
 
Deferred income taxes
   965    541 
 
Investment tax credits
   135    138 
 
Price risk management liabilities
   32    53 
 
Accrued pension obligations
   152    414 
 
Asset retirement obligations
   245    125 
 
Regulatory liabilities
   1,033    1,002 
 
Other deferred credits and noncurrent liabilities
   238    242 
 
Total Deferred Credits and Other Noncurrent Liabilities
   2,800    2,515 
          
Commitments and Contingent Liabilities (Notes 6 and 15)      
          
Member's equity
   4,150    3,786 
 
Total Equity
   4,150    3,786 
          
Total Liabilities and Equity
 $ 12,350  $ 11,019 
          
The accompanying Notes to Financial Statements are an integral part of the financial statements.

139

CONSOLIDATED STATEMENTS OF EQUITY
LG&E and KU Energy LLC and Subsidiaries
(Millions of Dollars)
Member's
Equity
December 31, 2010 (a)
$ 4,011 
Net income
 265 
Distributions to member
 (533)
Other comprehensive income (loss)
 (2)
December 31, 2011 (a)
$ 3,741 
Net income
$ 219 
Distributions to member
 (155)
Other comprehensive income (loss)
 (19)
December 31, 2012 (a)
$ 3,786 
Net income
$ 347 
Contributions from member
 243 
Distributions to member
 (254)
Other comprehensive income (loss)
 28 
December 31, 2013 (a)
$ 4,150 

(a)      See Note 24 for disclosure of balances of each component of AOCI.

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

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141


STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31,
Louisville Gas and Electric Company
(Millions of Dollars)   
             
     2013  2012  2011 
Operating Revenues         
 
Retail and wholesale
 $ 1,351  $ 1,247  $ 1,281 
 
Electric revenue from affiliate
   59    77    83 
 
Total Operating Revenues
   1,410    1,324    1,364 
             
Operating Expenses         
 Operation         
  
Fuel
   367    374    350 
  
Energy purchases
   195    163    209 
  
Energy purchases from affiliate
   10    12    36 
  
Other operation and maintenance
   373    363    363 
 
Depreciation
   148    152    147 
 
Taxes, other than income
   24    23    18 
 
Total Operating Expenses
   1,117    1,087    1,123 
             
Operating Income
   293    237    241 
             
Other Income (Expense) - net
   (2)   (3)   (2)
             
Interest Expense
   34    42    44 
             
Income Before Income Taxes
   257    192    195 
             
Income Taxes
   94    69    71 
             
Net Income (a)
 $ 163  $ 123  $ 124 

(a)Net income equals comprehensive income.

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

142

STATEMENTS OF CASH FLOWS
Louisville Gas and Electric Company
(Millions of Dollars)
  2013  2012  2011 
Cash Flows from Operating Activities         
 
Net income
 $ 163  $ 123  $ 124 
 Adjustments to reconcile net income to net cash provided         
  by (used in) operating activities         
   
Depreciation
   148    152    147 
   
Amortization
   6    11    12 
   
Defined benefit plans - expense
   18    18    21 
   
Deferred income taxes and investment tax credits
   26    69    51 
   
Other
   9    (13)   1 
 Change in current assets and current liabilities         
  
Accounts receivable
   (23)   (2)   25 
  
Accounts payable
   16         (24)
  
Accounts payable to affiliates
   1    (3)   6 
  
Unbilled revenues
   (13)   (7)   16 
  
Fuel, materials and supplies
   (12)        20 
  
Taxes payable
   9    (7)   3 
  
Other
   8    (7)   (7)
 Other operating activities         
  
Defined benefit plans - funding
   (48)   (27)   (70)
  
Settlement of interest rate swaps
   43           
  
Other assets
   (1)   (21)   (7)
  
Other liabilities
   6    22    7 
   
Net cash provided by (used in) operating activities
   356    308    325 
Cash Flows from Investing Activities         
 
Expenditures for property, plant and equipment
   (577)   (286)   (196)
 
Proceeds from the sale of other investments
             163 
 Net (increase) decrease in restricted cash and cash         
  
equivalents
   10    (3)   (9)
   
Net cash provided by (used in) investing activities
   (567)   (289)   (42)
Cash Flows from Financing Activities         
 
Net increase (decrease) in notes payable with affiliates
             (12)
 
Issuance of long-term debt
   248           
 
Net increase (decrease) in short-term debt
   (35)   55    (163)
 
Debt issuance and credit facility costs
   (3)   (2)   (2)
 
Payment of common stock dividends to parent
   (99)   (75)   (83)
 
Contributions from parent
   86           
   
Net cash provided by (used in) financing activities
   197    (22)   (260)
Net Increase (Decrease) in Cash and Cash Equivalents
   (14)   (3)   23 
Cash and Cash Equivalents at Beginning of Period
   22    25    2 
Cash and Cash Equivalents at End of Period
 $ 8  $ 22  $ 25 
              
Supplemental Disclosures of Cash Flow Information         
 Cash paid (received) during the period for:         
  
Interest - net of amount capitalized
 $ 36  $ 39  $ 40 
  
Income taxes - net
 $ 51  $ 5  $ 20 
              
The accompanying Notes to Financial Statements are an integral part of the financial statements.

143

BALANCE SHEETS AT DECEMBER 31,
Louisville Gas and Electric Company
(Millions of Dollars, shares in thousands)
          
     2013  2012 
Assets      
          
Current Assets      
 
Cash and cash equivalents
 $ 8  $ 22 
 Accounts receivable (less reserve: 2013, $2; 2012, $1)      
  
Customer
   102    59 
  
Other
   9    16 
 
Unbilled revenues
   85    72 
 
Accounts receivable from affiliates
        14 
 
Fuel, materials and supplies
   154    142 
 
Prepayments
   7    7 
 
Price risk management assets from affiliates
        7 
 
Regulatory assets
   17    19 
 
Other current assets
   3    1 
 
Total Current Assets
   385    359 
          
Property, Plant and Equipment      
 
Regulated utility plant
   3,383    3,187 
 
Less: accumulated depreciation - regulated utility plant
   332    220 
  
Regulated utility plant, net
   3,051    2,967 
 
Construction work in progress
   651    259 
 
Property, Plant and Equipment, net
   3,702    3,226 
          
Other Noncurrent Assets      
 
Regulatory assets
   303    400 
 
Goodwill
   389    389 
 
Other intangibles
   120    144 
 
Other noncurrent assets
   35    44 
 
Total Other Noncurrent Assets
   847    977 
          
Total Assets
 $ 4,934  $ 4,562 
          
The accompanying Notes to Financial Statements are an integral part of the financial statements.

144


BALANCE SHEETS AT DECEMBER 31,
Louisville Gas and Electric Company
(Millions of Dollars, shares in thousands)
     2013  2012 
Liabilities and Equity      
          
Current Liabilities      
 
Short-term debt
 $ 20  $ 55 
 
Accounts payable
   166    117 
 
Accounts payable to affiliates
   24    23 
 
Customer deposits
   24    23 
 
Taxes
   11    2 
 
Price risk management liabilities
   4    5 
 
Regulatory liabilities
   9    4 
 
Interest
   6    5 
 
Other current liabilities
   32    34 
 
Total Current Liabilities
   296    268 
          
Long-term Debt
   1,353    1,112 
       
Deferred Credits and Other Noncurrent Liabilities      
 
Deferred income taxes
   582    544 
 
Investment tax credits
   38    40 
 
Price risk management liabilities
   32    53 
 
Accrued pension obligations
   19    102 
 
Asset retirement obligations
   68    56 
 
Regulatory liabilities
   482    471 
 
Other deferred credits and noncurrent liabilities
   104    106 
 
Total Deferred Credits and Other Noncurrent Liabilities
   1,325    1,372 
          
Commitments and Contingent Liabilities (Notes 6 and 15)      
          
Stockholder's Equity      
 
Common stock - no par value (a)
   424    424 
 
Additional paid-in capital
   1,364    1,278 
 
Earnings reinvested
   172    108 
Total Equity
   1,960    1,810 
          
Total Liabilities and Equity
 $ 4,934  $ 4,562 

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

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

145

STATEMENTS OF EQUITY
Louisville Gas and Electric Company            
(Millions of Dollars)            
           
   Common            
   stock            
   shares     Additional      
   outstanding  Common  paid-in  Earnings   
   (a)  stock  capital  reinvested  Total
                
December 31, 2010
  21,294  $424  $1,278  $19  $1,721 
Net income
           124    124 
Cash dividends declared on common stock
           (83)   (83)
December 31, 2011
 21,294  $ 424  $ 1,278  $ 60  $ 1,762 
                
                
Net income
         $ 123  $ 123 
Cash dividends declared on common stock
           (75)   (75)
December 31, 2012
  21,294  $ 424  $ 1,278  $ 108  $ 1,810 
                
                
Net income
         $ 163  $ 163 
Capital contributions from LKE
        86       86 
Cash dividends declared on common stock
           (99)   (99)
December 31, 2013
  21,294  $ 424  $ 1,364  $ 172  $ 1,960 

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

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

146






















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147


STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31,
Kentucky Utilities Company
(Millions of Dollars)   
             
     2013  2012  2011 
Operating Revenues         
 
Retail and wholesale
 $ 1,625  $ 1,512  $ 1,512 
 
Electric revenue from affiliate
   10    12    36 
 
Total Operating Revenues
   1,635    1,524    1,548 
             
Operating Expenses         
 Operation         
  
Fuel
   529    498    516 
  
Energy purchases
   22    32    29 
  
Energy purchases from affiliate
   59    77    83 
  
Other operation and maintenance
   382    384    362 
 
Depreciation
   186    193    186 
 
Taxes, other than income
   24    23    19 
 
Total Operating Expenses
   1,202    1,207 ��  1,195 
             
Operating Income
   433    317    353 
             
Other Income (Expense) - net
   (3)   (8)   (1)
             
Other-Than-Temporary Impairments
        25      
             
Interest Expense
   70    69    70 
             
Income Before Income Taxes
   360    215    282 
             
Income Taxes
   132    78    104 
             
Net Income (a)
 $ 228  $ 137  $ 178 
             

(a)Net income approximates comprehensive income.

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

148

STATEMENTS OF CASH FLOWS
Kentucky Utilities Company
(Millions of Dollars)
  2013  2012  2011 
Cash Flows from Operating Activities         
 
Net income
 $ 228  $ 137  $ 178 
 Adjustments to reconcile net income to net cash provided         
  by (used in) operating activities         
   
Depreciation
   186    193    186 
   
Amortization
   14    14    13 
   
Defined benefit plans - expense
   18    11    14 
   
Deferred income taxes and investment tax credits
   69    99    108 
   
Impairment of assets
        25      
   
Other
   (3)   10    (10)
 Change in current assets and current liabilities         
  
Accounts receivable
   (37)   (17)   22 
  
Accounts payable
   23    1    2 
  
Accounts payable to affiliates
   (8)        (12)
  
Unbilled revenues
   (11)   (3)   8 
  
Fuel, materials and supplies
   10    7    (5)
  
Taxes payable
   7    15    (14)
  
Other
   10    6    (3)
 Other operating activities         
  
Defined benefit plans - funding
   (65)   (21)   (50)
  
Settlement of interest rate swaps
   43           
  
Other assets
   1    (3)   (2)
  
Other liabilities
   10    26    9 
   
Net cash provided by (used in) operating activities
   495    500    444 
Cash Flows from Investing Activities         
 
Expenditures for property, plant and equipment
   (855)   (480)   (279)
 
Other investing activities
   2           
   
Net cash provided by (used in) investing activities
   (853)   (480)   (279)
Cash Flows from Financing Activities         
 
Net increase (decrease) in notes payable with affiliates
             (10)
 
Issuance of long-term debt
   248           
 
Net increase (decrease) in short-term debt
   80    70      
 
Debt issuance and credit facility costs
   (3)        (3)
 
Payment of common stock dividends to parent
   (124)   (100)   (124)
 
Contributions from parent
   157           
   
Net cash provided by (used in) financing activities
   358    (30)   (137)
Net Increase (Decrease) in Cash and Cash Equivalents
        (10)   28 
Cash and Cash Equivalents at Beginning of Period
   21    31    3 
Cash and Cash Equivalents at End of Period
 $ 21  $ 21  $ 31 
              
Supplemental Disclosures of Cash Flow Information         
 Cash paid (received) during the period for:         
  
Interest - net of amount capitalized
 $ 61  $ 62  $ 60 
  
Income taxes - net
 $ 47  $ (39) $ 16 
              
The accompanying Notes to Financial Statements are an integral part of the financial statements.

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BALANCE SHEETS AT DECEMBER 31,
Kentucky Utilities Company
(Millions of Dollars, shares in thousands)
          
     2013  2012 
Assets      
          
Current Assets      
 
Cash and cash equivalents
 $ 21  $ 21 
 Accounts receivable (less reserve: 2013, $4; 2012, $2)      
  
Customer
   122    74 
  
Other
   9    13 
 
Unbilled revenues
   95    84 
 
Accounts receivable from affiliates
        7 
 
Fuel, materials and supplies
   124    134 
 
Prepayments
   4    10 
 
Price risk management assets from affiliates
        7 
 
Regulatory assets
   10      
 
Other current assets
   6    6 
 
Total Current Assets
   391    356 
          
Property, Plant and Equipment      
 
Regulated utility plant
   5,143    4,886 
 
Less: accumulated depreciation - regulated utility plant
   446    299 
  
Regulated utility plant, net
   4,697    4,587 
 
Other, net
   1    1 
 
Construction work in progress
   1,139    490 
 
Property, Plant and Equipment, net
   5,837    5,078 
          
Other Noncurrent Assets      
 
Regulatory assets
   171    230 
 
Goodwill
   607    607 
 
Other intangibles
   101    127 
 
Other noncurrent assets
   56    57 
 
Total Other Noncurrent Assets
   935    1,021 
          
Total Assets
 $ 7,163  $ 6,455 
          
The accompanying Notes to Financial Statements are an integral part of the financial statements.

150


BALANCE SHEETS AT DECEMBER 31,
Kentucky Utilities Company
(Millions of Dollars, shares in thousands)
     2013  2012 
Liabilities and Equity      
          
Current Liabilities      
 
Short-term debt
 $ 150  $ 70 
 
Accounts payable
   159    147 
 
Accounts payable to affiliates
   25    33 
 
Customer deposits
   26    25 
 
Taxes
   33    26 
 
Regulatory liabilities
   5    5 
 
Interest
   11    10 
 
Other current liabilities
   36    33 
 
Total Current Liabilities
   445    349 
          
Long-term Debt
   2,091    1,842 
       
Deferred Credits and Other Noncurrent Liabilities      
 
Deferred income taxes
   658    587 
 
Investment tax credits
   97    98 
 
Accrued pension obligations
   11    104 
 
Asset retirement obligations
   177    69 
 
Regulatory liabilities
   551    531 
 
Other deferred credits and noncurrent liabilities
   89    92 
 
Total Deferred Credits and Other Noncurrent Liabilities
   1,583    1,481 
          
Commitments and Contingent Liabilities (Notes 6 and 15)      
          
Stockholder's Equity      
 
Common stock - no par value (a)
   308    308 
 
Additional paid-in capital
   2,505    2,348 
 
Accumulated other comprehensive income (loss)
   1    1 
 
Earnings reinvested
   230    126 
 
Total Equity
   3,044    2,783 
          
Total Liabilities and Equity
 $ 7,163  $ 6,455 

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

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

151

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, 2010
  37,818  $308  $2,348  $35     $ 2,691 
Net income
           178       178 
Cash dividends declared on common stock
           (124)      (124)
December 31, 2011
 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 (b)
 37,818  $ 308  $ 2,348  $ 126  $ 1  $ 2,783 
                  
                  
Net income
         $ 228     $ 228 
Capital contributions from LKE
        157          157 
Cash dividends declared on common stock
           (124)      (124)
December 31, 2013 (b)
 37,818  $308  $2,505  $230  $1  $3,044 

(a)      Shares in thousands.  All common shares of KU stock are owned by LKE.
(b)      See Note 24 for disclosure of balances of each component of AOCI.

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

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COMBINED NOTES TO FINANCIAL STATEMENTS

1.  Summary of Significant Accounting Policies

(All Registrants)

General

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

Business and Consolidation

(PPL)

PPL is an energy and utility holding company that, through its subsidiaries, is primarily engaged in:  1) the regulated distribution of electricity in the U.K.; 2) the regulated generation, transmission, distribution and sale of electricity and the regulated distribution and sale of natural gas, primarily in Kentucky; 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 northwestern U.S.  Headquartered in Allentown, PA, PPL's principal subsidiaries are PPL Global, LKE (including its principal subsidiaries, LG&E and KU), PPL Electric and PPL Energy Supply (including its principal subsidiaries, PPL EnergyPlus and PPL Generation).  PPL's corporate level financing subsidiary is PPL Capital Funding.

WPD, a subsidiary of PPL Global, through indirect wholly owned subsidiaries operates regulated distribution networks providing electricity service in the U.K.  WPD serves end-users in Wales and southwest and central England.  Its principal subsidiaries are WPD (South Wales), WPD (South West), WPD (East Midlands) and WPD (West Midlands).

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 2013 and 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.

See Note 10 for additional information regarding the acquisition of WPD Midlands.

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.

(PPL and PPL Energy Supply)

PPL Energy Supply is an energy company conducting business primarily through its principal subsidiaries PPL Generation and PPL EnergyPlus.  PPL Generation owns and operates a portfolio of competitive domestic power generating assets.  These power plants are located in Pennsylvania and Montana 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 competitive retail markets, primarily in the northeastern and northwestern U.S.

On April 13, 2012, an indirect, wholly owned subsidiary of PPL Energy Supply completed the Ironwood Acquisition.  See Note 10 for additional information.

(PPL and PPL Electric)

PPL Electric is a cost-based rate-regulated utility 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.

153


(PPL, LKE, LG&E and KU)

LKE is a utility holding company with cost-based rate-regulated utility operations through its subsidiaries, LG&E and KU.  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 under the KU name.

(PPL, PPL Energy Supply and 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 Statements of Cash Flows do not separately report the cash flows of the Discontinued Operations.

(All Registrants)

The financial statements of the Registrants include each company's own accounts as well as the accounts of all entities in which the company has a controlling financial interest.  Entities for which a controlling financial interest is not demonstrated through voting interests are evaluated based on accounting guidance for VIEs.  The Registrants consolidate a VIE when they are determined to have a controlling interest in the VIE, and thus are the primary beneficiary of the entity.  For PPL and PPL Energy Supply, see Note 22 for information regarding a previously 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 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.

Regulation

(PPL)

WPD operates in an incentive-based regulatory structure under distribution licenses granted by Ofgem.  Electricity distribution revenues are set by Ofgem for a given time period through price control reviews that are not directly based on cost recovery.  The price control formula that governs WPD's allowed revenue is designed to provide economic incentives to minimize operating, capital and financing costs.  As a result, 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.

(All Registrants except PPL Energy Supply)

PPL Electric, LG&E and KU are cost-based rate-regulated utilities for which rates are set by regulators to enable PPL Electric, LG&E and KU to recover the costs of providing electric or gas service, as applicable, and to provide a reasonable return to shareholders.  Rates are generally established based on a historical or future 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.  Regulatory assets are recognized for the effect of transactions or events where future recovery of underlying costs is probable in regulated customer rates.  The effect of such accounting is to defer certain or qualifying costs that would otherwise currently be charged to expense.  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.  The accounting for regulatory assets and regulatory 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.

Accounting Records(All Registrants except PPL Energy Supply)

The system of accounts for domestic regulated entities is maintained in accordance with the Uniform System of Accounts prescribed by the FERC and adopted by the applicable state regulatory commissions.

154


(All Registrants)

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

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."  The Registrants continuously assess potential loss contingencies for environmental remediation, litigation claims, regulatory penalties and other events.  Loss accruals for environmental remediation are discounted when appropriate.

The accrual of contingencies that might result in gains is not recorded, unless realization is assured.

Changes in Classification

The classification of certain amounts in the 2012 and 2011 financial statements have been changed to conform to the current presentation.  The changes in classification did not affect the Registrants' net income or equity.

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.

Price Risk Management

(All Registrants except PPL Electric)

Energy and energy-related contracts are used to hedge the variability of expected cash flows associated with the generating units and marketing activities, as well as for trading purposes at PPL Energy Supply.  Interest rate contracts are used to hedge exposures to changes in the fair value of debt instruments and to hedge exposures to variability in expected cash flows associated with existing floating-rate debt instruments or forecasted fixed-rate issuances of debt.  Foreign currency exchange contracts are used to hedge foreign currency exposures, primarily associated with PPL's investments in U.K. subsidiaries.  Similar derivatives may receive different accounting treatment, depending on management's intended use and documentation.

Certain energy and energy-related contracts meet the definition of a 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 NPNS has been elected.  These contracts are accounted for using accrual accounting.  All other contracts that have been classified as derivative contracts are reflected on the balance sheets at fair value.  These contracts are recorded as "Price risk management assets" and "Price risk management liabilities" on the Balance Sheets.  The portion of derivative positions that deliver within a year are included in "Current Assets" and "Current Liabilities," while the portion of derivative positions that deliver beyond a year are recorded in "Other Noncurrent Assets" and "Deferred Credits and Other Noncurrent Liabilities."  PPL considers intra-month transactions to be spot activity, which is not accounted for as a derivative.

Energy and energy-related contracts are assigned a strategy and accounting classification.  Processes exist that allow for subsequent review and validation of the contract information.  See Note 19 for more information.  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 these guidelines include, but are not limited to:


155

·Physical coal, limestone, lime, uranium, electric transmission, gas transportation, gas storage and renewable energy credit contracts not traded on an exchange 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 effectively hedge the volatility in the future cash flows for energy-related commodities.

·Certain purchased option contracts or net purchased option collars may receive cash flow hedge treatment.

·Derivative transactions that do not qualify for NPNS or cash flow hedge treatment, or for which NPNS or cash flow hedge treatment is not elected, are recorded at fair value through earnings.

A similar process is also followed by the treasury department as it relates to interest rate and foreign currency derivatives.  Examples of accounting guidelines provided to the treasury department staff include, but are not 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.

·Derivative transactions that do not qualify for cash flow or net investment hedge 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 at PPL Electric, LG&E and KU 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 classification 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 "Unregulated wholesale energy" on the Statements of Income.

See Notes 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.  However, NPNS has been elected for these contracts.  See Notes 18 and 19 for additional information.

Revenue

Utility Revenue(PPL)

For the years ended December 31, the Statements of Income "Utility" line item contains rate-regulated revenue from the following:

156


    2013   2012   2011 
Domestic electric and gas revenue (a) $ 4,842  $  4,519  $  4,674 
U.K. electric revenue (b)   2,359    2,289    1,618 
 Total $ 7,201  $  6,808  $  6,292 

(a)Represents revenue from regulated generation, transmission and/or distribution in Pennsylvania, Kentucky, Virginia and Tennessee, including regulated wholesale revenue.
(b)Represents electric distribution revenue from the operation of WPD's distribution networks.  2011 includes eight months of revenue for WPD Midlands.

Revenue Recognition

(All Registrants)

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.  Any difference between estimated and actual revenues is adjusted the following month.

Certain PPL subsidiaries participate primarily in the PJM RTO, as well as in other RTOs and ISOs.  In PJM, PPL EnergyPlus is a marketer, a load-serving entity and a seller for PPL 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 RTO at the respective market price for that hour; if the net result is an obligation, the participant is charged with a spot-market purchase at the respective market price for that hour.  PPL Energy Supply records the hourly net sales in its Statements of Income as "Unregulated wholesale energy" 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 each 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 "Unregulated wholesale energy" and "Unregulated retail energy."  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 the Statements of Income within "Unregulated wholesale energy" 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 revenue or expense (see Note 19), unless hedge accounting is applied or NPNS is elected.  If derivatives meet cash flow hedging criteria, changes in fair value are recorded in AOCI.  The unrealized and realized results of derivative and non-derivative contracts that are designated as proprietary trading activities are reported net on the Statements of Income within "Unregulated wholesale energy."

"Energy-related businesses" revenue primarily includes revenue from PPL Energy Supply's mechanical contracting and engineering subsidiaries.  These subsidiaries record revenue 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 within "Unbilled revenues" on the Balance Sheets, and billings in excess of costs and estimated earnings on uncompleted contracts are recorded within "Other current liabilities" on the Balance Sheets.  The amount of costs and estimated earnings in excess of billings was $14 million and $12 million at December 31, 2013 and 2012, and the amount of billings in excess of costs and estimated earnings was $75 million and $70 million at December 31, 2013 and 2012.

157


Accounts Receivable

(All Registrants)

Accounts receivable are reported on 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 acquisition of WPD Midlands.

(PPL, PPL Energy Supply and PPL Electric)

In accordance with a PUC-approved purchase of accounts receivable program, PPL Electric purchases certain accounts receivable from alternative suppliers (including PPL EnergyPlus) at a discount, which reflects a provision for uncollectible accounts.  The alternative suppliers have no continuing involvement or interest in the purchased accounts receivable.  The purchased accounts receivable are initially recorded at fair value using a market approach based on the purchase price paid and are classified as Level 2 in the fair value hierarchy.  During 2013, 2012 and 2011, PPL Electric purchased $985 million, $848 million and $875 million of accounts receivable from unaffiliated third parties.  During 2013, 2012 and 2011, PPL Electric purchased $294 million, $313 million and $264 million of accounts receivable from PPL EnergyPlus.

Allowance for Doubtful Accounts(All Registrants)

Accounts receivable collectability is evaluated using a combination of factors, including past due status based on contractual terms, trends in write-offs, the age of the receivable, counterparty creditworthiness and economic conditions.  Specific events, such as bankruptcies, are also considered.  Adjustments to the allowance for doubtful accounts are made when necessary based on the results of analysis, the aging of receivables and historical and industry trends.

Accounts receivable are written off in the period in which the receivable is deemed uncollectible.  Recoveries of accounts receivable previously written off are recorded when it is known they will be received.

The changes in the allowance for doubtful accounts were:

     Additions         
  Balance at   Charged to     Balance at
  Beginning of Period Charged to Income Other Accounts Deductions (a) End of Period
PPL                    
2013  $ 64   $ 39   $ 4 (d)  $ 43   $ 64  
2012    54     55 (b)          45     64  
2011    55     65 (b)          66 (c)    54  
                     
PPL Energy Supply                    
2013  $ 23   $ 1         $ 3   $ 21  
2012    15     12 (b)          4     23  
2011    20     14 (b)          19 (c)    15  
                     
PPL Electric                    
2013  $ 18   $ 32         $ 32   $ 18  
2012    17     32           31     18  
2011    17     33           33     17  
LKE                    
2013  $ 19   $ 4   $ 4 (d)  $ 5   $ 22  
2012    17     9           7     19  
2011    17     15           15     17  
                     
LG&E                    
2013  $ 1   $ 2   $ 1 (d)  $ 2   $ 2  
2012    2     2           3     1  
2011    2     5           5     2  
                     
KU                    
2013  $ 2   $ 3   $ 3 (d)  $ 4   $ 4  
2012    2     4           4     2  
2011    6     6           10     2  

(a)Primarily related to uncollectible accounts written off.
(b)Includes amounts related to the SMGT bankruptcy.  See Note 15 for additional information.

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(c)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.
(d)Primarily related to capital projects, thus the provision was recorded as an adjustment to construction work in progress.

Cash

(All Registrants)

Cash Equivalents

All highly liquid investments with original maturities of three months or less are considered to be cash equivalents.

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 all Registrants.

(All Registrants except KU)

At December 31, the balances of restricted cash and cash equivalents included the following.

     PPL PPL Energy Supply PPL Electric LKE LG&E
     2013  2012  2013  2012  2013  2012  2013  2012  2013  2012 
                                  
Margin deposits posted to                              
 counterparties $  67  $  43  $  67  $  43                   
Cash collateral posted to                              
 counterparties   22    32              $  22  $  32  $  22  $  32 
Low carbon network fund (a)   27    14                         
Funds deposited with a trustee (b)   12    13        $  12  $  13             
Ironwood debt service reserves   17    17    17    17                   
Other   11    16    1    3                     
  Total $  156  $  135  $  85  $  63  $  12  $  13  $  22  $  32  $  22  $  32 

(a)Funds received by WPD, which are to be spent on approved initiatives to support a low carbon environment.
(b)Funds deposited with a trustee to defease PPL Electric's 1945 First Mortgage Bonds.

Fair Value Measurements (All Registrants)

The 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.

The Registrants classify fair value measurements within one of three levels in the fair value hierarchy.  The 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.


159

·
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, the Registrants' assessment of the significance of a particular input may affect how the assets and liabilities are classified within the fair value hierarchy.

Investments

(All Registrants)

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.  Investments 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 "Other current assets" on the Balance 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 held principally to capitalize on fluctuations in their value with the intention of selling them in the near-term are classified as trading.  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.

The 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 require that when a debt security is in an unrealized loss position and:

·there is an intent or a requirement to sell the security before recovery, the other-than-temporary impairment is recognized currently in earnings; or
·there is no intent or requirement to sell the security before recovery, the portion of the other-than-temporary impairment that is considered a credit loss, if any, is recognized currently in earnings and the remainder of the other-than-temporary impairment is reported in OCI, net of tax.

Unrealized gains and losses on available-for-sale equity securities are reported, net of tax, in OCI.  When an equity security's decline in fair value below amortized cost is determined to be an other-than-temporary impairment, the unrealized loss is recognized currently in earnings.  See Notes 18 and 23 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 "Other noncurrent assets" 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.


160

KU owns 20% of the common stock of EEI, which is accounted for as an equity method investment.  During 2012, KU recorded 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, 2013 and 2012.  See Note 18 for additional information.

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 "Other noncurrent assets" on the LKE, LG&E and KU 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 120 MW for LG&E and approximately 53 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

(All Registrants)

PP&E is recorded at original cost, unless impaired.  PP&E acquired in business combinations, such as the Ironwood and WPD Midlands acquisitions, is recorded at fair value at the time of acquisition, which establishes its original cost.  If impaired, the asset is written down to fair value at that time, which becomes the new cost basis of the asset.  Original cost for constructed assets 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.  The 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 Electric records net cost of removal when incurred as a regulatory asset. The regulatory asset is subsequently amortized through depreciation over a five-year period, which is recoverable in customer rates in accordance with regulatory practices.

(All Registrants except PPL Energy Supply)

AFUDC is capitalized at PPL Electric as part of the construction costs for 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.  LG&E and KU generally do not record AFUDC as a return is provided on construction work in progress.

(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 as the fuel is spent using the units-of-production method and included in "Fuel" on the Statements of Income.

PPL Energy Supply capitalizes interest costs as part of construction costs.  Capitalized interest, excluding AFUDC for PPL, is as follows.

161


     PPL
  PPL Energy Supply
       
2013  $ 46  $ 37 
2012    53    47 
2011    51    47 

Depreciation

(All Registrants)

Depreciation is recorded over the estimated useful lives of property using various methods including the straight-line, composite and group methods.  When a component of PP&E 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.

Following are the weighted-average rates of depreciation at December 31.

  2013 
     PPL            
     Energy PPL        
  PPL Supply Electric LKE LG&E KU
                    
Regulated utility plant   2.94       2.61     4.07    4.52    3.77 
Non-regulated PP&E - Generation   3.10    3.10                      
                    
  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                      

(PPL, LKE, LG&E and KU)

The KPSC 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 resulted in lower depreciation of approximately $22 million ($8 million for LG&E and $14 million for KU) in 2013, exclusive of net additions to PP&E.

(All Registrants)

Goodwill and Other Intangible Assets

Goodwill represents the excess of the purchase price paid over the fair value of the identifiable net assets acquired in a 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 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.


162

PPL and PPL 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 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.

Asset Impairment (Excluding Investments)

The 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.

A long-lived asset classified as held and used is 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 impaired, the asset's carrying value is written down to its fair value.  See Notes 15 and 18 for a discussion of the Corette coal-fired plant in Montana which was determined to be impaired in the fourth quarter of 2013.

A long-lived asset classified as held for sale is impaired when the carrying amount of the asset (disposal group) exceeds its fair value less cost to sell.  If impaired, the asset's (disposal group's) carrying value is written down to its fair value less cost to sell.

PPL Energy Supply's Brunner Island and Montour coal-fired generation plants in Pennsylvania were tested for impairment in the fourth quarter of 2013 and it was concluded that neither plant was impaired as of December 31, 2013.  The recoverability test is very sensitive to forward energy and capacity price assumptions as well as forecasted operation and maintenance and capital spending.  Therefore, a further decline in forecasted long-term energy or capacity prices or changes in environmental laws requiring additional capital or operations and maintenance costs, could negatively impact PPL Energy Supply's operations of these facilities and potentially result in future impairment charges for some or all of the carrying value of these plants.  The carrying value of these assets was $2.7 billion as of December 31, 2013 ($1.4 billion for Brunner Island and $1.3 billion for Montour).

PPL, 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 in circumstances when a portion of goodwill has been allocated to a business to be disposed.  PPL's, PPL Energy Supply's, LKE's, LG&E's and KU's reporting units are at the operating segment level.

PPL, PPL Energy Supply, LKE, LG&E and KU 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 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 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 management concludes it is more likely than not that the fair value of a reporting unit is less than the carrying amount based on the step zero assessment.


163

If the carrying amount of the reporting unit, including goodwill, exceeds its fair value, the implied fair value of goodwill must be calculated in the same manner as goodwill in a business combination.  The 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, goodwill is written down to its implied fair value.

PPL (for its U.K. Regulated and Kentucky Regulated segments), and individually, LKE, LG&E and KU elected to perform the qualitative step zero evaluation of goodwill in the fourth quarter of 2013 and determined that it was not more likely than not that the fair values of their reporting units were less than their carrying values.

PPL, for its Supply segment, and PPL Energy Supply elected to bypass step zero and quantitatively tested the goodwill of these reporting units for impairment in the fourth quarter of 2013 and no impairment was recognized.

Asset Retirement Obligations

PPL and its subsidiaries record liabilities to reflect various legal obligations associated with the retirement of long-lived assets.  Initially, this obligation is measured at fair value and offset with an increase in the value of the capitalized asset, which is depreciated over the asset's useful life.  Until the obligation is settled, the liability is increased through the recognition of accretion expense classified within "Other operation and maintenance" on the Statements of Income forto reflect changes in the obligation due to the passage of time.  The accretion and depreciation expenses recorded by LG&E and KU are recorded as a regulatory asset, such that there is no earnings impact.

Estimated ARO costs and settlement dates, which affect the carrying value of the ARO and the related capitalized asset, are reviewed periodically to ensure that any material changes are incorporated into the latest estimate of the ARO.  Any change to the capitalized asset, positive or negative, is generally amortized over the remaining life of the associated long-lived asset.  See Note 21 for additional information on AROs and a discussion of the remeasurement in the third quarter of 2010 of the ARO for the decommissioning of the Susquehanna nuclear units.

(PPL)

The accretion and depreciation, related to an ARO, recorded by LG&E and KU is offset with a regulatory asset, such that there is no income statement impact.  The regulatory asset is relieved when the ARO is settled.AROs.

Compensation and Benefits

Defined Benefits (PPL, PPL Energy Supply and PPL Electric)All Registrants)

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 OCIAOCI or, to regulatory assets or liabilities for LG&E, KU and PPL Electric.Electric, to regulatory assets 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 13 for a discussion of defined benefits.

Stock-Based Compensation

(PPL, PPL Energy SupplyAll Registrants except LG&E and PPL Electric)
KU)

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 several stock-based compensation plans.directors.  PPL grants most of its stock-based 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 12 for a discussion of stock-based compensation.  All awards are recorded as equity or a liability on the Balance Sheets.

164

Stock-based co mpensationcompensation is primarily included in "Other operation and maintenance" 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

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.Taxes

Income Taxes

(PPL, PPL Energy Supply and PPL Electric)All Registrants)

PPL and its domestic subsidiaries file a consolidated U.S. federal income tax return.

Significant management judgment is required in developing PPL and its subsidiaries'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 ofvaluation allowances on deferred tax assets, liabilities and valuation allowances.assets.

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 measure dmeasured 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 va luationvaluation allowances would decrease income by increasing tax expense in the period that such determination is made.

PPL and its subsidiariesThe Registrants defer investment tax credits when the credits are utilized and amortize the deferred amounts over the average lives of the related assets.

PPL and its subsidiariesThe Registrants recognize interest and penalties in "Income Taxes" on their Statements of Income.

See Note 5 for additional discussion regarding income taxes.

(All Registrants except 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 Electric and any domestic subsidiaries each filed a separate consolidated return.  Tax benefits are not shared between companies.  A tax benefit inures only to the entity that gave rise to said 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.  PPL Energy Supply's intercompany tax payable was $26 million at December 31, 2010 and the intercompany tax receivable was $21 million at December 31, 2009.  PPL Electric's intercompany tax receivable was $74 million and $19 mill ion at December 31, 2010 and 2009.

(PPL and PPL Electric)Supply)

The provision for PPL, PPL Electric, LKE, LG&E and PPL Electric'sKU's deferred income taxes for regulated assets is based upon the ratemaking principles reflected in rates established by the 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 noncurrent "Regulatory assets" or "Regulatory liabilities"liabilities."

(All Registrants except PPL)

The income tax provision for PPL Energy Supply, PPL Electric, LKE, LG&E and KU is calculated in accordance 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.

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  2013  2012 
       
PPL Energy Supply $ 44  $ (38)
PPL Electric   (19)   22 
LKE   (28)   (12)
LG&E   (8)   5 
KU   (27)   (15)

Taxes, Other Than Income (PPL, PPL Energy Supply and PPL Electric)All Registrants)

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.

Other

Leases

(PPL, PPL Energy Supply and PPL Electric)All Registrants)

PPL and its subsidiariesThe Registrants evaluate whether arrangements entered into contain leases for accounting purposes.

(PPL and PPL Energy Supply)

See Note 11 for a discussion of arrangements under which PPL and PPL Energy Supply, LG&E and KU are lessees for accounting purposes.

PPL EnergyPlus entered into several arrangements whereby PPL EnergyPlus was considered the lessor for accounting purposes.  See Note 9 for additional information regarding the 2010 sale of the Long Island generation business and the leases that were transferred to the purchaser upon completion of the sale.

Fuel, Materials and Supplies

(PPL, PPL Energy Supply and PPL Electric)All Registrants)

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.

(All Registrants except PPL and PPL Energy Supply)Electric)

"Fuel, materials and supplies" on the Balance Sheets consisted of the following at December 31.

 PPL PPL Energy Supply   PPL PPL Energy Supply LKE LG&E KU
 2010  2009  2010  2009    2013  2012  2013  2012  2013  2012  2013  2012  2013  2012 
                                  
FuelFuel $ 260  $ 137  $ 97  $ 137 Fuel $  305  $  284  $  163  $  135  $  141  $  149  $  64  $  61  $  77  $  88 
Natural gas stored underground (a)Natural gas stored underground (a)   81    14    21    14 Natural gas stored underground (a)  49   50   2   8   48   42   48   42     
Materials and suppliesMaterials and supplies   302    206    179    174 Materials and supplies   348    339    193    184    89    85    42    39    47    46 
 $ 643  $ 357  $ 297  $ 325    $  702  $  673  $  358  $  327  $  278  $  276  $  154  $  142  $  124  $  134 
            
(a) The majority of natural gas stored underground is available for resale.

(a)The majority of LKE's and LG&E's natural gas stored underground is held to serve retail customers.  The majority of PPL Energy Supply's natural gas stored underground is available for resale.

Guarantees (PPL, PPL Energy Supply and PPL Electric)All Registrants)

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 15 for further discussion of recorded and unrecorded guarantees.

Treasury Stock (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.


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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.

Gains or losses relating to foreign currency transactions are recognized in "Other Income (Expense) - net" on the Statements of Income.  Net transaction losses were insignificant in 2010, 2009 and 2008.See Note 17 for additional information.

New Accounting Guidance Adopted (PPL, PPL Energy Supply and PPL Electric)All Registrants)

Accounting for Transfers of Financial AssetsImproving Disclosures about Offsetting Balance Sheet Items

Effective January 1, 2010, PPL and its subsidiaries2013, the Registrants retrospectively adopted accounting guidance issued to reviseenhance disclosures about derivative instruments that either (1) offset on the accounting for transfersbalance sheet or (2) are subject to an enforceable master netting arrangement or similar agreement, irrespective of financial assets.  This guidance:

·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.

This guidance is applied prospectively to new transfers of financial assets.  Disclosureswhether they are required for all transfers, including those entered into beforeoffset on the effective date.balance sheet.

The adoption of this guidance resulted in enhanced disclosures but did not have a materialsignificant impact on PPL and its subsidiaries' financial statements.the Registrants.  See Note 719 for information on PPL Electric's participation in an asset-backed commercial paper program and "Accounts Receivable" above for information on PPL Electric's purchase of accounts receivable from alternative suppliers, which are within the scope of this guidance.new disclosures.

Consolidation of Variable Interest EntitiesTesting Indefinite-Lived Intangible Assets for Impairment

Effective January 1, 2010, PPL and its subsidiaries2013, the Registrants prospectively adopted accounting guidance issuedthat allows an entity to replaceelect the quantitative-based risksoption to first make a qualitative evaluation about the likelihood of an impairment of an indefinite-lived intangible asset.  If, based on this assessment, the entity determines that it is more likely than not that the fair value of the indefinite-lived intangible asset exceeds the carrying amount, a quantitative impairment test does not need to be performed.  If the entity concludes otherwise, a quantitative impairment test must be performed by determining the fair value of the asset and rewards calculation for determining whichcomparing it with the carrying value.  The entity would record an impairment charge, if any, has a controlling financial interest in a VIE and is the primary beneficiary.  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).
necessary.

The adoption of this guidance did not have a materialsignificant impact on PPL and its subsidiaries' financial statements.  See PPL and PPL Energy Supply's Balance Sheets and Note 22 for enhanced VIE disclosures.the Registrants.

Improving Disclosures about Fair Value MeasurementsReporting Amounts Reclassified Out of AOCI

Effective January 1, 2010, PPL and its subsidiaries2013, the Registrants prospectively adopted accounting guidance issued to improve the reporting of reclassifications out of AOCI.  The Registrants are required to provide information about the effects on net income of significant amounts reclassified out of AOCI by their respective statement of income line item, if the item is required to be reclassified to net income in its entirety.  For items not reclassified to net income in their entirety, the Registrants are required to reference other disclosures that provide greater detail about fair value measurements.  This guidance:

·requires disclosures be provided for each class of assets and liabilities, with class determined on the basis of the nature and risks of the assets and liabilities;
·clarifies that a description of valuation techniques and inputs used to measure fair value is required for Level 2 and 3 recurring and nonrecurring fair value measurements; and
·for recurring fair value measurements, requires separate disclosure of significant transfers into and out of levels and the reasons for those transfers.

This guidance makes corresponding amendments to employers' disclosures about pensions and other postretirement benefits.these reclassifications.

The adoption did not have a material impact on PPL and its subsidiaries' financial statements.  Theof this guidance resulted in enhanced disclosures are presented in Notes 13 and 18.

Subsequent Measurement - Cash Flow Hedges

Effective April 1, 2010, PPL and its subsidiaries prospectively adopted accounting guidance that was issued to clarify how an entity should reflect the subsequent measurement of 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:

·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; 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.

The adoption did not have a significant impact on PPL and its subsidiaries; however, the impact in future periods could be material.Registrants.  See "Commodity Price Risk (Non-trading)" in Note 1924 for additional information.

Pro Forma Disclosures for Business Combinations

Effective December 31, 2010, PPL and its subsidiaries prospectively adopted accounting guidance that requires disclosure of supplementary pro forma information for business combinations.  Under this guidance, an entity must:

·  present the pro forma disclosures as if the business combination occurred at the beginning of the prior annual period; and
·  disclose the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the pro forma revenue and earnings.

The adoption did not have a material impact on PPL and its subsidiaries' financial statements.  Pro forma information reflecting the acquisition of LKE is presented in Note 10.new disclosures.

2.  Segment and Related Information

(PPL and PPL Energy Supply)(PPL)

PPL completed the acquisition of LKE on November 1, 2010.  See Note 10 for additional information.  Following the November 1, 2010 acquisition of LKE, PPL is organized into four segments:  U.K. Regulated, Kentucky Regulated, International Regulated (formerly International Delivery), Pennsylvania Regulated (formerly Pennsylvania Delivery) and Supply.  There were no changes to thePPL's segments other than renaming certain segments, adding a Kentucky Regulated segmentare split between its regulated and allocating interest expense related to the Equity Units to the Kentucky Regulated segment ($21 million of which was included in the Supply segment prior to the November 1, 2010 acquisition).competitive businesses with its regulated businesses further segmented by geographic location.

ForThe U.K. Regulated segment consists of PPL Global which primarily includes WPD's regulated electricity distribution operations and certain costs, such as U.S. income taxes, administrative costs and allocated financing costs.  The U.K. Regulated segment 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.


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The Kentucky Regulated segment consists primarily of LKE'sthe operations of LKE, which owns and operates regulated electricpublic utilities engaged in the generation, transmission, distribution and distribution operations, primarily in Kentuckysale of electricity and includes the allocation of interest expense from the Equity Units issued in June 2010 to fund the acquisition.  This segment also includes LKE's regulated distribution and sale of natural gas, in Kentucky.

The Internationalrepresenting primarily the activities of LG&E and KU.  In addition, certain financing costs are allocated to the Kentucky Regulated segment primarily consists of the regulated electric distribution operations in the U.K.  In 2009, the International Regulated 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.  In 2008, the International Regulated segment recognized income tax benefits and miscellaneous expenses in Discontinued Operations in connection with the dissolution of certain Latin American holding companies.  See Note 9 for additional information..

The Pennsylvania Regulated segment includes the regulated electricelectricity delivery operations of PPL Electric.  This segment also includedIn addition, certain financing costs are allocated to the regulated gas delivery operations of PPL Gas Utilities prior to its sale in October 2008.  See Note 9 for additional information on the sale of PPL Gas Utilities.Pennsylvania Regulated segment.

The Supply segment consists primarily consists of the activities of PPL Energy Supply's subsidiaries, PPL Generation and PPL EnergyPlus.  PPL Generation owns and operates competitive domestic energy marketingpower plants to generate electricity and trading activities,acquires and develops competitive domestic generation projects.  PPL EnergyPlus markets and trades electricity, natural gas, and other energy-related products in competitive wholesale and retail markets.  In addition, certain financing and other costs are allocated to the Supply segment.

"Corporate and Other" primarily includes financing costs incurred at the corporate level that have not been allocated or assigned to the segments, as well as the competitive generation operations of PPL Energy Supply.  In 2010 and 2009, PPL Energy Supply sold or signed agreementscertain other unallocated costs, which is presented to sell certain Supplyreconcile segment facilities and businesses.  See Note 9 for additional information.information to PPL's consolidated results.

"Unallocated Costs" represent one-time LKE acquisition-relatedIn 2013, costs included in the Corporate and Other category increased, as anticipated, primarily due to an increase in financing at PPL Capital Funding not directly attributable to a particular segment.  PPL's growth in rate-regulated businesses provides the organization an enhanced corporate-level financing alternative, through PPL Capital Funding, that further enables PPL to cost-effectively support targeted credit profiles across all of PPL's rated companies.  As a result, PPL plans to further utilize PPL Capital Funding in addition to continued direct financing by the operating companies.  The financing costs associated primarily with PPL Capital Funding's new securities issuances, with certain exceptions including advisory, accountingthe remarketing of the debt component of the Equity Units, have not been directly assigned or allocated to any segment and legal fees, certain internal costs and Bridge Facility costs.  See Note 7 for additional information about the Bridge Facility.

The results of several facilities and businessesgenerally 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 to PPL/PPL Energy Supply, the operating results from these facilitiesreflected in Corporate and businesses have been excluded from the income statement data tables below.

PPL Energy Supply's reportable segments are International Regulated and Supply.  In 2010, there were no significant changes to these segments.  While the International Regulated segment at PPL Energy Supply is consistent with the International Regulated segment at PPL, the Supply segment information reported by PPL Energy Supply does not equal the Supply segment information reported by PPL because additional Supply segment functions exist at PPL.  Further, certain income items, including PLR revenue and certain interest income with affiliates, exist at PPL Energy Supply but are eliminatedOther in consolidation by PPL.  Finally, certain expense items are fully allocated to the segments by PPL only.

Segment costs include direct charges, as well as an allocation of indirect corporate service costs, from PPL Services.  These service costs include functions such as financial, legal, human resources and information services.  See Note 16 for additional information.2013.

Financial data for the segments are:

  PPL PPL Energy Supply
 2010  2009  2008  2010  2009  2008 
Income Statement DataIncome Statement Data                  Income Statement Data 2013  2012  2011 
Revenues from external customers by            
product            
 Kentucky Regulated            
Revenues from external customers by productRevenues from external customers by product      
 Electric $ 408            U.K. Regulated      
 Natural Gas   85            Utility service (a) $ 2,359  $ 2,289  $ 1,618 
 Total  493            Energy-related businesses   44    47    35 
 International Regulated             Total  2,403   2,336   1,653 
 Electric  727  $ 684  $ 824  $ 727  $ 684  $ 824  Kentucky Regulated      
 Energy-related businesses   34    32    33    34    32    33  Utility service (a)  2,976   2,759   2,793 
 Total  761   716   857   761   716   857  Pennsylvania Regulated      
 Pennsylvania Regulated             Utility service (a)  1,866   1,760   1,881 
 Electric  2,448   3,218   3,290        Supply      
 Supply             Energy (b)  4,075   4,970   5,938 
 Electric and Gas (a) (b)  4,444   3,124   3,224   4,764   4,930   5,050  Energy-related businesses   527    461    472 
 Energy-related businesses   375    391    486    364    379    478  Total  4,602   5,431   6,410 
 Total   4,819    3,515    3,710    5,128    5,309    5,528  Corporate and Other   13       
TotalTotal  8,521   7,449   7,857   5,889   6,025   6,385 Total  11,860   12,286   12,737 
                      
Intersegment electric revenues (c)            
Intersegment electric revenuesIntersegment electric revenues      
 Pennsylvania Regulated  7   74   111        Pennsylvania Regulated  4   3   11 
 Supply  320   1,806   1,826        Supply (c)  51   79   26 
                      
DepreciationDepreciation            Depreciation      
 Kentucky Regulated  49            U.K. Regulated  300   279   218 
 International Regulated  117   115   134   117   115   134  Kentucky Regulated  334   346   334 
 Pennsylvania Regulated  136   128   131        Pennsylvania Regulated  178   160   146 
 Supply   254    212    179    236    195    165  Supply  318   289   245 
Total  556   455   444   353   310   299 
              
Amortization            
 International Regulated  13   (13)  15   13   (13)  15 
 Pennsylvania Regulated  (22)  312   302       
 Supply  148   90   66   147   88   51 
 Unallocated costs   74                 Corporate and Other   31    26    17 
TotalTotal  213   389   383   160   75   66 Total  1,161   1,100   960 
                      
Unrealized (gains) losses on derivatives            
and other hedging activities (a)            
 Kentucky Regulated  1           
 Supply   541    329    (279)   536    330    (285)
Total  542   329   (279)  536   330   (285)
              
Interest income (d)            
 International Regulated  2   1   10   2   1   10 
 Pennsylvania Regulated  4   11   16       
 Supply   2    2    7    12    7    27 
Total  8   14   33   14   8   37 
              
Interest Expense (e)            
Amortization (d)Amortization (d)      
 Kentucky Regulated  55            U.K. Regulated  19   15   83 
 International Regulated  135   87   144   135   87   144  Kentucky Regulated  22   27   27 
 Pennsylvania Regulated  99   118   111        Pennsylvania Regulated  19   18   7 
 Supply  224   182   192   208   176   162  Supply  156   126   137 
 Unallocated costs   80                 Corporate and Other   6           
TotalTotal  593   387   447   343   263   306 Total  222   186   254 
              
Income from Continuing            
Operations Before Income Taxes            
 Kentucky Regulated  40           
 International Regulated  261   290   330   261   290   330 
 Pennsylvania Regulated  192   221   278       
 Supply  860   27   665   882   (13)  670 
 Unallocated costs   (114)               
Total  1,239   538   1,273   1,143   277   1,000 
              
Income Taxes (f)            
 Kentucky Regulated  16           
 International Regulated    20   45     20   45 
 Pennsylvania Regulated  57   79   102       
 Supply  228   6   249   262   3   256 
 Unallocated costs   (38)               
Total  263   105   396   262   23   301 
              
Deferred income taxes and investment            
tax credits            
 Kentucky Regulated  51           
 International Regulated  17   12   1   17   12   1 
 Pennsylvania Regulated  198   (23)  1       
 Supply   (15)   133    108    (25)   147    190 
Total  251   122   110   (8)  159   191 
              
Net Income Attributable to            
PPL/PPL Energy Supply            
 Kentucky Regulated (g)  26           
 International Regulated (g)  261   243   290   261   243   290 
 Pennsylvania Regulated (g)  115   124   161       
 Supply (g)  612   40   479   600   3   478 
 Unallocated Costs   (76)               
Total $ 938  $ 407  $ 930  $ 861  $ 246  $ 768 
              
Cash Flow Data            
Expenditures for long-lived assets            
 Kentucky Regulated $ 152           
 International Regulated  281  $ 240  $ 267  $ 281  $ 240  $ 267 
 Pennsylvania Regulated  411   298   286       
 Supply   795    723    1,142    760    694    1,117 
Total $ 1,639  $ 1,261  $ 1,695  $ 1,041  $ 934  $ 1,384 

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Income Statement Data 2013  2012  2011 
Unrealized (gains) losses on derivatives and other hedging activities (b)         
  U.K. Regulated   44    52    (8)
  Kentucky Regulated   12    11    9 
  Supply   180    (36)   (315)
Total   236    27    (314)
              
Interest Expense         
  U.K. Regulated   425    421    391 
  Kentucky Regulated   212    219    217 
  Pennsylvania Regulated   108    99    98 
  Supply   228    222    192 
  Corporate and Other   33         
Total   1,006    961    898 
              
Income from Continuing Operations Before Income Taxes         
  U.K. Regulated   993    953    358 
  Kentucky Regulated   484    263    349 
  Pennsylvania Regulated   317    204    257 
  Supply (b) (g)   (428)   662    1,237 
  Corporate and Other   (57)        
Total   1,309    2,082    2,201 
              
Income Taxes (e)         
  U.K. Regulated   71    150    33 
  Kentucky Regulated   179    80    127 
  Pennsylvania Regulated   108    68    68 
  Supply   (157)   247    463 
  Corporate and Other   (21)        
Total   180    545    691 
              
Deferred income taxes and investment tax credits (f)         
  U.K. Regulated   (45)   26    (39)
  Kentucky Regulated   254    136    218 
  Pennsylvania Regulated   127    114    106 
  Supply   (296)   150    299 
  Corporate and Other   32       
Total   72    426    584 
              
Net Income Attributable to PPL Shareowners         
  U.K. Regulated   922    803    325 
  Kentucky Regulated   307    177    221 
  Pennsylvania Regulated   209    132    173 
  Supply (b) (g)   (272)   414    776 
  Corporate and Other   (36)        
 Total $ 1,130  $ 1,526  $ 1,495 
              
Cash Flow Data  2013   2012   2011 
Expenditures for long-lived assets         
  U.K. Regulated $ 1,280  $ 1,016  $ 862 
  Kentucky Regulated   1,434    768    465 
  Pennsylvania Regulated   942    633    490 
  Supply   568    736    739 
  Corporate and Other   59       
Total $ 4,283  $ 3,153  $ 2,556 

 PPL PPL Energy Supply
  As of December 31, As of December 31,  As of December 31,
  2010  2009  2010  2009   2013  2012 
Balance Sheet DataBalance Sheet Data           Balance Sheet Data    
Total AssetsTotal Assets         Total Assets    
Kentucky Regulated $ 10,318 (h)      U.K. Regulated $ 15,895  $ 14,073 
International Regulated  4,800   $ 4,516  $ 4,800  $ 4,516 Kentucky Regulated  12,016   10,670 
Pennsylvania Regulated  5,189    4,883     Pennsylvania Regulated  6,846   6,023 
Supply   12,530 (h)   12,766    11,996    12,508 Supply  11,408   12,868 
Corporate and Other (h)   94    
TotalTotal $ 32,837   $ 22,165  $ 16,796  $ 17,024 Total $ 46,259  $ 43,634 


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  2013  2012  2011 
Geographic Data         
Revenues from external customers         
  U.K. $ 2,403  $ 2,336  $ 1,653 
  U.S.   9,457    9,950    11,084 
Total $ 11,860  $ 12,286  $ 12,737 

   PPL PPL Energy Supply
  2010  2009  2008  2010  2009  2008 
Geographic Data                  
Revenues from external                  
 customers                  
  U.S. $ 7,760  $ 6,733  $ 7,000  $ 5,128  $ 5,309  $ 5,528 
  U.K.   761    716    857    761    716    857 
Total $ 8,521  $ 7,449  $ 7,857  $ 5,889  $ 6,025  $ 6,385 

 PPL PPL Energy Supply
  As of December 31, As of December 31,  As of December 31,
  2010  2009  2010  2009   2013  2012 
Long-Lived AssetsLong-Lived Assets        Long-Lived Assets    
U.S. $ 18,228  $ 10,181  $ 6,519  $ 6,676 U.K. $ 11,145  $ 9,951 
U.K.   3,505    3,517    3,505    3,517 U.S.   22,638    20,776 
TotalTotal $ 21,733  $ 13,698  $ 10,024  $ 10,193 Total $ 33,783  $ 30,727 

(a)See Note 1 for additional information on Utility Revenue.
(b)Includes unrealized gains and losses from economic activity.  See Note 19 for additional information.
(b)Gas was combined with Electric because it was not significant.
(c)See "PLR Contracts" and "NUG Purchases"Contracts/Purchase of Accounts Receivable" in Note 16 for a discussion of the basis of accounting between reportable segments.
(d)Includes interest income from affiliate(s).Represents non-cash expense items that include amortization of nuclear fuel, regulatory assets, debt discounts and premiums, debt issuance costs, emission allowances and RECs.
(e)Includes interest expense with affiliate.
(f)Represents both current and deferred income taxes, including investment tax credits.
(f)Represents a non-cash expense item that is also included in "Income Taxes."
(g)Includes Discontinued Operations.a charge of $697 million ($413  million after tax) for the termination of the lease of the Colstrip coal-fired electric generating facility.  See Note 98 for additional information.
(h)The PPL asset balances at December 31, 2010 forPrimarily consists of unallocated items, including cash, PP&E and the Kentucky Regulated and Supply segments include the assignmentelimination of goodwill recorded as a result of the acquisition of LKE.  See Note 10 for additional information.inter-segment transactions.

(All Registrants except PPL)

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

3.  Preferred Securities

(PPL)

In June 2012, PPL Electric redeemed all of its preference stock at par value, without premium ($250 million in the aggregate).  Related dividend requirements of $4 million for 2012 and $16 million for 2011 have been included in "Net Income Attributable to Noncontrolling Interests" on the Statements of Income.

PPL is authorized to issue up to 10 million shares of preferred stock.  No PPL preferred stock was issued or outstanding in 2013, 2012, or 2011.

(PPL Electric)

PPL Electric operatesis authorized to issue up to 20,629,936 shares of preferred stock.  No PPL Electric preferred stock was issued or outstanding in 2013, 2012, or 2011. Prior to October 31, 2013, PPL Electric was authorized to issue up to 10 million shares of preference stock.  PPL Electric had 2.5 million shares of 6.25% Series Preference Stock (Preference Shares) issued and outstanding at December 31, 2011.  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).

(LG&E)

LG&E is authorized to issue up to 1,720,000 shares of preferred stock at a $25 par value and 6,750,000 shares of preferred stock without par value.  LG&E had no preferred stock issued or outstanding in 2013, 2012 or 2011.

(KU)

KU is authorized to issue up to 5,300,000 shares of preferred stock and 2,000,000 shares of preference stock without par value.  KU had no preferred or preference stock issued or outstanding in 2013, 2012 or 2011.

170


4.  Earnings Per Share

(PPL)

Basic EPS is computed by dividing income available to PPL common shareowners by the weighted-average number of common shares outstanding during the applicable period.  Diluted EPS is computed by dividing income available to PPL common shareowners by the weighted-average number of common shares outstanding, increased by incremental shares that would be outstanding if potentially dilutive non-participating securities were converted to common shares as calculated using the Treasury Stock method or If-Converted Method, as applicable.  Incremental non-participating securities that have a dilutive impact are detailed in the table below.

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:

     2013  2012  2011 
Income (Numerator)         
Income from continuing operations after income taxes attributable to PPL shareowners $ 1,128  $ 1,532  $ 1,493 
Less amounts allocated to participating securities   6    8    6 
Less issuance costs on subsidiary's preferred securities redeemed      6    
Income from continuing operations after income taxes available to PPL common         
 shareowners - Basic   1,122    1,518    1,487 
Plus interest charges (net of tax) related to Equity Units (a)   44       
Income from continuing operations after income taxes available to PPL common         
 shareowners - Diluted $ 1,166  $ 1,518  $ 1,487 
             
Income (loss) from discontinued operations (net of income taxes) available to PPL         
 common shareowners - Basic and Diluted $ 2  $ (6) $ 2 
             
Net income attributable to PPL shareowners $ 1,130  $ 1,526  $ 1,495 
Less amounts allocated to participating securities   6    8    6 
Less issuance costs on subsidiary's preferred securities redeemed        6      
Net income available to PPL common shareowners - Basic   1,124    1,512    1,489 
Plus interest charges (net of tax) related to Equity Units   44           
Net income available to PPL common shareowners - Diluted $ 1,168  $ 1,512  $ 1,489 
             
             
             
Shares of Common Stock (Denominator)         
Weighted-average shares - Basic EPS   608,983    580,276    550,395 
Add incremental non-participating securities:         
  Share-based payment awards (b)   1,062    563    400 
  Equity Units (a)   52,568         
  Forward sale agreements and purchase contracts (b)   460    787    157 
Weighted-average shares - Diluted EPS   663,073    581,626    550,952 
             
Basic EPS         
Available to PPL common shareowners:         
  Income from continuing operations after income taxes $ 1.85  $ 2.62  $ 2.70 
  Income (loss) from discontinued operations (net of income taxes)       (0.01)  0.01 
  Net Income $ 1.85  $ 2.61  $ 2.71 
             
Diluted EPS         
Available to PPL common shareowners:         
  Income from continuing operations after income taxes $ 1.76  $ 2.61  $ 2.70 
  Income (loss) from discontinued operations (net of income taxes)       (0.01)     
  Net Income $ 1.76  $ 2.60  $ 2.70 

(a)In 2013, the If-Converted Method was applied to the Equity Units prior to settlement.
(b)The Treasury Stock Method was applied to non-participating share-based payment awards, forward sale agreements and the 2010 Purchase Contracts for 2012 and 2011.

For the year ended December 31, PPL issued common stock related to stock-based compensation plans, ESOP and DRIP as follows:

171


(Shares in thousands)2013 
Stock-based compensation plans (a) 1,552 
ESOP 275 
DRIP 549 

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

For the years ended December 31, the following were excluded from the computations of diluted EPS because the effect would have been antidilutive.

(Shares in thousands) 2013  2012  2011 
          
Stock options   4,446    5,293    5,084 
Performance units   55    58    2 
Restricted stock units   29       

See Note 7 for additional information on the 2011 and 2010 Equity Units, including the issuance of PPL common stock to settle the 2010 Purchase Contracts, the April and May 2013 settlements of forward sale agreements and information on the repurchase of shares of PPL common stock that offset the 2013 issuances of common stock under one reportable segment, the regulated electric delivery operations in Pennsylvania.stock-based compensation plans, ESOP and DRIP.

3.  5.  Income and Other Taxes

(PPL)

"Income from Continuing Operations Before Income Taxes" included the following.

   2013  2012  2011 
           
Domestic income $ 196  $ 994  $ 1,715 
Foreign income   1,113    1,088    486 
 Total $ 1,309  $ 2,082  $ 2,201 

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 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:

    2013  2012 
Deferred Tax Assets      
 Deferred investment tax credits $137  $130 
 Regulatory obligations  144   124 
 Accrued pension costs  140   276 
 Federal loss carryforwards  331   524 
 State loss carryforwards  304   305 
 Federal and state tax credit carryforwards  332   287 
 Foreign capital loss carryforwards  467   525 
 Foreign loss carryforwards  6   6 
 Foreign - pensions  202   254 
 Foreign - regulatory obligations  26   27 
 Foreign - other  12   16 
 Contributions in aid of construction  137   134 
 Domestic - other  211   239 
 Valuation allowances  (663)  (706)
  Total deferred tax assets  1,786   2,141 
         

172


    2013  2012 
Deferred Tax Liabilities      
 Domestic plant - net   4,073    3,967 
 Taxes recoverable through future rates   151    141 
 Unrealized gain on qualifying derivatives   37    122 
 Other regulatory assets   244    319 
 Reacquired debt costs   34    40 
 Foreign plant - net   859    937 
 Domestic - other   78    66 
  Total deferred tax liabilities   5,476    5,592 
Net deferred tax liability $ 3,690  $ 3,451 

At December 31, PPL had the following loss and tax credit carryforwards.

   2013   Expiration
        
Loss carryforwards      
 Federal net operating losses (a) $ 952   2028-2032
 State net operating losses (a) (b)   5,011   2014-2033
 State capital losses  (c)   125   2014-2016
 Foreign net operating losses (d)   30   Indefinite
 Foreign capital losses  (e)   2,333   Indefinite
        
Credit carryforwards      
 Federal investment tax credit   245   2025-2033
 Federal alternative minimum tax credit   32   Indefinite
 Federal foreign tax credit   17   2017-2023
 Federal - other   35   2016-2033
 State - other   5   2022

(a)Includes an insignificant amount of federal and state net operating loss carryforwards from excess tax deductions related to stock compensation for which a tax benefit will be recorded in Equity when realized.
(b)A valuation allowance of $185 million has been recorded against the deferred tax assets for these losses.
(c)A valuation allowance of $5 million has been recorded against the deferred tax assets for these losses.
(d)A valuation allowance of $6 million has been recorded against the deferred tax assets for these losses.
(e)A valuation allowance of $467 million has been recorded against the deferred tax assets for these losses.

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 as follows:

     Additions       
  Balance at    Charged to     Balance
  Beginning Charged Other    at End
  of Period to Income Accounts Deductions of Period
                  
2013  $ 706  $ 29        $ 72 (a) $ 663 
2012    724    18  $ 10     46 (a)   706 
2011    464    190    112 (b)   42 (a)   724 

(a)The reductions of the U.K. statutory income tax rate in 2013, 2012 and 2011 resulted in $67 million, $46 million and $35 million in reductions 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 Acts of 2013, 2012 and 2011.
(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.

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, 2013 and 2012 were $2.9 billion and $2.0 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 in the event of repatriation to the U.S.


173

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 as follows:

     2013  2012  2011 
Income Tax Expense (Benefit)         
 Current - Federal $ (75)      $ 54 
 Current - State   1  $ (2)   (20)
 Current - Foreign   181    121    73 
   Total Current Expense (Benefit)   107    119    107 
 Deferred - Federal   73    553    558 
 Deferred - State   45    103    127 
 Deferred - Foreign   (53)   35    (23)
   Total Deferred Expense (Benefit), excluding operating loss carryforwards   65    691    662 
             
 Investment tax credit, net - Federal   (10)   (10)   (10)
 Tax expense (benefit) of operating loss carryforwards         
  Deferred - Federal (a)   36    (195)   (30)
  Deferred - State   (18)   (60)   (38)
   Total Tax Expense (Benefit) of Operating Loss Carryforwards   18    (255)   (68)
 Total income taxes from continuing operations $ 180  $ 545  $ 691 
             
 Total income tax expense - Federal $ 24  $ 348  $ 572 
 Total income tax expense (benefit) - State  28    41    69 
 Total income tax expense - Foreign   128    156    50 
   Total income taxes from continuing operations $ 180  $ 545  $ 691 

(a)A 2012 Federal income tax return adjustment was recorded in 2013 related to a reduction in the 2012 NOL recorded in the filed return.  The reduction was primarily due to PPL's decision, at the time of filing, to utilize regular modified accelerated cost recovery system (MACRS) depreciation rates for certain non-regulated assets otherwise eligible for bonus tax depreciation.

In the table above, the following income tax expense (benefits) are excluded from income taxes from continuing operations.

    2013  2012  2011 
            
Discontinued operations $1  $(4) $2 
Stock-based compensation recorded to Additional Paid-in Capital  (2)  (1)  3 
Issuance costs of Purchase Contracts recorded to Additional Paid-in Capital            (9)
Valuation allowance on state deferred taxes related to issuance costs of Purchase Contracts         
 recorded to Additional Paid-in Capital  (2)       4 
Other comprehensive income  159   (526)  (144)
Valuation allowance on state deferred taxes recorded to other comprehensive income  (7)       7 
  Total $149  $(531) $(137)

     2013  2012  2011 
Reconciliation of Income Tax Expense         
 Federal income tax on Income from Continuing Operations Before Income Taxes at         
  statutory tax rate - 35% $ 458  $ 729  $ 770 
Increase (decrease) due to:         
 State income taxes, net of federal income tax benefit   (7)   27    63 
 State valuation allowance adjustments (a)   24    13    36 
 Impact of lower U.K. income tax rates (b)   (129)   (110)   (33)
 U.S. income tax on foreign earnings - net of foreign tax credit (c)   9    26    (26)
 Federal and state tax reserves adjustments (d)   (43)   (1)   39 
 Foreign tax reserves adjustments (e)   (2)   (5)   (141)
 Federal and state income tax return adjustments (a) (f)   (5)   16    (17)
 Foreign income tax return adjustments   (4)   (6)     
 Impact of the U.K. Finance Acts on deferred tax balances (b)   (97)   (75)   (69)
 Federal income tax credits (g)   (9)   (12)   (13)
 Depreciation not normalized (a)   (8)   (11)   (20)
 Foreign valuation allowance adjustments (e)             147 
 State deferred tax rate change (h)   15    (19)   (26)
 Net operating loss carryforward adjustments (i)        (9)     
 Intercompany interest on U.K. financing entities (j)   (10)   (9)   (8)
 Other   (12)   (9)   (11)
   Total increase (decrease)   (278)   (184)   (79)
Total income taxes from continuing operations $ 180  $ 545  $ 691 
Effective income tax rate  13.8%  26.2%  31.4%


174

(a)During 2013, PPL recorded $23 million of state deferred income tax expense related to a deferred tax valuation allowance primarily due to a decrease in projected future taxable income at PPL Energy Supply over the remaining carryforward period of Pennsylvania net operating losses.

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 was extended to January 1, 2013 for property that had a cost in excess of $1 million, had a production period longer than one year and had a tax life of at least ten years.  PPL's tax deduction for 100% bonus regulated tax depreciation was zero in 2013 and was significantly lower in 2012 than in 2011.
(b)The U.K. Finance Act 2013, enacted in July 2013, reduced the U.K. statutory income tax rate from 23% to 21% effective April 1, 2014 and from 21% to 20% effective April 1, 2015.  As a result, PPL reduced its net deferred tax liabilities and recognized a deferred tax benefit during 2013 related to both rate decreases.

The U.K. Finance Act 2012, enacted in July 2012, reduced the U.K. statutory income tax rate from 25% to 24% retroactive to April 1, 2012 and from 24% to 23% effective April 1, 2013.  As a result, PPL reduced its net deferred tax liabilities and recognized a deferred tax benefit during 2012 related to both rate decreases.

The U.K. Finance Act 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.
(c)During 2013, PPL recorded $25 million of income tax expense resulting from increased taxable dividends offset by a $19 million income tax benefit associated with a ruling obtained from the IRS impacting the recalculation of 2010 U.K. earnings and profits that was reflected on an amended 2010 U.S. tax return.

During 2012, PPL recorded a $23 million adjustment to federal income tax expense related to the recalculation of 2010 U.K. earnings and profits.

During 2011, PPL recorded a $28 million federal income tax benefit related to U.K. pension contributions.
(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 June 2012, the U.S. Court of Appeals for the Fifth Circuit issued a contrary opinion in an identical case involving another company.  In July 2012, PPL filed a petition for a writ of certiorari seeking U.S. Supreme Court review of the Third Circuit's opinion.  The Supreme Court granted PPL's petition and oral argument was held in February 2013.  On May 20, 2013, the Supreme Court reversed the Third Circuit's opinion and ruled that the WPT is a creditable tax.  As a result of the Supreme Court ruling, PPL recorded a tax benefit of $44 million during 2013, of which $19 million relates to interest.

PPL recorded a tax benefit of $7 million during 2013 and $6 million during 2012 and 2011 to federal and state income tax reserves related to stranded cost securitization.  The reserve balance at December 31, 2013 related to stranded costs securitization is zero.
(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.
(f)During 2012, PPL recorded $16 million in 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 $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.
(g)During 2013, 2012 and 2011, 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.
(h)During 2013, 2012 and 2011, PPL recorded adjustments related to its December 31 state deferred tax liabilities as a result of annual changes in state apportionment and the impact on the future estimated state income tax rate.
(i)During 2012, PPL recorded adjustments to deferred taxes related to net operating loss carryforwards of LKE based on income tax return adjustments.
(j)During 2013, 2012 and 2011, PPL recorded income tax benefits related to interest expense on intercompany loans.

    2013  2012  2011 
Taxes, other than income         
 State gross receipts $ 135  $ 135  $ 140 
 State utility realty   2    2    (9)
 State capital stock   2    7    18 
 Foreign property   147    147    113 
 Domestic property and other   78    75    64 
 Total $ 364  $ 366  $ 326 

175


(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:

   2013  2012 
Deferred Tax Assets      
 Deferred investment tax credits $ 84  $ 75 
 Accrued pension costs   39    94 
 Federal loss carryforwards   28    51 
 Federal tax credit carryforwards   131    113 
 State loss carryforwards   80    79 
 Other   69    68 
 Valuation allowances   (78)   (74)
  Total deferred tax assets   353    406 
         
Deferred Tax Liabilities      
 Plant - net   1,392    1,579 
 Unrealized gain on qualifying derivatives   38    173 
 Other   46    44 
  Total deferred tax liabilities   1,476    1,796 
Net deferred tax liability $ 1,123  $ 1,390 

At December 31, PPL Energy Supply had the following loss and tax credit carryforwards.
2013 Expiration
Loss carryforwards
Federal net operating losses$ 80 2031-2032
State net operating losses (a) 1,204 2014-2033
Credit carryforwards
Federal investment tax credit 120 2031-2033
Federal - other 9 2031-2033

(a)  A valuation allowance of $78 million has been recorded against the deferred tax assets for these losses.

Federal alternative minimum tax credit carryforwards were insignificant at December 31, 2013.

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
                  
2013  $ 74  $ 4              $ 78 
2012    72    2                74 
2011    408    22        $ 358 (a)   72 

(a)During 2011, PPL Energy Supply distributed its membership interest in PPL Global to PPL Energy Funding.  See Note 9 for additional information.

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 as follows:

176


     2013  2012  2011 
Income Tax Expense (Benefit)         
 Current - Federal $  134  $  89  $  139 
 Current - State   21    22    (12)
   Total Current Expense (Benefit)   155    111    127 
 Deferred - Federal   (287)   193    251 
 Deferred - State   (27)   10    70 
   Total Deferred Expense (Benefit), excluding operating loss carryforwards   (314)   203    321 
             
 Investment tax credit, net - federal   (5)   (2)   (3)
 Tax expense (benefit) of operating loss carryforwards         
  Deferred - Federal (a)   22    (48)     
  Deferred - State        (1)     
   Total Tax Expense (Benefit) of Operating Loss Carryforwards   22    (49)     
 Total income taxes from continuing operations (b) $ (142) $ 263  $ 445 
             
 Total income tax expense - Federal $ (136) $ 232  $ 387 
 Total income tax expense (benefit) - State   (6)   31    58 
   Total income taxes from continuing operations (b) $ (142) $ 263  $ 445 

(a)A 2012 federal income tax return adjustment was recorded in 2013 related to a reduction in the 2012 NOL recorded in the filed return.  The reduction was primarily due to PPL's decision, at the time of filing, to utilize regular MACRS depreciation rates for certain non-regulated assets otherwise eligible for bonus tax depreciation.
(b)Excludes current and deferred federal, state and foreign tax expense (benefit) recorded to Discontinued Operations of $3 million in 2011.  Also, excludes federal, state and foreign tax expense (benefit) recorded to OCI of $47 million in 2013, $(267) million in 2012 and $(83) million in 2011.  The deferred tax benefit of operating loss carryforwards was insignificant for 2011.

     2013  2012  2011 
Reconciliation of Income Tax Expense         
 Federal income tax on Income (Loss) from Continuing Operations Before Income Taxes at         
  statutory tax rate - 35% $ (130) $ 258  $ 424 
Increase (decrease) due to:         
 State income taxes, net of federal income tax benefit   (22)   33    60 
 State valuation allowance adjustments (a)   4    2    22 
 State deferred tax rate change (b)   15    (19)   (26)
 Federal and state tax reserves adjustments (c)   6    (2)   2 
 Federal and state income tax return adjustments (d)   (1)   4    (22)
 Federal income tax credits (e)   (8)   (12)   (12)
 Other   (6)   (1)   (3)
   Total increase (decrease)   (12)   5    21 
Total income taxes from continuing operations $ (142) $ 263  $ 445 
Effective income tax rate  38.3%  35.6%  36.7%

(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 state deferred income tax expense related to deferred tax valuation allowances during 2011.
(b)During 2013, 2012 and 2011, PPL Energy Supply recorded adjustments related to its December 31 state deferred tax liabilities as a result of annual changes in state apportionment and the impact on the future estimated state income tax rate.                    .
(c)During 2013, PPL Energy Supply reversed $3 million in tax benefits related to a 2008 change in method of accounting for certain expenditures for tax purposes and recorded $4 million in federal tax expense related to differences in over (under) payment interest rates applied to audit claims as a result of the U.S. Supreme Court decision related to Windfall Profits Tax.
(d)During 2011, PPL Energy Supply 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)During 2013, 2012 and 2011, 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.

    2013  2012  2011 
Taxes, other than income         
 State gross receipts $ 37  $ 35  $ 31 
 State capital stock   1    5    12 
 Property and other   28    29    28 
  Total $ 66  $ 69  $ 71 


177

(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.

    2013  2012 
Deferred Tax Assets      
 Accrued pension costs $42  $81 
 Contributions in aid of construction  109   106 
 Regulatory obligations  38   24 
 State loss carryforwards  35   39 
 Federal loss carryforwards  72   81 
 Other  45   46 
  Total deferred tax assets  341   377 
         
Deferred Tax Liabilities      
 Electric utility plant - net  1,366   1,229 
 Taxes recoverable through future rates  129   122 
 Reacquired debt costs  23   27 
 Other regulatory assets  129   174 
 Other  8   12 
  Total deferred tax liabilities  1,655   1,564 
Net deferred tax liability $1,314  $1,187 

At December 31, PPL Electric had the following loss carryforwards.
2013 Expiration
Loss carryforwards
Federal net operating losses$ 206 2031-2032
State net operating losses 534 2030-2032

Credit carryforwards were insignificant at December 31, 2013.

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 as follows:

     2013  2012  2011 
Income Tax Expense (Benefit)         
 Current - Federal $ (15) $ (28) $ (25)
 Current - State   (4)   (18)   (13)
   Total Current Expense (Benefit)   (19)   (46)   (38)
 Deferred - Federal   109    162    123 
 Deferred - State   16    42    25 
   Total Deferred Expense (Benefit), excluding operating loss carryforwards   125    204    148 
             
 Investment tax credit, net - Federal   (1)   (1)   (2)
 Tax expense (benefit) of operating loss carryforwards         
  Deferred - Federal   4    (72)   (12)
  Deferred - State   (1)   (17)   (28)
   Total Tax Expense (Benefit) of Operating Loss Carryforwards   3    (89)   (40)
 Total income tax expense $ 108  $ 68  $ 68 
             
 Total income tax expense - Federal $ 97  $ 61  $ 84 
 Total income tax expense (benefit) - State   11    7    (16)
   Total income tax expense $ 108  $ 68  $ 68 


178


     2013  2012  2011 
Reconciliation of Income Taxes         
 Federal income tax on Income Before Income Taxes at statutory tax rate - 35% $ 111  $ 71  $ 90 
Increase (decrease) due to:         
 State income taxes, net of federal income tax benefit   16    9    12 
 Amortization of investment tax credit   (1)   (1)   (2)
 Federal and state tax reserves adjustments (a)   (9)   (8)   (9)
 Federal and state income tax return adjustments (b)   (1)   7    (4)
 Depreciation not normalized (c)   (6)   (8)   (17)
 Other   (2)   (2)   (2)
   Total increase (decrease)   (3)   (3)   (22)
Total income tax expense $ 108  $ 68  $ 68 
Effective income tax rate  34.1%  33.3%  26.5%

(a)PPL Electric recorded a tax benefit of $7 million during 2013 and $6 million during 2012 and 2011 to federal and state income tax reserves related to stranded cost securitization.  The reserve balance at December 31, 2013 related to stranded costs securitization is zero.
(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 was extended to January 1, 2013 for property that had a cost in excess of $1 million, had a production period longer that one year and had a tax life of at least ten years.  PPL Electric's tax deduction for 100% bonus depreciation was zero in 2013 and was significantly lower in 2012 than in 2011.

    2013  2012  2011 
Taxes, other than income         
 State gross receipts $ 98  $ 101  $ 109 
 State utility realty (a)   2    2    (10)
 State capital stock   1    1    4 
 Property and other   2    1    1 
  Total $ 103  $ 105  $ 104 

(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:

    2013  2012 
Deferred Tax Assets      
 Net operating loss carryforward $222  $376 
 Tax credit carryforwards  179   170 
 Regulatory liabilities  107   99 
 Accrued pension costs  26   42 
 Capital loss carryforward  4   5 
 Income taxes due to customers  23   26 
 Deferred investment tax credits  52   54 
 Other  57   41 
 Valuation allowances  (4)  (5)
  Total deferred tax assets  666   808 
         
Deferred Tax Liabilities      
 Plant - net  1,327   1,171 
 Regulatory assets  133   152 
 Other  12   13 
  Total deferred tax liabilities  1,472   1,336 
Net deferred tax liability $806  $528 

179


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.

   2013  Expiration
       
Loss carryforwards     
 Federal net operating losses $ 523  2028-2032
 State net operating losses   1,024  2028-2032
 State capital losses   106  2014-2016
       
Credit carryforwards     
 Federal investment tax credit   125  2025-2028
 Federal alternative minimum tax credit   28  Indefinite
 Federal - other   26  2016-2033
 State - other   9  2022

Changes in deferred tax valuation allowances were:

  Balance at        Balance
  Beginning      at End
  of Period Additions Deductions of Period
              
2013  $ 5     $ 1 (a) $ 4 
2012    5               5 
2011    6         1 (a)   5 

(a)Primarily related to the expiration of state capital loss carryforwards.

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:

    2013  2012  2011 
Income Tax Expense (Benefit)        
 Current - Federal$ (59) $ (32) $ (71)
 Current - State  10    2   6 
   Total Current Expense (Benefit)  (49)   (30)   (65)
 Deferred - Federal  244    185    208 
 Deferred - State  20    15    16 
   Total Deferred Expense, excluding benefits of operating loss carryforwards  264    200    224 
 Investment tax credit, net - Federal  (4)   (6)   (6)
 Tax benefit of operating loss carryforwards        
  Deferred - Federal  (4)   (46)   
  Deferred - State  (1)   (12)   
   Total Tax Benefit of Operating Loss Carryforwards  (5)   (58)     
 Total income tax expense from continuing operations (a)$ 206  $ 106  $ 153 
            
 Total income tax expense - Federal$ 177  $ 101  $ 131 
 Total income tax expense - State  29    5    22 
   Total income tax expense from continuing operations (a)$ 206  $ 106  $ 153 

(a)Excludes current and deferred federal and state tax expense (benefit) recorded to Discontinued Operations of $1 million in 2013, $(4) million in 2012, and $(1) million in 2011.  Also, excludes deferred federal and state tax expense (benefit) recorded to OCI of $18 million in 2013, $(12) million in 2012 and $(1) million in 2011.

     2013  2012  2011 
Reconciliation of Income Taxes         
 Federal income tax on Income Before Income Taxes at         
  statutory tax rate - 35% $ 193  $ 116  $ 147 
Increase (decrease) due to:         
 State income taxes, net of federal income tax benefit   20    6    15 
 Amortization of investment tax credit   (4)   (6)   (5)
 Net operating loss carryforward (a)        (9)   
 Other   (3)   (1)   (4)
   Total increase (decrease)   13    (10)   6 
Total income tax expense from continuing operations $ 206  $ 106  $ 153 
Effective income tax rate  37.4%  32.0%  36.5%


180

(a)During 2012, LKE recorded adjustments to deferred taxes related to net operating loss carryforwards based on income tax return adjustments.

     2013  2012  2011 
Taxes, other than income         
 Property and other $ 48  $ 46  $ 37 
   Total $ 48  $ 46  $ 37 

(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:

    2013  2012 
Deferred Tax Assets      
 Regulatory liabilities $59  $54 
 Deferred investment tax credits  15   16 
 Income taxes due to customers  19   21 
 Other  28   9 
  Total deferred tax assets  121   100 
         
Deferred Tax Liabilities      
 Plant - net  585   526 
 Regulatory assets  83   86 
 Accrued pension costs  24   27 
 Other  8   9 
  Total deferred tax liabilities  700   648 
Net deferred tax liability $579  $548 

LG&E expects to have adequate levels of taxable income to realize its recorded deferred income tax assets.

At December 31, 2013, LG&E had $10 million of federal net operating loss carryforwards that expire in 2032 and $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:

     2013  2012  2011 
Income Tax Expense (Benefit)         
 Current - Federal $ 52  $ (2) $ 12 
 Current - State   16    3    8 
   Total Current Expense (Benefit)   68    1    20 
 Deferred - Federal   33    65    52 
 Deferred - State   (2)   6    2 
   Total Deferred Expense, excluding benefits of operating loss carryforwards   31    71    54 
 Investment tax credit, net - Federal   (2)   (3)   (3)
 Tax benefit of operating loss carryforwards         
  Deferred - Federal  (3)      
   Total Tax Benefit of Operating Loss Carryforwards   (3)      
 Total income tax expense $ 94  $ 69  $ 71 
             
 Total income tax expense - Federal $ 80  $ 60  $ 61 
 Total income tax expense - State   14    9    10 
   Total income tax expense $ 94  $ 69  $ 71 


181
     2013  2012  2011 
Reconciliation of Income Taxes         
 Federal income tax on Income Before Income Taxes at         
  statutory tax rate - 35% $ 90  $ 67  $ 68 
Increase (decrease) due to:         
 State income taxes, net of federal income tax benefit   10    5    7 
 Amortization of investment tax credit   (2)   (3)   (3)
 Other   (4)        (1)
   Total increase (decrease)   4    2    3 
Total income tax expense $ 94  $ 69  $ 71 
Effective income tax rate  36.6%  35.9%  36.4%

     2013  2012  2011 
Taxes, other than income         
 Property and other $ 24  $ 23  $ 18 
   Total $ 24  $ 23  $ 18 

(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:

    2013  2012 
Deferred Tax Assets      
 Regulatory liabilities $47  $45 
 Deferred investment tax credits  38   38 
 Net operating loss carryforward  23   20 
 Income taxes due to customers  4   5 
 Accrued pension costs       (5)
 Other  8   7 
  Total deferred tax assets  120   110 
         
Deferred Tax Liabilities      
 Plant - net  721   623 
 Regulatory assets  50   65 
 Other  4   5 
  Total deferred tax liabilities  775   693 
Net deferred tax liability $655  $583 

KU expects to have adequate levels of taxable income to realize its recorded deferred income tax assets.

At December 31, 2013, KU had $65 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:

     2013  2012  2011 
Income Tax Expense (Benefit)         
 Current - Federal $ 51  $ (20) $ (8)
 Current - State   12    (1)   4 
   Total Current Expense (Benefit)   63    (21)   (4)
 Deferred - Federal   66    111    101 
 Deferred - State   8    11    10 
   Total Deferred Expense, excluding benefits of operating loss carryforwards   74    122    111 
 Investment tax credit, net - Federal   (2)   (3)   (3)
 Tax benefit of operating loss carryforwards         
  Deferred - Federal   (3)   (20)   
   Total Tax Benefit of Operating Loss Carryforwards   (3)   (20)     
 Total income tax expense (a) $ 132  $ 78  $ 104 
             
 Total income tax expense - Federal $ 112  $ 68  $ 90 
 Total income tax expense - State   20    10    14 
   Total income tax expense (a) $ 132  $ 78  $ 104 
182
(a)Excludes deferred federal and state tax (benefit) recorded to OCI of less than $1 million in 2013 and $1 million in 2012.

     2013  2012  2011 
Reconciliation of Income Taxes         
 Federal income tax on Income Before Income Taxes at         
  statutory tax rate - 35% $ 126  $ 75  $ 99 
Increase (decrease) due to:         
 State income taxes, net of federal income tax benefit   14    6    9 
 Amortization of investment tax credit   (2)   (3)   (3)
 Other   (6)        (1)
   Total increase (decrease)   6    3    5 
Total income tax expense $ 132  $ 78  $ 104 
Effective income tax rate  36.7%  36.3%  36.9%

     2013  2012  2011 
Taxes, other than income         
 Property and other $ 24  $ 23  $ 19 
   Total $ 24  $ 23  $ 19 

Unrecognized Tax Benefits (All Registrants)

Changes to unrecognized tax benefits were as follows:

   2013  2012 
PPL      
 Beginning of period $92  $145 
 Additions based on tax positions of prior years  3   15 
 Reductions based on tax positions of prior years  (32)  (61)
 Additions based on tax positions related to the current year       7 
 Reductions based on tax positions related to the current year       (3)
 Settlements  (30)  (2)
 Lapse of applicable statute of limitation  (11)  (9)
 End of period $22  $92 
        
PPL Energy Supply      
 Beginning of period $30  $28 
 Additions based on tax positions of prior years       4 
 Reductions based on tax positions of prior years  (15)  (2)
 End of period $15  $30 
        
PPL Electric      
 Beginning of period $26  $73 
 Reductions based on tax positions of prior years  (17)  (43)
 Additions based on tax positions related to the current year       5 
 Lapse of applicable statute of limitation  (9)  (9)
 End of period $    $26 

LKE's, LG&E's and KU's unrecognized tax benefits and changes in those unrecognized tax benefits are insignificant at December 31, 2013 and December 31, 2012.

At December 31, 2013, it was reasonably possible that during the next 12 months the total amount of unrecognized tax benefits could increase or decrease by the following amounts.  For PPL Electric, LKE, LG&E and KU, no significant changes in unrecognized tax benefits are projected over the next 12 months.
IncreaseDecrease
PPL$$22 
PPL Energy Supply15 

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.


183

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.

  2013  2012 
       
PPL $21  $38 
PPL Energy Supply  14   13 
PPL Electric       3 

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.

  2013  2012 
       
PPL $15  $(16)
PPL Energy Supply  15   17 
PPL Electric  3   1 

The following interest expense (benefit) was recognized in income taxes.  The amounts for LKE, LG&E and KU were insignificant.

  2013  2012  2011 
          
PPL $ (30) $  (4) $  27 
PPL Energy Supply   5    (4)   6 
PPL Electric   (7)   (4)   (5)

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, 2013, 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 prior 1997 and prior 1997 and prior 10/31/2010 and prior 10/31/2010 and prior 10/31/2010 and prior 
Pennsylvania (state)2009 and prior 2009 and prior 2008 and prior 
Kentucky (state)2008 and prior 2010 and prior 2010 and prior 2010 and prior 
Montana (state)2009 and prior 2009 and prior 
U.K. (foreign)2011 and prior 

(a)For LKE, LG&E, and KU, the ten month period ending October 31, 2010 remains 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, PPL Energy Supply and PPL Electric)

PPL changed its method of accounting for repair expenditures for tax purposes effective for its 2008 tax year for Pennsylvania operations.  PPL made the same change for its Montana operations for the 2009 tax year.  In 2011, the IRS issued guidance on repair expenditures related to network assets providing a safe harbor method of determining whether the repair expenditures can be currently deducted for tax purposes.  On April 30, 2013, the IRS issued Revenue Procedure 2013-24 providing guidance to taxpayers to determine whether expenditures to maintain, replace or improve steam or electric generation property must be capitalized for tax purposes.  PPL believes that this guidance will not have a material impact on PPL's current treatment of such expenditures.  The IRS may assert, and ultimately conclude, that PPL's deduction for generation-related expenditures should be less than the amount determined by PPL.  PPL believes that it has established adequate reserves for this contingency.        

184


6.  Utility Rate Regulation

Regulatory Assets and Liabilities

(All Registrants except PPL and PPL Electric)Energy Supply)

As discussed in Note 1 and summarized below, PPL, and 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 as summarized below.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.

For 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.  See Note 1 for additional information.

(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 notes payable)short-term debt) including adjustments for certain adjustments to exclude non-regulatednet investments and environmental compliance costs recovered separately through the environmental cost recovery (ECR) mechanism.other means.  As such, LG&E and KU generally earn a return on regulatory assets are generally earning a return.assets.

As a result of purchase accounting requirements, certain fair value amounts reflectingrelated to contracts that havehad favorable or unfavorable terms relative to market were recorded on the balance sheetBalance Sheets with an offsetting regulatory asset or liability.  Prior to the acquisition, LKE recoveredLG&E and KU recover in customer rates the cost of coal contracts, power purchases and emission allowances and this rate treatment will continue after the acquisition.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 makingrate-making impact of the fair value adjustments.  LKE'sLG&E's and KU's customer rates will continue to reflect these items (e.g. coal, purchased power, emission allowances) at theirthe original contracted prices.prices for these contracts.

For (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 calculationdevelopment of Virginia basemunicipal 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
   2010  2009  2010  2009 
              
Current Regulatory Assets:            
 Generation supply charge $ 45     $ 45    
 Universal service rider   10  $ 6    10  $ 6 
 Transmission formula rate   8    5    8    5 
 Environmental cost recovery (a)   5          
 Coal contracts (a) (b)   5          
 Other (a)   12          
Total current regulatory assets $ 85  $ 11  $ 63  $ 11 
              
Noncurrent Regulatory Assets:            
 Defined benefit plans (a) $ 592  $ 229  $ 262  $ 229 
 Taxes recoverable through future rates   254    253    254    253 
 Storm costs (a)   129    9    7    9 
 Unamortized loss on reacquired debt (a)   61    33    27    33 
 Interest rate swaps (a)   43          
 Coal contracts (a) (b)   22          
 Other (a)   44    7    7    7 
Total noncurrent regulatory assets $ 1,145  $ 531  $ 557  $ 531 
              
Current Regulatory Liabilities:            
 Coal contracts (a) (b) $ 46          
 Environmental cost recovery (a)   12          
 Emission allowances (a) (b)   11          
 PURTA tax   10     $ 10    
 Demand side management (a)   10          
 Gas supply clause (a)   9          
 Transmission service charge   8  $ 41    8  $ 41 
 Competitive transition costs      33       33 
 Other (a)   3          
Total current regulatory liabilities $ 109  $ 74  $ 18  $ 74 
              
Noncurrent Regulatory Liabilities:            
 Accumulated cost of removal of utility plant (a) $ 623          
 Coal contracts (a) (b)   213          
 Power purchase agreement - OVEC (a) (b)   124          
 Net deferred tax assets (a)   40          
 Act 129 compliance rider   14     $ 14    
 Defined benefit plans (a)   10          
 PURTA tax    $ 10     $ 10 
 Other (a)   7          
Total noncurrent regulatory liabilities $ 1,031  $ 10  $ 14  $ 10 
(All Registrants except PPL Energy Supply)

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

185


   PPL PPL Electric
   2013  2012  2013  2012 
Current Regulatory Assets:            
 Environmental cost recovery $ 7  $ 1         
 Gas supply clause   10    11         
 Fuel adjustment clause   2    6         
 Demand side management   8    1         
 Other   6       $ 6    
Total current regulatory assets $ 33  $ 19  $ 6      
              
Noncurrent Regulatory Assets:            
 Defined benefit plans $ 509  $ 730  $ 257  $ 362 
 Taxes recoverable through future rates   306    293    306    293 
 Storm costs   147    168    53    59 
 Unamortized loss on debt   85    96    57    65 
 Interest rate swaps   44    67         
 Accumulated cost of removal of utility plant   98    71    98    71 
 AROs   44    26           
 Other   13    32    1    3 
Total noncurrent regulatory assets $ 1,246  $ 1,483  $ 772  $ 853 

Current Regulatory Liabilities:            
 Generation supply charge $ 23  $ 27  $ 23  $ 27 
 Environmental cost recovery        4         
 Gas supply clause   3    4         
 Transmission service charge   8    6    8    6 
 Transmission formula rate   20         20    
 Fuel adjustment clause   4    1       
 Universal Service Rider   10    17    10    17 
 Storm damage expense   14         14    
 Gas line tracker   6              
 Other   2    2    1    2 
Total current regulatory liabilities $ 90  $ 61  $ 76  $ 52 
              
Noncurrent Regulatory Liabilities:            
 Accumulated cost of removal of utility plant $ 688  $ 679         
 Coal contracts (a)   98    141         
 Power purchase agreement - OVEC (a)   100    108         
 Net deferred tax assets   30    34         
 Act 129 compliance rider   15    8  $ 15  $ 8 
 Defined benefit plans   26    17         
 Interest rate swaps   86    14         
 Other   5    9         
Total noncurrent regulatory liabilities $ 1,048  $ 1,010  $ 15  $ 8 

   LKE LG&E KU
   2013  2012  2013  2012  2013  2012 
Current Regulatory Assets:                  
 Environmental cost recovery $ 7  $ 1  $ 2  $ 1  $ 5      
 Gas supply clause   10    11    10    11           
 Fuel adjustment clause   2    6    2    6           
 Demand side management   8    1    3    1    5      
Total current regulatory assets $ 27  $ 19  $ 17  $ 19  $ 10      
                    
Noncurrent Regulatory Assets:                  
 Defined benefit plans $ 252  $ 368  $ 164  $ 232  $ 88  $ 136 
 Storm costs   94    109    51    59    43    50 
 Unamortized loss on debt   28    31    18    20    10    11 
 Interest rate swaps   44    67    44    67           
 AROs   44    26    21    15    23    11 
 Other   12    29    5    7    7    22 
Total noncurrent regulatory assets $ 474  $ 630  $ 303  $ 400  $ 171  $ 230 


186


   LKE LG&E KU
   2013  2012  2013  2012  2013  2012 
Current Regulatory Liabilities:                  
  Environmental cost recovery      $ 4                 $ 4 
  Gas supply clause $ 3    4  $ 3  $ 4           
  Fuel adjustment clause   4    1            $ 4    1 
  Gas line tracker   6         6                
  Other   1                   1      
Total current regulatory liabilities $ 14  $ 9  $ 9  $ 4  $ 5  $ 5 
                     
Noncurrent Regulatory Liabilities:                  
 Accumulated cost of removal                  
  of utility plant $ 688  $ 679  $ 299  $ 297  $ 389  $ 382 
 Coal contracts (a)   98    141    43    61    55    80 
 Power purchase agreement - OVEC (a)   100    108    69    75    31    33 
 Net deferred tax assets   30    34    26    28    4    6 
 Defined benefit plans   26    17              26    17 
 Interest rate swaps   86    14    43    7    43    7 
 Other   5    9    2    3    3    6 
Total noncurrent regulatory liabilities $ 1,033  $ 1,002  $ 482  $ 471  $ 551  $ 531 

(a)The differences between PPL's and PPL Electric's balances are due to the consolidation of LG&E and KU.
(b)
These regulatory assets and liabilities were recorded as offsets to certain intangible assets and liabilitiesthat were recorded at fair value fromupon the acquisition of LKE.  See Note 10 for information on the acquisition and Note 20 for information on intangible assets.
LKE by PPL.

(PPL)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."

(All Registrants except PPL Energy Supply)

Defined Benefit Plans

Defined benefit plan regulatory assets and liabilities 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 generally, are amortized over the average remaining 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 $28 million for PPL, $9 million for PPL Electric, $19 million for LKE, $13 million for LG&E and $6 million for KU are expected to be amortized into net periodic defined benefit costs in 2014.

Storm Costs

PPL Electric, LG&E and KU have the ability to request from the PUC, KPSC and VSCC, as applicable, 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 2040 for PPL, LKE and KU, and through 2035 for LG&E.

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.


187

(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.

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 Rate

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.

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 that 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.

Storm Damage Expense

In accordance with the PUC's December 2012 final rate case order, PPL Electric proposed the establishment of a Storm Damage Expense Rider with the PUC.  The matter remains open before the PUC.  Based on 2013 actual storm experience, PPL Electric established a $14 million regulatory liability at December 31, 2013 for revenues collected from customers to cover storm costs in excess of actual storm costs incurred.

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.


188

Act 129 Compliance Rider

In compliance with Pennsylvania's Act 129 of 2008 and implementing regulations, Phase I of 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.  Phase II of PPL's energy efficiency and conservation plan allows PPL Electric to recover the maximum $185 million cost of the program over the three year period beginning June 1, 2013 through May 31, 2016.  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.

(PPL, LKE, LG&E and KU)

Environmental Cost Recovery

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 Federal Clean Air Act and those federal, state or local environmental requirements which apply to coal combustion wastes and by-products from facilities utilizedcoal-fired electric generating facilities.  The KPSC requires reviews of the past operations of the environmental surcharge for productionsix-month and two-year billing periods to evaluate the related charges, credits and rates of energy from coal, including a return, as well as to provide for the roll-in of operating expenses and a return of and on capital invested.ECR amounts to base rates each two-year period.  The ECR regulatory asset or liability represents the amount that has been over-under- or under-recoveredover-recovered due to timing or adjustments to the mechanism.mechanism and is typically recovered within 12 months.  As a result of the settlement agreement in the 2012 rate case, beginning in 2013, LG&E and KU will receive a 10.25% return on equity for all ECR projects included in the 2009 and 2011 compliance plans. In 2012 and 2011, LG&E and KU were authorized to receive a 10.63% return on equity for projects associated with the 2009 compliance plan and a 10.10% return on equity for projects associated with the 2011 compliance plan.

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, 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 typically 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 to generate electricity, 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 adjustment clause and, to the extent appropriate, reestablish the fuel charge included in base rates.  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.

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.


189

Demand Side Management

LG&E's and KU's DSM programs consist of energy efficiency programs which are intended to reduce peak demand and delay the investment in additional power plant construction, provide customers with tools and information to become better managers of their energy usage and prepare for potential future legislation governing energy efficiency.  LG&E's and KU's rates contain a DSM provision which includes a rate recovery mechanism that provides for concurrent recovery of DSM costs, and allows for the recovery of DSM revenues from lost sales associated with the DSM programs. Additionally, LG&E and KU earn an approved return on equity for capital expenditures associated with the residential and commercial load management/demand conservation programs.  The cost of DSM programs is assigned only to the class or classes of customers that benefit from the programs.

Interest Rate Swaps

(PPL, LKE, LG&E and KU)

In November 2012 and April 2013, LG&E and KU entered into forward-starting interest rate swaps with PPL that hedged the interest payments on new debt that was expected to be issued in 2013.  In September 2013, these hedges were terminated and LG&E and KU entered into new forward-starting interest rate swaps with PPL, effectively extending the start date of the prior hedges from September 2013 to December 2013.  All of these swaps had terms identical to forward-starting swaps entered into by PPL with third parties.  New debt totaling $500 million was issued in November 2013 (LG&E and KU each issued $250 million) and the hedges issued in September were terminated in November 2013.  Net cash settlements of $86 million (LG&E and KU each received $43 million) were received on the swaps that were terminated in September and November, which are included in "Cash Flows from Operating Activities" on the Statements of Cash Flows.  Net realized gains on these swaps will be returned through regulated rates. As such, the net settlements were reclassified from AOCI to regulatory liabilities and are being recognized in "Interest Expense" on the Statements of Income over the life of the newly issued debt.  For the year ended December 31, 2013, there was no hedge ineffectiveness recorded for the interest rate derivatives.  See Note 19 for additional information related to the forward-starting interest rate swaps.

(PPL, LKE and LG&E)

In addition to the hedges terminated as a result of the debt issuance, realized amounts associated with LG&E's interest rate swaps, including a terminated swap contract from 2008, are recoverable through rates based on an order from the KPSC, LG&E's unrealized losses and gains 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 or loss related to the 2008 terminated swap contract is to be recovered through 2035, as approved by the KPSC.

AROs

As discussed in Note 1, the accretion and depreciation expenses related to LG&E's and KU's AROs are recorded as a regulatory asset, such that there is no earnings impact.  When an asset with an ARO is retired, the related ARO regulatory asset is offset against the associated cost of removal regulatory liability, PP&E and ARO liability.

Gas Line Tracker

In the 2012 rate case order, the KPSC approved the GLT rate recovery mechanism.  The GLT authorizes LG&E to recover its incremental operating expenses and depreciation, and to earn a 10.25% return on equity for capital associated with the five year gas service riser and leak mitigation program.�� As part of this program, LG&E makes necessary repairs and assumes ownership of natural gas lines. LG&E annually files projected costs in October to become effective on the first billing cycle in January.  After the completion of a plan year, LG&E submits a balancing adjustment filing to the KPSC to amend rates charged for the differences between the actual costs and actual GLT charges for the preceding year.

Coal ContractsDefined Benefit Plans

As a resultDefined benefit plan regulatory assets and liabilities represent the portion of purchase accounting associated withunrecognized 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 generally, are amortized over the acquisitionaverage remaining service lives of LKE, the fair value of LKE's coal contracts was recorded on the balance sheet.  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.plan participants.  These regulatory assets and liabilities are beingadjusted 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 $28 million for PPL, $9 million for PPL Electric, $19 million for LKE, $13 million for LG&E and $6 million for KU are expected to be amortized over the same terms as the related contracts, which expire through 2016.into net periodic defined benefit costs in 2014.

Interest Rate SwapsStorm Costs

Since realized amounts associated withPPL Electric, LG&E's interest rate swaps, including a terminated swap contract, are recoverable through rates based on an order&E and KU have the ability to request from the PUC, KPSC LG&E's unrealized gains and losses are recordedVSCC, as applicable, 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 liability until they are realized as interest expense.  Interest expense from existing swaps is realizedredeemed that have been deferred and will be amortized and recovered over either the terms of the associated debt, which matures through 2033.  Interest expense related to the terminated swap contract is recovered over the remainingoriginal life of the extinguished debt asor the life of the datereplacement debt (in the case of the termination, which extendsrefinancing).  Such costs are being amortized through 2035.2029 for PPL Electric.  Such costs are being amortized through 2040 for PPL, LKE and KU, and through 2035 for LG&E.

Emission AllowancesAccumulated Cost of Removal of Utility Plant

As a resultLG&E and KU accrue for costs of purchase accounting associated with the acquisition of LKE, LKE's emission allowances were recorded at fair value on the balance sheetremoval through depreciation expense with an offsetting credit to a regulatory liability.  ThisThe regulatory liability is being amortizedrelieved as the emission allowancescosts are consumed, which is expected to occur through 2040.incurred.  See Note 1 for additional information.

Demand Side Management (DSM)

DSM consistsPPL Electric does not accrue for costs of energy efficiency programs whichremoval.  When costs of removal are intended to reduce peak demandincurred, PPL Electric records the deferral of costs as a regulatory asset.  Such deferral is included in rates and delay the investment in additional power plant construction, provide customers with tools and information to become better managers of their energy usage and prepare for potential future legislation governing energy efficiency.  The rates of LG&E and KU contain a DSM provision which includes a rate mechanism that provides for concurrent recovery of DSM costs and provides an incentive for implementing DSM programs.  The provision allows LG&E and KU to recover revenues from lost sales associated with the DSM programs up to the earlier of three years or implementation of new base rates which reflect that load reduction.

Gas Supply Clause

LG&E's natural gas rates contain a gas supply clause, whereby increases or decreases in the cost of natural gas supply are reflected in LG&E's rates, subject to approval by the KPSC.  The gas supply clause procedure prescribed by the KPSC provides for quarterly rate adjustments to reflect the expected cost of natural gas supply in that quarter.  In addition, the gas supply clause contains a mechanism whereby any over- or under-recoveries of natural gas supply cost from prior quarters are refunded to or recovered from customers through the adjustment factor determined for subsequent quarters.

Power Purchase Agreement

As a result of purchase accounting associated with the acquisition of LKE, the fair value of the OVEC power purchase agreement was recorded on the balance sheet with an offsetting regulatory liability.  This regulatory liability is being amortized over the same terms as the related contract, which will expire in March 2026.

Fuel Adjustment Clause (FAC)

LG&E's and KU's retail electric rates contain an FAC, whereby increases and decreases in the cost of fuel for electric generation are reflected in the rates charged to retail electric customers.  The FAC allows LG&E and KU to adjust billed amounts for the difference between the fuel cost component of base rates and the actual fuel cost, including transportation costs.  The balance at December 31, 2010 was insignificant.

KU also employs an FAC 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 over- or under-recovery of fuel expenses from the prior year.

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 transfer of the then current fuel adjustment charge or credit to the base charges.  In August 2010, the KPSC initiated a six-month review of LG&E's and KU's FAC mechanism for the billing period ended April 2010.  An Order was received in December 2010 approving the charges and credits billed during thesubsequent five-year period.


The Mine Safety and Health Administration enacted Emergency Temporary Standards regulations in 2006 and has since issued additional regulations as the result of the passage of the Mine Improvement and New Emergency Response Act of 2006.  At the state level, Kentucky and other states from which coal is supplied to LG&E and KU have passed mine safety legislation.  This legislation requires all underground coal mines to implement new safety measures and install new safety equipment.  Under the terms of the majority of the long-term coal contracts that LG&E and KU have in place, provisions allow for price adjustments for compliance costs resulting from new or amended laws or regulations.  LG&E's and KU's coal suppliers regularly submit price adjustments related to these compliance costs. 0; LG&E and KU employ an external consultant to review all relevant mine safety compliance cost claims for validity and reasonableness.  Depending upon the terms of the contracts and commercial practice, LG&E and KU may delay payment of the adjustments or pay certain adjustments subject to refund.  At appropriate times in the review, payment or refund processes, LG&E and KU adjust the values or amounts of inventory, accounts receivable or accounts payable relating to coal matters.  In general, LG&E and KU expect to recover these coal-related cost adjustments through the FAC.
187

(PPL and PPL Electric)

Generation Supply Charge (GSC)

The GSCgeneration supply charge is a cost recovery mechanism which providesthat permits PPL Electric recovery forto recover costs incurred to provide generation supply to PLR customers who receive basic generation supply service.  The recovery includes an energy charge,charges for generation supply (energy and capacity charge and an administrative charge.ancillary services), as well as administration of the acquisition process.  In addition, the GSCgeneration supply charge contains a reconciliation mechanism whereby any over-orover- or under-recovery from prior quarters is to be refunded to, or recovered from, customers through the adjustment factor determined for the subsequent quarter.

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 Rate

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.

Universal Service Rider (USR)(USR)

PPL Electric's distribution rates include apermit 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 are payment-troubled.that 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 shutofftermination 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-orover- or under-recovery from the current year is refunded to or recovered from residential customers through the adjustment factor determined for the subsequent year.

Transmission Formula RateStorm Damage Expense

TransmissionIn accordance with the PUC's December 2012 final rate case order, PPL Electric proposed the establishment of a Storm Damage Expense Rider with the PUC.  The matter remains open before the PUC.  Based on 2013 actual storm experience, PPL Electric established a $14 million regulatory liability at December 31, 2013 for revenues collected from customers to cover storm costs in excess of actual storm costs incurred.

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.


188

Act 129 Compliance Rider

In compliance with Pennsylvania's Act 129 of 2008 and implementing regulations, Phase I of 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.  Phase II of PPL's energy efficiency and conservation plan allows PPL Electric to recover the maximum $185 million cost of the program over the three year period beginning June 1, 2013 through May 31, 2016.  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 regulatedapplied 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.

(PPL, LKE, LG&E and KU)

Environmental Cost Recovery

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.  As a result of the settlement agreement in the 2012 rate case, beginning in 2013, LG&E and KU will receive a 10.25% return on equity for all ECR projects included in the 2009 and 2011 compliance plans. In 2012 and 2011, LG&E and KU were authorized to receive a 10.63% return on equity for projects associated with the 2009 compliance plan and a 10.10% return on equity for projects associated with the 2011 compliance plan.

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 FERC.  BeginningKPSC.  The gas supply clause includes a separate natural gas procurement incentive mechanism, 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 typically 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 to generate electricity, 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 adjustment clause and, to the extent appropriate, reestablish the fuel charge included in base rates.  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.

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.


189

Demand Side Management

LG&E's and KU's DSM programs consist of energy efficiency programs which are intended to reduce peak demand and delay the investment in additional power plant construction, provide customers with tools and information to become better managers of their energy usage and prepare for potential future legislation governing energy efficiency.  LG&E's and KU's rates contain a DSM provision which includes a rate recovery mechanism that provides for concurrent recovery of DSM costs, and allows for the recovery of DSM revenues from lost sales associated with the DSM programs. Additionally, LG&E and KU earn an approved return on equity for capital expenditures associated with the residential and commercial load management/demand conservation programs.  The cost of DSM programs is assigned only to the class or classes of customers that benefit from the programs.

Interest Rate Swaps

(PPL, LKE, LG&E and KU)

In November 2012 and April 2013, LG&E and KU entered into forward-starting interest rate swaps with PPL that hedged the interest payments on new debt that was expected to be issued in 2013.  In September 2013, these hedges were terminated and LG&E and KU entered into new forward-starting interest rate swaps with PPL, effectively extending the start date of the prior hedges from September 2013 to December 2013.  All of these swaps had terms identical to forward-starting swaps entered into by PPL with third parties.  New debt totaling $500 million was issued in November 2013 (LG&E and KU each issued $250 million) and the hedges issued in September were terminated in November 2013.  Net cash settlements of $86 million (LG&E and KU each received $43 million) were received on the swaps that were terminated in September and November, which are included in "Cash Flows from Operating Activities" on the Statements of Cash Flows.  Net realized gains on these swaps will be returned through regulated rates. As such, the net settlements were reclassified from AOCI to regulatory liabilities and are being recognized in "Interest Expense" on the Statements of Income over the life of the newly issued debt.  For the year ended December 31, 2013, there was no hedge ineffectiveness recorded for the interest rate derivatives.  See Note 19 for additional information related to the forward-starting interest rate swaps.

(PPL, LKE and LG&E)

In addition to the hedges terminated as a result of the debt issuance, realized amounts associated with LG&E's interest rate swaps, including a terminated swap contract from 2008, are recoverable through rates based on an order from the KPSC, LG&E's unrealized losses and gains 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 or loss related to the 2008 terminated swap contract is to be recovered through 2035, as approved by the KPSC.

AROs

As discussed in Note 1, 2008, PPL Electric's transmission revenuesthe accretion and depreciation expenses related to LG&E's and KU's AROs are billed in accordancerecorded as a regulatory asset, such that there is no earnings impact.  When an asset with a FERC-approved PJM open access transmission tariff that utilizes a formula-basedan ARO is retired, the related ARO regulatory asset is offset against the associated cost of removal regulatory liability, PP&E and ARO liability.

Gas Line Tracker

In the 2012 rate case order, the KPSC approved the GLT rate recovery mechanism.  The tariff allows for recovery of actual transmission costs incurred,GLT authorizes LG&E to recover its incremental operating expenses and depreciation, and to earn a 10.25% return on transmission plant placedequity for capital associated with the five year gas service riser and leak mitigation program.�� As part of this program, LG&E makes necessary repairs and assumes ownership of natural gas lines. LG&E annually files projected costs in service and an incentive return, including a return on construction work in progress,October to become effective on the Susquehanna-Roseland transmission line project.  The tariff utilizes estimated costsfirst billing cycle in January.  After the completion of a plan year, LG&E submits a balancing adjustment filing to the KPSC to amend rates charged for the current year billing to customers and requires a true-up to adjust fordifferences between the actual costs inand actual GLT charges for 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 implemen ted 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.preceding year.

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 Regulated 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.  See Note 15 for additional information on the FERC transmission rates.

Defined Benefit Plans

Recoverable costs of definedDefined benefit plansplan regulatory assets and liabilities 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.practices and generally, are amortized over the average remaining service lives of plan participants.  These regulatory assets and liabilities are adjusted at least annually or whenever the funded status of PPL's defined benefit plans is re-measured.

  PPL PPL Electric
  2010  2009  2010  2009 
             
Transition obligation $ 2  $ 10     $ 10 
Prior service cost   68    57  $ 32    57 
Net actuarial loss   522    162    230    162 
Recoverable costs of defined benefit plans $ 592  $ 229  $ 262  $ 229 

Of thesethe regulatory asset and liability balances recorded, costs $40of $28 million for PPL, and $9 million for PPL Electric, $19 million for LKE, $13 million for LG&E and $6 million for KU are expected to be amortized into net periodic defined benefit costs in 2011.  All costs will be amortized over the average service lives of plan participants.

Taxes Recoverable through Future Rates and Regulatory Liability associated with Net Deferred Tax Assets

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.

The regulatory liability associated with net deferred tax assets represents the future revenue impact from the reversal of deferred income taxes required primarily for unamortized investment tax credits.  This regulatory liability is recognized when the offsetting deferred tax asset is recognized.  For general-purpose financial reporting, this regulatory liability and the deferred tax asset are not offset; rather, each is displayed separately.2014.

Storm Costs

For PPL in September 2009,Electric, LG&E and KU have the KPSC approved deferral of $101 million of costs associated with a severe ice storm that occurred in January 2009 and a wind storm that occurred in February 2009.  Additionally, in December 2008, the KPSC approved deferral of $26 million of costs associated with high windsability to request from the remnants of Hurricane Ike in September 2008.  ThesePUC, KPSC and VSCC, as applicable, the authority to treat expenses related to specific extraordinary storms as a regulatory asset and defer and amortize such costs are being amortized over a ten-year period ending July 2020.

Forfor regulatory accounting and reporting purposes.  Once such authority is granted, PPL Electric, in 2007, the PUC approvedLG&E and KU can request recovery of $12 million of costs associated with severe ice storms that occurredthose expenses in January 2005.  Amortization began in January 2008 and will continue through August 2015.a base rate case.

Unamortized Loss on Reacquired 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 2036 for PPL and through 2029 for PPL Electric.  Such costs are being amortized through 2040 for PPL, LKE and KU, and through 2035 for LG&E.

Accumulated CostsCost of Removal of Utility Plant

For PPL, 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 reduction to accumulated depreciation.regulatory asset.  Such deferral is included in rates and amortized over the subsequent 5-yearfive-year period.


PURTA Tax
187

(PPL and PPL Electric)

In December 2009,Generation Supply Charge

The generation supply charge is a cost recovery mechanism that permits PPL Electric reachedto 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 settlement with the Pennsylvania Department of Revenue related to the appeal of its 1997 PURTA tax assessments that resulted in a reduction in PURTA tax.  The regulatory liabilityreconciliation mechanism whereby any over- or under-recovery from prior quarters is being refunded to, or recovered from, customers in 2011 pursuant to PUC regulations.through the adjustment factor determined for the subsequent quarter.

Transmission Service Charge (TSC)

PPL Electric is charged transmission-related costs 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 collectedrecovered from, customers through a transmission service chargethe adjustment factor determined for the subsequent year.

Competitive Transition CostsTransmission Formula Rate

Competitive transition costs werePPL 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 customersthe prior year expenditures is recorded as a resultregulatory asset or liability.

Universal Service Rider (USR)

PPL Electric's distribution rates permit recovery of PUC orders, which allowedapplicable 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 that 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.

Storm Damage Expense

In accordance with the PUC's December 2012 final rate case order, PPL Electric to recover its competitive transition (or stranded) costs overproposed the establishment of a transition period endingStorm Damage Expense Rider with the PUC.  The matter remains open before the PUC.  Based on 2013 actual storm experience, PPL Electric established a $14 million regulatory liability at December 31, 2009.  These2013 for revenues collected from customers to cover storm costs were over-collected at the endin excess of 2009 and were refunded to customers in 2010.actual storm costs incurred.

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.


188

Act 129 Compliance Rider

In compliance with Pennsylvania's Act 129 of 2008 and implementing regulations, Phase I of PPL Electric filed itsElectric's energy efficiency and conservation plan in July 2009.  The plan was approved by a PUC Orderorder in October 2009.  The Orderorder 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.  Phase II of PPL's energy efficiency and conservation plan allows PPL Electric to recover the maximum $185 million cost of the program over the three year period beginning June 1, 2013 through May 31, 2016.  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 unde r-recoveryunder-recovery from customers will be refunded or collectedrecovered at the end of the program.  See Note 15below under "Regulatory Matters - Pennsylvania Activities" for additional information on Act 129.

Smart Meter Rider(PPL, LKE, LG&E and KU)

Environmental Cost Recovery

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.  As a result of the settlement agreement in the 2012 rate case, beginning in 2013, LG&E and KU will receive a 10.25% return on equity for all ECR projects included in the 2009 and 2011 compliance plans. In 2012 and 2011, LG&E and KU were authorized to receive a 10.63% return on equity for projects associated with the 2009 compliance plan and a 10.10% return on equity for projects associated with the 2011 compliance plan.

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, 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 typically 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 to generate electricity, 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 adjustment clause and, to the extent appropriate, reestablish the fuel charge included in base rates.  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.

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.


189

Demand Side Management

LG&E's and KU's DSM programs consist of energy efficiency programs which are intended to reduce peak demand and delay the investment in additional power plant construction, provide customers with tools and information to become better managers of their energy usage and prepare for potential future legislation governing energy efficiency.  LG&E's and KU's rates contain a DSM provision which includes a rate recovery mechanism that provides for concurrent recovery of DSM costs, and allows for the recovery of DSM revenues from lost sales associated with the DSM programs. Additionally, LG&E and KU earn an approved return on equity for capital expenditures associated with the residential and commercial load management/demand conservation programs.  The cost of DSM programs is assigned only to the class or classes of customers that benefit from the programs.

Interest Rate Swaps

(PPL, LKE, LG&E and KU)

In complianceNovember 2012 and April 2013, LG&E and KU entered into forward-starting interest rate swaps with Pennsylvania's Act 129PPL that hedged the interest payments on new debt that was expected to be issued in 2013.  In September 2013, these hedges were terminated and LG&E and KU entered into new forward-starting interest rate swaps with PPL, effectively extending the start date of the prior hedges from September 2013 to December 2013.  All of these swaps had terms identical to forward-starting swaps entered into by PPL with third parties.  New debt totaling $500 million was issued in November 2013 (LG&E and KU each issued $250 million) and the hedges issued in September were terminated in November 2013.  Net cash settlements of $86 million (LG&E and KU each received $43 million) were received on the swaps that were terminated in September and November, which are included in "Cash Flows from Operating Activities" on the Statements of Cash Flows.  Net realized gains on these swaps will be returned through regulated rates. As such, the net settlements were reclassified from AOCI to regulatory liabilities and are being recognized in "Interest Expense" on the Statements of Income over the life of the newly issued debt.  For the year ended December 31, 2013, there was no hedge ineffectiveness recorded for the interest rate derivatives.  See Note 19 for additional information related to the forward-starting interest rate swaps.

(PPL, LKE and LG&E)

In addition to the hedges terminated as a result of the debt issuance, realized amounts associated with LG&E's interest rate swaps, including a terminated swap contract from 2008, are recoverable through rates based on an order from the KPSC, LG&E's unrealized losses and implementing regulations, PPL Electric filed its Smart Meter Plan in 2009.  The plan wasgains 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 or loss related to the 2008 terminated swap contract is to be recovered through 2035, as approved by the KPSC.

AROs

As discussed in Note 1, the accretion and depreciation expenses related to LG&E's and KU's AROs are recorded as a PUC Order in June 2010.  regulatory asset, such that there is no earnings impact.  When an asset with an ARO is retired, the related ARO regulatory asset is offset against the associated cost of removal regulatory liability, PP&E and ARO liability.

Gas Line Tracker

In August 2010, PPL Electric filed its revised Smart Meter Plan reflecting modification identified by the PUC its Order.  In December 2010,2012 rate case order, the PUC issued a Secretarial Letter approving PPL Electric's Smart Meter Rider which is designedKPSC approved the GLT rate recovery mechanism.  The GLT authorizes LG&E to recover Smart Meter program costs plusits incremental operating expenses and depreciation, and to earn a 10.25% return on Smart Meter investments.  The Smart Meter Rider isequity for capital associated with the five year gas service riser and leak mitigation program.�� As part of this program, LG&E makes necessary repairs and assumes ownership of natural gas lines. LG&E annually files projected costs in October to become effective January 1, 2011on the first billing cycle in January.  After the completion of a plan year, LG&E submits a balancing adjustment filing to the KPSC to amend rates charged for the differences between the actual costs and contains a reconciliation mechanism whereby any over- or under-recovery from customers is either refunded to or collected from customers inactual GLT charges for the subsequentpreceding year.

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.


190

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

4.  Earnings Per ShareU.K. Activities(PPL)

(PPL)Ofgem Review of Line Loss Calculation

BasicOfgem is currently consulting on the methodology to be used by all network operators to calculate the final line loss incentives and diluted EPS, computed usingpenalties for the two-class method, and reconciliations of the amounts of income and shares of common stock (in thousands) used in the calculation are:

    2010  2009  2008 
Income (Numerator)         
Income from continuing operations after income taxes attributable to PPL $ 955  $ 414  $ 857 
Less amounts allocated to participating securities   4    2    4 
Income from continuing operations after income taxes available to PPL common shareowners $ 951  $ 412  $ 853 
             
Income (loss) from discontinued operations (net of income taxes) available to PPL $ (17) $ (7) $ 73 
             
Net income attributable to PPL $ 938  $ 407  $ 930 
Less amounts allocated to participating securities   4    2    4 
Net income available to PPL common shareowners $ 934  $ 405  $ 926 
             
Shares of Common Stock (Denominator)         
Weighted-average shares - Basic EPS   431,345    376,082    373,626 
Add incremental non-participating securities:         
  Stock options and performance units   224    324    836 
  Convertible Senior Notes         439 
Weighted-average shares - Diluted EPS   431,569    376,406    374,901 
             
Basic EPS         
Available to PPL common shareowners:         
  Income from continuing operations after income taxes $ 2.21  $ 1.10  $ 2.28 
  Income (loss) from discontinued operations (net of income taxes)   (0.04)   (0.02)   0.20 
 Net Income $ 2.17  $ 1.08  $ 2.48 
             
Diluted EPS         
Available to PPL common shareowners:         
  Income from continuing operations after income taxes $ 2.20  $ 1.10  $ 2.28 
  Income (loss) from discontinued operations (net of income taxes)   (0.03)   (0.02)   0.19 
 Net Income $ 2.17  $ 1.08  $ 2.47 

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 NotesDPCR4.  WPD had a dilutive impact when the average market price of PPL common stock equaled or exceeded $24.87.

During 2010, PPL issued 312,107 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 234,211 and 2,162,012 shares of common stock related to its ESOP and its DRIP.  See Note 12 for a discussion of PPL's stock-based compensation plans.

In June 2010, PPL issued 103.5$74 million shares of common stock and 23 million Equity Units pursuant to concurrent registered underwritten offerings.  See Note 7 for additional information.  Subject to antidilution adjustments, the maximum number of shares that could potentially be issued to settle the Purchase Contracts related to the Equity Units is 61,136,300 shares, including 47,915,900 shares that could be issued under standard provisions of the Purchase Contracts and 13,220,400 shares that could be issued under make-whole provisions in the event of early settlement upon a Fundamental Change.

The Purchase Contracts will be dilutive only if the average VWAP of PPL's common stock for a certain period exceeds $28.80.  Because the average VWAP has not exceeded $28.80 since issuance, the Purchase Contracts were excluded from the diluted EPS calculation.

The following stock options to purchase PPL common stock and performance units were excluded from the computations of diluted EPS because the effect would have been antidilutive.

(Shares in thousands) 2010  2009  2008 
          
Stock options   4,936    2,394    604 
Performance units   45    1    2 

5.  Income and Other Taxes

(PPL)

"Income from Continuing Operations Before Income Taxes" included the following components:

   2010  2009  2008 
          
Domestic income $ 978  $ 248  $ 943 
Foreign income   261    290    330 
 Total $ 1,239  $ 538  $ 1,273 

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 is based upon the ratemaking principles of the applicable jurisdiction.  See Notes 1 and 3 for additional information.

Net deferred tax assets have been recognized based on management's estimates of future taxable income for the U.S. and certain foreign jurisdictions in which PPL's operations have historically been profitable.

Significant components of PPL's deferred income tax assets and liabilities from continuing operations were as follows:

    2010  2009 
Deferred Tax Assets      
 Deferred investment tax credits $45  $16 
 Regulatory obligations  205   28 
 Accrued pension costs  208   265 
 Accrued litigation costs  31   5 
 Federal loss carryforwards  314    
 State loss carryforwards  269   184 
 Federal tax credit carryforwards  169   23 
 Foreign capital loss carryforwards  377   144 
 Foreign - pensions  87   168 
 Foreign - other  8   6 
 Contributions in aid of construction  152   98 
 Domestic - other  219   190 
 Valuation allowances  (464)  (312)
  Total deferred tax assets  1,620   815 
         
Deferred Tax Liabilities      
 Plant - net   3,010    1,855 
 Taxes recoverable through future rates   105    104 
 Unrealized gain on qualifying derivatives   298    437 
 Other regulatory assets   213    
 Regulatory undercollections   22    
 Reacquired debt costs   25    14 
 Foreign - plant   526    546 
 Foreign - other   36    35 
 Domestic - other   95    72 
  Total deferred tax liabilities   4,330    3,063 
Net deferred tax liability $ 2,710  $ 2,248 

PPL had the following loss and tax credit carryforwards.

   2010  2009   Expiration
           
Loss carryforwards         
 Federal net operating losses (a) $ 799      2029
 Federal capital losses (a)   155      2011-2014
 State net operating losses (b)   4,168  $ 2,835   2011-2030
 State capital losses (b)   181      2011-2014
 Foreign capital losses   1,395    514   Indefinite
           
Credit carryforwards         
 Federal investment tax credit (a)   125      2025-2028
 Federal AMT credit (a)   20      Indefinite
 Federal foreign tax credit (c)      23    
 Federal - other (a)   24      2016-2030
           
(a)     Loss and credit carryforwards associated with the acquisition of LKE.
(b)     State net operating loss and state capital loss carryforwards associated with the acquisition of LKE are $1,039 and $163.
(c)     Fully utilized during 2010.

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
                  
2010  $ 312  $ 221  $ 6 (a) $ 75 (b) $ 464 
2009    285    24    17 (c)   14 (d)   312 
2008    323    9        47 (c)   285 

(a)A valuation allowance wasliability recorded against certain deferred tax assets as a result of the 2010 acquisition of LKE.  See Note 10 for additional information on the acquisition.
(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 $72 million (or $0.17 per share, basic and diluted).
(c)Related to the change in foreign net operating loss carryforwards, including the change in foreign currency exchange rates.
(d)Primarily from the projected revenue increase in connection with the expiration of the Pennsylvania generation rate caps in 2010, the valuation allowance related to a portion of state net operating loss carryforwards was reduced by $13 million.

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 i n "Earnings Reinvested" on the Balance Sheets.  The amounts considered permanently reinvested at December 31, 2010 and 2009 were $8372013, compared with $94 million and $622 million.  Ifat December 31, 2012.  In the earnings are remitted as dividends, PPL Global may be subject to additional U.S. taxes, netfourth quarter of allowable foreign tax credits.  It is not practicable to estimate2012, based on applying 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:

    2010  2009  2008 
Income Tax Expense (Benefit)         
 Current - Federal $ (51) $ (72) $ 214 
 Current - State   43    14    2 
 Current - Foreign   20    41    70 
  Total Current Expense (Benefit)   12    (17)   286 
 Deferred - Federal   364    130    69 
 Deferred - State   (99)   (10)   42 
 Deferred - Foreign   (9)   16    13 
  Total Deferred Expense   256    136    124 
 Investment tax credit, net - Federal   (5)   (14)   (14)
  Total income tax expense from continuing operations (a) $ 263  $ 105  $ 396 
            
 Total income tax expense - Federal $ 308  $ 44  $ 269 
 Total income tax expense - State  (56)   4    44 
 Total income tax expense - Foreign   11    57    83 
  Total income tax expense from continuing operations (a) $ 263  $ 105  $ 396 

(a)Excludes current and deferred federal, state and foreign tax expense (benefit) recorded to Discontinued Operations of $(6) million in 2010, $46 million in 2009 and $34 million in 2008.  Excludes realized tax benefits related to stock-based compensation, recorded as an increase to capital in excess of par value of an insignificant amount in 2010, $1 million in 2009 and $7 million in 2008.  Excludes tax benefits related to the issuance costs of the Purchase Contracts recorded as an increase to capital in excess of par value in the amount of $10 million in 2010.  Also, excludes federal, state, and foreign tax expense (benefit) recorded to OCI of $83 million in 2010, $358 million in 2009 and $(212) million in 2008.

     2010  2009  2008 
Reconciliation of Income Tax Expense         
 Federal income tax on Income from         
 Continuing Operations Before Income Taxes at statutory tax rate - 35% $ 434  $ 188  $ 446 
Increase (decrease) due to:         
 State income taxes, net of federal income tax benefit   36    10    35 
 State valuation allowance adjustments (a)   (65)   (13)   
 Impact of lower U.K. income tax rates   (20)   (23)   (22)
 U.S. income tax on foreign earnings - net of foreign tax credit (b)   34    (16)   (21)
 Change in federal and state tax reserves (c)   (60)   (5)   6 
 Change in foreign tax reserves (d)      17    5 
 Federal and state income tax return adjustments (e)   (3)   21    (2)
 Foreign income tax return adjustments         (17)
 Domestic manufacturing deduction (e) (f)   (11)   (3)   (17)
 Health Care Reform (g)   8       
 Foreign losses resulting from restructuring (d)   (46)   (46)   
 Enactment of the U.K.'s Finance Acts 2010 and 2008 (h)   (18)      (8)
 Federal income tax credits (i)   (12)   (2)   15 
 Other   (14)   (23)   (24)
   Total decrease   (171)   (83)   (50)
Total income tax expense from continuing operations $ 263  $ 105  $ 396 
Effective income tax rate  21.2%  19.5%  31.1%

(a)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.  During 2009, based on the projected revenue increase due to the expiration of the Pennsylvania generation rate caps in 2010, PPL recorded a $13 million state deferred income tax benefit related to the reversal of deferred tax valuation allowances for a portion of its Pennsylvania net operating losses.  During 2010, PPL recorded an additional $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)During 2010, PPL recorded additional U.S. income tax expense resulting from increased taxable dividends and certain restructuring of U.K. entities.  The increased taxable dividends allowed PPL to fully utilize its foreign tax credit carryforward in 2010.
(c)In 1997, the U.K. imposed a Windfall Profits Tax on privatized utilities, including WPD.  In September 2010, the U.S. Tax Court ruled in PPL's favor in a pending dispute with the IRS, concluding that the U.K. Windfall Profits Tax 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 to federal and state income tax reserves and related deferred income taxes during 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.  See Note 15 for additional information.

In July 2010, the U.S. Tax Court ruled in PPL's favorpreferred methodology indicated by Ofgem in a pending disputeconsultation issued in November 2012, the liability was reduced by $79 million 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.  See Note 15 for information on the January 2011 IRS appeal, which at this time does not appear to include the street lighting decision.

During 2010, 2009 and 2008 PPL recorded a $7 million, $6 million and $7 million tax benefit to federal and state income tax reserves related to stranded cost securitization.
(d)During 2010, PPL recorded a $46 million foreign tax benefit in conjunction with losses resulting from restructuring in the U.K.  These losses offset tax on a deferred gain from a prior year sale of WPD's supply business.

During 2009, PPL recorded a $46 million foreign tax benefit and a related $46 million tax reserve related to losses resulting from restructuring in the U.K.  Additionally, PPL recorded a $29 million foreign tax benefit related to the resolution of a tax dispute and foreign currency exchange losses.
(e)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 in federal income tax benefits related to the domestic manufacturing deduction and certain state tax benefits related to state net operating losses and regulated depreciation.
(f)During 2010, PPL recorded an increase in tax benefits related to domestic manufacturing deductions due to an increase in domestic taxable income resulting from the expiration of Pennsylvania generation rate caps in 2010.  In December 2010, Congress enacted legislation allowing for 100% bonus depreciation on qualified property.  The increased tax depreciation deduction related to bonus depreciation significantly reduced the tax benefits related to domestic manufacturing deductions during 2010.
(g)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.
(h)The U.K.'s Finance Act of 2010, enacted in July 2010, included a reduction in the U.K. statutory income tax rate.  Effective April 1, 2011, the statutory income tax rate will be reduced from 28% to 27%.  As a result, PPL reduced its net deferred tax liabilities and recognized a deferred tax benefit.

The U.K.'s Finance Act of 2008, enacted in July 2008, included a phase-out of tax depreciation on certain buildings.  As a result, PPL reduced its net deferred tax liabilities and recognized a deferred tax benefit.
(i)During 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.

During 2008, PPL recorded a $13 million expense to adjust the amount of synthetic fuel tax credits recorded during 2007.  See Note 15 for additional information.

    2010  2009  2008 
Taxes, other than income         
 State gross receipts $ 145  $ 187  $ 199 
 State utility realty   5    5    4 
 State capital stock   6    6    5 
 Foreign property   52    57    66 
 Domestic property and other   30    25    14 
 Total $ 238  $ 280  $ 288 

See Note 3 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 wascredit recorded in 2008, of which $7 million was reflected in "Taxes, other than income" and $1 million was reflected in "Other Income (Expense) - net""Utility" revenue on the Statement of Income.

(PPL Energy Supply)

"Income (loss) from Continuing Operations Before Income Taxes" included the following components:

   2010  2009  2008 
           
Domestic income (loss) $ 882  $ (13) $ 670 
Foreign income   261    290    330 
 Total $ 1,143  $ 277  $ 1,000 

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. 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:

    2010  2009 
Deferred Tax Assets      
 Deferred investment tax credits $ 33  $ 12 
 Accrued pension costs   100    149 
 Accrued litigation costs   31    4 
 Federal tax credit carryforwards      23 
 State loss carryforwards   111    111 
 Foreign capital loss carryforwards   377    144 
 Foreign - pensions   87    168 
 Foreign - other   8    6 
 Domestic - other   84    102 
 Valuation allowances   (408)   (255)
  Total deferred tax assets   423    464 
         
Deferred Tax Liabilities      
 Plant - net   1,246    1,046 
 Unrealized gain on qualifying derivatives   326    417 
 Foreign - plant   526    546 
 Foreign - other   36    35 
 Domestic - other   52��   46 
  Total deferred tax liabilities   2,186    2,090 
Net deferred tax liability $ 1,763  $ 1,626 

PPL Energy Supply had  In July 2013, Ofgem issued a federal foreign tax credit carryforward of $23 million at December 31, 2009 that was fully utilized during 2010.  PPL Energy Supply also had state net operating loss carryforwards that expire between 2011 and 2030 of $1.7 billion at December 31, 2010 and 2009.  Valuation allowances have been established for the amount that, more likely than not, will not be realized.

PPL Global had foreign capital loss carryforwards of $1.4 billion and $514 million at December 31, 2010 and 2009.  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.

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
                  
2010  $ 255  $ 205      $ 52 (a) $ 408 
2009 (c)   226    12  $ 17 (b)       255 
2008 (c)   259    14        47 (b)   226 

(a)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.
(b)Primarily related to the change in foreign net operating loss carryforwards including the change in foreign currency exchange rates.
(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.

PPL Global does not pay or record U.S. income taxesdecision paper on the undistributed earningsprocess to follow for closing out the line loss calculation.  Subsequent to the July 2013 decision paper, WPD received additional information from Ofgem.  As a result, during 2013, WPD recorded increases of WPD, as management has determined that$45 million to 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 haveliability with reductions 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 i n "Members Equity" on the Balance Sheets.  The amounts considered permanently reinvested at December 31, 2010 and 2009 were $837 million and $622 million.  If the earnings are remitted as dividends, PPL Global may be subject to additional U.S. taxes, net of allowable foreign tax credits.  It is not practicable to estimate the amount of additional taxes that might be payable on these foreign earnings.

Details of the components of income tax expense, a reconciliation of federal income taxes derived from statutory tax rates applied to "Income from Continuing Operations Before Income Taxes" to income taxes for reporting purposes, and details of "Taxes, other than income" were:

    2010  2009  2008 
Income Tax Expense (Benefit)         
 Current - Federal $ 174  $ (168) $ 37 
 Current - State   76    (9)   3 
 Current - Foreign   20    41    70 
  Total Current Expense (Benefit)   270    (136)   110 
 Deferred - Federal   92    124    141 
 Deferred - State   (89)   31    49 
 Deferred - Foreign   (9)   16    13 
  Total Deferred Expense (Benefit)   (6)   171    203 
 Investment tax credit, net - federal   (2)   (12)   (12)
  Total income tax expense from continuing operations (a) $ 262  $ 23  $ 301 
            
 Total income tax expense - Federal $ 264  $ (56) $ 166 
 Total income tax expense - State   (13)   22    52 
 Total income tax expense - Foreign   11    57    83 
  Total income tax expense from continuing operations (a) $ 262  $ 23  $ 301 

(a)Excludes current and deferred federal, state and foreign tax expense (benefit) recorded to Discontinued Operations of $(6) million in 2010, $46 million in 2009 and $36 million in 2008.  Also, excludes federal, state and foreign tax expense (benefit) recorded to OCI of $132 million in 2010, $338 million in 2009 and $(168) million in 2008.

     2010  2009  2008 
Reconciliation of Income Tax Expense         
 Federal income tax on Income from         
 Continuing Operations Before Income Taxes at statutory tax rate - 35% $ 400  $ 97  $ 350 
Increase (decrease) due to:         
 State income taxes, net of federal income tax benefit   40    1    34 
 State valuation allowance adjustments (a)   (52)      
 Impact of lower U.K. income tax rates   (20)   (23)   (22)
 U.S. income tax on foreign earnings - net of foreign tax credit (b)   34    (16)   (21)
 Change in federal and state tax reserves (c)   (49)   (3)   11 
 Change in foreign tax reserves (d)      17    5 
 Domestic manufacturing deduction (e) (f)   (11)   (3)   (17)
 Federal and state income tax return adjustments (f)   (3)   18    (9)
 Foreign income tax return adjustments         (17)
 Health Care Reform (g)   5       
 Foreign losses resulting from restructuring (d)   (46)   (46)   
 Enactment of the U.K.'s Finance Acts 2010 and 2008 (h)   (18)      (8)
 Federal income tax credits (i)   (12)   (2)   15 
 Other   (6)   (17)   (20)
   Total decrease   (138)   (74)   (49)
Total income tax expense from continuing operations $ 262  $ 23  $ 301 
Effective income tax rate  22.9%  8.3%  30.1%

(a)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"Utility" revenue increase related to the expiration of the Pennsylvania 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.
(b)During 2010, PPL Energy Supply recorded additional U.S. income tax expense resulting from increased taxable dividends and certain restructuring of U.K. entities.  The increased taxable dividends allowed PPL Energy Supply to fully utilize its foreign tax credit carryforward in 2010.
(c)In 1997, the U.K. imposed a Windfall Profits Tax on privatized utilities, including WPD.  In September 2010, the U.S. Tax Court ruled in PPL Energy Supply's favor in a pending dispute with the IRS, concluding that the U.K. Windfall Profits Tax is a creditable tax for U.S. tax purposes.  As a result and with the finalization of other issues, PPL Energy Supply recorded a $42 million tax benefit to federal and state income tax reserves and related deferred income taxes during 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.  See Note 15 for additional information.
(d)During 2010, PPL Energy Supply recorded a $46 million foreign tax benefit in conjunction with losses resulting from restructuring in the U.K.  These losses offset tax on a deferred gain from a prior year sale of WPD's supply business.

During 2009, PPL Energy Supply recorded a $46 million foreign tax benefit and a related $46 million tax reserve related to losses resulting from restructuring in the U.K.  Additionally, PPL Energy Supply recorded a $29 million foreign tax benefit related to the resolution of a tax dispute and foreign currency exchange losses.
(e)During 2010, PPL Energy Supply recorded an increase in tax benefits related to domestic manufacturing deductions due to an increase in domestic taxable income resulting from the expiration of Pennsylvania generation rate caps in 2010.  In December 2010, Congress enacted legislation allowing for 100% bonus depreciation on qualified property.  The increased tax depreciation deduction related to bonus depreciation significantly reduced the tax benefits related to domestic manufacturing deductions during 2010.
(f)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 adjustment to federal and state income tax expense resulting from the reduction in federal income tax benefits related to the domestic manufacturing deduction and certain state tax benefits related to state net operating losses.
(g)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.
(h)The U.K.'s Finance Act of 2010, enacted in July 2010, included a reduction in the U.K. statutory income tax rate.  Effective April 1, 2011, the statutory income tax rate will be reduced from 28% to 27%.  As a result, PPL Energy Supply reduced its net deferred tax liabilities and recognized a deferred tax benefit.

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 reduced its net deferred tax liabilities and recognized a deferred tax benefit.
(i)During 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.

During 2008, PPL Energy Supply recorded a $13 million expense to adjust the amount of synthetic fuel tax credits recorded during 2007.  See Note 15 for additional information.

    2010  2009  2008 
Taxes, other than income         
 State gross receipts $ 15       
 State capital stock   4  $ 3  $ 3 
 Foreign property   52    57    66 
 Domestic property and other   28    26    17 
  Total $ 99  $ 86  $ 86 

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 (Expense) - net" on the Statement of Income.  Other changes to the liability in 2013 included reductions of $66 million resulting from refunds being included in tariffs and foreign exchange movements.  The potential loss exposure is estimated to be in the range of $74 million to $213 million as of December 31, 2013.  PPL cannot predict the outcome of this matter.

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.  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.

Kentucky Activities

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

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 "Regulatory assets" on the Balance Sheets.Rate Case Proceedings

Significant componentsIn December 2012, the KPSC approved a rate case settlement agreement providing for increases in annual base electricity rates of PPL Electric's deferred income tax assets$34 million for LG&E and liabilities were as follows:

    2010  2009 
Deferred Tax Assets      
 Deferred investment tax credits $3  $3 
 Accrued pension costs     36 
 Contributions in aid of construction  103   99 
 Regulatory obligations  4   28 
 State loss carryforwards  11    
 Other  24   39 
  Total deferred tax assets  145   205 
         
Deferred Tax Liabilities      
 Electric utility plant - net  934   802 
 Taxes recoverable through future rates  105   105 
 Reacquired debt costs  12   14 
 Regulatory receivables  22    
 Other  19   23 
  Total deferred tax liabilities  1,092   944 
Net deferred tax liability $947  $739 

PPL Electric has$51 million for KU and an increase in annual base gas rates of $15 million for LG&E and authorizes a state net operating loss carryforward that expires in 2030 of $176 million at December 31, 2010.

Details of the components of income tax expense, a reconciliation of federal income taxes derived from statutory tax10.25% return on equity.  The approved rates applied to "Income Before Income Taxes" to income taxes for reporting purposes, and details of "Taxes, other than income" were:became effective January 1, 2013.

  2010  2009  2008 
Income Tax Expense (Benefit)         
 Current - Federal $ (127) $ 80  $ 93 
 Current - State   (14)   22    8 
  Total Current Expense   (141)   102    101 
 Deferred - Federal   190    (4)   10 
 Deferred - State   10    (17)   (7)
  Total Deferred Expense   200    (21)   3 
 Investment tax credit, net - Federal   (2)   (2)   (2)
  Total income tax expense $ 57  $ 79  $ 102 
            
 Total income tax expense - Federal $ 61  $ 74  $ 101 
 Total income tax expense - State   (4)   5    1 
  Total income tax expense $ 57  $ 79  $ 102 

  2010  2009  2008 
Reconciliation of Income Taxes         
 Federal income tax on Income Before Income Taxes at statutory tax rate - 35% $ 67  $ 77  $ 97 
Increase (decrease) due to:         
 State income taxes, net of federal income tax benefit   9    10    9 
 Amortization of investment tax credit   (2)   (2)   (2)
 Change in federal and state tax reserves (a)   (12)   (7)   (5)
 Federal and state income tax return adjustments (b)   (1)   4    6 
 Depreciation not normalized   (3)   (1)   (1)
 Other   (1)   (2)   (2)
  Total increase (decrease)   (10)   2    5 
Total income tax espense $ 57  $ 79  $ 102 
Effective income tax rate  29.7%  35.7%  36.7%

(a)In July 2010, the U.S. Tax Court ruled in PPL Electric's favor in a pending 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.  See Note 15 for information on the January 2011 IRS appeal, which at this time does not appear to include the street lighting decision.

During 2010, 2009 and 2008 PPL Electric recorded a $7 million, $6 million and $7 million tax benefit to federal and state income tax reserves related to stranded cost securitization.
(b)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.

  2010  2009  2008 
Taxes, other than income         
 State gross receipts $ 130  $ 187  $ 199 
 State utility realty   5    5    4 
 State capital stock   2    2    2 
 Property and other   1       (2)
  Total $ 138  $ 194  $ 203��

See Note 3 for information on a settlement related to PURTA tax that will be returned to PPL Electric customers.

(PPL, PPL Energy SupplyLKE and PPL Electric)LG&E)

CPCN Filings

In January 2014, LG&E and KU filed an application for a CPCN with the KPSC requesting approval to build a NGCC generating unit at KU's Green River generating site and a solar generating facility at the E. W. Brown generating site.


191

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 February 24, 2011,December 20, 2012, the Pennsylvania Department of Revenue issued interpretive guidance on the treatment of bonus depreciation for Pennsylvania tax purposes.  Corporation Tax Bulletin 2011-01 indicates that Pennsylvania will allow 100% bonus depreciation for qualifying assetsKPSC, in the sameapproval of the unanimous rate case settlement agreement, authorized regulatory asset recovery effective January 1, 2013, over a five year bonus depreciation is allowed for Federal tax purposes.  PPL is still evaluating the impact of this guidance and, while not yet quantified, its impact could be material.period.

Unrecognized Tax Benefits Pennsylvania Activities(PPL PPL Energy Supply and PPL Electric)

Changes to unrecognized tax benefits were as follows:Rate Case Proceeding

   2010  2009 
PPL      
 Beginning of period $212  $202 
 Additions based on tax positions of prior years  68   36 
 Reduction based on tax positions of prior years  (50)  (11)
 Additions based on tax positions related to the current year  43   50 
 Reductions based on tax positions related to the current year  (2)   
 Settlements  (17)  (55)
 Lapse of applicable statutes of limitations  (8)  (8)
 Acquisition of LKE  3    
 Effects of foreign currency translation  2   (2)
 End of period $251  $212 
        
PPL Energy Supply      
 Beginning of period $124  $119 
 Additions based on tax positions of prior years  65   17 
 Reduction based on tax positions of prior years  (47)  (5)
 Additions based on tax positions related to the current year  43   50 
 Reductions based on tax positions related to the current year  (3)   
 Settlements  (1)  (55)
 Effects of foreign currency translation  2   (2)
 End of period $183  $124 
        
PPL Electric      
 Beginning of period $74  $77 
 Additions based on tax positions of prior years  3   11 
 Reduction based on tax positions of prior years  (5)  (6)
 Reductions based on tax positions related to the current year  (2)   
 Lapse of applicable statutes of limitations  (8)  (8)
 End of period $62  $74 

AtIn December 31, 2010, it was reasonably possible that during2012, the next 12 months thePUC approved a total amountdistribution revenue increase of unrecognized tax benefits could increase by as much as $28 million or decrease by up to $226about $71 million for PPL increase byElectric, including a 10.4% allowed return on equity.  The approved rates became effective January 1, 2013.

Storm Damage Expense Rider

In its December 28, 2012 final rate case order, the PUC directed PPL Electric to file a proposed Storm Damage Expense Rider (SDER).  In March 2013, PPL Electric filed its proposed SDER with the PUC and, as much as $1 million or decrease by up to $181 million for PPL Energy Supply and increase by as much as $28 million or decrease by up to $42 million for PPL Electric.  These changes could result from subsequent recognition, derecognition and/or changes inpart of that filing, requested recovery of the measurement of uncertain tax positions2012 qualifying storm costs related to Hurricane Sandy.  PPL Electric proposed that the creditability of foreign taxes, the timing and utilization of foreign tax creditsSDER become effective January 1, 2013 at a zero rate with qualifying storm costs incurred in 2013 and the related impact2012 Hurricane Sandy costs included in rates effective January 1, 2014.  In April 2013, parties filed comments opposing the SDER.  PPL Electric and several other parties filed reply comments in May 2013.  In November 2013, the PUC suspended the effective date of the rider to February 28, 2014 and requested additional comments and reply comments on alternative minimum taxPPL Electric's proposal.  Comments and other credits,reply comments have been filed.  On February 10, 2014, PPL Electric agreed to an additional suspension of the timing and/effective date of the rider to May 1, 2014. This matter remains pending before the PUC. 

Act 129

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

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

Act 129 required EDCs to reduce overall electricity consumption by 1.0% by May 2011 and unitary filing groups.by 3.0% by May 2013, and reduce peak demand by 4.5% by May 2013.  The events that could cause thes e changes are direct settlements with taxing authorities, litigation, legal or administrative guidanceoverall consumption reduction is measured against PUC-forecasted consumption for the twelve months ended May 31, 2010.  The peak demand reduction was required to occur for the 100 hours of highest demand, which is determined by relevant taxing authoritiesactual demand reduction during the June 2012 through September 2012 period.  PPL Electric believes it has met the May 2011 and May 2013 overall electricity consumption requirements, and the lapsepeak demand reduction requirement based on the results of its November 15, 2013 Act 129 Final Annual Report.  PPL Electric does not expect the PUC to formally determine compliance for either the 2011 or 2013 requirements until after the first quarter of 2014.

Act 129 requires the PUC to evaluate the costs and benefits of the EE&C program by November 30, 2013 and adopt additional reductions if the benefits of the program exceed the costs.  In August 2012, after receiving input from stakeholders, the PUC issued a Final Implementation Order establishing a three-year Phase II program, ending May 31, 2016, with individual consumption reduction targets for each EDC.  PPL Electric's Phase II reduction target is 2.1% of the total energy consumption forecasted by the PUC for the twelve months ended May 31, 2010.  The PUC did not establish demand reduction targets for the Phase II program.  PPL Electric filed its Phase II EE&C Plan with the PUC on November 15, 2012 and, in March 2013, the PUC approved PPL Electric's Phase II EE&C Plan with minor modifications.  PPL Electric filed a Revised Phase II EE&C Plan on May 13, 2013 pursuant to the PUC's March Order.  On July 11, 2013, the PUC issued an applicable statuteOrder approving PPL Electric's Revised Phase II EE&C Plan.  PPL Electric began its Phase II Plan implementation on June 1, 2013.  In November 2013, PPL Electric filed 40 modifications to its Phase II Plan which contains programs designed to meet PPL Electric's target of limitation.reducing total energy consumption by 2.1%.  Parties have filed comments and reply comments on PPL Electric's proposal.

192


At December 31, 2010,Act 129 also requires Default Service Providers (DSP) to provide electricity generation supply service to customers pursuant to a PUC-approved default service procurement plan through auctions, requests for proposal and bilateral contracts at the total unrecognized tax benefitssole discretion of the DSP.  Act 129 requires a mix of spot market purchases, short-term contracts and related indirect effects that, if recognized, would decreaselong-term contracts (4 to 20 years), with long-term contracts limited to 25% of load unless otherwise approved by the effective tax rate were:

  2010  2009 
       
PPL $183  $119 
PPL Energy Supply  167   95 
PPL Electric  13   15 

At December 31, 2010, PPL, PPL Energy Supply and PPL Electric had a receivable for interest relatedPUC.  A DSP is able to tax positions of $7 million, $8 million and $3 million.  At December 31, 2009, PPL, PPL Energy Supply and PPL Electric had a payable for interest related to tax positions of $36 million, $27 million and $5 million.recover the costs associated with its default service procurement plan.

The following interest expense (benefit) was recognized in income taxesPUC approved PPL Electric's DSP procurement plan for the years:

  2010  2009  2008 
          
PPL $ (39) $ 1  $ 4 
PPL Energy Supply   (30)   (1)   2 
PPL Electric   (8)   (2)   2 
period January 1, 2011 through May 31, 2013, and PPL Electric has concluded all competitive solicitations to procure power for its PLR obligations under that plan.

The amounts recognized during 2010, 2009 and 2008PUC directed all EDCs to file default service procurement plans for PPL, PPL Energy Supply andthe period June 1, 2013 through May 31, 2015.  PPL Electric werefiled its plan in May 2012.  In that plan, PPL Electric proposed a process to obtain supply for its default service customers and a number of initiatives designed to encourage more customers to purchase electricity from the competitive retail market.  In January 2013, the PUC approved PPL Electric's plan with modifications.  PPL Electric filed revised retail competition initiatives and a revised plan consistent with the PUC's January order, and in May 2013, the PUC approved that filing with minor changes.  PPL Electric began implementing its revised plan on June 1, 2013.  PPL Electric anticipates filing its default service procurement plan for the period beginning June 1, 2015 in the second quarter of 2014.
Smart Meter Rider

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

PUC Investigation of Retail Electricity Market

In April 2011, the PUC opened an investigation of Pennsylvania's retail electricity market to be conducted in two phases.  Phase one addressed the status of the existing retail market and explored potential changes.  Questions issued by the PUC for phase one of the investigation focused primarily on default service issues.  Phase two was initiated in July 2011 to develop specific proposals for changes to the resultretail market and default service model.  From December 2011 through the end of litigation, settlements with taxing authorities, additional interest accrued or reversed2012, the PUC issued several orders and other pronouncements related to tax positions of prior yearsthe investigation.  A final implementation order was issued in February 2013, and the lapsePUC created several working groups to address continuing competitive issues.  Although the final implementation order contains provisions that will require numerous modifications to PPL Electric's current default service model for retail customers, those modifications are not expected to have a material adverse effect on PPL Electric's results of applicable statutesoperations.

Distribution System Improvement Charge

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

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


193

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.  At December 31, 2013 and 2012, respectively, $29 million and $28 million was included on the Balance Sheets as a regulatory asset.  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 "Storm Damage Expense Rider" above for information regarding PPL Electric's plan to file a proposed Storm Damage Expense Rider with the PUC.

PPL or its subsidiaries file tax returnsElectric 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 five major tax jurisdictions.  The income tax provision for PPL Energy Supply"Other operation and maintenance" on the Statement of Income.  Although PPL Electric is calculated in accordancehad storm insurance coverage with an intercompany tax sharinga 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 provides that taxable income be calculated as if PPL Energy Supply, PPL Electric and any domestic subsidiaries each filed a separate consolidated return.  See Note 1 for additional information regarding PPL's tax sharing policy.  Based on this tax sharing agreement, 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, 2010, these jurisdictions, as well as the tax years that are no long er subject to examination, were as follows:

PPL
PPLEnergy SupplyPPL Electric
U.S. (federal)1997 and prior1997 and prior1997 and prior
Pennsylvania (state)2004 and prior2004 and prior2004 and prior
Kentucky (state)2005 and prior
Montana (state)2005 and prior2005 and prior
U.K. (foreign)2008 and prior2008 and prior

6.  Preferred Securities

Preferred Stock

(PPL)

PPL is authorized to issue up to 10$16 million shares of preferred stock.  No PPL preferred stock was issued or outstanding in 2010, 2009, or 2008.

PPL classifies preferred securities of a subsidiary as "Noncontrolling Interests" on the Balance Sheets.  Dividend requirements of $17 million for 2010 and $18 million for 2009 and 2008 were included in "Net Income Attributable to Noncontrolling Interests""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)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.  The formula rate is calculated, in part, based on financial results as reported in PPL Electric's annual FERC Form 1, filed under the FERC's Uniform System of Accounts.

PPL Electric is authorized to issue up to 629,936 sharesinitiated its formula rate 2012, 2011 and 2010 Annual Updates.  Each update was subsequently challenged by a group of 4-1/2% Preferred Stockmunicipal customers, which challenges have been opposed by PPL Electric.  In August 2011, the FERC issued an order substantially rejecting the 2010 formal challenge and 10 million sharesthe municipal customers filed a request for rehearing of series preferred stock.  Therethat 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 247,524 sharesheld in late 2012 and early 2013.  In February 2013, the FERC issued an order setting for evidentiary hearings and settlement judge procedures a number of 4-1/2% Preferred Stock (amounting to $25 million)issues in the 2012 formal challenge and an aggregateconsolidated that challenge with the 2010 and 2011 challenges.  PPL Electric filed a request for rehearing of 257,665 sharesthe February order which remains pending before the FERC.  PPL Electric and the group of four seriesmunicipal customers have exchanged confidential settlement proposals and PPL Electric anticipates that there will be additional settlement conferences held in 2014.  PPL and PPL Electric cannot predict the outcome of preferred stock (amounting to $26 million) issued and outstanding at December 31, 2009 and 2008.the foregoing proceedings, which remain pending before the FERC.

In April 2010,May 2013, PPL Electric redeemed all five series offiled its outstanding preferred stock,2013 Annual Update with rates proposed to become effective on June 1, 2013.  The rates became effective as proposed, and no party has filed a par value in the aggregate of $51 million, for $54 million including accumulated dividends.  The redeemed shares are no longer outstanding and represent only the right to receive the applicable redemption price,challenge to the extent the shares have not yet been presented for payment.  The premium of $3 million is included in "Distributions on Preferred Securities" on the Statement of Income.2013 updated rates.

Preference Stock FERC Formula Rates(PPL Electric) (KU)

There were 10 million sharesIn May 2013, KU submitted to the FERC the annual adjustments to the formula rate, which incorporated certain proposed increases.  These rates became effective as of Preference Stock authorized and 2.5 million shares of PPL Electric's 6.25% Series Preference Stock (Preference Shares) issued and outstanding in 2010, 2009 and 2008.  The Preference Shares are held by a bank that acts as depositary for 10 million depositary shares, each of which represents a quarter interest in a share of Preference Shares.  Holders of the depositary shares are entitled to all proportional rights and preferences of the Preference Shares, including dividend, voting, redemption and liquidation rights, exercised through the bank acting as a depositary.  The Preference Shares rank senior to PPL Electric's common stock; they have no voting rights, except as provided by law, and they have a liquidation preference of $100 per share (equivalent to $25 per depositary sh are).  The Preference Shares, which have no stated maturity date and no sinking fund requirements, are redeemable by PPL Electric on or after April 6, 2011 for $100 per share (equivalent to $25 per depositary share).July 1, 2013.

DividendsIn September 2013, KU filed an application with the FERC to adjust the formula rate under which KU provides wholesale requirements power sales to 12 municipal customers.  Among other changes, the application requests an amended formula whereby KU would charge cost-based rates with a subsequent true-up to actual costs, replacing the current formula which does not include such a true-up.  KU's application proposed an authorized return on equity of 10.7%.  Subject to regulatory approval, the Preference Shares will be paid when, as and if declared bynew formula rate may become effective during the Boardsecond quarter of Directors at a fixed annual rate of 6.25%, or $1.5625 per depositary share per year, and are not cumulative.  PPL Electric may not pay dividends on, or redeem, purchase or make a liquidation payment with respect to any of its common stock, except in certain circumstances, unless full dividends on the Preference Shares have been paid for the then-current dividend period.2014.


194


7.  Financing Activities

Credit Arrangements and Short-term Debt

(PPL, PPL Energy Supply and PPL Electric)All Registrants)

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

       December 31, 2010 December 31, 2009
                Letters of      Letters of
       Expiration    Borrowed Credit Unused Borrowed Credit
        Date Capacity (a) Issued Capacity (a) Issued
PPL                    
LG&E and KU Credit Facilities                    
 LG&E Syndicated Credit Facility (b) (c) Dec. 2014 $ 400  $ 163     $ 237   n/a  n/a
 KU Syndicated Credit Facility (b) Dec. 2014   400     $ 198    202   n/a  n/a
    Total LG&E and KU Credit Facilities   $ 800  $ 163  $ 198  $ 439   n/a  n/a
                           
PPL and PPL Energy Supply                    
Domestic Credit Facilities                    
 Syndicated Credit Facility (d) Dec. 2014 $ 3,000  $ 350     $ 2,650   n/a  n/a
 3-year Bilateral Credit Facility (e) Mar. 2013   200   n/a $ 24    176   n/a $ 4 
 5-year Structured Credit Facility (f) Mar. 2011   300   n/a   161    139   n/a   285 
 5-year Syndicated Credit Facility (g)    n/a  n/a  n/a  n/a $ 285    373 
 364-day Syndicated Credit Facility (h)    n/a  n/a  n/a  n/a      
    Total Domestic Credit Facilities   $ 3,500  $ 350  $ 185  $ 2,965  $ 285  $ 662 
                           
WPD Credit Facilities                    
 WPDH Limited 5-year Syndicated                    
  Credit Facility (i) Jan. 2013 £ 150  £ 115   n/a £ 35  £ 132   n/a
 WPD (South West) 3-year Syndicated                    
  Credit Facility (j) July 2012   210      n/a   210    60   n/a
 Uncommitted Credit Facilities (k)     63     £ 3    60    21  £ 3 
    Total WPD Credit Facilities (l)   £ 423  £ 115  £ 3  £ 305  £ 213  £ 3 
                           
PPL and PPL Electric                    
 Syndicated Credit Facility (m) Dec. 2014 $ 200     $ 13  $ 187   n/a  n/a
 Asset-backed Credit Facility (n) July 2011   150      n/a   150      n/a
 5-year Syndicated Credit Facility (o)    n/a  n/a  n/a  n/a    $ 6 
    Total PPL Electric Credit Facilities   $ 350     $ 13  $ 337     $ 6 
       December 31, 2013 December 31, 2012
                Letters of      Letters of
                Credit Issued       Credit Issued
                and       and
                Commercial       Commercial
       Expiration      Paper Unused   Paper
        Date Capacity Borrowed Backup Capacity Borrowed Backup
PPL                    
U.K.                    
 PPL WW Syndicated                    
  Credit Facility (a) (d) Dec. 2016 £ 210  £ 103     £ 107  £ 106    
 WPD (South West)                    
  Syndicated Credit Facility (a) (d) Jan. 2017   245          245       
 WPD (East Midlands)                    
  Syndicated Credit Facility (a) (b) (d) Apr. 2016   300          300       
 WPD (West Midlands)                    
  Syndicated Credit Facility (a) (b) (d) Apr. 2016   300          300       
 Uncommitted Credit Facilities     84     £ 5    79     £ 4 
   Total U.K. Credit Facilities (c)   £ 1,139  £ 103  £ 5  £ 1,031  £ 106  £ 4 
                           
U.S.                    
 PPL Capital Funding                    
  Syndicated Credit Facility (d) (e) (g) Nov. 2018 $ 300  $ 270     $ 30       
                           
PPL Energy Supply                    
 Syndicated Credit Facility (d) (e) Nov. 2017 $ 3,000     $ 29  $ 2,971     $ 499 
 Letter of Credit Facility (e) Mar. 2014   150       138    12       132 
 Uncommitted Credit Facilities (e)     175       77    98       40 
   Total PPL Energy Supply Credit Facilities $ 3,325     $ 244  $ 3,081     $ 671 
                           
PPL Electric                    
 Syndicated Credit Facility (d) (e) Oct. 2017 $ 300     $ 21  $ 279     $ 1 
                           
LKE                    
                           
 Syndicated Credit Facility (d) (e) (g) Oct. 2018 $ 75  $ 75             
                           
LG&E                    
 Syndicated Credit Facility (d) (e) Nov. 2017 $ 500     $ 20  $ 480     $ 55 
                           
KU                    
 Syndicated Credit Facility (d) (e) Nov. 2017 $ 400     $ 150  $ 250     $ 70 
 Letter of Credit Facility (d) (e) (f) May 2016   198       198          198 
   Total KU Credit Facilities   $ 598     $ 348  $ 250     $ 268 

(a)Amounts borrowed are recorded as "Short-term debt" on the Balance Sheets.

(b)LG&E and KU each entered into a $400 million syndicated credit facility upon closing of the acquisition of LKE on November 1, 2010.  Under theThe facilities LG&E and KU each have 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 respective company's senior unsecured long-term debt rating.  Each company also pays customary commitment and letter of credit issuance fees under its respective facility.  The new credit facilities each contain a financial covenant requiring the respective borrower's debt to total capitalization not to exceed 70%, as calculated in accordance with the credit facilities, and other customary covenants.  Additionally, subject to certain conditions, LG&E and KU may each request that its respective facility' s capacity be increased by up to $100 million.  An aggregate of $9 million of fees were incurred in 2010 in connection with establishing these facilities.  Such fees were deferred and are being amortized through December 2014.

(c)The borrowing outstanding at December 31, 2010 bears interest at 2.27%.  Such borrowing was repaid in January 2011 with proceeds received from the remarketing of certain tax-exempt bonds that were held by LG&E at December 31, 2010, as discussed below in "Long-term Debt and Equity Securities."

(d)In October 2010, PPL Energy Supply entered into a new $4 billion syndicated credit facility to replace its $400 million 364-day Syndicated Credit Facility, which expired in September 2010, and the $3.2 billion 5-year Syndicated Credit Facility.  PPL Energy Supply subsequently reduced the capacity of the facility to $3 billion effective December 2010.  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 senior unsecured long-term debt rating.  PPL Energy Supply also pays customary commitment and letter of credit issuance fees under this facility.  Similar to the facilities that were replaced, the new credit facility contains a financial covenant requiring PPL Energy Supply's debt to total capitalization to not exceed 65%, as calculated in accordance with the facility, and other customary covenants.  Additionally subject to certain conditions, PPL Energy Supply may request that the facility's capacity be increased by up to $500 million.

In October 2010, PPL Energy Supply borrowed $3.2 billion under this 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.  Such borrowing bore interest at 2.26% and was refinanced by PPL primarily through the issuance of long-term debt by LG&E and KU Energy LLC, LG&E and KU, and the use of internal funds.  This borrowing and related repayments are included in "Net increase (decrease) in short-term debt" on the Statement of Cash Flows.  See "Long-term Debt and Equity Securities" below for a discussion of these debt issuances and the use of proceeds to repay affiliate loans.

PPL Energy Supply incurred an aggregate of $41 million of fees in 2010 in connection with establishing the new facility.  Such fees were initially deferred and amortized through December 2014.  In connection with the reduction in the capacity to $3 billion in December 2010, PPL Energy Supply wrote off $10 million, $6 million after tax, of deferred fees, which is reflected in "Interest Expense" in the Statement of Income.

The borrowings outstanding at December 31, 2010 bear interest at 2.27%.

(e)In March 2010, PPL Energy Supply's 364-day bilateral credit facility was amended.  The amendment included extending the expiration date to March 2013, thereby making it a three-year facility, and setting related commitment and utilization fees based on the company's senior unsecured long-term debt rating.  Under this facility, PPL Energy Supply can request the bank to issue letters of credit but cannot make cash borrowings.  This credit facility contains a financial covenant requiring PPL Energy Supply's debt to total capitalization not to exceed 65%, as calculated in accordance with the credit facility, and other customary covenants.

(f)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.  This credit facility contains a financial covenant requiring PPL Energy Supply's debt to total capitalization not to exceed 65%, as calculated in accordance with the credit facility, and other customary covenants.

(g)This $3.2 billion facility was terminated in October 2010 and was replaced with a new syndicated credit facility as discussed above.  Under this facility, which had an expiration date of June 2012, PPL Energy Supply had the ability to make cash borrowings and to request the lenders to issue letters of credit.  Borrowings generally bore interest at LIBOR-based rates plus a spread, depending upon the company's senior unsecured long-term debt rating.  The interest rate on the borrowing outstanding at December 31, 2009 was 0.73%.

(h)This $400 million facility expired in September 2010.  Under this facility, PPL Energy Supply had the ability to make cash borrowings and to request the lenders to issue up to $200 million of letters of credit.

(i)Under this facility, WPDH Limited has the ability to make cash borrowings but cannot request the lenders to issue letters of credit.  WPDH Limited pays customary commitment fees under this facility, and borrowings bear interest at LIBOR-based rates plus a spread, depending on the company's long-term credit rating.  The cash borrowing outstanding at December 31, 2010 was a USD-denominated borrowing of $181 million, which equated to £115 million at the time of borrowing and bears interest at approximately 0.94%.  The interest rates at December 31, 2009 were approximately 1.55% on a USD-denominated borrowing of $181 million, which equated to £107 million at the time of borrowing, and a weighted-average rate of approximately 1.53% on GBP-denominated borrowings aggregating £25 million.

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.

(j)Under this facility, WPD (South West) has the ability to make cash borrowings but cannot request the lenders to issue letters of credit.  WPD (South West) pays customary commitment fees under this facility, and borrowings bear interest at LIBOR-based rates plus a margin.  The weighted-average interest rate on the borrowings outstanding at December 31, 2009 was approximately 3.02%.

The facility 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 its RAB, in each caseRAV, calculated in accordance with the credit facility.

(k)(b)The weighted-average interest rate on the borrowings outstanding underUnder these facilities, at December 31, 2009 was 1.22%.

(l)The total amount borrowed under WPD's credit facilities equated to $181 millionWPD (East Midlands) and approximately $354 million at December 31, 2010 and 2009.  At December 31, 2010,WPD (West Midlands) each have the unused capacity of the WPD credit facilities was approximately $475 million.

(m)In December 2010, PPL Electric entered into a new $200 million syndicated credit facility to replace its $190 million 5-year Syndicated Credit Facility.  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.
(c)PPL WW's amounts borrowed at December 31, 2013 and 2012 were USD-denominated borrowings of $166 million and $171 million, which equated to £103 million and £106 million at the time of the borrowings and bore interest at 1.87% and 0.85%.  At December 31, 2013, the unused capacity of WPD's credit facilities was approximately $1.7 billion.
(d)Each company pays customary fees under its respective facility and borrowings generally bear interest at LIBOR-based rates plus a spread, depending upon the company's senior secured long-term debt rating.  an applicable margin.

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(e)The new credit facility containsfacilities contain a financial covenant requiring PPL Electric's debt to total capitalization not to exceed 65% for PPL Energy Supply and 70%, for PPL, PPL Electric, LKE, LG&E and KU, as calculated in accordance with the credit facility,facilities and other customary covenants.  PPL Electric also pays customary commitmentAdditionally, as it relates to the syndicated credit facilities and letter of credit issuance fees under this facility.  Additionally, subject to certain conditions, PPL ElectricEnergy Supply may request that theits facility's capacity be increased by up to $500 million, PPL Electric and KU each may request up to a $100 million. &# 160;An aggregatemillion increase in its facility's capacity and LKE may request up to a $25 million increase in its facility's capacity.
(f)KU's letter of $2 millioncredit facility agreement allows for certain payments under the letter of fees were incurred in 2010 in connection with establishing this facility.  Such fees were deferredcredit facility to be converted to loans rather than requiring immediate payment.
(g)PPL Capital Funding's and are being amortized throughLKE's borrowings at December 2014.31, 2013 bore interest at 1.79% and 1.67%, respectively.

(n)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 2010, PPL Electric and the subsidiary extended the expiration date of the credit agreement to July 2011.  The subsidiary pays customary commitment fees under this facility, and borrowing costs vary based on the commercial paper conduit's actual cost 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.
PPL Energy Supply, PPL Electric, LG&E and KU maintain commercial paper programs to provide an additional financing source to fund short-term liquidity needs, as necessary.  Commercial paper issuances, included in "Short-term debt" on the Balance Sheets, are supported by the respective Registrant's Syndicated Credit Facility.  The following commercial paper programs were in place at:

At December 31, 2010 and 2009, $248 million and $223 million of accounts receivable and $133 million and $192 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, 2010.  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.

(o)This $190 million facility was terminated in December 2010 and was replaced with a new syndicated credit facility as discussed above.  Under this facility, which had an expiration date of May 2012, PPL Electric had the ability to make cash borrowings and to request the lenders to issue letters of credit.
       December 31, 2013 December 31, 2012
       Weighted -    Commercial   Weighted - Commercial
       Average    Paper Unused Average Paper
       Interest Rate Capacity Issuances Capacity Interest Rate Issuances
                        
 PPL Energy Supply   $ 750     $ 750   0.50% $ 356 
 PPL Electric 0.23%   300  $ 20    280       
 LG&E 0.29%   350    20    330   0.42%   55 
 KU 0.32%   350    150    200   0.42%   70 
   Total   $ 1,750  $ 190  $ 1,560     $ 481 

(PPL and PPL Energy Supply)

In May 2010, PPL Energy Supply entered intomaintains 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.  As ofAt December 31, 2010,2013, PPL Energy Supply has not requested any capacity for the issuance of letters of credit under this arrangement.

In November 2010, PPL Energy Supply, PPL EnergyPlus, PPL Montour and PPL Brunner Island entered intomaintain 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.  Amounts guaranteed by PPL Montour and PPL Brunner Island are secured by mortgageshave granted liens on thetheir respective generating facilities owned by PPL Montour and PPL Brunner Island,to secure any amount they may owe under their guarantees, which had an aggregate carrying value of $2.6$2.7 billion at December 31, 2010.2013.  The facility expires in November 2015,2018, but is subject to automatic one-year renewals under certain conditions.  Ther eThere were no secured obligations outstanding under this facility at December 31, 2010.2013.

(PPL and PPL Electric)All Registrants except PPL)

PPL Electric maintains a commercial paper programSee Note 16 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 Syndicated Credit Facility, which expires in December 2014, based on available capacity.  PPL Electric had no commercial paper outstanding at December 31, 2010 and 2009.discussion of intercompany borrowings.

2011 Bridge Facility(PPL)

(PPL)

Concurrently,In March 2011, concurrently and in connection with entering into the agreement to acquire LKE,WPD Midlands, PPL Capital Funding and PPL WEM, as borrowers, and PPL, as guarantor, entered into a commitment letter with certain lenders pursuant to which, subject to the conditions set forth therein, the lenders committed to provide PPL with 364-day unsecured £3.6 billion bridge financing of up to $6.5 billion, the proceeds of which, if drawn upon, were required to be used at closing of the acquisition (i)facility to fund the consideration for the acquisition and (ii) to pay certain fees and expenses in connection with the acquisition.  In June 2010, the commitment of such lenders for the bridge financing was syndicated to a group of banks, including the lenders under the commitment letter.  Upon the syndication of the commitment, PPL Capital Funding, as borrower, and PPL, as guarantor, entered into a $6.5 billion Bridge Facility.

The Bridge Facility was terminated on November 1, 2010 upon closing of the acquisition of LKE.  In 2010,During 2011, PPL incurred $80$44 million of fees in connection with establishing the 2011 Bridge Facility, which is reflected in "Interest Expense" on the Statement of Income.  NoOn 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 madeoutstanding.  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.Facility, primarily with the proceeds from senior notes issued by WPD (East Midlands) and WPD (West Midlands).


196

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.

Long-term Debt and Equity Securities
                         
(PPL, PPL Energy Supply and PPL Electric)         
                         
      2010 (a) 2009 
           PPL Energy       PPL Energy   
      PPL Supply PPL Electric PPL Supply PPL Electric
U.S.                    
 Senior Unsecured Notes (b) $ 3,574 (c)(d) $ 2,600     $ 2,700  $ 2,600    
Junior Subordinated Notes, due                    
 2018-2067 (e)   1,630           500       
8.05% - 8.30% Senior Secured Notes,                    
 due 2013 (f)   437      437       437    437    
7.375% 1945 First Mortgage Bonds,                    
 due 2014 (g)   10       $ 10    10     $ 10 
 Senior Secured/First Mortgage Bonds (h)   3,185 (d)       1,150    1,150       1,150 
4.00% - 4.75% Senior Secured Bonds                    
 (Pollution Control Series), due                    
 2023-2029 (i) (j)   314         314    314       314 
First Mortgage Bonds (Collateral                    
 Series), due 2023-2037 (k)   925                  
Exempt Facilities Notes, due 2037-2038 (l)   231      231       231    231    
Other (m)   7      5             
  Total U.S. Long-term Debt   10,313      3,273    1,474    5,342    3,268    1,474 
                         
U.K.                    
4.80436% - 9.25% Senior Unsecured                    
 Notes, due 2017-2040 (n)   1,897      1,897       1,327    1,327    
1.541% Index-linked Senior Unsecured                    
 Notes, due 2053-2056 (o)   394      394       397    397    
  Total U.K. Long-term Debt   2,291      2,291       1,724    1,724    
   Total Long-term Debt Before Adjustments   12,604      5,564    1,474    7,066    4,992    1,474 
Fair value adjustments from hedging                    
 activities   50      1       44    3    
Fair value adjustments from purchase                    
 accounting (p)   38 (q)    30       35    35    
Unamortized premium   7      7       9    9    
Unamortized discount   (36)     (13)   (2)   (11)   (8)   (2)
   Total Long-Term Debt   12,663      5,589    1,472    7,143    5,031    1,472 
Less current portion of Long-term Debt   502      500             
Total Long-term Debt, noncurrent $ 12,161    $ 5,089  $ 1,472  $ 7,143  $ 5,031  $ 1,472 
Long-term Debt (All Registrants)

    Weighted-Average   December 31,
    Rate Maturities 2013  2012 
PPL         
U.S.         
 Senior Unsecured Notes (a)4.31% 2014 - 2043 $ 5,568  $ 4,506 
 Senior Secured Notes/First Mortgage Bonds (b) (c) (d) (e)3.80% 2015 - 2043   5,823    5,587 
 Junior Subordinated Notes5.29% 2019 - 2073   1,908    2,608 
 Other6.95% 2014 - 2020   15    15 
   Total U.S. Long-term Debt      13,314    12,716 
             
U.K.         
 Senior Unsecured Notes (f)5.53% 2016 - 2040   6,872    6,111 
 Index-linked Senior Unsecured Notes (g)1.83% 2043 - 2056   749    608 
   Total U.K. Long-term Debt (h)      7,621    6,719 
   Total Long-term Debt Before Adjustments      20,935    19,435 
             
 Fair market value adjustments      23    78 
 Unamortized premium and (discount), net      (51)   (37)
   Total Long-term Debt      20,907    19,476 
 Less current portion of Long-term Debt      315    751 
   Total Long-term Debt, noncurrent    $ 20,592  $ 18,725 
             
PPL Energy Supply         
 Senior Unsecured Notes (a)5.32% 2014 - 2038 $ 2,493  $ 2,581 
 Senior Secured Notes (b)8.86% 2025   49    663 
 Other6.00% 2020   5    5 
   Total Long-term Debt Before Adjustments      2,547    3,249 
             
 Fair market value adjustments      (22)   22 
 Unamortized premium and (discount), net         1 
   Total Long-term Debt      2,525    3,272 
 Less current portion of Long-term Debt      304    751 
   Total Long-term Debt, noncurrent    $ 2,221  $ 2,521 
             
PPL Electric         
 Senior Secured Notes/First Mortgage Bonds (c) (d)4.63% 2015 - 2043 $ 2,314  $ 1,964 
 Other7.38% 2014   10    10 
   Total Long-term Debt Before Adjustments      2,324    1,974 
             
 Unamortized discount      (9)   (7)
   Total Long-term Debt      2,315    1,967 
 Less current portion of Long-term Debt      10    
   Total Long-term Debt, noncurrent    $ 2,305  $ 1,967 
             
LKE         
 Senior Unsecured Notes3.31% 2015 - 2021 $ 1,125  $ 1,125 
 Senior Secured Notes/First Mortgage Bonds (c) (e)3.18% 2015 - 2043   3,460    2,960 
   Total Long-term Debt Before Adjustments      4,585    4,085 
             
 Fair market value adjustments      (1)   7 
 Unamortized discount      (19)   (17)
   Total Long-term Debt    $ 4,565  $ 4,075 
             
LG&E         
 Senior Secured Notes/First Mortgage Bonds (c) (e)2.77% 2015 - 2043 $ 1,359  $ 1,109 
   Total Long-term Debt Before Adjustments      1,359    1,109 
             
 Fair market value adjustments      (1)  6 
 Unamortized discount      (5)   (3)
   Total Long-term Debt    $ 1,353  $ 1,112 
             

197
 
    Weighted-Average   December 31,
    Rate Maturities 2013  2012 
KU         
 Senior Secured Notes/First Mortgage Bonds (c) (e)3.44% 2015 - 2043 $ 2,101  $ 1,851 
   Total Long-term Debt Before Adjustments      2,101    1,851 
             
 Fair market value adjustments     1   1 
 Unamortized discount      (11)   (10)
   Total Long-term Debt    $ 2,091  $ 1,842 

(a)Aggregate maturities of long-term debt are:
PPL - 2011, $502; 2012, $0; 2013, $1,137; 2014, $310; 2015, $1,300; and $9,355 thereafter.
PPL Energy Supply - 2011, $500; 2012, $0; 2013, $737; 2014, $300; 2015, $300; and $3,727 thereafter.
PPL Electric - 2011, $0; 2012, $0; 2013, $400; 2014, $10; 2015, $100; and $964 thereafter.
None of the debt securities outstanding have sinking fund requirements.
(b)
PPL - interest rates range from 2.125% to 7.00%, and maturities range from 2011 to 2047.
PPL Energy Supply - interest rates range from 5.40% to 7.00%, and maturities range from 2011 to 2046.
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.  Therefore, the REPS are reflected as a 2015 maturity for PPL and PPL Energy Supply in (a) above.  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 E nergyEnergy 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.

Also includes $250 million of notes that may be redeemed at par beginning in July 2011.

(c)(b)Includes $99 million of notes that may be redeemed at par beginning in July 2012.

(d)In November 2010, LG&E and KU Energy LLC issued $875 million aggregate principal amount of senior unsecured notes in two series:  $400 million of 2.125% Senior Notes due 2015 and $475 million of 3.750% Senior Notes due 2020.  LG&E and KU Energy LLC received proceeds of $864 million, net of discounts and underwriting fees, from the issuance of the notes.

Also in November 2010, LG&E issued $535 million aggregate principal amount of its first mortgage bonds in two series:  $250 million of 1.625% First Mortgage Bonds due 2015 and $285 million of 5.125% First Mortgage Bonds due 2040.  LG&E received proceeds of $527 million, net of discounts and underwriting fees, from the issuance of the bonds.  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 $2.5 billion at December 31, 2010.

Also in November 2010, KU issued $1.5 billion aggregate principal amount of its first mortgage bonds in three series:  $250 million of 1.625% First Mortgage Bonds due 2015; $500 million of 3.250% First Mortgage Bonds due 2020 and $750 million of 5.125% First Mortgage Bonds due 2040.  KU received proceeds of $1.48 billion, net of discounts and underwriting fees, from the issuance of the bonds.  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 $4.0 billion at December 31, 2010.

Approximately $2.6 billion of the net proceeds from the LG&E and KU Energy LLC, LG&E and KU debt issuances, together with approximately $163 million of borrowings by LG&E under its syndicated credit facility, were applied to repay borrowings by these entities from a subsidiary of PPL Energy Supply, which borrowings were incurred to permit each of LG&E and KU Energy LLC, LG&E and KU to repay certain indebtedness owed to affiliates of E.ON AG upon the closing of PPL's acquisition of LKE.  In addition, LG&E and KU Energy LLC used net proceeds of its offering to make a $100 million return of capital to PPL.

The LG&E and KU Energy LLC senior notes and LG&E and KU first mortgage bonds were issued in private offerings to qualified institutional buyers and other transactions not subject to registration requirements under the Securities Act of 1933.  In connection with the issuances, each entity entered into a registration rights agreement with representatives of the initial purchasers of applicable notes or bonds, pursuant to which each issuer agreed to file, by mid-May 2011, a registration statement to exchange such notes or bonds for securities containing substantially identical terms (except for certain transfer restrictions), or in certain cases to file, by mid-May 2011, a registration statement covering resales of such notes or bonds.  Each issuer also agreed, under its registration rights agreement, to (i) use its commercially reasonable efforts to cause the registration statement to be de clared effective under the Security Act by mid-August 2011 and (ii) upon effectiveness of the registration statement, take certain actions to promptly exchange the notes or bonds or, in the case of a registration statement covering resales of notes or bonds, keep the registration statement effective until no later than mid-November 2011.  Pursuant to each registration rights agreement, the issuer may be required to pay liquidated damages if it does not meet certain requirements under its registration rights agreement.  Liquidated damages will generally accrue with respect to the principal amount of the subject securities at a rate of 0.25% per annum for the first 90 days from and including the date on which a default specified under the applicable registration rights agreement occurs, and increase by an additional 0.25% per annum thereafter, provided that the liquidated damages rate shall not at any time exceed 0.50% per annum.  Liquidated damages will cease to accrue, with resp ect to the subject securities, when all registration defaults under the applicable registration rights agreement have been cured, or, if earlier, upon the redemption by the issuer or maturity of the notes or bonds.

(e)In October 2010, PPL Capital Funding repurchased $20 million of its 2007 Series A Junior Subordinated Notes due 2067, for $19 million, plus accrued interest.  At December 31, 2010, $480 million of such notes remain outstanding.  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.

20102012 includes $1.15 billion of 4.625% Junior Subordinated Notes due 2018 that were issued in connection with PPL's issuance of Equity Units in June 2010.  See discussion of the Equity Units below for further information on such notes.

(f)Represents lease financing consolidated through a VIE.VIE which was repaid in 2013.  See Note 22 for additional information.

(g)(c)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 1945 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 $13 million at December 31, 2010 and $14 million at December 31, 2009, 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.

(h)
PPL - interest rates range from 1.625% to 7.125%, and maturities range from 2013 to 2040.
PPL Electric - interest rates range from 4.95% to 7.125%, and maturities range from 2013 to 2039.
TheElectric's senior secured and first mortgage bonds issued by PPL Electricthat are secured by the lien of the PPL ElectricElectric's 2001 Mortgage Indenture, which covers substantially all electric distribution plant and certain transmission plant owned by PPL Electric.  The carrying value of PPL Electric's property, plant and equipment was approximately $3.6$5.1 billion and $3.3$4.3 billion at December 31, 20102013 and 2009.
2012.

Includes LG&E's first mortgage bonds that 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 $3.2 billion and $2.7 billion at December 31, 2013 and December 31, 2012.

Includes KU's first mortgage bonds that 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 $5.1 billion and $4.4 billion at December 31, 2013 and December 31, 2012.
(i)(d)Includes 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 PPL Electric's 2001 Mortgage Indenture and are secured as noted in (h)(c) above.  This amount includes $224 million of such bondsthat may be redeemed at par beginning in 2015.

(j)The related Pollution Control Bonds issued by the PEDFA on behalf of PPL Electric in an aggregate principal amount of2015 and $90 million were structured as variable-rate remarketable bonds, whereby PPL Electric could 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 Pollution Control Bonds were remarketed in September 2010.  The bonds were in a term rate mode bearing interest at 4.85% until October 2010.  Effective October 2010, the term rate on the bonds was set at 4.00% through maturity.  PPL Electricthat may direct the PEDFA to redeem the bonds,be redeemed, in whole or in part, at par beginning in October 2020.  The bonds2020 and are subject to mandatory redemption upon a determination that the interest rate on the bonds would be included in the holders' gross income for federal tax purposes.

(k)(e)In October 2010,Includes LG&E&E's and KU each issued aKU's series of its first mortgage bonds that were issued to the respective trustees of tax-exempt revenue bonds to secure its respective obligations to make payments with respect to each series of bonds.  The first mortgage bonds were issued in the same principal amount, contain payment and redemption provisions that correspond to and bear the same interest rate as 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 (d)(c) above.  The related tax-exempt revenue bonds were issued by various governmental entities, principally counties in Kentucky, on behalf of LG&E and KU.  The related revenue bond documents allow LG&E and KU to convert the interest rate mode on the bonds from time to time to a commercial paper rate, daily rat e,rate, weekly rate, term rate of at least one year or, in some cases, an auction rate.  At December 31, 2010, an aggregate of $183 million of tax-exempt revenue bonds issued on behalf of LG&E and KU were in a term rate mode and had a weighted average interest rate of approximately 5.31%.  The remaining $742 million were in either a commercial paper rate, daily rate, weekly rate or auction rate mode and had a weighted average interest rate of approximately 0.45% at December 31, 2010.LIBOR index rate.

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.  Since the date of acquisition of LKE by PPL, the average rate on LG&E's and KU's auction rate bonds in total was 0.4 9%.  As noted above, the instruments governing these auction rate bonds permit LG&E and KU to convert the bonds to other interest rate modes.
At December 31, 2013, 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, 2013, 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.

Certain variable rate tax-exempt revenue bonds totaling $511 million (including the $163 million discussed below) at December 31, 2010, 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.  At December 31, 2010, LG&E held $163 million of such bonds, which were issued on its behalf by Louisville/Jefferson County, Kentucky and are reflected as "Short-term investments" on the Balance Sheet.  In January 2011, the entire $163 million of bonds were remarketed to unaffiliated investors in a term rate mode, bearing interest at 1.90% into 2012.  The proceeds from the remarketing were used to repay the borrowing under LG&E's syndicated credit facility, which is discussed above in "Credit Arrangements and Short-term Debt."
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 ($135 million for LG&E and $96 million for KU), 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.

(l)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 2 007 (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.

Certain variable rate tax-exempt revenue bonds totaling $348 million at December 31, 2013 ($120 million for LG&E and $228 million for KU), 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.
(f)In connection with the issuance of each series of bonds by the PEDFA in 2009, 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.

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 by PPL Energy Supply under certain circumstances, including upon conversion to 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.  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 int erest rate mode through December 9, 2009.

At December 31, 2009, each series of bonds was in a commercial paper rate mode.  The weighted average rate was 0.59%.
The interest rate mode on all three series of bonds was converted from a commercial paper rate to a term rate of 3.00% for five years, effective in September 2010.
(m)
PPL - 6.00% - 7.471% notes due 2011 - 2020.
PPL Energy Supply - 6.00% notes due 2020.
(n)
In March 2010, WPD (South Wales) and WPD (South West) each issued £200Includes £225 million of 5.75% Notes due 2040 (Notes).  The combined debt issuance of £400 million equated to $603 million at the time of issuance ($623368 million at December 31, 2010), of which WPD received proceeds of £394 million, which equated to $593 million, net of discounts and underwriting fees.  The proceeds have been, or will be, used for general corporate purposes, including repayment of short-term debt, prepayment of certain pension contributions and funding of capital expenditures.  See Note 13 for further discussion of pension contributions.
Includes £225 million ($350 million at December 31, 2010 and $369 million at December 31, 2009)2013) 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.
Also includes £1.0 billion ($1.6 billion) at December 31, 2010 and £625 million ($1.0 billion) at December 31, 2009 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 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 Wales) and WPD (South West) operate.
Change from 2009 to 2010 includes a decrease of $53 million resulting from movements in foreign currency exchange rates.

(o)(g)The principal amount of thesethe notes issued by WPD (South West) and WPD (East Midlands) is 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 20092012 to 20102013 was an increase of approximately £11£12 million ($1720 million) and is offset by a $20 million decrease resulting from movements in foreign currency exchange rates.

Theseinflation.  In addition, this amount includes £225 million ($368 million at December 31, 2013) 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 £3.8 billion ($6.2 billion at December 31, 2013) 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.

(p)  Reflects adjustments made to record WPD's long-term debt at fair value at the time of acquisition of the controlling interest in WPD in 2002.
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None of the outstanding debt securities noted above have sinking fund requirements.  The aggregate maturities of long-term debt for the periods 2014 through 2018 and thereafter are as follows.          

(q)  Reflects adjustments made to record LG&E's and KU's long-term debt at fair value at the time of acquisition of LKE in 2010.
     PPL            
     Energy PPL         
  PPL Supply Electric LKE LG&E KU
                   
2014  $  314  $  304  $  10          
2015    1,304    304    100  $  900  $  250  $  250 
2016    814    354             
2017    104    4             
2018    653    403             
Thereafter   17,746    1,178    2,214    3,685    1,109    1,851 
Total $  20,935  $  2,547  $  2,324  $  4,585  $  1,359  $  2,101 

Long-term Debt and Equity Securities Activities

(PPL)

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

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

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

In September and October 2013, WPD (East Midlands) issued £40 million and £25 million aggregate principal amount of 1.676% Index-linked Senior Notes due 2052, which equated to $64 million and $40 million at the time of issuance.  The proceeds were used to fund capital expenditures and for other general corporate purposes.

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

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

(PPL and PPL Energy Supply)

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

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

In December 2013, the entire $284 million and $153 million principal amounts of the 8.05% and 8.30% Senior Notes were repaid upon maturity in connection with the Lower Mt. Bethel lease termination.  See Note 22 for additional information.
199

(PPL and PPL Electric)

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

(PPL, LKE, LG&E and KU)

In November 2013, LG&E and KU each issued $250 million of 4.65% First Mortgage Bonds due 2043.  LG&E and KU each received proceeds of $246 million, net of discounts and underwriting fees, which were used for repayment of short-term debt, including commercial paper, for capital expenditures and for other general corporate purposes.

(PPL)

2010 Equity Units

During 2013, several events occurred related to the 2010 Equity Units.  In May 2013, PPL Capital Funding remarketed $1.150 billion of 4.625% Junior Subordinated Notes due 2018 that were originally issued in June 2010 as a component of PPL's 2010 Equity Units.  In connection with the remarketing, PPL Capital Funding issued $300 million of 2.04% Junior Subordinated Notes due 2016 and $850 million of 2.77% Junior Subordinated Notes due 2018, which were simultaneously exchanged for three tranches of Senior Notes:  $250 million of 1.90% Senior Notes due 2018, $600 million of 3.40% Senior Notes due 2023 and $300 million of 4.70% Senior Notes due 2043.  The transaction was accounted for as a debt extinguishment, resulting in a $10 million loss on extinguishment of the Junior Subordinated Notes, recorded to "Interest Expense" on the Statement of Income.  The transaction was considered non-cash activity that was excluded from the 2013 Statement of Cash Flows.  Additionally, in July 2013, PPL issued 103.540 million shares of common stock at $28.73 per share to settle the 2010 Purchase Contracts.  PPL received net cash proceeds of $1.150 billion, which were used to repay short-term and long-term debt obligations and for other general corporate purposes.

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 $24.00$25.30 per share, for a total of $2.484$2.328 billion.  Proceeds from the issuance were $2.409$2.258 billion, net of the $75$70 million underwriting discount.  PPL also issued 2319.55 million 2011 Equity Units at a stated amount per unit of $50.00 for a total of $1.150 billion.$978 million.  Proceeds from the issuance were $1.116 billion,$948 million, net of the $34$30 million underwriting discount.  PPL investedused the net proceeds in U.S. government obligations, bank deposits and other highly rated investments until needed to partially fundrepay PPL Capital Funding's borrowings under the acquisition of LKE and2011 Bridge Facility, as discussed above, to pay certain acquisition-related fees and expenses.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 4.625%4.32% Junior Subordinated Notes due 2018 (20182019 (2019 Notes).

Each 2011 Purchase Contract obligates the holder to purchase, and PPL to sell, for $50.00 a variable 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 JulyMay 1, 2013,2014, subject to antidilution adjustments and an early settlement upon a Fundamental Change as follows:

·if the average VWAP equals or exceeds $28.80,approximately $30.99, then 1.73611.6133 shares (a minimum of 39,930,30031,540,015 shares);
·if the average VWAP is less than $28.80approximately $30.99 but greater than $24.00,$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 $24.00,$25.30, then 2.08331.9763 shares (a maximum of 47,915,90038,636,665 shares).

If holders elect to settle the 2011 Purchase Contract prior to JulyMay 1, 2013,2014, they will receive 1.73611.6133 shares of PPL common stock, subject to antidilution adjustments and an early settlement upon a Fundamental Change.  In addition to the maximum shares noted above, up to 1.2 million shares could be issued under make-whole provisions in the event of early settlement upon a Fundamental Change.

A holder's ownership interest in the 20182019 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 to no longer to be a holder of the 20182019 Notes, such holder's obligation under the 2011 Purchase Contract must be secured by a U.S. Treasury security.


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Each 2011 Purchase Contract also requires PPL to make quarterly contract adjustment payments at a rate of 4.875%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 9.5%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.

The 20182019 Notes are fully and unconditionally guaranteed by PPL as to payment of principal and interest.  The 20182019 Notes initially bear interest at 4.625%4.32% and are not subject to redemption prior to July 2015.May 2016.  Beginning July 2015,May 2016, PPL Capital Funding may, at its option, redeem the 20182019 Notes, in whole but not in part, at any time, at par plus accrued and unpaid interest.  The 20182019 Notes are expected to be remarketed in 2013 in2014 into two tranches, such that neither tranche will have an aggregate principal amount of less than the lesser of $300$250 million and 50% of the aggregate principal amount of the 20182019 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 settlemen t.  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.settlement.  Upon a successful remarketing, the interest rate on the 20182019 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 20182019 Notes will have the right to put their notes to PPL Capital Funding on JulyMay 1, 20132014 for an amount equal to the principal amount plus accrued interest.  In January 2014, PPL Capital Funding elected to conduct an optional remarketing of the 2019 Notes that will occur between January 30, 2014 and April 15, 2014.

Prior to July 2013,May 2016, PPL Capital Funding may elect at one or more times to defer interest payments on the 20182019 Notes for one or more consecutive interest periods until the earlier of the third anniversary of the interest payment due date and July 2015.May 2016.  Deferred interest payments will accrue additional interest at a rate equal to the interest rate then applicable to the 20182019 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 in terestinterest to, the subordinated guarantee of the 20182019 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 20182019 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 20182019 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 20182019 Notes were recorded at $1.150 billion,$978 million, which approximated fair value, as long-term debt.  At the time of issuance, the present value of the contract adjustment payments of $157$123 million was recorded to other liabilities representing the obligation to make contract adjustment payments, with an offsetting reduction to additional paid-in capital in excess of par value 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 iswas excluded from the Statement of Cash Flows in 2010.  Costs to issue the Equity Units were primarily allocated on a relative cost basis, resulting in $29 million being recorded to capital in excess of par value and $7 million being recorded to other noncurrent assets.2011.  See Note 4 for EPS considerations related to the 2011 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 16 under "PLR Contracts" (also see Note 15 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; and
·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.All Registrants)

The subsidiaries of PPL are separate legal entities.  PPL's subsidiaries are not liable for the debts of PPL.  Accordingly, creditors of PPL may not satisfy their debts from the assets of 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.

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, absent a specific contractual undertaking or as required by applicable law or regulation,Similarly, 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 pare ntparent or other subsidiary to pay thesuch creditors of its subsidiaries or as required by applicable law or regulation.


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Distributions, Capital Contributions and Related Restrictions

(PPL)

In February 2010,November 2013, PPL announced an increase todeclared its quarterly common stock dividend, effective April 1, 2010, to 35.0payable January 2, 2014, at 36.75 cents per share (equivalent to $1.40$1.47 per annum).  In February 2014, PPL declared its quarterly common stock dividend, payable April 1, 2014, at 37.25 cents per share (equivalent to $1.49 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.  Additionally, as discussed above in "Long-term Debt and Equity Securities," subject2067 or 2013 Series B Junior Subordinated Notes due 2073.  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%4.32% Junior Subordinated Notes due 20182019 have been paid and deferred contract adjustment payments on PPL's 2011 Purchase Contracts have been paid.  At December 31, 2010,2013, no payments were deferred on eitherany series of junior subordinated notes or the 2011 Purchase Contracts.

(All Registrants except PPL Energy Supply)

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.  Also,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, 2013, net assets of $2.5 billion ($1.0 billion for LG&E and $1.5 billion for KU) were restricted for purposes of paying dividends to LKE, and net assets of $2.5 billion ($1.0 billion for LG&E and $1.5 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 Vir giniaVirginia 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, Ordersorders from the KPSC require LG&E orand KU to obtain prior regulatory consent or approval before loaning fundslending amounts to PPL.  At December 31, 2010, the net restricted assets of LG&E and KU were approximately $4.4 billion.
(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)

In 2010, PPL Energy Supply distributed $4.7 billion to its parent company, PPL Energy Funding, and received cash contributions of $3.6 billion.  The cash contributions received from its parent related primarily to the funds received by PPL in June 2010 from the issuance of common stock and Equity Units.  These funds were invested by a subsidiary of PPL Energy Supply until they were returned to PPL Energy Funding in October 2010 to be available to partially fund PPL's acquisition of LKE and pay certain acquisition-related fees and expenses.

(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 and legal requirements and other factors.

(PPL Electric)

During 2010, PPL Electric paid common stock dividends of $71 million to PPL and received cash contributions of $55 million.

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.
(All Registrants except PPL)
                    
The following distributions and capital contributions occurred in 2013:
                  
    PPL Energy PPL          
    Supply Electric LKE LG&E KU
                    
Dividends/distributions paid to parent/member $  408  $  127  $  254  $  99  $  124 
Capital contributions received from parent/member   1,577    205    243    86    157 

8.  Acquisitions, Development and Divestitures

(PPL, PPL Energy Supply and PPL Electric)All Registrants)

PPL and its subsidiaries continuously evaluate strategic options and,The Registrants from time to time 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 resulting transactions may impact future financial results.  See Note 9 for information on anticipated and completed sales of businesses that were presented as discontinued operations by PPL and PPL Energy Supply andoperations.  See Note 10 for information on PPL's acquisition of LKE.completed acquisitions.

Domestic
202

Development

(PPL)(PPL, LKE, LG&E and KU)         

Cane Run Unit 7 Construction

In 2006, LKE entered intoSeptember 2011, LG&E and KU filed an application for 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 NGCC generating unit.  A formal request for recovery of the costs associated with the construction contractwas not included in the CPCN application but certain Cane Run Unit 7 construction work in progress has been included in base rates and the remaining capital costs are 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 724 MW.  In addition, KU retired a 12 MW unit at the Haefling plant in December 2013 and the remaining 71 MW unit at the Tyrone plant in February 2013.  There were no significant gains or losses related to the Trimble County Unit 2 (TC2) project, a coal-fired generating plant with capacity of 760 MW, of which the2013 retirements.

Future Capacity Needs

In January 2014, LG&E and KU sharefiled an application for a CPCN with the KPSC requesting approval to construct a NGCC unit at KU's Green River generating site (Green River Unit 5) and a solar generating facility at the E. W. Brown generating site.  Subject to finalizing details, regulatory applications, permitting and construction schedules, Green River Unit 5 is 75% or 570 MW.  The contract is a turnkey agreement for the design, engineering, procurement, construction, commissioning, testing and deliveryexpected to have approximately 700 MW of the project, according to designated specifications, terms and conditions.  LKE's share of the expected capitalcapacity at an estimated cost of the TC2 project$700 million and is $860 million.  With limited exceptions LKE took care, custody and control of TC2 on January 22, 2011, and has dispatched the unitplanned to meet customer demand since that date.be operational in 2018.  Green River Unit 5 will be jointly owned by LG&E and KU, with LG&E owning a 40% undivided interest and the contractor agreedKU owning a 60% undivided interest.  The solar generating facility is expected to have approximately 10 MW of capacity at an estimated cost of $36 million and is planned to be operational in 2016.  The solar generating facility will be jointly owned by LG&E and KU, with LG&E owning a further amendment of the construc tion agreement whereby the contractor will complete certain actions relating to identifying36% undivided interest and completing any necessary modifications to allow operation of TC2 on all fuels in accordance with initial specifications prior to certain dates, and amending the provisions relating to liquidated damages.  LKE cannot currently estimate the ultimate outcome of these matters.  See Notes 14 and 15 for additional information.KU owning a 64% undivided interest.

(PPL and PPL Energy Supply)

In 2007, PPL requested FERC approval to expand the capacity of its Holtwood hydroelectric plant.  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 2009, PPL filed a new application with the FERC to expand capacity at its Holtwood hydroelectric plant, which the FERC approved.  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.  The expansion project hasPackage, PPL Energy Supply filed an expected capital cost o f approximately $434 million.  Construction continues onapplication with the project, with commercial operations scheduledFERC to begin in 2013.  At December 31, 2010, expected remaining expenditures are $304 million.

expand capacity at its Holtwood and Rainbow hydroelectric facilities, which the FERC approved.  In 2009, PPL Montana received FERC approval for its request to redevelopthe first quarter of 2013, the Rainbow hydroelectric facility atredevelopment project in Great Falls, Montana, which increased total capacity to increase capacity by 28 MW.  The redevelopment project's expected cost is $212 million.  Construction continues on63 MW, was placed in service.  In the fourth quarter of 2013, the 125 MW Holtwood project with commercial operations scheduled to beginwas placed in 2012.  At December 31, 2010, expected remaining expenditures are $100 million.service.

PPL Energy Supply believes that it is qualifiedthe projects are eligible for either investment tax credits or Section 1603 Treasury grants for the hydroelectric plant expansion projects at the Holtwood and Rainbow facilities.grants.  As of December 31, 2013, PPL hasEnergy Supply had recognized investment tax credits for both projects and is evaluating whethercontinued to seekevaluate the desirability of obtaining Treasury grants in lieu of the investment tax credits.  During 2010,

As of December 31, 2013, PPL Energy Supply had recorded cumulative deferred investment tax credits of $52$60 million related to tax years 2010 and 2009.$117 million for the Rainbow and Holtwood hydroelectric facilities.  The credits reduced PPL anticipates recognizing an additional $90 million in tax credits for tax years 2011 and 2012.  These credits reduce PPL'sEnergy Supply's tax liability and will beare amortized over the life of the related assets.

In 2008,January 2014, the U.S. Department of Treasury awarded $56 million for Specified Energy Property in Lieu of Tax Credits for the Rainbow project.  PPL Susquehanna received NRC approvalEnergy Supply has accepted and will account for its request to increase the generation capacityreceipt of the Susquehanna nuclear plant.  The$56 million grant in 2014.  PPL Energy Supply is required to recapture $60 million of investment tax credits previously recorded related to the Rainbow project is being completed in phases over several years.  PPL Susquehanna's shareas a result of the totalgrant receipt.  The accounting for the grant receipt and recapture of investment tax credits is not expected capacity increase is currently estimated to be 195 MW.  The final phase ofhave a significant impact on the Unit 1 uprate was completedfinancial statements in 2010 and yielded 55 MW for PPL Susquehanna.  The final Unit 2 uprate is scheduled for 2011 and is projected to yield an additional 50 MW for PPL Susquehanna.  At December 31, 2010, PPL Susquehanna's share of expected remaining expenditures is $15 million.2014.

Bell Bend COLA

In 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 the Susquehanna plant.  Also in 2008, the COLA was formally docketed and accepted for review by the NRC.  PPL continues to respond to questions from the NRC regarding technical and site specific information provided in the initial COLA and subsequent amendments.  PPL does not expect to complete the COLA review process with the NRC prior to 2013.

203

In 2008, a PPL Energy Supply subsidiaryBell Bend submitted Parts I and II of an application for a federal loan guarantee for Bell Bend to the DOE.  In 2009,February 2014, the DOE announced that it was working to finalizethe first loan guarantees related to four projects, not including Bell Bend.guarantee for a nuclear project in Georgia.  Eight of the ten applicants whothat submitted Part II applications remain active in the 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 three projects.  The PPL Energy Supply subsidiaryBell Bend submits quarterly application updates for Bell Bend to the DOE to remain active in the loan guarantee application process.

The NRC continues to review the COLA.  PPL Bell Bend does not expect to complete the COLA review process with the NRC prior to 2016.  PPL Bell Bend has made no decision to proceed with construction of Bell Bend and expects that such decision will not be made for several years given the anticipated lengthy NRC license approval process.  Additionally, PPL 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 $144$224 million on the COLA and other permitting costs (including land costs) necessary for construction.construction, which is expected to be sufficient to fund the project through receipt of the license.  At December 31, 20102013 and 2009, $109December 31, 2012, $173 million and $77$154 million of costs, which includes capitalized interest, associated with the licensing application were capitalized and are included on the Balance Sheets in noncurrent "Other intangibles."  PPL Bell Bend believes it is probable that these costs are ultimately recoverable following NRC approvalthe estimated fair value of the COLA either through construction ofcurrently exceeds the new nuclear unit, transfer ofcosts expected to be capitalized associated with the COLA rights to a joint venture, or sale of the COLA rights to another party.licensing application.

(PPLRegional Transmission Line Expansion Plan (PPL and PPL Electric)

Susquehanna-Roseland

In 2007, PJM directed the construction of a new 150-mile, 500-kilovolt500-kV 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 iswas needed to prevent potential overloads that could occur as early as 2012 on several existing transmission lines in the interconnected PJM system.  PJM has directed PPL Electric to construct the Pennsylvania portion of the Susquehanna-Roseland line in Pennsylvania and has directed Public Service Electric & Gas Company to construct the New Jersey portion of the line.

Construction activities have been underway on the 101-mile route in Pennsylvania since 2012.  The line in New Jersey, in each case by June 1, 2012.is expected to be completed before the peak summer demand period of 2015.  At December 31, 2013, PPL Electric's estimated share of the project cost was $630 million.  At December 31, 2013, $377 million of costs is approximately $500 million.were capitalized and are included on the Balance Sheet primarily in "Construction work in progress."

This project is pending certain regulatory approvals.  PPL Electric has identified the approximately 100-mile route for the Pennsylvania portion of the line.  In February 2010, the PUC and the New Jersey Board of Public Utilities approved the project.  Several parties appealed the PUC decision to the Commonwealth Court of Pennsylvania, and certain of those appeals are pending before the court.  PPL Electric cannot predict the ultimate outcome or timing of these proceedings.Northeast/Pocono

In addition, both companies are working withOctober 2012, the National Park ServiceFERC issued an order in response to obtain any approvalsPPL Electric's December 2011 request for ratemaking incentives for the Northeast/Pocono Reliability project (a new 58-mile 230 kV transmission line that may beincludes three new substations and upgrades to adjacent facilities).  The FERC granted the incentive for inclusion in rate base of all prudently incurred construction work in progress (CWIP) costs but denied the requested incentive for a 100 basis point adder to the return on equity.  The order required a follow-up compliance filing from PPL Electric to routeensure proper accounting treatment of AFUDC and CWIP for the line throughproject, which PPL Electric submitted to the Delaware Water Gap National Recreation Area.  The National Park ServiceFERC in March 2013 and the FERC subsequently approved in April 2013.

In December 2012, PPL Electric submitted an application to the PUC requesting permission to site and construct the project.  A number of parties protested the application, which was subsequently  assigned to an Administrative Law Judge (ALJ).  Evidentiary hearings were held in July 2013.  In October 2013, the ALJ concluded that PPL met its burden on all issues, and recommended that the PUC approve the siting application, two zoning petitions, and the remaining eminent domain applications.  On January 9, 2014, the PUC issued a Final Order approving the Application.  No party has stated that its review will notfiled an appeal of the PUC's decision and the deadline for such appeals has passed.  PPL Electric expects the project to be completed until 2012.in 2017.  At December 31, 2013, PPL Electric cannot predict the ultimate outcome or timingElectric's estimated cost of the National Park Service approval.project was $335 million, most of which qualifies for the CWIP incentive treatment.     


204

Other (PPL and PPL Energy Supply)

Montana Transactions

In September 2013, PPL Electric anticipatesMontana executed a definitive agreement to sell to NorthWestern its hydroelectric generating facilities located in Montana with a generation capacity of 633 MW for $900 million in cash, subject to certain adjustments.  The sale, which is not expected to close before the delayssecond half of 2014, includes 11 hydroelectric power facilities and related assets.  The sale is subject to closing conditions, including receipt of regulatory approvals by the FERC and the Montana Public Service Commission and certain third-party consents.  Due to the uncertainties related to certain of these conditions as of December 31, 2013, the sale did not meet the applicable accounting criteria for the assets and liabilities included in the approval process will delaytransaction to be classified as held for sale on the in-service datebalance sheet.

To facilitate the sale, on December 20, 2013, PPL Montana terminated its operating lease arrangement related to 2014 or later.partial interests in Units 1, 2 and 3 of the Colstrip coal-fired electric generating facility and acquired those interests, collectively, for $271 million.  At lease termination, the existing lease-related assets on the balance sheet consisting primarily of prepaid rent and leasehold improvements were written-off and the acquired Colstrip assets were recorded at fair value as of the acquisition date.  PPL Electric also cannot predict what action, if any, PJM might take in the eventand PPL Energy Supply recorded a charge of a delay to its scheduled in-service date$697 million ($413 million after-tax) for the new line.  PJM continues to reaffirmtermination of the need for this project.lease included in "Loss on lease termination" on the 2013 Statements of Income.  The $271 million payment is reflected in "Cash Flows from Operating Activities" on the 2013 Statements of Cash Flow.

9.  Discontinued Operations

(PPL and PPL Energy Supply)

Anticipated Sale of Certain Non-core Generation Facilities(PPL and PPL Energy Supply)

As part of the LKE acquisition financing strategy, management explored the sale of certain non-core assets.  As a result of this process, in September 2010 certainIn 2011, PPL Energy Supply subsidiaries signed definitive agreements to sellcompleted the sale of their ownership interests in certain non-core generation facilities, which were included in the Supply segment, for approximately $381 million in cash.million.  The transaction includesincluded the natural gas-fired facilities in Wallingford, Connecticut and University Park, Illinois and a PPL Energy Supply subsidiary's sharean equity interest in Safe Harbor Water Power Corporation, which owns a hydroelectric facility in Conestoga, Pennsylvania and which is accounted forPennsylvania.  There was no significant impact on earnings in 2011 from the operation of this business or as an equity investment.a result of the sale.

These non-core generation facilities metDistribution of Membership Interest in PPL Global to Parent(PPL Energy Supply)

In January 2011, PPL Energy Supply distributed its entire membership interest in PPL Global to its parent, PPL Energy Funding.  The distribution was made based on the held for sale criteriabook value of the assets and liabilities of PPL Global with financial effect as of January 1, 2011, and no gains or losses were recognized on the distribution.

The amount of cash and cash equivalents of PPL Global at the time of the distribution was reflected as a financing activity in the third quarter2011 Statement of 2010.  AsCash Flows.

10.  Business Acquisitions

Ironwood Acquisition(PPL and PPL Energy Supply)

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 together own and operate, 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 result, assets with a carrying amounttolling agreement that expires in 2021.  The acquisition provides PPL Energy Supply, through its subsidiaries, operational control of $473 million were written down to their estimatedadditional combined-cycle gas generation in PJM.

The fair value (less cost to sell) of $377 million at September 30, 2010, resulting in a pre-tax impairment charge of $96 million ($58 million after tax).  In addition, $5 million ($4 million after tax) of allocated goodwillthe consideration paid for this acquisition was written off in the third quarter of 2010.  During the fourth quarter of 2010, additional tax expense of $2 million was recorded.  These charges are included in "Income (Loss) from Discontinued Operations (net of income taxes)" on the 2010 Statements of Income.  The sale is expected to close in the first quarter of 2011, subject to the receipt of necessary regulatory approv als and third-party consents.as follows.

Following are the components of Discontinued Operations in the Statements of Income.

  2010  2009  2008 
          
Operating revenues $ 113  $ 106  $ 150 
Operating expenses (a)   156    42    60 
Operating income (loss)   (43)   64    90 
Other income (expense) - net   2    2    2 
Interest expense (b)   11    9    7 
Income (loss) before income taxes   (52)   57    85 
Income tax expense (benefit)   (18)   24    35 
Income (Loss) from Discontinued Operations $ (34) $ 33  $ 50 
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)2010 includesThe long-term debt assumed through consolidation consisted of $226 million aggregate principal amount of 8.857% senior secured bonds to be fully repaid by December 31, 2025, plus $8 million of debt service reserve loans, and a $24 million fair value adjustment.  See Note 7 for information on the impairments to the carryingFebruary 2013 exchange of a portion of long-term debt assumed through consolidation.      

205
Purchase Price Allocation

The following table summarizes the allocation of the purchase price to the fair value of the generation facilities being sold and the write-off of allocated goodwill.
(b)Represents allocated interest expense based upon debt attributable to the generation facilities being sold.

The major classes of assets reported as held for sale onacquired and liabilities assumed through consolidation, and the Balance Sheet at December 31, 2010 were $357 million of PP&E and a $13 million equity method investment (corresponding amounts at December 31, 2009 were $461 million of PP&E and a $13 million equity method investment, which have not been reclassified on the Balance Sheet as of that date).

Sale of Long Island Generation Business

In February 2010, a PPL Energy Supply subsidiary completed the saleeffective settlement of the Long Island generation business, which was included in the Supply segment.  The definitive salestolling agreement which was executed in May 2009, included provisions that reduced the $135 million purchase price monthly, commencing September 1, 2009.  After adjusting for these price-reduction provisions, proceeds from the sale approximated $124 million.

In the second quarter of 2009, the Long Island generation business met the held for sale criteria.  As a result, at June 30, 2009, net assets held for sale were written down to their estimated fair value less cost to sell, resulting in a pre-tax impairment charge of $52 million ($34 million after tax).  At both September 30 and December 31, 2009, the estimated fair value (less cost to sell) was remeasured and additional impairments totaling $10 million ($3 million after tax) were recorded.  In addition, $2 million ($1 million after tax) of goodwill allocated to this business was written off in 2009.  PPL Energy Supply recorded a loss on the sale of $3 million during the first quarter of 2010 due to the price-reduction provisions.  The losses recognized in the third and fourth quarters of 2009 and the first quarter of 2010 did not significantly impact earnings, as such amounts were substantially offset by tolling revenues from the Long Island generation assets during the same periods.  These amounts are included in "Income (Loss) from Discontinued Operations (net of income taxes)" on the Statements of Income.

The tolling agreements related to these plants were transferred to the new owner upon completion of the sale.

Following are the components of Discontinued Operations in the Statements of Income.

  2010  2009  2008 
          
Operating revenues $ 4  $ 24  $ 26 
Operating expenses (a)   4    73    8 
Operating income (loss)      (49)   18 
Interest expense (b)      4    3 
Income (loss) before income taxes      (53)   15 
Income tax expense (benefit)      (20)   5 
Income (Loss) from Discontinued Operations $  $ (33) $ 10 
through consolidation.

(a)2010 includes the loss on the sale of the business.  2009 includes impairment charges.
(b)Represents allocated interest expense based upon debt attributable to PPL's Long Island generation business.

Upon completion of the sale, $41 million of PP&E and an $86 million net investment in a direct-financing lease, which had been classified as held for sale at December 31, 2009, were removed from the Balance Sheet.

Sale of Maine Hydroelectric Generation Facilities

Sale of the Remaining Maine Hydroelectric Generation Business

In December 2010, a PPL Energy Supply subsidiary completed the sale of its remaining three hydroelectric facilities in Maine, which were included in the Supply segment, for $24 million.  As a result of the sale, PPL Energy Supply recorded a gain of $11 million ($7 million after tax), reflected in "Income (Loss) from Discontinued Operations (net of income taxes)" on the 2010 Statement of Income.  Upon completion of the sale, assets totaling $13 million, primarily PP&E, were removed from the Balance Sheet.

Sale of the Majority of Maine Hydroelectric Generation Business

In 2009, a PPL Energy Supply subsidiary completed the sale of the majority of its Maine hydroelectric generation business, which was included in the Supply segment, for $81 million in cash, adjusted for working capital.  The assets sold in this transaction included five hydroelectric facilities and a 50% equity interest in a sixth hydroelectric facility, which had been accounted for as an equity investment, together with rights to increase energy output at these facilities upon completion of the sale of the PPL Energy Supply subsidiary's three other hydroelectric facilities in Maine (see "Sale of the Remaining Maine Hydroelectric Generation Business" above).  As a result of the sale of the majority of the Maine hydroelectric generation business, PPL Energy Supply recorded a gain of $38 million ($22 million after tax), reflected in "Income (Loss) from Discontinued Operations (net of income taxes)" on the 2009 Statement of Income.  Additionally, in December 2010, the PPL Energy Supply subsidiary received $14 million in contingent consideration, which was tied to its completion of the sale of the three other hydroelectric facilities noted above.  PPL Energy Supply accordingly recorded a gain of $14 million ($8 million after tax), reflected in "Income (Loss) from Discontinued Operations (net of income taxes)" on the Statement of Income.

Following are the components of Discontinued Operations in the Statements of Income.

  2010  2009  2008 
          
Operating revenues    $ 5  $ 11 
Operating expenses (a) $ (25)   (34)   3 
Operating income   25    39    8 
Other income (expense) - net      3    2 
Interest expense (b)      1    1 
Income before income taxes   25    41    9 
Income tax expense   10    17    4 
Income from Discontinued Operations $ 15  $ 24  $ 5 

(a)Includes the gains recorded on the sales.
(b)Represents allocated interest expense based upon debt attributable to the Maine hydroelectric generation business sold.

Sale of Interest in Wyman Unit 4

As a result of management's ongoing strategic review of PPL Energy Supply's non-core asset portfolio, in 2009, a PPL Energy Supply subsidiary sold its 8.33% ownership interest in the Wyman Unit 4 generating station, an oil-fired plant located in Yarmouth, Maine.  PPL Energy Supply's interest in the plant was included in the Supply segment.  In connection with the sale, PPL Energy Supply recorded a loss of $6 million ($4 million after tax).  This charge is included in "Income (Loss) from Discontinued Operations (net of income taxes)" on the 2009 Statement of Income.

Sale of Latin American Businesses

In 2007, PPL Energy Supply completed the sale of its regulated electricity delivery businesses in Chile, El Salvador and Bolivia, which were included in the International Regulated segment.  In 2008, PPL Global recognized income tax benefits and miscellaneous expenses in Discontinued Operations in connection with the dissolution of certain Latin American holding companies.  This process was substantially completed in 2008.  In 2009, PPL Energy Supply identified a correction to the previously computed tax bases of the Latin American businesses.  The most significant adjustment related to the sale of the El Salvadoran business 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 Energy Supply recorded $24 million of additional income tax expense in 2009, which is reflected on the Statement of Income in "Income (Loss) from Discontinued Operations (net of income taxes)."  The additional expense is not considered by management to be material to the 2009 financial statements.

Following are the components of Discontinued Operations in the Statements of Income.

  2009  2008 
       
Operating expenses    $ 2 
Operating loss      (2)
Other income (expense) - net      (1)
Loss before income taxes      (3)
Income tax expense (benefit) (a) $ 27    (8)
Income (Loss) from Discontinued Operations $ (27) $ 5 

(a)2009 includes 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.

(PPL)

WKE

Prior to its November 1, 2010 acquisition by PPL, WKE had a 25-year lease for and operated nine generating facilities of Big Rivers Electric Corporation, a power-generating cooperative in western Kentucky, and a tenth facility owned by the City of Henderson, Kentucky.  In 2007, WKE entered into an agreement to terminate the lease, which closed in 2009, prior to PPL acquiring LKE.  As part of the lease termination, WKE was obligated to pay a former customer, an aluminum smelter, an aluminum production payment in lieu of a lump-sum cash consent payment, as well as the difference between the electricity prices charged by WKE under the previous long-term sales contract and the electricity prices charged by the aluminum smelter's current electricity supplier.  This obligation was partially mitigated by the opportu nity to make off-system sales, when economic, for the contractual demand not used by the aluminum smelter.  In addition, the total amount of the obligation to this smelter was limited to $82 million.  Any amount paid by WKE over the limit has been recorded as an interest-bearing receivable and is required to be repaid (plus interest) only if certain conditions occur by 2028.  Such exposure expired in January 2011.  In addition, because the former customer posted a letter of credit supporting payment to its current electricity supplier, WKE reversed a portion of the liability associated with its guarantee of payment by the former customer.  Also, WKE had an obligation to another aluminum smelter, also a former customer, to make an escrow payment of approximately $4 million, which was included in the liability at December 31, 2010, and was paid in January 2011.  The income statement impacts are included in the Kentucky Regulated segment and are reflected in "Income (Loss) from Discontinued Operations (net of income taxes)" on the Statements of Income.  See Note 15 for additional information related to the termination of the lease.  The results of operations for 2010 were insignificant.

Sale of Gas and Propane Businesses

In 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 Regulated segment.  PPL completed the sale in October 2008 for $268 million in cash, adjusted for working capital at the sale date, pursuant to a stock purchase agreement.  Sale proceeds of $303 million, including estimated working capital, were contributed to PPL Energy Supply through its parent, PPL Energy Funding.  In 2008, PPL recorded impairment and other charges related to 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 prepay the entire $10 million aggregate principal of its 8.70% Senior Notes due Decemb er 2022.  In 2009, PPL recognized an insignificant charge in Discontinued Operations in connection with the settlement of the working capital adjustment.

Following are the components in Discontinued Operations in the Statements of Income.

2008 
Operating revenues $ 162505 
Operating expensesLong-term debt (current and noncurrent) (a)   154 (258)
Operating incomeTolling agreement (b) (170)
Other net assets (a)   8 
Other income (expense) - net (3)
Interest expense (b) 4 
Income before income taxes 1 
Income tax benefit (2)
Income from Discontinued OperationsNet identifiable assets acquired $ 385 

(a)Includes impairment and other charges related toRepresents non-cash activity excluded from the sale.2012 Statement of Cash Flows.
(b)
(b)
Includes $3 million
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 allocated interest expense based upon debt attributable to PPL's natural gas distributionPPL EnergyPlus and propane businesses.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.

10.  Acquisition of E.ON U.S. LLCWPD Midlands

(PPL)(PPL)

On NovemberApril 1, 2010 (acquisition date),2011, PPL, through its indirect, wholly owned subsidiary PPL WEM, completed theits acquisition of all of the limited liability company interestsoutstanding ordinary share capital of E.ON U.S. LLCCentral 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 a wholly owned subsidiarysubsidiaries of E.ON AG.  Upon completion ofThe 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 U.S. LLC was renamed LG&EAG, and KU Energy LLC.  LG&E and KU Energy LLC is a holding company withapproximately $800 million of long-term debt assumed through consolidation.  WPD Midlands operates two regulated utility operations conducted through its subsidiaries, LG&E and KU.distribution networks that serve 5 million end-users in the Midlands area of England.  The acquisition substantially reapportions the mix of PPL's regulated and competitive businesses by increasingincreased the regulated portion of itsPPL's business strengthens PPL's credit profile and enhances rate-regulated growth opportunities as the regulated businesses make 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 have been achieved from the combined operations of these entities.

The fair value of the consideration paid for E.ON U.S. LLCthis acquisition was as follows.follows (in billions).

Aggregate enterprise consideration $ 7,6146.6 
Less: fairFair value of assumed long-term debt outstanding netassumed through consolidation   7720.8 
Total cash consideration paid   6,8425.8 
Less: funds made available to E.ON U.S. LLCFunds used to repay pre-acquisition affiliate indebtedness   4,3491.7 
Cash consideration paid for E.ON U.S. LLC equity interestsCentral Networks' outstanding ordinary share capital $ 2,4934.1 


The $6.842 billion total cash consideration paid including repayment of affiliate indebtedness, was primarily funded by PPL's June 2010 issuanceborrowings under the 2011 Bridge Facility on the date of $3.634 billionacquisition.  Subsequently, PPL repaid those borrowings in 2011 using proceeds from the permanent financing, including issuances of common stock and 2011 Equity Units, that provided net proceeds totaling $3.525 billion, net of underwriting discounts, $3.2 billion of borrowings under an existing credit facility in October 2010, $249 million ofas well as proceeds from the monetizationissuance of certain full-requirement sales contracts in July 2010debt by PPL WEM, WPD (East Midlands) and cash on hand.WPD (West Midlands).  See Note 7 for additional information on the issuance of common stock and 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.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 is as follows.assumed.

CashCurrent assets (a) $ 30 
Accounts receivable (a) 175 
Current assets 764 
Investments 310.2 
PP&E   7,4694.9 
Other intangibles (current and noncurrent)Intangible assets   4270.1 
Regulatory and otherOther noncurrent assets   6890.1 
Current liabilities excluding current portion of long-term debt (b)   (516)(0.4)
PPL WEM affiliate indebtedness   (4,349)(1.7)
Long-term debt (current and noncurrent) (b)   (934)(0.8)
Other noncurrent liabilities (b)   (2,289)(0.7)
Net identifiable assets acquired   1,4971.7 
Goodwill   9962.4 
Net assets acquired $ 2,4934.1 

(a)TheIncludes gross contractual amount of the accounts receivable acquired was $186 million.  PPL expects $11of $122 million, to be uncollectible; however, credit risk is mitigated since uncollectible accounts are a component of customer rates.which approximates fair value.
(b)Represents non-cash activity excluded from the 2011 Statement of Cash Flows in 2010. Flows.
206

Goodwill related to the LKE acquisition

The purchase price allocation resulted in goodwill of $996 million was recorded at LG&E and KU.  For purposes of goodwill impairment testing, the goodwill$2.4 billion that was assigned to the reportable segments expected to benefit from the acquisition.  Both the KentuckyU.K. 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 foris attributable to the expected continued growth of a rate-regulated business located inwith a defined service area withoperating under a constructive regulatory environment,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 of LKE to leverage its assembled workforce to take advantageWPD (South West)'s and WPD (South Wales)'s existing management team's high level of those growth opportunitiesperformance in capital cost efficiency, system reliability and the attractiveness of stable, growing cash flows.  Although no other assets or liabil ities from the acquisition were assigned to the Supply segment, the Supply 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 ofcustomer service.  The goodwill to the Supply segment.  None of the goodwill recognized is expected to be included in regulated customer rates ornot deductible for U.K. income tax purposes.  As such, no deferred taxes were recorded related to goodwill.

See Note 9Separation Benefits - U.K. Regulated Segment

In connection with the 2011 acquisition, PPL completed a reorganization 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 "Guarantees and Other Assurances" sectionreorganization, 729 employees of Note 15 for additional information on certain indemnifications provided by LKE, the most significant of which relates to the discontinued operations of WKE.WPD Midlands were terminated.

The actual LKE operating revenuesseparation benefits, before income taxes, associated with the reorganization were as follows.

Severance compensation$61 
Early retirement deficiency costs (ERDC) under applicable pension plans46 
Outplacement services1 
Total separation benefits$108 

In connection with the reorganization, WPD Midlands recorded $93 million of the total expected separation benefits in 2011, of which $48 million related to severance compensation and net income attributable$45 million related to PPLERDC.  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.

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 addition to the reorganization 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 reorganization.  These separation benefits are also included in "Other operation and maintenance" on the Statement of Income.

Other

WPD Midlands 2011 financial results included in PPL's Statement of Income forand included in the year ended December 31, 2010, and PPL's unauditedU.K. Regulated segment were as follows.

Operating Revenues$ 790 
Net Income Attributable to PPL Shareowners 137 

Pro forma Information

The pro forma 2010 and 2009 operating revenues and net income attributable to PPL, including LKE,financial information, which includes WPD Midlands as if the acquisition had occurred January 1, 2009, are2010, is as follows.

     Net Income 
     (Loss) 
  Operating Attributable 
  Revenues to PPL 
        
Actual from November 1, 2010 – December 31, 2010 $ 493  $ 47  
Pro forma for 2010 (unaudited)   10,761    1,273  
Pro forma for 2009 (unaudited)   9,950    (881)(a)
2011 
Operating Revenues - PPL consolidated pro forma (unaudited)$ 13,140 
Net Income Attributable to PPL Shareowners - PPL consolidated pro forma (unaudited) 1,800 


(a) Includes a $1.493 billion goodwill impairment charge recorded by E.ON U.S. LLC in December 2009, prior to the acquisition by PPL.
207

The pro forma financial information presented above has been derived from the historical consolidatedcombined financial statements of PPL and LKE.  Adjustments included in the pro forma financial information include: (a) a pre-tax adjustment in 2010 of $165 million for non-recurring acquisition-related costs including the Bridge Facility in support of the acquisition, losses incurred in connection with the termination of interest rate swaps, and other third-party transaction costs; (b) a net decrease in interest expense from the repayment of affiliate indebtedness to subsidiaries of E.ON AG, and replacement with interest expense related to the November 2010 issuance of debt by LG&E and KU Energy LLC, LG&E and KU (the Kentucky Entities); and (c) the income tax effect of the pro forma adjustments,WPD Midlands, which was calculated using an est imated post-acquisition composite statutory income tax rate of 39%.  In addition, lossesacquired on April 1, 2011.  Income (loss) from discontinued operations (net of income taxes) of PPL and LKE of $18 million and $227 million in 2010 and 2009 were, which was not significant for 2011, was excluded from the pro forma amounts above.

The pro forma financial information has been presented for illustrative purposes onlyabove includes adjustments to depreciation, net periodic pension costs, interest expense and is not necessarily indicative of the results of operations that would have been achieved hadrelated income tax effects to reflect the acquisition been completed on the dates indicated, or the future consolidated results of operations of PPL.

During 2010, PPL incurred third-party acquisition-related costs of $31 million, including advisory, accounting and legal fees, which were recorded in "Other Income (Expense) - net" on the 2010 Statement of Income.  In addition, Bridge Facility costs of $80 million were recorded in "Interest Expense" on the 2010 Statement of Income.  See Note 7 for a discussion of costs incurred related to PPL's June 2010 issuance of common stock and Equity Units.

In November 2010, LKE issued $2.9 billion of debt, of which $100 million was used to return capital to PPL.  See Note 7 for additional information.

(PPL and PPL Energy Supply)

The majority of the net proceeds from the November 2010 debt issuances of LKE, discussed above, together with a borrowing by LG&E under its available credit facilities were applied 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 closingimpact of the acquisition.  In November 2010, PPL Energy Supply usedThe pre-tax nonrecurring credits (expenses) presented in the above-referenced amounts received from LKE, together with other cash on hand,following table were directly attributable to repay approximately $3.0 billionthe acquisition and adjustments were included in the calculation of its October 2010 borrowing under existing credit facilities.  See Note 7 for additional information.pro forma operating revenue and net income to remove the effect of these nonrecurring items and the related income tax effects.

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 expects to receive proceeds in the first quarter of 2011 from the sale of certain non-core generation facilities, which will be used to repay the short-term borrowings drawn on existing credit facilities.  See "Anticipated Sale of Certain Non-Core Generation Facilities" in Note 9 for additional information.
Income Statement
Line Item2011 
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)

As a result of the monetization of these full-requirement sales contracts, coupled with the expected net proceeds from the 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 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.
(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)The 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 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.
(c)The repayment of borrowings on the 2011 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.
(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 acquisition financing.
(e)The U.K. stamp duty tax represents a tax on the transfer of ownership of property in the U.K. incurred in connection with the 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."  

11.  Leases

Lessee Transactions

(PPL)

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 station.  In December 1999, after selling their interests in the combustion turbines, LG&E and KU entered into an 18-year lease of the turbines.  At the same time, LG&E and KU provided funds to fully defease the lease and executed an irrevocable notice to exercise an early purchase option contained in the lease after 15.5 years, which will occur in 2014.  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 Sheet at December 31, 2010.  At December 0;31, 2010, the Balance Sheet included assets of $104 million, which are reflected in "Regulated utility plant – electric and gas, net."  For 2010, the related accumulated depreciation and depreciation expense are insignificant.

Upon a default under the lease, LG&E and KU are obligated to pay to the lessor their share of certain amounts.  Primary events of default include loss or destruction of the combustion turbines, failure to insure or maintain the combustion turbines and unwinding of the transaction due to 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 that could be required to be paid at December 31, 2010 is $7 million.

(PPL and PPL Energy Supply)

Tolling Agreement

In 2008, PPL EnergyPlus acquired the rights to an existing long-term tolling agreement for the capacity and energy of Ironwood.  Under the agreement, PPL EnergyPlus has control over the plant's dispatch into the electricity grid and will supply the natural gas necessary to operate the plant.  The tolling agreement extends through 2021 and is considered to contain an operating lease for accounting purposes.  The fixed payments under the tolling agreement are subject to adjustment based upon changes to the facility capacity rating, which may occur up to twice per year.  Certain costs within the tolling agreement, primarily non-lease costs, are subject to escalation.

Colstrip Generating Plant

In July 2000, PPL Montana sold its interest in the Colstrip generating plants to owner lessors who are leasing a 50% interest in Colstrip Units 1 and 2 and a 30% interest in Unit 3 back to PPL Montana under four 36-year non-cancelable leases.  This transaction is accounted for as a sale-leaseback and classified as an operating lease.  These leases provide two renewal options based on the economic useful life of the generation assets.  PPL Montana currently amortizes material leasehold improvements over no more than the remaining life of the original leases.  PPL Montana is required to pay all expenses associated with the operations of the generation units.  The leases place certain restrictions on PPL Montana's ability to incur additional debt, sell assets and declare dividends and require PPL Montana to maintain certain financial ratios related to cash flow and net worth.  There are no residual value guarantees in these leases.  However, upon an event of default or an event of loss, PPL Montana could be required to pay a termination value of amounts sufficient to allow the lessor to repay amounts owing on the lessor notes and make the lessor whole for its equity investment and anticipated return on investment.  The events of default include payment defaults, breaches of representations or covenants, acceleration of other indebtedness of PPL Montana, change in control of PPL Montana and certain bankruptcy events.  The termination value was estimated to be $763 million at December 31, 2010.

Kerr Dam

At December 31, 2010,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.  Arbitration was held before an American Arbitration Association panel in January 2014, and a decision is to be issued on or before March 5, 2014.  On January 29, 2014, the arbitration panel issued a partial award of tangible asset portions of the conveyance price in the amount of $17 million to PPL Montana, reserving decision on the proposed inclusion of approximately $32 million of environmental mitigation costs until a final award is made in March.

(All registrants except PPL Electric)

Other Leases

PPL and its subsidiaries have entered into various agreements for the lease of office space, vehicles, land, gas storage and other equipment.


208

Rent - Operating Leases

Rent expense for PPL'sthe years ended December 31 for operating leases was $90 million, $86 million and $73 million in 2010, 2009 and 2008.  Rent expense for PPL Energy Supply's operating leases was $87 million, $86 million and $73 million in 2010, 2009 and 2008.as follows:

Total future minimum rental payments for all operating leases are estimated to be:
   2013   2012   2011 
          
PPL $111  $116  $109 
PPL Energy Supply  55   62   84 
LKE   18    18     18 
LG&E     7      7       7 
KU     10      10       10 

    PPL
  PPL Energy Supply
       
2011  $ 122  $ 108 
2012    117    106 
2013    120    110 
2014    117    109 
2015    101    96 
Thereafter   314    310 
Total (a) $ 891  $ 839 

(a)Includes $21 million in aggregate of future minimum lease payments related to the Wallingford property lease.  See Note 9 for additional information on the anticipated sale of this generation facility.
Total future minimum rental payments for all operating leases are estimated to be:
                
    PPL      
  PPL Energy Supply LKE LG&E KU
                
2014  $ 59  $ 31  $ 16  $ 6  $ 10 
2015    47    25    13    5    8 
2016    23    11    9    4    5 
2017    18    10    6    2    4 
2018    12    3    6    2    3 
Thereafter   42    3    29    12    15 
Total $ 201  $ 83  $ 79  $ 31  $ 45 

12.  Stock-Based Compensation

(All Registrants except LG&E and KU)

In 2012, shareowners approved the PPL SIP.  This new equity plan replaces the PPL Energy SupplyICP 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 Electric)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 granted under the ICP and ICPKE 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 15,769,431.  The ICPKE limits the total number of awards that may be granted under it after April 25, 2003 to 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      


209

(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.

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.

The Plans allow for the grant of restricted stock units.  Restricted stock units are awards based on the fair 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 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:

   2013  2012  2011 
           
PPL $ 30.30  $ 28.35  $ 25.25 
PPL Energy Supply   30.42    28.29    25.14 
PPL Electric   30.55    28.51    25.09 
LKE   30.00    28.34      

Restricted stock and restricted stock unit activity for 20102013 was:

    Weighted-    Weighted-
    Average    Average
  Restricted Grant Date Fair  Restricted Grant Date Fair
  Shares/Units Value Per Share  Shares/Units Value Per Share
PPLPPL     PPL    
Nonvested, beginning of periodNonvested, beginning of period  1,408,042  $ 36.97 Nonvested, beginning of period  2,503,770  $ 27.73 
Granted  745,430    28.93 Granted  1,307,951   30.30 
Vested  (471,640)   32.63 Vested  (638,421)  29.19 
Forfeited  (18,710)   32.59 Forfeited  (32,700)  28.61 
Nonvested, end of periodNonvested, end of period  1,663,122    31.22 Nonvested, end of period  3,140,600   28.50 
           
PPL Energy SupplyPPL Energy Supply     PPL Energy Supply    
Nonvested, beginning of periodNonvested, beginning of period  577,412  $ 37.04 Nonvested, beginning of period  1,060,686  $ 27.95 
Granted  225,880    29.49 Transferred  3,820   27.31 
Vested  (213,405)   32.96 Granted  527,440   30.42 
Forfeited  (9,470)   34.29 Vested  (236,382)  29.10 
Forfeited  (12,160)  29.04 
Nonvested, end of periodNonvested, end of period  580,417    31.33 Nonvested, end of period  1,343,404   28.71 
           
PPL ElectricPPL Electric     PPL Electric    
Nonvested, beginning of periodNonvested, beginning of period  154,220  $ 36.05 Nonvested, beginning of period  261,228  $ 27.30 
Granted  65,320    29.40 Transferred  (5,810)  27.48 
Vested  (46,635)   35.16 Granted  108,990   30.55 
Forfeited  (3,580)   29.75 Vested  (94,008)  28.41 
Forfeited  (4,850)  28.61 
Nonvested, end of periodNonvested, end of period  169,325    31.20 Nonvested, end of period  265,550   28.22 

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      Weighted-
      Average
    Restricted Grant Date Fair
    Shares/Units Value Per Share
LKE      
Nonvested, beginning of period   139,640  $ 28.34 
 Granted   127,293    30.00 
 Vested   (35,380)   28.87 
Nonvested, end of period   231,553    29.17 

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 2009 was $29.07 for PPL, $28.49 for PPL Energy Supply and $29.49 for PPL Electric.  The weighted-average grant date fair value of restricted stock and restricted stock units granted during 2008 was $46.22 for PPL, $46.03 for PPL Energy Supply and $45.92 for PPL Electric.

At December 31, 2010, unrecognized compensation expense related to nonvested awards was:

Restricted
Stock/UnitsWeighted-
UnrecognizedAverage
CompensationPeriod for
ExpenseRecognition
PPL$ 14 2.4 years
PPL Energy Supply 4 1.7 years
PPL Electric 2 3.8 years

The total fair value of restricted stock/units vesting for the years ended December 31 was:

  2010  2009  2008   2013  2012  2011 
                    
PPLPPL $ 15  $ 22  $ 25 PPL $ 19  $ 27  $ 19 
PPL Energy SupplyPPL Energy Supply   7    12    13 PPL Energy Supply  7   6   6 
PPL ElectricPPL Electric   2    2    2 PPL Electric  3   2   2 
LKELKE  1   4   1 

Performance Units

Performance units are intended to encourage and awardreward future corporate performance.  Performance units represent a target number of shares (Target Award) of PPL's common stock that the recipient would receive upon PPL's attainment of the applicable performance goal.  Performance is determined based on total shareowner return during a three-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, in thisthe case of the 2011 awards, the S&P 500 Electric Utilities Index, and in the case of the 2012 and 2013 awards, the Philadelphia Stock Exchange Utility Index.  Awards are payable on a graduated basis within the following ranges:  ifbased on thresholds that measure PPL's performance is at or aboverelative to peers that comprise the 85th percentile of theapplicable index group, the award ison which each years' awards are measured.  Awards can be paid atup to 200% of the Target Award; at the 50th percentile of the index group, the awardAward or forfeited with no payout if performance is paid at 100% of the Target Award; at the 40th percentile of the index group, the award is paid at 50% of the Target Award; and below the 40th percentile, no award is payable.a minimum established performance threshold.  Dividends payable during the performance cycle accumulate and are 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 three-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 2010 was:

      Weighted-
      Average Grant
   Performance Date Fair Value
   Units Per Share
PPL      
Nonvested, beginning of period   166,464  $ 43.23 
 Granted   121,246    34.06 
 Forfeited   (1,670)   33.82 
Nonvested, end of period   286,040    39.40 
        
PPL Energy Supply      
Nonvested, beginning of period   46,427  $ 42.39 
 Granted   33,107    34.16 
 Forfeited   (1,670)   33.82 
Nonvested, end of period   77,864    39.08 
        
PPL Electric      
Nonvested, beginning of period   11,635  $ 42.71 
 Granted   10,596    33.54 
Nonvested, end of period   22,231    38.34 

The weighted-average grant date fair value of performance units granted during 2009 was $39.76 for PPL, $38.18 for PPL Energy Supply and $39.95 for PPL Electric.  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, 2010, unrecognized compensation expense related to nonvested awards was:

Performance
UnitsWeighted-
UnrecognizedAverage
CompensationPeriod for
ExpenseRecognition
PPL$ 4 1.7 years
PPL Energy Supply 1 1.7 years

At December 31, 2010, PPL Electric's unrecognized compensation expense was insignificant and the weighted-average period for recognition was 1.7 years.Plans.

The fair value of each performance unit granted was estimated using a Monte Carlo pricing model that considers stock 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 3-yearU.S. Treasury bond.bond commensurate with the expected life of the performance unit.  Volatility over the expected term of three yearsthe performance unit is calculated using daily stock price observations for PPL and all companies in the index 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.  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:

  2010  2009  2008   2013  2012  2011 
             
Risk-free interest rateRisk-free interest rate 1.41% 1.11% 2.30%Risk-free interest rate 0.36% 0.30% 1.00%
Expected stock volatilityExpected stock volatility 34.70% 31.30% 20.70%Expected stock volatility 15.50% 19.30% 23.40%
Expected lifeExpected life 3 years 3 years 3 yearsExpected life 3 years 3 years 3 years


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The weighted-average grant date fair value of performance units granted was:

   2013  2012  2011 
           
PPL $ 34.15  $ 31.41  $ 29.67 
PPL Energy Supply   34.29    31.40    29.68 
PPL Electric   33.97    31.37    29.57 
LKE   33.84    31.30    29.20 

Performance unit activity for 2013 was:

      Weighted- 
      Average Grant 
   Performance  Date Fair Value 
   Units  Per Share 
PPL      
Nonvested, beginning of period   594,203  $ 31.14 
 Granted   348,495    34.15 
 Forfeited   (149,499)   32.63 
Nonvested, end of period   793,199    32.19 
        
PPL Energy Supply      
Nonvested, beginning of period   124,189  $ 31.26 
 Granted   74,614    34.29 
 Forfeited   (28,194)   33.47 
Nonvested, end of period   170,609    32.22 
        
PPL Electric      
Nonvested, beginning of period   26,083  $ 31.10 
 Granted   18,666    33.97 
 Forfeited   (6,539)   32.78 
Nonvested, end of period   38,210    32.22 
        
LKE      
Nonvested, beginning of period   82,750  $ 30.62 
 Granted   49,540    33.84 
 Forfeited   (2,660)   29.17 
Nonvested, end of period   129,630    31.88 

Stock Options

Under the Plans, stock options may be granted with an option exercise price per share not less than the fair value of PPL's common stock on the date of grant.  The options areOptions outstanding at December 31, 2013, 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, 2010, become exercisable in equal installments over a three-year service 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 using the straight-line method.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 2010 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   4,602,041  $ 32.59       
 Granted   1,017,600    31.03       
 Forfeited   (15,660)   31.17       
Outstanding at end of period   5,603,981    32.31    6.4  $ 2 
Options exercisable at end of period   3,770,172    32.00    5.3    2 
              
PPL Energy Supply            
Outstanding at beginning of period   1,408,936  $ 32.05       
 Granted   267,750    31.17       
 Forfeited   (15,660)   31.17       
Outstanding at end of period   1,661,026    31.92    6.1  $ 1 
Options exercisable at end of period   1,213,487    31.56    5.2    1 
              
PPL Electric            
Outstanding at beginning of period   225,670  $ 34.72       
 Granted   91,480    30.58       
Outstanding at end of period   317,150    33.53    7.0    
Options exercisable at end of period   166,361    34.52    5.5    

No stock options were exercised in 2010.  Substantially all stock option awards are expected to vest.

The fair value of each option granted is estimated using a Black-Scholes option-pricing model.  PPL uses a risk-free interest rate, expected option life, historicalexpected volatility and dividend 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 a ndand other economic conditions, are also reviewed in addition to the historical data to determine the final volatility assumption.  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 dividend yield is based on several factors, including PPL's most recent dividend payment, as of the grant date and the forecasted stock price through 2012.price.  The assumptions used in the model were:

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 2010  2009  2008   2013  2012  2011 
                    
Risk-free interest rateRisk-free interest rate 2.52% 2.07% 2.95%Risk-free interest rate 1.15% 1.13% 2.34%
Expected option lifeExpected option life 5.43 years 5.25 years 5.41 yearsExpected option life 6.48 years 6.17 years 5.71 years
Expected stock volatilityExpected stock volatility 28.57% 26.06% 20.85%Expected stock volatility 18.50% 20.60% 21.60%
Dividend yieldDividend yield 5.61% 3.48% 3.10%Dividend yield 5.00% 5.00% 5.93%

The weighted-average grant date fair value of options granted was:

 2010  2009  2008   2013  2012  2011 
                    
PPLPPL $ 4.70  $ 5.55  $ 7.61 PPL $ 2.18  $ 2.48  $ 2.47 
PPL Energy SupplyPPL Energy Supply  4.73   5.55   7.62 PPL Energy Supply  2.19   2.51   2.47 
PPL ElectricPPL Electric  4.62   5.65   7.60 PPL Electric  2.19   2.50   2.47 
LKELKE  2.18   2.51   2.47 

Stock option activity for 2013 was:

       Weighted-   
      Weighted  Average    
     Average  Remaining  Aggregate 
   Number  Exercise  Contractual  Total Intrinsic 
   of Options  Price Per Share  Term (years)  Value 
PPL            
Outstanding at beginning of period   9,134,545  $ 30.36       
 Granted   3,383,630    29.56       
 Exercised   (1,136,693)   27.13       
Outstanding at end of period   11,381,482    30.45    6.6  $ 15 
Options exercisable at end of period   6,415,615    31.66    5.0    8 
              
PPL Energy Supply            
Outstanding at beginning of period   2,265,123  $ 30.45       
 Transferred   88,546    25.67       
 Granted   713,030    29.66       
 Exercised   (221,363)   25.76       
Outstanding at end of period   2,845,336    30.47    6.2  $ 4 
Options exercisable at end of period   1,747,842    31.48    4.6    2 
              
PPL Electric            
Outstanding at beginning of period   340,530  $ 30.35       
 Granted   191,670    29.49       
Outstanding at end of period   532,200    30.04    7.1  $ 1 
Options exercisable at end of period   260,950    31.24    5.5      
              
LKE            
Outstanding at beginning of period   634,847  $ 27.11       
 Granted   501,950    29.51       
 Exercised   (139,641)   26.87       
Outstanding at end of period   997,156    28.35    8.4  $ 2 
Options exercisable at end of period   250,682    27.22    7.7    1 

PPL received $31 million in cash from stock options exercised in 2013.  The related tax savings were not significant for 2013.  Substantially all stock option awards are expected to vest.

The total intrinsic value of stock options exercised for the years ended December 31 was:

  2009  2008 
        
PPL $ 2  $ 20 
PPL Energy Supply   1    7 
PPL Electric      2 

At December 31, 2010, unrecognized compensation expense related to stock options was:

Weighted-
UnrecognizedAverage
CompensationPeriod for
ExpenseRecognition
PPL$ 2 1.5 years
PPL Energy Supply 1 1.6 years

At December 31, 2010, PPL Electric's unrecognized compensation expense2013 was insignificant$6 million and the weighted-average periodwas not significant for recognition was 1.6 years.2012 and 2011.

Compensation Expense

Compensation expense for restricted stock, restricted stock units, performance units and stock options accounted for as equity awards was as follows:

 2010  2009  2008   2013  2012  2011 
                    
PPL (a)PPL (a) $ 26  $ 23  $ 28 PPL (a) $ 52  $ 49  $ 36 
PPL Energy Supply (b)PPL Energy Supply (b)  20   17   22 PPL Energy Supply (b)  27   23   16 
PPL Electric (c)PPL Electric (c)  6   5   6 PPL Electric (c)  10   11   8 
LKELKE  8   8   5 


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The income tax benefit related to above compensation expense was as follows:

(a)Income tax benefits of $11 million, $9 million and $11 million.
(b)Income tax benefits of $8 million, $7 million and $9 million.
(c)Income tax benefits of $3 million, $2 million and $2 million.
   2013  2012  2011 
           
PPL $ 22  $ 20  $ 15 
PPL Energy Supply   11    10    6 
PPL Electric   4    4    3 
LKE   3    4    2 

The income tax benefit PPL realized from stock-based awards vested or exercised for 20102013 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 into stock units.  Such deferred stock units represent the number of shares of PPL's common stock to which the board members are entitled after they cease serving as a member of the Board of Directors.  Board members 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 424,170 such stock units outstanding at December 31, 2010, 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 expense in 2010 was insignificant. Compensation expense in 2009 was $2 million, net of income tax benefit of $1 million.  Compensation credits in 2008 were $4 million, net of income tax expense of $2 million.  Awards paid in 2010, 2009 and 2008 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, 2010, there were 526,821 stock appreciation rights outstanding, which were accounted for as liabilities with changes in fair value recognized currently in earnings based on Black-Scholes option valuation calculations.  Compensation2013, unrecognized compensation expense and awards paid related to nonvested restricted stock, appreciation rights were insignificant in 2010, 2009restricted stock units, performance units and 2008.stock option awards was:

Weighted- 
Unrecognized Average 
Compensation Period for 
Expense Recognition 
PPL$ 33 1.9 years 
PPL Energy Supply 13 2.0 years 
PPL Electric 3 2.0 years 
LKE 2 1.7 years 

13.  Retirement and Postemployment Benefits

(PPL, PPL Energy Supply and PPL Electric)All Registrants)

Defined Benefits

PPL and certain of its subsidiaries sponsor various defined benefit plans.

The majority of PPL's subsidiaries domestic employees are eligible for pension benefits under non-contributory defined benefit pension plans with benefits based on length of service and final average pay, as defined by the plans.  CertainEffective January 1, 2012, PPL's domestic qualified pension plans were closed to newly hired salaried employees.  Newly hired bargaining unit employees may alsocontinue to be eligible under the plans based on their collective bargaining agreements.  Salaried employees hired on or after January 1, 2012 are eligible to participate in the PPL Retirement Savings Plan, a 401(k) savings plan with enhanced employer matching.

The majority of PPL Montana employees are eligible for pension enhancementsbenefits under a cash balance pension plan.  Effective January 1, 2012, that plan was closed to newly hired salaried employees.  Eligibility of newly hired bargaining unit employees under the plan is based on their collective bargaining agreements.  Salaried employees hired on or after January 1, 2012 are eligible to participate in the form of special termination benefits under PPL's separation plan.  See "Separation Benefits" below for additional information regarding PPL's separation plan.PPL Retirement Savings Plan.

The defined benefit pension plans of LG&ELKE and KU Energy LLCits 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 PPL Montana are eligible for pension benefits under a cash balance pension plan and employees of certain of PPL'sPPL Energy Supply's mechanical contracting companies are eligible for benefits under multiemployer plans sponsored by various unions.

Effective April 1, 2010, WPD'sPPL WW's principal defined benefit pension plan was closed to most new employees, except 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 planplans are offered benefits under a defined 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.


214

The majority of employees of PPL's domestic subsidiaries will becomeare eligible for certain health care and life insurance benefits upon retirement through contributory plans.  Postretirement benefits underEffective January 1, 2014, the PPL Retiree HealthPostretirement Medical Plan arewas closed to newly hired salaried employees.  Postretirement health benefits may be paid from funded VEBA trusts and 401(h) accounts established as part of the PPL Retirement Plan and the LG&E and KU Retirement Plan within the PPL Services Corporation Master Trust, funded VEBA trusts and the LG&E and KU Energy LLC Pension Plan Trusts.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 betweentable provides the components of net periodic defined benefit costs for PPL's domestic (U.S.) and WPD (U.K.) pension plans.and other postretirement benefit plans for the years ended December 31.

   Pension Benefits            Pension Benefits      
   U.S. U.K. Other Postretirement Benefits   U.S. U.K. Other Postretirement Benefits
   2010  2009  2008  2010  2009  2008  2010  2009  2008    2013  2012  2011  2013  2012  2011  2013  2012  2011 
PPL                           
Net periodic defined benefit costsNet periodic defined benefit costs                           Net periodic defined benefit costs                   
(credits):                           (credits):                   
Service costService cost $ 64  $ 60  $ 62  $ 17  $ 9  $ 16  $ 8  $ 6  $ 8 Service cost $ 126  $ 103  $ 95  $ 69  $ 54  $ 44  $ 14  $ 12  $ 12 
Interest costInterest cost   159    145    140    151    156    188    28    29    33 Interest cost   213   220   217   320   340   282   29   31   33 
Expected return on plan assetsExpected return on plan assets   (184)   (169)   (180)   (202)   (189)   (231)   (20)   (18)   (21)Expected return on plan assets   (293)  (259)  (245)  (465)  (458)  (338)  (25)  (23)  (23)
Amortization of:Amortization of:                           Amortization of:                   
 Transition (asset) obligation      (5)   (4)            5    9    9  Transition (asset) obligation                               2   2 
 Prior service cost   21    19    20    4    4    5    4    9    9  Prior service cost (credit)   22   24   24   1   4   4       1     
 Actuarial (gain) loss   8    3    (9)   48    2    18    6    2    5  Actuarial (gain) loss   80    42    30    150    79    57    6    4    6 
Net periodic defined benefit costsNet periodic defined benefit costs                           Net periodic defined benefit costs                   
(credits) prior to settlement                           (credits) prior to settlement                   
charges and termination benefits   68    53    29    18    (18)   (4)   31    37    43 charges and termination benefits   148   130   121   75   19   49   24   27   30 
Settlement charges (a)      2                      
Termination benefits (b)      9                      
Settlement chargesSettlement charges       11                       
Termination benefits (a)Termination benefits (a)                  3    2    50          
Net periodic defined benefit costsNet periodic defined benefit costs                           Net periodic defined benefit costs                   
(credits) $ 68  $ 64  $ 29  $ 18  $ (18) $ (4) $ 31  $ 37  $ 43 (credits) $ 148  $ 141  $ 121  $ 78  $ 21  $ 99  $ 24  $ 27  $ 30 
                                                  
Other Changes in Plan AssetsOther Changes in Plan Assets                           Other Changes in Plan Assets                   
and Benefit Obligations                           and Benefit Obligations                   
Recognized in OCI and                           Recognized in OCI and                   
Regulatory Assets/Liabilities -                           Regulatory Assets/Liabilities -                   
Gross:                           Gross:                   
SettlementsSettlements    $ (2)                     Settlements      $ (11)                      
Current year net (gain) loss $ 142    102  $ 635  $ 17  $ 403  $ 476  $ 20  $ 32  $ (31)
Current year prior service cost                           
Net (gain) lossNet (gain) loss $ (319)  372  $ 117  $ 76  $ 1,073  $ 152  $ (68) $ 13  $ (9)
Prior service costPrior service cost                   
(credit)      1                (71)   (4)   (2)(credit)           8               (3)  (1)  10 
Amortization of:Amortization of:                           Amortization of:                   
 Transition asset      5    4             (5)   (9)   (9)
 Prior service cost   (21)   (19)   (22)   (4)   (4)   (5)   (4)   (8)   (9)
 Actuarial (loss)   (7)   (3)   (1)   (48)   (2)   (18)   (6)   (2)   (9)
Acquisition of regulatory assets/                           
liabilities:                           
 Transition obligation                     4        Transition asset (obligation)                               (2)  (2)
 Prior service cost   31                   6        Prior service (cost) credit   (22)  (24)  (24)  (1)  (4)  (4)      (1)    
 Actuarial (gain) loss   303                   (2)       Actuarial gain (loss)   (80)   (42)   (30)   (150)   (79)   (57)   (6)   (4)   (6)
Total recognized in OCI andTotal recognized in OCI and                           Total recognized in OCI and                   
regulatory assets/liabilities (c) (d)   448    84    616    (35)   397    453    (58)   9    (60)regulatory assets/liabilities (b)   (421)   295    71    (75)   990    91    (77)   5    (7)
                                                  
Total recognized in net periodicTotal recognized in net periodic                           Total recognized in net periodic                   
benefit costs, OCI and regulatory                           defined benefit costs, OCI and                   
assets/liabilities (d) $ 516  $ 148  $ 645  $ (17) $ 379  $ 449  $ (27) $ 46  $ (17)regulatory assets/liabilities (b) $ (273) $ 436  $ 192  $ 3  $ 1,011  $ 190  $ (53) $ 32  $ 23 

(a)IncludesRelated to the settlement ofWPD Midlands separations in the pension plan of PPL's former mining subsidiary, PA Mines, LLC in 2009.U.K.
(b)Related to a 2009 cost reduction initiative.
(c)For PPL's U.S. pension and other postretirement benefits, the amounts recognized in OCI and regulatory assets/liabilities are as follows:
   U.S. Pension Benefits  Other Postretirement Benefits
     2010   2009   2008   2010   2009   2008 
                     
 OCI $ 84  $ 51  $ 395  $ (40) $ 6  $ (38)
 Regulatory assets/liabilities   364    33    221    (18)   3    (22)
 Total recognized in OCI and                  
  regulatory assets/liabilities $ 448  $ 84  $ 616  $ (58) $ 9  $ (60)

(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/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
    2013   2012   2011   2013   2012   2011 
                    
OCI $ (228) $ 181  $ 47  $ (41) $ 12  $ (6)
Regulatory assets/liabilities   (193)   114    24    (36)   (7)   (1)
Total recognized in OCI and                  
 regulatory assets/liabilities $ (421) $ 295  $ 71  $ (77) $ 5  $ (7)

The estimated amounts to be amortized from AOCI and regulatory assets/liabilities into net periodic defined benefit costs in 20112014 are as follows:

215


       Other     
 Pension Benefits Postretirement Pension Benefits
 U.S. U.K. Benefits U.S. U.K.
               
Transition obligation       $ 2 
Prior service cost $ 25  $ 4    (1)
Actuarial loss   27    56    6 
Prior service cost (credit) $ 20     
Actuarial (gain) loss   30  $ 131 
Total $ 52  $ 60  $ 7  $ 50  $ 131 
              
Amortization from Balance Sheet:              
AOCI $ 17  $ 60  $ 2  $ 22  $ 131 
Regulatory assets/liabilities   35       5    28      
Total $ 52  $ 60  $ 7  $ 50  $ 131 

    Pension Benefits         
    U.S. U.K. Other Postretirement Benefits
    2010  2009  2008  2010  2009  2008  2010  2009  2008 
PPL Energy Supply                           
Net periodic defined benefit costs                           
(credits):                           
Service cost $ 4  $ 4  $ 4  $ 17  $ 9  $ 16  $ 1  $ 1  $ 1 
Interest cost   7    6    6    151    156    188    1    1    1 
Expected return on plan assets   (7)   (6)   (8)   (202)   (189)   (231)         
Amortization of:                           
  Prior service cost            4    4    5          
  Actuarial loss   2    2       48    2    18          
Net periodic defined benefit costs                           
 (credits) prior to settlement charges   6    6    2    18    (18)   (4)   2    2    2 
Settlement charges (a)      2                      
Net periodic defined benefit costs                           
 (credits) $ 6  $ 8  $ 2  $ 18  $ (18) $ (4) $ 2  $ 2  $ 2 
                              
Other Changes in Plan Assets                           
 and Benefit Obligations                           
 Recognized in OCI:                           
Settlements    $ (2)                     
Current year net (gain) loss $ 4    4  $ 27  $ 17  $ 403  $ 476        $ (1)
Current year prior service credit                           (1)
Amortization of:                           
  Prior service cost            (4)   (4)   (5)         
  Actuarial loss   (2)   (2)      (48)   (2)   (18)         
Total recognized in OCI   2       27    (35)   397    453          (2)
                              
Total recognized in net periodic                           
 benefit costs and OCI $ 8  $ 8  $ 29  $ (17) $ 379  $ 449  $ 2  $ 2  $ 
(PPL Energy Supply)

(a)Includes the settlement of the pension plan of PPL Energy Supply's former mining subsidiary, PA Mines, LLC in 2009.
The following table provides the components of net periodic defined benefit costs for PPL Energy Supply's pension and other postretirement benefit plans for the years ended December 31.

    Pension Benefits Other Postretirement Benefits
    2013  2012  2011  2013  2012  2011 
Net periodic defined benefit costs                  
(credits):                  
Service cost $ 7  $ 6  $ 5  $ 1  $ 1  $ 1 
Interest cost   8    7    7         1    1 
Expected return on plan assets   (10)   (9)   (9)               
Amortization of:                  
  Actuarial (gain) loss   3    2    2                
Net periodic defined benefit costs                  
 (credits) $ 8  $ 6  $ 5  $ 1  $ 2  $ 2 
                     
Other Changes in Plan Assets                  
 and Benefit Obligations                  
 Recognized in OCI:                  
Net (gain) loss $ (15) $ 16  $ 7  $ (1)      $ (2)
Prior service cost (credit)                  (3) $ (1)     
Amortization of:                  
  Actuarial gain (loss)   (3)   (2)   (2)               
Total recognized in OCI   (18)   14    5    (4)   (1)   (2)
                     
Total recognized in net periodic                  
 defined benefit costs and OCI $ (10) $ 20  $ 10  $ (3) $ 1  $   
Actuarial loss of $2 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 2011.2014.     

(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.

                     
    Pension Benefits Other Postretirement Benefits
    2013  2012  2011  2013  2012  2011 
Net periodic defined benefit costs                  
 (credits):                  
Service cost $ 26  $ 22  $ 24  $ 5  $ 4  $ 4 
Interest cost   62    64    67    8    9    10 
Expected return on plan assets   (82)   (70)   (64)   (5)   (4)   (3)
Amortization of:                  
  Transition (asset) obligation                       2    2 
  Prior service cost (credit)   5    5    5    3    3    2 
  Actuarial (gain) loss   33    22    24         (1)     
Net periodic defined benefit costs (credits) $ 44  $ 43  $ 56  $ 11  $ 13  $ 15 
                     

216


                     
    Pension Benefits Other Postretirement Benefits
    2013  2012  2011  2013  2012  2011 
Other Changes in Plan Assets                  
 and Benefit Obligations                  
 Recognized in OCI and                  
 Regulatory Assets/Liabilities -                  
 Gross:                  
Net (gain) loss $ (116) $ 96  $ 29  $ (14) $ (11) $ (3)
Prior service cost (credit)             8              11 
Amortization of:                  
  Transition (asset) obligation                 (2)   (2)
  Prior service (cost) credit   (5)   (5)   (5)   (3)   (3)   (2)
  Actuarial gain (loss)   (33)   (22)   (24)        1      
Total recognized in OCI and                  
 regulatory assets/liabilities   (154)   69    8    (17)   (15)   4 
                     
Total recognized in net periodic                  
 defined benefit costs, OCI and regulatory                  
 assets/liabilities $ (110) $ 112  $ 64  $ (6) $ (2) $ 19 

For PPL Energy Supply, prior service costs of $4 millionLKE's pension and actuarial loss of $56 million related toother postretirement benefits, the U.K. pension plans are expectedamounts recognized in OCI and regulatory assets/liabilities for the years ended December 31 were as follows:
       
    Pension Benefits Other Postretirement Benefits
    2013  2012  2011  2013  2012  2011 
                     
 OCI $ (46) $ 34  $ 1  
$
 (1) $ (1) $ 2 
 Regulatory assets/liabilities   (108)   35    7    (16)   (14)   2 
 Total recognized in OCI and                  
  regulatory assets/liabilities $ (154) $ 69  $ 8  $ (17) $ (15) $ 4 

The estimated amounts to be amortized from AOCIregulatory assets/liabilities into net periodic benefit costs in 2011.

Net periodic defined benefit costs for LKE in 2014 are as follows.

     Other
  Pension Postretirement
  Benefits Benefits
       
Prior service cost (credit) $ 5  $ 2 
Actuarial (gain) loss   13    (1)
Total $ 18  $ 1 
       
Amortization from Balance Sheet:      
Regulatory assets/liabilities $ 18  $ 1 
Total $ 18  $ 1 

(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.

    Pension Benefits
    2013  2012  2011 
Net periodic defined benefit costs (credits):         
Service cost $ 2  $ 2  $ 2 
Interest cost   14    14    14 
Expected return on plan assets   (20)   (19)   (18)
Amortization of:         
  Prior service cost (credit)   2    3    2 
  Actuarial (gain) loss   14    11    11 
Net periodic defined benefit costs (credits) $ 12  $ 11  $ 11 

217


    Pension Benefits
    2013  2012  2011 
Other Changes in Plan Assets and Benefit Obligations         
 Recognized in Regulatory Assets - Gross:         
Net (gain) loss $ (20) $ 18  $ 15 
Prior service cost (credit)           9 
Amortization of:         
  Prior service (cost) credit   (2)   (2)   (2)
  Actuarial gain (loss)   (14)   (11)   (11)
Total recognized in regulatory assets/liabilities   (36)   5    11 
            
Total recognized in net periodic defined benefit costs and regulatory assets $ (24) $ 16  $ 22 

The estimated amounts to be amortized from regulatory assets into net periodic defined benefit costs for LG&E in 2014 are as follows.

Pension
Benefits
Prior service cost (credit)$ 2 
Actuarial (gain) loss 6 
Total$ 8 

(All Registrants)

The following net periodic defined benefit costs (credits) were charged to operating expense, excluding amounts charged to construction and other non-expense accounts were:accounts.  The U.K. pension benefits apply to PPL only.

 Pension Benefits          Pension Benefits      
 U.S. U.K. Other Postretirement Benefits U.S. U.K. Other Postretirement Benefits
 2010  2009  2008  2010  2009  2008  2010  2009  2008  2013  2012  2011  2013  2012  2011  2013  2012  2011 
                                              
PPL $ 59  $ 56  $ 24  $ 16  $ (17) $ (4) $ 27  $ 31  $ 36  $ 117  $ 119  $ 98  $ 33  $ 25  $ 82  $ 19  $ 22  $ 24 
PPL Energy Supply (a)   24    26    10    16    (17)   (4)   12    14    16    45   37   27             6   6   7 
PPL Electric (b)(a)   12    14    5             8    10    13    18   19   14               3   3   4 
LKE   32   31   40         8   9    11 
LG&E   14   13   16         4   5    5 
KU (a)   9   8   10         2   3    4 

(a)Includes costs for the specific plans it sponsorsPPL Electric and the followingKU do not directly sponsor any defined benefit plans.  PPL Electric and KU were allocated these costs of defined benefit plans sponsored by PPL Services (for PPL Electric) and by LKE (for KU), based on PPL Energy Supply'stheir participation in those plans, which management believes are reasonable.
   Pension Benefits  Other Postretirement Benefits
     2010   2009   2008   2010   2009   2008 
                     
 PPL Energy Supply $ 19  $ 18  $ 8  $ 10  $ 13  $ 15 

In the table above, for PPL Energy Supply and LG&E, amounts include costs for the specific plans each sponsors and the following allocated costs of defined benefit plans sponsored by PPL Services (for PPL Energy Supply) and by LKE (for LG&E), based on their participation in those plans, which management believes are reasonable:
    Pension Benefits  Other Postretirement Benefits
     2013   2012   2011   2013   2012   2011 
                     
PPL Energy Supply $ 38  $ 31  $ 23  $ 5  $5  $ 6 
LG&E   5    5    7    4    5    5 

(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, which management believes are reasonable.
(All Registrants except PPL Electric and KU)

The following weighted-average assumptions were used in the valuation of the benefit obligations at December 31.  The U.K. pension benefits apply to PPL only.

   Pension Benefits         
   U.S. U.K. Other Postretirement Benefits
   2010  2009  2008  2010  2009  2008  2010  2009  2008 
PPL                           
 Discount rate  5.42%  6.00%  6.50%  5.54%  5.55%  7.47%  5.14%  5.81%  6.45%
 Rate of compensation increase  4.88%  4.75%  4.75%  4.00%  4.00%  4.00%  4.90%  4.75%  4.75%
                            
PPL Energy supply                           
 Discount rate  5.47%  6.00%  6.50%  5.54%  5.55%  7.47%  4.95%  5.55%  6.37%
 Rate of compensation increase  4.75%  4.75%  4.75%  4.00%  4.00%  4.00%  4.75%  4.75%  4.75%
   Pension Benefits      
   U.S. U.K. Other Postretirement Benefits
   2013  2012  2013  2012  2013  2012 
PPL                  
 Discount rate  5.12%  4.22%  4.41%  4.27%  4.91%  4.00%
 Rate of compensation increase  3.97%  3.98%  4.00%  4.00%  3.96%  3.97%
                   

218


   Pension Benefits      
   U.S. U.K. Other Postretirement Benefits
   2013  2012  2013  2012  2013  2012 
PPL Energy Supply                  
 Discount rate  5.18%  4.25%        4.51%  3.77%
 Rate of compensation increase  3.94%  3.95%        3.94%  3.95%
                    
LKE                  
 Discount rate  5.18%  4.24%        4.91%  3.99%
 Rate of compensation increase  4.00%  4.00%        4.00%  4.00%
                    
LG&E                  
 Discount rate  5.13%  4.20%            

The following weighted-average assumptions were used to determine the net periodic defined benefit costs for the yearyears ended December 31.  The U.K. pension benefits apply to PPL only.

   Pension Benefits         
   U.S. U.K. Other Postretirement Benefits
   2010  2009  2008  2010  2009  2008  2010  2009  2008 
PPL                           
 Discount rate  5.96%  6.50%  6.39%  5.59%  7.47%  6.37%  5.47%  6.45%  6.26%
 Rate of compensation increase  4.79%  4.75%  4.75%  4.00%  4.00%  4.25%  4.78%  4.75%  4.75%
 Expected return on plan assets (a)  7.96%  8.00%  8.25%  7.91%  7.90%  7.90%  6.90%  7.00%  7.80%
                            
PPL Energy supply                           
 Discount rate  6.00%  6.50%  6.39%  5.59%  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%
 Expected return on plan assets (a)  8.00%  7.78%  8.04%  7.91%  7.90%  7.90%  N/A  N/A  N/A
   Pension Benefits         
   U.S. U.K. Other Postretirement Benefits
   2013  2012  2011  2013  2012  2011  2013  2012  2011 
PPL                           
 Discount rate  4.22%  5.06%  5.42%  4.27%  5.24%  5.59%  4.00%  4.80%  5.14%
 Rate of compensation increase  3.98%  4.02%  4.88%  4.00%  4.00%  3.75%  3.97%  4.00%  4.90%
 Expected return on plan assets (a)  7.03%  7.07%  7.25%  7.16%  7.17%  7.04%  5.94%  5.99%  6.57%
                            
PPL Energy Supply                           
 Discount rate  4.25%  5.12%  5.47%           3.77%  4.60%  4.95%
 Rate of compensation increase  3.95%  4.00%  4.75%           3.95%  4.00%  4.75%
 Expected return on plan assets (a)  7.00%  7.00%  7.25%           N/A  N/A  N/A
                             
LKE                           
 Discount rate  4.24%  5.09%  5.49%           3.99%  4.78%  5.12%
 Rate of compensation increase  4.00%  4.00%  5.25%           4.00%  4.00%  5.25%
 Expected return on plan assets (a)  7.10%  7.25%  7.25%           6.76%  7.02%  7.16%
                             
LG&E                           
 Discount rate  4.20%  5.00%  5.39%                  
 Expected return on plan assets (a)  7.10%  7.25%  7.25%                  

(a)The expected long-term rates of return for PPL and PPL Energy Supply's U.S. pension and other postretirement benefits have been developedare based on management's projections 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 current and expected asset allocation isallocations are also considered in developing a reasonable return assumption.

The expected long-term rates of return for PPL and PPL Energy Supply's U.K. pension plans have been developed by PPL management with assistance from an independent actuary 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, PPL Energy Supply and LKE)

     Assumed Health Care Cost
     Trend Rates at December 31,
     2010  2009  2008 
PPL and PPL Energy Supply         
 Health care cost trend rate assumed for next year         
   - obligations  9.0%  8.0%  8.4%
   - cost  8.0%  8.4%  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  2019   2016   2014 
   - cost  2016   2014   2014 
The following table provides the assumed health care cost trend rates for the years ended December 31:

     2013  2012  2011 
PPL and PPL Energy Supply         
 Health care cost trend rate assumed for next year         
   - obligations  7.6%  8.0%  8.5%
   - cost  8.0%  8.5%  9.0%
 Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)         
   - obligations  5.0%  5.5%  5.5%
   - cost  5.5%  5.5%  5.5%
 Year that the rate reaches the ultimate trend rate         
   - obligations  2020   2019   2019 
   - cost  2019   2019   2019 

             
LKE         
 Health care cost trend rate assumed for next year         
   - obligations  7.6%  8.0%  8.5%
   - cost  8.0%  8.5%  9.0%
 Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)         
   - obligations  5.0%  5.5%  5.5%
   - cost  5.5%  5.5%  5.5%
 Year that the rate reaches the ultimate trend rate         
   - obligations  2020   2019   2019 
   - cost  2019   2019   2019 


219

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 2010.2013:

  One Percentage Point
  Increase Decrease
PPL      
Effect on accumulated postretirement benefit obligation $ 9  $ (8)
   One Percentage Point
   Increase Decrease
Effect on accumulated postretirement benefit obligation      
 PPL $ 6  $ (5)
 LKE   5    (4)

The effects on PPL Energy Supply's other postretirement benefit plansplan would not have been significant.

(PPL)

The funded status of the PPLPPL's plans at December 31 was as follows.follows:

   Pension Benefits         Pension Benefits    
   U.S. U.K. Other Postretirement Benefits   U.S. U.K. Other Postretirement Benefits
   2010  2009  2010  2009  2010  2009    2013  2012  2013  2012  2013  2012 
Change in Benefit ObligationChange in Benefit Obligation                  Change in Benefit Obligation             
Benefit Obligation, beginning of periodBenefit Obligation, beginning of period $ 2,460  $ 2,231  $ 2,933  $ 2,152  $ 498  $ 451 Benefit Obligation, beginning of period $ 5,046  $ 4,381  $ 7,888  $ 6,638  $ 722  $ 687 
 Service cost   64    60    17    9    8    6  Service cost   126   103   69   54   14   12 
 Interest cost   159    145    151    156    28    29  Interest cost   213   220   320   340   29   31 
 Participant contributions         6    5    7    6  Participant contributions           15   15   12   6 
 Plan amendments      1          (71)   (4) Plan amendments                   (4)  (1)
 Actuarial loss   222    125    37    611    32    43  Actuarial (gain) loss   (540)  546   46   1,081   (54)  31 
 Termination benefits      9              Settlements       (25)                
 Actual expenses paid   (2)   (1)             Termination benefits           3   2         
 Gross benefits paid   (127)   (104)   (152)   (189)   (44)   (36) Net transfer in (out)               12         
 Settlements (a)      (6)             Actual expenses paid       (3)                
 Federal subsidy               3    3  Gross benefits paid (a)   (254)  (176)  (375)  (397)  (57)  (46)
 Currency conversion         (151)   189        Federal subsidy                       2 
 Acquisition (b)   1,231             206     Currency conversion             177    143           
Benefit Obligation, end of periodBenefit Obligation, end of period   4,007    2,460    2,841    2,933    667    498 Benefit Obligation, end of period   4,591    5,046    8,143    7,888    662    722 
                                   
Change in Plan AssetsChange in Plan Assets                  Change in Plan Assets             
Plan assets at fair value, beginning of periodPlan assets at fair value, beginning of period   1,772    1,637    2,331    1,842    301    267 Plan assets at fair value, beginning of period   3,939   3,471   6,911   6,351   421   391 
 Actual return on plan assets   263    192    228    427    33    28  Actual return on plan assets   72   432   438   476   37   42 
 Employer contributions   148    54    231    95    17    33  Employer contributions   399   239   134   341   30   27 
 Participant contributions         6    5    7    6  Participant contributions           15   15   12   5 
 Actual expenses paid   (2)   (1)             Settlements       (25)                
 Gross benefits paid   (127)   (104)   (152)   (189)   (40)   (33) Actual expenses paid       (2)                
 Settlements (a)      (6)             Gross benefits paid (a)   (254)  (176)  (375)  (397)  (54)  (44)
 Currency conversion         (120)   151        Currency conversion             161    125           
 Acquisition (b)   765             42    
Plan assets at fair value, end of periodPlan assets at fair value, end of period   2,819    1,772    2,524    2,331    360    301 Plan assets at fair value, end of period   4,156    3,939    7,284    6,911    446    421 
                                   
Funded Status, end of periodFunded Status, end of period $ (1,188) $ (688) $ (317) $ (602) $ (307) $ (197)Funded Status, end of period $ (435) $ (1,107) $ (859) $ (977) $ (216) $ (301)
                                   
Amounts recognized in the BalanceAmounts recognized in the Balance                  Amounts recognized in the Balance             
Sheets consist of:                  Sheets consist of:             
 Current liability $ (10) $ (7)       $ (2) $ (1) Current liability $ (8) $ (8)         $ (1) $ (1)
 Noncurrent liability   (1,178)   (681) $ (317) $ (602)   (305)   (196) Noncurrent liability   (427)   (1,099) $ (859) $ (977)   (215)   (300)
Net amount recognized, end of periodNet amount recognized, end of period $ (1,188) $ (688) $ (317) $ (602) $ (307) $ (197)Net amount recognized, end of period $ (435) $ (1,107) $ (859) $ (977) $ (216) $ (301)
                                   
Amounts recognized in AOCI andAmounts recognized in AOCI and                  Amounts recognized in AOCI and             
regulatory assets/liabilities (pre-tax)                  regulatory assets/liabilities (pre-tax)             
consist of: (c)                  consist of:             
Transition obligation             $ 4  $ 26 
Prior service cost (credit)Prior service cost (credit) $ 131  $ 120  $ 7  $ 13    (16)   31 Prior service cost (credit) $ 69  $ 91      $ 1  $ (11) $ (7)
Net actuarial loss   836    398    1,097    1,126    112    101 
Total (d) $ 967  $ 518  $ 1,104  $ 1,139  $ 100  $ 158 
Net actuarial (gain) lossNet actuarial (gain) loss   842    1,241  $ 2,112    2,184    33    106 
Total (b)Total (b) $ 911  $ 1,332  $ 2,112  $ 2,185  $ 22  $ 99 
                                   
Total accumulated benefit obligationTotal accumulated benefit obligation                  Total accumulated benefit obligation             
for defined benefit pension plans $ 3,564  $ 2,237  $ 2,646  $ 2,806       for defined benefit pension plans $ 4,191  $ 4,569  $ 7,542  $ 7,259         

(a)IncludesCertain U.S. pension plans offered a limited-time program in 2013 during which terminated vested participants could elect to receive their accrued pension benefit as a one-time lump sum payment.  The increase in gross benefits paid is primarily the settlementresult of the pension plan$64 million of PPL's former mining subsidiary, PA Mines LLC,lump-sum cash payments made to terminated vested participants in 2009.2013 in connection with these offerings.

(b)IncludesWPD is not subject to accounting for the pension and other postretirement medical planseffects of LKE, which were acquired in 2010.  See Note 10 for additional information.certain types of regulation as prescribed by GAAP.  As a result, WPD does not record regulatory assets/liabilities.
(c)For PPL's U.S. pension and other post-retirement benefits, the amounts recognized in AOCI and regulatory assets/liabilities are

220

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
   2010  2009  2010  2009 
          
 AOCI $ 431  $ 346  $ 53  $ 95 
 Regulatory assets/liabilities   536    172    47    63 
 Total $ 967  $ 518  $ 100  $ 158 

(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/liabilities.
   U.S. Pension Benefits Other Postretirement Benefits
   2013  2012  2013  2012 
          
AOCI $ 430  $ 659  $ 19  $ 59 
Regulatory assets/liabilities   481    673    3    40 
Total $ 911  $ 1,332  $ 22  $ 99 

AllThe following tables provide information on pension plans where the projected benefit obligation (PBO) or accumulated benefit obligation (ABO) exceed the fair value of PPL'splan assets:

  U.S. U.K.
  PBO in excess of plan assets PBO in excess of plan assets
   2013   2012   2013   2012 
             
Projected benefit obligation $4,591  $5,046  $8,143  $7,888 
Fair value of plan assets  4,156   3,939   7,284   6,911 
             
  U.S. U.K.
  ABO in excess of plan assets ABO in excess of plan assets
   2013   2012   2013   2012 
             
Accumulated benefit obligation $572  $4,569  $3,441  $3,349 
Fair value of plan assets  431   3,939   3,131   2,812 

(PPL Energy Supply)         
               
The funded status of PPL Energy Supply's plans at December 31 was as follows:
               
    Pension Benefits      
    U.S. Other Postretirement Benefits
    2013  2012  2013  2012 
Change in Benefit Obligation            
Benefit Obligation, beginning of period $ 176  $ 143  $ 17  $ 17 
  Service cost   7    6    1    1 
  Interest cost   8    7         1 
  Plan amendments             (4)   (1)
  Actuarial (gain) loss   (23)   23    (1)     
  Gross benefits paid   (5)   (3)   (1)   (1)
Benefit Obligation, end of period   163    176    12    17 
               
Change in Plan Assets            
Plan assets at fair value, beginning of            
 period   149    132           
  Actual return on plan assets   3    16           
  Employer contributions        4    1      
  Gross benefits paid   (5)   (3)   (1)     
Plan assets at fair value, end of period   147    149           
               
Funded Status, end of period $ (16) $ (27) $ (12) $ (17)
               
Amounts recognized in the Balance            
 Sheets consist of:            
  Current liability           $ (1) $ (1)
  Noncurrent liability $ (16) $ (27)   (11)   (16)
Net amount recognized, end of period $ (16) $ (27) $ (12) $ (17)
               
Amounts recognized in AOCI            
 (pre-tax) consist of:            
Prior service cost (credit)           $ (5) $ (1)
Net actuarial (gain) loss $ 34  $ 52    1    2 
Total $ 34  $ 52  $ (4) $ 1 
               
Total accumulated benefit obligation            
 for defined benefit pension plans $ 163  $ 176           

PPL Energy Supply's pension plansplan had projected and accumulated benefit obligations in excess of plan assets at December 31, 2010 and 2009.  All of PPL's other postretirement benefit plans had accumulated postretirement benefit obligations in excessthe fair value of plan assets at December 31, 20102013 and 2009.2012.


(PPL Energy Supply)

221
The funded status of the PPL Energy Supply plans was as follows.

    Pension Benefits      
    U.S. U.K. Other Postretirement Benefits
    2010  2009  2010  2009  2010  2009 
Change in Benefit Obligation                  
Benefit Obligation, beginning of period $ 104  $ 95  $ 2,933  $ 2,152  $ 17  $ 15 
  Service cost   4    4    17    9    1    1 
  Interest cost   7    6    151    156    1    1 
  Participant contributions         6    5       
  Actuarial loss   9    7    37    611       
  Settlements (a)      (6)            
  Gross benefits paid   (3)   (2)   (152)   (189)   (1)   
  Currency conversion         (151)   189       
Benefit Obligation, end of period   121    104    2,841    2,933    18    17 
                     
Change in Plan Assets                  
Plan assets at fair value, beginning of                  
 period   87    78    2,331    1,842       
  Actual return on plan assets   12    9    228    427       
  Employer contributions   10    9    231    95    1    
  Participant contributions         6    5       
  Gross benefits paid   (3)   (3)   (152)   (189)   (1)   
  Settlements (a)      (6)            
  Currency conversion         (120)   151       
Plan assets at fair value, end of period   106    87    2,524    2,331       
                     
Funded Status, end of period $ (15) $ (17) $ (317) $ (602) $ (18) $ (17)
                     
Amounts recognized in the Balance                  
 Sheets consist of:                  
  Current liability             $ (1) $ (1)
  Noncurrent liability $ (15) $ (17) $ (317) $ (602)   (17)   (16)
Net amount recognized, end of period $ (15) $ (17) $ (317) $ (602) $ (18) $ (17)
                     
Amounts recognized in AOCI                  
 (pre-tax) consist of:                  
Prior service cost (credit) $ 1  $ 2  $ 7  $ 13  $ (1) $ (1)
Net actuarial loss   33    30    1,097    1,126    4    4 
Total $ 34  $ 32  $ 1,104  $ 1,139  $ 3  $ 3 
                     
Total accumulated benefit obligation                  
 for defined benefit pension plans $ 121  $ 104  $ 2,646  $ 2,806       

(a)Includes the settlement of the pension plan of PPL Energy Supply's former mining subsidiary, PA Mines LLC in 2009.

All of PPL Energy Supply's pension plans had projected and accumulated benefit obligations in excess of plan assets at December 31, 2010 and 2009.  All of PPL Energy Supply's other postretirement benefit plans had accumulated postretirement benefit obligations in excess of plan assets at December 31, 2010 and 2009.

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, which management believes are reasonable.  The actuarialactuarially 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:

  2013  2012 
       
Pension $ 96  $ 268 
Other postretirement benefits   35    60 

(LKE)

The funded status of LKE's plans at December 31 was as follows:

    Pension Benefits Other Postretirement Benefits
    2013  2012  2013  2012 
Change in Benefit Obligation            
Benefit Obligation, beginning of period $ 1,487  $ 1,306  $ 209  $ 214 
  Service cost   26    22    5    4 
  Interest cost   62    63    8    9 
  Participant contributions             7    8 
  Actuarial (gain) loss   (177)   144    (18)   (8)
  Gross benefits paid (a)   (70)   (48)   (18)   (19)
  Federal subsidy                  1 
Benefit Obligation, end of period   1,328    1,487    193    209 
               
Change in Plan Assets            
Plan assets at fair value, beginning of period   1,070    944    68    58 
  Actual return on plan assets   21    117    1    8 
  Employer contributions   152    57    16    13 
  Participant contributions             7    8 
  Gross benefits paid (a)   (70)   (48)   (18)   (19)
Plan assets at fair value, end of period   1,173    1,070    74    68 
               
Funded Status, end of period $ (155) $ (417) $ (119) $ (141)
               
Amounts recognized in the Balance            
 Sheets consist of:            
  Current liability $ (3) $ (3)          
  Noncurrent liability   (152)   (414) $ (119) $ (141)
Net amount recognized, end of period $ (155) $ (417) $ (119) $ (141)
               
Amounts recognized in AOCI and            
 regulatory assets/liabilities (pre-tax)            
 consist of:            
Prior service cost (credit) $ 24  $ 28  $ 8  $ 11 
Net actuarial (gain) loss   205    355    (30)   (17)
Total $ 229  $ 383  $ (22) $ (6)
               
Total accumulated benefit obligation            
 for defined benefit pension plans $ 1,176  $ 1,319       

(a)Certain LKE pension plans offered a limited-time program in 2013 during which terminated vested participants could elect to receive their accrued pension benefit as a one-time lump-sum payment.  The increase in gross benefits paid is primarily the result of $21 million of lump-sum cash payments made to terminated vested participants in 2013 in connection with these offerings.

The amounts recognized in AOCI and regulatory assets/liabilities at December 31 were as follows:
   Pension Benefits Other Postretirement Benefits
   2013  2012  2013  2012 
          
 AOCI $ (19) $ 27           
 Regulatory assets/liabilities   248    356  $ (22) $ (6)
 Total $ 229  $ 383  $ (22) $ (6)

The following tables provide information on pension plans where the projected benefit obligation (PBO) or accumulated benefit obligation (ABO) exceed the fair value of plan assets:

222


  PBO in excess of plan assets
   2013   2012 
       
Projected benefit obligation $1,328  $1,487 
Fair value of plan assets  1,173   1,070 
       
  ABO in excess of plan assets
   2013   2012 
       
Accumulated benefit obligation $350  $1,319 
Fair value of plan assets  284   1,070 

(LG&E)

The funded status of LG&E's plan at December 31, was as follows:

        Pension Benefits
        2013  2012 
Change in Benefit Obligation          
Benefit Obligation, beginning of period     $ 331  $ 298 
  Service cost       2    1 
  Interest cost       14    14 
  Actuarial (gain) loss       (35)   32 
  Gross benefits paid (a)       (21)   (14)
Benefit Obligation, end of period       291    331 
             
Change in Plan Assets          
Plan assets at fair value, beginning of period       287    256 
  Actual return on plan assets       4    32 
  Employer contributions       11    13 
  Gross benefits paid (a)       (21)   (14)
Plan assets at fair value, end of period       281    287 
             
Funded Status, end of period     $ (10) $ (44)
             
Amounts recognized in the Balance Sheets consist of:          
  Noncurrent liability     $ (10) $ (44)
Net amount recognized, end of period     $ (10) $ (44)
             
Amounts recognized in regulatory assets (pre-tax)          
 consist of:          
Prior service cost (credit)     $ 15  $ 17 
Net actuarial (gain) loss       90    123 
Total     $ 105  $ 140 
             
Total accumulated benefit obligation for defined benefit pension plan     $ 288  $ 328 

(a)LG&E's pension plan offered a limited-time program in 2013 during which terminated vested participants could elect to receive their accrued pension benefit as a one-time lump-sum payment.  The increase in gross benefits paid is primarily the result of $7 million of lump-sum cash payments made to terminated vested participants in 2013 in connection with this offering.

LG&E's pension plan had projected and accumulated benefit obligations in excess of plan assets at December 31, 2013 and 2012.

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 $287 million and $265 millionliabilities at December 31 2010as follows:

  2013  2012 
       
Pension $ 9  $ 58 
Other postretirement benefits   73    81 


223

(PPL and 2009. PPL Energy Supply's allocated share of other postretirement benefits was a liability of $55 million and $74 million at December 31, 2010 and 2009.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:

·
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 2013, 2012 and 2011.  At the date the financial statements were issued, the Form 5500 was not available for the plan year ending in 2013.  Therefore, the following disclosures specific to this plan are being made based on the Form 5500s filed for the plan years ended December 31, 2012 and 2011.  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 red and yellow, without utilizing an extended amortization period, as of December 31, 2012 and 2011.  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 healthother postretirement plans, including the plan identified as significant above.  The contribution amounts fluctuate each year based on the volume of work and welfare plans, depending on an employee's status.  Contributions were $49 million in 2010, $54 million in 2009 and $61 million in 2008.type of projects undertaken from year to year.

  2013  2012  2011 
          
Pension Plans $36  $31  $36 
Other Postretirement Benefit Plans  32   28   31 
Total Contributions $68  $59  $67 

(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, which management believes are reasonable.  The actuarialactuarially 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.

  2013  2012 
       
Pension $ 96  $ 237 
Other postretirement benefits   41    61 


224

(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 $259 million and $245 millionliabilities at December 31 2010 and 2009.  PPL Electric's allocated share of other postretirement benefits was a liability of $57 million and $73 million at December 31, 2010 and 2009.as follows.

(PPL and PPL Electric)

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.  At December 31, 2010, the liability was $3 million.  The liability is the net of $63 million of estimated future benefit payments offset by $28 million of assets in a retired miners VEBA trust and an additional $32 million of excess assets available in a Black Lung Trust that can be used to fund the health care benefits of retired miners.
  2013  2012 
       
Pension $ 11  $ 104 
Other postretirement benefits   42    53 

Plan Assets - U.S. Pension Plans

(All Registrants except PPL Services Corporation Master Trust(PPLElectric and PPL Energy Supply)KU)

PPL's primary legacy pension plan, the pension plans sponsored  by LKE and PPL Energy Supply's U.S.the pension plan in which employees of PPL Montana participate are invested in the PPL Services Corporation Master Trust (the Master Trust) that also includes a 401(h) accountaccounts that isare restricted for certain other postretirement benefit obligations.obligations of PPL and LKE.  The investment strategy for the master trustMaster 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.payments, while also managing the duration of the assets to complement the duration of the liabilities.  The master trustMaster 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 PPL Services Corporation Master Trust outline allowable investmentsoutlines 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.  Derivative instruments may be utilized as a cost-effective means to mitigate risktrustee and match the duration of investments to projected obligations.custodian.  The investment policies arepolicy is reviewed 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:  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, generally with long durations, and derivative positions.  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 PPL Services Corporation Master TrustEBPB 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 2013 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:
         2013 Target Asset Allocation (a)
   Percentage of trust assets  Weighted      
   2013 (a)  2012    Average  PPL Plans  LKE Plans
                
Growth Portfolio   59%    58%   55%  55%  55%
 Equity securities   30%    31%          
 Debt securities (b)   17%    18%          
 Alternative investments   12%    9%          
Immunizing Portfolio   39%    41%   43%  43%  43%
 Debt securities (b)   40%    40%          
 Derivatives   (1%)    1%          
Liquidity Portfolio   2%    1%   2%  2%  2%
Total   100%    100%   100%  100%  100%

        Target Asset
    Percentage of trust assets Target Range Allocation
Asset Class 2010  2009  2010  2010 
 Equity securities            
  U.S.   27%   31%  14 - 28%  21%
  International   16%   19%  9 - 23%  16%
 Debt securities and derivatives   47%   38%  43 - 57%  50%
 Alternative investments   9%   8%  4 - 18%  11%
 Cash and cash equivalents   1%   4%  0 - 9%  2%
 Total   100%   100%      100%
(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(PPL)

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The plans sponsored by LKE are invested in Pension Trusts that also include a 401(h) account that is restricted for certain other postretirement benefit obligations.  The investment strategy is to preserve the capital of the Pension Trusts and maximize investment earnings in excess of inflation with acceptable levels of volatility.  The return objective is to exceed the benchmark return for the policy index comprised of the following:  Russell 3000 Index, the MSCI-EAFE Index, Barclays Capital Aggregate and Barclays Capital U.S. Long Government Credit Bond Index in proportions equal to the targeted asset allocation.

Performance is evaluated on a long-term horizon of three to five years.  The assets of the Pension Trusts are broadly diversified within different asset classes and therefore have no significant concentration of risk.

Target allocation ranges have been developed based on input from external consultants.  The asset allocation for the Pension Trusts and the target allocation, by asset class, at December 31 are detailed below.

    Percentage  
     of plan assets Target Range
Asset Class 2010  2010 
 Equity securities      
  U.S.   56%  45 - 75%
 Debt securities (a)   37%  30 - 50%
 Other   7%  0 - 10%
 Total   100%   
         
(a)     Includes commingled debt funds      

(PPL and PPL Energy Supply)

PPL Montana, a subsidiary of PPL Energy Supply, has a pension plan whose assets are invested solely invested in the PPL Services Corporation Master Trust, which is fully disclosed by PPL (below).below.  The fair value of this plan's assets of $106$147 million and $149 million at December 31, 20102013 and 2012 represents an interest of approximately 3% and 4% in the Master Trust.

(LKE)

LKE has pension plans, including LG&E's plan, whose assets are invested solely in the PPL Services Corporation Master Trust, which is fully disclosed below.  The fair value of these plans' assets of $1.2 billion and $1.1 billion at December 31, 2013 and 2012 represents an interest of approximately 29% and 26% in the Master Trust.

(LG&E)

LG&E has a 5% undivided interestpension plan whose assets are invested solely in each asset and liabilitythe PPL Services Corporation Master Trust, which is fully disclosed below.  The fair value of this master trust, including each asset whose fair value measurement was determined using significant unobservable inputs (Level 3).plan's assets of $281 million and $287 million at December 31, 2013 and 2012 represents an interest of approximately 7% in the Master Trust for both years.

(All Registrants except PPL Electric and KU)

The fair value of net assets in the U.S. pension plan trusts by asset class and level within the fair value hierarchy was:

    December 31, 2010 December 31, 2009    December 31, 2013 December 31, 2012
       Fair Value Measurements Using    Fair Value Measurements Using       Fair Value Measurements Using    Fair Value Measurements Using
    Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3    Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
PPL Services Corporation Master TrustPPL Services Corporation Master Trust                        PPL Services Corporation Master Trust                 
Cash and cash equivalentsCash and cash equivalents $ 87  $ 87        $ 72  $ 72       Cash and cash equivalents $ 120  $ 120      $ 84  $ 84     
Equity securities:Equity securities:                        Equity securities:                 
 U.S.:                        
  Large-cap   494    373  $ 121       465    361  $ 104     U.S.:                 
  Small-cap   34    34          84    84        Large-cap   480   134  $ 346     558   206  $ 352   
 International:                         Small-cap   137   137       124   124     
  Developed markets   224    2    222       330    208    122     Commingled debt   749   13   736     676   56   620   
  Emerging markets   117    117          7    7        International   630   163   467     557   184   373   
Debt securities:Debt securities:                        Debt securities:                 
 U.S.:                         U.S. Treasury and U.S. government sponsored                 
  U.S. Treasury   296    296          212    212        agency   617   563   54     704   634   70   
  U.S. government sponsored agency   7       7       6       6     Residential/commercial backed securities   12     11  $ 1   12     11  $ 1 
  Residential mortgage-backed securities   39       39       50       48  $ 2  Corporate   963     940   23   874     847   27 
  Asset-backed securities   8       8       9       9     Other   24     24       24     23   1 
  Investment-grade corporate   357       357       233       231    2  International   7     7     7     7   
Alternative investments:Alternative investments:                 
  High-yield corporate   101       95  $ 6    92       84    8  Commodities   108     108     59     59   
  Municipality   4       4       1       1    
 International:                        
  Developed markets   4       4       5       5    
  Emerging markets   109       109       64       64    
Alternative investments:                        
 Real estate   76       76       65       65     Real estate   134     134     93     93   
 Private equity   10          10    6          6  Private equity   80       80   75       75 
 Hedge fund of funds   95       95       64       64     Hedge funds   210     210     125     125   
Derivatives:Derivatives:                        Derivatives:                 
 TBA debt securities   31          31    10          10  Interest rate swaps and swaptions   (49)    (49)    36     36   
 Interest rate swaps   (4)      (4)      (4)      (4)    Other   12     12     2     2   
Receivables   24    13    11       63    26    37    
Payables   (54)   (51)   (3)      (51)   (22)   (29)   
Total PPL Services Corporation Master Trust assets   2,059    871    1,141    47    1,783    948    807    28 
Insurance contractsInsurance contracts   37       37   42       42 
PPL Services Corporation Master Trust assets, atPPL Services Corporation Master Trust assets, at                        
fair value   4,271  $ 1,130  $ 3,000  $ 141    4,052  $ 1,288  $ 2,618  $ 146 
Receivables and payables, net (a)Receivables and payables, net (a)             (11)      
401(h) account restricted for other401(h) account restricted for other                        401(h) account restricted for other                 
postretirement benefit obligations   (18)   (8)   (10)      (11)   (6)   (5)   postretirement benefit obligations   (115)         (102)      
Fair value - PPL Services Corporation Master                        
Total PPL Services Corporation Master TrustTotal PPL Services Corporation Master Trust                 
Trust pension assets   2,041    863    1,131    47    1,772    942    802    28 pension assets $ 4,156        $ 3,939       
                           
(PPL)                        
                           
LG&E and KU Energy LLC Pension Trusts                        
Cash and cash equivalents   6    6                   
Equity securities:                        
 U.S.:                        
  Large-cap   293       293                
  Small/Mid-cap   67       67                
  Commingled debt   307       307                
 International developed markets   105       105                
Insurance contracts   47          47             
Total LG&E and KU Energy LLC                        
Pension Trusts' assets   825    6    772    47             
401(h) account restricted for other                        
postretirement benefit obligations   (47)      (47)               
Fair value - LG&E and KU Energy LLC                        
Pension Trusts' pension assets   778    6    725    47             
                           
Fair value - total U.S. pension plans $ 2,819  $ 869  $ 1,856  $ 94  $ 1,772  $ 942  $ 802  $ 28 

(a)Receivables and payables represent amounts for investments sold/purchased but not yet settled along with interest and dividends earned but not yet received.


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A reconciliation of U.S. pension trust assets classified as Level 3 at December 31, 2013 is as follows:

      Residential/               
      commercial              
      backed Corporate Private Insurance Other   
      securities debt equity contracts debt Total
                       
Balance at beginning of period $ 1  $ 27  $ 75  $ 42  $ 1  $ 146 
 Actual return on plan assets                  
   Relating to assets still held                  
    at the reporting date         3    2       5 
   Relating to assets sold during the period      5             5 
 Purchases, sales and settlements      (9)   2    (7)      (14)
 Transfers from level 3 to level 2               (1)   (1)
Balance at end of period $ 1  $ 23  $ 80  $ 37  $    $ 141 

A reconciliation of U.S. pension trust assets classified as Level 3 at December 31, 20102012 is as follows.follows:

     Residential Investment -               
      mortgage grade High-yield            
      backed corporate corporate Private TBA debt Insurance   
      securities debt debt equity securities contracts Total
                      
Balance at beginning of period $ 2  $ 2  $ 8  $ 6  $ 10     $ 28 
 Actual return on plan assets                     
   Relating to assets still held                     
    at the reporting date   (1)   (2)   1    (1)         (3)
   Relating to assets sold                     
    during the period         1             1 
 Acquisition of LKE                $ 46    46 
 Purchases, sales and                     
  settlements   (1)      (4)   5    21    1    22 
Balance at end of period $  $  $ 6  $ 10  $ 31  $ 47  $ 94 

A reconciliation of U.S. pension trust assets classified as Level 3 at December 31, 2009 is as follows.

    Residential Investment -            
     mortgage grade High-yield         
     backed corporate corporate Private TBA Debt   
     securities debt debt equity 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)
Balance at end of period $ 2  $ 2  $ 8  $ 6  $ 10  $ 28 

(PPL and PPL Energy Supply)
      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 

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.  These securities represent actively and passively managed investments that are managed against various U.S. equity indices.

Investments in commingled equity and debt funds are categorized as equity securities.  These investments are classified as Level 2, and categorizedexcept for exchange-traded funds, which are classified as equity securities.Level 1 based on quoted prices in active markets.  The fair value measurements for Level 2 investments are based on firm quotes of net asset values per share, which are not considered obtained from a quoted price in an active market.  For the PPL Services Corporation Master Trust, these securities represent investments that are measured against the Russell 1000 Growth Index, the Russell 3000 Index and the MSCI EAFE Index.  For the LG&E and KU Energy LLC Pension Trusts, these securities represent passively and actively managed investmentsInvestments in commingled equity funds managed against the S&P 500 Index, the Russell 2500 Growth & Value Indexesinclude funds that invest in U.S. and the MSCI EAFE Index.international equity securities.  Investments in commingled debt funds include funds that invest in a diversified portfolio of emerging market debt obligations, as well as funds that invest in investment grade long-duration fixed-income 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.  DebtThe fair value of debt securities areis generally measured using a market approach, including the use of matrix pricing.pricing models which incorporate observable inputs.  Common inputs include benchmark yields, reported trades;trades, broker/dealer bid/ask prices, benchmark securities and credit valuation adjustments.  When necessary, the fair value of debt securities is measured using the income approach, which incorporates similar observable inputs as well as benchmark yields, credit valuation adjustments, reference data from market research publications, monthly payment data, future predicted cash flows, 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 issued by foreign governments and corporations as well ascorporations; and exchange traded funds.  

Investments in commodities represent ownership of units of a commingled fund investments that are measured againstis 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 JP Morgan EMBI Global Diversified Indexglobal commodity markets, including energies, agriculture and the Barclays Long A or Better Index.  For the LG&Emetals (both precious and KU pension trusts, debt securities within comingled trusts are managed against the Barclays Aggregated Bond Index and the Barclays U.S. Government/Credit Long Index.industrial) using proprietary commodity trading strategies.  The debt securities heldfund has daily liquidity with a specified notification period.  The fund's fair value is based upon a unit value as calculated by the PPL Services Corporation Master Trust at December 31, 2010 have a weighted-average coupon of 4.25% and a weighted-average duration of 16 years.fund's trustee.


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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 a secondary factor.  Core real estate generally has a lower degree of leverage when compared towith 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 p artnership,partnership, including legal and tax implications, among others.  The fair value of the investment is based upon a partnership unit value.

Investments in private equity represent interests in partnerships in multiple early-stateearly-stage venture capital funds and private equity fund of funds that use a number of diverse investment strategies.  ThreeFour of the partnerships have limited lives of ten years, while the fourthfifth has a life of 15 years, after which liquidating distributions will be received.  Prior to the end of each partnership's life, the investment can notcannot 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 $90$76 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 a ttributed.attributed.

Investments in hedge fund of funds represent investments in twothree hedge fund of funds each with a different investment objective.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 boththe hedge fund of funds include long/short equity, market neutral, distressed debt, and relative value.  Generally, shares may be redeemed on 90with 65 to 95 days prior written notice.  BothThe 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.  One fund'sThe fair value for two of the funds has been estimated using the net asset value per share and the otherthird fund's fair value is 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, these instruments may be valued using models, including standard option valuation models and standard industry models.  These securities primarily represent investments in To-be-announced debt securities and interest rate swaps.  To-be-announced debt securities are commitmentsswaps and swaptions (the option to purchase debt securities and are used as a cost effective means of managing the duration of assets in the trust.  These commitments are valued by reviewing the issuing agency, program and coupon.  Interestenter into an interest rate swapsswap) which are valued based on the swap details, such as:as swap curves, notional amount, index and term of index, reset frequency, volatility and payer/recei verreceiver credit ratings.

Receivables/payables classified as Level 1 represent investments sold/purchased but not yet settled.  Receivables/payables classified as Level 2 represent interest and dividends earned but not yet received and costs incurred but not yet paid.

Insurance contracts, classified as Level 3, are held by the LG&E and KU Energy LLC Pension Trusts and represent an investment in an immediate participation guaranteed group annuity contract.  The fair value is based on contract value, which represents cost plus interest income less distributions for benefit payments and administrative expenses.

Plan Assets - U.S. Other Postretirement Benefit Plans(PPL)

PPL'sThe investment strategy with respect to its other postretirement benefit obligations is to fund VEBA trusts andand/or 401(h) accounts with voluntary contributions and to invest in a tax efficient manner.  Excluding the 401(h) accounts included in the PPL Services Corporation Master Trust, and LG&E and KU Energy LLC Pension Trusts, discussed in Plan Assets - U.S. Pensions Plans above, PPL'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 securi ties 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 as debt securities for asset allocation and target allocation purposes.  Securities issued by commingledOwnership interests in money market funds that invest entirely in money market securities are traded as equity units, but treated by PPL as cash and cash equivalents for asset allocation and target allocation purposes.  The asset allocation for the PPL VEBA trusts, excluding LKE, and the target allocation, by asset class, at December 31 are detailed below.

    Permitted Target Asset
    Percentage of plan assets Range Allocation
 Asset Class 2010  2009  2010  2010 
               
 U. S. Equity securities   55%   54%  45 - 65%  55%
 Debt securities (a)   39%   37%  30 - 50%  40%
 Cash and cash equivalents (b)   6%   9%  0 - 15%  5%
  Total   100%   100%      100%
     Target Asset
   Percentage of plan assets Allocation
  2013  2012  2013 
Asset Class         
U.S. Equity securities   55%    46%   45%
Debt securities (a)   41%    51%   50%
Cash and cash equivalents (b)   4%    3%   5%
 Total   100%    100%    100% 

(a)Includes commingled debt funds and debt securities.
(b)Includes commingled money market fund.funds.


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LKE's other postretirement benefit plan is invested primarily in a 401(h) account, with insignificant amounts invested in money market funds within VEBA trusts for liquidity.

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, 2010 December 31, 2009    December 31, 2013 December 31, 2012
       Fair Value Measurement Using    Fair Value Measurement Using       Fair Value Measurement Using    Fair Value Measurement Using
    Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3    Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
Money market fundsMoney market funds $ 12  $ 12        $ 13  $ 13       
U.S. Equity securities:U.S. Equity securities:                        U.S. Equity securities:                 
 Large-cap $ 163     $ 163     $ 156     $ 156    
 Commingled debt   69       69       61       61     Large-cap   182    $ 182     145    $ 145   
 Commingled money market funds   18       18       26       26     Commingled debt   100     100     119     119   
Debt securities:Debt securities:                        Debt securities:                     
 Municipalities   44       44       46       46     Municipalities   36       36       41       41    
Receivables   1       1       1       1    
Total VEBA trust assets   295       295       290       290    
Total VEBA trust assets, at fair valueTotal VEBA trust assets, at fair value   330  $ 12  $  318           318  $  13  $  305        
Receivables and payables, net (a)Receivables and payables, net (a)   1         1       
401(h) account assets(b)401(h) account assets(b)   65  $ 8    57       11  $ 6    5    401(h) account assets(b)   115          102       
Fair value - U.S. other postretirement                        
Total other postretirement benefit planTotal other postretirement benefit plan                 
benefit plans $ 360  $ 8  $ 352     $ 301  $ 6  $ 295    assets $ 446        $ 421         

(a)Receivables and payables represent amounts for investments sold/purchased but not yet settled along with interest and dividends earned but not yet received.
(b)LKE's other postretirement benefit plan was invested primarily in a 401(h) account as disclosed in the PPL Services Corporation Master Trust.

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 money market instruments including, but not limited to, commercial paper, notes, repurchase agreements and other evidences of indebtedness with a maturity date not exceeding 13 months from date of purchase. Redemptions can be made weekly on this fund.

Investments in commingled money market funds represent investments in a fund that invests in securities and a combination of other collective funds that together are designed to track the performance of the Barclays Capital Long-term Treasury Index, as well as a fund that investsinvest 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 eachthis fund.

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.  Fair value measurements are not obtained from a quoted price in an active market but are based on firm quotes of net asset values per share as provided by the trustee of the fund.  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.  Redemptions can be made weekly on these funds.

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 for these securities are based on recently executed transactions for identical securities or for similar securities.

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 managersmanagers; and therefore, have no significant concentration of risk.  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.

The asset allocation and target allocation at December 31 of WPD's pension plans are detailed below.

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         Target Asset 
    Percentage of plan assets Allocation 
Asset Class 2010  2009  2010  
            
 Cash and cash equivalents   2%       
 Equity securities          
  U.K. companies   18%   22%  16% 
  European companies (excluding the U.K.)   11%   13%  10% 
  Asian-Pacific companies   11%   10%  10% 
  North American companies   6%   6%  4% 
  Emerging markets companies   5%   5%  5% 
  Currency   2%   2%  6% 
  Global Tactical Asset Allocation   1%   1%  2% 
 Debt securities (a)   38%   35%  39% 
 Alternative investments   6%   6%  8% 
  Total   100%   100%   100% 
         Target Asset
   Percentage of plan assets Allocation
  2013  2012  2013 
Asset Class         
Equity securities         
 U.K.   7%    6%   7%
 European (excluding the U.K.)   5%    14%   4%
 Asian-Pacific   3%        3%
 North American   5%        5%
 Emerging markets   8%    3%   8%
 Currency   7%    2%   3%
 Global Tactical Asset Allocation   19%    18%   19%
Debt securities (a)   40%    51%   45%
Alternative investments   6%    6%   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, 2010 December 31, 2009    December 31, 2013 December 31, 2012
       Fair Value Measurement Using    Fair Value Measurement Using       Fair Value Measurement Using    Fair Value Measurement Using
    Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3    Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
                                                   
Cash and cash equivalentsCash and cash equivalents $ 46  $ 46        $ 5  $ 5       Cash and cash equivalents $ 10  $ 10        $ 14  $ 14     
Equity securities:Equity securities:                        Equity securities:                 
 U.K. companies   455     $ 455       501     $ 501     U.K. companies   523   267  $ 256     440   223  $ 217   
 European companies (excluding the U.K.)   273       273       290       290     European companies (excluding the U.K.)   355   275   80     956   720   236   
 Asian-Pacific companies   279       279       242       242     Asian-Pacific companies   226   180   46             
 North American companies   162       162       149       149     North American companies   352   254   98             
 Emerging markets companies   127       127       110       110     Emerging markets companies   411   126   285     231     231   
 Currency   51       51       42       42     Global Equities   161       161                 
 Global Tactical Asset Allocation   23       23       30       30     Currency   485       485     127     127   
 Commingled debt:                         Global Tactical Asset Allocation   1,384       1,384     1,220     1,220   
  U.K. corporate bonds   321       321       308       308     Commingled debt:                 
  U.K. gilts               24       24      U.K. corporate bonds   504       504     593     593   
  U.K. index-linked gilts   629       629       489       489      U.K. gilts   2,426       2,426     2,907     2,907   
Alternative investments:Alternative investments:                        Alternative investments:                 
 Real estate   158       158       141       141     Real estate   447         447       423       423    
Fair value - international pension plans $ 2,524  $ 46  $ 2,478     $ 2,331  $ 5  $ 2,326    
Fair value - U.K. pension plansFair value - U.K. pension plans $ 7,284  $ 1,112  $ 6,172       $ 6,911  $ 957  $ 5,954      

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 actively and passively managed equity index funds that are measured against the FTSE All Share Index.  Investments in Europeanvarious equity securities represent passively managed equity index funds that are measured against the FTSE Europe ex UK 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 secur ities represent investments in unitized passive and actively traded currency funds.indices.  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 securitiesU.K. corporate bonds include investment grade corporate bonds of companies from diversified U.K. industries.

U.K. gilts include gilts, index-linked gilts and swaps intended to track a portion of the plans' liabilities.

Investments in real estate represent holdings in a U.K. 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.  The fair value measurement of the fund is based upon a net asset value per share, 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.

Expected Cash Flows - U.S. Defined Benefit Plans (PPL)

PPL's U.S. defined benefit plans have the option to utilize available prior year credit balances to meet current and future contribution requirements.  However, PPL contributed $432$96 million to its U.S. pension planplans in January 2011 and will contribute an additional $33 million to ensure future compliance with minimum funding requirements.2014.


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PPL sponsors various non-qualified supplemental pension plans for which no assets are segregated from corporate assets.  PPL expects to make approximately $5$8 million of benefit payments under these plans in 2011.2014.

PPL is not required to make contributions to its other postretirement benefit plans but has historically funded these plans in amounts equal to the postretirement benefit costs recognized.  Continuation of this past practice would cause PPL to contribute $38$21 million to its other postretirement benefit plans in 2011.2014.

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid by the plans and the following federal subsidy payments are expected to be received by the separate plan trusts.PPL.

    Other Postretirement
        Expected
     Benefit Federal
   Pension Payment Subsidy
          
2011  $ 178  $ 51  $ 1 
2012    185    54    1 
2013    200    57    1 
2014    204    61    1 
2015    217    64    1 
2016 - 2020   1,308    354    4 
     Other Postretirement
        Expected
     Benefit Federal
   Pension Payment Subsidy
          
2014  $ 211  $ 53  $ 1 
2015    222    55    1 
2016    234    57    1 
2017    250    59    1 
2018    264    62    1 
2019-2023   1,545    338    3 

(PPL Energy Supply)

The PPL Montana pension plan has the option to utilize available prior year credit balances to meet current and future contribution requirements.  However, PPL Montana contributed $10$6 million to theits pension plan in January 2011 and will contribute an additional $5 million to ensure future compliance with minimum funding requirements.2014.

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid by the separate plan trusts.plans.

     Other
  Pension Postretirement
       
2011  $ 3  $ 2 
2012    4    2 
2013    4    2 
2014    5    2 
2015    6    3 
2016 - 2020   41    14 
     Other
  Pension Postretirement
       
2014  $ 5  $ 1 
2015    6    2 
2016    6    2 
2017    7    2 
2018    8    2 
2019-2023   52    11 

(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 $35 million to its pension plans in January 2014.

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 2014.

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 $13 million to its other postretirement benefit plan in 2014.

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid by the plans and the following federal subsidy payments are expected to be received by LKE.

     Other Postretirement
        Expected
     Benefit Federal
   Pension Payment Subsidy
          
2014  $ 58  $ 13  $ 1 
2015    57    13      
2016    60    14    1 
2017    64    14      
2018    69    15    1 
2019-2023   425    81    2 


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(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.  LG&E does not plan to contribute to its pension plan in 2014.

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid by the plan.

   Pension
    
2014  $ 15 
2015    15 
2016    15 
2017    16 
2018    17 
2019-2023   99 

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 contributionsContribution requirements for periods after April 1, 2014 were evaluated in accordance with the latest valuationdraft valuations performed as of March 31, 2013.  Contributions for periods prior to March 31, 2014 were based on a valuation as of June 30, 2011 for the PPL WEM plan and as of March 31, 2010 in respect of WPD's principal pension scheme, to determine contribution requirements for 2011 and forward.the PPL WW plan.  WPD expects to make contributions of approximately $15$313 million in 2011.2014.  WPD is currently permitted to recover in rates approximately 76%75% of itstheir deficit funding requirements for itstheir primary pension plan.plans.

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid by the separate plan trusts.plans.

  Pension
    
2011  $ 156 
2012    158 
2013    161 
2014    164 
2015    169 
2016 - 2020   895 
  Pension
    
2014  $ 387 
2015    392 
2016    397 
2017    402 
2018    410 
2019-2023   2,128 

(PPL, PPL Energy Supply and PPL Electric)

Savings Plans(All Registrants)

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:

 2010  2009  2008  2013  2012  2011 
                  
PPL $ 23  $ 17  $ 17  $ 41  $ 36  $ 31 
PPL Energy Supply   10    10    9   12   12   11 
PPL Electric   4    4    4   6   5   5 
LKE 13  12  11 
LG&E 7  6  5 
KU 6  6  6 

The increase for (PPL, PPL in 2010 is the result of PPL's acquisition of LKEEnergy Supply and the employer contributions related to the employees of that company and its subsidiaries under their existing plans.PPL Electric)

Employee Stock Ownership Plan

PPL sponsors 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, which is discretionary, 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.


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For 2013, PPL did not record compensation expense related to the ESOP as no contribution will be made.  Compensation expense for ESOP contributions was $8 million in 20102012 and 2009 and $7 million in 2008.2011.  These amounts were offset by the dividend-based contribution tax savings and had no impact on PPL's earnings.

PPL shares within the ESOP outstanding at December 31, 20102013 were 7,753,0077,699,472, or 2%1% of total common shares outstanding, and are included in all EPS calculations.

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" 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 20102013 and 2008.2012.

Health Care Reform

In March 2010, Health Care Reform was signed into law.  Many provisionsSee Note 10 for separation benefits recorded in 2011 in connection with a reorganization following the acquisition 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.

Beginning in 2013, provisions within Health Care Reform eliminate 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, in 2010:

·PPL decreased deferred tax assets by $13 million, increased regulatory assets by $9 million, increased deferred tax liabilities by $4 million and recorded income tax expense of $8 million;
·PPL Energy Supply decreased deferred tax assets by $5 million and recorded income tax expense of $5 million; and
·PPL Electric decreased deferred tax assets by $5 million, increased regulatory assets by $9 million and increased deferred tax liabilities by $4 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 provision 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.WPD Midlands.

14.  Jointly Owned Facilities

(All Registrants except PPL and PPL Energy Supply)Electric)

At December 31, 20102013 and 2009, subsidiaries of PPL and PPL Energy Supply2012, the Balance Sheets reflect the owned interests in the facilities listed below.  The Balance Sheets of PPL and PPL Energy Supply include the amounts noted in the following table.

    December 31, 2010
               Construction
    Ownership    Other Accumulated Work
    Interest Electric Plant Property Depreciation in Progress
PPL               
Generating Stations               
 Susquehanna  90.00% $ 4,553     $ 3,487  $ 79 
 Conemaugh  16.25%   213       106    11 
 Keystone  12.34%   196       60    2 
 Trimble County-Units 1 & 2 (a)  75.00%   352       10    907 
Merrill Creek Reservoir  8.37%    $ 22    15    
                 
PPL Energy Supply               
Generating Stations               
 Susquehanna  90.00% $ 4,553     $ 3,487  $ 79 
 Conemaugh  16.25%   213       106    11 
 Keystone  12.34%   196       60    2 
Merrill Creek Reservoir  8.37%    $ 22    15    
                 
    December 31, 2009
               Construction
    Ownership    Other Accumulated Work
    Interest Electric Plant Property Depreciation in Progress
PPL and PPL Energy Supply               
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    
               Construction
     Ownership    Other Accumulated Work
     Interest Electric Plant Property Depreciation in Progress
PPL               
 December 31, 2013               
 Generating Plants               
  Susquehanna  90.00% $  4,686       $  3,545  $  76 
  Conemaugh  16.25%   247         131    63 
  Keystone  12.34%   207         91    2 
  Trimble County Units 1 & 2  75.00%   1,288         144    54 
 Merrill Creek Reservoir  8.37%      $  22    16      
                  
 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      

(a)The interest in these Units was recognized as a result of the 2010 acquisition of LKE.  See Note 10 for additional information on the acquisition, and Note 8 for additional information on Trimble County Unit 2.
PPL Energy Supply               
 December 31, 2013               
 Generating Plants               
  Susquehanna  90.00% $  4,686       $  3,545  $  76 
  Conemaugh  16.25%   247         131    63 
  Keystone  12.34%   207         91    2 
 Merrill Creek Reservoir  8.37%      $  22    16      
                  
 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      


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               Construction
     Ownership    Other Accumulated Work
     Interest Electric Plant Property Depreciation in Progress
LKE                
 December 31, 2013               
 Generating Plants               
  Trimble County Unit 1  75.00% $  308       $  42  $  18 
  Trimble County Unit 2  75.00%   980         102    36 
                  
 December 31, 2012               
 Generating Plants               
  Trimble County Unit 1  75.00% $  304             $  33    $  10 
  Trimble County Unit 2  75.00%   975                 79        33 

In addition to the interests mentioned above, PPL Montana had a 50% leasehold interest in Colstrip Units 1 and 2 and a 30% leasehold interest in Colstrip Unit 3 under operating leases.  See Note 11 for additional information.  At December 31, 2010 and 2009, NorthWestern owned a 30% leasehold interest in Colstrip Unit 4.  PPL Montana and NorthWestern have a sharing agreement to govern each party's responsibilities regarding the operation of Colstrip Units 3 and 4, and each party is responsible for 15% of the respective operating and construction costs, regardless of whether a particular cost is specified to Colstrip Unit 3 or 4.
LG&E               
 December 31, 2013               
 Generating Plants               
  E.W. Brown Units 6-7  38.00% $  40       $  7  $  1 
  Paddy's Run Unit 13 & E.W. Brown Unit 5  53.00%   46         5    1 
  Trimble County Unit 1  75.00%   308         42    18 
  Trimble County Unit 2  14.25%   200         19    14 
  Trimble County Units 5-6  29.00%   29         3      
  Trimble County Units 7-10  37.00%   69         7    1 
  Cane Run Unit 7  22.00%                  91 
  Green River Unit 5  40.00%                1 
                  
 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  22.00%                  16 

KU                
 December 31, 2013               
 Generating Plants               
  E.W. Brown Units 6-7  62.00% $  64       $  11  $  2 
  Paddy's Run Unit 13 & E.W. Brown Unit 5  47.00%   42         4    1 
  Trimble County Unit 2  60.75%   780         83    22 
  Trimble County Units 5-6  71.00%   70         8      
  Trimble County Units 7-10  63.00%   118         12    2 
  Cane Run Unit 7  78.00%                  317 
  Green River Unit 5  60.00%                2 
                  
 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  78.00%                  53 

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 stationsplants equal to its percentage ownership.  The share of fuel and other operating costs associated with the stationsplants is included in the corresponding operating expenses on the Statements of Income.

In addition to the interests mentioned above, at December 31, 2012, PPL Montana had a 50% leasehold interest in Colstrip Units 1 and 2 and a 30% leasehold interest in Colstrip Unit 3 under operating leases.  In December 2013, PPL Montana terminated the operating lease arrangement and acquired these interests.  See Note 8 for additional information. At December 31, 2013, the book value of the acquired assets was not significant.  At December 31, 2013 and 2012, NorthWestern owned a 30% interest in Colstrip Unit 4.  PPL Montana and NorthWestern have a sharing agreement that governs each party's responsibilities and rights relating to the operation of Colstrip Units 3 and 4.  Under the terms of that agreement, each party is responsible for 15% of the total non-coal operating and construction costs of Colstrip Units 3 and 4, regardless of whether a particular cost is specific to Colstrip Unit 3 or 4, and is entitled to take up to the same percentage of the available generation from Units 3 and 4.

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15.  Commitments and Contingencies

Energy Purchases, Energy Sales and Other Commitments

Energy Purchase Commitments

(PPL)(PPL and PPL Energy Supply)

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 wind2021 
RECs2021 
Wind Power2027 

(a)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, entersLG&E and KU)

LG&E and KU enter into purchase contracts to supply the coal and natural gas requirements for generation facilities and LG&E's gas supply operations.  The coalThese contracts extend through 2016 andinclude the natural gas contracts extend through 2012.  LKE also enters into contracts for the transportation of natural gas, which expire through 2018.following commitments:

LKE indirectly holds an 8.13% interest
Maximum 
Maturity 
Contract TypeDate 
Coal2019 
Coal Transportation and Fleeting Services2024 
Natural Gas Storage2024 
Natural Gas Transportation2024 

LG&E and KU have a power purchase agreement with OVEC expiring in June 2040.  See footnote (i) to the table in "Guarantees and Other Assurances" below for information on the OVEC which is accountedpower purchase contract.  Future obligations for power purchases from OVEC are unconditional demand payments, comprised of annual minimum debt service payments, as a cost method investment.  OVEC ownswell as contractually required reimbursement of plant operating, maintenance and operates two coal-fired power plants.  LKE is contractually entitled to 8.13% of OVEC's output, approximately 194 MW of generation capacity.  Pursuant toother expenses as follows:

  LG&E KU Total
          
2014  $ 18  $ 8  $ 26 
2015    18    8    26 
2016    18    8    26 
2017    19    8    27 
2018    20    9    29 
Thereafter   504    224    728 
  $ 597  $ 265  $ 862 
          

In addition, LG&E and KU had total energy purchases under the OVEC power purchase agreement which expires in 2026, LKE may be conditionally responsible for its pro-rata share of certain obligations of OVEC under defined circumstances.  These contingent liabilities may include unpaid OVEC indebtedness as well as shortfall amounts in certain excess decommissioning costs and postretirement benefits other than pension.  LKE's contingent potential proportionate share of OVEC's outstanding debt was approximately $113 million atthe years ended December 31 2010.as follows:

(PPL and PPL Energy Supply)
  2013  2012  2011 
          
LG&E $ 18  $ 20  $22 
KU   8    9   10 
Total $ 26  $ 29  $32 


PPL Energy Supply enters into long-term purchase contracts to supply the fuel requirements for generation facilities.  These contracts include commitments to purchase coal, emission allowances, limestone, natural gas, oil and nuclear fuel.  These long-term contracts extend through 2019, with the exception of a limestone contract that extends through 2030.  PPL Energy Supply also enters 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 Energy Supply has entered into long-term contracts to purchase power that extend through 2017, with the exception of long-term power purchase agreements for the full output o f two wind farms that extend through 2027.

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As part of the purchase of generation assets from Montana Power, PPL Montana assumed a power purchase and power sales agreement, which expired at December 31, 2010.  In accordance with purchase accounting guidelines, PPL Montana recorded a liability of $58 million as the fair value of the agreement at the acquisition date.  The liability was being reduced over the term of the agreement 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 Sheets and was fully amortized in 2010.

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 11 for additional information.

(PPL and PPL Electric)

In 2009,May 2012, PPL Electric filed a plan with the PUC approved PPL Electric's procurement planto purchase its electricity supply for default customers for the period January 2011June 2013 through May 2015.  The PUC approved the plan in January 2013.  Through 2010,The approved plan provides that PPL Electric has conducted six of its 14 plannedprocure this electricity through competitive solicitations.solicitations twice each plan year beginning in April 2013.  The solicitations will include a mix of long-term andlayered short-term purchasesfull-requirement products ranging from fivethree months to five years to fulfill PPL Electric's obligation to provide12 months for customer supplyresidential and small commercial and industrial PLR customers as well as a PLR.recurring 12 month spot market product for large commercial and industrial PLR customers.  To date, two of four solicitations have been completed.

(PPL Energy Supply and PPL Electric)

See Note 16 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 2024,into 2020, excluding long-term retail salesrenewable energy agreements for the full output from solar generators that extend through 2036.into 2038.

(PPL Energy Supply and PPL Electric)Supply)

See Note 16 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 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 (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.  Although 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 PPL Montana 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 $10 million between 2011 and 2015, in addition to the a nnual rent it pays to the tribes.

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 comprising 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 $34$29 million between 20112014 and 2040.

In September 2013, PPL Montana reached an agreement to sell its hydroelectric facilities to NorthWestern.  The agreement includes PPL Montana's 11 hydroelectric power plants and the company's Hebgen Lake reservoir.  See Note 8 for additional information.

Legal Matters

(PPL, PPL Energy Supply and PPL Electric)All Registrants)

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

(PPL)WKE Indemnification(PPL and LKE)

Trimble County Unit 2 ConstructionSee footnote (h) 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.

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In June 2006, LKE entered into a construction contract regarding the TC2 project.  The contract is generally in the form of a turnkey agreement for the design, engineering, procurement, construction, commissioning, testing and delivery of the project, according to designated specifications, terms and conditions.  The contract price and its components are subject to a number of potential adjustments which may serve to increase or decrease the ultimate construction price.  During 2009 and 2010, LKE received several contractual notices from the TC2 construction contractor asserting historical force majeure and excusable event claims for a number of adjustments to the contract price, construction schedule, commercial operations date, liquidated damages or other relevant provisions.  In September 2010, L KE and the construction contractor agreed to a settlement to resolve the force majeure and excusable event claims occurring through July 2010, under the TC2 construction contract, which settlement provided for a limited, negotiated extension of the contractual commercial operations date and/or relief from liquidated damage calculations.  With limited exceptions LKE took care, custody and control of TC2 on January 22, 2011, and has dispatched the unit to meet customer demand since that date.  LG&E and KU and the contractor agreed to a further amendment of the construction agreement whereby the contractor will complete certain actions relating to identifying and completing any necessary modifications to allow operation of TC2 on all fuels in accordance with initial specifications prior to certain dates, and amending the provisions relating to liquidated damages.  LKE cannot currently estimate the ultimate outcome of these matters.

Trimble County Unit 2 Transmission

LG&E's and KU's Certificate of Public Convenience and Necessity (CCN) and condemnation rights relating to a transmission line associated with the TC2 construction have been challenged by certain property owners in Hardin County, Kentucky. Certain proceedings relating to CCN challenges and federal historic preservation permit requirements have concluded with outcomes in LG&E's and KU's favor.

With respect to the remaining issues in dispute, during 2008, KU obtained various successful rulings at the Hardin County Circuit Court confirming its condemnation rights.  In August 2008, several landowners appealed such rulings to the Kentucky Court of Appeals.  In May 2010, the Kentucky Court of Appeals issued an Order affirming the Hardin Circuit Court's finding that KU had the right to condemn easements on the properties.  In May 2010, the landowners filed a petition for reconsideration with the Court of Appeals.  In July 2010, the Court of Appeals denied that petition.  In August 2010, the landowners filed for discretionary review of that denial by the Kentucky Supreme Court.

Consistent with the regulatory authorizations and relevant legal proceedings, LG&E and KU have completed construction activities on transmission line segments.  During 2010, LG&E and KU placed into operation permanent sections of the transmission line.  PPL cannot predict the outcome of remaining issues related to this matter.

Montana Hydroelectric Litigation (PPL and PPL Energy Supply)

In November 2004, PPL Montana Avista Corporation (Avista) and PacifiCorp commenced an action for declaratory judgmentHydroelectric Litigation

As previously reported, in February 2012 the U.S. Supreme Court issued a decision overturning decisions by the Montana First Judicial District Court seeking a determinationand the Montana Supreme Court which had held that no lease payments or other compensation for theirthe streambeds underlying PPL Montana's hydroelectric facilities' use and occupancy of riverbeds in Montana can be collectedgenerating facilities were owned by the State of Montana.Montana and that PPL Montana owed the State of Montana compensation for its prior use of those streambeds.  As a result of the U.S. Supreme Court decision, PPL Montana reversed its total loss accrual resulting in a $65 million net credit to "Other operation and maintenance" and a $10 million net credit to "Interest Expense" on the Statement of Income in 2011.  The case was remanded by the U.S. Supreme Court to the Montana Supreme Court and, in April 2012, returned by the Montana Supreme Court to the Montana First Judicial District Court.  Further proceedings have not been scheduled by the district court.

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 (Bankruptcy Court).  At the time of the bankruptcy filing, SMGT was PPL EnergyPlus' largest unsecured credit exposure.  This lawsuit followed dismissalcontract was accounted for as NPNS by PPL EnergyPlus.

The SMGT Contract provided for fixed volume purchases on jurisdictional groundsa 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 Bankruptcy Court issued an earlier federal lawsuit seeking such compensationorder approving the request of the SMGT trustee and PPL EnergyPlus to terminate the SMGT Contract, effective April 1, 2012.  As a result, PPL EnergyPlus was free 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 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, 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 the termination of the SMGT Contract.  No assurance can be given as to the collectability of the claim and, therefore, no amounts have been recorded in the 2013 financial statements.

Sierra Club Litigation

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

On March 6, 2013, the Sierra Club and MEIC filed a complaint against PPL Montana and the other Colstrip co-owners in the U.S. District Court, of Montana.  Initially brought by two individuals, for whom the State was later substituted, the federal lawsuit alleged 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 should, under a 1931 regulatory scheme enacted after all but one of the hydr oelectric 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 StateDistrict of Montana, that it was not seeking compensation for the period prior to PPL Montana's December 1999 acquisition of the hydroelectric facilities.

Following a number of adverse trial court rulings, in 2007 Pacificorp and Avista each entered into settlement agreements with the State of Montana providing, in pertinent part, that each company would make prospective lease payments for use of the State's navigable riverbeds (subject to certain future adjustments), resolving the State's claims for past and future compensation.

Following an October 2007 trial of this matter on damages, in June 2008, the Montana District Court awarded the State retroactive compensation of approximately $35 million for the 2000-2006 period and approximately $6 million for 2007 compensation.  Those amounts continue to accrue interest at 10 percent per year.  The Montana District Court also deferred determination of compensation for 2008 and future years to the Montana State Land Board.  In October 2008,Billings Division.  PPL Montana appealed the decision to the Montana Supreme Court, requesting a stay of judgment and a stay of the Land Board's authority to assess compensation for 2008 and future periods.

In 2009, PPL Montana adjusted its previously recorded accrual by $8 million, $5 million after tax.  Of this total, $5 million, $3 million after tax, related to prior periods.  In March 2010, the Montana Supreme Court substantially affirmed the June 2008 Montana District Court decision.  As a result, in the first quarter of 2010, PPL Montana recorded a pre-tax charge of $56 million ($34 million after tax or $0.08 per share, basic and diluted, for PPL), representing estimated rental compensation for the first quarter of 2010 and prior years, including interest.  Rental compensation was estimated for periods subsequent to 2007, although such estimated amounts may differ from amounts ultimately determined by the Montana State Land Board.  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."  PPL Montana continues to accrue interest expense for the prior years and rent expense for the current year.  PPL Montana's total loss accrual at December 31, 2010 was $75 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.  Several amicus briefs have been filed supporting PPL Montana's petition, including, among others, a combined brief by the Edison Electric Institute and National Hydropower Association.  In October 2010, the State of Montana and PPL Montana filed respective reply briefs.  In November 2010, the Supreme Court requested the U.S. Solicitor General to provide its viewsoperates Colstrip on behalf of the federal government whetherco-owners.  The complaint is generally consistent with the Court should grant or deny PPL Montana's petition.  It is not known when that brief might be filed in 2011 or what the positionprior Notices and lists 39 separate claims for relief.  All but three of the Solicitor General will be.claims allege Prevention of Significant Deterioration (PSD) related violations under the federal Clean Air Act for various plant maintenance projects completed since 1992.  For each such project or set of projects, there are separate claims for failure to obtain a PSD permit, for failure to obtain a Montana Air Quality Permit to operate after the project(s) were completed and for operating after completion of such project(s) without "Best Available Control Technology".  The stayremaining three claims relate to the alleged failure to update the Title V operating permit for Colstrip to reflect the alleged major modifications described in the other claims, allege that the previous Title V compliance certifications were incomplete because they did not address the major plant modifications, and that numerous opacity violations have occurred at the plant since 2007.  The complaint requests injunctive relief and civil penalties on average of $36,000 per day per violation, including a request that the owners remediate environmental damage and that $100,000 of the judgment granted duringcivil penalties be used for beneficial mitigation

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projects.  In January 2014, trial in this matter as to liability was re-scheduled for March 2015.  A new date for trial as to remedies, if there is a finding of liability, has not been scheduled.

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

PJM/MISO Billing Dispute(PPL, PPL Energy Supply and PPL Electric)

In 2009, PJM reported that it had discovered a modeling error in the market-to-market power flow calculations between PJM and the MISO.  The error was a result of incorrect modeling of certain generation resources that have an impact on power flows across the PJM/MISO border.  Informal settlement discussions on this issue terminated in March 2010.  Also in March 2010, MISO filed two complaints with the FERC concerning the modeling error and related matters with a demand for $130 million of principal plus interest.  In April 2010, PJM filed answers to the complaints and filed a related complaint against MISO.  In its answers and complaint, PJM denies that any compensation is due to MISO and seeks recovery in excess of $25 million from MISO for alleged violations by MISO regarding market-to- market power flow calculations.  PPL participates in markets in both PJM and MISO.  The amount and timing of any payments by PJM to MISO or by MISO to PJM relating to these modeling errors is uncertain, as is the method by which PJM or MISO would allocate any such payments to PJM and MISO participants.  In June 2010, the FERC ordered the complaints to be consolidated and set for settlement discussions, followed by hearings if the discussions are unsuccessful.  In January 2011, the parties to this dispute filed a settlement with the FERC under which no compensation would be paid to either PJM or MISO and providing for certain improvements in how the calculations are administered going forward.  The settlement requires FERC approval.  PPL cannot predict the outcome of this matter.

Regulatory Issues

(All Registrants except PPL Energy Supply)

See Note 6 for information on regulatory matters related to utility rate regulation.

Enactment of Financial Reform Legislation (PPL and PPL Energy Supply)All Registrants)

InThe Dodd-Frank Act became effective in July 2010 the Dodd-Frank Act was signed into law.  Of particular relevance to PPL and PPL Energy Supply, the Dodd-Frank Act 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 however,also provides an exemption from mandatory clearing and exchange trading requirements for over-the-counter derivative transactions used to hedge or mitigate commercial risk.  Althoughthat the phrase "to hedge or mitigate commercial risk" is not defined in the Dodd-Frank Act, recent rules proposed by theU.S. Commodity Futures Trading Commission set forth an inclusive, multi-pronged definition for the phrase.  Based on this proposed definition and other requirements in the proposed rule, it is anticipated that transacti ons utilized by PPL and PPL Energy Supply should qualify if they are not entered into for speculative purposes.  The Dodd-Frank Act also provides that the Commodity Futures Trading Commission(CFTC) may impose collateral and margin requirements for over-the-counter derivative transactions, including those that are used to hedge commercial risk.  However, during drafting of the Dodd-Frank Act,as well as capital requirements for certain members of Congress adopted report language and issued a public letter stating that it was not their intention to impose margin and collateral requirements on counterparties that utilize these transactions to hedge commercial risk.  Finalentity classifications.  The CFTC is establishing final rules on major provisions in the Dodd-Frank Act through its rulemaking process.  Several final rules providing for the definition of the terms "swap", "swap dealer", and "major swap participant" became effective in October 2012.  The entity classification thresholds and requirements set forth in these final rules do not require the Registrants to register as either swap dealers or major swap participants.  Consequently, as commercial end users, the Registrants are not subject to the heightened regulatory requirements applicable to swap dealers or major swap participants, including impositionBusiness Conduct Standards, enhanced recordkeeping and reporting, clearing and exchange trading of collateralCFTC-mandated swaps and marginother complex requirements will be established through rulemakingsunder other CFTC regulations.  The Dodd-Frank Act and in most cases, will not take effect until at least 12 months afterits implementing regulations, however, have imposed on the date of enactment.  PPLRegistrants significant additional and PPL Energy Supplycostly recordkeeping, reporting and documentation requirements.

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.  PPLAdditionally, the burden that the Dodd-Frank Act and PPL Energy Supplyimplementing regulations impose on all market participants could cause decreased liquidity in the bilateral swap market as financial entities discontinue their proprietary trading operations.  Decreased liquidity could increase costs for Registrants to successfully meet hedge targets.  The Registrants will continue to evaluate the provisions of the Dodd-Frank Act and monitor developments related to its implementation.  At this time, PPL and PPL Energy Supply cannot predict the impact that the new law or its implementing regulations, will have on their business or operations, or the markets in which they transact business.

(PPL)

Utility Competition in Virginia

The Commonwealth of Virginia passed the Virginia Electric Utility Restructuring Act in 1999.  This act gave customers the abilitybut could incur significant costs related to choose their electric supplier and capped electric rates through December 2010.  KU subsequently received a legislative exemption from the customer choice requirements of this law.  In April 2007, however, the Virginia General Assembly amended the Virginia Electric Utility Restructuring Act, terminating the competitive market and commencing re-regulation of utility rates.  The new act ended the cap on rates at the end of 2008.  Pursuant to this legislation, the VSCC adopted regulations revising the rules governing utility rate increase applications.  As of January 2009, a hybrid model of regulation is being applied in Virginia, under which utility r ates are reviewed every two years.  KU's exemption from the requirements of the Virginia Electric Utility Restructuring Act, however, discharges KU from the requirements of the new hybrid model of regulation.  In lieu of submitting an annual information filing, KU has the option of requesting a change in base rates to recover prudently incurred costs by filing a traditional base rate case.  KU is also subject to other utility regulations in Virginia, including, but not limited to, the recovery of prudently incurred fuel costs through an annual fuel factor charge and the submission of integrated resource plans.

Kentucky Activities

Home Energy Assistance Program

During September 2007, the KPSC approved a five-year Home Energy Assistance program effective in October 2007.  The program was scheduled to terminate in September 2012, and is funded through a $0.15 per month meter charge.  This program was extended through September 2015 in the KPSC Order approving PPL's acquisition of LKE.

Gas Customer Choice Study

In April 2010, the KPSC commenced a proceeding to investigate natural gas retail competition programs, their regulatory, financial and operational aspects and potential benefits, if any, of such programs to Kentucky consumers.  A number of entities, including LG&E, are parties to the proceeding.  In December 2010, the KPSC issued an Order in the proceeding declining to endorse gas competition at the retail level, noting the existence of a number of transition or oversight costs and an uncertain level of economic benefits in such programs.  With respect to existing gas transportation programs available to large commercial or industrial users, the Order indicates that the KPSC will review utilities' current tariff structures, user thresholds and other terms and conditions of such programs, as part of such c ompanies' next regular gas rate cases.

Integrated Resource Planning

Integrated resource planning ("IRP") regulations in Kentucky require major utilities to make triennial IRP filings with the KPSC.  In April 2008, LG&E and KU filed their 2008 joint IRP with the KPSC.  The IRP provides historical and projected demand, resource and financial data, and other operating performance and system information.  The KPSC issued a staff report and Order closing this proceeding in December 2009.  Pursuant to the VSCC's December 2008 Order, KU filed its IRP in July 2009.  The filing consisted of the 2008 Joint IRP filed by LG&E and KU with the KPSC along with additional data.  The VSCC issued an Order in August 2010 finding the IRP was reasonable and in the public interest.  LG&E and KU anticipate filing a joint IRP with the KPSC in April 2011.

Green Energy Riders

In February 2007, LG&E and KU filed a Joint Application and Testimony for Proposed Green Energy Riders.  In May 2007, a KPSC Order was issued authorizing LG&E and KU to establish Small and Large Green Energy Riders, allowing customers to contribute funds to be used for the purchase of renewable energy credits.  During November 2009, LG&E and KU filed an application to both continue and modify the existing Green Energy Programs.  In February 2010, the KPSC approved the application, as filed.

Other

In February 2006, the KPSC initiated an administrative proceeding to consider the requirements of the federal Energy Policy Act of 2005 (Energy Act), Subtitle E Section 1252, Smart Metering, which concerns time-based metering and demand response, and Section 1254, Interconnections.  The Energy Act requires each state regulatory authority to conduct a formal investigation and issue a decision on whether or not it is appropriate to implement certain Section 1252 standards within eighteen months after the enactment of the Energy Act and to commence consideration of Section 1254 standards within a year after the enactment of the Energy Act.  Following a public hearing with all Kentucky jurisdictional electric utilities, in December 2006, the KPSC issued an Order in this proceeding indicating that the 2005 Energy Act Sectio n 1252 and Section 1254 standards should not be adopted.  However, all the KPSC jurisdictional utilities are required to file real-time pricing pilot programs for their large commercial and industrial customers.  LG&E and KU developed real-time pricing pilots for large industrial and commercial customers and filed the details of the plan with the KPSC in April 2007.  In February 2008, the KPSC issued an Order approving the real-time pricing pilot programs proposed by LG&E and KU for implementation for their large commercial and industrial customers.  The tariff was filed in October 2008, with an effective date of December 1, 2008.  LG&E and KU file annual reports on the program within 90 days of each plan year-end for the three-year pilot period.

Pursuant to a LG&E 2004 rate case settlement agreement, and as referred to in the Energy Act Administrative Order, LG&E made its responsive pricing and smart metering pilot program filing, which addresses real-time pricing for residential and general service customers, in March 2007.  In July 2007, the KPSC approved the application as filed for a small number of residential customers and a sampling of other customers, and authorized LG&E to establish the responsive pricing and smart metering pilot program, recovery of non-specific customer costs through the DSM billing mechanism and the filing of annual reports by April 1, 2009, 2010 and 2011.  LG&E must also file an evaluation of the program by July 1, 2011.

Pennsylvania Activities(PPL and PPL Electric)

Act 129 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 conservation service providers to implement all or a portion 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.  In October 2009, the PUC approved 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.  In September 2010, PPL Elect ric filed its Program Year 1 Annual Report and Process Evaluation Report.  PPL Electric also filed a petition requesting permission to modify two components of its EE&C Plan.  Various responses were filed to that petition which the PUC has assigned to two Administrative Law Judges for hearings and a recommended decision.  In December 2010, the Administrative Law Judges issued a recommended decision approving PPL Electric's request.  Parties have filed exceptions and reply exceptions to the recommended decision.  The PUC issued its final order in January 2011, approving the changes proposed by PPL Electric and directing PPL Electric to re-file its plan to reflect all changes made since it was initially approved.

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 procurement 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.  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 20 10, PPL Electric submitted a revised plan with a cost estimate of $38 million to be incurred over a five-year period, beginning in 2009,Act and filed a rider to recover these costs beginning January 1, 2011.  In December 2010, the PUC approved PPL Electric's rate rider to recover the costs of its smart meter program.regulations.

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

Under Act 129, the DSP competitive procurement plan must ensure adequate and reliable service "at least cost 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 approved PPL Electric's procurement plan for the period January 1, 2011 through May 31, 2013, and PPL Electric has begun purchasing under that plan.  In December 2010, the PUC approved PPL Electric's rate rider to recover the costs of providing default service.

New Jersey Capacity Legislation(PPL, PPL Energy Supply and PPL Electric)

New Jersey Capacity Legislation

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

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appeals of the FERC's order.  PPL, PPL Energy Supply and PPL Electric cannot predict the outcome of this proceeding.proceeding or the economic impact on their businesses or operations, or the markets in which they transact business.

AlsoIn addition, in February 2011, PPL, withand several other generating companies and utilities filed a complaint in FederalU.S. District Court in New Jersey challenging the Act on the grounds that the Actit violates well-established principles under the Supremacy Clause and the Commerce Clause of the United States Constitution.  In this action, the Plaintiffs requestU.S. Constitution and requesting declaratory and injunctive relief barring implementation of the Act by the Commissioners of the BPU.  PPL cannot predict the outcome of this proceeding.

FERC Formula 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.

BPU Commissioners.  In October 2008,2011, the FERC acceptedcourt denied 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 3 for information on a true-up of these revenues.

In May 2010, PPL Electric initiated the 2010 Annual Update of its formula rate.  In November 2010, a group of municipal customers taking transmission service in PPL Electric's zone filed a preliminary challenge to the update, and in December, they filed a formal challenge.  In January 2011, PPL Electric filed aBPU's motion to dismiss the proceeding and in September 2012 the U.S. District Court denied all summary judgment motions.  Trial of this matter was completed in June 2013.  In October 2013, the U.S. District Court in New Jersey issued a numberdecision finding the Act unconstitutional under the Supremacy Clause on the grounds that it infringes upon the FERC's exclusive authority to regulate the wholesale sale of electricity in interstate commerce.  The decision has been appealed to the challengesU.S. Court of Appeals for the Third Circuit by CPV Power Development, Inc., Hess Newark, LLC and submitted responses to allthe State of the challenges.New Jersey.  Oral arguments are scheduled for March 27, 2014.  PPL, PPL Energy Supply and PPL Electric cannot predict the outcome of this proceeding or the economic impact on their businesses or operations, or the markets in which remains pending before the FERC.they transact business.

Maryland Capacity Order

In September 2008, KU filed an application withApril 2012, the FERC for increasesMaryland Public Service Commission (MD PSC) ordered three electric utilities in Maryland to enter into long-term contracts to support the construction of new electric base rates applicablegenerating facilities in Maryland, specifically a 661 MW natural gas-fired combined-cycle generating facility to wholesale power sales contracts or interchange agreements involving, collectively, 12 Kentucky municipalities.be owned by CPV Maryland, LLC.  PPL believes the intent and effect of the action by the MD PSC is to encourage the construction of new generation in Maryland even when, under the FERC-approved PJM economic model, such new generation would not be economic.  The application requested a shift from an all-in stated unit charge rate to an unbundled formula rate, including an annual adjustment mechanism.  In May 2009, the FERC issued an Order approving a settlement among the partiesMD PSC action could depress capacity prices in PJM in the case, incorporating increasesshort term, impacting PPL Energy Supply's revenues, and harm the long-term ability of approximately 3% from prior ratesthe PJM capacity market to encourage necessary generation investment throughout PJM.

In April 2012, PPL and several other generating companies filed a returncomplaint in U.S. District Court in Maryland challenging the MD PSC order on equitythe grounds that it violates well-established principles under the Supremacy and Commerce clauses of 11%.the U.S. Constitution and requested declaratory and injunctive relief barring implementation of the order by the MD PSC Commissioners.  In May 2010, KU submittedAugust 2012, the court denied the MD PSC and CPV Maryland, LLC motions to dismiss the proceeding.  Trial of this matter was completed in March 2013.  In September 2013, the U.S. District Court in Maryland issued a decision finding the MD PSC order unconstitutional under the Supremacy Clause on the grounds that it infringes upon the FERC's exclusive authority to regulate the wholesale sale of electricity in interstate commerce.  The decision has been appealed to the FERCU.S. Court of Appeals for the proposed current annual adjustment to the formula rate.  This updated rate became effective on July 1, 2010, subject to certain review proceduresFourth Circuit by the wholesale requirements customersCPV Power Development, Inc. and the FERC, including potenti al refundsState of Maryland.  PPL, PPL Energy Supply, and PPL Electric cannot predict the outcome of this proceeding or the economic impact on their businesses or operations, or the markets in the case of disallowed costs or charges.

By mutual agreement, the parties' settlement of the 2008 application left outstanding the issue of whether KU must allocate the municipal customers a portion of renewable resources that it may be required to procure on behalf of its retail ratepayers.  An Order was issued by the FERC in July 2010, indicating that KU is not required to allocate a portion of any renewable resources to the 12 municipalities, thus resolving the remaining issue.which they transact business.

California ISO and Western U.S.Pacific 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.  Also, as previously reported, there has been further litigation about additional claims of2001.  Several parties subsequently claimed refunds for periods prior to October 2000.  In January 2011, PPL and the "California Parties" (collectively, three California utility companies, the California Public Utility Commission and certain California state authorities) filed a settlement under which PPL would receive approximately $2 million of its $17 million claim, together with interest.  Theat FERC must approve the settlement.  At December 31, 2010, PPL has reserved all of the non-payment exposure related to these sales.

In June 2003, the FERC took several actions as a result of several related investigations beyondthese sales.  In June 2003, the California ISO litigation.  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 neither PPL EnergyPlus norevidence.  In July 2012, PPL Montana believes itand the City of Tacoma, one of the two parties claiming refunds at FERC, reached a settlement whereby PPL Montana paid $75 thousand to resolve the City of Tacoma's $23 million claim.  The settlement does not resolve the remaining claim outstanding at December 31, 2013 by the City of Seattle for approximately $50 million.  In April 2013, the FERC issued an order on reconsideration allowing the parties to seek refunds for the period January 2000 through December 2000.  As a result, the City of Seattle may be able to seek refunds from PPL Montana for such period.  Hearings before a FERC Administrative Law Judge regarding the City of Seattle's refund claims were completed in October 2013.  Briefing was completed in January 2014 and an initial decision is a subject of these investigations.expected in mid-March 2014.

Although PPL and its subsidiaries believe that they have not engaged in any improper trading or marketing practices affecting the westernPacific Northwest markets, PPL and PPL Energy Supply cannot predict the outcome of the above-described investigations, lawsuits and proceedings or whether any PPL subsidiaries will be the subject of any additional governmental investigations or named in other lawsuits or refund proceedings.

PJM RPM Litigation(  Consequently, PPL and PPL Energy Supply and PPL Electric)cannot estimate a range of reasonably possible losses, if any, related to this matter.


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.& #160; 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, and the appeal was subsequently transferred to the U.S. Court of Appeals for the District of Columbia Circuit.  In February 2011, the U.S. Court of Appeals for the District of Columbia Circuit issued on order denying the appeal.  PPL cannot predict the outcome of this proceeding.
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(All Registrants)

In December 2008, 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, including PPL Energy Supply, to increase.  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 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 PJM and by other parties in response to PJM proposals could significantly affect the compensation available to suppliers of capacity participating in future RPM auc tions.  In March 2009, the FERC entered an order approving in part and disapproving in part the changes proposed by PJM.  In August 2009, the FERC issued an order granting rehearing in part, denying rehearing in part and clarifying its March 2009 order.  No request for rehearing or appeal of the August 2009 order was timely filed.  In October 2010, the August 2009 Order became final and will not have a material impact on PPL, PPL Energy Supply or PPL Electric.  As a result, the remaining issues in this matter are those referred to in the paragraph above.

FERC Market-Based Rate Authority

(PPL)

In July 2006, the FERC issued an Order in LG&E's and KU's market-based rate proceedings accepting their further proposal to address certain market power issues the FERC had claimed would arise upon an exit from the MISO.  In particular, LG&E and KU received permission to sell power at market-based rates at the interface of control areas in which it may be deemed to have market power, subject to a restriction that such power not be intentionally re-sold back into such control areas.  However, restrictions exist on sales by LG&E and KU of power at market-based rates in the LG&E/KU and Big Rivers Electric Corporation control areas.  In June 2007, the FERC issued Order No. 697 implementing certain reforms to market-based rate regulations, including restrictions similar to those previously in place for LG&E's and KU's power sales at control area interfaces.  In December 2008, the FERC issued Order No. 697-B potentially placing additional restrictions on certain power sales involving areas where market power is deemed to exist.  As a condition of receiving and retaining market-based rate authority, LG&E and KU must comply with applicable affiliate restrictions set forth in the FERC regulation.

In June 2009, the FERC issued Order No. 697-C which generally clarified certain interpretations relating to power sales and purchases at control area interfaces or into control areas involving market power.  In July 2009, the FERC issued an order approving LG&E's and KU's September 2008 tri-annual application for updated market-based rate authority.  During July 2009, affiliates of LG&E and KU completed a transaction terminating certain prior generation and power marketing activities in the Big Rivers Electric Corporation control area, which termination should ultimately allow a filing to request a determination that LG&E and KU are no longer deemed to have market power in such control area.

LG&E and KU conduct certain of their wholesale power sales activities in accordance with existing market-based rate authority principles and interpretations.  Future FERC proceedings relating to Orders 697 or market-based rate authority could alter the amount of sales made at market-based versus cost-based rates.

(PPL and PPL Energy Supply)

In December 1998, the FERC authorized LG&E, KU and PPL EnergyPlus to make wholesale sales of electric powerelectricity 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 Northwest market-based rate filing for PPL Montana and a Northeast market-based rate filing for most of the other PPL subsidiaries in PJM's region.  In December 2010,June 2011, FERC approved PPL's market-based rate update for the Eastern and Western regions and PPL filed its market-based rate update for the Eastern region.  In JanuarySoutheast region, including LG&E and KU in addition to PPL EnergyPlus.  Also, in June 2011, PPL filed the market-based rate updateFERC 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 Western region.

Currently, a seller grantedBREC balancing area and removing restrictions on their 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'sin such region.  In December 2013, PPL filed 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 Appealsupdates 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 refundsEastern 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 court decisions.  At this time,Western regions.  PPL cannot predict the impactultimate outcome of these court decisions on the FERC's future market-based rate authority program or on PPL's business.

MISO Revenue Sufficiency Guarantee(PPL)

In August 2010, the FERC issued Orders accepting most facets of several MISO Revenue Sufficiency Guarantee ("RSG") compliance filings.  The FERC ordered the MISO to issue refunds for RSG charges that were imposed by the MISO on the assumption that there were rate mismatches for the period beginning November 2007 through the present.  There is no financial statement impact to LG&E and KU from this Order, as the MISO had anticipated that the FERC would require these refunds and had preemptively included them in resettlements paid in 2009.  The FERC denied the MISO's proposal to exempt certain resources from RSG charges, effective prospectively.  The FERC accepted portions and rejected portions of the MISO's proposed RSG rate Redesign Proposal, which will be effective when certain software is ready for implementation subject to further compliance filings.  The impact of the Redesign Proposal on LG&E and KU cannot be estimatedupdate filings at this time.

In August 2009, the FERC determined that the MISO had failed to demonstrate that its proposed exemptions to real-time RSG charges were just and reasonable.  In November 2009, the MISO made a compliance filing incorporating the rulings of the FERC orders and a related task-force, with a primary open issue being whether certain of the tariff changes are applied prospectively only or retroactively to approximately January 2009.  The conclusion of the RSG matter, including the retroactivity decision, may result in refunds to LG&E and KU.  PPL cannot presently predict the outcome of this matter.Electricity - Reliability Standards

(PPL and PPL Energy Supply)

IRS Synthetic Fuels Tax Credits

PPL, through its subsidiaries, had interests in two synthetic fuel production facilities:  the Somerset facility, located in Pennsylvania, 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.

(PPL, PPL Energy Supply and PPL Electric)

IRS Tax Litigation

In January 2011, the IRS appealed, to the U.S. Court of Appeals for the Third Circuit, the U.S. Tax Court's decision that the 1997 U.K. Windfall Profits Tax (WPT) is a creditable tax for U.S. Federal income tax purposes.  In its decision, the Tax Court ruled on two issues: (1) the 1997 U.K. WPT imposed on all U.K. privatized utilities, including PPL's U.K. subsidiary, was creditable against the Company's U.S. income taxes; and (2) PPL Electric's street lighting assets could be depreciated for tax purposes over seven years as permitted for "property without a class life" instead of the 20-year depreciation recovery period argued by the IRS.  While not certain, it appears that the IRS has recommended not to prosecute an appeal of the street lighting decision.  PPL filed its tax returns for 1997 and all int ervening years on the basis that the WPT was creditable and that the appropriate tax depreciable life for its street lighting assets was seven years.  Therefore, the cash benefit resulting from these items has already been realized.  Prior to the Tax Court decision, the Company had accrued a tax reserve equivalent to the full amount of the tax and interest exposure for these two items.  See Note 5 for additional information on the release of tax reserves based on this favorable Tax Court decision.  PPL cannot predict the outcome of this matter.

Energy Policy Act of 2005 - Reliability Standards(PPL, PPL Energy Supply and PPL Electric)

NERC is responsible for establishing and enforcing mandatory reliability standards (Reliability Standards) regarding the bulk power system.  The FERC oversees this process and independently enforces the Reliability Standards.

The Reliability Standards have the force and effect of law and apply to certain users of the bulk power electricity system, including electric utility companies, generators and marketers.  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 self-report potential violations of certain applicable reliability requirements and submittedsubmit accompanying mitigation plans.plans, as required.  The resolution of certaina number of these potential violation reportsviolations is pending.  In April 2010, a PPL Electric settlement with theAny Regional Reliability Entity (including RFC resolving four self-reported potential violations became final.  PPL Electric agreed to pay a settlement amount of $290,000 and, among other things, to engage in additional vegetation clearing at a cost of approximately $7 million over the next three years.  The settlement amount was paid in May 2010.  Any regional reliability entityor SERC) determination concerning the resolution of v iolationsviolations of the Reliability Standards remains subject to the approval of the NERC and the FERC.  PPL and its subsidiaries cannot predict the outcome of these matters.

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 may 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 initiated its consideration of proposed changes to Reliability Standards to address the impacts of Geomagnetic Disturbances on the reliable operation of the bulk-power system, which might, among other things, lead to a requirement to install equipment that blocks geo-magnetically induced currents on implicated transformers.  On May 16, 2013, FERC issued Order No. 779, requiring NERC to submit two types of Reliability Standards for FERC's approval in twelve month intervals.  The first type would require certain owners and operators of the nation's electricity infrastructure, such as the Registrants, to develop and implement operational procedures to mitigate the effects of Geomagnetic Disturbances on the bulk-power system.  This NERC proposed standard was filed by NERC with FERC for approval in January of 2014, with a comment due date of March 24, 2014.  The second type is to require owners and operators of the bulk-power system to assess certain Geomagnetic Disturbance events and develop and implement plans to protect the bulk-power system from those events and must be filed by NERC with FERC for approval by January 22, 2015.  The Registrants may be required to make significant expenditures in new equipment or penaltiesmodifications to their facilities to comply with the new requirements.  The Registrants are unable to predict the amount of any expenditures that may be imposed.required as a result of the adoption of any Reliability Standards for Geomagnetic Disturbances.

Settled Litigation (PPL and PPL Energy Supply)

U.K. Overhead Electricity NetworksSpent Nuclear Fuel Litigation

In 2002, for safety reasons, the U.K. Government issued guidance that low voltage overhead electricity networks within three meters horizontal clearance ofMay 2011, PPL Susquehanna entered into a building should either be insulated or relocated.  This imposed a retroactive requirement on existing assets that were built with lower clearances.  In 2008, the U.K. Government determined that the U.K. electricity network should complysettlement agreement with the guidance issued.  WPD estimatesU.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 totaling $56 million to "Fuel" on the Statement of Income 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 costUnited States government

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for costs paid or injuries sustained related to storing spent nuclear fuel at the Susquehanna plant through December 31, 2013.  In January 2014, PPL Susquehanna entered into a new agreement with the Department of compliance will be $87 million.  The projected expenditures overEnergy to extend the next fivesettlement agreement on the same terms as the prior agreement for an additional three 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 U.K. Government has determined that WPD (South Wales) should comply by 2015 and WPD (South West) by 2018 .the end of 2016.

To improve network reliability, in 2009, the U.K. Government enforced a regulation requiring network operators to implement a risk-based program over 25 years to clear trees within falling distance of key high-voltage overhead lines.  WPD estimates that the cost of compliance will be $100 million over the 25-year period.  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.

Environmental Matters - Domestic

(PPL, PPL Energy Supply and PPL Electric)All Registrants)

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 operatingoperation of certain facilities or performance of certain operations to comply with statutes, regulations and other requirements of regulatory bodies or courts.  In addition, legal challenges to new environmental permits or rules add to the uncertainty of estimating the future cost impact of these permits and rules.

LG&E and KU are entitled to recover, through the ECR mechanism, certain costs of complying with the Clean Air Act, as amended, and those federal, state or local environmental requirements which are applicable to coal combustion wastes and by-products from facilities that generate electricity from coal in accordance with approved compliance plans.  Costs not covered by the ECR mechanism for LG&E and KU and all such costs for PPL Electric are subject to rate recovery before the companies' respective state regulatory authorities, or the FERC, if applicable.  Because PPL Electric does not own any generating plants, its exposure to related environmental compliance costs is reduced.  As PPL Energy Supply is not a rate-regulated entity, it cannot seek to recover environmental compliance costs through the mechanism of rate recovery.  PPL, PPL Electric, LKE, LG&E and KU can provide no assurances as to the ultimate outcome of future environmental or rate proceedings before regulatory authorities.

(All Registrants except PPL and PPL Energy Supply)Electric)

Air

To comply with air related requirements described below, 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 a combined $2.1 billion for LG&E and KU and $400 million for PPL Energy Supply.  Actual costs may be significantly lower or higher depending on the final requirements.  Environmental compliance costs incurred by LG&E and KU are subject to recovery through a rate recovery mechanism.  See Note 3 for additional information.

The Clean Air Act addresses, among other things, emissions causing acid deposition, installation of best available control technologies for new or substantially modified sources, attainment of national ambient air quality standards, toxic air emissions and visibility standards in the U.S.  Amendments to the Clean Air Act requiring additional emission reductions are likely to continue to be proposed in the U.S. Congress.  The Clean Air Act allows states to develop more stringent regulations and in some instances, as discussed below, Kentucky, Pennsylvania and Montana have done so.

CSAPR (formerly Clean Air Transport Rule (formerly CAIR)Rule) and CAIR

In July 2011, the EPA adopted the CSAPR.  The EPA has proposed a new Clean Air Transport Rule (Transport Rule) to replaceCSAPR replaced the EPA's previous rule called CAIR which was struck downinvalidated in July 2008 by the U.S. Court of Appeals for the District of Columbia Circuit (the(D.C. Circuit Court).  CAIR subsequently was effectively reinstated by the D.C. Circuit Court in December 2008, pending finalization of the Transport Rule.  The final Transport Rule is expectedCSAPR.  Like CAIR, CSAPR targeted sources in 2011.

CAIRthe eastern U.S. and the new Transport Rule are meant to facilitate attainment of ambient air quality standards for ozone and fine particulates by requiringwould have required reductions in sulfur dioxide and nitrogen oxides.  oxides in two phases (2012 and 2014).

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

The Transport Rule would establish a newKentucky fossil-fueled generating plants can meet the CAIR sulfur dioxide emission allowance caprequirements by utilizing sulfur dioxide allowances (including banked allowances and trade program that is completely independent of the current Acid Rain Program, and a newoptimizing existing controls).  To meet standards for nitrogen oxide emission allowance cap and trade program.  The EPA is seeking comment on several different approaches that would allow varying degrees of trading, but all trading would be more restrictive thanoxides under the previous CAIR, rule.  The first phasethe Kentucky companies will need to buy allowances and/or make operational changes.  LG&E and KU do not currently anticipate that the costs of meeting these reinstated CAIR standards will be significant.

PPL Energy Supply's Pennsylvania fossil-fueled generating plants can meet the Transport Rule that would capCAIR sulfur dioxide emission requirements with the existing scrubbers that were placed in service in 2008 and 2009.  To meet the CAIR standards for nitrogen oxide emissions would become effective in 2012.   The second phase, loweringoxides, PPL Energy Supply will need to buy allowances and/or make operational changes, the sulfur dioxide cap, would become effective in 2014.costs of which are not anticipated to be significant.

PPL's preliminary review of the allocations proposed by the EPA in the Transport Rule indicates that, starting in 2012, greater reductions in sulfur dioxide would likely be required for PPL than were required under CAIR starting in 2015, because the number of allowances allocated to PPL will be lower than what was allocated to PPL under CAIR and the more restrictive trading under the Transport Rule reduces compliance flexibility.  PPL may look at more aggressive operation of existing scrubbers, fuel switching and/or dual fuel capability.  All of these options could impose significant costs.  The EPA has developed alternative proposals for allowance allocations which may reduce the impact.National Ambient Air Quality Standards

With respect to nitrogen oxide, the Transport Rule proposes a slightly higher amount of allowances for PPL's Pennsylvania plants but a lower amount for PPL's Kentucky plants compared to those allocated under CAIR.  However, due to the more restrictive trading program, the purchase of nitrogen oxide allowances may not be a reliable compliance option.  Therefore, other compliance options, such as the installation of additional SCRs or SNCRs at one or more PPL units, are being evaluated.

In addition to the reductions in sulfur dioxide and nitrogen oxide required for PPL's Pennsylvania and Kentucky plants due to the Transport Rule, PPL'sfossil-fueled generating plants 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,oxides, sulfur dioxide and/or fine particulates.  The

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

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

PPL, PPL Energy Supply, LKE, LG&E and KU anticipate that some of the measures required for compliance with the CAIR, or the MATS, or the Regional Haze requirements (as discussed below), such as upgraded or new sulfur dioxide scrubbers at certain plants and, in the case of LG&E and KU, the previously announced retirement of coal-fired generating units at the Cane Run, Green River and Tyrone plants, will help to develop plans by 2014 to bring those areas into attainment by 2017.  For areas in attainment or unclassifiable, states are required to develop maintenance plans by mid-2013 that demonstrate continued attainment.  0;achieve compliance with the new one-hour sulfur dioxide standard.  If additional reductions were to be required, the costs to PPLfinancial impact could be significant.  The short-term impact on the Corette plant from the EPA's final designation of part of Yellowstone County in Montana as non-attainment (as noted above) is not expected to be significant, as PPL Energy Supply previously announced its intent to place the plant in long-term reserve status beginning in April 2015.

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

Citing its authority under the Clean Air Act, in 2005,MATS

In May 2011, the EPA issued the Clean Air Act Mercury Regulations (CAMR) affecting coal-fired power plants.  Since CAMR was overturned inpublished a 2008 U.S. Circuit Court decision, the EPA is now proceeding to develop standards imposing MACT forproposed regulation requiring stringent reductions of mercury emissions and other hazardous air pollutants from electric generating units.  Under a recent approved settlement,power plants.  In February 2012, the EPA published the final rule, known as the MATS, with an effective date of April 2012.  The rule is being challenged by industry groups and states in the D.C. Circuit Court, where oral arguments were held in December 2013.  The rule provides for a three-year compliance deadline with the potential for a one-year extension as provided under the statute.  PPL has received compliance extensions for certain plants in Kentucky and Pennsylvania.  LG&E, KU and PPL Energy Supply are considering extension requests for other plants as well.

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

With respect to PPL Energy Supply's Pennsylvania plants, PPL Energy Supply believes that installation of chemical additive systems may be necessary at certain coal-fired plants, the capital cost of which is not expected to be significant.  PPL Energy Supply continues to analyze the potential impact of MATS on operating costs.  With respect to PPL Energy Supply's Montana plants, modifications to the air pollution controls installed on Colstrip may be required, the cost of which is not expected to issue final MACTbe significant.  For the Corette plant, PPL Energy Supply announced in September 2012 its intention, beginning in April 2015, to place the plant in long-term reserve status, suspending the plant's operation due to expected market conditions and the costs to comply with the MATS requirements.  The Corette plant was determined to be impaired in December 2013.  See Note 18 for additional information.  PPL Energy Supply, LG&E and KU are continuing to conduct in-depth reviews of the MATS, including the potential implications to scrubber wastewater discharges.  See the discussion of effluent limitations guidelines and standards by November 2011 and compliance is statutorily required three years later.  In order to develop these standards, the EPA has collected information from coal- and oil-fired electric utility steam generating units.below.

Regional Haze and Visibility

The EPA's regional haze programs were developed under the Clean Air Visibility Rule was issuedAct to eliminate man-made visibility degradation by 2064.  Under the EPA in June 2005programs, states are required to address regional haze or regionally-impaired visibility caused by multiple sources over a wide area.  The rule requirestake action via state plans to make reasonable progress every decade, including the application of Best Available Retrofit Technology (BART) for certain electric generating units.  Underon power plants commissioned between 1962 and 1977.

The primary power plant emissions affecting visibility are sulfur dioxide, nitrogen oxides and particulates.  To date, the focus of regional haze activity has been the western U.S. because the EPA had determined that the regional trading program in the eastern U.S. under CSAPR satisfied BART rule, PPL submittedrequirements to reduce sulfur dioxide and nitrogen oxides.  However, the D.C. Circuit Court's August 2012 decision to vacate and remand CSAPR and to implement CAIR in its place on an interim basis leaves power plants located in the eastern U.S., including PPL's plants in Pennsylvania DEP its analysesand Kentucky, exposed to reductions in sulfur dioxide and nitrogen oxides as required by BART, unless the D.C. Circuit Court's decision, now pending before the U.S. Supreme Court, is overturned.


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In addition to this exposure stemming from the remand of the visibility impacts of particulate matter emissions from MartinsCSAPR, LG&E's Mill Creek Units 3 and 4 Brunner Island Units 2 and 3 and Montour Units 1 and 2.  No analysis was submitted for sulfur dioxide or nitrogen oxides, because the EPA determined that meeting the requirements for CAIR also meets the BART requirements for those pollutants.  Although the EPA has not yet expressly stated that a similar approach will be taken under the Transport Rule, the EPA has not reques ted any further studies.  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.

Also under the BART rule, 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.  The EPA responded 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 data related to the Colstrip generating plant non-BART-affected emission sources.  PPL responded to this request in March 2009.  PPL has not received comments from the EPA on these submissions.

In November 2010, PPL Montana received a request from EPA Region 8, under EPA's Reasonable Further Progress goals of the Regional Haze Rules to provide further analysis with respect to Colstrip Units 3 and 4.  Colstrip's Units 3 and 4 are not BART eligible units and are already well controlled.  PPL completed a high level analysis of various control optionsrequired to reduce sulfuric acid mist emissions of sulfur dioxide, and particulate matter and submitted that analysis to EPA in January 2011.  The analysis shows that these units are well controlled that any incremental reductions would not be cost effective and that further analysis would not be warranted.  PPL also concluded that further analysis for nitrogen oxides was not justifiable as these units installed controls under a Consent Decree in which the EPA had previousl y agreed that, when implemented, would satisfy the requirements for installing BART for nitrogen oxides.

PPL cannot predict whether any additional reductions will be required in Pennsylvania or Montana.  If additional reductions are required, the costs could be significant depending on what is required.

LG&E and KU also submitted analyses of the visibility impacts of its Kentucky BART-eligible sources to the Kentucky Division for Air Quality (KDAQ).  Only LG&E's Mill Creek plant wasbecause they were determined to have a significant regional haze impact.  The KDAQ has submitted aThese reductions are in the Kentucky Division of Air Quality's regional haze state implementation plan (SIP)that was submitted to the EPA.  LG&E is currently installing sorbent injection technology to comply with these reductions, the costs of which are not expected to be significant.

In Montana, the EPA which requiresRegion 8 developed the Mill Creek plantregional haze plan as the MDEQ declined to reduce its sulfuric acid mist emissions fromdevelop a BART state implementation plan.  The EPA finalized the plan ("Federal Implementation Plan" or "FIP") in 2012.  The final FIP assumed no additional controls for Corette or Colstrip Units 3 and 4.  After approval4, but proposed tighter limits for Corette and Colstrip Units 1 and 2.  PPL Energy Supply expects to meet these tighter permit limits at Corette without any significant changes to operations, although other requirements have led to the planned suspension of operations at Corette beginning in April 2015 (see "MATS" above).  Under the Kentucky SIP by EPAfinal FIP, Colstrip Units 1 and revision2 may require additional controls, including the possible installation of an SNCR and other technology, to meet more stringent nitrogen oxides and sulfur dioxide limits.  The cost of these potential additional controls, if required, could be significant. Both PPL and environmental groups have appealed the Mill Creek plant's Title V air permit, sorbent injection controls will be installed atfinal FIP rules to the plant to reduce sulfuric acid mist emissions.U.S. Court of Appeals for the Ninth Circuit.

New Source Review (NSR)

The EPA has reinitiatedcontinued its NSR enforcement efforts.  This initiative targetsefforts targeting coal-fired powergenerating plants.  The EPA has asserted that modification of 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.  The requests are similar to those that PPL received several years ago for its Colstrip, Coretteplants, and Martins Creek plants. PPL and the EPA have exchanged certain information regarding this matter.  In January 2009, PPL, PPL Energy Supply and other companies that own or operate the Keystone plant in Pennsylvania received a notice of violation from the EPA alleging that certain projects were undertaken without proper NSR comp liance.compliance.  In May and November 2012, PPL Montana received information requests from the EPA regarding projects undertaken during a Spring 2012 maintenance outage at Colstrip Unit 1.  In September 2012, PPL Montana received an information request from the Montana Department of Environmental Quality regarding Colstrip Unit 1 and other projects.  PPL and PPL Energy Supply cannot predict the outcome of this matter.these matters, and cannot estimate a range of reasonably possible losses, if any.

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

In August 2007, LG&E and KU received information requests for theirthe Mill Creek and Trimble County plants, and KU received requests for the Ghent plants,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.matters, and cannot estimate a range of reasonably possible losses, if any.

In March 2009, KU received a noticeStates and environmental groups also have commenced litigation alleging violations of violation alleging that flue gas desulfurization and SCR controls were installed at the Ghent plant without proper NSR compliance.  In December 2009,regulations by coal-fired generating plants across the EPA issued an information request seeking additionalnation.  See "Legal Matters" above for information on this matter.  KU has exchanged settlement proposalsa lawsuit filed by environmental groups in March 2013 against PPL Montana and other information with the EPA regarding impositionowners of additional permit limits and emission controls and anticipates continued settlement negotiations.  In addition, any settlement or future litigation could potentially encompass a September 2007 notice of violation alleging opacity violations at the plant. Depending on the provisions of a final settlement or the results of litigation, if any, resolution of this matter could involve significant increased operating and capital expenditures. &# 160;PPL is currently unable to predict the final outcome of this matter.

KU has entered a consent decree, approved by the federal district court in March 2009, which resolved notices of violation issued by the EPA which alleged NSR and state air permit violations at the Brown plant.  The consent decree includes provisions for the surrender of excess ozone season nitrogen oxide allowances estimated at 650 allowances annually for eight years; installation of flue gas desulfurization systems (sulfur dioxide removal systems, or scrubbers), by December 31, 2010; installation of an SCR by December 31, 2012 and compliance with specified emission limits and operational restrictions.  KU is currently implementing compliance measures as required by the consent decree.Colstrip.

If PPL subsidiaries are found to have violated NSR regulations by significantly increasing pollutants through a major plant modification, PPL, PPL Energy Supply, LKE, LG&E and KU would, among other things, be required to meet stringent permit limits reflecting Best Available Control Technology (BACT) for pollutants meeting the emissions of any pollutant found to have significantly increased due to a major plant modification.National Ambient Air Quality Standards (NAAQS) in the area and reflecting Lowest Achievable Emission Rates (LAER) for pollutants not meeting the NAAQS in the area.  The costs to meet such limits, including installation of technology at certain units, could be significant.

StatesTC2 Air Permit (PPL, LKE, LG&E and environmental groups also have initiated enforcement actions and litigation alleging violations 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.

Pursuant to the 2007 U.S. Supreme Court decision on global climate change, as discussed below, the EPA has announced that it will regulate carbon dioxide emissions from new or modified stationary sources under its NSR regulations beginning January 2011.  The NSR regulations require major new or modified sources of regulated pollutants to receive pre-construction and operation permits with limits that prevent the significant deterioration of air pollution in areas that are in attainment of the ambient air quality standards for these pollutants.  In May 2010, the EPA published a final rule establishing thresholds for regulating GHG emissions from major new or modified sources.  Combined carbon dioxide emissions or carbon dioxide equivalent emissions of 100,000 tons or more per year will classify a source as maj or for permitting applicability purposes.  The threshold for a major modification of a major source is an increase of carbon dioxide or carbon dioxide equivalent emissions of 75,000 tons per year.  If the modifications result in emissions increases exceeding 75,000 tons per year, the plant will need to conduct an analysis of best available control technology for GHG and meet limits based on best available control technology.  To date, the EPA has not provided final guidance on what constitutes best available control technology for GHG emissions, but has indicated in draft guidance that it may consider efficiency projects and other options as possible best available control technology for carbon dioxide emissions from power plants.  In addition, in December 2010, the EPA announced that it intends to promulgate New Source Performance Standards addressing GHG emissions from new and existing power plants, with a proposed rule anticipated in July 2011 and a final rule in Ma y 2012.  The implications of these developments, including the outcome of any litigation challenging the regulation, are uncertain.

Opacity

(PPL and PPL Energy Supply)

From time to time, emissions from PPL's power plants may cause opacity issues, which may raise environmental concerns.  PPL addresses these issues on a case-by-case basis.  If it is determined that actions must be taken to address opacity issues, such actions could result in costs that are not now determinable, but could be significant.

Trimble County Unit 2 Air PermitKU)

The Sierra Club and other environmental groups petitioned the Kentucky Environmental and Public Protection Cabinet to overturn the air permit issued for the TC2 baseload generating unit, but the agency upheld the permit in an order issued in September 2007.  In response to subsequent petitions by environmental groups, the EPA ordered certain non-material changes to the permit which, in January 2010, were incorporated into a final revised permit issued by the KDAQ in January 2010.KDAQ.  In March 2010, the environmental groups petitioned the EPA to object to the revised state permit.  Until the EPA issues a final ruling

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on the pending petition and all available appeals have beenare exhausted, PPL, LKE, LG&E and KU cannot predict the final outcome of this matter.matter or the potential impact on the capital costs of this project, if any.

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

In the 2011 to 2013 time period, the Louisville Metro Air Pollution Control District issued several notices of violation alleging violations of local air quality rules at the Cane Run plant.  In November 2013, LG&E entered into a settlement resolving the pending citations in return for payment of a civil penalty in a non-material amount and performance of remedial measures not expected to result in material costs.

On September 6, 2013, PPL, LKE and LG&E received a letter on behalf of two residents adjacent to the Cane Run plant notifying various federal, state, and local agencies of their intent to file a citizen suit for alleged violations of the Clean Air Act (CAA) and Resource Conservation and Recovery Act (RCRA).  On December 16, 2013, six residents, on behalf of themselves and others similarly situated, filed a class action complaint against LG&E and PPL in the U.S. District Court for the Western District of Kentucky for alleged violations of the CAA and RCRA.  In addition, these plaintiffs assert common law claims of nuisance, trespass, and negligence.  These plaintiffs seek injunctive relief and civil penalties that would accrue to governmental agencies, plus costs and attorney fees, for the alleged statutory violations.  Under the common law claims, these plaintiffs seek monetary compensation and punitive damages for property damage and diminished property values for a class consisting of residents within four miles of the plant.  In their individual capacities, these plaintiffs seek compensation for alleged adverse health effects.  PPL, LKE and LG&E cannot predict the outcome of this matter or the potential impact on operations of the Cane Run plant.  LG&E has previously announced that it anticipates retiring the coal-fired units at Cane Run before the end of 2015.

(PPL and PPL Energy Supply)All Registrants)

Global Climate Change

There is concern nationally and internationally about global climate change and the possible contribution of GHG emissions including, most significantly, carbon dioxide from the combustion of fossil fuels.  This has resulted in increased demands for carbon dioxide emission reductions from investors, environmental organizations, government agencies and the international community.  These demands and concerns have led to federal legislative proposals, actions at regional, state and local levels, litigation relating to GHG emissions and the EPA regulations on GHGs.

Greenhouse Gas Legislation

Climate change legislation was being considered by Congress last year, but debate on such legislation has been halted given other competing legislative priorities and the November 2010 elections.  The timing and elements of any future legislation addressing GHG emission reductions are uncertain and may depend on the 2011 Congressional agenda.  At the state level, the 2010 elections have also reduced the likelihood of GHG legislation in the near term.

Greenhouse Gas Regulations and Tort Litigation

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

In June 2013, President Obama released his Climate Action Plan which reiterates the goal of reducing greenhouse gas emissions in the U.S. "in the range of" 17% below 2005 levels by 2020 through such actions as regulating power plant emissions, promoting increased use of renewables and clean energy technology, and establishing tighter energy efficiency standards.  Also, by Presidential Memorandum the EPA was directed to issue a BACT analysis for projects that trigger such a review.  In ad dition, New Source Performance Standardsrevised proposal for new and existing power plants are expected(a prior proposal was issued in 2012) by September 20, 2013, with a final rule in a timely fashion thereafter, and to issue proposed standards for existing plants by June 1, 2014 with a final rule to be issued by June 1, 2015.  The EPA was further directed to require that states develop implementation plans for existing plants by June 2016.  Regulation of existing plants could have a significant industry-wide impact depending on the structure and stringency of the final rule and the state implementation plans.  The Administration's recent increase in its estimate of the "social cost of carbon" (which is used to calculate benefits associated with proposed regulations) from $23.80 to $38 per metric ton in 2015 may also lead to more costly regulatory requirements; the White House Office of Management and Budget (OMB) has opened this issue for public comment.  Additionally, the Climate Action Plan requirements related to preparing the U.S. for the impacts of climate change could affect PPL and others in the industry as modifications to electricity delivery systems to improve the ability to withstand major storms may be needed in order to meet those requirements.

The EPA issued its revised proposal for new sources on September 20, 2013 as directed by the White House.  This proposal was published in the Federal Register on January 8, 2014, with comments due on March 10, 2014.  Unlike the EPA's prior proposal, the EPA's revised proposal established separate emission standards for coal and gas units based on the application of different technologies.  The coal standard is based on the application of partial carbon capture and sequestration technology, but because this technology is not presently commercially available, the revised proposal effectively precludes the construction of new coal plants.  The EPA proposed the same standard for NGCC power plants as was proposed in July 20112012 and finalized in May 2012.  See NSR discussion above.may not be consistently achievable.  In addition, the EPA deleted the explicit exemption previously proposed for simple-cycle natural gas plants.

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At the regional level, ten northeastern states signedhave been participating in 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, fromcovers electric power plants with capacity greater than 25 MW.  The MOU also providesprogram calls for a 10% reduction in carbon dioxide emissions from base levelsthese plants by 2019.

2019 compared to 2005 levels.  Pennsylvania has not stated an intention to join the RGGI, but has enacted the Pennsylvania Climate Change Act of 2008 (PCCA).  The PCCA established a Climate Change Advisory Committee to advise the DEPPADEP on the development of a Climate Change Action Plan.  In December 2009,2013, the Advisory Committee finalized itsissued an updated Climate Change Action Report which identifiesand identified specific actions that could result in reducing GHG emissions by 30% by 2020.  SomeThe report recognized some legislative initiatives that were enacted since 2009 that facilitated reductions in GHG emissions and made a number of legislative recommendations that include amending 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 takenPA AEPS Act to implementinclude additional waste-to-energy facilities, providing incentives for coal mine methane usage, providing incentives for alternative fuel vehicles and addressing the recommendationslong-term viability issues of the report.  In addition, legislation has been introducedcarbon capture and amendments filed to several bills that would, if enacted, significantly in crease renewable and solar supply requirements.  It is highly unlikely that this legislation will achieve passage in the 2011 legislative session.

Eleven Western states, including Montana and certain 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 GHG emission allocations, offsets, and reporting recommendations.sequestration.

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.  AIn November 2011, the Council issued a final plan is expectedreport to the Secretary of Kentucky's Energy and Environment Cabinet for his consideration.  The final report acknowledged that the recommendations would require additional review and analysis prior to implementation, and that many of the recommendations would likely require, in early 2011.part, further legislative or regulatory actions.  The impact of any such plan is not now determinable.  It is highly unlikely that legislation requiring mandatory GHG reductions willdeterminable, but the costs to comply with the plan could be adopted in Kentucky in 2011.significant.

A number of lawsuits have been filed asserting common law claims including nuisance, trespass and negligence against various companies with GHG emitting facilities,plants and, although the decided cases to date have not sustained claims brought on the basis of these theories of liability, the law remains unsettled on these claims.  In September 2009, the U.S. Court of Appeals for the Second Circuit in the case of AEP v. Connecticut reversed a federal district court's decision and ruled that several states and public interest groups, as well as the City of New York, could sue five electric utility companies under federal common law for allegedly causing a public nuisance as a result of their emissions of GHGs.  In December 2010,June 2011, the U.S. Supreme Court announcedoverturned the Second Circuit and held that it will review this decision.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 recently(Fifth Circuit) declined to overturn a district court ruling that pla intiffsplaintiffs 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 LG&E and KULKE as a defendant based upon emissions from the Kentucky plants.  In January 2011, the Supreme Court denied a pending petition to reverse the Fifth Circuit's ruling.  In May 2011, the plaintiffs in the Comer case filed a substantially similar complaint in federal district court in Mississippi against 87 companies, including KU and three other indirect subsidiaries of LKE, under a Mississippi statute that allows the re-filing of an action in certain circumstances.  In March 2012, the Mississippi federal district court granted defendants' motions to dismiss the state common law claims.  Plaintiffs appealed to the U.S. Court of Appeals for review which has effectively brought the case to an end.  Notwithstanding, additionalFifth Circuit, and in May 2013, the Fifth Circuit affirmed the district court's dismissal of the case.  Additional litigation in federal and state courts over thesesuch issues is continuing.  PPL, LKE and KU cannot predict the outcome of these lawsuits or estimate a range of reasonably possible losses, if any.

PPL continues to evaluate options for reducing, avoiding, off-setting or sequestering its carbon dioxide emissions.  In 2010,2013, PPL's power plants (based on PPL's equity share of these assets) emitted approximately 3762 million tons of carbon dioxide (including 6 million tons of emissions from the LKE plants after their acquisition on November 1, 2010) compared to 29with 70 million tons in 2009.2012.  The totals reflect 26 million tons from PPL Energy Supply, and 17 million tons and 19 million tons from LG&E's and KU's generating fleets.  All tons are U.S. short tons (2,000 pounds/ton).

Renewable Energy Legislation(All Registrants)

There has been interest in renewable energy legislation at both the state and federal levels.  At the federal level, House and Senate bills proposed last year would have imposed mandatoryFederal legislation on renewable energy supplyis not expected to be enacted this year.  In Pennsylvania, bills were introduced calling for an increase in AEPS Tier 1 obligations and energy efficiency requirementsto create a $25 million permanent funding program for solar generation.  Bills (SB 1171 and HB 100) were also introduced to add natural gas as a qualified AEPS resource, and another bill (HB 1912) would repeal the AEPS Act entirely.  A bill adding new hydropower to Montana's renewable portfolio standard was enacted with an effective date of October 1, 2013.  An interim legislative committee in Montana is reviewing the state's RPS.  PPL and PPL Energy Supply cannot predict at this time whether the committee will recommend any changes to existing laws.  In Maryland, bills have been introduced in the 15%2014 session to double the state's RPS requirement from 20% range by approximately 2020.  At this time, PPL does not expect similar legislation to progress at the federal or state levels (beyond what is otherwise already required in Pennsylvania) in the near term.40% and provide exceptions for specific types of energy sources.


PPL believes
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The Registrants believe there are financial, regulatory and logistical uncertainties related to GHG 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 and downward pressure on energy prices that could result from such renewable generation and back-up, impacts to PJM's capacity market and the need for substantial changes to transmission and distribution systems to accommodate renewable energy.energy 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 competitive plants' future competitive position, results of operation, cash fl owsflows and financial position of any GHG emissions, 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(PPL and PPL Energy Supply)

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

In June 2010, the EPA proposed two approaches to regulating the disposal and management of coal combustion residualsCCRs (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.  In the one approach, the EPA would regulateRegulating CCRs as a hazardous waste under Subtitle C of RCRA.  This approachthe RCRA would have very significant impacts on anymaterially increase costs and result in early retirements of many coal-fired plant, andplants, as it would require plants to retrofit their operations to comply with full hazardous waste requirements fromfor 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 the current markets.existing markets for CCRs.  The secondEPA's proposed approach wouldto regulate CCRs as a solidnon-hazardous waste under Subtitle D of RCRA. &# 160;This approachthe RCRA would onlymainly affect disposal and most significantly affect any wet disposal operations.  Under this approach, many of the current markets for beneficial uses would not be affected.  Currently, PPL expects that several of its plants in Kentucky and Montana could be significantly impacted by the requirements of Subtitle D of RCRA,EPA's proposed non-hazardous waste regulations, as these plants are using surface impoundments for management and disposal of CCRs.

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

The EPA is continuing to evaluate the unprecedented number of comments it received on its June 2010 proposed regulations.  In June 2009,October 2011, the EPA's Office of Enforcement and Compliance AssuranceEPA issued a much broaderNotice of Data Availability (NODA) requesting comments on selected documents it received during the comment period for the proposed regulations.  On September 20, 2013, in response to the proposed Effluent Limitation Guidelines, PPL submitted comments on the proposed CCR regulations.  Also, on September 3, 2013, PPL commented on a second CCR NODA seeking comment on additional information request to Colstrip and 18 other non-affiliated plants, seeking information under the RCRA, the Clean Water Act and the Emergency Planning and Community Right-to-Know Act.  PPL respondedrelated to the EPA's broader information request.  Althoughproposal.

A coalition of environmental groups and two CCR recycling companies have filed lawsuits against the EPA's enforcement office issued the request,EPA seeking a deadline for final rulemaking and, in settlement of that litigation, the EPA has not necessarily concluded thatagreed to issue its final rulemaking by the plants are in violationend of any EPA requirements.  The EPA conducted a multi-media inspection at Colstrip in August 20092014.

In July 2013, the U.S. House of Representatives passed House Bill H.R. 2218, the Coal Residuals and issued a report in December 2010 stating thatReuse Management Act of 2013, which would preempt the EPA did not identify any violations offrom issuing final CCR regulations and would set non-hazardous CCR standards under RCRA and authorize state permit programs.  It remains uncertain whether similar legislation will likely be passed by the applicable compliance standards for the Colstrip facility.

U.S. Senate.  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 if any, they would have on PPL'stheir facilities, but the costsfinancial and operational impact is expected to PPL could be significant.material if CCRs are regulated as hazardous waste and significant if regulated as non-hazardous.

Martins Creek Fly Ash ReleaseTrimble County Landfill Permit (PPL, LKE, LG&E and KU)

In 2005, there wasMay 2011, LG&E submitted an application for a release of approximately 100 million gallons of water containing fly ash from a disposal basinspecial waste landfill permit to handle coal combustion residuals generated at the Martins Creek plant used in connection with the operationTrimble County plant.  After extensive review of the plant's two 150 MW coal-fired generating units.  This resultedpermit application in ash being deposited onto adjacent roadways and fields, and into a nearby creek andMay 2013, the Delaware River.  PPL determinedKentucky Division of Waste Management denied the permit application on the grounds that the release was caused byproposed facility would violate the Kentucky Cave Protection Act because it would eliminate an on-site karst feature considered to be a failurecave.  After assessing additional options for managing coal combustion residuals, in January 2014, LG&E submitted to the disposal basin's discharge structure.Kentucky Division of Waste Management a landfill permit application for an alternate site adjacent to the plant.  PPL, conducted extensive clean-upLKE, LG&E and completed studies, in conjunction withKU are unable to determine the precise impact of this matter until a group of natural resource trusteeslandfill permit is issued and the Delaware River Basin Commission, evaluating the effects of the release on the river's sediment, water quality and ecosystem.any resulting legal challenges are concluded.


The
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Seepages and Groundwater Infiltration - Pennsylvania, DEP 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 DEP have settled this matter.  The settlement also required 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 and has continued discussing potential natural resource damages and mitigation options with the agencies.

Through December 31, 2010, PPL Energy Supply has spent $28 million for remediation and related costs and an immaterial remediation liability remained.  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.

Basin Seepage – PennsylvaniaMontana and Kentucky

(All Registrants except PPL Electric)

Seepages or groundwater infiltration have been detected at active and retired wastewater basins and landfills at various PPL, PPL Energy Supply, LKE, LG&E and KU plants.  PPL, hasPPL Energy Supply, LKE, LG&E and KU have completed or isare completing assessments of seepages or groundwater infiltration at various facilities and ishave completed or are working with agencies to implement assessment or abatement measures, for those seepages, where required.  The potential cost to address identified seepages or other seepages at PPL plants is not now determinable, but couldA range of reasonably possible losses cannot currently be significant.estimated.

Basin Seepage - Montana(PPL and PPL Energy Supply)

In May 2003, approximately 50 plaintiffs brought an action againstAugust 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 other ownerswastewater 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 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 ($5 million after tax).  In 2008,waste-water treatment facilities.  PPL Montana recorded an insignificant reserve for its share of potential additional settlements with three property owners living nearcannot predict at this time if the original plaintiffs but who were not partiesactions required under the AOC will create the need to adjust the lawsuit.  In the fourth quarter of 2009, PPL Montana settled with two ofexisting ARO related to these property owners for an insignificant amount.facilities.

In 2007, six plaintiffsSeptember 2012, Earthjustice filed an affidavit pursuant to Montana's Major Facility Siting Act (MFSA) that sought review of the AOC by Montana's Board of Environmental Review (BER) on behalf of the Sierra Club, the MEIC, and the National Wildlife Federation (NWF).  In September 2012, PPL Montana filed an election with the BER to have this proceeding conducted in Montana state district court as contemplated by the MFSA.  In October 2012, Earthjustice filed a separate lawsuitpetition for review of the AOC in the Montana Sixteenth Judicial District Courtstate district court in Rosebud County.

(All Registrants except PPL Electric)

Clean Water Act 316(b)

The EPA published proposed rule 316(b) for existing facilities in April 2011.  The EPA has been evaluating the comments it received to the proposed rule and meeting with industry groups to discuss options.  The proposed rule contains two requirements to reduce impact to aquatic organisms at cooling water intake structures.  The first requires all existing facilities to meet standards for the reduction of mortality of aquatic organisms that become trapped against water intake screens (impingement) regardless of the Colstrip plant owners asserting similar property damage claimslevels of mortality actually occurring or the cost to achieve the standards.  The second requirement is to determine and install the best technology available to reduce mortality of aquatic organisms pulled through a plant's cooling water system (entrainment).  A form of cost-benefit analysis is allowed for this second requirement involving a site-specific evaluation based on nine factors, including impacts to energy delivery reliability and the remaining useful life of the plant.  The final rule is expected by April 17, 2014.  Until the final rule is issued, PPL, PPL Energy Supply, LKE, LG&E and KU cannot estimate a range of reasonably possible costs, if any, that would be required to comply with such a regulation.

Effluent Limitations Guidelines (ELGs) and Standards

In June 2013, the EPA published proposed regulations to revise discharge limitations for steam electric generation wastewater permits.  The proposed limitations are based on the EPA review of available treatment technologies and their capacity for reducing pollutants and include new requirements for fly ash and bottom ash transport water and metal cleaning waste waters, as were asserted bywell as new limits for scrubber wastewater and landfill leachate.  The EPA's proposed ELG regulations contain requirements that would affect the plaintiffs ininspection and operation of CCR facilities, if finalized.  The EPA has indicated that it will coordinate these regulations with the May 2003 complaint.  A tentative settlement agreement was reached in July 2010.regulation of CCRs discussed above.  The settlementproposal contains alternative approaches, some of which could significantly impact PPL's coal-fired plants.  PPL, PPL Energy Supply, LKE, LG&E and KU worked with industry groups to comment on the proposed regulation on September 20, 2013.  The final regulation is not yet final, and may not be honored by the plaintiffs, but PPL Montana's share is not expected to be issued in May 2014 but it may be delayed.  At the present time, PPL, PPL Energy Supply, LKE, LG&E and KU are unable to predict the outcome of this matter or estimate a range of reasonably possible costs, but the costs could be significant.  Pending finalization of the ELGs, certain states and environmental groups (including Pennsylvania and Kentucky) are proposing more stringent technology-based limits in permit renewals.  Depending on the final limits imposed, the costs of compliance could be significant and costs could be imposed ahead of federal timelines.


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Other Issues

In 2006, the EPA significantly decreased to 10 parts per billion (ppb) the drinking water standards related to arsenic.  In Pennsylvania, Montana and Kentucky, this arsenic standard has been incorporated into the states' water quality standards and could result in more stringent limits in NPDES permits for its Pennsylvania, Montana and Kentucky plants.  Recently, the EPA developed a draft risk assessment for 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 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.

The EPA is reassessing its polychlorinated biphenyls (PCB) regulations under the ToxicsToxic 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 or some PCB-containing equipment.  PPLThe EPA is planning to propose the revised regulations in November 2014.  PCBs are found, in varying degrees, in all of the Registrants' operations.  The Registrants cannot predict at this time the outcome of these proposed EPA regulations and what impact, if any, they would have on PPL'stheir facilities, but the costs to PPL could be significant.

The EPA finalized requirements in 2004 for new or modified cooling water intake structures.  These requirements affect where generating facilities are built, establish intake design standards and could lead to requirements for cooling towers at new and modified power plants.  Another rule, 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, however, the U.S. Supreme Court ruled that the EPAPPL Energy Supply has discretion to use cost-benefit analysis in determining the best technology available for minimizing adverse environmental impact.  The EPA is developing a new rule which is expected to be finalized in 2012.  How the cost-benefit analysis will be employed, if incorporated, as well as other issues raised by the Second Circuit Court decision (not reviewed by the U.S. Supreme Court) and actions the states may take on their own could result in stricter standards for existing structures that could impose significant costs on PPL plants.

In October 2009, the EPA released its Final Detailed Study of the Steam Electric Power Generating effluent limitations guidelines and standards.  Final regulations are expected to be effective in 2013.  PPL expects the revised guidelines and standards to be more stringent than the current standards, which could result in more stringent discharge permit limits.

PPL has signed a Consent Order and Agreement (COA) with the Pennsylvania DEP under which it agreed, 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 channel, especially during cold weather.  Debris at intake pumps can result in a unit trip or reduction in load, causing a sudden change in water temperature.  PPL has committed to construct a barrier to prevent debris from entering the river water intake area, pending receipt of regulatory permits, at a cost of approximately $4 million.
PPL has also investigated alternatives to exclude fish from the discharge channel at its Brunner Island plant, but the subsidiary and submitted three alternativesthe PADEP have concluded that a barrier method to exclude fish is not workable.  In June 2012, a Consent Order and Agreement (COA) was signed that allows the DEP.  Accordingsubsidiary to study a change in a cooling tower operational method that may keep fish from entering the channel.  Should this approach fail, the COA oncerequires a retrofit of impingement control technology at the intakes to the cooling towers, at Brunner Island became operational, PPL must implement onethe cost of these fish exclusion alternatives if a fish kill occurs in the discharge channel due to thermal impacts from the plant.  Following start-up of the cooling towers in April 2010, several hundred dead fish were found in the cooling tower intake basket although there were no sudden changes in water temperature.  In the third quarter of 2010, PPL discussed this matter with the DEP and both agreed that this condition was not one anticipated by the COA, thereby concluding it did not trigger a need to implement a fish exclusion project.  At this time, no fish exclusion project is planned.which could be significant.

In May 2010, the Kentucky Waterways Alliance and other environmental groups filed a petition with the Kentucky Energy and Environment Cabinet challenging the Kentucky Pollutant Discharge Elimination System permit issued in April 2010, which covers water discharges from the Trimble County station.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.  Until such time as all available appealsIn September 2013, the court reversed the Cabinet order upholding the permit and remanded the permit to the agency for further proceedings.  In October 2013, LG&E filed a notice of appeal with the Kentucky Court of Appeals.  PPL, LKE, LG&E and KU are exhausted, PPL is unable to predict the outcome or impact of this matter.matter or estimate a range of reasonably possible losses, if any.

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

Superfund and Other Remediation(PPL, PPL Energy Supply and PPL Electric)All Registrants)

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

Depending on the outcome of investigations at sites where investigations have not begun or been completed or developments at sites for which PPL Electric, LG&E and KU currently lackslack 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 current 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, chemical by-products of coal gas manufacturing.  As a result of the EPA's evaluation, individual states may establish stricter standards for water quality and soil cleanup.  This could require several PPL subsidiaries to take more extensive assessment and remedial actions at former coal gas manufacturing 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.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.  In December 2013, PPL

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Generation subsidiaries reached an agreement of sale for one of the two pumping mine sites and the passive wetlands treatment system at the third site.  Once these sales are finalized and responsibilities are transferred to the new owner, subject to regulatory agency approvals, PPL Generation subsidiaries will no longer be responsible for operating and maintaining these two sites.  At December 31, 2010,2013, PPL Energy Supply had accrued a discounted liability of $25$21 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-average rate used was 8.16%8.21%.  Expected undiscounted payments are estimated at $2$1 million for 2011, $1 million each of the years from 20122014 through 2014, $2 million for 2015,2018, and $137$107 million for work after 2015.2018.

From time to time, PPL undertakesEnergy Supply, PPL Electric, LG&E and KU undertake remedial action in response to spills or other releases at various on-site and off-site locations, negotiatesnegotiate with the EPA and state and local agencies regarding actions necessary for compliance with applicable requirements, negotiatesnegotiate with property owners and other third parties alleging impacts from PPL's operations and undertakesundertake similar actions necessary to resolve environmental matters which arise in the course of normal operations.  Based on analyses to date, resolution of these general environmental matters is not expected to have a materialsignificant adverse impact on PPL'sthese Registrants' 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.  The Stakeholder Group on Extremely Low Frequency EMF, set up by the U.K. Government, has issued two reports, one in April 2007 and one in June 2010, describing options for reducing public exposure to EMF.  The U.K. Government responded to the first report in 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.  The U.K. Government is currently considering the second report which concentrates on EMF exposure from distribution systems.  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 distri bution 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. Government has implemented a project to alleviate the impact of flooding on the U.K. utility infrastructure, including major electricity substations.  WPD has agreed with the Ofgem to spend $27 million on flood prevention, which will be recovered through rates during the five-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.  The first information request was received by WPD in March 2010, with reports due for submission by June 2011. WPD has worked with other U.K. electricity network operators to undertake research with the internationally recognized U.K. Met Office and to report using common agreed methodology.

There are no other material legal or administrative proceedings pending against or related to WPD with respect to environmental matters.  See "Electric and Magnetic Fields," above, for a discussion of EMFs.

Other

Nuclear Insurance (PPL and PPL Energy Supply)

The Price-Anderson Act is a United States Federal law which governs liability-related issues and ensures the availability of funds for public liability claims arising from an incident at any of the U.S. licensed nuclear facilities.  It also seeks to limit the liability of nuclear reactor owners for such claims from any single incident.  Effective September 10, 2013, the liability limit per incident was $13.6 billion for such claims which is funded by insurance coverage from American Nuclear Insurers (ANI) and an industry assessment program.

Under the industry assessment program, in the event of a nuclear incident at any of the reactors covered by The Price-Anderson Act as amended, PPL Susquehanna could be assessed up to $255 million per incident, payable at $38 million per year.

Additionally, PPL Susquehanna purchases property insurance programs from NEIL, an industry mutual insurance company of which PPL Susquehanna is a member of certain insurance programs that provide coverage for property damage to members' nuclear generating plants.  Facilitiesmember.  Effective April 1, 2013, facilities at the Susquehanna plant are insured against property damage losses up to $2.75 billion under these programs.$2.50 billion.  PPL Susquehanna is also a member ofpurchases 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 NEIL property and replacement power insurance programs, PPL Susquehanna could be assessed retroactiveretrospective premiums in the event of the insurers' adverse loss experience.  At December 31, 2010,Effective April 1, 2013, this maximum assessment was $40$46 million.

Labor Unions(All Registrants)

In 2014, certain labor agreement negotiations are scheduled to begin or have begun.  For PPL, PPL Energy Supply and PPL Electric, negotiations with the eventIBEW commenced in January 2014.  The current agreement expires in May 2014.  For LG&E, negotiations with the IBEW will begin in October 2014.  The current agreement expires in November 2014.  For KU, the agreement with the IBEW includes a wage reopener in July 2014 and the current agreement expires in August 2015.  Additionally, KU's negotiations with the United Steelworkers of a nuclear incidentAmerica labor union will begin in July 2014 and the current agreement expires in August 2014.  The Registrants cannot predict the outcome of the union labor negotiations.


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The labor agreements expiring in 2014 covered the following employees at the Susquehanna plant, PPL Susquehanna's public liability for claims resulting from such incident would be limited to $12.6 billion under provisions of The Price-Anderson Act Amendments under the Energy Policy Act of 2005.  PPL Susquehanna is protected against this liability by a combination of commercial insurance and an industry assessment program.December 31, 2013:

In the event of a nuclear incident at any of the reactors covered by The Price-Anderson Act Amendments under the Energy Policy Act of 2005, PPL Susquehanna could be assessed up to $235 million per incident, payable at $35 million per year.

At December 31, 2010, the property, replacement power and nuclear incident insurers maintained an A.M. Best financial strength rating of A ("Excellent").
  Number of Employees Percent of Total Workforce
     
PPL  3,755  20%
PPL Energy Supply  1,190  24%
PPL Electric  1,419  63%
LKE  774  22%
LG&E  701  70%
KU  73  7%

Guarantees and Other Assurances

(PPL, PPL Energy Supply and PPL Electric)All Registrants)

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 and PPL Electric)All Registrants)

The table below details guarantees provided as of December 31, 2010.2013.  "Exposure" represents the estimated maximum potential amount of future payments that could be required to be made under the guarantee.  The total recorded liability at December 31, 2010 was $14 million and at December 31, 2009 was $3 million.  Other than as noted in the descriptions for "WPD guarantee of pension and other obligations of unconsolidated entities," the probability of expected payment/performance under each of these guarantees is remote.remote except for "WPD guarantee of pension and other obligations of unconsolidated entities" and "Indemnification of lease termination and other divestitures."  The total recorded liability at December 31, 2013 and 2012 was $26 million and $24 million for PPL and $19 million and $20 million for LKE.  For reporting purposes, on a consolidated basis, all guarantees of PPL Energy Supply (other than the letters of credit), PPL Electric, LKE, LG&E and KU also apply to PPL, and all guarantees of LG&E and KU also apply to LKE.

   Exposure at  
   December 31, Expiration
   2010 (a) Date
PPL      
Indemnifications for sale of PPL Gas Utilities $ 300 (c)  
Indemnifications of LKE   300 (d) 2021 to 2023
        
PPL Energy Supply (b)      
Letters of credit issued on behalf of affiliates   20 (e) 2011 to 2012
Retrospective premiums under nuclear insurance programs   40 (f)  
Nuclear claims under The Price-Anderson Act Amendments under The Energy Policy Act of 2005   235 (g)  
Indemnifications for entities in liquidation and sales of assets   515 (h) 2012 to 2017
Indemnification to operators of jointly owned facilities   6 (i)  
WPD guarantee of pension and other obligations of unconsolidated entities   64 (j) 2015
Tax indemnification related to unconsolidated WPD affiliates   8 (k) 2012
Guarantee of a portion of an unconsolidated entity's debt   22 (l) 2018
   Exposure at Expiration
   December 31, 2013 Date
PPL      
Indemnifications related to the WPD Midlands acquisition      (a)  
WPD indemnifications for entities in liquidation and sales of assets  $ 12 (b) 2017 - 2018
WPD guarantee of pension and other obligations of unconsolidated entities    127 (c)  
        
PPL Energy Supply      
Letters of credit issued on behalf of affiliates    29 (d) 2014 - 2015
Indemnifications for sales of assets    250 (e) 2025
Guarantee of a portion of a divested unconsolidated entity's debt    22 (f) 2018
          
PPL Electric      
Guarantee of inventory value    27 (g) 2017
        
LKE      
Indemnification of lease termination and other divestitures    301 (h) 2021 - 2023
        
LG&E and KU      
LG&E and KU guarantee of shortfall related to OVEC      (i)  

(a)RepresentsIndemnifications related to certain liabilities, including a specific unresolved tax issue and those relating to properties and assets owned by the seller that were transferred to WPD Midlands in connection with the acquisition.  A cross indemnity has been received from the seller on the tax issue.  The maximum exposure and expiration of these indemnifications cannot be estimated because the maximum potential amount of future payments that could be required to be made underliability is not capped and the guarantee.expiration date is not specified in the transaction documents.
(b)Other thanIndemnification to the lettersliquidators and certain others for existing liabilities or expenses or liabilities arising during the liquidation process.  The indemnifications are limited to distributions made from the subsidiary to its parent either prior or subsequent to liquidation or 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 where the agreements provide for specific limits.

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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 or 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.
(c)Relates to certain obligations of discontinued or modified electric associations that were guaranteed at the time of privatization by the participating members.  Costs are allocated to the members and can be reallocated if an existing member becomes insolvent.  At December 31, 2013, WPD has recorded an estimated discounted liability 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, and as a result, the exposure has been estimated.
(d)Standby letter of credit all guarantees ofarrangements under PPL Energy Supply,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 also apply to PPL on a consolidated basis.  Neither PPL nor PPL Energy Supply is liable for obligations under guarantees provided by WPD, as the beneficiaries of the guarantees do not have recourse to such entities.
(c)(e)PPL has provided indemnification toIndemnifications are governed by the purchaser of PPL Gas Utilitiesspecific sales agreement and Penn Fuel Propane, LLC for damages arising out of anyinclude breach of the representations, warranties and covenants, under the related transaction agreement and liabilities for damages arising out of certain other matters, includingmatters.  PPL Energy Supply's maximum exposure with respect to certain pre-closing unknown environmental liabilities relating to former manufactured gas plant properties or off-site disposal sites, if any, outsideindemnifications and the expiration of Pennsylvania.  The indemnification provisions for most representationsthe indemnifications cannot be estimated because the maximum potential liability is not capped by the transaction documents and warranties, including tax and environmental matters, are capped at $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 $4.5 million.  The indemnification provisions for most representations and warranties expiredexpiration date is based on September 30, 2009 without any claims havin g 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,limitations.  The exposure and expiration date noted is based on those cases in which the indemnification provisionagreements provide 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.specific limits.
(d)(f)Relates to a guarantee of one-third of the divested entity's debt.  The purchaser provided a cross-indemnity, secured by a lien on the purchaser's stock of the divested entity.  The exposure noted reflects principal only.
(g)A third party logistics firm provides inventory procurement and fulfillment services.  The logistics firm has title to the inventory, however, upon termination of the contracts, PPL Electric has guaranteed to purchase any remaining inventory that has not been used or sold.
(h)LKE provides certain indemnifications, the most significant of which relate to the termination of the WKE lease in July 2009.  These guarantees cover the due and punctual payment, performance and discharge by each party of its respective present and future obligations.  The most comprehensive of these guarantees is the LKE guarantee covering operational, regulatory and environmental commitments and indemnifications made by WKE under the WKE Transaction Termination Agreement.  This guarantee has a term of 12 years ending July 2021, and a cumulative maximum exposure of $200 million.  Certain items such as non-excluded government fines and penalties fall outside the cumulative cap.  LKE has contested the applicability of the indemnification requirement relating to one matter presented by a counterparty under this guarantee.  Another guarantee with a maximum exposure of $100 million covering other indemnifications expires in 2023.  In May 2012, LKE's indemnitee received an arbitration panel's decision affecting this matter, which granted LKE's indemnitee certain rights of first refusal to purchase excess power at a market-based price rather than at an absolute fixed price.  In January 2013, LKE's indemnitee commenced a proceeding in the Kentucky Court of Appeals appealing the December 2012 order of the Henderson Circuit Court, confirming the arbitration award.  A decision in the appellate matter may occur during 2014.  LKE is not awarebelieves its indemnification obligations in this matter remain subject to various uncertainties, including potential for additional legal challenges regarding the arbitration decision as well as future prices, availability and demand for the subject excess power.  LKE continues to evaluate various legal and commercial options with respect to this indemnification matter.  The ultimate outcomes of claims made by any party at this time, although one matter is currently in arbitration, the outcome of whichWKE termination-related indemnifications cannot be predicted at this time.  See Note 9 for additional information.  Additionally, LKE has indemnified various third parties related to historical obligations for other divested subsidiaries and affiliates, including certain indemnifications of current officers with respect to its former Argentine businesses, for which LKE has received a cross-indemnity from a third party.affiliates.  The indemnifications vary by entity and the maximum amount limitsexposures range from being capped at the sale price to no specified maximum; however, LKE is not aware of formal claims under such indemnities made by any party at this time.  LKE could be required to perform on these indemnifications in the event of covered losses or liabilities being claimed by an indemnified party.  No additional material lossIn the second quarter of 2012, LKE adjusted its estimated liability for certain of these indemnifications by $9 million ($5 million after-tax), which is anticipated by reasonreflected in "Income (Loss) from Discontinued Operations (net of income taxes)" on the Statement of Income.  The adjustment was recorded in the Kentucky Regulated segment for PPL.  LKE cannot predict the ultimate outcomes of such indemnification.indemnification circumstances, but does not currently expect such outcomes to result in significant losses above the amounts recorded.
(e)(i)Standby letter of credit arrangements under PPL Energy Supply's credit facilities forPursuant to 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 contingentlyOVEC power purchase contract, LG&E and KU are obligated to pay this amount relatedfor their share of OVEC's excess debt service, post-retirement and decommissioning costs, as well as any shortfall from amounts currently included within a demand charge designed to potential retrospective premiums that could be assessed under its nuclear insurance programs.  See "Nuclear Insurance," above, for additional information.
(g)This iscover these costs over the maximum amount PPL Susquehanna could be assessed for each incident at anyterm of the nuclear reactors covered by this Act.  See "Nuclear Insurance," above for additional information.
(h)PPL Energy Supply'scontract.  LKE's proportionate share of OVEC's outstanding debt was $129 million at December 31, 2013, consisting of LG&E's share of $89 million and KU's share of $40 million.  The 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 basedof these potential obligations are not presently determinable.  See "Energy Purchases Commitments" above for additional information 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 agre ements 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.OVEC power purchase contract.

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 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 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 most representations and warranties.

A subsidiary of PPL Energy Supply has agreed to provide indemnifications 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 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.

(i)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.
(j)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, 2010, 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.
(k)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.
(l)
Reflects principal payments only.

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 $4 million deductible per occurrence and provides maximum aggregate coverage of $200$225 million.  This insurance may be applicable to obligations under certain of these contractual arrangements.

16.  Related Party Transactions

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

PLR Contracts

PPL Electric had power purchase contracts withholds competitive solicitations for PLR generating supply.  PPL EnergyPlus in whichhas been awarded a portion of the PLR generation supply through these competitive solicitations.  The sales and purchases between PPL EnergyPlus suppliedand PPL Electric's entire PLR load.  These contracts expired on 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 and 2008 which are included in the Statements of Income as "Wholesale"Unregulated wholesale energy marketing to affiliate" by PPL Energy Supply, and as "Energy purchases from affiliate" by PPL Electric.  These purchases included nuclear decommissioning recovery and amortization of an up-front contract payment.

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.  PPL Electric paid interest equal to one-month LIBOR plus 0.5% on the 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 t he required deposits was $2 million and $10 million for 2009 and 2008.

PPL Electric held competitive solicitations in prior years for PLR generation supply for 2010 and beyond.  PPL EnergyPlus has been awarded a portion of this supply.  These purchases totaled $320 million in 2010, 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.


See Note 1 for additional information regarding PPL Electric's purchases of accounts receivable from PPL EnergyPlus.
251

Under the standard Default Service Supply Master Agreement for the competitive 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.  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) when 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 $20 million at December 31, 2013.  In no instance is $35 million.PPL Electric required to post collateral to suppliers under these supply contracts.

PPL Energy Supply has credit exposure to PPL Electric under these energy supply contracts.Electric's customers may choose an alternative supplier for their generation supply.  See Note 181 for additional information on this credit exposure.regarding PPL Electric's purchases of accounts receivable from alternative suppliers, including PPL EnergyPlus.

NUG PurchasesAt December 31, 2013, PPL Energy Supply had a net credit exposure of $28 million from PPL Electric from its commitment as a PLR supplier and from the sale of its accounts receivable to PPL Electric.

PPL ElectricWholesale Sales and Purchases (LG&E and KU)

LG&E and KU jointly dispatch their generation units with the lowest cost generation used to serve their retail customers.  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 customers 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 customers 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 $3 million in 2010, $70 million in 2009 and $108 million in 2008.  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.  Mostand 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 NUG contracts have expired, with the final NUG contract to expire in 2014.other is dependent on its retail customers' needs and its available generation.

Allocations of Corporate ServiceSupport Costs(All Registrants except PPL)

Both PPL Services provides corporate functions such as financial, legal, human resources and information technology services.  PPL Services chargesLKS provide the respective PPL and LKE subsidiaries forwith administrative, management and support services. Where applicable, the cost of such services when they can be specifically identified.  The costcosts of these services that is not directlyare charged to the respective subsidiaries as direct support costs.  General costs that cannot be directly attributed to a specific subsidiary are allocated and charged to the respective subsidiaries as indirect support costs.  PPL subsidiaries is allocated to certain subsidiaries based on an average ofServices uses a three-factor methodology that includes the subsidiaries' relative invested capital, operation and maintenance expenses and number of employees.employees to allocate indirect costs.  LKS bases its indirect allocations on the subsidiaries' number of employees, total assets, revenues, number of customers and/or other statistical information.  PPL Services allocatedand LKS charged the following amounts which PPL management believesfor the years ended December 31, and believe these amounts are reasonable, to PPL Energy Supply and PPL Electric, including amounts applied to accounts that are further distributed between capital and expense.

   2010   2009 (a)  2008 
          
PPL Energy Supply $ 232  $ 214  $ 209 
PPL Electric   134    121    116 
   2013   2012   2011  
           
PPL Energy Supply from PPL Services $ 218  $ 212  $ 189  
PPL Electric from PPL Services   146    157    145  
LKE from PPL Services   15    15    16  
LG&E from LKS  216    186    190  
KU from LKS  207    161    204  

(a)Excludes allocated costs associated with the February 2009 workforce reduction.  See Note 13 for additional information.
LG&E and KU also 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 periodically holds revolving lines of credit and demand notes from certain affiliates.  There were no balancesNo balance was outstanding at December 31, 20102013 and 2009.  In 2010, the interest rates were equal to 1-month LIBOR plus 1% and 1-month LIBOR plus 3.50%.2012.  Interest earned on these notesrevolving facilities is included in "Interest Income from Affiliates" on the StatementsStatement of Income.  In addition, in November 2010, this subsidiary held term notes with certain LKE subsidiaries.  These notes were subsequently repaidInterest earned on borrowings was not significant for 2013 and therefore no balances were outstanding at December 31, 2010.  Interest on these notes was due monthly at interest rates between 4.24% and 7.04%.  While balances were outstanding,2012.  For 2011, interest earned on all these affiliate note receivables were $9borrowings was $8 million, insignificant and $4 mil lion for 2010, 2009 and 2008.which was primarily attributable to borrowings by PPL Energy Funding with an interest rate of 3.77%.


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(PPL Electric)

A PPL Electric subsidiary periodically holds revolving demand notes from an affiliate.  There were nocertain affiliates.  At December 31, 2013, $150 million was outstanding balancesand was reflected in "Notes receivable from affiliate" on the Balance Sheet.  No balance was outstanding at December 31, 2010 and 2009.  In 2010, the2012.  The interest rates wereon borrowings are equal to 1-monthone-month LIBOR plus 3.50% and 3-month LIBOR plus 3.50%a spread.  The interest rate on the outstanding borrowing at December 31, 2013, was 1.92%.  Interest earned on these notes is includedrevolving facilities was not significant for 2013, 2012 and 2011.

(LKE)

LKE maintains a revolving line of credit with a PPL Energy Funding subsidiary whereby LKE can borrow funds on a short-term basis at market-based rates.  In October 2013, the revolving line of credit was reduced by $75 million and the limit as of December 31, 2013 was $225 million. The interest rates on borrowings are equal to one-month LIBOR plus a spread.  No balance was outstanding at December 31, 2013. At December 31, 2012, $25 million was outstanding and was reflected in "Interest Income from Affiliate""Notes payable with affiliates" on the StatementsBalance Sheet.  The interest rate on the outstanding borrowing at December 31, 2012 was 1.71%.  Interest on the revolving line of Income,credit was not significant for 2013 or 2012.

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, 2013, $70 million was outstanding and was $2 million, $4 millionreflected in "Notes receivable from affiliates" on the Balance Sheet. No balance was outstanding at December 31, 2012. The interest rate on the loan based on the PPL affiliate's credit rating is currently equal to one-month LIBOR plus a spread. The interest rate on the outstanding borrowing at December 31, 2013 was 2.17%. Interest income on this note was not significant for 2013 or 2012.

Intercompany Derivatives (LKE, LG&E and $9 millionKU)

Periodically, LG&E and KU enter into forward-starting interest rate swaps with PPL.  These hedging instruments have terms identical to forward-starting swaps entered into by PPL with third parties.  See Note 19 for 2010, 2009 and 2008.additional information on intercompany derivatives.

(PPL Energy Supply)

Intercompany Derivatives

In 2010, 2009 and 2008, a subsidiary of PPL Energy Supply entered into a combination of average rate forwards and average rate options with PPL to sell British pounds sterling.  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 (Expense) - net" on the Statement of Income.  PPL Energy Supply recorded a net gain of $3 million during 2010, a net loss of $9 million during 2009 and a net gain of $9 million during 2008 related to average rate forwards and average rate options.  Contracts outstanding at Dec ember 31, 2010 hedged a total exposure of £89 million related to the translation of expected income in 2011.  Contracts outstanding at December 31, 2009 hedged a total exposure of £48 million related to the translation of expected income in 2010.  The fair value of these positions, primarily reflected in "Current Assets - Price risk management assets" on the Balance Sheet, was a net asset of $4 million and $2 million at December 31, 2010 and 2009.

A subsidiary of 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 contracts entered into by PPL with third parties.  The total amount of the contracts outstanding at December 31, 2010 and 2009 was £35 million and £40 million ($62 million and $78 million based on contracted rates).  The fair value of these positions at December 31, 2010 was an asset of $7 million, which is included in "Current Assets - Price risk management assets," with an offsetting after-tax amount included in the foreign currency translation adjustment component of AOCI on the Balance Sheet.  The fair value of these positions at December 31 , 2009 was an asset of $13 million, of which $8 million was included in "Current Assets - Price risk management assets" and $5 million was included in "Other Noncurrent Assets - Price risk management assets," with an offsetting after-tax amount included in the foreign currency translation adjustment component of AOCI on the Balance Sheet.

Trademark Royalties

A PPL subsidiary ownsowned 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 2010 and 2009 and $48 million in 2008.2011.  These allocations arecharges were primarily included in "Other operation and maintenance" on the StatementsStatement of Income.

(Distribution of Interest in PPL Global to Parent

In January 2011, PPL Energy Supply anddistributed its membership interest in PPL Electric)Global to its parent, PPL Energy Funding.  See Note 9 for additional information.

Transmission

PPL Energy Supply owns no domestic transmission or distribution facilities, other than facilities to interconnect its generation with the electric transmission system.  Therefore, PPL EnergyPlus and other PPL Generation subsidiaries must pay PJM, the operator of the transmission system, to deliver the energy these subsidiaries supply to retail and wholesale customers in PPL Electric's franchised territory in eastern and central Pennsylvania.  PJM in turn pays PPL Electric for the use of its transmission system.  PPL eliminates the impact of these revenues and expenses on its Statements of Income.

Other(All Registrants except PPL)

See NotesNote 1 and 5 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, see Note 1 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 ofassociated with defined benefits.

17.  Other Income (Expense) - net
(All Registrants)
The breakdown of "Other Income (Expense) - net" for the years ended December 31 was:

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    PPL PPL Energy Supply
    2013  2012  2011  2013  2012  2011 
Other Income                  
 Earnings on securities in NDT funds $ 23  $ 22  $ 24  $ 23  $ 22  $ 24 
 Interest income   3    5    7         1    1 
 AFUDC - equity component   10    10    7                
 Net hedge gains associated with the 2011 Bridge Facility (a)             55                
 Earnings (losses) from equity method investments        (8)   1                
 Gain on redemption of debt (b)             22                
 Miscellaneous - Domestic   18    11    10    14    5    6 
 Miscellaneous - U.K.        2    1                
 Total Other Income   54    42    127    37    28    31 
Other Expense                  
 Economic foreign currency exchange contracts (Note 19)   38    52    (10)               
 Charitable contributions   25    10    9    4    3    3 
 WPD Midlands acquisition-related costs (Note 10)             34                
 Foreign currency loss on 2011 Bridge Facility             57                
 U.K. stamp duty tax (Note 10)             21                
 Miscellaneous - Domestic   12    16    9    3    7    5 
 Miscellaneous - U.K.   2    3    3                
 Total Other Expense   77    81    123      7    10      8 
Other Income (Expense) - net $ (23) $ (39) $ 4  $ 30  $ 18  $ 23 

(a)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.

For PPL Electric, "Other Income (Expense) - net

(PPL, PPL Energy Supplynet" for 2013, 2012 and PPL Electric)

2011 was primarily the equity component of AFUDC.  The breakdowncomponents of "Other Income (Expense) - net" was:

    PPL PPL Energy Supply PPL Electric
    2010  2009  2008  2010  2009  2008  2010  2009  2008 
Other Income                           
 Gains related to the                           
  extinguishment of notes (a)    $ 29        $ 25             
 Earnings on securities in NDT funds $ 20    20  $ 10  $ 20    20  $ 10          
 Interest income   8    14    33    6    6    23  $ 2  $ 8  $ 7 
 AFUDC   5    1    1             5    1    1 
 Mine remediation liability adjustment         11          11          
 Miscellaneous - Domestic   5    9    5    4    3    5    1       
 Miscellaneous - International   1    1    4    1    1    4          
 Total Other Income   39    74    64    31    55    53    8    9    8 
Other Expense                           
 Economic foreign currency                           
  exchange contracts   (3)   9    (9)   (3)   9    (9)         
 Charitable contributions   4    6    5    1                
 Cash flow hedges (b)   29                         
 LKE acquisition costs (Note 10)   31                         
 Miscellaneous - Domestic   7    8    9    5    9    10    3    3    3 
 Miscellaneous - International   2    4    6    2    4    6          
 Total Other Expense   70    27    11    5    22    7    3    3    3 
Other Income (Expense) - net $ (31) $ 47  $ 53  $ 26  $ 33  $ 46  $ 5  $ 6  $ 5 

(a)In 2009, PPL Energy Supply completed tender offers to purchase up to $250 million aggregate principal amount of certain of its outstanding senior notes for $220 million, resulting in a $25 million net gain.  PPL recorded an additional net gain of $4 million as a result of reclassifying gains and losses on related cash flow hedges from AOCI into earnings.
(b)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, debt that had been planned to be issued by PPL Energy Supply 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.  Associated net losses were reclassified from AOCI into earnings.
for 2013 for LKE, LG&E and KU were not significant.  "Other Income (Expense) - net" for 2012 for LKE and KU were primarily losses from an equity method investment.  The components of "Other Income (Expense) - net" for 2012 for LG&E were not significant. The components of "Other Income (Expense) - net" for 2011 for LKE, LG&E and KU were not significant.

18.  Fair Value Measurements and Credit Concentration

(PPL, PPL Energy Supply and PPL Electric)All Registrants)

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

Recurring Fair Value Measurements

The assets and liabilities measured at fair value were:

     December 31, 2010 December 31, 2009
     Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
PPL                        
Assets                        
 Cash and cash equivalents $ 925  $ 925        $ 801  $ 801       
 Short-term investments - municipal debt                        
  securities   163    163                   
 Restricted cash and cash equivalents (a)   66    66          129    129       
 Price risk management assets:                        
  Energy commodities   2,503     $ 2,452  $ 51    3,354    3  $ 3,234  $ 117 
  Interest rate swaps   15       15       50       50    
  Foreign currency exchange contracts   11       11       15       15    
  Cross-currency swaps   44       44       12       12    
 Total price risk management assets   2,573       2,522    51    3,431    3    3,311    117 
 NDT funds:                        
  Cash and cash equivalents   10    10          7    7       
  Equity securities:                        
   U.S. large-cap   303    207    96       259    176    83    
   U.S. mid/small-cap   119    89    30       101    75    26    
  Debt securities:                        
   U.S. Treasury   75    75          74    74       
   U.S. government sponsored agency   7       7       9       9    
   Municipality   69       69       65       65    
   Investment-grade corporate   33       33       29       29    
   Residential mortgage-backed securities               1       1    
   Other   1       1                
  Receivables (payables), net   1    (1)   2       3       3    
 Total NDT funds   618    380    238       548    332    216    
 Auction rate securities (b)   25          25    25          25 
Total assets $ 4,370  $ 1,534  $ 2,760  $ 76  $ 4,934  $ 1,265  $ 3,527  $ 142 
                            
Liabilities                        
 Price risk management liabilities:                        
  Energy commodities $ 1,552     $ 1,498  $ 54  $ 2,080  $ 2  $ 2,068  $ 10 
  Interest rate swaps   53       53                
  Cross-currency swaps   9       9       4       4    
 Total price risk management liabilities $ 1,614     $ 1,560  $ 54  $ 2,084  $ 2  $ 2,072  $ 10 
                            
PPL Energy Supply                        
Assets                        
 Cash and cash equivalents $ 661  $ 661        $ 245  $ 245       
 Restricted cash and cash equivalents (a)   26    26          111    111       
 Price risk management assets:                        
  Energy commodities   2,503     $ 2,452  $ 51    3,354    3  $ 3,234  $ 117 
  Foreign currency exchange contracts   11       11       15       15    
  Cross-currency swaps   44       44       12       12    
 Total price risk management assets   2,558       2,507    51    3,381    3    3,261    117 
 NDT funds:                        
  Cash and cash equivalents   10    10          7    7       
  Equity securities:                        
   U.S. large-cap   303    207    96       259    176    83    
   U.S. mid/small-cap   119    89    30       101    75    26    
  Debt securities:                        
   U.S. Treasury   75    75          74    74       
   U.S. government sponsored agency   7       7       9       9    
   Municipality   69       69       65       65    
   Investment-grade corporate   33       33       29       29    
   Residential mortgage-backed securities               1       1    
   Other   1       1                
  Receivables (payables), net   1    (1)   2       3       3    
 Total NDT funds   618    380    238       548    332    216    
 Auction rate securities (b)   20          20    20          20 
Total assets $ 3,883  $ 1,067  $ 2,745  $ 71  $ 4,305  $ 691  $ 3,477  $ 137 
                            
Liabilities                        
 Price risk management liabilities:                        
  Energy commodities $ 1,541     $ 1,487  $ 54  $ 2,080  $ 2  $ 2,068  $ 10 
  Cross-currency swaps   9       9       4       4    
 Total price risk management liabilities $ 1,550     $ 1,496  $ 54  $ 2,084  $ 2  $ 2,072  $ 10 
                            
PPL Electric                        
Assets                        
 Cash and cash equivalents $ 204  $ 204        $ 485  $ 485       
 Restricted cash and cash equivalents (a)   14    14          14    14       
Total assets $ 218  $ 218        $ 499  $ 499       
     December 31, 2013 December 31, 2012
     Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
PPL                        
Assets                        
 Cash and cash equivalents $ 1,102  $ 1,102            $ 901  $ 901           
 Restricted cash and cash equivalents (a)   156    156              135    135           
 Price risk management assets:                        
  Energy commodities   1,188    3  $ 1,123  $ 62    2,068    2  $ 2,037  $ 29 
  Interest rate swaps   91         91         15         15      
  Cross-currency swaps                       14         13    1 
 Total price risk management assets   1,279    3    1,214    62    2,097    2    2,065    30 

254


     December 31, 2013 December 31, 2012
     Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
 NDT funds:                        
  Cash and cash equivalents   14    14              11    11           
  Equity securities                        
   U.S. large-cap   547    409    138         412    308    104      
   U.S. mid/small-cap   81    33    48         60    25    35      
  Debt securities                        
   U.S. Treasury   95    95              95    95           
   U.S. government sponsored agency   6         6         9         9      
   Municipality   77         77         82         82      
   Investment-grade corporate   38         38         40         40      
   Other   5         5         3         3      
  Receivables (payables), net   1    (1)   2              (2)   2      
 Total NDT funds   864    550    314         712    437    275      
 Auction rate securities (b)   19              19    19         3    16 
Total assets $ 3,420  $ 1,811  $ 1,528  $ 81  $ 3,864  $ 1,475  $ 2,343  $ 46 
                            
Liabilities                        
 Price risk management liabilities:                        
  Energy commodities $ 1,070  $ 4  $ 1,028  $ 38  $ 1,566  $ 2  $ 1,557  $ 7 
  Interest rate swaps   36         36         80         80      
  Foreign currency contracts   106         106         44         44      
  Cross-currency swaps   32         32         4         4      
 Total price risk management liabilities $ 1,244  $ 4  $ 1,202  $ 38  $ 1,694  $ 2  $ 1,685  $ 7 

PPL Energy Supply                        
Assets                        
 Cash and cash equivalents $ 239  $ 239            $ 413  $ 413           
 Restricted cash and cash equivalents (a)   85    85              63    63           
 Price risk management assets:                        
  Energy commodities   1,188    3  $ 1,123  $ 62    2,068    2  $ 2,037  $ 29 
 Total price risk management assets   1,188    3    1,123    62    2,068    2    2,037    29 
 NDT funds:                        
  Cash and cash equivalents   14    14              11    11           
  Equity securities                        
   U.S. large-cap   547    409    138         412    308    104      
   U.S. mid/small-cap   81    33    48         60    25    35      
  Debt securities                        
   U.S. Treasury   95    95              95    95           
   U.S. government sponsored agency   6         6         9         9      
   Municipality   77         77         82         82      
   Investment-grade corporate   38         38         40         40      
   Other   5         5         3         3      
  Receivables (payables), net   1    (1)   2              (2)   2      
 Total NDT funds   864    550    314         712    437    275      
 Auction rate securities (b)   16              16    16         3    13 
Total assets $ 2,392  $ 877  $ 1,437  $ 78  $ 3,272  $ 915  $ 2,315  $ 42 
                            
Liabilities                        
 Price risk management liabilities:                        
  Energy commodities $ 1,070  $ 4  $ 1,028  $ 38  $ 1,566  $ 2  $ 1,557  $ 7 
 Total price risk management liabilities $ 1,070  $ 4  $ 1,028  $ 38  $ 1,566  $ 2  $ 1,557  $ 7 

PPL Electric                        
Assets                        
 Cash and cash equivalents $ 25  $ 25            $ 140  $ 140           
 Restricted cash and cash equivalents (c)   12    12              13    13           
Total assets $ 37  $ 37            $ 153  $ 153           


255


     December 31, 2013 December 31, 2012
     Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
LKE                        
Assets                        
 Cash and cash equivalents $ 35  $ 35            $ 43  $ 43           
 Restricted cash and cash equivalents (d)   22    22              32    32           
 Price risk management assets:                        
  Interest rate swaps                       14       $ 14      
 Total price risk management assets                       14         14      
Total assets $ 57  $ 57            $ 89  $ 75  $ 14      
                            
Liabilities                        
 Price risk management liabilities:                        
  Interest rate swaps $ 36       $ 36       $ 58       $ 58      
 Total price risk management liabilities $ 36       $ 36       $ 58       $ 58      

LG&E                        
Assets                        
 Cash and cash equivalents $ 8  $ 8            $ 22  $ 22           
 Restricted cash and cash equivalents (d)   22    22              32    32           
 Price risk management assets:                        
  Interest rate swaps                       7       $ 7      
 Total price risk management assets                       7         7      
Total assets $ 30  $ 30            $ 61  $ 54  $ 7      
                            
Liabilities                        
 Price risk management liabilities:                        
  Interest rate swaps $ 36       $ 36       $ 58       $ 58      
 Total price risk management liabilities $ 36       $ 36       $ 58       $ 58      
                            
KU                        
Assets                        
 Cash and cash equivalents $ 21  $ 21            $ 21  $ 21           
 Price risk management assets:                        
  Interest rate swaps                       7       $ 7      
 Total price risk management assets                       7         7      
Total assets $ 21  $ 21            $ 28  $ 21  $ 7      

(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.
A reconciliation of net assets and liabilities classified as Level 3 is as follows.
(d)Included in "Other noncurrent assets" on the Balance Sheets.

A reconciliation of net assets and liabilities classified as Level 3 for the years ended December 31 is as follows:A reconciliation of net assets and liabilities classified as Level 3 for the years ended December 31 is as follows:
   Fair Value Measurements Using Significant Unobservable Inputs (Level 3)          
   December 31, 2010 December 31, 2009   PPL
   Energy Auction    Energy Auction      Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
   Commodities, Rate    Commodities,  Rate      Energy Auction Cross-  
    net Securities Total  net Securities Total   Commodities, Rate Currency  
PPL                  
    net Securities Swaps Total
2013 2013          
Balance at beginning of periodBalance at beginning of period $ 107  $ 25  $ 132  $ 188  $ 24  $ 212 Balance at beginning of period $ 22  $ 16  $ 1  $��39 
Total realized/unrealized gains (losses)                   Total realized/unrealized gains (losses)         
 Included in earnings   (137)      (137)   (136)      (136) Included in earnings   (5)          (5)
 Included in OCI (a)   11       11    18    5    23  Included in OCI (a)           1   1 
Purchases, sales, issuances and settlements, net   (16)      (16)   104    (4)   100  Sales   (2)          (2)
Transfers into Level 3 (b)   (15)      (15)   (67)      (67) Settlements   (3)          (3)
Transfers out of Level 3   47       47           Transfers into Level 3   10   3   3   16 
Balance at end of period $ (3) $ 25  $ 22  $ 107  $ 25  $ 132 
                    
PPL Energy Supply                  
Balance at beginning of period $ 107  $ 20  $ 127  $ 188  $ 19  $ 207 
Total realized/unrealized gains (losses)                  
 Included in earnings   (137)      (137)   (136)      (136)
 Included in OCI (a)   11       11    18    5    23 
Purchases, sales, issuances and settlements, net   (16)      (16)   104    (4)   100 
Transfers into Level 3 (b)   (15)      (15)   (67)      (67)
Transfers out of Level 3   47       47           Transfers out of Level 3   2         (5)   (3)
Balance at end of periodBalance at end of period $ (3) $ 20  $ 17  $ 107  $ 20  $ 127 Balance at end of period $ 24  $ 19  $    $ 43 

256


      PPL
      Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
      Energy Auction Cross-   
      Commodities, Rate Currency   
       net Securities Swaps Total
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 

(a)Included"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 December 31 is as follows:
              
      PPL Energy Supply
      Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
      Energy Auction   
      Commodities, Rate   
       net Securities Total
2013          
Balance at beginning of period $ 22  $ 13  $ 35 
  Total realized/unrealized gains (losses)         
    Included in earnings   (5)        (5)
  Sales   (2)        (2)
  Settlements   (3)        (3)
  Transfers into Level 3   10    3    13 
  Transfers out of Level 3   2         2 
Balance at end of period $ 24  $ 16  $ 40 
              
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 

(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 and quantitative information about the fair value measurement of assets and liabilities classified as Level 3 are as follows:

December 31, 2013
Fair Value, netSignificantRange
AssetValuationUnobservable(Weighted
(Liability)TechniqueInput(s)Average) (a)
PPL
Energy commodities
Retail natural gas sales contracts (b)$ 36 Discounted cash flow Observable wholesale prices used as proxy for retail delivery points 10% - 100% (86%)
Full-requirement sales contracts (c) (12)Discounted cash flow Proprietary model  100% (100%)
Auction rate securities (f) 19 Discounted cash flowModeled from SIFMA Index10% - 80% (63%)

257


December 31, 2013
Fair Value, netSignificantRange
AssetValuationUnobservable(Weighted
(Liability)TechniqueInput(s)Average) (a)
PPL Energy Supply
Energy commodities
Retail natural gas sales contracts (b)$ 36 Discounted cash flow Observable wholesale prices used as proxy for retail delivery points 10% - 100% (86%)
Full-requirement sales contracts (c) (12)Discounted cash flow Proprietary model  100% (100%)
Auction rate securities (f) 16 Discounted cash flow Modeled from SIFMA Index10% - 80% (63%)

December 31, 2012
Fair Value, netSignificantRange
AssetValuationUnobservable(Weighted
(Liability)TechniqueInput(s)Average) (a)
PPL
Energy commodities
Retail natural gas sales contracts (b)$ 24 Discounted cash flow Observable wholesale prices used as proxy for retail delivery points 21% - 100% (75%)
Power sales contracts (d) (4)Discounted cash flow Proprietary model used to calculate forward basis prices 24% (24%)
FTR purchase contracts (e) 2 Discounted cash flow Historical settled prices used to model forward prices  100% (100%)
Auction rate securities (f) 16 Discounted cash flowModeled from SIFMA Index54% - 74% (64%)
Cross-currency swaps (g) 1 Discounted cash flow Credit valuation adjustment 22% (22%)

PPL Energy Supply
Energy commodities
Retail natural gas sales contracts (b)$ 24 Discounted cash flow Observable wholesale prices used as proxy for retail delivery points 21% - 100% (75%)
Power sales contracts (d) (4)Discounted cash flow Proprietary model used to calculate forward basis prices 24% (24%)
FTR purchase contracts (e) 2 Discounted cash flow Historical settled prices used to model forward prices 100% (100%)
Auction rate securities (f) 13 Discounted cash flow Modeled from SIFMA Index57% - 74% (65%)

(a)For energy commodities and auction rate securities, the range and weighted average represent the percentage of fair value derived from the unobservable inputs.  For cross-currency swaps, the range and weighted average represent the percentage decrease in fair value due to the unobservable inputs used in the model to calculate the credit valuation adjustment.
(b)Transfers intoAs the forward price of natural gas increases/(decreases), the fair value of contracts (decreases)/increases.
(c)As forward market prices increase/(decrease), the fair value of contracts (decreases)/increases.  As the volumetric assumptions for full-requirement sales contracts in a gain position increase/(decrease), the fair value of contracts increases/(decreases).  As the volumetric assumptions for full-requirement sales contracts in a loss position increase/(decrease), the fair value of contracts (decreases)/increases.
(d)As the forward price of basis increases/(decreases), the fair value of contracts (decreases)/increases.
(e)As the forward implied spread increases/(decreases), the fair value of contracts increases/(decreases).
(f)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).
(g)The credit valuation adjustment incorporates projected probabilities of default and outestimated recovery rates.  As the credit valuation adjustment increases/(decreases), the fair value of Level 3 are presented on a net basis in 2009.  Accounting guidance effective January 1, 2010 requires transfers into and out of Level 3 be presented on a gross basis.  See Note 1 for additional information.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, 2010
   Energy Commodities, net
   Unregulated Wholesale  
   Retail Electric Energy Energy
   and Gas Marketing Purchases
PPL and PPL Energy Supply         
Total gains (losses) included in earnings for the period $ 11  $ 14  $ (162)
Change in unrealized gains (losses) relating to positions still held at the         
 reporting date   4    6    (119)
            Cross-Currency
    Energy Commodities, net Swaps
                        
    Unregulated Unregulated Retail       Energy Interest
    Wholesale Energy Energy  Fuel Purchases Expense
    2013  2012  2013  2012  2013  2012  2013  2012  2013  2012 
PPL                                
Total gains (losses) included in earnings  $ (36) $ (19)  $ 25  $ 26  $ 3     $ 3  $  (5)      
$
 (1)
Change in unrealized gains (losses) relating to                                
 positions still held at the reporting date    (23)   (3)    24    29            1    1         
                                  

258


  December 31, 2009
   Energy Commodities, net
   Unregulated Wholesale Net Energy  
   Retail Electric Energy Trading Energy
   and Gas Marketing Margins Purchases
PPL and PPL Energy Supply            
Total gains (losses) included in earnings for the period $ 13  $ 22  $ (16) $ (155)
Change in unrealized gains (losses) relating to positions still held at the            
 reporting date   8    12    1    (83)

Cash and Cash Equivalents, Short-term Investments, and Restricted Cash and Cash Equivalents
            Cross-Currency
    Energy Commodities, net Swaps
                        
    Unregulated Unregulated Retail       Energy Interest
    Wholesale Energy Energy  Fuel Purchases Expense
    2013  2012  2013  2012  2013  2012  2013  2012  2013  2012 
PPL Energy Supply                                
Total gains (losses) included in earnings    (36)   (19)    25    26   3       3    (5)      
Change in unrealized gains (losses) relating to                                
 positions still held at the reporting date    (23)   (3)    24    29            1    1       

(PPL, PPL Energy Supply and PPL Electric)

The fair value measurements of cash and cash equivalents and restricted cash and cash equivalents are based on the amount on deposit.

(PPL)

The fair value measurements of short-term investments are based on quoted prices.

(PPL and PPL Energy Supply)

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

Energy commodity contracts are generally valued using the income approach, except for exchange-traded derivative gas and oil contracts, which are valued using the market approach and are classified as Level 1.  When 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 using inputs which may include quotes obtained from an exchange (where there is insufficient market liquidity to warrant inclusion in Level 1), binding and non-binding broker quotes, prices posted by ISOs or published tariff rates.  Furthermore, PPL obtains independent quotes are obtained from the market to validate the forward price curves.  OTCEnergy commodity contracts include forwards, futures, swaps, options and structured deals for electricity, gas, oil, and/or emission allowancestransactions 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 deal 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.  Level 3 contracts are valued using PPL proprietary models which may include significant unobservable inputs such as delivery at a location where pricing is unobservable, delivery dates that are beyond the dates for which independent quotes are available, implied volatilities, implied correlations and market implied heat rates.  Forward transactions, including forward transactions classified as Level 3, are analyzed by PPL's Risk Management department, which reports to the Chief Financial Officer (CFO).  Accounting personnel, who also report to the CFO, interpret the analysis quarterly to appropriately classify the forward transactions in the fair value hierarchy.  Valuation techniques are evaluated periodically.  Additionally, Level 2 and Level 3 fair value measurements include adjustments for credit risk based on PPL's own creditworthiness (for net liabilities) and its counterparties' creditworthiness (for net assets).  PPL's credit department assesses all reasonably available market information and uses probabilities of defaultwhich is used by accounting personnel to calculate the credit valuation adjustment.  PPL assumes that 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 settlement prices to project forward prices.

In certain instances, PPL transfers energy commodity contracts are transferred between Level 2 and Level 3.  The primary reasons for the transfers during 20102013 and 20092012 were changes in the availability of market information and changes in the significance of the unobservable portioninputs utilized in the valuation of the contract.  As the delivery period of a contract becomes closer, market information may become available.  When this occurs, the model's unobservable inputs are replaced with observable market information.

Price Risk Management Assets/Liabilities - Interest Rate Swaps/Foreign Currency Exchange Contracts/Cross-Currency Swaps(PPL, LKE, LG&E and KU)

To manage their 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, 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 readily 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)GBP), 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 mar ket 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.  For PPL, the primary reason for the transfers during 2012 and 2013 was the change in the significance of the credit valuation adjustment.  Cross-currency swaps classified as Level 3 are valued by PPL's Treasury department, which reports to the CFO.  Accounting personnel, who also report to the CFO, interpret analysis quarterly to classify the contracts in the fair value hierarchy.  Valuation techniques are evaluated periodically.


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(PPL and PPL Energy Supply)

NDT Funds

The fair value measurements of cash and cash equivalents are based on the amount on deposit.

PPL and PPL Energy Supply generally use the market approach is used to measure the fair value of equity securities held in the NDT funds.

·The fair value measurements of equity securities classified as Level 1 are based on quoted prices in active markets and are comprised of securities that are representative of the Wilshire 5000 index, which is invested in approximately 70% large-cap stocks and 30% mid/small-cap stocks.markets.

·InvestmentsThe fair value measurements of 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.2.  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.

DebtThe fair value of debt securities areis generally measured using a market approach, including the use of matrix pricing.pricing models, which incorporate observable inputs.  Common inputs include benchmark yields, reported trades, broker/dealer bid/ask prices, benchmark securities and credit valuation adjustments.  When necessary, the fair value of debt securities is measured using the income approach, which incorporates similar observable inputs as well as benchmark yields, credit valuation adjustments, reference data from market research publications, monthly payment data, future predicted cash flows, collateral performance and new issue data.  The debt securities held by the NDT funds at December 31, 2010 have a weighted-average coupon of 4.59% and a weighted-average duration of five years.

Auction Rate Securities

PPL's and PPL Energy Supply's auctionAuction rate securities include Federal Family Education Loan Program guaranteed student loan revenue bonds, as well as various municipal bond issues.  At December 31, 2010, contractual maturities for these auction rate securities were a weighted averageThe probability of approximately 25 years.  PPL and PPL Energy Supply do not have significant exposure to realizerealizing losses on these securities; however, auction rate securities are classified as Level 3 because failed auctions limit the amount of observable market data that is available for measuring the fair value of these securities.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, forsuch as future interest rates that are estimated based on the underlying structureSIFMA Index, creditworthiness, and credit qualityliquidity assumptions driven by the impact of each security;auction failures.  When the present value of future interest payments estimated based on forward rates of the SIFMA Index, and principal payments discounted using interest rates for bonds with a credit rating and remaining term to maturity similaris significant to the stated maturity ofoverall valuation, the auction rate securities;securities are classified as Level 3.  The primary reason for the transfers in and out of Level 3 in 2013 and 2012   was the impact of auction failures or redemption at par.change in discount rates and SIFMA Index.

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

Nonrecurring Fair Value Measurements (All Registrants except PPL Electric and PPL Energy Supply)LG&E)

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)
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 
 December 31, 2009   20       13    7 
 March 31, 2009   45       15    30 
              
Certain non-core generation facilities:            
 September 30, 2010   473  $ 381       96 
              
Long Island generation business:            
 December 31, 2009   132    128       5 
 September 30, 2009   137    133       5 
 June 30, 2009   189    138       52 
     Carrying Fair Value Measurements Using   
    Amount (a) Level 2 Level 3 Loss (b)
PPL and PPL Energy Supply            
 Corette plant and emission allowances:            
  2013  $ 65        $ 65 
 RECs (c):            
  2011    6  $ 1       5 
PPL, LKE and KU            
 Equity investment in EEI:            
  2012    25          25 
               

(a)Represents carrying value before fair value measurement.
(b)The loss on the Corette plant and emission allowances was recorded in the Supply segment and included in "Other operation and maintenance" on the Statement of Income.  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 allowancesRECs 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 and the Long Island generation business were recorded in the Supply segment and included in "Income (Loss) from Discontinued Operations (net of income taxes)" on the Statements of Income.
(c)Current and long-term sulfur dioxide emission allowancesRECs are included in "Other current assets" and "Other intangibles" in their respective areas on the Balance Sheets.

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Sulfur Dioxide
The significant unobservable inputs used in and the quantitative information about the nonrecurring fair value measurement of assets and liabilities classified as Level 3  are as follows:
Fair Value, netSignificantRange
AssetValuationUnobservable(Weighted
(Liability)TechniqueInput(s)Average)
PPL and PPL Energy Supply
Corette plant and emission allowances:
December 31, 2013$Discounted cash flowLong-term forward price curves and capital expenditure projections100% (100%)

PPL, LKE and KU
Equity investment in EEI:
December 31, 2012$Discounted cash flowLong-term forward price curves and capital expenditure projections100%  (100%)

(PPL and PPL Energy Supply)

Corette Plant and Emission Allowances

During the fourth quarter 2013, PPL Montana recorded an impairment loss on the Corette plant and related emission allowances.  In connection with the completion of its annual business planning process that included revised long-term power and gas price assumptions and other factors, PPL Energy Supply has now determined that it is less likely that the Corette plant will restart after operations are suspended no later than April 2015. PPL Energy Supply performed an internal analysis using an income approach based on discounted cash flows to assess the fair value of the Corette asset group.  Assumptions used in the fair value assessment were forward energy prices, expectations for demand for energy in Corette's market, and expected operation and maintenance and capital expenditures that were consistent with assumptions used in the business planning process.  Through this analysis, PPL Energy Supply determined the fair value of the asset group to be negligible.

The assets were valued by the PPL Energy Supply Financial Department, which reports to the President of PPL Energy Supply.  Accounting personnel, who report to the Chief Financial Officer, interpreted the analysis to appropriately classify the assets in the fair value hierarchy.

RECs

Due to declines in forecasted full-requirement obligations in certain markets as well as declines in market prices, in 2010 and 2009, PPL Energy Supply assessed the recoverability of sulfur dioxide emission allowancescertain RECs not expected to be consumed.  When available, observableused.  Observable market prices (Level 2) were used to value the sulfur dioxide emission allowances.  When observable market prices were not available,RECs.

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 was modeled using pricesof 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 observable transactions and appropriate discount rates.  The modeled values were significant to the overallmerchant generation business.  Assumptions used in the fair value measurement.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.

Certain Non-Core Generation Facilities

Certain non-core generation facilities met the held for sale criteria at September 30, 2010.  As a result, net assets held for sale were written down to their estimated fair value less cost to sell.  The fair value in the table above excludes $4 million of estimated costs to sell and was based on the negotiated sales price (achieved through an active auction process).  See Note 9 for additional information on the anticipated sale.

Long Island Generation Business

The Long Island generation business met the held for sale criteria at June 30, 2009.  As a result, net assets held for sale were written down to their estimated fair value less cost to sell.  The fair value in the table above excludes $1 million of estimated costs to sell and was based on the negotiated sales price (achieved through an active auction process).  See Note 9 for additional information on the completed sale.
Nitrogen Oxide Allowances
In July 2008, the United States Court of Appeals for the D.C. Circuit issued a ruling that invalidated the CAIR in its entirety, including its cap-and-trade program.  As a result of this decision, in 2008, PPL determined that all of the annual nitrogen oxide allowances purchased by PPL EnergyPlus pursuant to the CAIR were no longer required, had no value and, therefore, recorded a pre-tax impairment charge of $33 million ($20 million after tax).  Further, in 2008, PPL EnergyPlus recorded an additional charge and corresponding reserve of $9 million pre-tax ($5 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 Stateme nt of Income.
FinancialFinancial Instruments Not Recorded at Fair Value

(PPL, PPL Energy Supply and PPL Electric)

NPNS

PPL and PPL Energy Supply enter into full-requirement sales contracts, power purchase agreements and certain retail energy and physical capacity contracts that range in maturity through 2023 and qualify for NPNS.  PPL Electric also enters into contracts that qualify for NPNS.  See "Energy Purchase Commitments" in Note 15 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, 2010 and 2009.  The estimated fair value of these contracts, calculated using similar inputs and valuation techniques as those described above within "Price Risk Management Assets/Liabilities - Energy Commodities," was:

  Net Asset (Liability)
  December 31, December 31,
  2010  2009 
       
PPL $ 229  $ 122 
PPL Energy Supply   240    334 
PPL Electric   (8)   (216)

OtherRegistrants)

The carrying amounts of contract adjustment payments related to the Purchase Contract component of the Equity Units and long-term debt on the Balance Sheets and their estimated fair valuevalues are set forth below.  The fair valuevalues of these instruments waswere estimated using an income approach by discounting future cash flows at estimated current cost of funding rates.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.

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 December 31, 2010 December 31, 2009  December 31, 2013 December 31, 2012
  Carrying   Carrying    Carrying   Carrying  
  Amount Fair Value Amount Fair Value  Amount Fair Value Amount Fair Value
PPLPPL        PPL        
Contract adjustment payments (a) $ 146  $ 148     Contract adjustment payments (a) $ 21  $ 22  $ 105  $ 106 
Long-term debt  12,663   12,868  $ 7,143  $ 7,280 Long-term debt  20,907   22,177   19,476   21,671 
PPL Energy SupplyPPL Energy Supply        PPL Energy Supply        
Long-term debt  5,589   5,919   5,031   5,180 Long-term debt  2,525   2,658   3,272   3,556 
PPL ElectricPPL Electric        PPL Electric        
Long-term debt  1,472   1,578   1,472   1,567 Long-term debt  2,315   2,483   1,967   2,333 
LKELKE        
Long-term debt  4,565   4,672   4,075   4,423 
LG&ELG&E        
Long-term debt  1,353   1,372   1,112   1,178 
KUKU        
Long-term debt  2,091   2,155   1,842   2,056 

(a)ReflectedIncluded in "Other current liabilities" and long-term other liabilities"Other deferred credits and noncurrent liabilities" on the balance sheet.  See Note 7 for additional information.Balance Sheets.

(PPL and PPL Energy Supply)

The carrying value of "Short-term debt" at December 31, 2010 and 2009 on the Balance Sheets represented or approximatedshort-term debt (including notes between affiliates), when outstanding, approximates fair value due to the liquid nature of the instruments or variable interest rates associated with the financial instruments.short-term debt and is classified as Level 2.

Credit Concentration Associated with Financial Instruments

(PPL, PPL Energy Supply and PPL Electric)All Registrants)

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 business and, as such,When NPNS is elected, 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 19 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, 2010,2013, PPL had credit exposure of $2.8$1.0 billion tofrom energy trading partners, excluding the effects of netting arrangements, reserves and collateral.  As a result of netting arrangements, reserves and collateral, PPL's credit exposure was reduced to $749$539 million.  One of theThe top ten counterparties including their affiliates accounted for 12%$281 million, or 52%, of this exposure, and the next highest counterparty accounted for 11% of the exposure.  Ten counterparties accounted for $445 million, or 59%, of the net exposure.  Nine of these counterparties had an investment grade credit rating from S&P or Moody's and accounted for 89%95% of the top ten exposure.exposures.  The remaining counterparty has not been rated by S&P or Moody's, but is current on its obligations.

(PPL Energy Supply)

At December 31, 2010,2013, PPL Energy Supply had credit exposure of $2.8$1.0 billion tofrom energy trading partners, excluding exposure from related parties and the effects of netting arrangements, reserves and collateral.  As a result of netting arrangements, reserves and collateral, this credit exposure was reduced to $749$536 million.  One of theThe top ten counterparties including their affiliates accounted for 12%$281 million, or 52%, of this exposure, and the next highest counterparty accounted for 11% of the exposure.  Ten counterparties accounted for $445 million, or 59%, of the net exposure.  Nine of these counterparties had an investment grade credit rating from S&P or Moody's and accounted for 89%95% of the top ten exposure.exposures.  The remaining counterparty has not been rated by S&P or Moody's, but is current on its obligations.

At December 31, 2010, PPL Energy Supply's credit exposure under certain energy supply contracts to PPL Electric was $42 million.  Netting arrangements had an insignificant change on this  See Note 16 for information regarding the related party credit exposure.

(PPL Electric)

At December 31, 2010, PPL Electric had nois exposed to credit exposurerisk under energy supply contracts (including its supply contracts with its affiliate PPL EnergyPlus).; however, its PUC-approved recovery mechanism is anticipated to substantially eliminate this exposure.

(LKE, LG&E and KU)

At December 31, 2013, LKE's, LG&E's and KU's credit exposure was not significant.

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19.  Derivative Instruments and Hedging Activities

Risk Management Objectives(PPL, PPL Energy Supply and PPL Electric)

(All Registrants)

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. PPL completed its acquisition of LKE in November 2010.  60;Due to the timing of the acquisition, PPL is evaluating changes to processes, including risk management, as part of its ongoing integration activities.  LKE continues to operate under its existing policies, which have been reviewed by PPL and have been deemed adequate to minimize risk until this evaluation and integration process is complete.

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 market liquidity and volumetric risks.  Forward contracts, futures contracts, options, swaps and structured transactions 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 NPNS is elected.

The table below summarizes the market risks that affect PPL and PPL Energy Supply are exposed toits Subsidiary Registrants.

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 investment and
earningsX

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 risk from:

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

·PPL Energy Supply is exposed to commodity price risk 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;activities.

·interest rate andPPL Electric is exposed to commodity price risk associated with debt usedfrom its obligation as PLR; however, its PUC-approved cost recovery mechanism substantially eliminates its exposure to finance operations, as well as debt and equity securities in NDT funds and defined benefit plans; and
·foreign currency exchange ratethis risk.  PPL Electric also mitigates its exposure to volumetric risk associated with investments in U.K. affiliates, as well as purchases of equipment in currencies other than U.S. dollars.

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, volumes of full-requirement sales contracts, basis 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 and PPL Electric are exposed to market price and volumetric risks from PPL Electric's obligation as PLR.  The PUC has approved a cost recovery mechanism that allows PPL Electric to pass through to customers the cost associated with fulfillingby entering into full-requirement supply agreements to serve its PLR obligation.  This cost recovery mechanism substantially eliminates PPL Electric's exposure to market price risk.  PPL Electric also mitigates its exposure to volumetric risk by entering into full-requirement supply agreements for its customers.  These supply agreements transfer the volumetric risk associated with the PLR obligation to the energy suppliers.

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


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Interest rate risk

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

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

Equity securities price risk

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

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

Foreign currency risk

·PPL is exposed to foreign currency exchange risk primarily associated with its investments and earnings 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.non-performance.

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

PPL and PPL Energy Supply areis exposed to credit risk from "in-the-money" commodity derivatives with theirits energy trading partners, which include other energy companies, fuel suppliers, and financial institutions, other wholesale customers and from foreign currency derivatives with financial institutions.retail customers.

PPLLKE and PPL ElectricLG&E are exposed to credit risk from PPL Electric's supply agreements for its PLR obligation.interest rate derivatives with third-party financial institutions.

The majority of PPL's,PPL and PPL Energy Supply's and PPL Electric's credit risk stems from PPL subsidiaries' commodity derivatives for multi-year contracts for energy sales and purchases.  If PPL Energy Supply's counterparties fail to perform their obligations under such contracts and PPL Energy Supply could not replace the sales or purchases at the same or better prices as those under the defaulted contracts, PPL Energy Supply would incur financial losses.  Those losses would be recognized immediately or through lower revenues or higher costs in future years, depending on the accounting treatment for the defaulted contracts.  In the event ana supplier of LKE (through its subsidiaries LG&E KUand KU) or PPL Electric supplier defaults on its obligation, those entities would be required to seek replacement power or replacement fuel in the market.  In general, incremental costs incu rredincurred by these entities would be recoverable from customers in future rates.rates, thus mitigating the financial 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.agreements or provisions.  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, their tangible net worth falls below specified percentages or their exposures exceed an established credit limit.  See Note 18 for credit concentration associated with financial instruments.energy trading partners.

Master Netting Arrangements

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


264

PPL's and PPL Energy Supply's obligation to return counterparty cash collateral under master netting arrangements was $338$9 million and $355$112 million at December 31, 20102013 and December 31, 2009.2012.

PPL Electric, LKE and LG&E had no obligation to return cash collateral under master netting arrangements at December 31, 20102013 and December 31, 2009.2012.

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

PPL Energy Supply, and PPL Electric and KU had not posted any cash collateral under master netting arrangements at December 31, 20102013 and December 31, 2009.2012.

See "Offsetting Derivative Investments" below for a summary of derivative positions presented in the balance sheets where a right of setoff exists under these arrangements.

(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, transportation/transmission availability and reliability within and between regions, market liquidity, and the nature and extent of current and potential federal and state regulations.

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

PPL Energy Supply has a formal hedging program to economically hedge the forecasted purchase and sale of electricity and related fuels for its competitive baseload generation fleet, which includes 7,369 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 3,309 MW (summer rating) of natural gas and oil-fired generation.  PPL Energy Supply's marketing portfolio is comprised of full-requirement sales contracts and related supply contracts, retail natural gas and electricity sales contracts and other marketing activities.  The strategies that PPL Energy Supply uses to hedge its full-requirement sales contracts include purchasing energy (at a liquid trading hub or directly at the load delivery zone), capacity and RECs in the market and/or supplying the energy, capacity and RECs from its generation assets.

PPL and PPL Energy Supply enter into financial and physical derivative contracts, including forwards, futures, swaps and options, to hedge the price risk associated with electricity, natural gas, oil and other commodities.  Certain contracts qualify for NPNS or are non-derivatives or NPNS is elected and therefore they are therefore not reflected in the financial statements until delivery.  See Note 18 for additional information on NPNS.  PPL and PPL Energy Supply segregate their remaining non-trading activities into two categories:  cash flow hedge activityhedges and economic activity.

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 have 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."discussed below.

Cash Flow Hedges

ManyCertain derivative contracts have qualified for hedge accounting so that the effective portion of a derivative's gain or loss is deferred in AOCI and reclassified into earnings when the forecasted transaction occurs.  TheCertain cash flow hedge positions were dedesignated during 2013 and 2012 and the unamortized portion remained in AOCI because the original forecasted transaction is still expected to occur.  There were no active cash flow hedges that existed at December 31, 2010 range in maturity through 2015.2013.  At December 31, 2010,2013, the accumulated net unrealizedunrecognized after-tax gains (losses) that are expected to be reclassified into earnings during the next 12 months were $300$25 million for PPL and PPL Energy Supply.  Cash flow hedges are discontinued if it is no longer probable that the original forecasted transaction will occur by the end of the originally specified time periods and any amounts previously recorded in AOCI are reclassified into earnings.earnings once it is determined that the hedge transaction is probable of not occurring.  For 2010,2013, there were no reclassifications, while in 2012 and 2011, such reclassifications were after-tax losses of $(89) million, primarily due to the monetization of certain full-requirement sales contracts, for which the associated hedges are no longer required, as discussed above.  For 2009 and 2008, such reclassifications were an after-tax gain of $9 million and an after-tax loss of $(8) million.insignificant.

For 2010, 20092013 and 2008,2012, hedge ineffectiveness associated with energy derivatives was insignificant.  For 2011, hedge ineffectiveness associated with energy derivatives was an after-tax a lossgain (loss) of $(30) million, a gain of $41 million and a gain of $12$(22) million.


In addition, when cash flow hedge positions fail hedge effectiveness testing, hedge accounting is not permitted in the quarter in which this occurs and, accordingly, the entire change in fair value for the periods that failed is recorded to the income statement.  Certain power and gas cash flow hedge positions failed effectiveness testing during 2008 and the first quarter of 2009.  However, these positions were not dedesignated as hedges, as prospective regression analysis demonstrated that these hedges were 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 2009, fewer power and gas cash flow hedges failed hedge effectiveness testing; therefore, a portion of the previously recognized u nrealized gains recorded in 2008 associated with these hedges were reversed.  For 2009, after-tax losses of $(215) million were recognized in earnings as a result of these reversals.  During the first quarter of 2010, after-tax losses of $(82) million were recognized in earnings as a result of these reversals continuing.   Effective April 1, 2010, clarifying accounting guidance was issued that precludes the reversal of previously recognized gains/losses resulting from hedge failures.  By the end of the first quarter of 2010, all previously recorded hedge ineffectiveness gains resulting from hedge failures were reversed, thus the new accounting guidance did not have a significant impact at adoption on April 1, 2010. See Note 1 for more information on this accounting change.
265

Economic Activity

CertainMany derivative contracts economically hedge the commodity price and volumetric risk associated with electricity, natural gas, oil and other commodities but do not receive hedge accounting treatment.treatment because they were not eligible for hedge accounting or because hedge accounting was not elected.  These derivatives hedge a portion of the economic value of PPL and PPL Energy Supply's competitive generation assets and unregulated full-requirement and retail contracts, which are subject to changes in fair value due to market price volatility and volume expectations.  Additionally, economic activity includeswould also include the ineffective portion of qualifying cash flow hedges including the entire change in fair value of certain cash flow hedges that failed retrospective effectiveness testing (see "Cash Flow Hedges" above).  The derivative contracts in this category that existed at December 31, 20102013 range in maturity through 2017.2019.

Examples of economic activity may 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 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 the physical generating capacity is owned, the price exposure is limited togenerally capped at the cost ofprice at which the particular generating unit would be dispatched and therefore does not expose PPL Energy Supply to uncovered market price risk.

The net fair value of economic positions at December 31, 2013 and December 31, 2012 was a net asset (liability) of $107 million and $346 million for PPL and PPL Energy Supply also purchases call options or sells put options to create a net purchase position to cover an overall short position in the non-trading portfolio.

Unrealized activity associated with monetizing certain full-requirement sales contracts was also included in economic activity during 2010.

Supply.  The unrealized gains (losses) for economic activity arewere as follows.

  PPL PPL Energy Supply
   2010  2009  2008  2010  2009  2008 
                    
Operating Revenues                  
 Utility $ (2)               
 Unregulated retail electric and gas   1  $ 6  $ 5  $ 1  $ 6  $ 5 
 Wholesale energy marketing   (805)   (229)   1,056    (805)   (229)   1,056 
Operating Expenses                  
 Fuel   29    49    (79)   29    49    (79)
 Energy purchases   286    (155)   (553)   286    (155)   (553)

The net gains (losses) recorded in "Wholesale energy marketing" resulted primarily from certain full-requirement sales contracts for which PPL Energy Supply did not elect NPNS, from hedge ineffectiveness, including hedges that failed effectiveness testing, as discussed in "Cash Flow Hedges" above, and from the monetization of certain full-requirement sales contracts.  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, from hedge ineffectiveness, including hedges that failed effectiveness testing, and from purchase contracts that no longer hedge the full-requirement sales contracts that have been monetized as discussed above in "Monetization of Certain Full-Req uirement Sales Contracts."
   2013  2012  2011 
Operating Revenues         
 Unregulated wholesale energy $ (721) $ (311) $ 1,407 
 Unregulated retail energy   12    (17)   31 
Operating Expenses         
 Fuel   (4)   (14)   6 
 Energy purchases   586    442    (1,123)

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.  PPL Energy Supply's trading activity is shown in "NetNet energy trading margins"margins, which are included in "Unregulated wholesale energy" on the Statements of Income.Income, were insignificant for 2013, 2012 and 2011.

Commodity Volumetric ActivityVolumes

PPL Energy Supply currently employs four primary strategies to maximizeAt December 31, 2013, the value 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.  The tables within this section present thenet volumes of PPL Energy Supply's derivative activity, excluding those that qualify for NPNS, unless otherwise noted.

Sales of Baseload Generation

PPL Energy Supply has a formal hedging program for its competitive baseload generation fleet, which includes 7,408 MW of nuclear, coal and hydro generating capacity.  The objective of this program is to provide a reasonable level of near-term cash flow and earnings certainty while preserving upside potential of power price increases over the medium term.  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 2011-2013.  These expected sales could be impacted by several factors, including plant availability.

2011 (a) 2012 (a) 2013 (a)
 51,435   54,675   54,364 

(a)Excludes expected sales from the Safe Harbor hydroelectric facility that has been classified as held for sale.  See Note 9 for additional information.

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, 2010.

   Derivative Total Power Fuel Purchases (d)
Year Sales (a) (b) Sales (c) Coal Nuclear
          
2011  91% 99% 99% 100%
2012  58% 68% 96% 100%
2013  7% 15% 87% 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.
(b)Volumes for derivative sales contracts that deliver between 2014 and 2015 are 1,180 GWh.
(c)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.
(d)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 to 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 the volumes (in thousands of barrels) of derivative(sales)/purchase contracts used in support of this strategy at December 31, 2010.the various strategies discussed above were as follows.

Contract Type 2011  2012  2013 
        
 Oil Swaps  6,822   6,167   300 

Optimization of Intermediate and Peaking Generation

In addition to its competitive baseload generation activities, PPL Energy Supply attempts to optimize the overall value of its competitive intermediate and peaking fleet, which includes 4,321 MW of gas and oil-fired generation.  The following table presents the volumes of derivative contracts used in support of this strategy at December 31, 2010.

  Units 2011  2012 
       
Net Power Sales:      
 Options (a) GWh  (69)  
 Non-option contracts (b) GWh  (1,969)  (408)
        
Net Fuel Purchases:      
 Non-option contracts Bcf  15.9   2.7 
    Volumes (a)
Commodity Unit of Measure 2014  2015  2016  Thereafter
           
Power MWh  (33,278,963)  (14,421,817)  4,348,927   18,931,370 
Capacity MW-Month  (19,575)  (3,929)  501   9 
Gas MMBtu  25,869,617   (33,082,289)  19,082,945   (9,202,403)
Coal Tons  495,900       
FTRs MW-Month  9,581   1,705     
Oil Barrels  150,000   380,869   274,137   101,261 

(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.

Interest Rate Risk

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.  The full-requirement sales contracts PPL Energy Supply is awarded do not provide for specific levels of load, and actual load could vary significantly from forecasted amounts.  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, 2010.

   Units 2011  2012  2013 
          
Energy sales contracts (a) (b) GWh  (15,613)  (8,387)  (3,057)
Related energy supply contracts (b)        
 Energy purchases GWh  9,042   3,974   186 
 Volumetric hedges (c) GWh  419   (16)  
 Generation supply GWh  2,909   3,589   2,848 
Retail gas sales contracts Bcf  (5.7)  (5.3)  (0.1)
Retail gas purchase contracts Bcf  5.7   5.2   0.1 

(a)Includes NPNS and contracts that are not derivative, which are the majority of PPL Energy Supply's full-requirement sales contracts and receive accrual accounting.  Also included in these volumes are the sales from PPL EnergyPlus to PPL Electric to supply PPL Electric's PLR load obligation.
(b)Net volumes for derivative contracts, excluding contracts that qualify for NPNS that deliver between 2014 and 2015 are insignificant.
(c)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.

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, 2010.

Commodity Units 2011  2012  2013 
          
 FTRs GWh  23,283   47   
 Power Basis Positions GWh  (7,481)  (230)  (216)
 Gas Basis Positions (a) Bcf  14.9   3.2   

(a)Net volumes that deliver in 2014 are insignificant.

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 at December 31, 2010.

Commodity Units 2011  2012  2013 
          
 Capacity (a) MW-months  (6,634)  (177)  (1,005)

(a)Net volumes that deliver between 2014 and 2016 are 647 MW-months.

Proprietary Trading Activity

At December 31, 2010, PPL Energy Supply's proprietary trading positions, excluding FTR, basis and capacity contract activity that has already been included in the tables above, were not significant.

Sales of Excess Regulated Generation(PPL)

PPL manages the price risk of its expected excess regulated generation capacity using market-traded forward contracts.  At December 31, 2010, PPL's net volume of electricity based financial derivatives outstanding to hedge excess regulated generation was 998 GWh for LKE.

Interest Rate Risk (PPL, LKE, LG&E and PPL Energy Supply)KU)

PPL and its subsidiaries have issuedissue debt to finance their operations, which exposes 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 their debt portfolio, adjust the duration of theirthe 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 its subsidiaries'the debt portfolio due to changes in benchmark interest rates.

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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, theseAt December 31, 2013, outstanding interest rate swap contracts range in maturity through 2041 and2044 for PPL's domestic interest rate swaps.  These swaps had aan aggregate notional value of $500 million$1.3 billion at December 31, 2010.  2013.

At December 31, 2013, PPL held a notional position in cross-currency interest rate swaps totaling $1.3 billion that range in maturity through 2028 to hedge the interest payments and principal of WPD's U.S. dollar-denominated senior notes.

For 2010,2013 and 2012, hedge ineffectiveness associated with interest rate derivatives was insignificant.  For 2011, hedge ineffectiveness associated with these derivatives resulted in a net after-tax lossgain (loss) of $(9) million.  For 2009 and 2008, hedge ineffectiveness associated with these derivatives was not significant.  No contracts were outstanding at PPL Energy Supply at December 31, 2010.
In anticipationmillion, which included a gain (loss) of debt issuances that occurred in March 2010, WPD (South West) and WPD (South Wales) entered into forward starting$(4) million attributable to certain interest rate swaps tothat failed hedge effectiveness testing during the change in benchmark interest rates up through the datesecond quarter of the debt issuances.  See Note 7 for information on the debt issued.  For 2010, WPD (South Wales) recorded hedge ineffectiveness of $3 million in "Interest Expense" on the Statement of Income related to the forward-starting interest rate swaps.
2011.

At December 31, 2010, WPDH Limited holds a net notional position in cross-currency swaps totaling $302 million 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.  For 2010, 2009 and 2008, no amounts were recorded related to hedge ineffectiveness.

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 periodsperiod and any amounts previously recorded in AOCI are reclassified to earnings.  As a resultinto earnings once it is determined that the hedged transaction is probable 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 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.PPL reclassified a net after-tax loss of $(19) million in 2010 and a net after-tax gain of $1 million in 2009.not occurring.  PPL had no such reclassifications in 2008.  PPL Energy Supply had no such reclassifications in 2010, 2009for 2013, 2012 and 2008.2011.

At December 31, 2010,2013, 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 $(7) million for PPL and insignificant for PPL Energy Supply.$(10) million.  Amounts are reclassified as the hedged interest payments are made.

Economic Activity(LKE, LG&E and KU)

In November 2012 and April 2013, LG&E hasand KU entered into forward-starting interest rate swap contractsswaps with PPL that economically hedgehedged the interest payments on variable debt.  As discussednew debt that was expected to be issued in Note 3, realized gains2013.  In September 2013, these hedges were terminated and lossesLG&E and KU entered into new forward-starting interest rate swaps with PPL, effectively extending the start date of the prior hedges from September 2013 to December 2013.  All of these swaps had terms identical to forward-starting swaps entered into by PPL with third parties.  New debt totaling $500 million was issued in November 2013 (LG&E and KU each issued $250 million) and the hedges issued in September were terminated in November 2013.  Net cash settlements of $86 million (LG&E and KU each received $43 million) were received on the swaps are recoverable through regulated rates.  Therefore, the changethat were terminated in fair value of these derivatives isSeptember and November, which are included in regulatory assets and liabilities."Cash Flows from Operating Activities" on the Statement of Cash Flows.  Realized gains and losses on these swaps are probable of recovery through regulated rates; as such, the net settlements were reclassified from AOCI to regulatory liabilities and are being recognized in "Interest Expense" on the Statements of Income whenover the hedged transaction occurs.  At December 31, 2010, LG&E held contracts with a notional amountlife of $179 million that range in maturity through 2033.the newly issued debt.  For 2013, there was no hedge ineffectiveness recorded for the interest rate derivatives.

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, 2010,In July 2012, contracts held by PPL held contracts that rangeranged in maturity through 2047 and had a notional value of $349 million.$99 million were canceled without penalties by the counterparties. PPL Energy Supply did not hold any such contracts at December 31, 2010.2013 or 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 2010, 2009 and 2008.  Additionally, PPL recognized n et after-tax gains of $4 million from hedges of debt that no longer qualified as fair value hedges for 2009, while the amounts were not significant for 2010 and 2008.  PPL Energy Supply did not recognize any gains or losses resulting from hedges of debt issuances that no longer qualified as fair value hedges for 2010, 20092013, 2012 and 2008.2011.

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 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.


267

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, 2013, LG&E held contracts with a notional amount of $179 million that range in maturity through 2033.

Foreign Currency Risk

(PPL)

PPL and PPL Energy Supply areis exposed to foreign currency risk, primarily through investments in and earnings of 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, 2010, 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 2010, 2009 and 2008.

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, 2010, 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 2010, 2009 and 2008.  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 2010, 2009 and 2008.

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, 2010 was £352013 had a notional amount of £301 million (approximately $62$477 million based on contracted rates).  TheseThe settlement dates of these contracts were settled in January 2011.range from May 2014 through December 2015.

Additionally, a PPL Global subsidiary that has a U.S. dollar functional currency entered into GBP intercompany loans payable with PPL WEM subsidiaries that have GBP functional currency.  The loans qualify as a net investment hedge for the PPL Global subsidiary.  As such, the foreign currency gains and losses on the intercompany loans for the PPL Global subsidiary are recorded to the foreign currency translation adjustment component of OCI.  At December 31, 2010,2013, the fair valueoutstanding balances of these positions was a net assetthe intercompany loans were £42 million (approximately $69 million based on spot rates).  For 2013 and 2012, PPL recognized insignificant amounts of $7 million.  At December 31, 2009, the fair value of these positions was a net asset of $13 million.  For 2010, 2009 and 2008, PPL and PPL Energy Supply recognized after tax net investment hedge gains of $4 million, after-tax losses of $(5) million and after-tax gains of $20 million(losses) on the intercompany loans in the foreign currency translation adjustment component of AOCI.  OCI.

At Decemb erDecember 31, 2010,2013 and 2012, PPL had an insignificant amount and PPL Energy Supply had $15$14 million of accumulated net investment hedge after-tax gains after tax,(losses) that were included in the foreign currency translation adjustment component of AOCI compared with $11 million of gains, after tax, at December 31, 2009.  See Note 16 for additional information.AOCI.

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, 2010,2013, the total exposure hedged by PPL was £89 million and the net fair value of these positions was a net asset of $4 million.approximately £1.4 billion (approximately $2.3 billion based on contracted rates).  These contracts had termination dates ranging from January 2014 through December 2015.

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 December 2011.  Thepurchase GBP in order to economically hedge the foreign currency exchange rate risk related to the repayment.  When these trades were settled in April 2011, PPL recorded $55 million of pre-tax, net fair value of similar hedging instruments outstanding at December 31, 2009 was a net asset of $2 million.  Gains and losses, both realized and unrealized, on these contracts are includedgains (losses) in "Other Income (Expense) - net" on the StatementsStatement of Income.  For 2010, PPL and PPL Energy Supply recorded net gains of $3 million.  For 2009 and 2008, PPL and PPL Energy Supply recorded net losses of $( 9) million and net gains of $9 million related to similar average rate forwards and average rate options.  See Note 16 for additional information.

Accounting and Reporting

(PPL, PPL Energy Supply and PPL Electric)All Registrants)

All derivative instruments are recorded at fair value on the balance sheetBalance Sheet as an asset or liability (unless they qualifyunless NPNS is elected.  NPNS contracts for NPNS; See Note 18PPL and PPL Energy Supply include certain full-requirement sales contracts, other physical purchase and sales contracts and certain retail energy and physical capacity contracts, and for additional information).PPL Electric include certain 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.  However,met and designated as such, except for the change in fair value of LG&E's and KU's interest rate swaps isthat are recognized in aas regulatory asset.assets or regulatory liabilities.  See Note 36 for additional information.amounts recorded in regulatory assets and regulatory liabilities at December 31, 2013 and 2012.

See Note 1 for additional information on accounting policies related to derivative instruments.

268


(PPL)

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

      December 31, 2010 December 31, 2009     December 31, 2013 December 31, 2012
      Derivatives designated as Derivatives not designated Derivatives designated as Derivatives not designated     Derivatives designated as Derivatives not designated Derivatives designated as Derivatives not designated
      hedging instruments as hedging instruments (a) hedging instruments as hedging instruments (a)     hedging instruments as hedging instruments hedging instruments as hedging instruments
      Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities     Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities
Current:Current:                        Current:                    
Price Risk Management                        Price Risk Management                   
 Assets/Liabilities (b):                         Assets/Liabilities (a):                   
  Interest rate swaps $ 11  $ 19     $ 2  $ 10           Interest rate swaps (b) $ 82         $ 4  $ 14  $ 22      $ 5 
  Cross-currency swaps   7    9          1  $ 4        Cross-currency swaps    $ 4              3        
  Foreign currency                         Foreign currency                   
   exchange contracts   7     $ 4       8     $ 2      contracts     16       55       2       23 
  Commodity contracts   878    19    1,011    1,095    741    219    1,395  $ 1,279  Commodity contracts         $ 860    750    59      $ 1,452    1,010 
    Total current   903    47    1,015    1,097    760    223    1,397    1,279    Total current   82    20    860    809    73    27    1,452    1,038 
Noncurrent:Noncurrent:                        Noncurrent:                   
Price Risk Management                        Price Risk Management                   
 Assets/Liabilities (b):                         Assets/Liabilities (a):                   
  Interest rate swaps   4          32    40           Interest rate swaps (b)  9          32    1          53 
  Cross-currency swaps   37             11           Cross-currency swaps     28           14   1        
  Foreign currency                         Foreign currency                   
   exchange contracts               5            contracts     4       31              19 
  Commodity contracts   169    7    445    431    578    118    640    464  Commodity contracts           328    320    27        530    556 
    Total noncurrent   210    7    445    463    634    118    640    464    Total noncurrent   9    32    328    383    42    1    530    628 
Total derivativesTotal derivatives $ 1,113  $ 54  $ 1,460  $ 1,560  $ 1,394  $ 341  $ 2,037  $ 1,743 Total derivatives $ 91  $ 52  $ 1,188  $ 1,192  $ 115  $ 28  $ 1,982  $ 1,666 

(a)$326 million and $375 million of net gains associated with derivatives that were no longer designated as hedging instruments are recorded in AOCI at December 31, 2010 and 2009.
(b)Represents the location on the Balance Sheet.Sheets

The after-tax balances of accumulated net gains (losses) (excluding net investment hedges) in AOCI were $695 million, $602 million and $(21) million at December 31, 2010, 2009 and 2008.
(b)Excludes accrued interest, if applicable.

The following tables present the pre-tax effect of derivative instruments recognized in income, OCI or regulatory assets.assets and regulatory liabilities.

 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 

Derivatives in Hedged Items in Location of Gain Gain (Loss) Recognized Gain (Loss) Recognized
Fair Value Hedging Fair Value Hedging (Loss) Recognized in Income on Derivative in Income on Related Item
Relationships Relationships in Income 2010  2009  2010  2009 
                 
Interest rate swaps Fixed rate debt Interest expense $ 48  $ 12  $ (6) $ 29 
    Other Income - net            7 
             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)
2013            
 Cash Flow Hedges:           
  Interest rate swaps $ 127  Interest Expense $ (20)     
  Cross-currency swaps   (41) Other Income (Expense) - net   (28)     
        Interest Expense   1      
  Commodity contracts      Unregulated wholesale energy   263  $ 1 
        Energy purchases   (58)     
        Depreciation   2      
        Other   3      
 Total $ 86    $ 163  $ 1 
 Net Investment Hedges:           
  Foreign currency contracts $ (14)        
               
269
             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) Other income (Expense) - net $ 1      
        Interest Expense   (18)     
               
  Cross-currency swaps   (15) Other Income (Expense) - net   (23)     
        Interest Expense   (2)     
  Commodity contracts   114  Unregulated wholesale energy   891  $ (1)
        Energy purchases   (139)   (2)
        Depreciation   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) Other Income (Expense) - net   29      
        Interest Expense   5      
               
  Commodity contracts   431  Unregulated wholesale energy   835    (39)
        Fuel   1      
        Energy purchases   (243)   1 
        Depreciation   2      
 Total $ 341    $ 616  $ (51)
 Net Investment Hedges:           
  Foreign currency contracts $ 6         

   2010   2009 
               Gain (Loss)     Gain (Loss)
                  Recognized     Recognized
                  in Income     in Income
               on Derivative  Gain (Loss)  on Derivative
            Gain (Loss)  (Ineffective  Reclassified  (Ineffective
            Reclassified  Portion and  from AOCI  Portion and
      Derivative Gain  Location of  from AOCI  Amount  into  Amount
      (Loss) Recognized in  Gain (Loss)  into Income  Excluded from  Income  Excluded from
   Derivative   OCI (Effective Portion)  Recognized   (Effective  Effectiveness  (Effective  Effectiveness
   Relationships  2010   2009   in Income  Portion)  Testing)  Portion)  Testing)
Cash Flow Hedges:                     
 Interest rate swaps $ (145) $ 64  Interest expense $ (4) $ (17) $ (2)   
           Other income            
            (expense) - net   (30)      1    
 Cross-currency       Interest expense   2       2    
  swaps   25    (45) Other income            
            (expense) - net   16       (20)   
 Commodity       Wholesale energy            
  contracts   487    829   marketing   680    (201)   358  $ (296)
           Fuel   2       (20)   2 
           Depreciation   2       1    
           Energy purchases   (458)   3    (544)   (7)
           Other O&M         1    
Total $ 367  $ 848     $ 210  $ (215) $ (223) $ (301)
Net Investment                     
 Hedges:                     
  Foreign exchange                     
   contracts $ 5  $ (9)               

Derivatives Not Designated as Location of Gain (Loss) Recognized in      
 Hedging Instruments:  Income on Derivatives  2010   2009 
         
Foreign exchange contracts Other income (expense) - net $ 3  $ (9)
Commodity contracts Utility   (2)   
  Unregulated retail electric and gas   11    13 
  Wholesale energy marketing   (70)   588 
  Net energy trading margins (a)   1    
  Fuel   12    12 
  Energy purchases   (405)   (808)
  Total $ (450) $ (204)
         
Derivatives Not Designated as Location of Gain (Loss) Recognized as      
 Hedging Instruments: Regulatory Liabilities/Assets  2010   2009 
         
Interest rate swaps Regulatory asset $ (11)   
    $ (11)   

(a)Differs from the Statement of Income due to intra-month transactions that PPL defines as spot activity, which is not accounted for as a derivative.
Derivatives Not Designated as Location of Gain (Loss) Recognized in         
 Hedging Instruments  Income on Derivatives  2013   2012   2011 
            
Foreign currency contracts Other Income (Expense) - net $ (38) $ (52) $ 65 
Interest rate swaps Interest Expense   (8)   (8)   (8)
Commodity contracts Utility             (1)
  Unregulated wholesale energy   (85)   1,199    1,600 
  Unregulated retail energy   25    30    39 
  Fuel   2         (1)
  Energy purchases   130    (965)   (1,493)
  Total $ 26  $ 204  $ 201 
            
Derivatives Not Designated as Location of Gain (Loss) Recognized as         
 Hedging Instruments Regulatory Liabilities/Assets  2013   2012   2011 
            
Interest rate swaps Regulatory assets - noncurrent $ 22  $ 1  $ (26)
            
Derivatives Designated as Location of Gain (Loss) Recognized as         
 Cash Flow Hedges Regulatory Liabilities/Assets  2013   2012   2011 
            
Interest rate swaps Regulatory liabilities - noncurrent $ 72  $ 14    

(PPL Energy Supply)

The following tables present the fair value and location of derivative instruments recorded on the Balance Sheets.

       December 31, 2010 December 31, 2009
       Derivatives designated as Derivatives not designated Derivatives designated as Derivatives not designated
       hedging instruments as hedging instruments (a) hedging instruments hedging instruments (a)
       Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities
Current:                        
 Price Risk Management                        
  Assets/Liabilities (b):                        
   Cross-currency swaps $ 7  $ 9        $ 1  $ 4       
   Foreign currency                        
    exchange contracts   7     $ 4       8     $ 2    
   Commodity contracts   878    19    1,011  $ 1,084    741    219    1,395  $ 1,279 
     Total current   892    28    1,015    1,084    750    223    1,397    1,279 
Noncurrent:                        
 Price Risk Management                        
  Assets/Liabilities (b):                        
   Cross-currency swaps   37             11          
   Foreign currency                        
    exchange contracts               5          
   Commodity contracts   169    7    445    431    578    118    640    464 
     Total noncurrent   206    7    445    431    594    118    640    464 
Total derivatives $ 1,098  $ 35  $ 1,460  $ 1,515  $ 1,344  $ 341  $ 2,037  $ 1,743 
       December 31, 2013 December 31, 2012
       Derivatives designated as Derivatives not designated Derivatives designated as Derivatives not designated
       hedging instruments as hedging instruments hedging instruments as hedging instruments
       Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities
Current:                        
 Price Risk Management                        
  Assets/Liabilities (a):                        
   Commodity contracts           $ 860  $ 750  $ 59       $ 1,452  $ 1,010 
     Total current             860    750    59         1,452    1,010 

270


       December 31, 2013 December 31, 2012
       Derivatives designated as Derivatives not designated Derivatives designated as Derivatives not designated
       hedging instruments as hedging instruments hedging instruments as hedging instruments
       Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities
Noncurrent:                        
 Price Risk Management                        
  Assets/Liabilities (a):                        
   Commodity contracts             328    320    27         530    556 
     Total noncurrent             328    320    27         530    556 
Total derivatives           $ 1,188  $ 1,070  $ 86       $ 1,982  $ 1,566 

(a)$326 million and $375 million of net gains associated with derivatives that were no longer designated as hedging instruments are recorded in AOCI at December 31, 2010 and 2009.
(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 $733 million, $573 million and $(12) million at December 31, 2010, 2009 and 2008.

The following tables present the pre-tax effect of derivative instruments recognized in income or OCI.  There were no gains (losses) on interest rate swaps for 2013 or 2012.

Derivatives in Hedged Items in Location of Gain Gain (Loss) Recognized Gain (Loss) Recognized
Fair Value Hedging Fair Value Hedging (Loss) Recognized in Income on Derivative in Income on Related Item
Relationships Relationships in Income 2010  2009  2010  2009 
                 
Interest rate swaps Fixed rate debt Interest expense    $ 1  $ 2    
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   2009 
                 Gain (Loss)     Gain (Loss)
                  Recognized     Recognized
                 in Income     in Income
                 on Derivative     on Derivative
           Gain (Loss)  (Ineffective  Gain (Loss)  (Ineffective
           Reclassified  Portion and  Reclassified  Portion and
      Derivative Gain Location of  from AOCI  Amount  from AOCI  Amount
      (Loss) Recognized in Gains (Losses)  into Income  Excluded from  into Income  Excluded from
   Derivative  OCI (Effective Portion) Recognized  (Effective  Effectiveness  (Effective  Effectiveness
   Relationships  2010   2009  in Income   Portion)   Testing)  Portion)  
Testing)
Cash Flow Hedges:                    
  Cross-currency       Interest expense $ 2     $ 2    
   swaps $ 25  $ (45) Other income            
            (expense) - net   16       (20)   
  Commodity       Wholesale energy            
   contracts   487    829   marketing   680  $ (201)   358  $ (296)
           Fuel   2       (20)   2 
           Depreciation   2       1    
           Energy purchases   (458)   3    (544)   (7)
           Other O&M         1    
  Interest rate       Interest expense     (3)      
   swaps                    
Total $ 512  $ 784     $ 244  $ (201) $ (222) $ (301)
Net Investment                     
 Hedges:                     
  Foreign exchange                     
   contracts $ 5  $ (9)               
             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)
2013            
 Cash Flow Hedges:           
  Commodity contracts      Unregulated wholesale energy $ 263  $ 1 
        Depreciation   2      
        Energy purchases   (58)     
 Total        $ 207  $ 1 
               
2012            
 Cash Flow Hedges:           
  Commodity contracts $ 114  Unregulated wholesale energy $ 891  $ (1)
        Depreciation   2      
        Energy purchases   (139)   (2)
 Total $ 114    $ 754  $ (3)
               
2011            
 Cash Flow Hedges:           
  Commodity contracts $ 431  Unregulated wholesale energy $ 835  $ (39)
        Fuel   1      
        Energy purchases   (243)   1 
        Depreciation   2      
 Total $ 431    $ 595  $ (38)

Derivatives Not Designated as Location of Gain (Loss) Recognized in     Location of Gain (Loss) Recognized in      
Hedging Instruments:  Income on Derivatives  2010   2009 
Hedging Instruments  Income on Derivatives  2013   2012   2011 
                   
Foreign exchange contracts Other income (expense) - net $ 3  $ (9)
Commodity contracts Unregulated retail electric and gas   11    13  Unregulated wholesale energy $ (85) $ 1,199  $ 1,600 
 Wholesale energy marketing   (70)   588  Unregulated retail energy   25    30    39 
 Net energy trading margins (a)   1     Fuel   2         (1)
 Fuel   12    12  Energy purchases   130    (965)   (1,493)
 Energy purchases   (405)   (808) Total $ 72  $ 264  $ 145 
 Total $ (448) $ (204)

(LKE)

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

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

271


(a)Represents the location on the Balance Sheet.

The following table presents the pre-tax effect of derivative instruments designated as cash flow hedges that are recognized in regulatory liabilities.

Derivative Instruments Location of Gain (Loss) 2013  2012  2011 
            
Interest rate swaps Regulatory liabilities - noncurrent $ 72  $ 14    

(LG&E)

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

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

(a)Differs fromRepresents the Statement of Income due to intra-month transactions that PPL Energy Supply defines as spot activity, which is not accounted for as a derivative.location on the balance sheet.

The following table presents the pre-tax effect of derivative instruments designated as cash flow hedges that are recognized in regulatory liabilities.

Derivative Instruments Location of Gain (Loss) 2013  2012  2011 
            
Interest rate swaps Regulatory liabilities - noncurrent $ 36  $ 7    

(KU)

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

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

(a)Represents the location on the Balance Sheets.

The following table presents the pre-tax effect of derivative instruments designated as cash flow hedges that are recognized in regulatory liabilities.

Derivative Instruments Location of Gain (Loss) 2013  2012  2011 
            
Interest rate swaps Regulatory liabilities - noncurrent $ 36  $ 7    

(LKE and LG&E)

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

272


       December 31, 2013 December 31, 2012 
       Assets Liabilities  Assets Liabilities 
Current:              
 Price Risk Management              
  Assets/Liabilities (a):              
   Interest rate swaps     $ 4       $ 5  
     Total current       4         5  
Noncurrent:              
 Price Risk Management              
  Assets/Liabilities (a):              
   Interest rate swaps       32         53  
     Total noncurrent       32         53  
Total derivatives     $ 36       $ 58  

(a)Represents the location on the Balance Sheets.

The following tables present the pre-tax effect of derivatives not designated as cash flow hedges that are recognized in income or regulatory assets.

Derivative Instruments Location of Gain (Loss) 2013  2012  2011 
            
Interest rate swaps Interest Expense $ (8) $ (8) $ (8)
Commodity contracts Operating Revenues             (1)
  Total $ (8) $ (8) $ (9)

Derivative Instruments Location of Gain (Loss) 2013  2012  2011 
            
Interest rate swaps Regulatory assets - noncurrent $ 22  $ 1  $ (26)

(All Registrants except PPL Electric)

Offsetting Derivative Instruments

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

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

     Assets Liabilities
        Eligible for Offset       Eligible for Offset   
           Cash          Cash   
        Derivative Collateral       Derivative Collateral   
     Gross Instruments Received Net Gross Instruments Pledged Net
December 31, 2013                        
PPL                        
 Energy Commodities $ 1,188  $ 912  $ 7  $ 269  $ 1,070  $ 912  $ 1  $ 157 
 Treasury Derivatives   91    61         30    174    61    23    90 
Total $ 1,279  $ 973  $ 7  $ 299  $ 1,244  $ 973  $ 24  $ 247 
                           
PPL Energy Supply                        
 Energy Commodities $ 1,188  $ 912  $ 7  $ 269  $ 1,070  $ 912  $ 1  $ 157 


273


     Assets Liabilities
        Eligible for Offset       Eligible for Offset   
           Cash          Cash   
        Derivative Collateral       Derivative Collateral   
     Gross Instruments Received Net Gross Instruments Pledged Net
December 31, 2013                        
LKE                        
 Treasury Derivatives                     $ 36       $ 20  $ 16 
                           
LG&E                        
 Treasury Derivatives                     $ 36       $ 20  $ 16 

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

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

Credit Risk-Related Contingent Features(PPL and PPL Energy Supply)

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 the credit ratings of PPL, PPL Energy Supply, LKE, LG&E and KU or certain of their subsidiaries.  Most of these provisionsfeatures would require PPL or PPL Energy Supply tothe transfer of additional collateral or permit the counterparty to terminate the contract if the applicable credit rating were to fall below investment grade.  Some of these provisionsfeatures also would allow the counterparty to require additional collateral upon each decreasedowngrade in the credit rating at levels that remain above investment grade.  In either case, if the applicable credit rating were to fall below i nvestmentinvestment grade (i.e., below BBB- for S&P or Fitch, or Baa3 for Moody's), and assuming no assignment to an investment grade affiliate were allowed, most of these credit contingent provisionsfeatures 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 provisionsfeatures 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 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.features.

To determine net liability positions, PPLAt December 31, 2013, 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 contract.  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, 2010 was $121 million for PPL and $78 million for PPL Energy Supply, of which PPL and PPL Energy Supply had posted collateral of $37 million and $18 million in the normal course of business.  At December 31, 2010, 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 prepay or post additional collateral of $186 million and $171 million to their counterparties including net receivables and payables already recor ded on the balance sheet.is summarized as follows:

20.  Goodwill and Other Intangible Assets
       PPL      
    PPL Energy Supply LKE LG&E
               
Aggregate fair value of derivative instruments in a net liability            
 position with credit risk-related contingent features $ 245  $  157  $  26  $  26 
Aggregate fair value of collateral posted on these derivative instruments   41    19    22    22 
Aggregate fair value of additional collateral requirements in the event of            
 a credit downgrade below investment grade (a)   214   147    6   6 

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

274


The changes in the carrying amount of goodwill by segment were:

20. Goodwill and Other Intangible Assets
20. Goodwill and Other Intangible Assets
                  
GoodwillGoodwill
                  
(PPL)(PPL)
                  
The changes in the carrying amount of goodwill by segment were:The changes in the carrying amount of goodwill by segment were:
                  
    Kentucky Regulated International Regulated Supply Total   U.K. Regulated Kentucky Regulated Supply Total
    2010  2009  2010  2009  2010  2009  2010  2009    2013  2012  2013  2012  2013  2012  2013  2012 
PPLPPL                        PPL                
Balance at beginning of period (a)Balance at beginning of period (a)       $ 715  $ 669  $ 91  $ 94  $ 806  $ 763 Balance at beginning of period (a) $ 3,076  $ 3,032  $ 662  $ 662  $ 420  $ 420  $ 4,158  $ 4,114 
Goodwill recognized during the period (b) $ 662             334       996    Changes during the period (b)   67    44                        67    44 
Allocation to discontinued operations (c)               (5)   (3)   (5)   (3)
Effect of foreign currency exchange rates         (36)   46          (36)   46 
Balance at end of period (a)Balance at end of period (a) $ 662     $ 679  $ 715  $ 420  $ 91  $ 1,761  $ 806 Balance at end of period (a) $ 3,143  $ 3,076  $ 662  $ 662  $ 420  $ 420  $ 4,225  $ 4,158 
                           
          International Regulated Supply Total
          2010  2009  2010  2009  2010  2009 
PPL Energy Supply                        
Balance at beginning of period (a)       $ 715  $ 669  $ 91  $ 94  $ 806  $ 763 
Allocation to discontinued operations (c)               (5)   (3)   (5)   (3)
Effect of foreign currency exchange rates         (36)   46          (36)   46 
Balance at end of period (a)       $ 679  $ 715  $ 86  $ 91  $ 765  $ 806 

(a)There were no accumulated impairment losses recorded.related to goodwill.
(b)Recognized as a resultPrimarily the effect of the 2010 acquisition of LKE.  See Note 10 for additional information.foreign currency exchange rates.
(c)2010 represents goodwill allocated to certain non-core generation facilities and written off.  2009 represents goodwill allocated to the Long Island and the majority of the Maine hydroelectric generation businesses and written off.

Other Intangibles

(PPL)

The gross carrying amount and the accumulated amortization of other intangible assets were:

Other Intangible AssetsOther Intangible Assets
          
(PPL)(PPL)
          
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, 2010 December 31, 2009   December 31, 2013 December 31, 2012
   Gross    Gross      Gross   Gross  
   Carrying Accumulated Carrying Accumulated   Carrying Accumulated Carrying Accumulated
   Amount Amortization Amount Amortization   Amount Amortization Amount Amortization
Subject to amortization:Subject to amortization:             Subject to amortization:         
Contracts $ 597 (a) $ 49  $ 203  $ 23 Contracts (a) $ 408  $ 202  $ 408  $ 150 
Land and transmission rights   256 (b)   110    272    114 Land and transmission rights  331   117   284   113 
Emission allowances/RECs (c) (d)   37 (e)      56    Emission allowances/RECs (b)  16       17     
Licenses and other (f)   242     30    172    18 Licenses and other (c)   305    45    287    39 
Total subject to amortizationTotal subject to amortization   1,132 (g)   189    703    155 Total subject to amortization   1,060    364    996    302 
                         
Not subject to amortization due to indefinite life:Not subject to amortization due to indefinite life:             Not subject to amortization due to indefinite life:         
Land and transmission rights   16        16    Land and transmission rights  16       18     
Easements   77        76    Easements (d)   239         220      
Total not subject to amortization due to indefinite lifeTotal not subject to amortization due to indefinite life   93        92    Total not subject to amortization due to indefinite life   255         238      
TotalTotal $ 1,225   $ 189  $ 795  $ 155 Total $ 1,315  $ 364  $ 1,234  $ 302 

(a)Includes $394 million, which representsGross carrying amount includes the fair value at the acquisition date of coal contracts with terms favorable to market recognized as a result of the 2010 acquisition of LKE.  The weighted-average amortization period of these contracts was five years at the acquisition date.LKE by PPL.  An offsetting regulatory liability was recorded related to these contracts, which will beis being amortized over the same weighted average amortization period as the intangible assets, eliminating any income statement impact.  This is referred to as "regulatory offset" in the tables below.  See Note 36 for additional information.
(b)Includes $14 million, which represents the fair value of land and transmission rights recognized as a result of the 2010 acquisition of LKE.  The weighted-average amortization period of these rights was 14 years at the acquisition date.
(c)Removed from the Balance Sheets andEmission allowances/RECs are expensed when consumed or sold.  Consumption expense was $47 million, $32 million, and $25 million in 2010, 2009 and 2008.  Consumption expensesold; therefore, there is estimated at $24 million for 2011, $4 million for 2012 and $2 million for 2013 through 2015.
(d)During 2010 and 2009, PPL recorded $17 million and $37 million of impairment charges.  See Note 18 for additional information.
(e)Includes $16 million, which represents the fair value of emission allowances recognized as a result of the 2010 acquisition of LKE.  The weighted-average consumption period of these emission allowances was three years at the acquisition date.  An offsetting regulatory liability was recorded related to these emission allowances, which will be amortized over the same weighted-average consumption period as the emission allowances, eliminating any income statement impact.  See Note 3 for additional information.
(f)"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.
(g)Includes $424 million of intangible assets resulting from the 2010 acquisition of LKE.  See Note 10 for additional information regarding the acquisition.

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 $24 million, $22 million and $13 million in 2010, 2009 and 2008, and is estimated to be $24 million for 2011, and $23 million per year for 2012 through 2015.

(PPL Energy Supply)

The gross carrying amount and the accumulated amortization of other intangible assets were:

   December 31, 2010 December 31, 2009
    Gross    Gross   
    Carrying Accumulated Carrying Accumulated
    Amount Amortization Amount Amortization
Subject to amortization:            
 Contracts $ 203  $ 38  $ 203  $ 23 
 Land and transmission rights   19    16    59    23 
 Emission allowances/RECs (a) (b)   20       56    
 Licenses and other (c)   239    29    172    18 
Total subject to amortization   481    83    490    64 
               
Not subject to amortization due to indefinite life:            
 Easements   77       76    
Total $ 558  $ 83  $ 566  $ 64 

(a)Removed from the Balance Sheets and expensed when consumed or sold.  Consumption expense was $46 million, $32 million, and $25 million in 2010, 2009, and 2008.  Consumption expense is estimated at $13 million for 2011, $3 million for 2012 and $2 million for 2013 through 2015.
(b)During 2010 and 2009, PPL Energy Supply recorded $16 million and $37 million of impairment charges.  See Note 18 for additional information.no accumulated amortization.
(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.
(d)Gross carrying amount includes $88 million, which represents the fair value at the acquisition date 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" on the Balance Sheets.

Amortization expense for the years ended December 31, excluding consumption of emission allowances/RECs of $23 million, $12 million, and $16 million in 2013, 2012 and 2011, was as follows:

   2013   2012   2011 
          
Intangible assets with no regulatory offset $ 10  $ 14  $ 25 
Intangible assets with regulatory offset   51    47    87 
Total $ 61  $ 61  $ 112 

Amortization expense for each of the next five years, excluding insignificant amounts for consumption of emission allowances/RECs, is estimated to be:

275


   2014   2015   2016   2017   2018 
                
Intangible assets with no regulatory offset $ 10  $ 10  $ 8  $ 8  $ 8 
Intangible assets with regulatory offset   48    50    27    9    9 
Total $ 58  $ 60  $ 35  $ 17  $ 17 

(PPL Energy Supply)
               
The gross carrying amount and the accumulated amortization of other intangible assets were:
               
    December 31, 2013 December 31, 2012
    Gross    Gross   
    Carrying Accumulated Carrying Accumulated
    Amount Amortization Amount Amortization
Subject to amortization:            
 Land and transmission rights $ 17  $ 14  $ 17  $ 13 
 Emission allowances/RECs (a)   11         13      
 Licenses and other (b)   295    39    277    35 
Total subject to amortization $ 323  $ 53  $ 307  $ 48 

(a)Emission allowances/RECs are expensed when consumed or sold; therefore, there is no accumulated amortization.
(b)"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 are included in "Other current assets" and long-term intangible assets are presented as "Other intangibles" in their respective areas on the Balance Sheets.

Amortization expense for the years ended December 31, excluding consumption of emission allowances/RECs was $20of $23 million, $19$12 million, and $10$16 million in 2010, 20092013, 2012, and 2008, and is estimated to be $20 million per year for 2011 through 2015.was as follows:

(PPL Electric)
   2013   2012   2011 
          
Amortization expense $ 5  $ 9  $ 20 

The gross carrying amount and the accumulated amortization of other intangible assets were:
Amortization expense and consumption of emission allowances/RECs is expected to be insignificant in future years.

(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, 2010 December 31, 2009   December 31, 2013 December 31, 2012
   Gross   Gross     Gross   Gross  
   Carrying Accumulated Carrying Accumulated   Carrying Accumulated Carrying Accumulated
   Amount Amortization Amount Amortization   Amount Amortization Amount Amortization
Subject to amortization:Subject to amortization:         Subject to amortization:         
Land and transmission rights $ 222  $ 93  $ 214  $ 91 Land and transmission rights $ 293  $ 102  $ 249  $ 99 
Licenses and other   3    1       Licenses and other   5    1    4    1 
Total subject to amortizationTotal subject to amortization   225    94    214    91 Total subject to amortization   298    103    253    100 
                    
Not subject to amortization due to indefinite life:Not subject to amortization due to indefinite life:         Not subject to amortization due to indefinite life:         
Land and transmission rights   16       16    Land and transmission rights   16         18      
TotalTotal $ 241  $ 94  $ 230  $ 91 Total $ 314  $ 103  $ 271  $ 100 

Intangible assets are shown as "Intangibles" on the Balance Sheets.

Amortization expense was $3 million for 2010, 2009insignificant in 2013, 2012 and 2008,2011 and is estimatedexpected to be $3 million per year for 2011 and 2012, and $2 million per year for 2013 through 2015.insignificant in future years.

(PPL, PPL Energy Supply and PPL Electric)
(LKE)
The gross carrying amount and the accumulated amortization of other intangible assets were:

276


Following are the weighted-average rates of amortization at December 31.

  PPL PPL Energy Supply PPL Electric
  2010  2009  2010  2009  2010  2009 
                   
Contracts  20.24%(a)7.41%  7.41%  7.41%      
Land and transmission rights  1.40%  1.23%        1.40%  1.23%
Emission allowances/RECs (b)                  
Licenses and other  4.16%  4.07%  4.16%  4.07%      
    December 31, 2013 December 31, 2012
    Gross    Gross   
    Carrying Accumulated Carrying Accumulated
    Amount Amortization Amount Amortization
Subject to amortization:            
 Coal contracts (a) $ 269  $ 171  $ 269  $ 128 
 Land and transmission rights   20    2    18    1 
 Emission allowances (b)   4       4    
 OVEC power purchase agreement (c)   126    25    126    17 
Total subject to amortization $ 419  $ 198  $ 417  $ 146 

(a)For PPL,Gross carrying amount represents the fair value at the acquisition date of coal contracts with terms favorable to market recognized as a result of the 2010 weighted-average amortization rateacquisition by PPL.  An offsetting regulatory liability was impacted by the acquisition of LKE.  The intangible assets associated withrecorded related to these contracts, recorded in purchase accounting arewhich is being amortized over a significantly shorter lifethe same period as compared to PPL's preexistingthe intangible assets, associated with contracts, resulting in a significantly higher weighted-average amortization rate compared to PPL's historical rates.  Excluding LKE, PPL's 2010 weighted-average amortization rate was 7.41%.eliminating any income statement impact.  See Note 6 for additional information.
(b)Expensed whenRepresents the fair value at the acquisition date 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 insignificant in 2013 and in 2012.
(c)Gross carrying amount represents the fair value at the acquisition date of the OVEC power purchase contract recognized as a result of the 2010 acquisition by PPL.  See Note 6 for additional information.

(PPL and PPL Energy Supply)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.

In November 2009, NRC approved PPL Susquehanna's application for 20-year license renewals for each
Amortization expense, excluding consumption of emission allowances, was as follows:
          
   2013   2012   2011 
          
Intangible assets with no regulatory offset $ 1     $ 1 
Intangible assets with regulatory offset   51  $ 47    87 
Total $ 52  $ 47  $ 88 

Amortization expense for each of the next five years, excluding consumption of emission allowances, is estimated to be:
                
   2014   2015   2016   2017   2018 
                
Intangible assets with regulatory offset $ 48  $ 50  $ 27  $ 9  $ 9 

(LG&E)
               
The gross carrying amount and the accumulated amortization of other intangible assets were:
               
    December 31, 2013 December 31, 2012
    Gross    Gross   
    Carrying Accumulated Carrying Accumulated
    Amount Amortization Amount Amortization
Subject to amortization:            
 Coal contracts (a) $ 124  $ 81  $ 124  $ 62 
 Land and transmission rights   7    1    8    1 
 Emission allowances (b)   1       1    
 OVEC power purchase agreement (c)   87    17    87    13 
Total subject to amortization $ 219  $ 99  $ 220  $ 76 

(a)Gross carrying amount represents the fair value at the acquisition date 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)Represents the fair value at the acquisition date 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 2013 and in 2012.
(c)Gross carrying amount represents the fair value at the acquisition date 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 Susquehanna nuclear units.  Costs of $17 million were capitalized related to these license renewals.  The weighted-average period prior toBalance Sheets.  Long-term intangible assets are presented as "Other intangibles" on the next PPL Susquehanna license renewal is 33 years.Balance Sheets.

277


Amortization expense, excluding consumption of emission allowances, was as follows:
          
   2013   2012   2011 
          
Intangible assets with no regulatory offset         $ 1 
Intangible assets with regulatory offset $ 23  $ 23    45 
Total $ 23  $ 23  $ 46 

Amortization expense for each of the next five years, excluding consumption of emission allowances, is estimated to be:
                
   2014   2015   2016   2017   2018 
                
Intangible assets with regulatory offset $ 23  $ 24  $ 13  $ 6  $ 6 

(KU)
               
The gross carrying amount and the accumulated amortization of other intangible assets were:
               
    December 31, 2013 December 31, 2012
    Gross    Gross   
    Carrying Accumulated Carrying Accumulated
    Amount Amortization Amount Amortization
Subject to amortization:            
 Coal contracts (a) $ 145  $ 90  $ 145  $ 66 
 Land and transmission rights   13    1    10      
 Emission allowances (b)   3       3      
 OVEC power purchase agreement (c)   39    8    39    4 
Total subject to amortization $ 200  $ 99  $ 197  $ 70 

(a)Gross carrying amount represents the fair value at the acquisition date 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)Represents the fair value at the acquisition date 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 2013 and in 2012.
(c)Gross carrying amount represents the fair value at the acquisition date 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, excluding consumption of emission allowances, was as follows:
          
   2013   2012   2011 
          
Intangible assets with no regulatory offset $ 1           
Intangible assets with regulatory offset   28  $ 24  $ 42 

Amortization expense for each of the next five years, excluding consumption of emission allowances, is estimated to be:
                
   2014   2015   2016   2017   2018 
                
Intangible assets with regulatory offset $ 24  $ 26  $ 13  $ 3  $ 3 

21.  Asset Retirement Obligations

(PPL)

The fair value of LG&E's and KU's liabilities wereWPD has recorded in the financial statements as of the acquisition date to reflect various legal obligations associated with the retirement of long-lived assets, primarilyconditional AROs required by U.K. law related to the retirement of assets associated with its generating unitstreated wood poles, gas-filled switchgear and natural gas wells.  See Note 10 for additional information on the acquisition.fluid-filled cables.


As described in Notes 1 and 3, the accretion recorded by LG&E and KU is offset with a regulatory asset, such that there is no income statement impact.
278

(PPL and PPL Energy Supply)

PPL and PPL Energy Supply havehas recorded liabilities in the financial statementsAROs 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 $342 million and $316 million at December 31, 2013 and 2012.  The fair value of investments that are legally restricted for the decommissioning of the Susquehanna nuclear plant was $864 million and $712 million at December 31, 2013 and 2012, 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 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.  PPL and PPL Energy Supply management werewas 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.

The most significant ARO recorded by PPL and PPL Energy Supply relates to the decommissioning of the Susquehanna nuclear plant.  In the third quarter of 2010, PPL Susquehanna completed a site-specific study to update the estimated cost to dismantle and decommission each Susquehanna nuclear unit immediately following final shutdown.  This estimate included decommissioning the radiological portions of the station and the cost of removal of non-radiological structures and materials.  Based on this study, which used a methodology consistent with the prior site-specific study done in 2002, the decommissioning ARO liability and the associated long-lived asset were reduced by $103 million.  The primary factor for this decline was the lower estimated inflation rate assumption used in the 2010 ARO calculatio n.

The accrued nuclear decommissioning obligation was $270 million and $348 million at December 31, 2010 and 2009, 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 $618 million and $548 million at December 31, 2010 and 2009, 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.

The changes in the carrying amounts of AROs were:

  PPL PPL Energy Supply
   2010  2009  2010  2009 
             
ARO at beginning of period $ 426  $ 389  $ 426  $ 389 
 Accretion expense   32    31    31    31 
 Obligations assumed in acquisition of LKE   103          
 New obligations incurred   4    9    4    9 
 Changes in estimated cash flow or settlement date   (100)   16    (100)   16 
 Obligations settled   (17)   (19)   (16)   (19)
ARO at end of period $ 448  $ 426  $ 345  $ 426 

In addition to periodically updating the nuclear decommissioning ARO as described above, changes to other 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 2010, PPL Energy Supply revised cost estimates at several plants, the most significant being the Susquehanna nuclear plant discussed above and the ash basins at Montour and Martins Creek.  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.  The effect of these new and revised liabilities was to increase the ARO liability and related plant balances by $7 million in 2010 and $25 million in 2009.  The 2010 and 2009 income statement impact of these changes was insignificant.

The classification of AROs on the Balance Sheets was as follows.

  PPL PPL Energy Supply
   2010  2009  2010  2009 
             
Current portion (a) $ 13  $ 10  $ 13  $ 10 
Long-term portion (b)   435    416    332    416 
 Total $ 448  $ 426  $ 345  $ 426 

(a)Included in "Other current liabilities."
(b)Included in "Asset retirement obligations."
date.

(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.

(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, LG&E's and KU's accretion and depreciation expense are recorded as a regulatory asset, such that there is no earnings impact.  In 2013, AROs were revalued primarily due to updates in the estimated cash flows for ash ponds and CCR surface impoundments based on updated cost estimates.

(All Registrants except PPL Electric)

The changes in the carrying amounts of AROs were as follows.

    PPL PPL Energy Supply
    2013  2012  2013  2012 
               
ARO at beginning of period $ 552  $ 497  $ 375  $ 359 
 Accretion expense   38    36    29    28 
 Obligations incurred   6    9    6    3 
 Changes in estimated cash flow or settlement date   123    31    1    (7)
 Effect of foreign currency exchange rates   1    1           
 Obligations settled   (15)   (22)   (7)   (8)
ARO at end of period $ 705  $ 552  $ 404  $ 375 

    LKE LG&E KU
    2013  2012  2013  2012  2013  2012 
                     
ARO at beginning of period $ 131  $ 118  $ 62  $ 57  $ 69  $ 61 
 Accretion expense   7    6    3    3    4    3 
 Obligations incurred        6                   6 
 Changes in estimated cash flow                  
  or settlement date   122    15    17    5    105    10 
 Obligations settled   (8)   (14)   (8)   (3)        (11)
ARO at end of period $ 252  $ 131  $ 74  $ 62  $ 178  $ 69 


279


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

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 endsended in December 2013.  Under a residual value guarantee, if the generation facility iswas sold at the end of the lease term and the cash proceeds from the sale arewere less than the original acquisition cost, the subsidiary of PPL Energy Supply iswas obligated to pay up to 70.52% of the origina loriginal acquisition cost.  This residual value guarantee protectsprotected the other variable interest holders from losses related to their investments.  LMB Funding, LP cannotcould not 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 consolidatesconsolidated this VIE.

The lease financing, which includesincluded $437 million of "Long-term Debt"debt and $18 million of "Noncontrolling Interests" at December 31, 2010 and December 31, 2009, isinterests" was secured by, among other things, the generation facility, the carrying amount of which is disclosed on the Balance Sheets.  The debt matures at the end of the initial lease term.Sheet.  As a result of the consolidation, PPL Energy Supply has recorded interest expense in lieu of rent expense.  For 2010, 20092013, 2012 and 2008,2011, additional depreciation on the generation facility of $12 million, $16 million $11 million and $11$16 million was recorded.

A subsidiary of PPL Energy Supply purchased the Lower Mt. Bethel plant for $455 million at the lease termination date in December 2013.  The proceeds were used by LMB Funding, LP to repay $437 million of outstanding debt and make an $18 million distribution to its equity investors both of which have been included in the PPL and PPL Energy Supply Consolidated Statements of Cash Flows as financing activities.  The transaction was treated as a transfer of assets between entities under common control and did not result in any change to the presentation of the Lower Mt. Bethel plant assets as they had previously been included in PPL's and PPL Energy Supply's consolidated financial statements.

Subsequent to these transactions, the PPL Energy Supply subsidiary no longer has a variable interest in and is no longer the primary beneficiary of LMB Funding, LP.  Accordingly, LMB Funding, LP was deconsolidated, which had no impact on PPL's and PPL Energy Supply's consolidated financial statements.

23.  Available-for-Sale Securities

(PPL and PPL Energy Supply)

PPL and its subsidiaries classify certain short-term investments, securitiesSecurities held by the NDT funds and auction rate securities are classified 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.  The specific identification method is used to calculate realized gains and losses.

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

       December 31, 2013 December 31, 2012
          Gross Gross      Gross Gross  
       Amortized  Unrealized  Unrealized   Amortized  Unrealized  Unrealized  
       Cost Gains Losses Fair Value  Cost  Gains Losses Fair Value
                         
NDT funds:                                        
PPL and PPL Energy Supply                        
  Cash and cash equivalents $ 14          $ 14  $ 11          $ 11 
  Equity securities   265  $ 363        628    252  $ 220        472 
  Debt securities   217    7  $ 3    221    211    19  $ 1    229 
  Receivables/payables, net   1            1                 
  Total NDT funds $ 497  $ 370  $ 3  $ 864  $ 474  $ 239  $ 1  $ 712 
                              
Auction rate securities:                        
 PPL $ 20      $ 1  $ 19  $ 20      $ 1  $ 19 
 PPL Energy Supply   17        1    16    17        1    16 

See Note 18 for information regardingdetails on the fair value of these securities.securities held by the NDT funds.


    2010  2009 
        Gross    Gross
     Amortized  Unrealized Amortized  Unrealized
     Cost Gains  Cost  Gains
PPL            
 Short-term investments - municipal debt securities $ 163          
 NDT funds:            
  Cash and cash equivalents   10     $ 7    
  Equity securities:            
   U.S. large-cap   180  $ 123    170  $ 89 
   U.S. mid/small-cap   67    52    65    36 
  Debt securities:            
   U.S. Treasury   71    4    72    2 
   U.S. government sponsored agency   6    1    9    
   Municipality   69       63    2 
   Investment-grade corporate   31    2    28    1 
   Residential mortgage-backed securities         1    
   Other   1          
  Receivables/payables, net   1       3    
  Total NDT funds   436    182    418    130 
 Auction rate securities   25       25    
 Total $ 624  $ 182  $ 443  $ 130 
                
PPL Energy Supply            
 NDT funds:            
  Cash and cash equivalents $ 10     $ 7    
  Equity securities:            
   U.S. large-cap   180  $ 123    170  $ 89 
   U.S. mid/small-cap   67    52    65    36 
  Debt securities:            
   U.S. Treasury   71    4    72    2 
   U.S. government sponsored agency   6    1    9    
   Municipality   69       63    2 
   Investment-grade corporate   31    2    28    1 
   Residential mortgage-backed securities         1    
   Other   1          
  Receivables/payables, net   1       3    
  Total NDT funds   436    182    418    130 
 Auction rate securities   20       20    
 Total $ 456  $ 182  $ 438  $ 130 
280

There were no securities with credit losses at December 31, 20102013 and 2009.2012.

The following table shows the scheduled maturity dates of debt securities held at December 31, 2010.2013.

 Maturity Maturity Maturity Maturity     Maturity Maturity Maturity Maturity   
   Less Than1-55-10in Excess     Less Than1-56-10in Excess  
  1 YearYearsYearsof 10 YearsTotal  1 YearYearsYearsof 10 YearsTotal
PPLPPL            PPL            
Amortized costAmortized cost $ 14  $ 61  $ 60  $ 231  $ 366 Amortized cost $ 7  $ 97  $ 54  $ 79  $ 237 
Fair valueFair value  14    63    63   233   373 Fair value  7    99    55   79   240 
                        
PPL Energy SupplyPPL Energy Supply           PPL Energy Supply           
Amortized costAmortized cost $ 14  $ 61  $ 60  $ 63  $ 198 Amortized cost $ 7  $ 97  $ 54  $ 76  $ 234 
Fair valueFair value  14    63    63   65   205 Fair value  7    99    55   76   237 

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.
           
   2013  2012  2011 
PPL         
Proceeds from sales of NDT securities (a) $ 144  $ 139  $ 156 
Other proceeds from sales        5    163 
Gross realized gains (b)   17    29    28 
Gross realized losses (b)   7    21    16 

 2010  2009  2008 
PPL       
Proceeds from sales of NDT securities (a) $ 114  $ 201  $ 197 
Other proceeds from sales    154   126 
Gross realized gains (b)  13   27   19 
Gross realized losses (b)  (5)  (20)  (23)
       
PPL Energy SupplyPPL Energy Supply              
Proceeds from sales of NDT securities (a)Proceeds from sales of NDT securities (a) $ 114  $ 201  $ 197  $ 144  $ 139  $ 156 
Other proceeds from salesOther proceeds from sales    154   33       3     
Gross realized gains (b)Gross realized gains (b)  13   27   19   17   29   28 
Gross realized losses (b)Gross realized losses (b)  (5)  (20)  (23)  7   21   16 

(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.  Collections from customers ended in December 2009.
(b)Excludes the impact of other-than-temporary impairment charges recognized inon the Statements of Income.

Short-term Investments(PPL, LKE and LG&E)

(PPL)

As discussed in Note 7, atAt 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 2008.  At December 31, 2010, these investments were reflected in "Short-term investments" on the Balance Sheet.  In January 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 fair value was insignificant.not significant.

NDT Funds(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.  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 and Equity Securities" 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.
NDT Funds

(PPL and PPL Energy Supply)

Beginning in January 1999 and ending in December 2009, in accordance with the PUC Final Order, approximately $130 million of decommissioning costs were recovered from 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.

Amounts previously collected from PPL Electric's customers for decommissioning the Susquehanna nuclear plant, less applicable taxes, were 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.  PPL and PPL Energy Supply recorded impairments for certain securities invested in the NDT funds of $3 million, $18 million and $36$6 million for 2010, 20092011.  The amounts for 2013 and 2008.2012 are insignificant.  These impairments are reflected on the Statements of Income in "Other-Than-Temporary Impairments."


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 debt securities and unrealized gains on both debt and equity securitie s are recorded to OCI.  There were no credit losses on debt securities held in the NDT funds at December 31, 2010 or December 31, 2009.
281


24.  Subsequent EventsAccumulated Other Comprehensive Income (Loss)

(PPL, Energy Supply)

On January 31, 2011, PPL Energy Supply distributed its membership interest in PPL Global, representing 100% ofand LKE)

AOCI, which is presented on the outstanding membership interestsBalance Sheet of PPL Global, to PPL Energy Supply's parent, PPL Energy Funding.  The distribution was made basedand included in Member's equity on the book value of the assets and liabilities of PPL Global with financial effect as of January 1, 2011.  The purpose of the distribution is 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, and related presentation as discontinued operations, will be reflected in PPL Energy Supply's March 31, 2011 Quarterly Report to the SEC on Form 10-Q.  Following the distribution, PPL Energy Supply retained its core business, the generation and marketing of power, primarily in the northeastern and northwestern power markets of the U.S.

The unaudited pro forma 2010 and 2009 operating revenues and income (loss) from continuing operations after income taxes attributable to PPL Energy Supply, excluding PPL Global, as if the distribution had occurred January 1, 2009, are as follows.

     Income (Loss)
     from Continuing
     Operations After
     Income Taxes
    Attributable to
  Operating Revenues PPL Energy Supply
       
Pro forma for 2010 (unaudited) $ 5,128  $ 595 
Pro forma for 2009 (unaudited)   5,309    (17)

The pro forma financial information presented above was derived from the historical consolidated financial statementsBalance Sheets of PPL Energy Supply and PPL Global.  There were no significant pro forma adjustments.LKE, consisted of the following after-tax gains (losses).

The unaudited pro forma December 31, 2010 balance sheet amounts, excluding PPL Global, as if the distribution had occurred December 31, 2010, are as follows.
     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, 2010$ (195) $ 88  $ 695  $ (4) $ (32) $ (1,032) $ 1  $ (479)
OCI  (48)   2    (168)   3    7    (105)      (309)
December 31, 2011$ (243) $ 90  $ 527  $ (1) $ (25) $ (1,137) $ 1  $ (788)
                         
OCI  94    22    (395)   2    11    (886)      (1,152)
December 31, 2012$ (149) $ 112  $ 132  $ 1  $ (14) $ (2,023) $ 1  $ (1,940)
                         
Amounts arising during the period  138    67    45         2    71         323 
Reclassifications from AOCI       (6)   (83)        6    135         52 
Net OCI during the period  138    61    (38)        8    206         375 
December 31, 2013$ (11) $ 173  $ 94  $ 1  $ (6) $ (1,817) $ 1  $ (1,565)

PPL Energy Supply                       
                         
December 31, 2010$ (195) $ 88  $ 733  $ (3) $ (23) $ (955)      $ (355)
OCI     2    (86)   3    2    (18)        (97)
Distribution of membership                       
 interest in PPL Global (a)   195       (41)      5    780       939 
December 31, 2011     $ 90  $ 606  $    $ (16) $ (193)      $ 487 
                         
OCI     22    (395)      6    (72)      (439)
December 31, 2012$    $ 112  $ 211  $    $ (10) $ (265)      $ 48 
                         
Amounts arising during the period       67              2    71         140 
Reclassifications from AOCI       (6)   (123)        4    14         (111)
Net OCI during the period       61    (123)        6    85         29 
December 31, 2013$    $ 173  $ 88  $    $ (4) $ (180)      $ 77 

LKE                       
                         
December 31, 2010               $ 6     $ 6 
OCI            $ (2)         (2)
December 31, 2011              $ (2) $ 6     $ 4 
                         
OCI         $ 1       (20)      (19)
December 31, 2012         $ 1  $ (2) $ (14)    $ (15)
                         
Amounts arising during the period                 28       28 
Net OCI during the period                           28         28 
December 31, 2013               $ 1  $ (2) $ 14       $ 13 

Current Assets(a)$ 3,736 
Investments 655 
PPE, net 6,133 
Other Noncurrent Assets 1,442 
Total Assets$ 11,966 
Current Liabilities$ 3,489 
Long-term Debt 2,776 
Deferred Credits and Other Noncurrent Liabilities 2,480 
Equity 3,221 
Total Liabilities and Equity$ 11,966 See Note 9 for additional information.

The pro forma financial information has been presentedfollowing table presents the gains (losses) and related income taxes for illustrative purposes only and isreclassifications from AOCI for the year ended December 31, 2013.  The defined benefit plan components of AOCI are not necessarily indicativereflected in their entirety in the statement of income; rather, they are included in the resultscomputation of operations that would have been achieved had the distribution been completed on the dates indicated, or the future consolidated results of operations or financial position of PPL Energy Supply.net periodic defined benefit costs (credits).  See Note 13 for additional information.

282
SCHEDULE I - PPL CORPORATION
CONDENSED UNCONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
(Millions of Dollars)
          
    2010  2009  2008 
            
Operating Revenues
 $  $  $ 
            
Operating Expenses         
Other operation and maintenance
   4       5 
Total Operating Expenses
   4       5 
            
Operating Loss
   (4)      (5)
            
Other Income - net         
 
Equity in earnings of subsidiaries
   1,038    378    929 
 
Other income (expense)
   (60)   3    
  
Total
   978    381    929 
            
Interest Expense - net
   80    (39)   (7)
            
Income Before Income Taxes
   894    420    931 
            
Income Tax Expense (Benefit)
   (44)   13    1 
            
Net Income Attributable to PPL Corporation
 $ 938  $ 407  $ 930 
            
  The accompanying Notes to Condensed Unconsolidated Financial Statements are an integral part of the financial statements.


   Affected Line Item on the Statements of Income
           Other            
   Unregulated       Income            
   wholesale Energy Interest (Expense),    Total Income Total
Details about AOCI energy purchases Expense net Other Pre-tax Taxes After-tax
PPL                        
Available-for-sale securities          $  10     $  10  $  (4) $  6 
Qualifying derivatives                        
 Interest rate swaps       $  (20)           (20)   1    (19)
 Cross-currency swaps         1    (28)      (27)   4    (23)
 Energy commodities $  263  $  (58)       $  5    210    (85)   125 
 Total $  263  $  (58) $  (19) $  (28) $  5    163    (80)   83 
Defined benefit plans                        
 Prior service costs                  (10)   4    (6)
 Net actuarial loss                  (184)   49    (135)
 Total                $  (194) $  53    (141)
                          
Total reclassifications                    $ (52)

PPL Energy Supply                        
Available-for-sale securities          $  10     $  10  $  (4) $  6 
Qualifying derivatives                        
 Energy commodities $  263  $  (58)       $  2    207    (84)   123 
Defined benefit plans                        
 Prior service costs                  (7)   3    (4)
 Net actuarial loss                  (24)   10    (14)
 Total                $  (31) $  13    (18)
                          
Total reclassifications                    $ 111 

25.  New Accounting Guidance Pending Adoption

(All Registrants)

Accounting for Obligations Resulting from Joint and Several Liability Arrangements

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

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

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

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

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

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

Effective January 1, 2014, the Registrants will prospectively adopt accounting guidance that requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax

283
 
SCHEDULE I - PPL CORPORATION
CONDENSED UNCONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(Millions of Dollars)         
          
    2010  2009  2008 
            
Cash Flows from Operating Activities         
Net cash provided by (used in) operating activities
 $ 713  $ 995  $ 200 
            
Cash Flows from Investing Activities         
 
Capital contributions to equity investees
   (2,709)   (642)   (120)
 Proceeds from the sale of an equity investee         303 
 
Acquisition of LKE
   (6,842)      
Net cash (used in) investing activities
   (9,551)   (642)   183 
            
Cash Flows from Financing Activities         
 
Issuance of equity, net of issuance costs
   2,441    60    19 
 
Return of capital from equity investees
   150    100    120 
 
Net increase (decrease) in short-term debt with affiliates
   6,826    5    
 
Payment of common stock dividends
   (566)   (517)   (491)
 
Repurchase of common stock
         (38)
 
Other
   (13)   (1)   7 
Net cash provided by (used in) financing activities
   8,838    (353)   (383)
            
Net Increase (Decrease) in Cash and Cash Equivalents         
Cash and Cash Equivalents at Beginning of Period
         
Cash and Cash Equivalents at End of Period
 $  $  $ 
            
            
Supplemental Disclosures of Cash Flow Information:
Cash Dividends Received from Equity Investees
 $ 507  $ 717  $ 493 
Non-cash transactions:         
 Reduction in "Short-term debt with affiliates" and "Affiliated companies         
  
at equity"
 $ 2,784       
 
Present value of contract adjustment payments
   157       
            
The accompanying Notes to Condensed Unconsolidated Financial Statements are an integral part of the financial statements.

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

SCHEDULE I - PPL CORPORATION      
CONDENSED UNCONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
(Millions of Dollars)      
       
    2010  2009 
Assets      
         
Current Assets      
 Accounts Receivable      
  
Other
 $ 6  $ 7 
  
Affiliates
   29    28 
 
Prepayments
   121    5 
 
Deferred income taxes
   11    
 
Price risk management assets
   15    11 
 
Total Current Assets
   182    51 
         
Investments      
 
Affiliated companies at equity
   13,406    6,086 
         
Other Noncurrent Assets
   32    46 
Total Assets
 $ 13,620  $ 6,183 
         
       
Liabilities and Equity      
         
Current Liabilities      
 
Short-term debt with affiliates
 $ 4,062  $ 20 
 
Accounts payable with affiliates
   958    471 
 
Dividends
   170    132 
 
Other current liabilities
   85    8 
 
Total Current Liabilities
   5,275    631 
         
         
Deferred Credits and Other Noncurrent Liabilities
   135    56 
         
Equity      
 PPL Corporation Shareowners' Common Equity      
  
Common stock - $0.01 par value
   5    4 
  
Capital in excess of par value
   4,602    2,280 
  
Earnings reinvested
   4,082    3,749 
  
Accumulated other comprehensive loss
   (479)   (537)
  
Total PPL Corporation Shareowners' Common Equity
   8,210    5,496 
         
Total Liabilities and Equity
 $ 13,620  $ 6,183 
         
  The accompanying Notes to Condensed Unconsolidated Financial Statements are an integral part of the financial statements.
The adoption of this guidance is not expected to have a significant impact on the Registrants.


284

SCHEDULE I - LG&E and KU Energy LLC
CONDENSED UNCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31,
(Millions of Dollars)   
             
     2013  2012  2011 
          
Operating Revenues
         
          
Operating Expenses         
 
Other operation and maintenance
    $ 3    
 
Total Operating Expenses
        3      
             
Operating Income (Loss)
        (3)     
             
Equity in Earnings of Subsidiaries
 $ 376    234  $ 267 
          
Interest Income with Affiliate
   5    10    29 
             
Interest Expense
   39    39    31 
             
Interest Expense with Affiliate
   3    2    2 
             
Income (Loss) Before Income Taxes
   339    200    263 
             
Income Tax Expense (Benefit)
   (8)   (19)   (2)
             
Net Income (Loss) Attributable to Member
 $ 347  $ 219  $ 265 
             
Comprehensive Income (Loss) Attributable to Member
 $ 375  $ 200  $ 263 
             
             
The accompanying Notes to Condensed Unconsolidated Financial Statements are an integral part of the financial statements.

285


SCHEDULE I - LG&E and KU Energy LLC
CONDENSED UNCONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(Millions of Dollars)   
             
     2013  2012  2011 
          
Cash Flows from Operating Activities         
Net cash provided by (used in) operating activities
 $ 136  $ 364  $ 346 
          
Cash Flows from Investing Activities         
  
Capital contributions to affiliated subsidiaries
   (243)      
  
Net decrease (increase) in notes receivable from affiliates
   (122)   (15)   (63)
Net cash provided by (used in) investing activities
   (365)   (15)   (63)
             
Cash Flows from Financing Activities         
  
Net increase (decrease) in notes payable with affiliates
   171    (196)   
  
Net increase (decrease) in short-term debt
   75       
  
Issuance of long-term debt
           250 
  
Contribution from member
   243       
  
Distribution to member
   (254)   (155)   (533)
Net cash provided by (used in) financing activities
   235    (351)   (283)
             
Net Increase (Decrease) in Cash and Cash Equivalents   6    (2)     
Cash and Cash Equivalents at Beginning of Period
        2    2 
Cash and Cash Equivalents at End of Period
 $ 6  $    $ 2 
             
             
Supplemental disclosures of cash flow information:         
Cash Dividends Received from Affiliated Subsidiaries
 $ 223  $ 175  $ 207 
             
The accompanying Notes to Condensed Unconsolidated Financial Statements are an integral part of the financial statements.

286


SCHEDULE I - LG&E and KU Energy LLC
CONDENSED UNCONSOLIDATED BALANCE SHEETS AT DECEMBER 31,
(Millions of Dollars)
          
     2013  2012 
Assets      
          
Current Assets      
 
Cash and cash equivalents
 $ 6    
 
Accounts receivable
   2    
 
Accounts receivable from affiliates
   11  $ 4 
 
Notes receivable from affiliates
   1,682    1,560 
 
Deferred income taxes
   10    1 
 
Total Current Assets
   1,711    1,565 
          
Investments      
 
Affiliated companies at equity
   4,519    4,096 
          
Other Noncurrent Assets      
 
Deferred income taxes
   170    184 
 
Other noncurrent assets
   6    7 
 
Total Other Noncurrent Assets
   176    191 
          
Total Assets
 $ 6,406  $ 5,852 
          
Liabilities and Equity      
          
Current Liabilities      
 
Short-term debt
 $ 75    
 
Notes payable to affiliates
    $ 25 
 
Accounts payable to affiliates
   843    906 
 
Taxes
   12    8 
 
Other current liabilities
   6    6 
 
Total Current Liabilities
   936    945 
          
Long-term Debt      
 
Long-term debt
   1,121    1,121 
 
Notes payable to affiliates
   196    
 
Total Long-term Debt
   1,317    1,121 
       
Deferred Credits and Other Noncurrent Liabilities
   3    
Equity
   4,150    3,786 
          
Total Liabilities and Equity
 $ 6,406  $ 5,852 
          
The accompanying Notes to Condensed Unconsolidated Financial Statements are an integral part of the financial statements.

287

Schedule I - PPL CorporationLG&E and KU Energy LLC
Notes to Condensed Unconsolidated Financial Statements

1.Basis of Presentation

PPL Corporation (PPL)LG&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 and the distribution or other payment of such earnings to it in the form of dividends or repayment of loans and advances 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 read in conjunction with the consolidated financial statements and notes thereto of PPL.LKE.

PPLLKE indirectly or directly owns all of the ownership interests of its significant subsidiaries.  PPL does not own the preferred securities of PPL Electric Utilities Corporation.  PPLLKE relies primarily on dividends or loans from its subsidiaries to fund PPL'sLKE's dividends to its common shareholdersmember and to meet its other cash requirements.

2.Commitments and Contingencies

See Note 15 to PPL’sLKE's consolidated financial statements for commitments and contingencies of its subsidiaries.

Guarantees and Other Assurances

PPL has provided indemnificationLKE provides certain indemnifications, the most significant of which relate to the purchaser of PPL Gas Utilities and Penn Fuel Propane, LLC for damages arising out of any breachtermination of the representations, warrantiesWKE lease in July 2009.   These guarantees cover the due and covenantspunctual 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 related transaction agreementWKE Transaction Termination Agreement.  This guarantee has a term of 12 years ending July 2021, and for damages arising outa cumulative maximum exposure of certain other matters, including certain pre-closing unknown environmental liabilities$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 former manufactured gas plant properties or off-site disposal sites, ifone matter presented by a counterparty under this guarantee.  Another guarantee with a maximum exposure of $100 million covering other indemnifications expires in 2023.  In May 2012, LKE's indemnitee received an arbitration panel's decision affecting this matter, which granted LKE's indemnitee certain rights of first refusal to purchase excess power at a market-based price rather than at an absolute fixed price.  In January 2013, LKE's indemnitee commenced a proceeding in the Kentucky Court of Appeals appealing the December 2012 order of the Henderson Circuit Court, confirming the arbitration award.  A decision in the appellate matter may occur during 2014.  LKE believes its indemnification obligations in this matter remain subject to various uncertainties, including potential for additional legal challenges regarding the arbitration decision as well as future prices, availability and demand for the subject excess power.  LKE continues to evaluate various legal and commercial options with respect to this indemnification matter.  The ultimate outcomes of the WKE termination-related indemnifications cannot be predicted at this time.  Additionally, LKE has indemnified various third parties related to historical obligations for other divested subsidiaries and affiliates.  The indemnifications vary by entity and the maximum exposures range from being capped at the sale price to no specified maximum; however, LKE is not aware of formal claims under such indemnities made by any outside of Pennsylvania.  The estimated maximum potential amount of future payments thatparty at this time.  LKE could be required to be made under theperform on these indemnifications at December 31, 2010 was $300 million.  The indemnification provisions for most representations and warranties, including tax and environmental matters, are capped at $45 million, in the aggregate, and are triggered (i) only ifevent of covered losses or liabilities being claimed by an indemnified party.  In the individual claim exce eds $50,000, and (ii) only if, and onlysecond quarter of 2012, LKE adjusted its estimated liability 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 extent that, in the aggregate, total claims exceed $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 s ites 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.amounts recorded.

 
288
 

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
2010             
Operating revenues as previously reported
 $ 3,033  $ 1,503       
  
Reclassification of discontinued operations (b)
   (27)   (30)      
  
Operating revenues
   3,006    1,473  $ 2,179  $ 1,863 
Operating income as previously reported
   492    238       
  
Reclassification of discontinued operations (b)
   (16)   (12)      
  
Operating income
   476    226    522    642 
Income from continuing operations after income taxes as            
 
previously reported
   255    92       
  
Reclassification of discontinued operations (b)
   (8)   (7)      
  
Income from continuing operations after income taxes
   247    85    306    338 
Income (loss) from discontinued operations as previously reported
            
  
Reclassification of discontinued operations (b)
   8    7       
  
Income (loss) from discontinued operations
   8    7    (53)   21 
Net income
   255    92    253    359 
Net income attributable to PPL Corporation
   250    85    248    355 
Income from continuing operations after income taxes available to            
 PPL Corporation common shareowners: (c)            
  
Basic EPS
   0.66    0.22    0.62    0.69 
  
Diluted EPS
   0.66    0.22    0.62    0.69 
Net income available to PPL Corporation common shareowners: (c)            
  
Basic EPS
   0.66    0.22    0.51    0.73 
  
Diluted EPS
   0.66    0.22    0.51    0.73 
Dividends declared per share of common stock (d)
   0.350    0.350    0.350    0.350 
Price per common share:            
  
High
 $ 32.77  $ 28.80  $ 28.00  $ 28.14 
  
Low
   27.47    23.75    24.83    25.13 
               
2009             
Operating revenues as previously reported
 $ 2,344  $ 1,671       
  
Reclassification of discontinued operations (b)
   (30)   (28)      
  
Operating revenues
   2,314    1,643  $ 1,782  $ 1,710 
Operating income as previously reported
   412    104       
  
Reclassification of discontinued operations (b)
   (21)   (18)      
  
Operating income
   391    86    171    248 
Income from continuing operations after income taxes as            
 
previously reported
   243    29       
  
Reclassification of discontinued operations (b)
   (11)   (8)      
  
Income from continuing operations after income taxes
   232    21    51    129 
Income (loss) from discontinued operations as previously reported
   3    (32)      
  
Reclassification of discontinued operations (b)
   11    8       
  
Income (loss) from discontinued operations
   14    (24)   (25)   28 
Net income (loss)
   246    (3)   26    157 
Net income (loss) attributable to PPL Corporation
   241    (7)   20    153 
Income from continuing operations after income taxes available to            
 PPL Corporation common shareowners: (c)            
  
Basic EPS
   0.63    0.07    0.12    0.37 
  
Diluted EPS
   0.63    0.07    0.12    0.37 
Net income (loss) available to PPL Corporation 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 
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 
2013             
Operating revenues
 $ 2,457  $ 3,450  $ 3,105  $ 2,848 
Operating income (e)
   693    758    857    31 
Income (loss) from continuing operations after income taxes (e)
   413    404    410    (98)
Income (loss) from discontinued operations
        1    1      
Net income (loss) (e)
   413    405    411    (98)
Net income (loss) attributable to PPL (e)
   413    405    410    (98)
Income (loss) from continuing operations after income taxes available to             
 PPL common shareowners: (b) (e)            
  
Basic EPS
   0.70    0.68    0.65    (0.16)
  
Diluted EPS (d)
   0.65    0.63    0.62    (0.16)
Net income (loss) available to PPL common shareowners: (b) (e)            
  
Basic EPS
   0.70    0.68    0.65    (0.16)
  
Diluted EPS (d)
   0.65    0.63    0.62    (0.16)
Dividends declared per share of common stock (c)
   0.3675    0.3675    0.3675    0.3675 
Price per common share:            
  
High
 $ 31.35  $ 33.55  $ 32.09  $ 31.79 
  
Low
   28.64    28.44    29.03    28.95 
               
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 

(a)Quarterly results can vary depending on, among other things, weather and the forward pricing of power.  In addition, earnings in 2010 and 2009 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 2010, certain PPL Energy Supply subsidiaries signed definitive agreements to sell their entire interests in certain non-core generation facilities.  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.
(d)As a result of a reported loss, diluted earnings per share for the three months ended December 31, 2013 exclude incremental shares as they were anti-dilutive.
(e)Fourth quarter of 2013 includes a charge for the termination of the lease of the Colstrip coal-fired electric generating facility in Montana.  See Note 8 to the Financial Statements for additional information.

289

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
2010             
Operating revenues as previously reported
 $ 2,334  $ 1,043       
  
Reclassification of discontinued operations (b)
   (27)   (30)      
  
Operating revenues
   2,307    1,013  $ 1,680  $ 889 
Operating income as previously reported
   391    179       
  
Reclassification of discontinued operations (b)
   (16)   (12)      
  
Operating income
   375    167    435    477 
Income from continuing operations after income taxes as            
 
previously reported
   200    86       
  
Reclassification of discontinued operations (b)
   (8)   (8)      
  
Income from continuing operations after income taxes
   192    78    320    291 
Income (loss) from discontinued operations as previously reported
            
  
Reclassification of discontinued operations (b)
   8    8       
  
Income (loss) from discontinued operations
   8    8    (54)   19 
Net income
   200    86    266    310 
Net income attributable to PPL Energy Supply
   200    86    265    310 
               
2009             
Operating revenues as previously reported
 $ 1,949  $ 1,354       
  
Reclassification of discontinued operations (b)
   (30)   (28)      
  
Operating revenues
   1,919    1,326  $ 1,433  $ 1,347 
Operating income as previously reported
   295    34       
  
Reclassification of discontinued operations (b)
   (21)   (19)      
  
Operating income
   274    15    82    152 
Income from continuing operations after income taxes as            
 
previously reported
   188    1       
  
Reclassification of discontinued operations (b)
   (11)   (8)      
  
Income from continuing operations after income taxes
   177    (7)   13    71 
Income (loss) from discontinued operations as previously reported
   3    (32)      
  
Reclassification of discontinued operations (b)
 �� 11    8       
  
Income (loss) from discontinued operations
   14    (24)   (28)   31 
Net income (loss)
   191    (31)   (15)   102 
Net income (loss) attributable to PPL Energy Supply
   191    (31)   (16)   102 
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
2013             
Operating revenues
 $ 513  $ 414  $ 464  $ 479 
Operating income
   121    92    105    101 
Net income
   64    45    51    49 
Net income available to PPL
   64    45    51    49 
             
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 

(a)Quarterly results can vary depending on, among other things, weatherPPL Electric's business is seasonal in nature, with peak sales periods generally occurring in the winter and the forward pricing of power.  In addition, earnings in 2010 and 2009 were affected by special items.summer months.  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 2010, certain PPL Energy Supply subsidiaries signed definitive agreements to sell their entire interests in certain non-core generation facilities.  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.
290

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
 
(a) Evaluation of disclosure controls and procedures.
   
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
   
  The registrants' principal executive officers and principal financial officers, based on their evaluation of the registrants'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, 2010,2013, the registrants'Registrants' disclosure controls and procedures are effective to ensure that material information relating to the registrantsRegistrants 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 officers and principal financial officers, to allow for timely decisions regarding required disclosure.
PPL Corporation
PPL acquired LKE on November 1, 2010.  These companies are included in our 2010 financial statements as of the date of the acquisition and accounted for 5.0% of net income and 32.6% and 47.3% of consolidated total assets and net assets, respectively, of PPL Corporation for the year ended December 31, 2010.  Because of the size and complexity of these companies as well as the timing of the acquisition, the internal controls over financial reporting of LKE were excluded from a formal evaluation of effectiveness of PPL Corporation's disclosure controls and procedures.  PPL is evaluating changes to processes, information technology systems and other components of internal controls over financial reporting as part of its ongoing integration activities.
   
(b) Changes in internal control over financial reporting.
 
PPL Corporation, PPL Energy Supply, LLC, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company, and Kentucky Utilities Company
   
  Except
As reported in the June 30, 2013 Form 10-Q, the principal executive officers and principal financial officers of the Registrants concluded that the implementation of a financial consolidation and reporting system for PPL and its primary U.S. subsidiaries resulted in a material change to the LKE acquisition discussed above,Registrants' internal control over financial reporting.  The new system enhances the consolidation of subsidiary accounts, provides reporting tools for analysis and automates certain aspects of financial statement preparation for each of the Registrants.  Processes and controls over the consolidation and reporting processes that were previously considered to be effective were replaced with new or modified controls that were also determined to be effective.
The new consolidation and reporting system was subject to extensive testing and data reconciliation during implementation.  Post-implementation reviews were conducted which confirmed the continued effectiveness of the internal controls relating to the system implementation processes and to key business processes.
The Registrants' principal executive officers and principal financial officers have concluded that there were no other changes in the Registrants' internal control over financial reporting during the Registrants' fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Registrants' internal control over financial reporting.
PPL Corporation
As reported in the June 30, 2013 Form 10-Q, PPL's principal executive officer and principal financial officer concluded that the implementation of a new general ledger system and a financial reporting system at WPD resulted in a material change to its internal control over financial reporting. The general ledger system that was implemented at WPD replaced the existing mainframe system and resulted in more automation and enhanced controls over general ledger processing and consolidation.  The reporting system that was implemented at WPD improves and automates controls over data transfer included in PPL's consolidation process and improves controls over GAAP and foreign currency adjustments. In each of the WPD system implementations, controls that were previously determined to be effective were replaced with new or modified controls that were also determined to be effective.

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The general ledger and reporting systems were subject to extensive testing and data reconciliation during their implementation.  Post-implementation reviews were conducted which confirmed the continued effectiveness of the internal controls relating to the system implementation processes and to key business processes.  Risks related to the system implementations at WPD were also partially mitigated by PPL's existing policy of consolidating foreign subsidiaries on a one-month lag, which provided management additional time for review and analysis of WPD results and their incorporation into PPL's consolidated financial statements.
The Registrant's principal executive officer and principal financial officer have concluded that there were no other changes in the registrant'sRegistrant's internal control over financial reporting during the registrant'sRegistrant's fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, the registrant'sRegistrant's internal control over financial reporting.
PPL Energy Supply, LLC and PPL Electric Utilities Corporation
PPL Energy Supply and PPL Electric's principal executive officers and principal financial officers have concluded that there were no changes in the registrants' internal control over financial reporting during the registrants' fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, the registrants' internal control over financial reporting.
 
Management's Report on Internal Control over Financial Reporting
 
PPL Corporation
   
  
PPL's management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) 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"(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on our evaluation under the framework in "Internal Control - Integrated Framework,"Framework"(2013), our management concluded that our internal control over financial reporting was effective as of December 31, 2010.2013.  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 111.
In accordance with SEC rules, management excluded LKE from its evaluation of internal controls over financial reporting due to the size and complexity of the acquired companies as well as the timing of the acquisition.  LKE accounted for 5.0% of net income and 32.6% and 47.3% of consolidated total assets and net assets, respectively, of PPL Corporation for the year ended December 31, 2010. As discussed above, PPL Corporation is evaluating changes to processes, information technology systems and other components of internal controls over financial reporting as part of its ongoing integration activities.
   
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"(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on our evaluation under the framework in "Internal Control - Integrated Framework," ourFramework"(2013), management of these companies concluded that our internal control over financial reporting was effective as of December 31, 2010.2013.  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 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.

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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," "Board Committees - Audit Committee" and "Section 16(a) Beneficial Ownership Reporting Compliance" in PPL's 20112014 Notice of Annual Meeting and Proxy Statement, which will be filed with the SEC not later than 120 days after December 31, 2010,2013, 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 20102013 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 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 website 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 website 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 website: www.pplweb.com/about/corporate+governanceabout-us/corporate-governance.

PPL Energy Supply, LLC, and 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, and PPL Electric, LKE, LG&E and KU meet the conditions set forth in General Instruction (I)(1)(a) and (b) of Form 10-K.

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EXECUTIVE OFFICERS OF THE REGISTRANTS

Officers of PPL, PPL Energy Supply and PPL Electricthe 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, 2010.2013.

PPL Corporation
PPL Corporation
       
Name Age Positions Held During the Past Five Years Dates
 
James H. Miller62Chairman, President and Chief Executive OfficerOctober 2006 - present
PresidentJune 2006 - September 2006
President and Chief Operating OfficerAugust 2005 - June 2006
       
William H. Spence 5356Chairman, 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 Officer June 2006 - presentJuly 2011
 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. Farr 4346 Executive Vice President and Chief Financial Officer April 2007 - present
 Senior Vice President-FinancialJanuary 2006 - March 2007
Senior Vice President-Financial and ControllerAugust 2005 - January 2006
       
Robert J. Grey 6063Executive Vice President, General Counsel and SecretaryNovember 2012 - present
 Senior Vice President, General Counsel and Secretary March 1996 - presentNovember 2012
       
David G. DeCampli (a) 5356President-PPL Energy SupplyMarch 2012 - present
 President-PPL Electric April 2007 - March 2012
Gregory N. Dudkin (a)56President-PPL ElectricMarch 2012 - present
    Senior Vice President-Transmission and Distribution Engineering and Operations-PPLPresident-Operations-PPL Electric December 2006June 2009 - April 2007March 2012
    Vice President-Asset Investment StrategyIndependent ConsultantFebruary 2009 - June 2009
Senior Vice-President of Technical Operations and Development-Exelon Energy Delivery-ExelonJune 2006 - January 2009
 Fulfillment-Comcast Corporation April 2004 - December 2006
       
Robert D. Gabbard (a) 5154 President-PPL EnergyPlus June 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 (a) 5053 President-PPL Global August 2004 - present
       
Victor A. Staffieri (a) (b)
 55
58
 
Chairman President andof the Board, Chief Executive Officer-LKE
Officer and President-LKE
 
May 2001 - present
 
       
James E. AbelMark F. Wilten 5946 Senior Vice President-Finance and Treasurer August 2010June 2012 - present
    Vice President-FinanceTreasurer-Nissan North America and TreasurerNissan Motor June 1999August 2010 - May 2012
 Acceptance Corporation
Assistant Treasurer-Nissan Motor Acceptance CorporationAugust 2008 - August 2010
       
J. Matt Simmons, Jr. (a) (c)Vincent Sorgi 45Vice President-Risk Management and Chief Risk OfficerSeptember 2009 - present
42 Vice President and Controller January 2006 - March 2010
Vice President-Finance and Controller-Duke Energy AmericasOctober 2003 - January 2006
Vincent Sorgi (d)39Vice President and Controller March 2010 - present
    Controller-Supply Accounting June 2008 - March 2010
    Controller-PPL EnergyPlus April 2007 - June 2008


   Financial Director-Supply-PPL GenerationApril 2006 - April 2007
Director of Business Operations-PSEG Fossil, LLCMarch 2004 - March 2006

(a) Designated an executive officer of PPL by virtue of their respective positions at a PPL subsidiary.
(b)Victor A. Staffieri was designated an executive officer of PPL following the acquisition of LKE on November 1, 2010.
(c)On March 28, 2010, J. Matt Simmons, Jr. resigned as Vice President and Controller.
(d)On March 29, 2010, Vincent Sorgi was elected as Vice President and Controller.

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 20112014 Notice of Annual Meeting and Proxy Statement, which will be filed with the SEC not later than 120 days after December 31, 2010,2013, and which information is incorporated herein by reference.


294

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

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 20112014 Notice of Annual Meeting and Proxy Statement, which will be filed with the SEC not later than 120 days after December 31, 2010,2013, and which information is incorporated herein by reference.  In addition, provided below in tabular format is information as of December 31, 2010,2013, 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 Number of securitiesNumber of securities to be  Number of securities
issued upon exercise ofWeighted-average exerciseremaining available for futureissued upon exercise ofWeighted-average exerciseremaining available for future
outstanding options, warrantsprice of outstanding options,issuance under equityoutstanding options, warrantsprice of outstanding options,issuance under equity
and rights (3)warrants and rights (3)compensation plans (4)
and rights (3)
warrants and rights (3)
compensation plans (4)
Equity compensation     2,484,121 - ICP      
plans approved by 3,394,915 - ICP$ 32.67- ICP 9,025,897 - ICPKE 4,126,523 - ICP$ 31.34 - ICP 3,163,654 - ICPKE
security holders (1) 2,209,066 - ICPKE$ 31.77- ICPKE 14,518,081 - DDCP 2,206,230 - SIP$ 29.26 - SIP 7,727,573 - SIP
 5,603,981 - Total$ 32.31- Combined 26,028,099 - Total 5,048,729 - ICPKE$ 30.23 - ICPKE 1,905,081 - DDCP
       11,381,482 - Total$ 30.45 - Combined 12,796,308 - 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 12 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, 2010.2013.  In addition, as of December 31, 2010,2013, the following other securities had been awarded and are outstanding under the ICP, SIP, ICPKE and DDCP:  45,40030,400 shares of restricted stock, 511,190321,450 restricted stock units and 173,774238,319 performance units under the ICP; 40,000 shares of restricted stock, 250,526 restricted stock units and 166,609 performance units under the SIP; 24,600 shares of restricted stock, 1,081,9322,473,624 restricted stock units and 112,266388,271 performance units under the ICPKE; and 424,170500,049 stock units under the DDCP.
   
(4) Based upon the following aggregate award limitations under the ICP, SIP, ICPKE and DDCP: (a) under the ICP, 15,769,431 awards (i.e., 5% of the total PPL common stock outstanding as of April 23, 1999) granted after April 23, 1999; (b) under the 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.


295

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

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 20112014 Notice of Annual Meeting and Proxy Statement, which will be filed with the SEC not later than 120 days after December 31, 2010,2013, and is incorporated herein by reference.

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

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 20102013 and 2009"2012" in PPL's 20112014 Notice of Annual Meeting and Proxy Statement, which will be filed with the SEC not later than 120 days after December 31, 2010,2013, 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, 20102013 and 2009,2012, 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.

 2010  2009  2013  2012 
 (in thousands) 
(in thousands)
          
Audit fees (a) $ 2,526  $ 2,769  $ 1,612  $ 2,132 
Audit-related fees (b)   16    31   9   54 
Tax fees (c)   375      70   163 
All other fees (d)   118    8 

(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 performance of specific agreed-upon procedures and a review of eXtensible Business Reporting Language tags assigned to financial statement line items.procedures.
   
(c) Includes fees for tax advice in connection with the funding of the Western Power Utilities Pension Scheme, reviewa tax basis and consultation related to PPL's recognition of tax benefits resulting from favorable U.S. Court decisions, consultationearnings and analysis related to non-income tax process improvements initiated by PPLprofit study and review, consultation and analysis related to investment tax credits and related capital expenditures on certain hydro-electric plant upgrades.

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, 2013 and 2012, for professional services rendered for the audit of PPL Electric's annual financial statements and for fees billed for other services rendered by EY.

  2013  2012 
  
(in thousands)
       
Audit fees (a) $ 953  $ 1,319 
Audit-related fees (b)   10    10 
Tax fees (c)   72    207 

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(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 in connection with statutory and regulatory filings or engagements, including comfort letters and consents for financings and filings made with the SEC.

(d)(b)Fees for performance of specific agreed-upon procedures.

(c)Includes fees for an analysis related to access to an EY online accounting research toolthe deductibility of certain transmission and an International Financial Reporting Standards diagnostic readiness assessment.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, 2013 and 2012, for professional services rendered for the audits of LKE's annual financial statements and for fees billed for other services rendered by EY.

  2013  2012 
  
(in thousands)
       
Audit fees (a) $ 1,646  $ 1,715 

(a)Includes estimated fees for audit of annual financial statements and review of financial statements included in LKE'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.

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, 2013 and 2012, for professional services rendered for the audits of LG&E's annual financial statements and for fees billed for other services rendered by EY.

  2013  2012 
  
(in thousands)
       
Audit fees (a) $ 691  $ 731 

(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, 2013 and 2012, for professional services rendered for the audits of KU's annual financial statements and for fees billed for other services rendered by EY.

     
  2013  2012 
  
(in thousands)
       
Audit fees (a) $ 646  $ 626 

(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

297

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 20102013 and 2009 services provided by EY.

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, 2010 and 2009, for professional services rendered for the audit of PPL Electric's annual financial statements and for fees billed for other services rendered by EY.

  2010  2009 
  (in thousands)
       
Audit fees (a) $ 791  $ 865 
Audit-related fees (b)   21    18 
Tax fees (c)   58    
All other fees (d)   42    3 

(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 in connection with statutory and regulatory filings or engagements, including comfort letters and consents for financings and filings made with the SEC.
(b)Fees for performance of specific agreed-upon procedures and a review of eXtensible Business Reporting Language tags assigned to financial statement line items.
(c)Fees for consultation and analysis related to non-income tax process improvements initiated by PPL and review and consultation related to PPL's recognition of tax benefits resulting from favorable U.S. Court decisions.
(d)Fees related to access to an EY online accounting research tool and an International Financial Reporting Standards diagnostic readiness assessment.

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 pre-approved specific categories of services and authorization levels.  All services outside of the specified categories and all amounts exceeding the authorized levels are reviewed a nd pre-approved by the Chair of the Audit Committee of PPL, who serves as the Committee designee to review and pre-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 2010 and 20092012 services provided by EY.

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 "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 - PPL CorporationLG&E and KU Energy LLC Condensed Unconsolidated Financial Statements.
   
  All other schedules are omitted because of the absence of the conditions under which they are required or because the required information is included in the financial statements or notes thereto.
   
 3.Exhibits
   
  See Exhibit Index immediately following the signature pages.

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SHAREOWNER AND INVESTOR INFORMATION


Annual Meetings:  The 20112014 annual meeting of shareowners of PPL will be held on Wednesday, May 18, 2011,21, 2014, at the Zoellner Arts Center, onRadisson Blu Hotel located at the campus of Lehigh UniversityHerald Way Pegasus Business Park East Midlands Airport, DE74 2TZ, in Bethlehem, Pennsylvania, in Lehigh County.Derby, United Kingdom.

Proxy and Information Statement Material:  A proxy statement and notice of PPL's annual meeting is mailedprovided to all shareowners of record as of February 28, 2011.2014.  The latest proxy statement can be accessed at www.pplweb.com.

PPL Annual Report: The report is published and mailed in the beginning of April and provided to all shareowners of record.record as of February 28, 2014.  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 preference stock by the PPL Electric Board of Directors, dividends are paid on the first business day of April, July, October and January.  The 20112014 record dates for dividends are expected to be March 10, June 10, September 9,10 and December 9.10.

Direct Deposit of Dividends: Shareowners may choose to have their dividend checks deposited directly into their checking or savings account.

PPL Shareowner InformationPPL's Website Line (1-800-345-3085)(www.pplweb.com):  Shareowners can get detailed corporate and financial information 24 hours a day using the PPL Shareowner Information Line.  They can hear timely recorded messages about earnings, dividends and other company news releases; request information by fax; and request printed materials in the mail.  Otheraccess PPL publications such as the annual and quarterly reports to the Securities and Exchange Commission (Forms(SEC Forms 10-K and 10-Q), other PPL filings, corporate governance materials, news releases, stock quotes and historical performance.  Visitors to our website can subscribe to receive automated email alerts for SEC filings, earnings releases, daily stock prices or other financial news.

Financial reports which are available at www.pplweb.comwill be mailed without charge upon request or writeby writing to:

Manager - PPL Investor Services
Two North Ninth Street (GENTW13)
Allentown, PA  18101

Via FAX:  610-774-5106
Via email:  invserv@pplweb.com

or by calling:
PPL's Website(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 website can provide their email address and indicate their desire to receive future earnings or news releases automatically.

Shareowner Inquiries:

PPL           Shareowner Services, toll-free at 1-800-345-3085; or
Wells Fargo Bank, N.A.
161 North Concord Exchange
South St. Paul, MN  55075-1139

Toll Free:  1-800-345-3085
Outside U.S.:  651-453-2129
FAX:  651-450-4085
www.wellsfargo.com/shareownerservices           PPL Corporate Offices at 610-774-5151.

Online Account Access:  Registered shareowners can accessactivate their account informationfor online access by visiting www.shareowneronline.com.shareowneronline.com.

Dividend Reinvestment and Direct Stock Purchase Plan (Plan):  PPL offers its existing shareholders, employees and new 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 partially reinvested in PPL common stock or can receive full payment of cash dividends by check or EFT.  Participants in the Plan may choose to have their common stock certificates deposited into their Plan account.

Direct Registration System:  PPL participates in the Direct Registration System (DRS).  Shareowners may choose to have their common stock certificates deposited intoconverted to book entry form within the DRS.DRS by submitting their certificates to PPL's transfer agent.


Listed Securities:

New York Stock Exchange

PPL Corporation:
Common Stock (Code:  PPL)

Corporate Units issued 2011 (Code:  PPLPRU)PPLPRW)

PPL Energy Supply, LLC:
7.0% Senior Unsecured Notes due 2046 (Code:  PLS)

PPL Capital Funding, Inc.:
2007 Series A Junior Subordinated Notes due 2067 (Code:  PPL/67)

6.85% Senior2013 Series B Junior Subordinated Notes due 20472073 (Code:  PLV)PPX)


299


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
Website:  shareowneronline.com

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 PPLcontact Shareowner Information Line
Toll Free:Services, toll-free, at 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

300

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 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/ Vincent Sorgi   Principal Accounting Officer
Vincent Sorgi -    
Vice President and Controller
(Principal Accounting Officer)    
     
     
     
Directors:    
     
Frederick M. Bernthal Stuart E. GrahamHeydt  
John W. Conway Stuart HeydtVenkata Rajamannar Madabhushi  
E. Allen DeaverPhilip G. Cox Craig A. Rogerson  
Steven G. Elliott William H. Spence
Louise K. GoeserNatica von Althann  
Louise K. GoeserStuart E. Graham Keith H. Williamson  
     
By  /s/ JamesWilliam H. MillerSpence    
JamesWilliam H. Miller,Spence, Attorney-in-fact Date:  February 25, 201124, 2014  

301

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/ Vincent Sorgi   Principal Accounting Officer
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, 201124, 2014    

302

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/ Vincent SorgiDennis A. Urban, Jr.   Principal Financial Officer and
Vincent SorgiDennis A. Urban, Jr. -   
Controller
(Principal Financial Officer and Principal Accounting Officer
Vice President and ControllerOfficer)    
     

     
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. ChristiansenRobert J. Grey  
Paul A. Farr Dean A. Christiansen
/s/ Robert J. Grey  
Robert J. Grey    
     
     
     
     
     
     
     
     
Date:  February 25, 201124, 2014    

303

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/ Victor A. Staffieri
/s/ Paul W. Thompson
Victor A. StaffieriPaul W. Thompson
/s/ S. Bradford Rives
S. Bradford Rives
Date:  February 24, 2014

304

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/ Victor A. Staffieri
/s/ Paul W. Thompson
Victor A. StaffieriPaul W. Thompson
/s/ S. Bradford Rives
S. Bradford Rives
Date:  February 24, 2014

305

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/ Victor A. Staffieri
/s/ Paul W. Thompson
Victor A. StaffieriPaul W. Thompson
/s/ S. Bradford Rives
S. Bradford Rives
Date:  February 24, 2014

306
EXHIBIT INDEX

The following Exhibits indicated by an asterisk preceding the Exhibit number are filed herewith.  The balance of the Exhibits hashave heretofore been filed with the Commission and pursuant to Rule 12(b)-32 are incorporated herein by reference.  Exhibits indicated by a [_] are filed or listed pursuant to Item 601(b)(10)(iii) of Regulation S-K.

1(a)-Final Terms of 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)
1(b)-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)
1(c)-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)
1(d)-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)
1(e)-Final Terms of the WPD West Midlands £400 million 3.875% Senior Unsecured Notes due October 17, 2024 (Exhibit 1.1 to PPL Corporation Form 8-K Report (File No. 1-11459) dated October 18, 2013)
1(f)-Final Terms of the WPD East Midlands £40 million 1.676% Notes due 2052 (Exhibit 1.2 to PPL Corporation Form 8-K Report (File No. 1-11459) dated October 18, 2013)
1(g)-Final Terms of the WPD East Midlands £25 million 1.676% Notes due 2052 (Exhibit 1.3 to PPL Corporation Form 8-K Report (File No. 1-11459) dated October 18, 2013)
2(a)-Purchase and Sale Agreement by and between PPL Montana, LLC and NorthWestern Corporation, dated as of September 26, 2013 (Exhibit 2.1 to PPL Corporation Form 8-K Report (File No. 1-11459) dated September 27, 2013)
2(b)-Lease Termination Agreement by and between PPL Montana, LLC, Montana OL3 LLC and Montana OP3 LLC, dated as of September 26, 2013 (Exhibit 2.2 to PPL Corporation Form 8-K Report (File No. 1-11459) dated September 27, 2013)
2(c)-Lease Termination Agreement by and between PPL Montana, LLC, Montana OL4 LLC and Montana OP4 LLC, dated as of September 26, 2013 (Exhibit 2.3 to PPL Corporation Form 8-K Report (File No. 1-11459) dated September 27, 2013)
2(d)-Lease Termination Agreement by and between PPL Montana, LLC, Montana OL1 LLC and Montana OP1 LLC, dated as of September 26, 2013 (Exhibit 2.4 to PPL Corporation Form 8-K Report (File No. 1-11459) dated September 27, 2013)
2(e)-Lease Termination Agreement by and between PPL Montana, LLC, Montana OL1 LLC and Montana OP1 LLC, dated as of September 26, 2013 (Exhibit 2.5 to PPL Corporation Form 8-K Report (File No. 1-11459) dated September 27, 2013)
   
3(a)-Amended and Restated Articles of Incorporation of PPL Corporation, effective as of May 21, 200815, 2013 (Exhibit 3(i) to PPL Corporation Form 8-K Report (File No. 1-11459) dated May 21, 2008)20, 2013)
   
3(b)-Amended and Restated Articles of Incorporation of PPL Electric Utilities Corporation, effective as of October 31, 2013 (Exhibit 3(a) to PPL Electric Utilities Corporation Form 10-Q Report (File No. 1-905) for the quarter ended March 31, 2006)September 30, 2013)
   
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))
   

307


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 19, 201015, 2013 (Exhibit 99.13(ii) to PPL Corporation Form 8-K Report (File No. 1-11459) dated May 24, 2010)20, 2013)
   
3(e)-Amended and Restated Bylaws of PPL Electric Utilities Corporation, effective as amended and restated effective March 30, 2006of October 31, 2013 (Exhibit 3.23(b) to PPL Electric Utilities Corporation Form 8-K10-Q Report (File No. 1-905) dated Marchfor the quarter ended September 30, 2006)2013)
   
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)-1-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(h)-2
-Amendment to Amended and Restated Operating Agreement of LG&E and KU Energy LLC, effective as of November 25, 2013
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)
   
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(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(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)
   

308


4(b)-5-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 Amended and Restated 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)
4(b)-10-Amendment No. 9 to said Employee Stock Ownership Plan, dated December 21, 2012 (Exhibit 4(b)-10 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2012)
4(b)-11-Amendment No. 10 to said Employee Stock Ownership Plan, dated September 16, 2013 (Exhibit 4(a) to PPL Corporation Form 10-Q Report (File No. 1-11459) for the quarter ended September 30, 2013)
   
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(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(d)-2-Supplement,Supplemental Indenture No. 8, dated as of May 18, 2004, to said Indenture (Exhibit 4.7 to Registration Statement Nos. 333-116478, 333-116478-01 and 333-116478-02)
4(d)-3-Supplement, dated as of July 1, 2007,June 14, 2012, to said Indenture (Exhibit 4(b) to PPL Corporation Form 8-K Report (File No. 1-11459) dated July 16, 2007)June 14, 2012)
4(d)-3-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(d)-4-Supplemental Indenture No. 10, dated as of May 24, 2013, to said Indenture (Exhibit 4.2 to PPL Corporation Form 8-K Report (File No. 1-11459) dated May 24, 2013)
4(d)-5-Supplemental Indenture No. 11, dated as of May 24, 2013, to said Indenture (Exhibit 4.3 to PPL Corporation Form 8-K Report (File No. 1-11459) dated May 24, 2013)
4(d)-6-Supplemental Indenture No. 12, dated as of May 24, 2013, to said Indenture (Exhibit 4.4 to PPL Corporation Form 8-K Report (File No. 1-11459) dated May 24, 2013)
   
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(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)
   

309


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(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(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(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(f)-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(f)-8-7-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(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(f)-12-Supplemental Indenture No. 15, dated as of July 1, 2013, to said Indenture (Exhibit 4(a) to PPL Electric Utilities Corporation Form 8-K Report (File No. 1-905) dated July 11, 2013)
   
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(g)-2- 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(g)- 3-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(g)-4-3-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(g)-5-4-
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(g)-6-5-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(g)-7-6-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(g)-8-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(g)-9-7-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(g)-10-8-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)
   

310


4(g)-11-9-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)
   
4(g)-12-10-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(g)-11-Supplemental Indenture No. 11, dated as of December 1, 2011, to said Indenture (Exhibit 4(a) to PPL Energy Supply, LLC Form 8-K Report (File No. 1-32944) dated December 16, 2011)
4(g)-12-Supplemental Indenture No. 12, dated as of February 12, 2013, to said Indenture (Exhibit 4.1 to PPL Energy Supply, LLC Form 8-K Report (File No. 1-32944) dated February 13, 2013)
   
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(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-Pollution Control Facilities Loan Agreement, dated as of February 1, 2005, between PPL Electric Utilities Corporation and the Lehigh County Industrial Development Authority (Exhibit 10(ff) to PPL Electric Utilities Corporation Form 10-K Report (File No. 1-905) for the year ended December 31, 2004)
   
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(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(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(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(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(m)-3-Supplement,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 28,30, 2010)

311


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(m)-5-Supplemental Indenture No. 4, dated as of March 15, 2013, to said Subordinated Indenture (Exhibit 4(b) to PPL Corporation Form 8-K Report (File No. 1-11459) dated March 15, 2013)
   
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)
   
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(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)
   
4(o)-Trust Deed constituting £200 million 5.75 percent Notes due 2040, dated March 23, 2010, between Western Power Distribution (South Wales) plc and HSBC Corporate Trustee Company (UK) Limited (Exhibit 4(a) to PPL Corporation Form 10-Q Report (File No. 1-11459) for the quarter ended March 31, 2010)
   
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(q)-4
-Supplemental Indenture No. 3, dated as of November 1, 2013, to said Indenture (Exhibit 4(b) to PPL Corporation Form 8-K Report (File No. 1-11459) dated November 13, 2013)
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(r)-4
-Supplemental Indenture No. 3, dated as of November 1, 2013, to said Indenture (Exhibit 4(a) to PPL Corporation  Form 8-K Report (File No. 1-11459) dated November 13, 2013)
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)

312


   
*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(t)
4(s)-3		-Registration Rights Agreement,Supplemental Indenture No. 2, dated November 12, 2010, between LG&E and KU Energy LLC and the Initial Purchasersas 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(u)
-Registration Rights Agreement, dated November 16, 2010, between Louisville Gas and Electric Company and the Initial Purchasers
*4(v)
-Registration Rights Agreement, dated November 16, 2010, between Kentucky Utilities Company and the Initial Purchasers
*4(w)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(w)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)
   
*4(x)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(x)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(y)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(y)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(z)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(z)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(aa)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(aa)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(bb)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(bb)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)
   

313


*4(cc)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(cc)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(dd)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(dd)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)
   
*4(ee)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(ee)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(ff)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(ff)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(gg)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(gg)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(hh)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(hh)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(ii)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)

314


   
*4(ii)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(jj)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(jj)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(kk)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)
   
*4(kk)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(ll)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(ll)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(mm)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(mm)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(nn)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(nn)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(oo)
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(pp)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)
   

315


*4(pp)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(qq)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(qq)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(rr)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)
   
*4(rr)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(ss)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(ss)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(tt)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(tt)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-Amended and Restated Trust Deed, dated September 10, 2013, by and among Western Power Distribution (East Midlands) plc, Western Power Distribution (West Midlands) plc, Western Power Distribution (South West) plc and Western Power Distribution (South Wales) plc as Issuers, and HSBC Corporate Trustee Company (UK) Limited as Note Trustee (Exhibit 4.1 to PPL Corporation Form 8-K Report (File No. 1-11459) dated October 18, 2013)
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)

316


   
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(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)
   
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(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(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(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(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(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(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(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(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(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(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(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)

317


   
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(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)
   
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(j)-5-Amendment No. 2, to said Credit and Security Agreement, dated as of July 27, 2010, among PPL Receivables Corporation, as Borrower, PPL Electric Utilities Corporation, as Servicer, Victory Receivables Corporation, as a Lenderto said Credit and The Bank of Tokyo – Mitsubishi UFJ, Ltd., New York Branch, as Liquidity Bank and as AgentSecurity 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 of 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 of December 23, 2010, amongMarch 31, 2011, to said Credit and Security Agreement (Exhibit 10(c) to PPL Receivables Corporation Form 10-Q Report (File No. 1-11459) for the quarter ended March 31, 2011)
10(j)-8-Amendment No. 5, dated as Borrower,of 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 of 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 Servicer, Victory Receivablesof September 24, 2012, to said Credit and Security Agreement (Exhibit 10(b) to PPL Electric Utilities Corporation as a Lender and The Bank of Tokyo - Mitsubishi UFJ, Ltd., New York Branch, as Liquidity Bank and as AgentForm 10-Q Report (File No. 1-905) for the quarter ended September 30, 2012)
   
10(k)-$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(l)-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(l)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(l)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(l)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(l)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)
   

318


10(l)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(l)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(l)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)
   
10(l)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(l)10(k)-10-Ninth Amendment, to said Reimbursement Agreement, dated as of March 31, 2010, to said Reimbursement Agreement (Exhibit 99.1 to PPL Energy Supply, LLC Form 8-K Report (File No. 1-32944) dated April 6, 2010)
   
10(m)-110(k)-11-$300 Million Five-Year Letter of Credit and Revolving Credit Agreement,Tenth 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(m)-2-First AmendmentFebruary 22, 2012, to said Letter of Credit and Revolving CreditReimbursement Agreement dated as of December 29, 2006 (Exhibit 10(t)-210(k)-11 to PPL Energy Supply, LLC Form 10-K Report (File No. 333-74794)1-32944) for the year ended December 31, 2006)2011)
   
10(n)-110(k)-12-$300 Million Five-Year Letter of Credit and Reimbursement Agreement,Eleventh Amendment, 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(n)-2-First AmendmentFebruary 28, 2013, to said Letter of Credit and Reimbursement Agreement dated as of December 29, 2006 (Exhibit 10(u)-210(k)-12 to PPL Energy Supply, LLC Form 10-K Report (File No. 333-74794)1-32944) for the year ended December 31, 2006)2012)
   
10(o)-$200,000,000 Revolving Credit Agreement, dated as of December 31, 2010, among PPL Electric Utilities Corporation, the Lenders party thereto and Wells Fargo Bank, National Association, as Administrative Agent, Swingline Lender and Issuing Lender (Exhibit 10.1 to PPL Electric Utilities Corporation Form 8-K Report (File No. 1-905) dated January 6, 2011)
10(p)-1-$4,000,000,000 Revolving Credit Agreement, dated as of October 19, 2010, among PPL Energy Supply, LLC, the Lenders party thereto and Wells Fargo Bank, National Association, as Administrative Agent, Swingline Lender and Issuing Lender (Exhibit 10.1 to PPL Energy Supply, LLC Form 8-K Report (File No. 1-32944) dated October 21, 2010)
*10(p)-2
- Notice of Reduction to said Revolving Credit Agreement, dated November 17, 2010, effective as of December 1, 2010.
10(q)-£150 million Credit Agreement, dated as of January 24, 2007, among Western Power Distribution Holdings Limited and the banks named therein (Exhibit 10(y) to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2006)
10(r)-£210 million Multicurrency Revolving Facility Agreement, dated July 7, 2009, between Western Power Distribution (South West) plc and HSBC Bank plc, Lloyds TSB Bank plc and Clydesdale Bank plc (Exhibit 10(c) to PPL Corporation Form 10-Q Report (File No. 1-11459) for the quarter ended June 30, 2009)
10(s)10(l)-Purchase and Sale Agreement, dated as of 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 28,30, 2010)
   
10(t)10(m)-$500 million Facility Agreement, dated as of May 14, 2010, among PPL 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(u)10(n)-Purchase and Sale Agreement, dated as of September 9, 2010, by and between PPL Holtwood, LLC and LSP Safe Harbor Holdings, LLC (Exhibit 10.1 to PPL Corporation Form 8-K Report (File No. 1-11459) dated September 13, 2010)
   
10(v)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(w)
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 year ended December 31, 2010)
   
*10(x)
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(y)
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, 2010)

319


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-Amendment and Restatement Agreement, dated as of August 16, 2012, regarding $198,309,583.05 Amended and Restated Letter of Credit Agreement, dated as of August 16, 2012, among Kentucky Utilities Company, the Lenders from time to time party hereto, and Banco Bilbao Vizcaya Argentaria, S.A., New York Branch, as Administrative Agent (Exhibit 10(c) to Kentucky Utilities Company Form 10-Q Report (File No. 1-3464) for the quarter ended September 30, 2012)
10(u)-2-Amendment No. 1, dated as of May 1, 2013, to said Amended and Restated Letter of Credit Agreement among Kentucky Utilities Company, the Lenders from time to time party thereto, and Banco Bilbao Vizcaya Argentaria, S.A., New York Branch, as Administrative Agent and Sumitomo Mitsui Banking Corporation, New York Branch as Issuing Lender (Exhibit 10(a) to Kentucky Utilities Company Form 10-Q Report (File No. 1-3464) for the quarter ended March 31, 2013)
10(u)-3-Amendment No. 2, dated as of May 1, 2013, to said Amended and Restated Letter of Credit Agreement among Kentucky Utilities Company, the  Lenders from time to time party thereto, Sumitomo Mitsui Banking Corporation, New York Branch, as successor Administrative Agent and Sumitomo Mitsui Banking Corporation, New York Branch as Issuing Lender (Exhibit 10(b) to Kentucky Utilities Company Form 10-Q Report (File No. 1-3464) for the quarter ended March 31, 2013)
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(w)-1-
Confirmation of Forward Sale Transaction, dated April 9, 2012, between PPL Corporation and Morgan Stanley & Co. LLC (Exhibit 10.1 to PPL Corporation Form 8-K Report (File No. 1-11459) dated April 13, 2012)
10(w)-2-Confirmation of Forward Sale Transaction, dated April 20, 2012, between PPL Corporation and Morgan Stanley & Co. LLC (Exhibit 10.1 to PPL Corporation Form 8-K Report (File No. 1-11459) dated April 26, 2012)
10(x)-1-Confirmation 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 as of April 20, 2012, entered into by and among 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, National Association, as Administrative Agent, Swingline Lender and Issuing Lender (Exhibit 10(f) to PPL Corporation Form 10-Q Report (File No. 1-11459) for the quarter ended March 31, 2012)

320


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, 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(z)-3
-First Amendment, dated as of August 30, 2013, to said Uncommitted Line of Credit Letter Agreement
10(aa)-1-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)
*10(aa)-2
-Amended and Restated Letter of Credit Issuance and Reimbursement Agreement, dated as of August 30, 2013, between PPL Energy Supply, LLC and Canadian Imperial Bank of Commerce, New York Agency
10(bb)-$400,000,000300,000,000 Amended and Restated Revolving Credit Agreement, dated as of November 1, 2010,6, 2012, among PPL Electric Utilities Corporation, the Lenders party thereto and Wells Fargo Bank, National Association, as Administrative Agent, Issuing Lender and Swingline Lender (Exhibit 10(bb) to PPL Electric Utilities Corporation Form 10-K Report (File No. 1-905) for the year ended December 31, 2012)
10(cc)-$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 (Exhibit 10(cc) to PPL Energy Supply, LLC Form 10-K Report (File No. 1-32944) for the year ended December 31, 2012)
10(dd)-$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 (Exhibit 10.110(dd) to PPL Corporation Form 8-K10-K Report (File No. 1-11459) dated November 1, 2010)for the year ended December 31, 2012)
   
10(aa)10(ee)-$400,000,000500,000,000 Amended and Restated Revolving Credit Agreement, dated as of November 1, 2010,6, 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 (Exhibit 10.210(ee) to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2012)
10(ff)-£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 (Exhibit 10(ff) to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2012)
*10(gg)
-Amended and Restated Collateral Agency Agreement, dated as of February 12, 2013, among PPL Ironwood, LLC, The Bank of New York Mellon, as Trustee, The Bank of New York Mellon, as Collateral Agent and The Bank of New York Mellon, as Depositary Bank
*10(hh)
-Third Supplemental Indenture, dated as of February 12, 2013, to Trust Indenture dated as of June 1, 1999, among PPL Ironwood, LLC, The Bank of New York Mellon, as Trustee and The Bank of New York Mellon, as Depositary Bank

321


*10(ii)
-$75,000,000 Revolving Credit Agreement, dated as of October 30, 2013, among LG&E and KU Energy LLC, the Lenders from time to time party thereto, and PNC Bank, National Association, as the Administrative Agent and the Issuing Lender, PNC Capital Markets LLC, as Sole Lead Arranger and Sole Bookrunner, Fifth Third Bank, as Syndication Agent, and Central Bank & Trust Company, as Documentation Agent
10(jj)-$300,000,000 Revolving Credit Agreement, dated as of November 12, 2013, among PPL Capital Funding, Inc., as borrower, PPL Corporation, as Guarantor, the Lenders party thereof and PNC Bank National Association, as Administrative Agent, and Manufactures and Traders Trust as Syndication Agent (Exhibit 10.1 to PPL Corporation Form 8-K Report (File No. 1-11459) dated November 1, 2010)13, 2013)
   
[_]10(bb)10(kk)-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(bb)10(kk)-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(bb)10(kk)-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(bb)10(kk)-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(bb)10(kk)-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(bb)10(kk)-6-Amendment No. 5 to said Amended and Restated 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)
   
[_]10(cc)10(ll)-1-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 (Exhibit 10(hh)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2012)
   
[_]10(cc)10(ll)-2-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 (Exhibit 10(hh)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2012)
[_]10(ll)-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(cc)-310(ll)-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(cc)-410(ll)-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)
   

322


[_]10(dd)10(mm)-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(dd)10(mm)-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)
   
[_]10(dd)10(mm)-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(dd)10(mm)-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(ee)10(mm)-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(nn)-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(ee)10(nn)-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(ee)10(nn)-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(ee)10(nn)-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(ee)10(nn)-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(ff)10(nn)-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(oo)-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(ff)10(oo)-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(ff)10(oo)-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(ff)10(oo)-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(ff)10(oo)-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(ff)10(oo)-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)

323


   
[_]10(ff)10(oo)-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(ff)10(oo)-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)
   
[_]10(ff)10(oo)-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(gg)10(pp)-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(gg)10(pp)-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(gg)10(pp)-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(gg)10(pp)-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(gg)10(pp)-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(hh)10(pp)-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(qq)-Short-term Incentive Plan (Schedule A to Proxy Statement of PPL Corporation, dated March 20, 2006)April 6, 2011)
   
[_]10(ii)-Agreement dated January 15, 2003 between PPL Corporation and Mr. Miller regarding Supplemental Pension Benefits (Exhibit 10(u) to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2002)
[_]10(jj)-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(kk)10(rr)-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(ll)-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(mm)-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(nn)10(ss)-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(oo)10(tt)-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(oo)10(tt)-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(pp)-Form of Performance Unit Agreement entered into between PPL Corporation and the Named Executive Officers (Exhibit 10(ss) to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2007)
[_]10(qq)-Employment letter dated May 22, 2009, between PPL Services Corporation and Gregory W. Dudkin (Exhibit 10(b) to PPL Corporation Form 10-Q Report (File No. 1-11459) for the quarter ended June 30, 2009)
*[_]10(rr)
-Retention Agreement, effective as of December 1, 2010, entered into between PPL Corporation and Victor A. Staffieri
*[_]10(ss)
10(uu)		-Amended and Restated Employment and Severance Agreement, dated as of October 29, 2010, between E.ON U.S. LLC and Victor A. Staffieri (Exhibit 10(ss) to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)

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[_]10(vv)-1-Form of Change 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)
[_]10(vv)-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(ww)-1-PPL Corporation 2012 Stock Incentive Plan (Annex A to Proxy Statement of PPL Corporation, dated April 3, 2012)
[_]10(ww)-2-Form of Performance Unit Agreement for performance unit awards under the Stock Incentive Plan (Exhibit 10(tt)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2012)
[_]10(ww)-3-Form of Performance Contingent Restricted Stock Unit Agreement for restricted stock unit awards under the Stock Incentive Plan (Exhibit 10(tt)-3 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2012)
[_]10(ww)-4-Form of Nonqualified Stock Option Agreement for stock option awards under the Stock Incentive Plan (Exhibit 10(tt)-4 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2012)
[_]10(xx)-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, 2012)
   
*12(a)
-PPL Corporation and Subsidiaries Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
   
*12(b)
-PPL Energy Supply, LLC and Subsidiaries Computation of Ratio of Earnings to Fixed Charges
   
*12(c)
-PPL Electric Utilities Corporation and Subsidiaries Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
*12(d)
-LG&E and KU Energy LLC and Subsidiaries Computation of Ratio of Earnings to Fixed Charges
*12(e)
-Louisville Gas and Electric Company Computation of Ratio of Earnings to Fixed Charges
*12(f)
-Kentucky Utilities Company Computation of Ratio of Earnings to Fixed Charges
   
*21
-Subsidiaries of PPL Corporation
   
*23(a)
-Consent of Ernst & Young LLP - PPL Corporation
   
*23(b)
-Consent of Ernst & Young LLP - PPL Energy Supply, LLC
   
*23(c)
-Consent of Ernst & Young LLP - PPL Electric Utilities Corporation
   
*23(d)
-Consent of PricewaterhouseCoopersErnst & Young LLP - PPL CorporationLG&E and KU Energy LLC
*23(e)
-Consent of Ernst & Young LLP - Louisville Gas and Electric Company
*23(f)
-Consent of Ernst & Young LLP - Kentucky Utilities Company
   
*24
-Power of Attorney
   

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*31(a)
-Certificate of PPL's principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
*31(b)
-Certificate of PPL's principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
*31(c)
-Certificate of PPL Energy Supply's principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
*31(d)
-Certificate of PPL Energy Supply's principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
*31(e)
-Certificate of PPL Electric's principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
*31(f)
-Certificate of PPL Electric's principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
*31(g)
-Certificate of LKE's principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*31(h)
-Certificate of LKE's principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*31(i)
-Certificate of LG&E's principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*31(j)
-Certificate of LG&E's principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*31(k)
-Certificate of KU's principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*31(l)
-Certificate of KU's principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*32(a)
-Certificate of PPL's principal executive officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
*32(b)
-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
   
*32(c)
-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
   
*32(d)
-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
   
*32(e)
-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
   
*32(f)
-Certificate of PPL Electric'sKU's principal executive officer and principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
*99(a)
-Examples of Wholesale Energy, FuelPPL Corporation and Emission Allowance Price Fluctuations - 2006 through 2010Subsidiaries Long-term Debt Schedule
   

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**101.INS-XBRL Instance Document for PPL Corporation, PPL Energy Supply, LLC, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company
   
**101.SCH-XBRL Taxonomy Extension Schema for PPL Corporation, PPL 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.

327