| |
(b) | Energy-related businesses are mechanical contracting and services subsidiaries that primarily support the generation and marketing and trading businesses in Talen Energy's East segment. Activities of PPL Energy Supply. Their activitiesthese businesses include developing renewable energy projects and providing energy-related products and services to commercial and industrial customers through their mechanical contracting and services subsidiaries. Energy-related businesses for PPL's Supply segment had additional revenues not related to PPL Energy Supply of $13 million and $8 million for 2012 and 2011, which are not included in this table. customers. |
Power Generation by PPL GenerationFuel Source and other PPL Energy Supply subsidiaries includes power obtained through PPL EnergyPlus' power purchase agreements. See "Item 2. Properties - Supply Segment" for details of PPL Energy Supply's generating capacity.Segment
During 2013, PPL2015, Talen Energy Supply owned or controlled power plants (including facilities for which Talen Energy has the rights to the output) that generated the following amounts of electricity.electricity (by segment):
|
| | | | | | | | |
| GWh |
Fuel Source | East | | West | | Total |
Nuclear (a) | 18,505 |
| | — |
| | 18,505 |
|
Natural Gas/Oil | 15,320 |
| | 2,470 |
| | 17,790 |
|
Coal | 18,181 |
| | 3,775 |
| | 21,956 |
|
Hydro | 903 |
| | — |
| | 903 |
|
Renewables (b) | 293 |
| | — |
| | 293 |
|
Total | 53,202 |
| | 6,245 |
| | 59,447 |
|
| | | 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) | PPLRepresents Talen Energy's share of the total output. |
| |
(b) | In 2015, Talen Energy Supply subsidiaries ownowned or controlcontrolled renewable energy projects (including facilities for which Talen Energy has the rights to the output) located in Pennsylvania, New Jersey, Vermont and New Hampshire with aan aggregate generating capacity (summer rating) of 4226 MW. PPL EnergyPlus sellsTalen Energy Marketing sold the energy, capacity and RECs produced by these plants into the wholesale market as well as to commercial and industrial customers. In November 2015, projects that had an aggregate generating capacity of 19 MW were sold. For the projects sold, the above generation amounts include generation through their date of sale. |
PPL Energy Supply's generation subsidiaries are EWGs that 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 OSHA and comparable state statutes.Fuel Supply
See Note 9 to the Financial Statements"Item 2. Properties" for information on the 2011 salefuel source for each of certain non-core generation facilities.Talen Energy's plants.
Coal
Pennsylvania
PPL EnergyPlus actively manages PPL Energy Supply's coal requirements by purchasing coal principally from mines located in northern Appalachia.
During 2013, PPL Generation purchased 5.7 million tons of coal required 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 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. PPL Generation, by and through its agent PPL EnergyPlus, has agreements in place that will provide more than 17 million tons of PPL Generation's projected coal needs for the Pennsylvania power plants from 2014 through 2018 and augments its coal supply agreements with spot market purchases, as needed.
A PPL Generation subsidiary owns a 12.34% interest in the Keystone plant 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 Conemaugh Fuels, LLC. The Keystone plant contracts with Keystone Fuels, LLC for its coal requirements, which provided 4.2 million tons of coal to the Keystone plant in 2013. The Conemaugh plant requirements are purchased under contract from Conemaugh Fuels, LLC, which provided 4.3 million tons of coal to the Conemaugh plant in 2013.
All wholly owned PPL Generation coal plants within Pennsylvania are equipped with scrubbers, which use limestone in their operations. Acting as agent for PPL Generation, PPL EnergyPlus has entered into limestone contracts with suppliers that will provide for those plants' requirements through 2014. During 2013, 405,000 tons of limestone were delivered to Brunner Island and Montour under these contracts. Annual limestone requirements range from approximately 400,000-500,000 tons.
Montana
PPL Montana owns a 30% interest in Colstrip Unit 3 and NorthWestern owns 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 15% of the available generation from Units 3 and 4. Each party is responsible for its own coal costs. PPL Montana, 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, with the other Colstrip Units 1 and 2 owner, has a long-term purchase and supply agreement with the current supplier for Units 1 and 2, 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. PPL Montana, with the other Colstrip Units 3 and 4 owners, has a long-term coal supply contract for Units 3 and 4, which provides these units 100% of their coal requirements through December 2019.
These units were originally built with scrubbers and PPL Montana has entered into a long-term contract to purchase the limestone requirements for these units. The contract extends through December 2030.
Coal supply contracts are in place to purchase low-sulfur coal with defined quality characteristics and specifications for PPL Montana's Corette plant. The contracts covered 100% of the plant's coal requirements in 2013 and similar contracts are in place to supply 100% of the expected coal requirements through 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 2013, 100% of the physical gas requirements for the Martins Creek units were purchased on the spot market and oil requirements were supplied from inventory. At December 31, 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 38% of the maximum daily requirements of the Lower Mt. Bethel combined-cycle facility. During 2013, 100% of the physical gas requirements were purchased on the spot market.
For PPL's Ironwood facility, PPL EnergyPlus has long-term transportation contracts that can deliver up to approximately 25% of Ironwood's maximum daily gas requirements. Daily gas requirements can also be met through a combination of short-term transportation capacity release transactions coupled with upstream supply. PPL EnergyPlus currently has no long-term physical gas contracts for this facility. During 2013, 100% of the physical gas requirements were purchased on the spot market.
Nuclear
The nuclear fuel cycle consists of several material and service components: the mining and milling of uranium ore to produce uranium concentrates; the conversion of these concentrates into uranium hexafluoride, a gas component; the enrichment of the hexafluoride gas; the fabrication of fuel assemblies for insertion and use in the reactor core; and the temporary storage and final disposal of spent nuclear fuel.
PPL Susquehanna Nuclear 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 20182020 and Unit 2 to operate into the first quarter of 2019. PPL Susquehanna Nuclear 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'sSusquehanna Nuclear has an 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 intechnology, which, together with the spent nuclear fuel pools, andhas the on-sitecapacity to accommodate spent fuel expected to be discharged through 2017. This spent fuel storage facility at Susquehannais currently in the process of being expanded to accommodate spent fuel discharged through approximately 2017. If necessary, the on-siteadditional spent fuel storage, facility can be expanded,and assuming appropriate regulatory approvals are obtained, additional expansion will take place in the future such that, together, the spent fuel pools and the expanded dry fuel storage facility will accommodate all of the spent nuclear fuel expected to be discharged through 2044, the current licensed life of the plant.
In 1996, the U.S. Court of Appeals for the District of Columbia Circuit ruled that the Nuclear Waste Policy Act imposed on the DOE an unconditional obligation to begin accepting spent nuclear fuel on or before January 31, 1998. In January 2004, PPL Susquehanna filed suit in the U.S. Court of Federal Claims for unspecified damages suffered as a result of the DOE's breach of its contract to accept and dispose of spent nuclear fuel. In May 2011, PPL Susquehanna Nuclear entered into a settlement agreement with the U.S. Government relating to PPL Susquehanna'sSusquehanna Nuclear's 2004 lawsuit seeking damagesagainst the U.S. Government for partial breach of the Departmentstandard contract for disposal 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 thefuel. The settlement agreement,included reimbursement 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 arenuclear plant incurred through December 31, 2013.2013, and Susquehanna Nuclear received payments for its claimed costs for those periods. In exchange, PPL Susquehanna hasNuclear waived any claims against the United States governmentU.S. Government for costs paid or injuries sustained related to storing spent nuclear fuel at the Susquehanna nuclear plant through December 31, 2013. In January 2014, PPL Susquehanna Nuclear entered into a newan addendum to that agreement with the Department of Energy to extend the settlement agreement on the same terms as the prior agreement for an additional three years to the end of 2016.
Susquehanna Nuclear expects to enter into discussions with the DOE this year to further extend the settlement agreement beyond 2016.
PPL EnergyPlus sells the capacity and electricity produced by PPL Generation subsidiaries, and buys and sells purchased power, capacity, ancillary services, FTRs,Talen Energy manages natural gas and oil uranium, emission allowancessupply utilizing a combination of contracted purchases, spot market purchases and RECs in competitive wholesalestorage for the commodities and competitive retail markets.pipeline capacity. The amount and duration of contracted capacity varies due to factors including fuel availability, economic considerations and plant location on the pipeline grid. Talen Energy has various short and
PPL EnergyPlus transacts in competitive retail energy markets, and buys and sells electricity andTable of Contentslong-term natural gas supply to meetand transportation contracts in place; however, the diverse needsmajority of business customers. PPL EnergyPlus sells retail electricity supply to business customers in Delaware, the 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 activitiesneeds are not currentlysatisfied with short-term transactions on a significant component of PPL Energy Supply's margins.spot basis.
WithinOil requirements are normally supplied by inventory and replenished through purchases on the constraints of its hedging policy, PPL EnergyPlusspot market.
Coal
Talen Energy actively manages its portfolioscoal requirements by purchasing coal from mines located in central and northern Appalachia and Colorado for its plants located within PJM and from mines located adjacent to the Colstrip facility in Montana. Coal is delivered by rail, barge or conveyor. Reliability of energycoal deliveries can be affected from time to time by a number of factors including fluctuations in demand, coal mine production issues and energy-related productsother supplier or transporter operating difficulties. Coal inventory is maintained at levels estimated to optimizebe necessary to avoid operational disruptions at coal-fired generating units. Long-term supply contracts support adequate levels of coal inventory and are augmented with spot market purchases, as needed. Talen Energy has long-term supply agreements through 2018 for plants located in PJM and for the Colstrip plant through 2019. The contracts in place are expected to provide 62% of 2016 requirements.
In addition, certain of Talen Energy's plants are equipped with flue gas desulfurization equipment or Scrubbers, which use limestone in their valueoperations. Talen Energy has entered into limestone contracts with suppliers that will provide limestone for the plants located in PJM through 2016 and for the Colstrip plant through 2030 and are expected to limit exposure to price fluctuations. provide 100% of 2016 requirements.
See Note 1910 to the Financial Statements for more information.additional information on Talen Energy's ownership interest in and cost sharing arrangement related to Colstrip.
ACQUISITIONS AND DIVESTITURES
|
| | | | | | |
| Competition | Completion Date | | Capacity (a) | | Markets |
Acquisitions: | | | | | | |
MACH Gen | | November 2015 | | 2,344 MW | | NYISO, ISO-NE, WECC |
RJS Power | | June 2015 | | 5,182 MW | | PJM, ERCOT, ISO-NE |
Divestitures: | | | | | | |
Ironwood | | February 2016 | | 661 MW | | PJM |
C.P. Crane | | February 2016 | | 402 MW | | PJM |
Talen Renewable Energy | | November 2015 | | 19 MW | | Various |
Montana Hydroelectric Business | | November 2014 | | 633 MW | | WECC |
Announced Divestitures: | | | | | | |
Holtwood and Lake Wallenpaupack | | March 2016 (b) | | 308 MW | | PJM |
| |
(a) | Based on summer rating. |
| |
(b) | Anticipated closing date. |
See Note 6 to the Financial Statements for additional information on acquisitions and divestitures.
FRANCHISES AND LICENSES
Talen Energy Marketing has a license from the DOE to export electricity to Canada. Talen Energy Marketing also has a permit from the National Energy Board of Canada to export firm and interruptible electricity from Canada to the United States.
Susquehanna Nuclear 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, a Talen Energy subsidiary, Bell Bend, LLC, submitted a COLA to the NRC for a new nuclear generating unit (Bell Bend) to be built adjacent to the Susquehanna nuclear plant. Also in 2008, the COLA was formally docketed and accepted for review by the NRC. Talen Energy does not expect the COLA review process with the NRC to be completed prior to 2018. See Note 6 to the Financial Statements for additional information.
Holtwood, LLC, a subsidiary of Talen Generation that owns hydroelectric generating operations in Pennsylvania, operates the Holtwood and Lake Wallenpaupack hydroelectric generating plants pursuant to FERC-granted licenses that expire in 2030 and 2045, respectively. In 2015, Talen Energy announced that it agreed to sell these facilities. The sale is expected to close in March 2016. 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.
COMPETITION
Since the early 1990s, there has been increased competition in U.S. energy markets because of federal and state competitive market initiatives. Although some states such as Pennsylvania and Montana, have created a competitive market for electricity generation, other states continue to consider different types of regulatory initiatives concerning competition in the
power and gas 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. Interest in re-regulation, however, has slowed dueHowever, these initiatives have not fully developed as a result of various efforts by industry participants to recent declining power prices.prevent the erosion of the competitive market structure. As such, the markets in which PPLTalen Energy Supply participates are highly competitive.
PPLThe power generation business is a regional business that is diverse in terms of industry structure and fundamentals. Demand for electricity may be met by generation capacity based on several competing generation technologies, such as natural gas-fired, coal-fired or nuclear generation, as well as power generation facilities fueled by alternative energy sources, including hydro power, synthetic fuels, solar, wind, wood, geothermal, waste heat and solid waste sources. Talen Energy Supply 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 of new generating assets, technological advances in power generation, the actions of environmental and other regulatory authorities and other factors. PPLIn retail power markets, Talen Energy Supply primarily competes with other electricity suppliers based on its ability to aggregate generation supply at competitive prices from different sources and to efficiently utilize transportation from third-party pipelines and transmission from electric utilities, ISOs and ISOs.RTOs. Competitors in wholesale power markets include regulated utilities, industrial companies, NUGs, competitive subsidiaries of regulated utilities, financial institutions and other energy marketers. See "Item 1A. Risk Factors - RisksFactors-Risks Related to Supply Segment",Our Business," "Item 7. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview"Operations" and Notes 1511 and 1915 to the Financial Statements for more information concerning the risks faced with respect to competitive energy markets.
See "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, 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. PPL Bell Bend, LLC does not expect to complete the COLA review process with the NRC prior to 2016. See Note 8 to Financial Statements for additional information.
PPL Holtwood operates the Holtwood hydroelectric generating plant pursuant to a FERC-granted license that expires in 2030. In 2013, a 125 MW expansion project was placed in 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.
PPL Montana's 11 hydroelectric facilities and one storage reservoir in Montana are licensed by the FERC. The Thompson Falls and Kerr licenses expire in 2025 and 2035, the licenses for the nine Missouri-Madison facilities expire in 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.
· | 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.
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, the Registrants'Talen Energy's 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 weather 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"Item 1A. Risk Factors - EnvironmentalRisks Related to Our Business" and "Environmental Matters" in "Item 7. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations"below for additional information regarding climate change.
FINANCIAL CONDITION
See "Financial Condition" in Item"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 "Item 7. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations" |
for information concerning projected capital expenditure requirements for 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
The Registrants are subject to certain existing and developing federal, regional, state and local laws and regulations with respect to air and water quality, land use and other environmental matters. The EPA is in the process of proposing and finalizing an unprecedented number of environmental regulations that will directly affect the electricity industry. These initiatives cover air, water and waste. See "Financial Condition - Liquidity and Capital Resources - Forecasted Uses of Cash - Capital Expenditures" in "Item 7. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations" onfor information concerning the $2.4 billion of projected environmental capital expenditure requirements for 2016 through 2020. Included in the projections are $137 million of expenditures for the years 2014-2018. Also, see "Environmental Matters" in Note 15 to the Financial Statements for additional information. To comply with primarily air-related environmental requirements, PPL's forecast for environmental capital expenditures reflects awhich reflect Talen Energy's best estimate projection of capital expenditures that may be required within the next five years. Such projections are $2.4 billion for PPL, including $2.2 billion for LKE ($1.1 billion each for LG&E and KU), and $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 compliance requirements and market conditions. PPL's and LKE's subsidiariesTalen Energy also may also incur environmental-related capital expenditures and operating expenses, which are not now determinable, but could be significant. MostSee "Environmental Matters" below for additional information on the potential impact on capital expenditures from environmental matters.
ENVIRONMENTAL MATTERS
Environmental Laws and Regulations
Extensive federal, state and local environmental laws and regulations are applicable to Talen Energy's air emissions, water discharges and the management of hazardous and solid waste, as well as other aspects of its business. In addition, many of these environmental 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 Talen Energy's services.
It may be necessary for Talen Energy to modify, curtail, replace or cease operation of certain facilities or performance of certain operations to comply with statutes, regulations and other requirements imposed by regulatory bodies, courts or environmental groups. Talen Energy may incur costs to comply with environmental laws and regulations, including increased capital expenditures or operating and maintenance expenses, monetary fines, penalties or other restrictions, which could be material. Legal challenges to environmental permits or rules add to the uncertainty of estimating the future cost of complying with these permits and rules. In addition, costs may increase significantly if the requirements or scope of environmental laws or regulations, or similar rules, are expanded or changed.
The following is a discussion of the more significant environmental matters impacting Talen Energy's business.
CSAPR
The EPA's CSAPR addresses the interstate transport of fine particulates and ozone by regulating emissions of sulfur dioxide and nitrogen oxide. CSAPR establishes interstate allowance trading programs for sulfur dioxide and nitrogen oxide emissions from fossil-fuel fired plants for 28 states in two phases: Phase 1 trading commenced in January 2015, and Phase 2 trading is expected to commence in 2017. Although Talen Energy does not currently anticipate significant costs to comply with these programs, changes in market or operating conditions, or significant regulatory changes, could result in impacts that are greater than anticipated. Talen Energy is evaluating the EPA's recently released "CSAPR Update Rule" proposal which recommends more stringent ozone season nitrogen oxide budgets for 23 states, including several where Talen Energy owns affected generation. Additional capital and/or operating and maintenance expenses could be imposed on Talen Energy plants in Maryland, New Jersey, New York, Pennsylvania and Texas as a result of this action. Legal challenges to CSAPR are on-going in federal and state court.
NAAQS
In 2008, the EPA revised downward the NAAQS for ozone. As a result, states in the ozone transport region (OTR), including Pennsylvania, Maryland, Massachusetts, New York and New Jersey, are required by the Clean Air Act to impose additional reductions in nitrogen oxide emissions based upon reasonably available control technologies (RACT). PADEP is expected to finalize a RACT rule by the end of the first quarter of 2016 that requires some fossil-fuel fired power plants in Pennsylvania to operate at more stringent nitrogen oxide emission rates starting in 2017. Maryland coal plants operated at reduced nitrogen oxide emission rates during the 2015 ozone season as a result of an emergency action issued by the Governor of Maryland (which later became a final rule) and in November 2015 the MDE promulgated additional nitrogen oxide regulations for Maryland coal plants that require even more stringent operations starting no later than June 2020. In October 2015, the EPA released a final rule that strengthened the NAAQS for ozone. This could lead to even further nitrogen oxide reductions for Talen Energy's fossil-fuel fired plants within and outside of the OTR. State and federal efforts to address interstate transport issues associated with ozone NAAQS, including increased pressure by state environmental agencies and environmental groups to further reduce nitrogen oxide emissions from plants with selective catalytic reduction technology, and updated transport rules such as that proposed by EPA in December 2015 (as discussed above), could additionally lead to further emission reductions and increased compliance costs.
In 2010, the EPA finalized a more stringent NAAQS for sulfur dioxide and required states to identify areas that meet the standard and areas that are in non-attainment or are unclassifiable. In July 2013, the EPA finalized non-attainment designations for parts of the country where attainment is due by 2018. States are working on designations for other areas pursuant to a consent decree between the EPA and Sierra Club approved in March 2015 with 2017 or 2020 deadlines, depending on which designation methodology (modeling or monitoring) is selected. Several of Talen Energy's plants are in areas being evaluated for designation.
Until final rules are promulgated, all non-attainment designations are finalized, and state compliance plans are developed, Talen Energy cannot predict the ultimate outcome of the new NAAQS for ozone and sulfur dioxide on its fleet or plants, or whether they may have a material adverse effect on Talen Energy's financial condition or results of operations. Talen Energy anticipates
that some of the measures required for compliance with the CSAPR (as discussed above) or the MATS and Regional Haze Rules (as discussed below), will help to achieve compliance.
MATS
In February 2012, the EPA finalized a rule (known as the MATS Rule) requiring reductions of mercury and other hazardous air pollutants from fossil-fuel fired power plants by April 2015 with one-and two-year extension opportunities. Subsequently, the U.S. Supreme Court determined that the EPA acted unreasonably by refusing to consider costs incurredwhen determining whether the MATS regulation was appropriate and necessary. To address the Supreme Court action, the DC Circuit in December 2015 remanded the MATS Rule to the EPA to incorporate a revised appropriate and necessary finding. The EPA has since issued a proposed supplemental finding on cost, claiming that the regulation was appropriate and necessary. The EPA has committed to finalizing the Rule by LG&EApril 2016. The existing MATS Rule remains in effect. Separate from the EPA's MATS Rule, several states, including Montana and KUMaryland where Talen Energy owns affected facilities, have enacted regulations requiring mercury emission reductions from coal plants. Talen Energy cannot currently predict whether any costs necessary to comply with the EPA's MATS Rule or similar regulations will have a material adverse effect on Talen Energy's financial condition or results of operations.
Regional Haze
The EPA's regional haze programs were developed under the Clean Air Act to eliminate man-made visibility degradation by 2064. Under the programs, states are required to make reasonable progress every decade, through the application of, among other things, Best Available Retrofit Technology (BART) on power plants commissioned between 1962 and 1977. The primary power plant emissions affecting visibility are sulfur dioxide, nitrogen oxides and particulates. While the focus of regional haze regulation previously was on the western U.S., in December 2015, a final federal implementation plan for Texas was released with an emphasis on coal plants. Minimal impacts are anticipated to Talen Energy's gas fleet in Texas.
As for the eastern U.S., the EPA had determined that region-wide reductions under the CSAPR trading program could, in most instances, be utilized under state programs to satisfy BART requirements for sulfur dioxide and nitrogen oxides. However, the EPA's determination is being challenged by environmental groups. In September 2015, the Third Circuit Court of Appeals vacated portions of the EPA's approval of Pennsylvania's regional haze state implementation plan and remanded the rule to the EPA for further consideration. Talen Energy is unable to determine at this time if the future impacts of regional haze regulation on Talen Energy plants in the eastern U.S. will have a material adverse effect on Talen Energy's financial condition or results of operations. See Note 11 to the Financial Statements for information on a legal decision issued by the Ninth Circuit Court of Appeals in a case involving Talen Montana challenging the EPA's final Regional Haze Federal Implementation Plan for Montana.
New Source Review (NSR)
The EPA has continued its NSR enforcement efforts targeting coal-fired generating plants. The EPA has alleged that modification of these plants has increased their emissions and, consequently, that they are subject to recovery through a rate recovery mechanism.stringent NSR requirements under the Clean Air Act. Talen Energy has responded to several information requests from the EPA, but has received no further substantive communications from the EPA related to those requests since providing its responses. See Note 611 to the Financial Statements for information on a lawsuit filed by environmental groups in March 2013 against Talen Montana and other owners of Colstrip related to NSR.
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 to Talen Energy's generation assets, as well as impacts on Talen Energy's customers. In addition, changed weather patterns could potentially reduce annual rainfall in areas where Talen Energy's generation facilities use river water for cooling. Federal and state initiatives to prepare energy assets and infrastructure for the impacts of climate change, such as those actions driven by President Obama's 2013 Climate Action Plan (discussed further below), could result in binding obligations to physically protect Talen Energy's generation assets from climate change impacts.
Talen Energy cannot currently predict whether its businesses will experience these potential risks or whether any related costs will have a material adverse effect on Talen Energy's financial condition or results of operations.
GHG Regulations & Tort Litigation
In April 2010, the EPA and the U.S. Department of Transportation issued new light-duty vehicle emissions standards that applied beginning with 2012 model year vehicles. The EPA stated that this standard authorizes regulation of carbon dioxide emissions from stationary sources under the NSR and Title V operating permit provisions of the Clean Air Act. Following legal challenges, in June 2014, the U.S. Supreme Court ruled that the EPA has the authority to regulate carbon dioxide emissions under the Clean Air Act, but only for stationary sources that would otherwise have been subject to these provisions due to significant increases in emissions of other regulated pollutants. As a result, any new sources or major modifications to an existing GHG source causing a net significant increase in carbon dioxide emissions must comply with best achievable control technology (BACT) permit limits for carbon dioxide if it would otherwise be subject to BACT or lowest achievable emissions rate limits due to significant increases in other regulated pollutants. EPA is expected to propose a de minimis threshold for such permits in June 2016.
In June 2013, President Obama released his Climate Action Plan reiterating the goal of reducing GHG emissions in the U.S. through such actions as regulating power plant emissions, promoting increased use of renewables and clean energy technology, and establishing more restrictive energy efficiency standards. In October 2015, the EPA finalized carbon dioxide regulations for new and existing power plants, and the EPA has proposed a federal implementation plan that would apply to any states that fail to submit an acceptable state plan for the existing plant rule. EPA's existing plant rule has been stayed by the U.S. Supreme Court until all legal challenges to the rule have been resolved. The new plant rule remains in effect and challenges are also outstanding in federal court. Implementation of the new and existing power plant rules could have a significant industry-wide impact, but at this time Talen Energy is unable to determine if the rules will have a material adverse effect on Talen Energy's financial condition or results of operations.
A number of lawsuits have been filed asserting common law claims including nuisance, trespass and negligence against various companies with GHG emitting plants and, although the decided cases to date have not sustained claims brought on the basis of these theories of liability, the law remains unsettled on these claims.
Exemptions for Startup, Shutdown and Malfunction Events
In May 2015, the EPA released a final rule which prohibits states from exempting startup, shutdown and malfunction (SSM) events from compliance requirements in State Implementation Plans (SIPs). The Rule issues a SIP call for each of those states where the SSM provisions in the SIPs of those states fail to meet the EPA's requirements. Affected states, including Arizona, New Jersey, Montana and Texas where Talen Energy owns generation facilities, must submit revised provisions to the EPA in November 2016. Revisions to a SIP or other regulations in other non-affected states where Talen Energy operates could result from this action. The EPA's final rule is being challenged in federal court. Talen Energy cannot currently predict whether revisions to SIPs or other similar regulations will have a material adverse effect on Talen Energy's financial condition or results of operations.
CCRs
The EPA's final rule regulating CCRs, including fly ash, bottom ash and sulfur dioxide scrubber wastes became effective in October 2015. It imposes extensive new requirements, including location restrictions, design and operating standards, groundwater monitoring and corrective action requirements and closure and post-closure care requirements on CCR impoundments and landfills that are located at active power plants and not closed. Under the rule, the EPA will regulate CCRs as non-hazardous under Subtitle D of RCRA and allow beneficial use of CCRs, with some restrictions. This self-implementing rule requires posting of compliance documentation on a publicly accessible website and is only enforceable through citizen suits. Talen Energy expects that its plants using surface impoundments for management and disposal of CCRs, or that previously managed CCRs and continue to manage wastewaters, will be most impacted by the rule. Requirements for covered CCR impoundments and landfills include commencement or completion of closure activities generally between three and ten years from certain triggering events. Talen Energy anticipates incurring capital or operation and maintenance costs prior to that time to address other requirements of the rule, such as groundwater monitoring and disposal facility modifications, or to implement various compliance strategies. The final CCR Rule is being challenged in federal court.
Talen Energy continues to review the Rule and evaluate financial and operational impacts. During 2015, an increase of $41 million was recorded to existing AROs. Further changes to AROs may be required as estimates are refined and compliance with the rule continues. See Note 18 for information on AROs.
ELGs and Standards
The EPA's final ELG regulations that revise discharge limitations for steam electric generation wastewater discharge permits became effective in January 2016. The final limitations are based on the EPA's review of available treatment technologies and their capacity for reducing pollutants and include new requirements for fly ash and bottom ash transport water and for scrubber wastewater. The EPA's final ELG regulations contain requirements that could have a material impact on Talen Energy's coal-fired plants. At the present time, Talen Energy is evaluating the new requirements. The new ELG limitations and standards will be implemented as each plant's discharge permit is renewed. The compliance period for the new requirements is from November 2018 through the end of 2023, based on the date that the permit is renewed and the applicable deadline negotiated with the agencies for that facility. At this point, Talen Energy is unable to estimate a range of reasonably possible compliance costs. The final ELG regulations are being challenged in federal court.
Seepages and Groundwater Infiltration - Pennsylvania and Montana
Talen Energy has completed or is completing assessments of seepages or groundwater infiltration at various active and retired wastewater basins and landfills at certain of its facilities. Talen Energy has completed or is working with agencies to respond to related notices of violations and implement assessment or abatement measures, where required or applicable. A range of reasonably possible losses cannot currently be estimated and, therefore, Talen Energy is unable to determine if any such abatement measures will have a material adverse effect on Talen Energy's financial condition or results of operations.
In August 2012, Talen Montana entered into an Administrative Order on Consent (AOC) with the MDEQ which establishes a comprehensive process to investigate and remediate groundwater seepage impacts related to the wastewater facilities at the Colstrip power plant. The AOC requires that within five years, Talen Montana provide financial assurance to the MDEQ for the costs associated with closure and future monitoring of the waste-water treatment facilities. Talen Montana cannot predict at this time if the actions required under the AOC will create the need to adjust the existing ARO related to this facility. Talen Montana is defending the AOC in litigation brought by environmental groups as discussed in Note 11 to the Financial Statements.
Under the Pennsylvania Clean Streams Law, a subsidiary of Talen Generation is obligated to remediate acid mine drainage at a former mine site and may be required to take additional steps to prevent potential acid mine drainage at a previously capped refuse pile at this mine site. The subsidiary is pumping and treating mine water at the former mine site.
At December 31, 2015, Talen Generation had accrued a discounted liability of $19 million to cover the costs of pumping and treating groundwater at this mine site for 50 years. Talen Energy discounted this liability based on a risk-free rate of 8.41% at the time of the mine closure. Expected undiscounted payments are estimated to be $1 million for each of the years 2016, 2017, 2019, and 2020, $3 million in 2018, and $92 million for work after 2020.
Clean Water Act_316(b) Rule
The EPA's final 316(b) Rule for existing facilities became effective in October 2014 and regulates cooling water intake structures and their impact on aquatic organisms. States are allowed considerable authority to make site-specific determinations under the Rule which requires existing facilities to choose between several options to reduce impingement and entrainment. Plants already equipped with closed-cycle cooling, an acceptable option, would likely not incur substantial compliance costs. Plants equipped with once-through cooling water systems would likely require additional technology to comply with the rule. Talen Energy is evaluating compliance strategies, but does not presently expect to incur material compliance costs. The EPA's final rule is being challenged in federal court.
Waters of the United States (WOTUS)
In June 2015, the EPA and the U.S. Army Corps of Engineers (Army Corps) published their final rule redefining the term WOTUS. The rule, which became effective in August 2015, identifies six types of categorically jurisdictional waters and two categories of waters for which case-by-case evaluations are needed to determine whether a "significant nexus" exists. In October 2015, the U.S. Court of Appeals for the Sixth Circuit issued an order preventing the EPA from implementing the rule nationwide. Talen Energy will continue to evaluate the rule, and while no material impacts to Talen Energy's financial condition or results of operations are anticipated, the redefinition could impact future development actions, such as plant and gas infrastructure expansions, in the event the stay is lifted. Legal challenges are on-going in federal and state court.
Superfund and Other Remediation
From time to time, Talen Energy undertakes investigative or remedial actions in response to notices of violations, spills or other releases at various on-site and off-site locations, negotiates with the EPA and state and local agencies regarding actions
necessary for compliance with applicable requirements, negotiates with property owners and other third parties alleging impacts from Talen Energy's operations and undertakes similar actions necessary to resolve environmental matters which arise in the course of normal operations. Based on analysis to-date, resolution of these environmental matters is not expected to have a material adverse effect on Talen Energy's financial condition or results of operations.
Future investigation or remediation work at sites currently under review, or at sites not currently identified, may result in additional costs for Talen Energy, but at this time Talen Energy is unable to determine if such investigation or remediation work will have a material adverse effect on Talen Energy's financial condition or results of operations.
Other
In addition to the environmental matters discussed above, from time-to-time in the ordinary course of its business, Talen Energy may become involved in other environmental matters or become subject to other environmental statutes, regulations or requirements. In the opinion of management based upon information currently available to Talen Energy, while the outcome of these other environmental matters and proceedings is uncertain, the likely results are not expected, either individually or in the aggregate, to have a material adverse effect on Talen Energy's financial condition or results of operations, although the effect could be material to Talen Energy's results of operations in any interim reporting period.
See Note 11 to the Financial Statements for additional information.information on environmental matters.
REGULATORY MATTERS
Talen Energy operates in a highly regulated industry and is subject to regulation by various federal and state agencies and in the various regions where it conducts business.
Certain of Talen Energy's generation subsidiaries are EWGs that 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. A portion of this electricity is sold to Talen Energy Marketing under FERC-jurisdictional power purchase agreements. Susquehanna Nuclear is subject to the jurisdiction of the NRC in connection with the operation of its Susquehanna nuclear units. In addition, certain of Talen Energy'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 Talen Energy are also subject to OSHA and comparable state statutes.
The following is a discussion of the more significant regulatory matters impacting Talen Energy's business.
Proposed Legislation/Initiatives - Pacific Northwest
In January 2016, legislation was proposed in the State of Washington to provide a means of cost recovery to utility owners of coal-fired generating facilities who commit to retire such facilities. An initiative also was submitted to the Washington legislature that would impose a carbon tax of $25 per ton on fossil fuels in Washington. The 2016 legislature now has three options relative to the initiative - (i) pass the same into law as drafted; (ii) defer action on the same to the voters in November 2016; or (iii) revise and pass the initiative, sending both the original and amended measures to the November 2016 state-wide ballot.
In the same time frame, legislation was proposed in the State of Oregon that would double the renewable mandate in Oregon to 50% by 2040 and would limit Oregon utilities' ability to use coal power in Oregon only until 2030, although one utility there would be able to use a small amount thereafter until 2035. A key provision of the Oregon legislation is that two pending "no coal" initiatives would be withdrawn once the bill becomes law.
Talen Energy cannot predict whether any legislation seeking to achieve these objectives will be enacted in either state or, if enacted, if such legislation would have a material adverse effect on Talen Energy's financial condition or results of operations.
Electricity - Reliability Standards
The NERC is responsible for establishing and enforcing mandatory reliability standards (Reliability Standards) regarding the bulk power system. The FERC oversees this process and independently enforces the Reliability Standards.
The Reliability Standards have the force and effect of law and apply to certain users of the bulk power electricity system, including electric utility companies, generators and marketers. Under the Federal Power Act, the FERC may assess civil penalties of up to $1 million per day, per violation, for certain violations.
Talen Energy monitors its subsidiaries' compliance with the Reliability Standards and continues to self-report potential violations of certain applicable reliability requirements and submit accompanying mitigation plans, as required. The resolution of a number of potential violations is pending.
In the course of implementing their programs to ensure compliance with the Reliability Standards by those Talen Energy subsidiaries subject to the standards, certain other instances of potential non-compliance may be identified from time to time. Talen Energy cannot predict the outcome of these matters, and cannot estimate a range of reasonably possible losses, if any.
Other
In addition to the regulatory matters discussed above, Talen Energy and its subsidiaries are party to other regulatory proceedings arising in the ordinary course of business or have other regulatory exposure. While the outcome of these other regulatory matters and proceedings is uncertain, the likely results are not expected, either individually or in the aggregate, to have a material adverse effect on Talen Energy's financial condition or results of operations, although the effect could be material to Talen Energy's results of operations in any interim reporting period.
See Note 11 to the Financial Statements for additional information on regulatory matters.
EMPLOYEE RELATIONS
At December 31, 2013, PPL2015, Talen Energy and its subsidiaries had the following4,981 full-time employees.
PPL Energy Supply (a) | | 4,912 |
PPL Electric | | 2,239 |
LKE | | |
| KU | | 945 |
| LG&E | | 999 |
| LKS | | 1,446 |
| Total LKE | | 3,390 |
PPL Global (primarily WPD) | | 6,309 |
PPL Services and other | | 1,258 |
Total PPL | | 18,108 |
(a) | Includesemployees, 2,579 of which were represented by labor unions. These numbers include union employees of mechanical contracting subsidiaries, whose numbers tend to fluctuate due to the nature of this business. |
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 of WPD who are membersmechanical contracting subsidiaries and tend to fluctuate due to the nature of labor unions (or 64% of PPL's U.K. workforce). WPD recognizes four unions, the largest of which represents 40% of its union workforce. WPD's Electricity Business Agreement, which covers 3,941 union employees, may be amended by agreement between WPD and the unions and can be terminated with 12 months' notice by either side.mechanical contractors' business.
AVAILABLE INFORMATION
PPL'sTalen Energy's Internet website is www.pplweb.com.www.talenenergy.com. Under the Investor heading of that website, PPLTalen Energy provides access to all SEC filings of the Registrants (including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,8‑K, and amendments to these reports filed or furnished pursuant to Section 13(d) or 15(d)) free of charge, as soon as reasonably practicable after filing or furnishing with the SEC. Additionally, 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.
The RegistrantsWe face various risks associated with theirour businesses. 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 1511 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 PPLTalen Energy and its consolidated subsidiaries taken as a whole, or to PPLwhole.
Talen Energy's business was formed on June 1, 2015, by the spinoff of Talen Energy Supply and its consolidated subsidiaries taken as a whole within the Supply segment discussions, or PPL Electricsubsequent combination of that business with RJS Power, to form an independent, publicly traded company (collectively, the "Talen Transactions"). See Notes 1, 3 and its consolidated subsidiaries taken as a whole within6 to the Pennsylvania Regulated segment discussion, or LKE and its consolidated subsidiaries taken as a whole within the Kentucky Regulated segment discussion.Financial Statements for additional information.
Risks Related to All Segments
(All Registrants)
We plan to selectively pursue growth of 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 plan to pursue expansion of our transmission and distribution capacity over the next several years and to optimize our 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, and power uprates at certain of our existing power plants, the construction of new power plants or modification of existing power plants, and 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 or modification of existing plants, or the construction or acquisition of transmission and distribution projects, we may be required to expend significant sums for preliminary engineering, permitting, resource exploration, legal and other expenses before it can be established whether a project is feasible, economically attractive or capable of being financed. Expansion in our regulated businesses is dependent on future load or service requirements and subject to applicable regulatory processes. The success of both a new or acquired project would likely be contingent, among other things, upon the negotiation of satisfactory operating contracts, obtaining acceptable financing and maintaining acceptable credit ratings, as well as receipt of required and appropriate governmental approvals. If we were unable to complete construction or expansion of a project, we may not be able to recover our investment in the project. Furthermore, we might be unable to operate any new or modified plants as efficiently as projected, which could result in higher than projected operating and other costs and reduced earnings.Our Business
Adverse economic conditions could adversely affect our financial condition and results of operations.
DeclinesAdverse economic conditions and declines in wholesale energyelectricity prices partially resulting from adverse economic conditions, have significantly impacted our earnings. The breadth and depth of these negative economic conditions had a wide-ranging impact on the U.S. and U.K. business environment, including our businesses, andbusinesses. In addition, adverse economic conditions also reduce the demand for energy commodities has declined significantly.commodities. This reduced demand continues to impact the key domestic wholesale energyelectricity markets we serve (such as PJM) and our Pennsylvania and Kentucky utility businesses.serve. The combination of lower demand for power and increased supply of natural gas has put downward price pressure on wholesale energyelectricity markets in general, further impacting our energy marketing results. In general, economic and commodity market conditions will continue to challenge predictability regardingimpact our unhedged future energy margins, utility profits, liquidity, earnings growth and overall financial condition. In addition, adverse economic conditions, declines in wholesale electricity prices, reduced demand for power and other factors may negatively impact the trading price of our common stock and impact forecasted cash flow, which may require us to evaluate our assets for impairment. Any such impairment could have a material impact on our results of operations and financial statements.
DisruptionAdverse changes in financial marketscommodity 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 capacity and related congestion charges and other costs. Unlike most commodities, the limited ability to store electricity 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 and can be unpredictable. Among the factors that influence such prices are:
demand for electricity;
supply of electricity available from current or new generation resources;
variable production costs, primarily fuel (and associated 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 affecting demand for or the price of electricity or the facilities necessary to deliver electricity.
Our risk management policy and procedures relating to electricity and fuel prices, interest rates 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 and counterparty credit positions. We have implemented procedures to monitor compliance with our risk management policy, 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 policy may not work as planned. For example, actual electricity and fuel prices may be significantly different or more volatile
than the historical trends and assumptions upon which we based our risk management calculations. Additionally, unforeseen market disruptions could decrease market depth and liquidity, negatively impacting our ability to enter into new transactions. We enter into financial conditioncontracts 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 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. As part of our risk management policy, we have established credit procedures to evaluate counterparty credit risk. However, if counterparties fail to perform, we may be forced to enter into alternative arrangements at then-current market prices. In that event, our financial results could 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. To the extent we do not hedge against such exposure and fuel requirements and applicable commodity prices change in ways that would be adverse to us, our results of operations and financial position may be adversely affected. To the extent we do hedge, those hedges may not ultimately prove to be effective.
The accounting for our hedging activities may increase the volatility in our quarterly and annual financial results.
We engage in commodity-related marketing and price-risk management activities in order to physically and financially hedge our exposure to market risk with respect to electricity sales from our generation assets, fuel utilized by those assets and emission allowances.
We generally attempt to balance our fixed-price physical and financial purchases and sales commitments in terms of contract volumes and the timing of performance and delivery obligations through the use of financial and physical derivative contracts. These derivatives are recorded on the balance sheet at fair value with changes in the fair value resulting from fluctuations in the underlying commodity prices immediately recognized in earnings, unless the derivative qualifies for the NPNS exception. Specific criteria are required in order to elect the NPNS exception, which permits qualifying hedges to be treated under the accrual accounting method. All economic hedges may not necessarily qualify for the NPNS exception, or we may elect not to utilize the NPNS exception. As a result, our quarterly and annual results are subject to significant fluctuations caused by changes in market prices.
We are exposed to operational, price and credit risks associated with selling and marketing products in the wholesale and retail electricity markets.
We sell electricity in wholesale markets under market-based rates 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. It is possible, however, that market price fluctuations and the absence of long-term agreements could adversely impact our profitability and results of operations.
To the extent that we do have agreements in place to deliver firm electricity and capacity and fail to do so, we could be required to pay damages. These damages would generally be based on the difference between the market price to acquire replacement electricity or capacity 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 businesses are heavily dependent onwholesale power sales agreements typically include provisions requiring us to post collateral for the benefit of our counterparties if the market price of electricity varies from the contract prices in excess of certain predetermined amounts. We currently believe that we have sufficient liquidity to fulfill our potential collateral obligations under these power sales 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.
We also face credit and capital, among other things, for capital expenditures and providing collateral to support hedging in our energy marketing business. Regulations being implemented under the Dodd-Frank Act and Basel III in Europe may impose costly additional requirements on our businesses and the businesses of othersrisk that counterparties with whom we contract such as banksin both the wholesale and retail markets will default in their performance, in which case we may have to sell our electricity into a lower-priced market or other counterparties, or simply resultmake purchases in increased costs to conduct our business or access sources of capital and liquidity upon which the conduct of our businesses is dependent.
a higher-priced
Wemarket 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 electricity varies from the contract price in excess of certain predetermined amounts. However, there can be no assurance that we will avoid counterparty nonperformance risk, including bankruptcy, which could be negatively affected by rising interest rates, downgrades to our bond credit ratings, adverse credit market conditions or other negative developments inadversely impact our ability to access capital markets.meet our obligations to other parties, which could in turn subject us to claims for damages.
The full-requirements sales contracts that Talen Energy Marketing 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.
InWe generally hedge our full-requirements sales contracts with our own generation or electricity purchases from third parties. If the ordinary course of business,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 reliant upon adequate long-term and short-term financingrequired under the terms of full-requirements sales contracts to fund our significant capital expenditures, debt service and operating needs. As a capital-intensive business,provide the electricity necessary to fulfill increased demand at the contract price, which could be lower than the cost to procure additional electricity on the open market or could mean that we are sensitiverequired to developmentsoperate our plants to meet the requirements despite the fact that it may be unprofitable to do so. Therefore, any significant decrease or increase 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 conditionsload compared with our forecasts 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 impactmaterial adverse effect on the costour results of capital incurred by our businesses. A ratings downgrade could increase our short-term borrowing costsoperations 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.
position.
Our operating revenues could fluctuate on a seasonal basis, especially as a result of extreme weather conditions.
Our businesses are subject to seasonal demand cycles. For example, in some markets demand for, and market prices of, electricity peak during hot summer months, while in other markets such peaks occur in cold winter months. As a result, our overall operating results in the future may fluctuate substantially on a seasonal basis if weather conditions such as heat waves, extreme cold, unseasonably mild weather or severe storms occur. The patterns of these fluctuations may change depending on the type and location of our facilities and the terms of our contracts to sell electricity.
Operating expenses could be affected by weather conditions, including storms, as well as by significant man-mademanmade or accidental disturbances, including terrorism or natural disasters.
Weather and these other factors can significantly affect our profitability or operations by causing outages, damaging infrastructure and requiring significant repair costs. Storm outages and damage often directly decrease revenues and increase expenses, due to reduced usage and restoration costs.
We may experience disruptions in our fuel supply, which could adversely affect our ability to operate our generation facilities.
We purchase fuel and other products consumed during the production of electricity (such as coal, natural gas, oil, water, uranium, lime, limestone and other chemicals) from a number of suppliers. Delivery of these fuels to our facilities is dependent upon the continuing financial viability of contractual counterparties as well as the infrastructure (including rail lines, rail cars, barge facilities, roadways, riverways and natural gas pipelines) available to serve each generation facility. As a result, we are subject to the risks of disruptions or curtailments in the production of power at our generation facilities if fuel is unavailable at any price or if a counterparty fails to perform or if there is a disruption in the fuel delivery infrastructure. Disruption in the delivery of fuel, 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.
We have sold forward a portion of our power in order to lock in long-term prices that we deemed to be favorable at the time we entered into the forward sale contracts. In order to hedge our obligations under these forward power sales contracts, we have entered into long-term and short-term contracts for the purchase and delivery of fuel. Many of the forward power sales contracts do not allow us to pass through changes in fuel costs or discharge the power sale obligations in the case of a disruption in fuel supply due to force majeure events or the default of a fuel supplier or transporter. Disruptions in our fuel supplies may therefore require us to find alternative fuel sources at higher costs, to find other sources of power to deliver to counterparties at a higher cost, or to pay damages to counterparties for failure to deliver power as contracted. Any such event could have a material adverse effect on our financial performance.
We also buy significant quantities of fuel on a short-term or spot market basis. Prices for all of our fuels fluctuate, sometimes rising or falling significantly over a relatively short period of time. The price we can obtain for the sale of electricity may not rise at the same rate, or may not rise at all, to match a rise in fuel or delivery costs. This may have a material adverse effect on our financial performance. Changes in market prices for coal, oil and natural gas may result from the following:
weather conditions;
seasonality;
demand for energy commodities and general economic conditions;
disruption or other constraints or inefficiencies of electricity, gas or coal transmission or transportation;
additional generating capacity;
availability and levels of storage and inventory for fuel stocks;
natural gas, crude oil, refined products and coal production levels;
changes in market liquidity;
federal, state and foreign governmental regulation and legislation; and
the creditworthiness and liquidity of fuel suppliers and/or transporters and their willingness to do business with us.
Our plant operating characteristics and equipment, particularly at our coal-fired plants, often dictate the specific fuel quality to be combusted. The availability and price of specific fuel qualities may vary due to supplier financial or operational disruptions, transportation disruptions and force majeure. At times, coal of a specific quality may not be available at any price, or we may not be able to transport such coal to our facilities on a timely basis. In this case, we may not be able to run the coal facility even if it would be profitable. Operating a coal facility with different quality coal can lead to emission or operating problems. If we have sold forward the power from such a coal facility, we could be required to supply or purchase power from alternate sources, perhaps at a loss. This could have a material adverse impact on the financial results of specific plants and on our results of operations.
Unforeseen circumstances could cause us to hold excess coal inventories and incur contract termination costs.
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. For example, extraordinarily low natural gas prices could cause natural gas to be the more cost-competitive fuel compared to coal for generating electricity, and as a result we may reduce or idle 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. For example, to mitigate the risk of oversupply, we incurred charges of $41 million during 2015 to reduce our contracted coal deliveries.
If the services provided by the transmission facilities that deliver the wholesale power from our generation facilities are inadequate, our ability to sell and deliver wholesale power may be materially adversely affected. Furthermore, any change in the structure and operation of, or the various pricing limitations imposed by, the RTOs and ISOs that operate these transmission facilities may adversely affect the profitability of our generation facilities.
We do not own or control the transmission facilities required to sell the wholesale power from our generation facilities. If the transmission service from these facilities is unavailable or disrupted, or if the transmission capacity infrastructure is inadequate, our ability to sell and deliver wholesale power may be materially adversely affected. RTOs and ISOs provide transmission services, administer transparent and competitive power markets and maintain system reliability. Many of these RTOs and ISOs operate in the real-time and day ahead markets in which we sell electricity. The RTOs and ISOs that oversee most of the wholesale power markets impose, and in the future may continue to impose, offer caps and other mechanisms to guard against the potential exercise of market power in these markets as well as price limitations. These types of price limitations and other regulatory mechanisms may adversely affect the profitability of our generation facilities that sell electricity and capacity into the wholesale power markets. Problems or delays that may arise in the formation and operation of maturing RTOs and similar market structures, or changes in geographic scope, rules or market operations of existing RTOs, may also affect our ability to sell, the prices we receive or the cost to transmit power produced by our generating facilities. Rules governing the various regional power markets may also change from time to time, which could affect our costs or revenues. Additionally, if the transmission service from these facilities is unavailable or disrupted, or if the transmission capacity infrastructure is inadequate, our ability to sell and deliver wholesale power may be materially adversely affected. Furthermore, the rates for transmission capacity from these facilities are set by others and thus are subject to changes, some of which could be significant. As a result, our financial condition, results of operations and cash flows may be materially adversely affected.
The FERC has issued regulations that require wholesale electricity 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.
Because our generation facilities are part of interconnected regional grids, we face the risk of blackout due to a disruption on a neighboring interconnected system.
Major electric power blackouts are possible and have occurred, which could disrupt electrical service for extended periods of time. If a blackout were to occur, the impact could result in interruptions to our operations, increased costs to replace existing contractual obligations, the possibility of regulatory investigations and potential operational risks to our facilities. Additionally, in response to a blackout, there could be changes or developments in applicable regulations or market structures that could have longer-term impact on our business and results of operations.
We face intense competition in the competitive power generation market, which may adversely affect our ability to operate profitably and generate positive cash flow.
Our generation business is dependent on our ability to operate successfully in a competitive environment and is not assured of any rate of return on capital investments through a regulated rate structure.
Competition is affected by electricity and fuel prices, relative cost of production of energy products, 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, establishment of legislation which favors one form of generation over another, such as investment tax credits or production tax credits, and other factors. These competitive factors may negatively affect our ability to sell electricity and related products and services, as well as the prices that we receive for such products and services, which could adversely affect our results of operations and our ability to grow our business.
We sell our available electricity and capacity products into competitive wholesale markets through contracts of varying duration. Competition in the wholesale electricity markets occurs principally on the basis of the price of products and, to a lesser extent, reliability and availability. We believe that the commencement of commercial operation of new electricity generating facilities in the regional markets where we own or control generation facilities and the evolution of demand side management resources will continue to increase competition in the wholesale electricity markets in those regions, which could have an adverse effect on electricity and capacity prices. We also face competition in the wholesale markets for generation capacity and ancillary services.
Competitors in the wholesale power markets in which we operate include regulated utilities, industrial companies, non-utility generators, competitive subsidiaries of regulated utilities, financial institutions and other energy marketers. We compete against these entities based on the cost of producing our products, which can include costs attributable to our access to credit sources and the levels of unsecured credit extended to our competitors.
In retail power markets, we primarily compete with other electricity suppliers based on our 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, ISOs and RTOs.
Despite federal and state deregulation initiatives, our generation business is still subject to extensive regulation, including requirements that we obtain and comply with government permits and approvals, which may increase our costs, reduce our revenues, or prevent or delay operation of our businessesfacilities.
We are required to obtain, and to comply with, numerous permits, approvals, licenses and certificates from federal, state and local governmental agencies. The process of obtaining and renewing necessary permits can be lengthy and complex and can sometimes result in the establishment of permit conditions that make the project or activity for which the permit was sought unprofitable or otherwise unattractive. In addition, such permits or approvals may be subject to denial, revocation or modification under various circumstances. Failure to obtain or comply with the conditions of permits or approvals, or failure to comply with applicable laws or regulations, may result in the delay or temporary suspension of our operations and electricity sales or the curtailment of our power delivery and may subject us to penalties and other sanctions. Although various regulators routinely renew existing licenses, renewal could be denied or jeopardized by various factors, including failure to provide adequate financial assurance for closure; local community, political or other opposition; and executive, legislative or regulatory action. Our cost or inability to obtain and comply with the permits and approvals required for our operations could have a material adverse effect on our operations and cash flows.
In addition, 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. In addition, pursuant to PJM's new Capacity Performance construct, we may be subject, in certain PJM emergency events, to economic penalties for generation non-performance, which could be material. See "Item 1. Business-Markets - Recent Market Developments - PJM" in this Form 10-K for additional information.
Our costs to comply with federal, state and local statutes, rules and regulations relating to environmental protection and worker health and safety could be material and could cause the continued operation of certain of our generation facilities to be uneconomic.
Our business is subject to cyber-based securityextensive federal, state and integrity risk.local statutes and regulations relating to environmental protection and worker health and safety. These laws and regulations, which have become more stringent over time, impose numerous requirements, including the acquisition of permits to conduct regulated activities, the incurrence of capital or operating expenditures to limit or prevent releases of hazardous materials, the imposition of specific standards addressing worker protection, and the imposition of substantial liabilities and remedial obligations for pollution or contamination.
If there is any delay in obtaining any environmental regulatory approvals necessary for our operations or capital projects, or if we fail to obtain, maintain or comply with any such approvals, operations at our affected facilities could be halted, reduced or subjected to additional costs.
Numerous functions affectingFor example, the efficient operationEPA's ELGs and the EPA's CCR Rule could adversely affect our operations and restrict or delay our ability to obtain permits. Moreover, the EPA's Clean Power Plan could have a significant impact on current operations and future opportunities, though it is not possible at this time to predict how this and other pending and/or recently promulgated regulations and laws will impact our business.
We have spent and expect to spend substantial amounts in the future on measures regarding environmental control and compliance, including, but not limited, with respect to pollution control technology. At some 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 operationolder generating facilities, it may be uneconomic for us to install necessary controls to comply with new or proposed legislation or regulations, which could cause us to retire those units.
Certain of our generation plants, includingoperations pose risks of environmental liability due to leakage, migration, emission, releases or spills of hazardous substances to the Susquehanna nuclear plant, andair, surface or subsurface soils, surface water or groundwater. We may be required to remediate contaminated properties currently or formerly owned or operated by us or facilities of third parties that received waste generated by our energy and fuel trading businesses,operations regardless of whether such contamination resulted from the conduct of others or from our own actions that were in compliance with all applicable laws at the time those actions were taken. Certain environmental laws impose strict as well as joint and several liability (that could result in an entity paying more than its fair share) for costs required to remediate and restore sites. In addition, claims for damages to persons or property, including natural resources, may result from the environmental, health and safety impacts of our transmissionoperations.
Failure to comply with applicable laws, regulations and distribution operations arepermits may result in liability for administrative, civil and/or criminal penalties, the imposition of remedial obligations, and the issuance of injunctions limiting or preventing some or all reliant on cyber-based technologiesof our operations. In addition, private parties may also have the right to pursue legal actions to enforce compliance, as well as to seek damages for non-compliance, with environmental laws, regulations and therefore, subjectpermits or for personal injury or property damage.
See "Item 1. Business - Environmental Matters" for additional information regarding environmental laws and regulations applicable to the risk that such systems could be the target of disruptive actions, principally by terrorists or vandals, or otherwise be compromised by unintentional events. As a result, operations could be interrupted, property could be damaged and customer information lost or stolen, causing us to incur significant losses of revenues, other substantial liabilities and damages and costs to replace or repair damaged equipment.
our operations.
Our businesses are subject to physical, market and economic risks relating to potential effects of climate change.
Climate change may produce changes in weather or other environmental conditions, including temperature or precipitation levels, and thus may impact consumer demand for electricity. In addition, the potential physical effects of climate change, such as increased frequency and severity of storms, floods and other climatic events, could disrupt our operations and cause us to incur significant costs in preparing for or responding to these effects. These or other meteorological changes could lead to increased operating costs, capital expenses or power purchase costs. Greenhouse gas regulationClimate change could increasealso affect the availability of a secure and economical supply of water in some locations, which is essential for the continued operation of our generation plants. See "Item 1. Business - Environmental Matters" for additional information regarding the potential impact of climate change and related regulations on our business.
The availability and cost of emission allowances could negatively impact our costs of operations.
We are required to maintain, through either allocations or purchases, sufficient emission allowances for sulfur dioxide, nitrogen oxide and carbon dioxide to support our operations in the ordinary course of operating our power generation facilities. These allowances are used to meet the obligations imposed on us by various applicable environmental laws. If our operational needs require more than our allocated allowances, we may be forced to purchase such allowances on the open market, which could be costly. If we are unable to maintain sufficient emission allowances to match our operational needs, we may have to curtail our operations so as not to exceed our available emission allowances, or install costly new emission controls. As we use the emission allowances that we have purchased on the open market, costs associated with such purchases will be recognized as operating expense. If such allowances are available for purchase, but only at significantly higher prices, the purchase of such allowances could materially increase our costs of operations in the affected markets.
Changes in legislative and regulatory policy, including the promotion of renewable energy, energy efficiency, conservation and self-generation, may adversely impact our business.
Economic downturns, periods of high energy supply costs and other factors can lead to changes in or the development of legislative and regulatory policy designed to promote reductions in energy consumption, increased energy efficiency, renewable energy and self-generation by customers. This focus on conservation, renewable energy, energy efficiency and self-generation may result in a decline in electricity particularly power generated by fossil fuels, and such increasesdemand, which could have a depressive effect on regional economies. Reduced economic and consumer activity in turn adversely affect our service areas -- both generally and specificbusiness.
We are subject to certain industriesrisks associated with nuclear generation, including the risk that our nuclear generating facility could become subject to increased security or safety requirements that would increase capital and consumers accustomedoperating 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 31% of our 2015 competitive power generation output (including output of (i) RJS as of June 2015, (ii) MACH Gen as of November 2015, (iii) certain of our renewables businesses prior to previously lower cost power -- could reduce demand fortheir sale in November 2015 and (iv) the powerfacilities that we generate, markethave announced are to be sold to satisfy the FERC order approving the combination of Talen Energy Supply 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 electricity usage.RJS Power). 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; 21limitations on the amounts and types of insurance commercially available to cover losses and liabilities that might arise in connection with nuclear operations; and
We cannot predict the outcome of the legal proceedings and investigations currently being conducteduncertainties with respect to the technological and financial aspects of decommissioning nuclear plants at the end of their licensed lives. The licenses for our currenttwo nuclear units expire in 2042 and past business activities. An adverse determination2044.
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 us that cannot be predicted. In addition, although we have no reason to anticipate a serious nuclear incident at our Susquehanna nuclear plant, if an incident did occur, any resulting operational loss, damages and injuries could have a material adverse effect on our financial condition, results of operations, cash flows and financial condition.
Our indebtedness could adversely affect our financial condition and impair our ability to operate our business.
As of December 31, 2015, we had $4,811 million in total indebtedness. Our indebtedness could have important consequences to our future financial condition, operating results and business, including the following:
requiring that a substantial portion of our cash flows from operations be dedicated to payments on our indebtedness instead of other purposes, including operations, capital expenditures and future business opportunities;
limiting our ability to obtain additional debt or equity financing for working capital, capital expenditures, debt service requirements, acquisitions and general corporate or other purposes;
increasing our cost of borrowing; and
limiting our ability to adjust to changing market and economic conditions and limiting our ability to carry out capital spending that is important to our growth.
Although the agreements governing the Talen Energy Supply RCF contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and any additional indebtedness incurred in compliance with these restrictions could be substantial. See Note 5 to the Financial Statements for additional information regarding our indebtedness.
The agreements governing our indebtedness contain covenants that may restrict our operational flexibility.
The Talen Energy Supply RCF contains financial and other covenants that restrict our ability to, among other things:
incur additional indebtedness, or issue guarantees or certain preferred shares;
pay dividends, redeem stock or make other distributions;
repurchase, prepay or redeem subordinated indebtedness;
make investments or acquisitions;
create liens;
make negative pledges;
consolidate or merge with another company;
sell or otherwise dispose of all or substantially all of our assets; and
enter into certain transactions with affiliates.
The Amended STF Agreement and the First Lien Credit and Guaranty Agreement similarly contain customary covenants that may restrict our operational flexibility.
Our ability to borrow additional amounts under these agreements depends upon satisfaction of those covenants. Events beyond our control could affect our ability to meet those covenants. Our failure to comply with obligations under the agreements governing our indebtedness may result in an event of default under those agreements. A default, if not cured or waived, may permit acceleration of our indebtedness. If our indebtedness is accelerated, we cannot be certain that we will have sufficient funds available to pay the accelerated indebtedness or that we will have the ability to refinance the accelerated indebtedness on terms favorable to us or at all. This could have serious consequences to our financial condition, operating results and business and could cause us to become bankrupt or insolvent. See Note 5 to the Financial Statements for additional information regarding our indebtedness.
Our cash flows.
flow and ability to meet debt obligations depend on the performance of our subsidiaries and affiliates.
We are involveda holding company and conduct our operations primarily through subsidiaries. Substantially all of our consolidated assets are held by such subsidiaries. Accordingly, our cash flow and our ability to meet our obligations under certain of our debt instruments depend upon the earnings of these subsidiaries and the distribution or other payment of such earnings to us in the form of dividends, loans or advances or repayment of loans and advances from us. The subsidiaries are separate and distinct legal proceedings, claimsentities and litigationhave no obligation to pay any amounts due on the notes or to make any funds available for such payment. The debt agreements of some of our subsidiaries and affiliates contain provisions that might restrict their ability to pay dividends, make distributions or otherwise transfer funds to us upon failing to meet certain financial tests or other conditions prior to the payment of other obligations, including operating expenses, debt service and reserves.
Variable rate indebtedness subjects us to the risk of higher interest rates, which could cause our future debt service obligations to increase significantly.
Our borrowings under the Talen Energy Supply RCF and the First Lien Credit and Guaranty Agreement are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on such variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income would decrease.
Disruption in financial markets could adversely affect our financial condition and results of operations.
Our businesses are heavily dependent on credit and access to capital, among other things, for financing capital expenditures and providing collateral to support hedging in our energy marketing business. Regulations under the Dodd-Frank Act in the United States and 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.
We could be negatively affected by rising interest rates, downgrades to our 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 as well as downgrades to our credit ratings could result in increased costs and decreased availability of credit.
Recent or future acquisition or divestiture activities may have adverse effects on our business, financial condition and results of operations.
From time to time, we may seek to acquire additional assets or businesses. The acquisition of new assets or businesses is subject to ongoing statesubstantial risks, including delays in completing such acquisitions, the failure to identify material problems during due diligence, the risk of over-paying for assets, the ability to retain customers or employees and federal investigations arising outthe inability to arrange financing for an acquisition as may be required or desired. We may acquire assets in geographic regions or markets in which we do not currently operate, which may expose us to increased market and/or regulatory risks. In addition, we may not be able to achieve the anticipated operating and financial benefits of future acquisitions. For example, we may not be able to achieve certain tax benefits related to our business operations, the most significantrecently completed acquisition of which are summarized in "Federal Matters" in Note 6 and "Legal Matters," "Regulatory Issues" and "Environmental Matters - Domestic" in Note 15MACH Gen to the Financial Statements. We cannot predictextent we do not have adequate taxable income in future periods following completion of the ultimate outcomeacquisition. Further, the integration and consolidation of these matters, noracquired businesses requires substantial human, financial and other resources and, ultimately, such integration processes may result in unexpected costs or charges and we may not be able to operate the acquired businesses or assets in the manner in which we intended. There can be no assurances that any future acquired businesses will perform as expected or that the returns from such acquisitions will support the indebtedness incurred to acquire them or the capital expenditures needed to develop them.
In addition, we reasonably estimateare required to sell certain assets pursuant to the FERC order approving the combination of Talen Energy Supply and RJS Power and we may from time to time choose to sell certain other assets or businesses that are no longer core to our operations. In connection with such dispositions, we may indemnify or guarantee counterparties against certain liabilities, which may result in future costs or liabilities that could potentially result from a negative outcomepayable by us. For example, we have agreed to indemnify the buyers in each case.of the Holtwood and Lake Wallenpaupack, Ironwood and Crane transactions against certain losses pursuant to the terms of their respective sale agreements. In addition, we may incur additional costs as a result of disposing of certain assets or businesses, and we may experience write-downs of assets if the carrying value of the assets or business sold exceeds the price received.
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 supply electricity, most notably fuel cells, micro turbines, batteries, windmills and photovoltaic (solar) cells, the development of which has expanded due to global climate change and energy efficiency concerns. Research and development activities are ongoing to seek improvements in alternate technologies. It is possible that advances will reduce the cost of alternative 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 customers could decline, with a corresponding decline in revenues derived by generators. These alternative energy sources could result in a decline to the dispatch and capacity factors of our plants. As a result of all of these factors, the value of our generation facilities could be significantly reduced.
Our facilities may not operate as planned, which may increase our expenses and decrease our revenues and have an adverse effect on our financial performance.
Operation of our power plants, information technology systems and other assets and conduct of other activities subjects us to a variety of risks, including the breakdown or failure of equipment, accidents, security breaches, viruses or outages affecting information technology systems, labor disputes, obsolescence, delivery/ transportation problems and disruptions of fuel supply and performance below expected levels. These events may impact our ability to conduct our businesses efficiently and lead to increased costs, expenses or losses. Planned and unplanned outages at our power plants may require us to purchase power at then-current market prices to satisfy our commitments or, in the alternative, pay penalties and damages for failure to satisfy them. Although we maintain customary insurance coverage for certain of these risks, no assurance can be given that such insurance coverage will be sufficient to compensate us fully in the event losses occur.
We plan to optimize our competitive power generation operations, which involves a number of uncertainties and may not achieve the desired financial results.
We plan to optimize our competitive power generation operations. We plan to do this through the construction of new power plants or modification of existing power plants, and the potential closure of certain existing plants and acquisition of plants that may become available for sale. These types of projects involve numerous risks. Any planned power plant modifications could result in cost overruns, reduced plant efficiency and higher operating and other costs. With respect to the construction of new plants or modification of existing plants, 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. For example, we recently committed capital to co-fire the Brunner Island coal facility on natural gas to better position the plant for low gas price environments, which is expected to be completed by the end of 2016. The success of both a new or acquired project may be contingent, among other things, upon obtaining acceptable financing and maintaining acceptable credit ratings, as well as receipt of 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 modified plants as efficiently as projected, which could result in higher than projected operating and other costs and reduced earnings.
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 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 liabilitiescosts is highly dependent on a variety of assumptions, most of which relate to factors beyond our control. These assumptions include investment returns, interest rates, health care cost trends, inflation rates, benefit improvements, salary increases and the demographics of plan participants. If our assumptions prove to be inaccurate, our future costs and cash contribution requirements to fund these benefits could increase significantly.
We may be requiredThe loss of key personnel, the inability to record impairment charges in the future for certain of our investments, whichhire and retain qualified employees, and strikes or work stoppages by unionized employees, 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 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 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. These indemnities and guarantees relate, among other things, to liabilities which may arise with respect to the period during which we or our subsidiaries operated a 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 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 liability, caused to or by employees, customers, contractors, vendors, contractual or financial counterparties and other third parties.
Our facilities may not operate as planned, which may increase our expenses and decrease our revenues and have an adverse effect on our business, financial position and results of operations.
Our operations depend on the continued efforts of our employees. Retaining key employees and maintaining the ability to attract new employees are important to both our operational and financial performance.
Operation We cannot guarantee that any member of power plants, transmissionour management or any one of our key employees will continue to serve in any capacity for any particular period of time. Certain events, such as an aging workforce, mismatch of skill set or complement to future needs, or unavailability of contract resources may lead to operating challenges and distribution facilities, information technology systemsincreased costs. The challenges we might face as a result of such risks include a lack of resources, losses to our knowledge base and other assetsthe time required to develop new workers' skills. In any such case, costs, including costs for contractors to replace employees, productivity costs and activities subjects ussafety costs, may rise. Failure to a variety of risks,hire and adequately train replacement employees, including the breakdowntransfer of significant internal historical knowledge and expertise to new employees, or failurechanges in the availability and cost of equipment, accidents, security breaches, viruses or outages affecting information technology systems,contract labor disputes, obsolescence, delivery/transportation problems and disruptions of fuel supply and performance below expected levels. These events may impactadversely affect our ability to conductmanage and operate our businesses efficientlybusiness. If we are unable to successfully attract and leadretain an appropriately qualified workforce, our financial position or results of operations could be negatively affected. In addition to increased costs, expenses or losses. Operation of our delivery systems below our expectations may result in lost revenue and increased expense, including higher maintenance costs which may not be recoverable from customers. Planned and unplanned outages at our power plants may require us to purchase power at then-current market prices to satisfy our commitments or, in the alternative, pay penalties and damages for failure to satisfy them.
Although we maintain customary insurance coverage for certain of these risks, no assurance can be given that such insurance coverage will be sufficient to compensate us fullyforegoing, in the event that our union employees participate in a strike, work stoppage or engage in other forms of labor disruption, we would be responsible for procuring replacement labor and could experience reduced power generation or outages.
War, other armed conflicts or terrorist attacks, including cyber-based attacks, could have a material adverse effect on our business.
War and terrorist attacks have caused and may continue to cause instability in the world's financial and commercial markets and have contributed to high levels of volatility in prices for oil and gas. Instability and unrest in the Middle East, Afghanistan, Ukraine and Iraq, as well as threats of war or other armed conflict elsewhere, may lead to additional acts of war or terrorism, including in the United States, as well as further disruption and volatility in prices for oil and gas. Armed conflicts and terrorism and their effects on us or our markets may significantly affect our business and results of operations. In addition, we
may incur increased costs for security, including additional physical plant security and security personnel or additional capability following a terrorist incident.
The operation of our generation plants, including the Susquehanna nuclear plant, and our energy marketing and trading businesses are reliant on computer systems and networks and, therefore, subject to the risk that such systems could be the target of disruptive actions, by terrorists, vandals or others. As a result, operations could be interrupted, property could be damaged and sensitive customer information could be lost or stolen, causing us to incur significant losses occur.
of revenues, other substantial liabilities and damages, costs to replace or repair damaged equipment and damage to our reputation.
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 other taxes. We also estimate our ability to utilize tax benefits and tax credits. Due to the revenue needs of the jurisdictions in which our businesses operate, various tax and fee increases may be proposed or considered. We cannot predict whether such tax legislation or regulation will be introduced or enacted or the effect of any such changes on our businesses. If enacted, any changes could increase tax expense and could have a significant negative impact on our results of operations and cash flows.
Risks Relating to or Arising out of the Talen Transactions
If the spinoff conducted as part of the Talen Transactions does not qualify as a tax-free distribution under the Code, including as a result of subsequent acquisitions of stock or equity of PPL or Talen Energy Corporation or Talen Energy Supply, then we may be liable for substantial U.S. federal income taxes or may be required to indemnify PPL.
Among other requirements, the completion of the Talen Transactions was conditioned upon PPL's receipt of a legal opinion of tax counsel to the effect that, the contribution of Talen Energy Supply to HoldCo, together with the spinoff conducted by PPL, will qualify as a reorganization pursuant to Section 368(a)(1)(D) and a tax-free distribution pursuant to Section 355 of the Code, that the merger conducted as part of those transactions will qualify as a reorganization pursuant to Section 368(a) of the Code, and that such merger and the related contribution of RJS to Talen Energy will qualify as a transaction described in Section 351 of the Code. That legal opinion is not binding on the IRS, and the IRS may reach conclusions that are different from the conclusions reached in such opinion. We are not aware of any facts or circumstances that would cause the factual statements or representations on which the legal opinion was based to be materially different from the facts at the time the Talen Transactions were completed. If, notwithstanding the receipt of such opinion, the IRS were to determine the spinoff to be taxable, PPL would recognize a tax liability that could be substantial. We would be jointly and severally liable for such tax liability under applicable Treasury Regulations as a former member of the PPL consolidated federal income tax group.
In addition, the spinoff will be taxable to PPL pursuant to Section 355(e) of the Code if there is a 50% or greater change in ownership (by vote or value) of PPL, Talen Energy Corporation or Talen Energy Supply, directly or indirectly, as part of a plan or series of related transactions that include the spinoff. Because PPL's shareholders collectively owned more than 50% of Talen Energy Corporation's common stock following the Talen Transactions, the Talen Transactions alone will not cause the spinoff to be taxable to PPL under Section 355(e) of the Code. However, Section 355(e) of the Code might apply if acquisitions of stock of PPL before or after the spinoff, or stock or equity of Talen Energy Corporation or Talen Energy Supply after June 1, 2015, are considered to be part of a plan or series of related transactions that include the spinoff. We are not aware of any such plan or series of transactions. Under the separation agreement, however, in certain circumstances and subject to certain limitations, we would be required to indemnify PPL for certain taxes that may be imposed on the spinoff, including taxes that arise because acquisitions of Talen Energy Corporation stock or Talen Energy Supply equity result in the Talen Energy spinoff being taxable under Section 355(e) of the Code.
We are subjectmay not realize the anticipated synergies, cost savings and growth opportunities from the Talen Transactions.
The benefits that we expect to achieve as a result of the riskTalen Transactions will depend, in part, on our ability to realize anticipated growth opportunities, cost savings and other synergies. Our success depends on the continued integration of the Talen Energy and RJS Power businesses, which could result in significant expenses that our workforce and its knowledge base may become depleted in coming years.
PPL is experiencing an increase in attrition due primarily to the number of retiring employees. Over the period from 2014 through 2018, 23.5% of PPL's total workforce is projected to leave the company, with the risk that critical knowledge will be lost and that it may be difficult to replace departed personnel dueestimate accurately at this time. In addition, we may experience challenges when combining separate business cultures, information technology systems and employees, and those challenges may divert senior management's time and attention. Even if we are able to a declining trend incomplete 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. Substantiallyintegration successfully, we may not fully realize all of the consolidated assets of these Registrants are held by such subsidiaries. Accordingly, their cash flowsgrowth opportunities, cost savings and abilityother synergies that we expect, either within the anticipated time frame for integration or at all. For example, we may be unable to meet debt and guaranty obligations,eliminate all duplicative costs. Also, 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 abilitystandalone company outside 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.
(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. |
(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.
The rates we charge our utility customers must be approved by one or more federal or state regulatory commissions, including the 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, there can be no assurance that 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. 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. Although our rates are generally regulated based on an analysis of our costs incurred in a base year or based on future projected costs, the rates we are allowed to charge may or may not match our costs at any given time. Our 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 effect on our business, results of operations, cash flows and financial condition.
Our domestic utility businesses are subject to significant and complex governmental regulation.
In addition to regulating the rates we charge, various federal and state regulatory authorities regulate many aspects of our domestic utility operations, including:
· | 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; |
· | acquisition and disposal of utility assets and issuance of securities; and |
· | various other 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 which may not be recoverable from customers.
Changes in transmission and wholesale power market structures could increase costs or reduce revenues.
Wholesale revenues fluctuate with regional demand, fuel prices and contracted capacity. Changes to transmission and wholesale power market structures and prices may occur in the future, are not predictable and may result in unforeseen effects on energy purchases and sales, transmission and related costs or revenues. These can include commercial or regulatory changes affecting power pools, exchanges or markets in which 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 LG&E and KU) and transmission, distribution and other infrastructure projects, such as projects for environmental compliance and system reliability. The completion of these projects without delays or cost overruns is subject to risks in many areas, including:
· | approval, licensing and permitting; |
· | land acquisition and the availability of suitable land; |
· | skilled labor or equipment shortages; |
· | construction problems or delays, including disputes with third-party intervenors; |
· | increases in commodity prices or labor rates; |
· | environmental considerations and regulations; |
· | weather and geological issues; and |
· | political, labor and regulatory developments. |
Failure to complete our capital projects on schedule or on budget, or at all, could adversely affect our financial performance, operations and future growth if such expenditures are not granted rate recovery by our regulators.
Risks Specific to Kentucky Regulated Segment
(PPL, LKE, LG&E and KU)
The costs of compliance with, and liabilities under, environmental laws are significant and are subject to continuing changes.
Extensive federal, state and local environmental laws and regulations are applicable to LG&E's and KU's generation business, including its air emissions, water discharges and the management of hazardous and solid waste, among other business-related activities, and the costs of compliance or alleged non-compliance cannot be predicted but could be material. In addition, our costs may increase significantly if the requirements or scope of environmental laws, regulations or similar rules are expanded or changed. Costs may take the form of increased capital expenditures or operating and maintenance expenses, monetary fines, penalties or forfeitures, 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 industrial power users, and may impact the costs of their products and demand for our services.
Ongoing changes in environmental regulations or their implementation requirements and our compliance strategies relating thereto entail a number of uncertainties.
The environmental standards governing LG&E's and KU's businesses, particularly as applicable to coal-fired generation and related activities, continue to be subject to uncertainties due to ongoing rulemakings and other regulatory developments, legislative activities and litigation. 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 resultRiverstone groups of PJM's regional transmission expansion plan (RTEP) process.
PJM and the FERC have 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,companies, we expect to make substantial expenditures to construct the Susquehanna-Roseland and Northeast/Pocono transmission lines that PJM has determined are necessary for the reliability of the regional transmission grid. Although the FERC has granted our request for incentive rate treatment of such facilities, we cannot be certain that all costs that we may incur will be recoverable. In addition, the date when these facilities will be in service, which can be significantly impacted by delays related to public opposition or other factors, is subject to the outcome of future events that are not all within our control. As a result, we cannot predict the ultimate financial or operational impact of this project or other RTEP projects on PPL Electric.
We could be subject to higher costs and/or penalties related to Pennsylvania Conservation and Energy Efficiency Programs.
PPL Electric is subject to Act 129 which contains requirements for energy efficiency and conservation programs and for the use of smart metering technology, imposes PLR electricity supply procurement rules, provides remedies for market misconduct, and made changes to the existing AEPS. The law also requires electric utilities to meet specified goals for reduction in customer electricity usage and peak demand. Utilities not meeting these Act 129 requirements are subject to significant penalties that cannot be recovered in rates. Numerous factors outside of our control could prevent compliance with these requirements and result in penalties to us.
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 obtainreplace the resources provided by PPL or maintain all environmental regulatory approvals necessary for our planned capital projects which are necessaryRiverstone to our business. If there is a delay in obtaining any required environmental regulatory approval or if we failthe Talen Energy and RJS Power businesses prior to obtain, maintain or comply with any such approval, operations at our affected facilities could be halted, reduced or subjected to additional costs.the Talen
We face intense competition in our energy supply business, which may adversely affect our ability to operate profitably.
We sell our available energy and capacity into the competitive wholesale markets through contracts of varying duration. Competition in the wholesale power markets occurs principally on the basis of the price of products and, to a lesser extent, on the basis of reliability and availability. We believe that the commencement of commercial operation of new electricity generating facilities in the regional markets where we own or control generation capacity and the evolution of demand side management resources will continue to increase competition in the wholesale electricity market in those regions, which could have an adverse effect on electricity and capacity prices.
We also face competition in the wholesale markets for generation capacity and ancillary services. We primarily compete with other electricity suppliers based on our ability to aggregate supplies at competitive prices from different sources and to efficiently utilize transportation from third-party pipelines and transmission from electric utilities and ISOs. We also compete against other energy marketers on the basis of relative financial condition and access to credit sources, and our competitors may have greater financial resources than we have.
Competitors in the wholesale power markets in which PPL Generation subsidiaries and PPL EnergyPlus operate include regulated utilities, industrial companies, non-utility generators, competitive subsidiaries of regulated utilities and financial institutions.
Adverse changes in commodity prices and related costs may decrease our future energy margins, which could adversely affect our earnings and cash flows.
Our energy margins, or the amount by which our revenues from the sale of power exceed our costs to supply power, are impacted by changes in market prices for electricity, fuel, fuel transportation, emission allowances, RECs, electricity capacity and related congestion charges and other costs. Unlike most commodities, the limited ability to store electricity 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 and can be unpredictable. Among the factors that influence such prices are:
· | supply for electricity available from current or new generation resources; |
· | variable production costs, primarily fuel (and associated 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 affecting demand for or the price of electricity or the facilities necessary to deliver electricity. |
Our risk management policy and programs relating to electricity and fuel prices, interest rates 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 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 decrease market depth and liquidity, negatively impacting our ability to enter into new transactions. We enter into financial contracts to hedge commodity basis risk, and as a result are exposed to the risk that the correlation between delivery points could change with actual physical delivery. Similarly, interest rates or foreign currency exchange rates could change in significant ways that our risk management procedures were not designed to address. As a result, we cannot always predict the impact that our risk management decisions may have on us if actual events result in greater losses or costs than our risk models predict or greater volatility in our earnings and financial position.
In addition, our trading, marketing and hedging activities are exposed to counterparty credit risk and market liquidity risk. We have adopted a credit risk management policy and program to evaluate counterparty credit risk. However, if counterparties fail to perform,Transactions. Alternatively, we may be forcedable to enter into alternative arrangementsreplace them but not at then-current market prices. In that event,the same or lower cost as what previously was available, and any resulting incremental costs could be material.
Our accounting, management and financial reporting systems may not be adequately prepared to comply with the disclosure controls and internal control over financial reporting requirements to which we are subject.
Prior to June 1, 2015, our financial results could be adversely affected.
were included within the consolidated results of PPL, and RJS Power was not subject to the reporting and other requirements of the Exchange Act.
We do not always hedge against risks associatednow are subject to reporting and other obligations under the Exchange Act and are responsible for ensuring that all aspects of our business comply with electricitySection 404 of the Sarbanes-Oxley Act, under which we must maintain effective disclosure controls and fuel price volatility.
procedures and internal control over financial reporting. To comply with these requirements on a stand-alone basis separate from PPL and with the addition of the RJS Power business, we may need to upgrade our systems, implement additional financial and management controls, reporting systems and procedures, and hire additional accounting, legal and finance staff. Along those lines, our report on our internal control over financial reporting in this Form 10-K includes a scope exception for the RJS Power business. It also includes a scope exception for the MACH Gen business acquired in November 2015. We attemptexpect to mitigate risks associated with satisfying our contractual electricity sales obligations by either reserving generation capacity to deliver electricity or purchasingincur additional annual expenses for the necessary financial or physical productspurpose of addressing these reporting 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 fuelcompliance 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 positionthose expenses may be adversely affected.
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.significant. If we are unable to deliver firm capacityupgrade our financial 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 electricitymanagement controls, reporting systems, IT systems and the contract price of any undelivered capacity or electricity. Depending on price volatilityprocedures in the wholesale electricity markets, such damages could be significant. Extreme weather conditions, unplanned generation facility outages, environmental compliance costs, transmission disruptions,a timely and other factors could affecteffective fashion, our ability to meet our obligations, or cause significant increases insatisfy financial reporting requirements and other rules that apply to reporting companies under the market price of replacement capacityExchange Act and electricity.
Our wholesale power agreements typically include provisions requiring us to post collateral for the benefit of our counterparties if the market price of energy varies from the contract prices in excess of certain pre-determined amounts. 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 facilitiesSarbanes-Oxley Act could be limited by financial markets or other factors. See Note 7impaired. Any failure to the Financial Statements for a discussion of PPL's credit facilities.
We also face credit risk that counterparties with whom we contract in both the wholesaleachieve and retail markets will default in their performance, in which case we may have to sell our electricity into a lower-priced market or make purchases in a higher-priced market than existed at the 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 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 actual load significantly below or above our forecasts could adversely affect our energy margins.
We 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 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 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 forecastsmaintain effective internal controls could have a material adverse effect on our results of operationsbusiness, financial condition and financial position.
Unforeseen changes in the price of coal and natural gas could cause us to incur excess coal inventories and contract termination costs.
Extraordinarily low natural gas prices during 2012 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 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.
We rely on transmissionOwnership of our common stock is highly concentrated, and distribution assets that we do not own the Riverstone Holders may exert significant influence over matters requiring Board of Directors and/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 electricity 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 on the most favorable terms.stockholder approval.
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, thereRiverstone Holders, each of which is indirectly controlled by Riverstone, collectively beneficially own approximately 35% of 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 operationoutstanding shares 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 "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.
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.
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 alternative 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 customers could decline, with a corresponding decline in revenues derived by generators. These alternative energy sources could result in a decline to the dispatch and capacity factors of our plants.common stock. As a result, the Riverstone Holders collectively exercise significant influence over all matters requiring stockholder approval for the foreseeable future, including approval of allsignificant corporate transactions. Moreover, pursuant to a stockholder agreement, the Riverstone Holders have the right to appoint individuals to serve on the Board of these factors,Directors of Talen Energy Corporation. See "Item 13. Certain Relationships and Related Transactions, and Director Independence." Currently, Messrs. Alexander, Casey and Hoffman serve on the valueBoard of Directors as designees of the Riverstone Holders. As a result, the Riverstone Holders have the ability to exert significance influence over matters requiring approval of our generation facilities could be significantly reduced.
We areBoard of Directors and other matters subject to certain risks associated with nuclear generation, including the riskterms of 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 33% of our 2013 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 |
· | 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. |
stockholder agreement.
The NRC hasinterests of the Riverstone Holders may conflict with the interests of our other stockholders. The Riverstone Holders may have an interest in having us pursue acquisitions, divestitures and other transactions that, in their judgment, could enhance their investment in us, even though such transactions might involve risks to other stockholders. In addition, Riverstone and its affiliates engage in a broad authority under federal law to impose licensing requirements,spectrum of activities, including security, safety and employee-related requirements forinvestments in the operation of nuclearpower generation facilities.industry. In the eventordinary course of noncompliance, the NRC has authority to impose finestheir business activities, Riverstone and its affiliates may engage in activities where their interests conflict with our interests or shut down a unit, or both, depending upon its assessmentthose 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 to anticipate a serious nuclear incident at our Susquehanna plant, if an incident did occur, any resulting operational loss, damages and injuries could have a material adverse effect on our results of operations, cash flows and financial condition. See Note 15 to the Financial Statements for a discussion of nuclear insurance.stockholders.
ITEM 1B. UNRESOLVED STAFF COMMENTS
PPLTalen Energy Corporation PPLand Talen Energy Supply, LLC PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company
None.
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)
LG&E's and KU's properties consist primarily of regulated generation facilities, electric transmission and distribution assets and natural gas transmission and distribution assets in Kentucky. The 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, 2013 was:
| | | | | LKE | | LG&E | | KU |
| | | | | | | | | | | | | |
| | | Total MW | | Ownership or | | | | Ownership or | | | | Ownership or |
| | | Capacity | | Lease Interest | | | | Lease Interest | | | | Lease Interest |
Primary Fuel/Plant | | Summer | | in MW | | % Ownership | | in MW | | % Ownership | | in MW |
| | | | | | | | | | | | | |
Coal | | | | | | | | | | | | |
| Ghent - Units 1- 4 | | 1,932 | | 1,932 | | | | | | 100.00 | | 1,932 |
| Mill Creek - Units 1- 4 | | 1,472 | | 1,472 | | 100.00 | | 1,472 | | | | |
| E.W. Brown - Units 1-3 | | 682 | | 682 | | | | | | 100.00 | | 682 |
| Cane Run - Units 4 - 6 | | 563 | | 563 | | 100.00 | | 563 | | | | |
| Trimble County - Unit 1 (a) | | 511 | | 383 | | 75.00 | | 383 | | | | |
| Trimble County - Unit 2 (a) | | 732 | | 549 | | 14.25 | | 104 | | 60.75 | | 445 |
| Green River - Units 3- 4 | | 161 | | 161 | | | | | | 100.00 | | 161 |
| OVEC - Clifty Creek (b) | | 1,164 | | 95 | | 5.63 | | 66 | | 2.50 | | 29 |
| OVEC - Kyger Creek (b) | | 956 | | 78 | | 5.63 | | 54 | | 2.50 | | 24 |
| | | 8,173 | | 5,915 | | | | 2,642 | | | | 3,273 |
Natural Gas/Oil | | | | | | | | | | | | |
| E.W. Brown Unit 5 (c) (d) | | 132 | | 132 | | 53.00 | | 69 | | 47.00 | | 63 |
| E.W. Brown Units 6 - 7 (c) | | 292 | | 292 | | 38.00 | | 111 | | 62.00 | | 181 |
| E.W. Brown Units 8 - 11 (d) | | 486 | | 486 | | | | | | 100.00 | | 486 |
| Trimble County Units 5 - 6 | | 314 | | 314 | | 29.00 | | 91 | | 71.00 | | 223 |
| Trimble County Units 7 - 10 | | 628 | | 628 | | 37.00 | | 232 | | 63.00 | | 396 |
| Paddy's Run Units 11 - 12 | | 35 | | 35 | | 100.00 | | 35 | | | | |
| Paddy's Run Unit 13 | | 147 | | 147 | | 53.00 | | 78 | | 47.00 | | 69 |
| Haefling - 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 |
Hydro | | | | | | | | | | | | |
| Ohio Falls - Units 1-8 | | 54 | | 54 | | 100.00 | | 54 | | | | |
| Dix Dam - Units 1-3 | | 24 | | 24 | | | | | | 100.00 | | 24 |
| | | 78 | | 78 | | | | 54 | | | | 24 |
| | | | | | | | | | | | | |
Total | | 10,337 | | 8,079 | | | | 3,340 | | | | 4,739 |
(a) | Trimble County Unit 1 and Trimble County Unit 2 are jointly owned with Illinois Municipal Electric Agency and Indiana Municipal Power Agency. Each owner is entitled to its proportionate share of the units' total output and funds its proportionate share of capital, fuel and other operating costs. See Note 14 to the Financial Statements for additional information. |
(b) | This unit is owned by OVEC. LG&E and KU have a power purchase agreement that entitles LG&E and KU to their proportionate share of the unit's total output and LG&E and KU fund their proportionate share of fuel and other operating costs. Clifty Creek is located in Indiana and Kyger Creek is located in Ohio. See Note 15 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. |
(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. |
For a description of LG&E's and KU's service areas, see "Item 1. Business - General - Segment Information - Kentucky Regulated Segment." At December 31, 2013, LG&E's transmission system included in the aggregate, 45 substations (32 of which are shared with the distribution system) with a total capacity of 7 million kVA and 675 pole miles of lines. LG&E's distribution system included 97 substations (32 of which are shared with the transmission system) with a total capacity of 5 million kVA, 3,886 circuit miles of overhead lines and 2,419 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 cable miles.
LG&E's natural gas transmission system includes 4,272 miles of gas distribution mains and 388 miles of gas transmission mains, consisting of 255 miles of gas transmission pipeline, 126 miles of gas transmission storage lines, six miles of gas combustion turbine lines and one mile of gas transmission pipeline in regulator facilities. Five underground natural gas storage fields, with a total working natural gas capacity of approximately 15 Bcf, are used in providing natural gas service to ultimate consumers. KU's service area includes an additional 11 miles of gas transmission pipeline providing gas supply to natural gas combustion turbine 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.
LG&E and KU continuously reexamine development projects based on market conditions and other factors to determine whether to proceed with the projects, sell, cancel or expand them or pursue other options. LG&E and KU plan to implement the following capacity increases and decreases at the following plants located in Kentucky.
| | | | | 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 | | |
(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)
For a description of PPL Electric's service territory, see "Item 1. Business - General - Segment Information - Pennsylvania Regulated Segment." 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 includes 62 substations with a total capacity of 18 million kVA and 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 8,193 underground cable 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 Regional Transmission Line Expansion Plan.
Supply Segment(PPL and PPL Energy Supply)
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'sTalen Energy's electric generating capacity (summer rating) at December 31, 20132015 by segment was as follows.
|
| | | | | | | | | | | | | | | | |
Plant | | Owner | | Total MW Capacity | | % Ownership | | Talen Energy's Ownership in MW | | Fuel Type | | State | | Region/ISO |
| | | | | | | | | | | | | | |
East segment | | | | | | | | | | | | | | |
Martins Creek | | Talen Generation | | 1,708 |
| | 100.00 | | 1,708 |
| | Natural Gas/Oil | | PA | | PJM |
Ironwood (a) | | Talen Generation | | 661 |
| | 100.00 | | 661 |
| | Natural Gas | | PA | | PJM |
Lower Mt. Bethel | | Talen Generation | | 555 |
| | 100.00 | | 555 |
| | Natural Gas | | PA | | PJM |
Combustion turbines | | Talen Generation | | 370 |
| | 100.00 | | 370 |
| | Natural Gas/Oil | | PA | | PJM |
Bayonne | | Sapphire | | 165 |
| | 100.00 | | 165 |
| | Natural Gas/Oil | | NJ | | PJM |
Camden | | Sapphire | | 145 |
| | 100.00 | | 145 |
| | Natural Gas/Oil | | NJ | | PJM |
Dartmouth | | Sapphire | | 82 |
| | 100.00 | | 82 |
| | Natural Gas/Oil | | MA | | ISO-NE |
Elmwood Park | | Sapphire | | 70 |
| | 100.00 | | 70 |
| | Natural Gas/Oil | | NJ | | PJM |
Newark Bay | | Sapphire | | 122 |
| | 100.00 | | 122 |
| | Natural Gas/Oil | | NJ | | PJM |
Pedricktown (b) | | Sapphire | | 117 |
| | 100.00 | | 117 |
| | Natural Gas/Oil | | NJ | | PJM |
York | | Sapphire | | 46 |
| | 100.00 | | 46 |
| | Natural Gas | | PA | | PJM |
Montour | | Talen Generation | | 1,528 |
| | 100.00 | | 1,528 |
| | Coal | | PA | | PJM |
Brunner Island | | Talen Generation | | 1,428 |
| | 100.00 | | 1,428 |
| | Coal | | PA | | PJM |
Keystone (c) | | Talen Generation | | 1,718 |
| | 12.34 | | 212 |
| | Coal | | PA | | PJM |
Conemaugh (c) | | Talen Generation | | 1,754 |
| | 16.25 | | 285 |
| | Coal | | PA | | PJM |
Brandon Shores | | Raven | | 1,274 |
| | 100.00 | | 1,274 |
| | Coal | | MD | | PJM |
C.P. Crane (a) | | Raven | | 402 |
| | 100.00 | | 402 |
| | Coal | | MD | | PJM |
H.A. Wagner | | Raven | | 966 |
| | 100.00 | | 966 |
| | Coal/Natural Gas/Oil | | MD | | PJM |
Susquehanna (c) | | Talen Generation | | 2,513 |
| | 90.00 | | 2,262 |
| | Nuclear | | PA | | PJM |
Holtwood (a) | | Talen Generation | | 262 |
| | 100.00 | | 262 |
| | Hydro | | PA | | PJM |
Lake Wallenpaupack (a) | | Talen Generation | | 46 |
| | 100.00 | | 46 |
| | Hydro | | PA | | PJM |
Athens | | MACH Gen | | 969 |
| | 100.00 | | 969 |
| | Natural Gas | | NY | | NYISO |
Millennium | | MACH Gen | | 335 |
| | 100.00 | | 335 |
| | Natural Gas | | MA | | ISO-NE |
Renewables (d) | | N/A | | 7 |
| | 100.00 | | 7 |
| | Renewables | | PA | | PJM |
| | | | 17,243 |
| | | | 14,017 |
| | | | | | |
West segment | | | | | | | | | | | | | | |
Laredo | | Jade | | 181 |
| | 100.00 | | 181 |
| | Natural Gas | | TX | | ERCOT |
Nueces Bay | | Jade | | 648 |
| | 100.00 | | 648 |
| | Natural Gas | | TX | | ERCOT |
Barney Davis | | Jade | | 964 |
| | 100.00 | | 964 |
| | Natural Gas | | TX | | ERCOT |
Harquahala | | MACH Gen | | 1,040 |
| | 100.00 | | 1,040 |
| | Natural Gas | | AZ | | WECC |
Colstrip Units 1 & 2 (c) | | Talen Generation | | 614 |
| | 50.00 | | 307 |
| | Coal | | MT | | WECC |
Colstip Unit 3 (c) | | Talen Generation | | 740 |
| | 30.00 | | 222 |
| | Coal | | MT | | WECC |
| | | | 4,187 |
| | | | 3,362 |
| | | | | | |
Total | | | | 21,430 |
| | | | 17,379 |
| | | | | | |
| | | | | | | | | | |
| | | | | | | | PPL Energy Supply's | | |
Primary Fuel/Plant | | Total MW Capacity | | % Ownership | | Ownership in MW | | Location |
| | | | | | | | | | |
Natural Gas/Oil | | | | | | | | |
| Martins Creek | | 1,729 | | 100.00 | | 1,729 | | Pennsylvania |
| Ironwood | | 662 | | 100.00 | | 662 | | Pennsylvania |
| Lower Mt. Bethel | | 555 | | 100.00 | | 555 | | Pennsylvania |
| Combustion turbines | | 363 | | 100.00 | | 363 | | Pennsylvania |
| | | | 3,309 | | | | 3,309 | | |
| | | | | | | | | | |
Coal | | | | | | | | |
| Montour | | 1,518 | | 100.00 | | 1,518 | | Pennsylvania |
| Brunner Island | | 1,439 | | 100.00 | | 1,439 | | Pennsylvania |
| Colstrip Units 1 & 2 (a) | | 614 | | 50.00 | | 307 | | Montana |
| Conemaugh (a) | | 1,742 | | 16.25 | | 283 | | Pennsylvania |
| Colstrip Unit 3 (a) | | 740 | | 30.00 | | 222 | | Montana |
| Keystone (a) | | 1,718 | | 12.34 | | 212 | | Pennsylvania |
| Corette (b) | | 148 | | 100.00 | | 148 | | Montana |
| | | | 7,919 | | | | 4,129 | | |
| | | | | | | | | | |
Nuclear | | | | | | | | |
| Susquehanna (a) | | 2,521 | | 90.00 | | 2,269 | | Pennsylvania |
| | | | | | | | | | |
Hydro | | | | | | | | |
| Various (c) | | 633 | | 100.00 | | 633 | | Montana |
| Various | | 296 | | 100.00 | | 296 | | Pennsylvania |
| | | | 929 | | | | 929 | | |
| | | | | | | | | | |
Qualifying Facilities | | | | | | | | |
| Renewables (d) | | 34 | | 100.00 | | 34 | | Pennsylvania |
| Renewables | | 8 | | 100.00 | | 8 | | Various |
| | | | 42 | | | | 42 | | |
| | | | | | | | | | |
Total | | 14,720 | | | | 10,678 | | |
| |
(a) | Plant was sold in the first quarter of 2016 or is under an agreement of sale to satisfy the FERC approved mitigation in connection with the RJS Power acquisition. See Note 1 to the Financial Statements for additional information on the FERC approved mitigation and Note 6 to the Financial Statements for additional information on the announced sales. |
| |
(b) | Pedricktown includes capacity dedicated to serving landlord load (maximum of 11 MW). |
| |
(c) | This unit is jointly owned. Each owner is entitled to its proportionate share of the unit's total output and funds its proportionate share of fuel and other operating costs. See Note 1410 to the Financial StatementsStatement for additional information. |
(b) | PPL Energy Supply intends to place this plant in long-term reserve status in April 2015. |
(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 facilities owned, controlled or for which PPLTalen Energy Supply has the rights to the output.output through agreements of Talen Energy Marketing with third parties. |
Amounts guaranteed by PPL Montour and PPL Brunner Island in connection with an $800 million secured energy marketing and trading facilityCertain of Talen Energy's credit arrangements are secured by liens on the generating facilities owned by PPL Montour and PPL Brunner Island.majority of the plants above. See Note 75 to the Financial Statements for additional information.
Talen Energy's corporate headquarters are located at 835 Hamilton Street, Suite 150, Allentown, PA 18101-1179 under a lease that expires in 2018.
ITEM
Item 3. LEGAL PROCEEDINGSLegal Proceedings
See Notes 5, 6Talen Energy Corporation and 15Talen Energy Supply, LLC
The information required with respect to this item can be found in Note 11 to the Financial Statements, forwhich provides information regarding legal, tax litigation, regulatory and environmental proceedings and matters.matters and is incorporated by reference into this Item 3.
Item 4. Mine Safety Disclosures
ITEM 4. MINE SAFETY DISCLOSURESTalen Energy Corporation and Talen Energy Supply, LLC
Not applicable.
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 theTalen Energy's ability to pay dividends for all Registrants.or make distributions.
PPLTalen Energy Corporation
Additional informationTalen Energy Corporation's common stock is traded on the NYSE under the symbol "TLN". The following table sets forth the high and low sales prices for this itemTalen Energy Corporation's common stock for each quarter of the year 2015, as reported on the NYSE.
|
| | | | | | | | | | | | | | |
| | For the 2015 Quarters Ended |
| | Mar. 31 | | June 30 | | Sept. 30 | | Dec. 31 |
Price per common share: (a) | | | | | | | | |
High | | N/A | | $ | 20.50 |
| | $ | 18.02 |
| | $ | 12.09 |
|
Low | | N/A | | $ | 16.87 |
| | $ | 9.83 |
| | $ | 5.73 |
|
| |
(a) | There is no price per common share data available prior to June 1, 2015, which is the date on which Talen Energy Corporation became a publicly traded company. |
Talen Energy Corporation has not declared or paid dividends and does not currently expect to declare or pay dividends on its common stock. Instead, Talen Energy Corporation intends to retain earnings to finance the growth and development of its business and for working capital and general corporate purposes. Talen Energy Corporation's ability to pay dividends to holders of its common stock is set forth inlimited by its ability to obtain cash or other assets from its subsidiaries. Further, certain of the sections entitled "Quarterly Financial, Common Stock Priceagreements governing Talen Energy Corporation's subsidiaries' indebtedness, including the Talen Energy Supply RCF and Dividend Data," "Item 12. Security Ownershipthe First Lien Credit and Guaranty Agreement, restrict the ability of Certain Beneficial Ownerscertain of Talen Energy Corporation's subsidiaries to pay dividends or otherwise transfer assets to Talen Energy Corporation. Any payment of dividends will be at the discretion of Talen Energy Corporation's board of directors and Managementwill depend upon various factors then existing, including earnings, financial condition, results of operations, capital requirements, level of indebtedness, contractual restrictions with respect to payment of dividends, restrictions imposed by applicable law, general business conditions and Related Stockholder Matters" and "Shareowner and Investor Information"other factors that Talen Energy Corporation's board of this report. directors may deem relevant.
At January 31, 2014,29, 2016, there were 64,51553,889 common stock shareownersstockholders of record.
There were no purchases by PPLTalen Energy Corporation of its common stock during the fourth quarter of 2013.2015.
PPLTalen Energy Supply, LLC
There is no established public trading market for PPLTalen Energy Supply's membership interests. PPLTalen Energy Funding, a direct wholly owned subsidiary of PPL,Corporation owns all of PPLTalen Energy Supply's outstanding membership interests. Distributions on the membership interests will be paid as determined by PPLTalen Energy Supply's Board of Managers.
PPLTalen Energy Supply made cash distributions, primarily to its former member, PPL Energy Funding Corporation, of $408$219 million in 20132015 and $787 million$1.9 billion in 2012.2014.
PPL Electric Utilities Corporation
ITEM 6. SELECTED FINANCIAL DATA
ThereTalen Energy Corporation's business was formed on June 1, 2015 after the spinoff from PPL and the acquisition by Talen Energy Supply of RJS Power. Talen Energy Supply is no established public trading marketconsidered the accounting predecessor of Talen Energy Corporation. As such, Talen Energy Corporation's consolidated financial information below for PPL Electric's common stock, as PPL owns 100%2015 represents twelve months of legacy Talen Energy Supply information consolidated with seven months of RJS information from June 1, 2015, while the outstanding common shares. Dividends paid2014 and earlier periods represent only legacy Talen Energy Supply information. See Notes 1, 3 and 6 to PPLthe Financial Statements for information on those common shares are determined by PPL Electric's Boardthe spinoff and acquisition of Directors. PPL Electric paid common stock dividends to PPL of $127 million in 2013 and $95 million in 2012.RJS Power.
|
| | | | | | | | | | | | | | | | | | | | |
Talen Energy Corporation (a) (b) | | 2015 | | 2014 | | 2013 | | 2012 | | 2011 |
| | | | | | | | | | |
Income Items (in millions) | | | | | | | | | | |
Operating revenues (c) | | $ | 4,481 |
| | $ | 4,581 |
| | $ | 4,495 |
| | $ | 4,393 |
| | $ | 4,834 |
|
Income (Loss) from continuing operations after income taxes attributable to Talen Energy Corporation stockholders | | (341 | ) | | 187 |
| | (262 | ) | | 428 |
| | 672 |
|
Income (Loss) from discontinued operations (net of income taxes) (d) | | — |
| | 223 |
| | 32 |
| | 46 |
| | 96 |
|
Net Income (Loss) attributable to Talen Energy Corporation stockholders | | (341 | ) | | 410 |
| | (230 | ) | | 474 |
| | 768 |
|
Balance Sheet Items (in millions) (e) | | | | | | | | | | |
Property, plant and equipment, net | | $ | 8,587 |
| | $ | 6,436 |
| | $ | 7,174 |
| | $ | 7,293 |
| | $ | 6,486 |
|
Total assets | | 12,826 |
| | 10,760 |
| | 11,074 |
| | 12,375 |
| | 13,179 |
|
Short-term debt | | 608 |
| | 630 |
| | — |
| | 356 |
| | 400 |
|
Long-term debt (including current portion) | | 4,203 |
| | 2,218 |
| | 2,525 |
| | 3,272 |
| | 3,024 |
|
Common equity | | 4,303 |
| | 3,907 |
| | 4,798 |
| | 3,848 |
| | 4,037 |
|
Total capitalization | | 9,114 |
| | 6,755 |
| | 7,323 |
| | 7,476 |
| | 7,461 |
|
Income (Loss) per share attributable to Talen Energy Corporation stockholders - Basic (f) | | | | | | | | | | |
Income (Loss) from continuing operations | | $ | (3.10 | ) |
| $ | 2.24 |
|
| $ | (3.13 | ) |
| $ | 5.12 |
|
| $ | 8.04 |
|
Income (Loss) from discontinued operations (net of income taxes) (d) | | $ | — |
|
| $ | 2.67 |
|
| $ | 0.38 |
|
| $ | 0.55 |
|
| $ | 1.15 |
|
Net Income (Loss) | | $ | (3.10 | ) |
| $ | 4.91 |
|
| $ | (2.75 | ) |
| $ | 5.67 |
|
| $ | 9.19 |
|
Income (Loss) per share attributable to Talen Energy Corporation stockholders - Diluted (f) | |
|
|
|
|
|
|
|
|
|
Income (Loss) from continuing operations | | $ | (3.10 | ) |
| $ | 2.24 |
|
| $ | (3.13 | ) |
| $ | 5.12 |
|
| $ | 8.04 |
|
Income (Loss) from discontinued operations (net of income taxes) (d) | | $ | — |
|
| $ | 2.67 |
|
| $ | 0.38 |
|
| $ | 0.55 |
|
| $ | 1.15 |
|
Net Income (Loss) | | $ | (3.10 | ) |
| $ | 4.91 |
|
| $ | (2.75 | ) |
| $ | 5.67 |
|
| $ | 9.19 |
|
LG&E and KU Energy LLC
There is no established public trading market for LKE's membership interests. PPL owns all of LKE's outstanding membership interests. Distributions on the membership interests will be paid as determined by LKE's Board of Directors. LKE made cash distributions to PPL of $254 million in 2013 and $155 million in 2012.
Louisville Gas and Electric Company
There is no established public trading market for LG&E's common stock, as LKE owns 100% of the outstanding common shares. Dividends paid to LKE on those common shares are determined by LG&E's Board of Directors. LG&E paid common stock dividends to LKE of $99 million in 2013 and $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 outstanding common shares. Dividends paid to LKE on those common shares are determined by KU's Board of Directors. KU paid common stock dividends to LKE of $124 million in 2013 and $100 million in 2012.
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA |
| | | | | | | | | | | | | | | | | | |
PPL Corporation (a) (b) | | | 2013 | | | 2012 | | | 2011 (c) | | | 2010 (c) | | | 2009 |
| | | | | | | | | | | | | | | | | | |
Income Items (in millions) | | | | | | | | | | | | | | | |
| Operating revenues | | $ | 11,860 | | $ | 12,286 | | $ | 12,737 | | $ | 8,521 | | $ | 7,449 |
| Operating income | | | 2,339 | | | 3,109 | | | 3,101 | | | 1,866 | | | 896 |
| Income from continuing operations after income taxes | | | | | | | | | | | | | | | |
| | attributable to PPL shareowners | | | 1,128 | | | 1,532 | | | 1,493 | | | 955 | | | 414 |
| Net income attributable to PPL shareowners | | | 1,130 | | | 1,526 | | | 1,495 | | | 938 | | | 407 |
Balance Sheet Items (in millions) (d) | | | | | | | | | | | | | | | |
| Total assets | | | 46,259 | | | 43,634 | | | 42,648 | | | 32,837 | | | 22,165 |
| Short-term debt | | | 701 | | | 652 | | | 578 | | | 694 | | | 639 |
| Long-term debt | | | 20,907 | | | 19,476 | | | 17,993 | | | 12,663 | | | 7,143 |
| Noncontrolling interests | | | | | | 18 | | | 268 | | | 268 | | | 319 |
| Common equity | | | 12,466 | | | 10,480 | | | 10,828 | | | 8,210 | | | 5,496 |
| Total capitalization | | | 34,074 | | | 30,626 | | | 29,667 | | | 21,835 | | | 13,597 |
Financial Ratios | | | | | | | | | | | | | | | |
| Return on average common equity - % | | | 9.84 | | | 13.76 | | | 14.93 | | | 13.26 | | | 7.48 |
| Ratio of earnings to fixed charges (e) | | | 2.2 | | | 2.9 | | | 3.1 | | | 2.7 | | | 1.9 |
Common Stock Data | | | | | | | | | | | | | | | |
| Number of shares outstanding - Basic (in thousands) | | | | | | | | | | | | | | | |
| | | Year-end | | | 630,321 | | | 581,944 | | | 578,405 | | | 483,391 | | | 377,183 |
| | | Weighted-average | | | 608,983 | | | 580,276 | | | 550,395 | | | 431,345 | | | 376,082 |
| Income from continuing operations after income taxes | | | | | | | | | | | | | | | |
| | available to PPL common shareowners - Basic EPS | | $ | 1.85 | | $ | 2.62 | | $ | 2.70 | | $ | 2.21 | | $ | 1.10 |
| Income from continuing operations after income taxes | | | | | | | | | | | | | | | |
| | available to PPL common shareowners - Diluted EPS | | $ | 1.76 | | $ | 2.61 | | $ | 2.70 | | $ | 2.20 | | $ | 1.10 |
| Net income available to PPL common shareowners - | | | | | | | | | | | | | | | |
| | Basic EPS | | $ | 1.85 | | $ | 2.61 | | $ | 2.71 | | $ | 2.17 | | $ | 1.08 |
| Net income available to PPL common shareowners - | | | | | | | | | | | | | | | |
| | Diluted EPS | | $ | 1.76 | | $ | 2.60 | | $ | 2.70 | | $ | 2.17 | | $ | 1.08 |
| Dividends declared per share of common stock | | $ | 1.47 | | $ | 1.44 | | $ | 1.40 | | $ | 1.40 | | $ | 1.38 |
| Book value per share (d) | | $ | 19.78 | | $ | 18.01 | | $ | 18.72 | | $ | 16.98 | | $ | 14.57 |
| Market price per share (d) | | $ | 30.09 | | $ | 28.63 | | $ | 29.42 | | $ | 26.32 | | $ | 32.31 |
| Dividend payout ratio - % (f) | | | 84 | | | 55 | | | 52 | | | 65 | | | 128 |
| Dividend yield - % (g) | | | 4.89 | | | 5.03 | | | 4.76 | | | 5.32 | | | 4.27 |
| Price earnings ratio (f) (g) | | | 17.10 | | | 11.01 | | | 10.89 | | | 12.13 | | | 29.92 |
Sales Data - GWh | | | | | | | | | | | | | | | |
| Domestic - Electric energy supplied - retail (h) | | | 44,564 | | | 42,379 | | | 40,147 | | | 14,595 | | | 38,912 |
| Domestic - Electric energy supplied - wholesale (h)(i) | | | 61,124 | | | 54,958 | | | 63,701 | | | 74,105 | | | 37,772 |
| Domestic - Electric energy delivered - retail | | | 67,848 | | | 66,931 | | | 67,806 | | | 42,463 | | | 36,689 |
| U.K. - Electric energy delivered | | | 78,219 | | | 77,467 | | | 58,245 | | | 26,820 | | | 26,358 |
| |
(a) | | The earningsEarnings each year were affected by severalcertain items that management considers special.believes are not indicative of ongoing operations. See "Results of Operations - Segment Results"EBITDA and Adjusted EBITDA" in "Item 7. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations" for a description of specialthose items in 2013,2015, 2014, and 2013. Significant pre-tax items in 2012 and 2011.2011 included unrealized gains on derivative contracts of $91 million and $120 million, while 2012 included a $29 million coal contract modification payment and 2011 included litigation-related credits of $132 million. The earnings were also affected by theacquisitions and sales of various businesses. See Note 96 to the Financial Statements for aadditional information, including discussion of the discontinued operations in 2013, 20122014 and 2011.2013. |
| |
(b) | | See "Item 1A. Risk Factors" and Notes 1 6 and 1511 to the Financial Statements for a discussion of uncertainties that could affect PPL'sTalen Energy Corporation's future financial condition. |
| |
(c) | Amounts for prior years have been reclassified to conform to the current presentation related to certain operating revenues and expenses. See "Reclassifications" in Note 1 to the Financial Statements for additional information. |
| 2011 includes eight months of WPD Midlands activity following the April 1, 2011 acquisition, as PPL consolidates WPD on a one-month lag. 2010 includes two months of LKE activity following the November 1, 2010 acquisition. |
(d) | 2014 includes an after-tax gain on the sale of the hydroelectric business in Montana of $206 million. |
| |
(e) | As of each respective year-end. |
(e) | | Computed using earnings and fixed charges of PPL and its subsidiaries. Fixed charges consist of interest on short- and long-term debt, amortization of debt discount, expense and premium - net, other interest charges, the estimated interest component of operating rentals and preferred securities distributions of subsidiaries. See Exhibit 12(a) for additional information. |
(f) | | Based onThe calculation of basic and diluted EPS. |
(g) | | Based on year-end market prices. |
(h) | | The electric energy supplied changes in 2010 reflectearnings per share for 2015 utilized the expirationweighted-average shares outstanding during the year assuming the shares issued to PPL's shareholders were outstanding during the entire year and reflects the impact of the PLR contract between PPL EnergyPlusprivate placement of shares to the Riverstone Holders on the spinoff date. For 2014, 2013, 2012 and PPL Electric as of December 31, 2009. |
(i) | | GWh are included until2011, weighted average shares outstanding assumed the transaction closing for facilities thatshares issued to PPL's shareholders at the spinoff date in 2015 were sold.outstanding during those entire years. |
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
PPLTalen Energy Supply, LLC PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company
Item 6 is omitted as PPLTalen Energy Supply PPL Electric, LKE, LG&E and KU meetmeets the conditions set forth in General Instructions (I)(1)(a) and (b) of Form 10-K.
Item 7. Combined Management's Discussion and Analysis of Financial Condition and Results of Operations
(All Registrants)
This combined Item"Item 7. "Management'sCombined Management's Discussion and Analysis of Financial Condition and Results of Operations" is separately filed by PPLTalen Energy Corporation and each of its Subsidiary Registrants. InformationTalen Energy Supply. Any information contained herein relating to anyan individual Registrantregistrant is filed by such Registrantregistrant solely on its own behalf, and no Registrantneither registrant makes any representation as to information relating to anythe other Registrant. Theregistrant except that information relating to Talen Energy Supply and its subsidiaries is also attributed to Talen Energy Corporation and information relating to the subsidiaries of Talen Energy Supply is also attributed to Talen Energy Supply. As Talen Energy Corporation is substantially comprised of Talen Energy Supply and its subsidiaries, most disclosures refer to Talen Energy and are intended to be applicable to both registrants. When identification of a particular registrant or subsidiary is considered important to understanding the matter being disclosed, the specific Registrantentity's name is used, in particular, for those few disclosures that apply only to which disclosures are applicableTalen Energy Corporation. Each disclosure referring to a subsidiary applies to both Talen Energy Corporation and Talen Energy Supply and each disclosure referring to Talen Energy Supply applies to Talen Energy Corporation through consolidation.
Talen Energy Corporation's obligation to report under the Securities and Exchange Act of 1934, as amended, commenced on May 1, 2015, the date Talen Energy Corporation's Registration Statement on Form S-1 relating to the spinoff transaction was declared effective by the SEC. Talen Energy Supply is identifieda separate registrant and considered the predecessor of Talen Energy Corporation, and therefore, the financial information prior to June 1, 2015 presented in parenthetical headingsthis Annual Report on Form 10-K for both registrants includes only legacy Talen Energy Supply information. From June 1, 2015, upon completion of the spinoff and acquisition, Talen Energy Corporation's and Talen Energy Supply's consolidated financial information also includes RJS. As such, Talen Energy Corporation's and Talen Energy Supply's consolidated financial information presented in italics above the applicable disclosure or within the applicable disclosurethis Annual Report on Form 10-K for each Registrant's related activities2015 represents twelve months of legacy Talen Energy Supply information consolidated with seven months of RJS information from June 1, 2015, while 2014 and disclosures. Within combined disclosures, amounts are disclosed for any Registrant when significant.2013 represent only legacy Talen Energy Supply information.
The information provided in this Item 7.following should be read in conjunction with the Registrants'registrants' Consolidated Financial Statements and the accompanying Notes. Capitalized terms and abbreviations are defined in the glossary. Dollars are in millions, except per share data, unless otherwise noted.
"Management's Discussion and Analysis of Financial Condition and Results of Operations" includes the following information:
| · | "Overview" provides a description of each Registrant'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. |
"Overview," which provides Talen Energy's business strategy, key performance measures, an executive summary and a discussion of key competitive power business dynamics.
| · | "Results of Operations" for PPL provides a more 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 2012 and 2012 with 2011. |
"Results of Operations" includes "Statement of Income Analysis," which addresses significant changes in principal line items on the Statements of Income comparing 2015 with 2014 and 2014 with 2013 on a GAAP basis. The "Margins" discussion, presented by segment, includes a reconciliation of this non-GAAP financial measure to operating income (loss). The "EBITDA and Adjusted EBITDA" discussion, also presented by segment, includes a reconciliation of these non-GAAP financial measures to operating income (loss) and consolidated net income (loss).
| · | "Financial Condition - Liquidity and Capital Resources" provides an analysis of the Registrants' liquidity positions and credit profiles. This section also includes a discussion of forecasted sources and uses of cash and rating agency actions. |
"Financial Condition - Liquidity and Capital Resources" provides an analysis of Talen Energy's liquidity positions and credit profiles. This section also includes a discussion of forecasted sources and uses of cash as well as rating agencies and credit considerations.
| · | "Financial Condition - Risk Management" provides an explanation of the Registrants' risk management programs"Financial Condition - Risk Management" provides an explanation of the risk management policy relating to Talen Energy's market and credit risk. |
| · | "Application of Critical Accounting Policies" provides an overview of the accounting policies that are particularly important to the results of operations and financial condition of the Registrants and that require their management to make significant estimates, assumptions and other judgments of inherently uncertain matters. |
"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 Talen Energy and that require management to make significant estimates, assumptions and other judgments of inherently uncertain matters.
Overview
Talen Energy is a North American competitive power generation and marketing company headquartered in Allentown, Pennsylvania. Talen Energy produces and sells electricity, capacity and ancillary services from its fleet of power plants totaling approximately 17,400 MW at December 31, 2015, principally located in the Northeast, Mid-Atlantic and Southwest regions of the U.S. See "Item 2. Properties" for additional information on Talen Energy's power plants. For a more detailed description of the Registrants and their businesses,Talen Energy's business, see "Item 1. Business."
(All Registrants except PPLTalen 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.
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 isseeks to optimize the value from its competitive power generation assetassets and marketing portfoliosportfolio while mitigating near-term volatility in both cash flowsflow and earnings. PPLearnings metrics. Talen Energy Supply endeavors to doaccomplish this by matching energy supplyprojected output from its generation assets with load, or customer demand, under contracts of varying durations with creditworthy counterparties to capture profitsforward power sales in the wholesale and retail markets while effectively managing exposure to energy and fuel price volatility, counterparty credit risk and operational risk. PPLTalen Energy Supply is focused on maintaining profitability duringsafe, reliable, and resilient operations, disciplined capital investment, portfolio optimization, cost management and the current and projected periodpursuit of low energy and capacity prices. See "Financial and Operational Developments - Economic and Market Conditions" below for additional information.value enhancing growth opportunities.
(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 and growth opportunities, a key objective of the RegistrantsTalen Energy is to maintain targeted credit profiles andadequate liquidity positions.capacity. In addition, the Registrants haveTalen Energy has a financial risk management policy and operational risk management programsprocedures 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, PPLTalen Energy generally uses contracts such as forwards, options, swaps and swaps.insurance contracts primarily focused on mitigating cash flow volatility within the next 12 month period.
Financial and Operational DevelopmentsKey Performance Measures
EarningsIn addition to operating income (loss), Talen Energy utilizes Adjusted EBITDA and Margins, both non-GAAP financial measures, as indicators of performance for its business, with Adjusted EBITDA as the primary financial performance measure used by management to evaluate its business and monitor results of operations. Results for the years ended December 31 were as follows.(PPL) |
| | | | | | | | | | | |
| 2015 | | 2014 | | $ Change |
Net Income (Loss) | $ | (341 | ) | | $ | 410 |
| | $ | (751 | ) |
| | | | |
|
Operating Income (Loss) | (39 | ) | | 397 |
| | (436 | ) |
| | | | |
|
Adjusted EBITDA | 1,002 |
| | 759 |
| | 243 |
|
| | | | |
|
Margins | 1,899 |
| | 1,653 |
| | 246 |
|
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. |
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 anda detailed analysis of Talen Energy's results, the definitions of operations.Margins and Adjusted EBITDA and a reconciliation of these non-GAAP measures to related GAAP measures.
2014 OutlookExecutive Summary
(PPL)The increase in Margins, a primary driver to changes in the other three earnings measures reflected above, was primarily due to a $237 million increase related to the RJS and MACH Gen generating facilities acquired in 2015.
Excluding special items, lower earnings are expectedThe declines in operating income (loss) and net income (loss) were substantially due to non-cash goodwill and other asset impairment charges recorded in 2015. Net income (loss) was also negatively impacted by an $80 million after-tax charge related to a debt extinguishment in 2015, and net income (loss) in 2014 compared with 2013. The factors underlying these projections by segmentbenefited from a $206 million after-tax gain on the sale of the hydroelectric generating facilities in Montana. See Note 6 to the Financial Statements for additional information on the sale of the hydroelectric generating facilities.
Several of the key financial and Subsidiary Registrant are discussed below (on an after-tax basis).operational developments that impacted results for the year ended December 31, 2015 were as follows:
(PPL's U.K. Regulated Segment)
Excluding special items, earningsSpinoff from PPL - During 2015, Talen Energy incurred certain restructuring, TSA and other charges in 2014 are projectedconnection with the spinoff from PPL. See Note 1 to be comparable with 2013. Higher electricity delivery revenuethe Financial Statements for additional information on the spinoff, acquisition and lower pension expense are expected to be offset by higher income taxes, higher depreciation and higher financing costs.related charges.
Impairment Charges - During 2015, management considered a number of events and changes in circumstances and concluded that impairment assessments for goodwill and certain long-lived assets were necessary. The charges recorded were as follows:
(PPL's Kentucky Regulated Segment and LKE, LG&E and KU) |
| | | | | | | | | | | | | | | | | |
| | | Pre-tax | | After-tax |
| | | Third Quarter | | Fourth Quarter | | Total | | Total |
| Goodwill | | $ | 466 |
| | $ | (1 | ) | | $ | 465 |
| | $ | 444 |
|
| Sapphire plants and C.P. Crane plant | | 122 |
| | 67 |
| | 189 |
| | 113 |
|
| Total | | $ | 588 |
| | $ | 66 |
| | $ | 654 |
| | $ | 557 |
|
Excluding special items, lower earningsIn addition to the impairment assessments that resulted in these charges, management also tested its coal-fired generation facilities located primarily within the PJM market for impairment and concluded that the plants were not impaired at December 31, 2015. The recoverability assessment is very sensitive to forward energy and capacity price assumptions as well as forecasted operation and maintenance and capital spending and further declines could negatively impact future testing results. The carrying value of these coal-fired generation facilities was more than $3 billion as of December 31, 2015. See Notes 14 and 16 to the Financial Statements for additional information on the impairment testing that occurred and the charges recorded in 2015.
Loss on Debt Extinguishment - In conjunction with the termination of a remarketing dealer's right to remarket certain senior unsecured notes, Talen Energy recorded a pre-tax charge of $134 million. See Note 5 to the Financial Statements for additional information.
Coal Contract Modification - To mitigate the risk of oversupply of coal due to reduced dispatching of coal-fired generation facilities, primarily as a result of the continued decline in natural gas prices. Talen Energy incurred pre-tax charges of $41 million in the third quarter of 2015 to reduce its contracted coal deliveries in 2015 through 2018.
Acquisition of MACH Gen - In November 2015, Talen Energy obtained 2,344 MW (summer rating) of generating capacity with the completion of the acquisition of all of the membership interests of MACH Gen for cash consideration of approximately $600 million. In addition, $578 million of a MACH Gen subsidiary's debt remained outstanding after the acquisition. See Notes 5 and 6 to the Financial Statements for additional information.
Divestiture of Talen Renewable Energy - In November 2015, Talen Energy completed the sale of Talen Renewable Energy for $116 million. See Note 6 to the Financial Statements for additional information.
Divestiture of Ironwood, Holtwood, Lake Wallenpaupack and C.P. Crane Power Plants - In October 2015, Talen Energy announced the sale of these facilities, with an aggregate generating capacity of approximately 1,400 MW, to satisfy a December 2014 FERC order approving the combination of Talen Energy Supply and RJS Power. Upon completion of these divestitures, Talen Energy will have generated $1.5 billion in pre-tax cash proceeds. The sales of Ironwood and C.P. Crane were completed in February 2016. See Note 6 to the Financial Statements for additional information.
Susquehanna Nuclear Plant - The Susquehanna nuclear plant continues to make modifications to address the causes of turbine blade cracking first identified in 2011. Unit 1 completed its planned refueling and turbine inspection outage in June 2014 and installed newly designed shorter last stage blades on one of the low pressure turbines. The same short blade modifications were installed on two of the three turbines on Unit 2 during the spring 2015 scheduled refueling outage. All remaining turbine blade modifications are projectedscheduled to be performed during planned refueling and maintenance outages. The Susquehanna nuclear plant set a single-year generation record and achieved an annualized capacity factor of over 94 percent.
Brunner Island Co-firing Project - Construction is under way and is expected to be completed by the end of 2016. The project is expected to cost $118 million. At December 31, 2015, $23 million of costs associated with the project have been incurred.
Key Competitive Power Business Dynamics
Electricity, natural gas and capacity prices are significant contributors to the profitability of Talen Energy's portfolio. A discussion of the general factors and current market conditions affecting these commodities and Talen Energy's operations follows.
Electricity Prices
Electricity prices impact Talen Energy's operations. The price for electricity varies by region and can be influenced by a host of supply and demand factors including, but not limited to, generator availability, market design, fuel prices for power generators, transmission congestion, demand growth and seasonality. In 2015, delivered prices for electricity fell, relative to 2014 delivered prices, across the competitive power markets in 2014 compared with 2013,which Talen Energy operates, primarily driven by higher operationunusual market and maintenance expense, higher depreciationweather volatility in the first quarter of 2014 and higher financing costs, partially offset by returns on additional environmental capital investments and modest retail load growth.a continued decline in natural gas prices, which are discussed below.
(PPL's Pennsylvania Regulated SegmentThe table below reflects the average around-the-clock day ahead electricity prices at various pricing points located near Talen Energy's power plants for the years ended December 31.
|
| | | | | | | | | | | |
| 2015 (a) | | 2014 (a) | | 2013 (a) |
PJM - West Hub | $ | 35.82 |
| | $ | 51.01 |
| | $ | 38.42 |
|
| | | | | |
PJM - PPL Zone | 33.01 |
| | 52.13 |
| | 38.01 |
|
| | | | | |
PJM - BGE Hub | 43.73 |
| | 60.22 |
| | 41.53 |
|
| | | | | |
ERCOT - North | 25.31 |
| | 35.74 |
| | 33.19 |
|
| | | | | |
ERCOT - South | 25.85 |
| | 36.02 |
| | 33.76 |
|
| | | | | |
NYISO - Zone F | 38.00 |
| | 61.19 |
| | 50.47 |
|
| | | | | |
ISO-NE Mass Hub | 41.90 |
| | 64.56 |
| | 56.42 |
|
| |
(a) | Source: data obtained from applicable ISO/RTO publications. |
If a decline in electricity prices driven by declining gas prices persists, Talen Energy will likely experience lower energy Margins at its coal-fired and PPL Electric)nuclear generation facilities as higher priced hedges expire. To mitigate the impact of the declining Margins on coal-fired and nuclear generation facilities, as described above, Talen Energy is pursuing opportunities to modify certain of its coal-fired generation facilities to be capable of operating on both coal and natural gas, as well as evaluating cost reduction measures at these facilities.
Excluding special items, higher earnings are projectedIn November 2015, the FERC issued an order on "Price Formation" in 2014 compared with 2013, primarily driventhe energy and ancillary service markets. These changes and future changes signaled by higher transmission marginsthe FERC in that order may eventually improve pricing and returns on distribution improvement capital spending, partially offset by higher financing coststhus compensation for generators in the energy and higher income taxes.ancillary services markets, but no assurances can be given that will occur.
(PPL's Supply Segment and PPL Energy Supply)In December 2015, the FERC accepted a previously submitted PJM proposal that permits cost-based offers to exceed $2,000/MWh in certain circumstances but limits cost-based offers to $2,000/MWh for the purpose of setting locational marginal prices. Under the proposal, market-based offers are permitted to rise along with cost-based offers but are not permitted to exceed $2,000/MWh or the corresponding cost-based offers. Moreover, electricity providers will be permitted to recover actual costs above $2,000MWh through make-whole payments. In addition, electricity prices will be permitted to rise to $3,700/MWh during certain shortage pricing events. The changes became effective in December 2015.
Excluding special items, lower earningsHowever, in January 2016, as a part of the Price Formation efforts, the FERC issued a Notice of Proposed Rulemaking (NOPR) for comment which requires each RTO, including PJM, to cap each resource's incremental electricity offer to the higher of $1,000/MWh or that resource's verified cost-based incremental electricity offer. Under this proposal, verified cost-based incremental electricity offers above $1,000/MWh would be used for purposes of calculating Locational Marginal Prices. Comments on this NOPR are projecteddue within 60 days and final FERC action on this proposed ruling could modify the above December 2015 acceptance of the PJM proposal.
Capacity Prices
Capacity prices are another key source of revenue for Talen Energy’s operations. Currently, about 80% of Talen Energy's generation capacity is located in markets with a capacity product, including assets in PJM, NYISO and ISO-NE. Similar to electricity, capacity prices are affected by supply and demand fundamentals such as power plant additions and retirements, imports/exports of capacity from/to adjacent markets, costs associated with plant retrofits, risk premiums associated with penalties for non-performance, demand response products, ISO demand forecasts and reserve margin targets. Over the past three auction cycles, capacity prices have increased in PJM and ISO-NE, primarily attributable to incentive-based changes in the capacity market structures designed to improve operational availability during periods of peak demand.
The table below reflects the cleared capacity prices for the zones in which the majority of Talen Energy's plants are located for the three most recent strip auctions.
|
| | | | | | | | | | | |
| 2015/2016 (a) | | 2016/2017 (a) | | 2017/2018 (a) |
PJM - MAAC ($/MW-day) | $ | 167.46 |
| | $ | 119.13 |
| | $ | 120.00 |
|
| | | | | |
PJM - SWMAAC ($/MW-day) | 167.46 |
| | 119.13 |
| | 120.00 |
|
| | | | | |
PJM - RTO ($/MW-day) | 136.00 |
| | 59.37 |
| | 120.00 |
|
| | | | | |
PJM Capacity Performance ($/MW-day) (b) | N/A |
| | 134.00 |
| | 151.50 |
|
| | | | | |
NYISO - Rest of State ($/kW-month) (c) | 1.25 |
| | N/A |
| | N/A |
|
| | | | | |
ISO-NE - Rest of Pool ($/kW-month) | 3.43 |
| | 3.15 |
| | 15.00 |
|
| |
(a) | Source: data obtained from applicable ISO/RTO publications. |
| |
(b) | The capacity performance product percentage of reliability requirements is being phased in through the 2020/2021 auction as described below. |
| |
(c) | Represents the 2015/2016 winter strip auction. Auctions beyond 2015/2016 have not yet been conducted. |
As a result of unusual market and weather volatility in the first quarter of 2014, comparedPJM determined that changes were necessary to ensure system reliability. In December 2014, PJM proposed to add an enhanced Capacity Performance (CP) product to the capacity market structure to permit additional compensation for generation owners/operators to make the necessary investments to maintain system reliability in exchange for stronger performance requirements, with 2013, primarily driven by lowerhigher penalties for non-performers. In June 2105, the FERC issued an order approving the PJM CP proposal largely as it was filed and the CP product is being phased in through the 2020/2021 auction based on a percentage of capacity to meet reliability requirements. The phase in percentage was set at 60% for 2016/2017, 70% for 2017/2018 and 80% for both 2018/2019 and 2019/2020. 2020/2021 will be the first auction to procure 100% of the CP product. In August 2015, PJM completed the first base residual auction inclusive of a CP product for the planning year 2018/2019 and subsequently, in late August and September 2015, PJM completed the two CP transitional auctions for planning years 2016/2017 and 2017/2018. The first CP product implementation will begin on June 1, 2016 for the portion procured in the 2016/2017 transitional auction.
In December 2015, PJM altered its process for forecasting load beginning with the most recent 2016 "Load Processing Report" to reflect a shorter period for historical weather data, updated end usage data, and the inclusion of distributed solar generation. The revised process lowered the load forecast. This reduction in load is expected to put downward pressure on PJM capacity prices.
In January 2016, the U.S. Supreme Court reversed the ruling of the U.S. Court of Appeals for the D.C. Circuit Court and upheld the FERC's jurisdiction over rules regarding DR in organized markets. Therefore, DR will be permitted to continue to participate in future PJM energy and capacity prices, partially offset by lower financing costs and lower income taxes.auctions.
(All Registrants)Natural Gas Prices
Natural gas prices are a key aspect of the current competitive power environment. The extensive development of major shale formations in the U.S. over the past few years has caused natural gas prices to decline. Power prices have also declined substantially due to the high degree of correlation with natural gas prices, weak general economic conditions and other factors. As a result, Talen Energy has experienced a shift in the dispatching of its generation fleet from coal-fired to gas-fired generation.
Environmental Regulations
Talen Energy is subject to extensive federal, state and local environmental laws, rules and regulations, including those pertaining to CCRs, GHG, effluent limitation guidelines and MATS. In 2015, the EPA published the final rules related to GHG regulations for new and existing power plants that could have a significant industry-wide impact. Talen Energy is in the process of evaluating these rules. See "Financial Condition - Environmental Matters" below for additional information on these requirements. In 2015, Talen Energy recorded increases to existing AROs of $41 million as a result of a review of the 2015 CCR rule. Further changes to AROs may be required as estimates are refined and compliance with the rule continues.
Other Regulatory Matters
There have been attempts in Ohio by certain companies to have their utilities be permitted to subsidize several uneconomic merchant generation assets owned by non-utility affiliates. Those attempts are being opposed by many generator and consumer interests both in Ohio and at the FERC. Additional efforts to oppose on grounds of federal preemption may also be made in Federal Court. If approved and not reversed, out of market subsidies could be disruptive to the market signals for competitive generation and threaten the long-term viability of PJM's markets. It is too early to predict the outcome of these efforts to subsidize uneconomic generators in Ohio.
Talen Energy cannot predict the impact that future economic and market conditions and regulatory requirements may have on its financial condition or results of operations.
Results of Operations
As a result of the RJS Power acquisition on June 1, 2015, results for RJS (since the date of acquisition) are included in Talen Energy's 2015 results with no comparable amounts in 2014 and 2013. When discussing Talen Energy's results of operations for 2015 compared with 2014, the results of RJS are isolated for purposes of comparability (if significant). At acquisition, the Sapphire operations were classified as discontinued operations. However, in November 2015, when the FERC approved the third mitigation package excluding the Sapphire portfolio, the assets and liabilities and operating results were reclassified to held and used and to continuing operations, as it is no longer probable that the Sapphire portfolio will be sold.
As a result of the MACH Gen acquisition on November 2, 2015, results for MACH Gen (since the date of acquisition) are included in Talen Energy's 2015 results with no comparable amounts in 2014 and 2013. When discussing Talen Energy's results of operations for 2015 compared with 2014, the results of MACH Gen are isolated for purposes of comparability (if significant).
Talen Energy is organized in two segments: East and West, based on geographic location. The East segment includes the generating, marketing and trading activities in PJM, NYISO and ISO-NE. The West segment includes the generating, marketing and trading activities located in ERCOT and WECC. See Note 2 to the Financial Statements for additional information on Talen Energy's segments and the segment reevaluation.
The discussion within "Statement of Income Analysis" addresses significant changes in principal line items on the Statements of Income comparing 2015 with 2014 and 2014 with 2013 on a GAAP basis. The "Margins" discussion, presented by segment, includes a reconciliation of that non-GAAP financial measure to operating income(loss). The "EBITDA and Adjusted EBITDA" discussion, also presented by segment, includes a reconciliation of those non-GAAP financial measures to operating income (loss) and consolidated net income (loss).
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,"Item 7. Combined Management's Discussion and Notes 1, 6Analysis of Financial Condition and 15Results of Operations" and Note 11 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 impactTable 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.
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.
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 - Segment Information - U.K. Regulated Segment" for additional information.
Equity Forward Agreements
In the second quarter of 2013, PPL settled forward sale agreements for 10.5 million shares of PPL common stock by issuing 8.4 million shares and cash settling the remaining 2.1 million shares. PPL received net cash proceeds of $201 million, which was used to repay short-term debt obligations and for other general corporate purposes. See Note 7 to the Financial Statements for additional information. Prior to settlement, incremental shares were included within the calculation of diluted EPS using the treasury stock method. See Note 4 to the Financial Statements for the impact on the calculation of diluted EPS.
Equity Units
During 2013, several events occurred related to the 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.
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.
(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.
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 Earnings" and "Statement of Income Analysis" are presented on a constant U.K. foreign currency exchange rate basis, where applicable, in order to isolate the impact of the change in the exchange rate on the item being explained. Results computed on a constant U.K. foreign currency exchange rate basis are calculated by translating current year results at the prior year weighted-average U.K. foreign currency exchange rate.
(Subsidiary Registrants)
The discussion for each of PPL Energy Supply, PPL Electric, LKE, LG&E and KU provides a summary of earnings. 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, Margins, EBITDA and Adjusted EBITDA
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 Shareowners for 2013 and 34% of PPL's assets at December 31, 2013.
Net Income Attributable to PPL Shareowners includes the following results (PPL WW and WPD Midlands on a consolidated basis, except for 2012 and 2011 acquisition-related adjustments, which are shown separately):
| | | | | | | | | | | | % 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.Analysis --
| | | 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 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, | | | | For the Years Ended December 31, | | |
| 2015 | | 2014 | | Change | | 2014 | | 2013 | | Change |
Wholesale energy (a) (b) (c) | $ | 2,828 |
| | $ | 2,653 |
| | $ | 175 |
| | $ | 2,653 |
| | $ | 2,890 |
| | $ | (237 | ) |
Wholesale energy to affiliate (b) | 14 |
| | 84 |
| | (70 | ) | | 84 |
| | 51 |
| | 33 |
|
Retail energy (a) (b) | 1,095 |
| | 1,243 |
| | (148 | ) | | 1,243 |
| | 1,027 |
| | 216 |
|
Energy-related businesses | 544 |
| | 601 |
| | (57 | ) | | 601 |
| | 527 |
| | 74 |
|
Total Operating Revenues | 4,481 |
| | 4,581 |
| | (100 | ) | | 4,581 |
| | 4,495 |
| | 86 |
|
Fuel (a) (b) (c) | 1,194 |
| | 1,196 |
| | (2 | ) | | 1,196 |
| | 1,048 |
| | 148 |
|
Energy purchases (a) (b) (c) | 676 |
| | 1,054 |
| | (378 | ) | | 1,054 |
| | 1,153 |
| | (99 | ) |
Operation and maintenance | 1,052 |
| | 1,007 |
| | 45 |
| | 1,007 |
| | 961 |
| | 46 |
|
Loss on lease termination | — |
| | — |
| | — |
| | — |
| | 697 |
| | (697 | ) |
Impairments | 657 |
| | — |
| | 657 |
| | — |
| | 65 |
| | (65 | ) |
Depreciation | 356 |
| | 297 |
| | 59 |
| | 297 |
| | 299 |
| | (2 | ) |
Taxes, other than income | 65 |
| | 57 |
| | 8 |
| | 57 |
| | 53 |
| | 4 |
|
Energy-related businesses | 520 |
| | 573 |
| | (53 | ) | | 573 |
| | 512 |
| | 61 |
|
Total Operating Expenses | 4,520 |
| | 4,184 |
| | 336 |
| | 4,184 |
| | 4,788 |
| | (604 | ) |
Operating Income (Loss) | (39 | ) | | 397 |
| | (436 | ) | | 397 |
| | (293 | ) | | 690 |
|
Other Income (Expense) - net | (118 | ) | | 30 |
| | (148 | ) | | 30 |
| | 32 |
| | (2 | ) |
Interest Expense | 211 |
| | 124 |
| | 87 |
| | 124 |
| | 159 |
| | (35 | ) |
Income Taxes | (27 | ) | | 116 |
| | (143 | ) | | 116 |
| | (159 | ) | | 275 |
|
Income (Loss) from Continuing Operations After Income Taxes | (341 | ) | | 187 |
| | (528 | ) | | 187 |
| | (261 | ) | | 448 |
|
Income (Loss) from Discontinued Operations (net of income taxes) | — |
| | 223 |
| | (223 | ) | | 223 |
| | 32 |
| | 191 |
|
Net Income (Loss) | (341 | ) | | 410 |
| | (751 | ) | | 410 |
| | (229 | ) | | 639 |
|
Net Income (Loss) Attributable to Noncontrolling Interests | — |
| | — |
| | — |
| | — |
| | 1 |
| | (1 | ) |
Net Income (Loss) Attributable to Talen Energy Corporation Stockholders | $ | (341 | ) | | $ | 410 |
| | $ | (751 | ) | | $ | 410 |
| | $ | (230 | ) | | $ | 640 |
|
· | 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. |
· | 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. |
· | 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 U.K. earnings and profits calculations, partially offset by a $27 million increase 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 interest rate swaps failing hedge effectiveness testing. |
(e) | Tax on the transfer of ownership of property in the U.K., which is not tax deductible for income tax purposes. |
(f) | 2012 represents severance compensation and early retirement deficiency costs. 2011 primarily represents severance compensation, early retirement deficiency costs and outplacement services for employees separating from the WPD Midlands companies as a result of a reorganization to transition the WPD Midlands companies to the same operating structure as WPD (South West) and WPD (South Wales). 2011 also includes severance compensation and early retirement deficiency costs associated with certain employees who separated from the WPD Midlands companies, but were not part of the reorganization. |
(g) | 2011 primarily includes $34 million, pre-tax, of advisory, accounting and legal fees which are recorded in "Other Income (Expense) - net" on the Statement of Income; $37 million, pre-tax, of costs, primarily related to the termination of certain contracts, rebranding and relocation costs that were recorded to "Other operation and maintenance" expense on the Statement of Income; and $6 million, pre-tax, of costs associated with the integration of certain information technology assets, that were recorded in "Depreciation" on the Statement of Income. |
(h) | The U.K. Finance Act of 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 5 to the Financial Statements for additional information. |
(j) | In November 2012, Ofgem issued additional consultation on the final DPCR4 line loss close-out that published values for each DNO and further indicated the preferred methodology that would replace the methodology under WPD's licenses, 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. |
Kentucky Regulated Segment
The Kentucky Regulated segment consists primarily of LKE's regulated electricity generation, transmission and distribution operations of LG&E and KU, as well as LG&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 Shareowners for 2013 and 26% of PPL's assets at December 31, 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) |
· | See "Margins - Changes in Non-GAAP Financial Measures" for an explanation of Kentucky Gross Margins. |
· | Higher other operation and maintenance in 2012 compared with 2011 primarily due to $11 million of expenses related to an increased scope of scheduled outages and a $6 million credit to establish a regulatory asset recorded when approved in 2011 related to 2009 storm costs.
|
· | Higher depreciation in 2013 compared with 2012 primarily due to environmental costs related to the 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.
| | | 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 adjustments | and 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 18 to the Financial Statements for additional information. |
(c) | 2012 includes an adjustment recorded by LKE to an indemnification liability. |
Pennsylvania Regulated Segment
The Pennsylvania Regulated segment includes the regulated electricity transmission and distribution operations of PPL Electric. In addition, certain financing costs are allocated to the Pennsylvania Regulated segment. The Pennsylvania Regulated segment represents 18% of Net Income Attributable to PPL Shareowners for 2013 and 15% of PPL's assets at December 31, 2013.
Net Income Attributable to PPL Shareowners 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 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.
| | 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) |
· | See "Margins - Changes in Non-GAAP Financial Measures" for an explanation of Pennsylvania Gross Delivery Margins. |
· | Lower other operation and maintenance for 2013 compared with 2012, primarily due to lower storm costs of $17 million and lower 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 the ongoing efforts to ensure the reliability of the delivery system and replace aging infrastructure. |
· | Income taxes were higher in 2013 compared with 2012 primarily due to higher pre-tax income which increased income taxes by $47 million, partially offset by $8 million of income tax return adjustments primarily recorded in 2012, largely related to 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.
· | Lower noncontrolling interests for both periods due to PPL Electric's redemption of preference securities in June 2012. |
Supply Segment
The Supply segment consists primarily of PPL Energy Supply's wholesale, retail, marketing and trading activities, as well as the competitive generation operations. In addition, certain financing and other costs are allocated to the Supply segment. The Supply segment represents negative 24% of Net Income Attributable to PPL Shareowners for 2013 and 25% of PPL's assets at December 31, 2013. In 2011, PPL Energy Supply subsidiaries completed the sale of several businesses, which have been classified as Discontinued Operations. See Note 9 to the Financial Statements for additional information.
Net Income Attributable to PPL Shareowners includes the following results.
| | | | | | | | | | | | % Change |
| | | 2013 | | 2012 | | 2011 | | 2013 vs. 2012 | | 2012 vs. 2011 |
Energy revenues | | | | | | | | | | | | | |
| External (a) | | $ | 4,075 | | $ | 4,970 | | $ | 5,938 | | (18) | | (16) |
| Intersegment | | | 51 | | | 79 | | | 26 | | (35) | | 204 |
Energy-related businesses | | | 527 | | | 461 | | | 472 | | 14 | | (2) |
| Total operating revenues | | | 4,653 | | | 5,510 | | | 6,436 | | (16) | | (14) |
Fuel (a) | | | 1,049 | | | 965 | | | 1,080 | | 9 | | (11) |
Energy Purchases | | | | | | | | | | | | | |
| External (a) | | | 1,168 | | | 1,810 | | | 2,277 | | (35) | | (21) |
| Intersegment | | | 3 | | | 2 | | | 4 | | 50 | | (50) |
Other operation and maintenance (b) | | | 1,072 | | | 1,058 | | | 899 | | 1 | | 18 |
Loss on lease termination (c) | | | 697 | | | | | | | | n/a | | n/a |
Depreciation | | | 318 | | | 289 | | | 245 | | 10 | | 18 |
Taxes, other than income | | | 66 | | | 68 | | | 72 | | (3) | | (6) |
Energy-related businesses | | | 512 | | | 450 | | | 467 | | 14 | | (4) |
| Total operating expenses | | | 4,885 | | | 4,642 | | | 5,044 | | 5 | | (8) |
Other Income (Expense) - net | | | 33 | | | 18 | | | 43 | | 83 | | (58) |
Other-Than-Temporary Impairments | | | 1 | | | 2 | | | 6 | | (50) | | (67) |
Interest Expense | | | 228 | | | 222 | | | 192 | | 3 | | 16 |
Income Taxes | | | (157) | | | 247 | | | 463 | | (164) | | (47) |
Income (Loss) from Discontinued Operations | | | | | | | | | 3 | | n/a | | (100) |
Net Income | | | (271) | | | 415 | | | 777 | | (165) | | (47) |
Net Income Attributable to Noncontrolling Interests | | | 1 | | | 1 | | | 1 | | | | |
Net 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. |
The changes in the components of the Supply segment's results between these periods were due to the 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.
| | 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 "Margins - Changes in Non-GAAP Financial Measures" for an explanation of Unregulated Gross Energy Margins. |
· | Lower other operation and maintenance in 2013 compared with 2012 primarily due to lower fossil and hydroelectric costs of $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 income (expense) - net in 2013 compared with 2012, however no individual item was significant in comparison to the prior year. |
| Lower other income (expense) - net in 2012 compared with 2011 primarily due to a $22 million gain on the July 2011 debt redemption. |
· | Higher interest expense in 2012 compared with 2011 primarily due to hedging activity, which increased interest expense by $30 million, and $12 million related to the debt assumed as a result of the Ironwood Acquisition, partially offset by $11 million of lower interest on short-term borrowings. |
· | Lower income taxes in 2013 compared with 2012 due to lower pre-tax income, which reduced income taxes by $62 million, and $10 million related to the impact of prior period tax return adjustments, partially offset by $38 million of higher taxes due to state tax 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 gains (losses), which management considers special items, also impacted the Supply segment's results.
| | | 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, $1 | maintenance | | | | | | | | | (1) |
| | | Other operation and | | | | | | | | | |
| RECs, net of tax of $0, $0, $2 | maintenance | | | | | | | | | (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, $0 | maintenance | | | | | | (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, $0 | Discontinued 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 repairs | Income 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), $0 | maintenance | | | | | | 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) | 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 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 recorded a pre-tax charge of $65 million for the plant and related 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) | In 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 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) | In October 2011, a wholesale customer, SMGT, filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy code. In 2012, PPL EnergyPlus recorded an additional allowance for unpaid amounts under the long-term power contract. In March 2012, the U.S. Bankruptcy Court for the District of Montana approved the request to terminate the contract, effective April 1, 2012. In June 2013, PPL EnergyPlus received an approval for an administrative claim in the amount of $2 million. |
(f) | In 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 the electricity auctions and therefore were not included in the auction pricing. A FERC order was issued in 2011 approving the disbursement of these supply costs by the wholesale customer to the suppliers; therefore, PPL accrued its share of this additional revenue in 2011. |
(g) | As a result of lower electricity and natural gas prices, coal-fired generation output decreased during 2012. Contract modification payments were incurred to reduce 2012 and 2013 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 of $697 million ($413 million after-tax) for the termination of the lease. See Note 8 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."
| | | | 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) |
Energy-related economic activity (a) | | | (127) | | | 100 | | | 321 |
Option premiums (b) | | | (4) | | | (1) | | | 19 |
Adjusted energy-related economic activity | | | (131) | | | 99 | | | 340 |
Less: Economic activity realized, associated with the monetization of certain | | | | | | | | | |
| full-requirement sales contracts in 2010 | | | | | | 35 | | | 216 |
Adjusted energy-related economic activity, net, pre-tax | | $ | (131) | | $ | 64 | | $ | 124 |
| | | | | | | | | | | |
Adjusted energy-related economic activity, net, after-tax | | $ | (77) | | $ | 38 | | $ | 72 |
(a) | See Note 19 to the Financial Statements for additional information. |
(b) | Adjustment for the net deferral and amortization of option premiums over the delivery period of the item that was hedged or upon realization. Option premiums are recorded in "Unregulated wholesale energy" and "Energy purchases" on the Statements of Income. |
Margins
Non-GAAP Financial Measures
Management utilizes the following non-GAAP financial measures as indicators of performance for its businesses.
· | "Kentucky Gross Margins" is a single financial performance measure of 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 the Supply segment's and PPL Energy Supply's competitive energy activities, which are managed on a geographic basis. In calculating this measure, energy revenues, including operating revenues associated with certain businesses classified as discontinued operations, are offset by the cost of fuel, energy purchases, certain other operation and maintenance expenses, primarily ancillary charges, gross receipts tax, recorded in "Taxes, other than income," and operating expenses associated with certain businesses classified as discontinued operations. This performance measure is relevant due to the volatility in the individual revenue and expense lines on the Statements of Income that comprise "Unregulated Gross Energy Margins." This volatility stems from a number of factors, including the required netting of certain transactions with ISOs and significant fluctuations in unrealized gains and losses. Such factors could result in gains or losses being recorded in either "Unregulated wholesale energy", "Unregulated retail energy" or "Energy purchases" on the Statements of Income. This performance measure includes PLR revenues from energy sales to PPL Electric by PPL EnergyPlus, which are reflected in "PLR intersegment utility revenue (expense)" in the reconciliation table below (in "Unregulated wholesale energy to affiliate" in PPL Energy Supply's reconciliation table). "Unregulated Gross Energy Margins" excludes adjusted energy-related economic activity, which includes the changes in fair value of positions used to economically hedge a portion of the economic value of the competitive generation assets, full-requirement sales contracts and retail activities. This economic value is subject to changes in fair value due to market price volatility of the input and output commodities (e.g., fuel and power) prior to the |
delivery period that was hedged. Adjusted energy-related economic activity 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 or upon realization.
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 report their 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.
Reconciliation of Non-GAAP Financial Measures
The following tables contain the components from the Statement of Income that are included in the non-GAAP financial measures and a reconciliation to PPL's "Operating Income" for the years ended December 31.
| | | | | 2013 | | 2012 |
| | | | | | | | | | Unregulated | | | | | | | | | | | | | Unregulated | | | | | | | |
| | | | | Kentucky | | PA Gross | | Gross | | | | | | | Kentucky | | PA Gross | | Gross | | | | | |
| | | | | 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 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 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. |
(c) | Primarily represents WPD's utility revenue. |
(d) | Primarily related to PLR supply sold by PPL EnergyPlus to PPL Electric. |
(e) | 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. |
(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 revenues and expenses are not reflected in "Operating Income" on the Statements of Income. |
Changes in Non-GAAP Financial Measures
The following table shows the non-GAAP financial measures by PPL's reportable segment and by component, as applicable, for the year ended December 31 as well as the change between periods. The factors that gave rise to the changes are described following the table.
| | | | | | | | | | | $ 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) |
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 |
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) |
Kentucky Gross Margins
Kentucky Gross Margins increased in 2013 compared with 2012, primarily due to higher base 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 at 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 due to the transfer of the 2005 and 2006 ECR plans into base rates as a result of the 2012 Kentucky rate cases for LG&E and KU. This transfer results in depreciation and other operation and maintenance expenses associated with the 2005 and 2006 ECR plans being excluded from Kentucky Gross Margins in 2013, while the recovery of such costs remain in Kentucky Gross Margins through base rates.
Kentucky Gross Margins decreased in 2012 compared with 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 at LG&E due to incremental returns on environmental investments, with retail volumes consistent with the prior year.
Pennsylvania Gross Delivery Margins
Distribution
Distribution margins increased in 2013 compared with 2012, primarily due to a $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 adverse 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 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 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 recovery of additional costs through the FERC 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 bankruptcy of SMGT, $9 million of higher average fuel prices and $9 million of lower wholesale energy prices.
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 |
| | | | 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 |
(b) | Amounts included in "Margins" and project costs.are not discussed separately. |
(g) | In 2012, PPL Energy Supply announced its intention, beginning |
(c) | Amounts for prior years have been reclassified to conform to the current presentation. See "Reclassifications" 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 181 to the Financial Statements for additional information. |
See below for a discussion of the components of the changes to Net Income (Loss) for the periods. The changes in Net Income (Loss) and Operating Income (Loss) from period to period were, in part, attributable to the acquisition of RJS Power, MACH Gen and several items that management believes are not indicative of ongoing operations. See "EBITDA and Adjusted EBITDA" below for information on the items management does not believe are indicative of ongoing operations.
Energy-Related Businesses
Net contributions to the East segment's operating income (loss) from energy-related businesses decreased by $4 million in 2015 compared with 2014. Net contributions to the East segment's operating income (loss) increased by $13 million in 2014 compared with 2013. During 2014, Talen Energy recorded a $17 million increase to "Energy-related businesses" revenues on the 2014 Statements of Income related to prior periods and the timing of revenue recognition for a mechanical contracting and engineering subsidiary. See Note 1 to the Financial Statements for additional information. Excluding the impact of the 2014 adjustment, the change in 2015 compared with 2014 was an increase of $13 million due to higher margins on existing construction projects at the mechanical contracting and engineering subsidiaries. The change in 2014 compared with 2013 was primarily due to the $17 million revenue adjustment.
Operation and Maintenance
The increase (decrease) in operation and maintenance was due to:
|
| | | | | | | |
| 2015 vs. 2014 | | 2014 vs. 2013 |
East segment: | | | |
RJS - Raven and Sapphire (a) | $ | 104 |
| | $ | — |
|
MACH Gen - Athens and Millennium (a) | 7 |
| | — |
|
Fossil and Hydro (b) | (51 | ) | | (9 | ) |
Nuclear (c) | (21 | ) | | 33 |
|
Talen Energy Marketing (d) | (25 | ) | | 4 |
|
Energy Services (e) | (17 | ) | | 4 |
|
West segment: | | | |
RJS - Jade (a) | 22 |
| | — |
|
MACH Gen - Harquahala (a) | 3 |
| | — |
|
Talen Montana (f) | 23 |
| | (20 | ) |
Other: | | | |
Accelerated stock-based compensation (g) | 25 |
| | — |
|
TSA costs | 29 |
| | — |
|
Restructuring costs (h) | 12 |
| | — |
|
Transaction costs (i) | 20 |
| | — |
|
Separation benefits (j) | (17 | ) | | 17 |
|
Separation costs (k) | (14 | ) | | 16 |
|
Other (l) | (55 | ) | | 1 |
|
Total | $ | 45 |
|
| $ | 46 |
|
(h) | Amounts |
(a) | There are no comparable amounts in the 2014 or 2013 periods as RJS was acquired in June 2015 and MACH Gen was acquired in November 2015. |
| |
(b) | The decrease for 2015 compared with 2012 are comparable2014 and have not been isolatedthe decrease for purposes of comparability. Amounts in 20122014 compared with 2011 were not comparable as 2012 includes nine months2013 was primarily due to lower coal plant outage costs. |
| |
(c) | The decrease for 2015 compared with 2014 was primarily due to $11 million of lower outage costs and $13 million of lower contractor costs supporting operations. The increase in 2014 compared with 2013 was primarily due to higher contractor costs supporting operations. |
| |
(d) | The decrease for 2015 compared with 2014 was primarily due to lower payroll related costs attributable to restructuring activities. |
| |
(e) | The decrease for 2015 compared with 2014 was primarily due to the gain on the sale of Talen Renewable Energy in November 2015. |
| |
(f) | The increase for 2015 compared with 2014 was primarily due to $8 million of higher coal plant outage costs and $7 million of costs associated with the retirement of the Corette plant in 2015. The decrease in 2014 compared with 2013 was primarily due to the elimination of $20 million of rent expense and, therefore, have been isolated for purposes of comparability.associated with the Colstrip lease that was terminated in 2013. |
| |
(g) | Related to the spinoff transaction. See Note 101 to the Financial Statements for information onadditional information. |
| |
(h) | The increase for 2015 compared with 2014 was due to costs recorded in 2015 related to the acquisition.spinoff transaction, including expenses for the FERC-required mitigation plan and legal and professional fees. |
| |
(i) | 2013The increase for 2015 compared with 20122014 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 reservedcosts recorded in 2012. For 2012 compared with 2011, no individual item was significant in comparison2015 related to the prior year.RJS, MACH Gen and mitigation asset sale transactions. |
| |
(j) | The increasesdecrease for 2015 compared with 2014 and the increase in both periods were primarily2014 compared with 2013 was due to higher vegetation management costs.bargaining unit one-time voluntary retirement benefits recorded in 2014 as a result of the ratification of the IBEW Local 1600 three-year labor agreement in June 2014. |
(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)(k) | The decrease in 2013for 2015 compared with 20122014 and the increase in 2014 compared with 2013 was primarily due to costs incurred in 20122014 related to restructuring in anticipation of the WPD Midlands reorganization.spinoff, which included cash severance compensation, lump sum COBRA reimbursement payments and outplacement services. |
(n) | Amounts in 2012 |
(l) | The decrease for 2015 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 20112014 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.corporate expenses. |
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 86 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. |
(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 $26Impairments in 2015 primarily include a $465 million in 2013 compared with 2012 and increased by $21goodwill impairment, a $175 million in 2012 compared with 2011 primarily due to a $25 million pre-tax impairment of the EEI investmentSapphire plants and a $14 million impairment of the C.P. Crane plant (all included in 2012.the East segment). 2013 includes a $65 million impairment of the Corette plant (included in the West segment). These impairments exclude those recorded to "Income (Loss) from Discontinued Operations (net of income taxes)" on the 2014 Statement of Income. See Notes 1 and 18Note 16 to the Financial Statements for additional information.
Depreciation
Depreciation increased by $59 million in 2015 compared with 2014, primarily due to increases in the East and West segments of $31 million and $25 million, primarily related to the acquisitions of RJS Power and MACH Gen. There are no comparable amounts in 2014 and 2013 for RJS or MACH Gen as their acquisition occurred in 2015.
Depreciation decreased by $2 million in 2014 compared with 2013, primarily due to an $8 million increase in the East segment and a $10 million decrease in the West segment. The increase in the East segment was partially due to $13 million from PP&E additions in part due to the completed Holtwood expansion project in 2013. The decrease in the West segment was primarily due to decreases from the impairment of the Corette plant and the write off of leasehold improvement assets in conjunction with the termination of the operating lease at the Colstrip facility, both of which occurred in 2013. See Note 14 to the Financial Statements for additional information on the Corette impairment and Note 6 to the Financial Statements for information on the Colstrip operating lease termination.
Taxes, Other Than Income
Taxes, other than income increased by $8 million for 2015 compared with 2014. This increase was primarily due to $11 million related to RJS, $7 million impacting the East segment and $4 million impacting the West segment. Taxes other than income increased by $4 million in 2014 compared with 2013, within the East segment. There are no comparable amounts in 2014 and 2013 for RJS as the acquisition occurred in 2015.
Other Income (Expense) - net
Other income (expense) - net decreased by $148 million in 2015 compared with 2014 and decreased by $2 million in 2014 compared with 2013. The decrease in 2015 compared with 2014 was primarily due to the recording of a $134 million charge for a termination payment to a remarketing dealer related to an October 2015 debt extinguishment and a $9 million decrease in 2015 in net earnings on the NDT funds. See Note 5 for additional information on the debt extinguishment. The decrease in 2014 compared with 2013 resulted from 2013 including a gain of $8 million related to adjustments to liabilities for a former mining subsidiary partially offset by a $5 million increase in 2014 in net earnings on the NDT funds.
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 |
|
| | | | | | | |
| 2015 vs. 2014 | | 2014 vs. 2013 |
Long-term debt interest expense (a) | $ | 56 |
| | $ | (50 | ) |
MACH Gen (b) | 6 |
| | — |
|
Short-term debt interest expense | 11 |
| | 7 |
|
Capitalized interest (c) | 3 |
| | 14 |
|
Net amortization of debt discounts, premiums and issuance costs (d) | 11 |
| | (4 | ) |
Other | — |
| | (2 | ) |
Total | $ | 87 |
| | $ | (35 | ) |
| |
(a) | Interest relatedThe increase in 2015 compared with 2014 was due to thea debt issuance in April 2011 to supportMay 2015 and the WPD Midlands acquisition. |
(b) | 2013 increased due toassumption of an RJS Power subsidiary's debt issuancesin June 2015 in connection with the RJS Power acquisition, partially offset 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'sa 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.August 2014. The increase in 2012 compared with 2011 is primarily due to four additional months of expense in 2012 of $74from the RJS Power related debt was $35 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 106 to the Financial Statements for information on the acquisition. The decrease in 2014 compared with 2013 was primarily due to the repayment of debt in July and December 2013. |
(g)(b) | In February 2012,Represents interest on long-term debt. There are no comparable amounts in 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,2014 or 2013 periods as MACH Gen was acquired in 2011, PPL Montana reversed its total loss accrual including accrued interest.November 2015. See Note 156 to the Financial Statements for additional information.information on the acquisition. |
(h) | In May |
(c) | The increase in 2014 compared with 2013 PPL Capital Funding remarketed and exchanged junior subordinate notes that were originally issuedwas primarily due to the Holtwood hydroelectric expansion project placed in June 2010 as a component of PPL's 2010 Equity Units.service in November 2013. |
| |
(d) | The increase in 2015 compared with 2014 was due to the write-off of fees associated with Talen Energy Supply's $3 billion syndicated credit facility that was terminated in connection with the spinoff. |
See Note 7 to the Financial Statements for information on 2013 long-term debt activity.Table of ContentsIncome 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) |
|
| | | | | | | |
| 2015 vs. 2014 | | 2014 vs. 2013 |
Change in pre-tax income at current tax rates (a) | $ | (36 | ) | | $ | 298 |
|
RJS (b) | (49 | ) | | — |
|
MACH Gen (b) | (5 | ) | | — |
|
Federal and state uncertain tax benefits recognized (c) | (12 | ) | | — |
|
State deferred tax rate change (d) | (16 | ) | | (16 | ) |
Goodwill impairment (e) | (21 | ) | | — |
|
Federal income tax credits (f) | (9 | ) | | 8 |
|
Federal and state tax return adjustments | (7 | ) | | (6 | ) |
Other | 12 |
| | (9 | ) |
Total | $ | (143 | ) | | $ | 275 |
|
| |
(a) | The valuation allowancesExcludes income taxes related to RJS and MACH Gen as there are no comparable amounts in 2014 or 2013 as their acquisition occurred in 2015. Also excludes the impact of the goodwill impairment recorded in 2015 because the effective tax rate on PPL'sthe impairment does not bear a customary relationship to the recognized loss as a result of a significant portion of the impairment being related to non-deductible goodwill. |
| |
(b) | There are no comparable amounts in the 2014 or 2013 periods as RJS was acquired in June 2015 and MACH Gen was acquired in November 2015. |
| |
(c) | In 2015, open audits for the tax years 2008 - 2011 were settled by PPL with the IRS resulting in a tax benefit of $12 million for Talen Energy's portion of the settlement of previously unrecognized tax benefits. |
| |
(d) | During 2015, 2014 and 2013, Talen Energy recorded adjustments related to its December 31 state deferred tax assets primarily relate to Pennsylvania net operating loss carryforwards. Pennsylvania requires that each corporation fileliabilities as a separate income tax return and has significantresult of 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) | Changeschanges in state apportionment resulted in an increase toand the impact on the future estimated state income tax rate at December 31, 2013rate. |
| |
(e) | Federal and reductionsstate tax impacts attributable to the future estimated state tax rate at December 31, 2012 and 2011. PPLdeductible portion of goodwill that was impaired during the third quarter of 2015. See Note 16 to the Financial Statements for additional information on the goodwill impairment. |
| |
(f) | During 2015, Talen Energy recorded a $15 million deferredbenefit primarily related to the recognition of previously unamortized tax expensecredits as a result of the sale of Talen Renewable Energy in November 2015. During 2013, Talen Energy recorded a $19 million deferred tax benefit in 2012 and a $26 million deferred tax benefit in 2011 related to its state deferredinvestment tax liabilities. |
(c) | In May 2013, the U.S. Supreme Court reversed the December 2011 ruling of the U.S. Court of Appealscredits on progress expenditures 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.Holtwood hydroelectric plant expansion. See Note 56 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.
(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 54 to the Financial Statements for additional information oninformation.
Income (Loss) from Discontinued Operations (net of income taxes.taxes)
Noncontrolling InterestsIncome (Loss) from Discontinued Operations (net of income taxes) for 2014 and 2013 includes the Montana hydroelectric generating facilities which were sold in November 2014. See Note 6 to the Financial Statements for additional information.
"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.
| | 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
Management utilizes "Margins,"Unregulated Gross Energy Margins" is a non-GAAP financial performance measure, that management utilizes as an indicator of the performance offor its business. See PPL's "Results
"Margins" is defined as energy revenues offset by the cost of Operations - Margins" for informationfuel, energy purchases, certain operation and maintenance expenses, primarily ancillary charges, and gross receipts tax, recorded in "Taxes, other than income." This performance measure is relevant due to the volatility in the individual revenue and expense lines on why managementthe Statements of Income that comprise "Margins." This volatility stems from a number of factors, including the required netting of certain transactions with ISOs, RTOs and significant fluctuations in unrealized gains and losses. Such factors could result in gains or losses being recorded in either "Wholesale energy," "Retail energy" or "Energy purchases" on the Statements of Income. This performance measure includes PLR revenues from energy sales to PPL Electric by Talen Energy Marketing, which prior to June 1, 2015, are reflected in "Wholesale energy to affiliate" in the reconciliation table below. "Margins" excludes unrealized (gains) losses on: energy related economic activity, which includes the changes in fair value of positions used to economically hedge a portion of the economic value of the competitive generation assets, full-requirement sales contracts and retail activities; and trading activities. These derivatives are 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 or when realized. Energy related economic activity includes premium amortization associated with options. Unrealized gains and losses related to derivatives and premium amortization associated with options are deferred and included in "Margins" over the delivery period of the item that was hedged or upon realization.
This measure is not intended to replace "Operating Income (Loss)," which is determined in accordance with GAAP, as an indicator of overall operating performance. Other companies may use different measures to analyze and report their results of operations. Management believes this measure provides additional useful criteria to make investment decisions. This
performance measure is usefulused, in conjunction with other information, by senior management to manage Talen Energy's operations and for explanationsanalyze actual results compared with budget.
Reconciliation of the underlying drivers of the changes between periods.Margins
The following tables contain the components from the Statements of Income that are included in this non-GAAP financial measureMargins and a reconciliation to "Operating Income"Income (Loss)" for the years ended December 31.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2015 | | 2014 |
| East Segment | | West Segment | | Reconciling Items (a) | | Operating Income (b) | | East Segment | | West Segment | | Reconciling Items (a) | | Operating Income (b) |
Operating Revenues | | | | | | | | | | | | | | | |
Wholesale energy | $ | 2,531 |
| | $ | 222 |
| | $ | 75 | (c) | | $ | 2,828 |
| | $ | 2,496 |
| | $ | 96 |
| | $ | 61 | (c) | | $ | 2,653 |
|
Wholesale energy to affiliate (d) | 14 |
| | — |
| | — |
| | 14 |
| | 84 |
| | — |
| | — |
| | 84 |
|
Retail energy | 1,039 |
| | 73 |
| | (17 | ) (c) | | 1,095 |
| | 1,135 |
| | 81 |
| | 27 | (c) | | 1,243 |
|
Energy-related businesses | — |
| | — |
| | 544 |
| | 544 |
| | — |
| | — |
| | 601 |
| | 601 |
|
Total Operating Revenues | 3,584 |
| | 295 |
|
| 602 |
|
| 4,481 |
|
| 3,715 |
| | 177 |
|
| 689 |
|
| 4,581 |
|
| | | | | | | | | | | | | | | |
Operating Expenses | | | | | | | | | | | | | | | |
Fuel | 1,038 |
| | 120 |
| | 36 | (c) | | 1,194 |
| | 1,097 |
| | 72 |
| | 27 | (c) | | 1,196 |
|
Energy purchases | 723 |
| | 34 |
| | (81 | ) (c) | | 676 |
| | 971 |
| | 26 |
| | 57 | (c) | | 1,054 |
|
Operation and maintenance | 16 |
| | — |
| | 1,036 |
| | 1,052 |
| | 22 |
| | — |
| | 985 |
| | 1,007 |
|
Impairments (Note 16) | — |
| | — |
| | 657 |
| | 657 |
| | — |
| | — |
| | — |
| | — |
|
Depreciation | — |
| | — |
| | 356 |
| | 356 |
| | — |
| | — |
| | 297 |
| | 297 |
|
Taxes, other than income | 41 |
| | — |
| | 24 |
| | 65 |
| | 43 |
| | — |
| | 14 |
| | 57 |
|
Energy-related businesses | 8 |
| | — |
| | 512 |
| | 520 |
| | 8 |
| | — |
| | 565 |
| | 573 |
|
Total Operating Expenses | 1,826 |
| | 154 |
|
| 2,540 |
|
| 4,520 |
|
| 2,141 |
| | 98 |
|
| 1,945 |
|
| 4,184 |
|
Total | $ | 1,758 |
| | $ | 141 |
|
| $ | (1,938 | ) |
| $ | (39 | ) | | $ | 1,574 |
| | $ | 79 |
|
| $ | (1,256 | ) |
| $ | 397 |
|
| | | | | | 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 | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| 2013 | |
| East Segment | | West Segment | | Reconciling Items (a) | | Operating Income (b) | |
Operating Revenues | | | | | | | | |
Wholesale energy | $ | 3,086 |
| | $ | 98 |
| | $ | (294 | ) (c) | | $ | 2,890 |
| |
Wholesale energy to affiliate (d) | 51 |
| | — |
| | — |
| | 51 |
| |
Retail energy | 933 |
| | 82 |
| | 12 | (c) | | 1,027 |
| |
Energy-related businesses | — |
| | — |
| | 527 |
| | 527 |
| |
Total Operating Revenues | 4,070 |
| | 180 |
|
| 245 |
|
| 4,495 |
| |
| | | | | | | | |
Operating Expenses | | | | | | | | |
Fuel | 966 |
| | 78 |
| | 4 | (c) | | 1,048 |
| |
Energy purchases | 1,265 |
| | 23 |
| | (135 | ) (c) | | 1,153 |
| |
Operation and maintenance | 20 |
| | — |
| | 941 |
| | 961 |
| |
Loss on lease termination | — |
| | — |
| | 697 |
| | 697 |
| |
Impairments | — |
| | — |
| | 65 |
| | 65 |
| |
Depreciation | — |
| | — |
| | 299 |
| | 299 |
| |
Taxes, other than income | 37 |
| | — |
| | 16 |
| | 53 |
| |
Energy-related businesses | 7 |
| | — |
| | 505 |
| | 512 |
| |
Total Operating Expenses | 2,295 |
| | 101 |
|
| 2,392 |
|
| 4,788 |
| |
Total | $ | 1,775 |
| | $ | 79 |
|
| $ | (2,147 | ) |
| $ | (293 | ) | |
| |
(a) | Represents amounts excluded from Margins. |
| |
(b) | As reported on the Statements of Income. |
| |
(c) | Includes unrealized gains (losses) on 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 1915 to the Financial Statements. For 2012, "Unregulated wholesale energy"Also includes unrealized gains (losses) on trading activity of $(37) million, $27 million and "Energy purchases" include a net pre-tax loss$(6) million for 2015, 2014 and 2013. Amounts have been adjusted for option premiums of $35$8 million relatedand $(10) million for 2015 and 2014. To mitigate the risk of oversupply, Talen Energy incurred charges of $41 million during 2015 to reduce its contracted coal deliveries, which is also included in this amount. See Note 11 to the monetizationFinancial Statements for additional information. 2015 also includes net realized gains on certain derivative contracts that were early-terminated of certain full-requirement sales contracts. 2011 includes$13 million and a net pre-tax lossprior period revenue adjustment of $216 million related$(7) |
million. See Note 1 to the Financial Statements for additional information on the revenue adjustment. 2015, 2014 and 2013 includes OCI amortization on non-active derivative positions of $(11) million, $(11) million and $(13) million.
| |
(d) | Amounts recorded prior 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.spinoff for activity with PPL Electric. |
Changes in Margins
The following table shows Margins by segment for the years ended December 31, as well as the change between periods. Margins do not include operations related to those assets classified as discontinued operations. The factors that gave rise to the changes are described following the table.
|
| | | | | | | | | | | | | | | | | | | |
| | | Change |
| 2015 | | 2014 | | 2013 | | 2015 vs. 2014 | | 2014 vs. 2013 |
East segment | $ | 1,758 |
| | $ | 1,574 |
| | $ | 1,775 |
| | $ | 184 |
| | $ | (201 | ) |
West segment | 141 |
| | 79 |
| | 79 |
| | 62 |
| | — |
|
Total | $ | 1,899 |
| | $ | 1,653 |
| | $ | 1,854 |
| | $ | 246 |
| | $ | (201 | ) |
East Segment
East segment Margins increased $162 million in 2015 from the Raven and Sapphire portfolios. There are no comparable amounts in the 2014 or 2013 periods as the acquisition of Raven and Sapphire occurred during 2015.
Excluding the impact of the Raven, Sapphire and MACH Gen acquisitions, East segment Margins increased in 2015 compared with 2014 by $22 million primarily due to higher realized energy prices of $68 million, improved spark spreads of $59 million, higher nuclear availability of $51 million and lower average fuel prices of $24 million, substantially offset by lower capacity prices of $55 million, gains realized in 2014 on certain commodity positions of $46 million, the net effect of unusual market and weather volatility in the first quarter of 2014 as discussed below of $38 million, lower volumes on full-requirement sales contracts of $25 million and retail electric activity of $12 million.
East segment Margins decreased in 2014 compared with 2013 primarily due to lower realized energy prices of $354 million and lower capacity prices of $34 million, partially offset by favorable asset performance of $70 million, gains realized in 2014 on certain commodity positions of $46 million, unusual market and weather volatility in 2014 as discussed below of $38 million and gas optimization of $26 million.
During the first quarter of 2014, the PJM region experienced unusually cold weather conditions, higher demand and congestion patterns, causing rising natural gas and electricity prices in spot and near-term forward markets. Due to these market dynamics, Talen Energy captured opportunities on unhedged generation, which were offset primarily by losses incurred by under-hedged full-requirement sales contracts and retail electric portfolios, which were not fully hedged or able to be fully hedged given the higher load conditions and lack of market liquidity.
West Segment
West segment Margins increased $68 million in 2015 compared with 2014 from the Jade portfolio. There are no comparable amounts in the 2014 and 2013 periods as the acquisition of Jade occurred during 2015.
EBITDA and Adjusted EBITDA
In addition to operating income (loss), EBITDA and Adjusted EBITDA, non-GAAP financial measures are other indicators of performance for Talen Energy's business, with Adjusted EBITDA as the primary financial performance measure used by management to evaluate its business and monitor results of operations.
EBITDA represents net income (loss) before interest expense, income taxes, depreciation and certain amortization. Adjusted EBITDA represents EBITDA further adjusted for certain non-cash and other items that management believes are not indicative of ongoing operations including, but not limited to, unrealized gains and losses on derivative contracts, stock-based compensation expense, asset retirement obligation accretion, impairments, gains and losses on securities in the NDT funds, gains or losses on sales, dispositions or retirements of assets, debt extinguishments and transition, transaction and restructuring costs.
EBITDA and Adjusted EBITDA are not intended to represent cash flows from operations, operating income (loss) or net income (loss) as defined by U.S. GAAP as indicators of operating performance and are not necessarily comparable to similarly-
titled measures reported by other companies. Management cautions investors that amounts presented in accordance with Talen Energy's definitions of EBITDA and Adjusted EBITDA may not be comparable to similar measures disclosed by other companies because not all companies calculate EBITDA and Adjusted EBITDA in the same manner. Talen Energy believes EBITDA and Adjusted EBITDA are useful to investors and other users of these financial statements in evaluating Talen Energy's operating performance because they provide additional tools to compare business performance across companies and across periods. Talen Energy believes that EBITDA is widely used by investors to measure a company's operating performance without regard to such items as interest expense, income taxes, depreciation and amortization, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired. Additionally, Talen Energy believes that investors commonly adjust EBITDA information to eliminate the effect of restructuring and other expenses, which vary widely from company to company and impair comparability. Talen Energy adjusts for these and other items, as management believes that these items would distort their ability to efficiently view and assess the company's core operating trends. In summary, management primarily uses Adjusted EBITDA as a measure of operating performance to assist in comparing performance from period to period on a consistent basis and to readily view operating trends, as a measure for planning and forecasting overall expectations and for evaluating actual results against such expectations, as a measure of certain corporate financial goals used to determine variable compensation and in communications with the Talen Energy Corporation Board of Directors, senior management, shareholders, creditors, analysts and investors concerning Talen Energy's financial performance.
Reconciliations of EBITDA and Adjusted EBITDA
The tables below provide reconciliations of EBITDA and Adjusted EBITDA to operating income (loss) on a segment basis and to net income (loss) on a consolidated basis for the years ended December 31.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2015 | | 2014 |
| East Segment |
| West Segment |
| Other |
| Total | | East Segment | | West Segment | | Other | | Total |
Net income (loss) |
|
|
|
|
|
| $ | (341 | ) | | | | | | | | $ | 410 |
|
(Income) loss from discontinued operations (net of tax) |
|
|
|
|
|
| — |
| | | | | | | | (223 | ) |
Interest expense |
|
|
|
|
|
| 211 |
| | | | | | | | 124 |
|
Income taxes |
|
|
|
|
|
| (27 | ) | | | | | | | | 116 |
|
Other (income) expense - net |
|
|
|
|
|
| 118 |
| | | | | | | | (30 | ) |
Operating income (loss) | $ | 198 |
|
| $ | 2 |
|
| $ | (239 | ) |
| $ | (39 | ) | | $ | 558 |
| | $ | 71 |
| | $ | (232 | ) | | $ | 397 |
|
Depreciation | 327 |
|
| 26 |
|
| 3 |
|
| 356 |
| | 296 |
| | 1 |
| | — |
| | 297 |
|
Other income (expense) - net | 19 |
|
| (2 | ) |
| (135 | ) |
| (118 | ) | | 29 |
| | — |
| | 1 |
| | 30 |
|
EBITDA | $ | 544 |
|
| $ | 26 |
|
| $ | (371 | ) |
| $ | 199 |
| | $ | 883 |
| | $ | 72 |
| | $ | (231 | ) | | $ | 724 |
|
Unrealized (gain) loss on derivative contracts (a) | (175 | ) |
| 25 |
|
| — |
|
| (150 | ) | | 15 |
| | (32 | ) | | — |
| | (17 | ) |
Stock-based compensation expense (b) | — |
|
| — |
|
| 40 |
|
| 40 |
| | — |
| | — |
| | 18 |
| | 18 |
|
(Gain) loss from NDT funds | (15 | ) |
| — |
|
| — |
|
| (15 | ) | | (26 | ) | | — |
| | — |
| | (26 | ) |
ARO accretion | 33 |
|
| 1 |
|
| — |
|
| 34 |
| | 32 |
| | — |
| | — |
| | 32 |
|
Coal contract adjustment (c) | 41 |
| | — |
| | — |
| | 41 |
| | — |
| | — |
| | — |
| | — |
|
Impairments (d) | 657 |
| | — |
| | — |
| | 657 |
| | — |
| | — |
| | — |
| | — |
|
REPS Remarketing | — |
| | — |
| | 134 |
| | 134 |
| | — |
| | — |
| | — |
| | — |
|
Mechanical subsidiary revenue adjustment (e) | — |
| | — |
| | — |
| | — |
| | (17 | ) | | — |
| | — |
| | (17 | ) |
TSA costs | — |
|
| — |
|
| 29 |
|
| 29 |
| | — |
| | — |
| | — |
| | — |
|
Separation benefits (f) | — |
|
| — |
|
| 2 |
|
| 2 |
| | — |
| | — |
| | 33 |
| | 33 |
|
Corette closure costs (g) | — |
|
| 4 |
|
| — |
|
| 4 |
| | — |
| | — |
| | — |
| | — |
|
Terminated derivative contracts (h) | (13 | ) |
| — |
|
| — |
|
| (13 | ) | | — |
| | — |
| | — |
| | — |
|
Revenue adjustment (i) | 7 |
|
| — |
|
| — |
|
| 7 |
| | — |
| | — |
| | — |
| | — |
|
Transaction costs | — |
|
| — |
|
| 20 |
|
| 20 |
| | — |
| | — |
| | — |
| | — |
|
Restructuring costs (j) | — |
|
| — |
|
| 12 |
|
| 12 |
| | — |
| | — |
| | 1 |
| | 1 |
|
Other (k) | 1 |
|
| — |
|
| — |
|
| 1 |
| | 11 |
| | — |
| | — |
| | 11 |
|
Adjusted EBITDA | $ | 1,080 |
|
| $ | 56 |
|
| $ | (134 | ) |
| $ | 1,002 |
| | $ | 898 |
| | $ | 40 |
| | $ | (179 | ) | | $ | 759 |
|
|
| | | | | | | | | | | | | | | | |
| 2013 | |
| East Segment | | West Segment | | Other | | Total | |
Net income (loss) |
|
|
|
|
|
| $ | (230 | ) | |
(Income) loss from discontinued operations (net of tax) |
|
|
|
|
|
| (32 | ) | |
Noncontrolling interest | | | | | | | 1 |
| |
Interest expense |
|
|
|
|
|
| 159 |
| |
Income taxes |
|
|
|
|
|
| (159 | ) | |
Other (income) expense - net |
|
|
|
|
|
| (32 | ) | |
Operating income (loss) | $ | 652 |
| | $ | (750 | ) | | $ | (195 | ) |
| $ | (293 | ) | |
Depreciation | 288 |
| | 11 |
| | — |
| | 299 |
| |
Other income (expense) - net | 30 |
| | — |
| | 2 |
|
| 32 |
| |
Noncontrolling interest | (1 | ) | | — |
| | — |
|
| (1 | ) | |
EBITDA | $ | 969 |
|
| $ | (739 | ) |
| $ | (193 | ) |
| $ | 37 |
| |
Unrealized (gain) loss on derivative contracts (a) | 133 |
| | 3 |
| | — |
|
| 136 |
| |
Stock-based compensation expense (b) | — |
| | — |
| | 16 |
|
| 16 |
| |
(Gain) loss from NDT funds | (22 | ) | | — |
| | — |
|
| (22 | ) | |
ARO accretion | 29 |
| | — |
| | — |
|
| 29 |
| |
Impairments (d) | — |
| | 65 |
| | — |
| | 65 |
| |
Loss on lease termination (Note 6) | — |
| | 697 |
| | — |
|
| 697 |
| |
Other (k) | 13 |
| | (2 | ) | | — |
|
| 11 |
| |
Adjusted EBITDA | $ | 1,122 |
|
| $ | 24 |
|
| $ | (177 | ) |
| $ | 969 |
| |
(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)(a) | Includes economic activity related to fuel as described inRepresents unrealized gains (losses) on derivatives. See "Commodity Price Risk (Non-trading) - Economic Activity" withinand "Commodity Price Risk (Trading)" in Note 1915 to the Financial Statements. 2012Statements for additional information on derivatives. Amounts have been adjusted for option premiums of $8 million and $(10) million for 2015 and 2014. |
| |
(b) | 2015 includes a net pre-tax loss of $29 million related to coal contract modification payments. 2011 includes pre-tax credits of $57 millioncharge for the spent nuclear fuel litigation settlement. |
(f) | Representsacceleration of expense as a result of 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. |
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.spinoff. See Note 181 to the Financial Statements for additional information. For periods prior to June 2015, represents the portion of PPL's stock-based compensation cost allocable to Talen Energy. Amounts prior to June 2015 were cash settled with a former affiliate. |
| |
(c) | To mitigate the risk of oversupply, Talen Energy incurred pre-tax charges of $41 million in 2015 in connection with an agreement to reduce its contracted coal deliveries. See Note 11 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 payments2015 includes charges for goodwill and certain long-lived assets. 2013 includes a charge for the use of certain Montana streambeds. As a result, in 2011, PPL Montana reversed its total loss accrual.Corette plant and related emission allowances. See Note 15Notes 14 and 16 to the Financial Statements for additional information. |
| |
(e) | Amounts in 2013 compared with 2012 are comparableIn 2014, Talen Energy recorded $17 million to "Energy-related businesses" revenues related to prior periods and have not been isolatedthe timing of revenue recognition for purposes of comparability. Amounts in 2012 compared with 2011 were not comparable as 2012 includes nine months of expensea mechanical contracting and therefore, have been isolated for purposes of comparability.engineering subsidiary. 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.
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 $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.
Other Income (Expense) - net
See Note 17 to the Financial Statements for details.
Interest Income from Affiliates
Interest income from affiliates decreased by $6 million in 2012 compared with 2011, 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 151 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) |
(a) | The valuation allowances recorded on PPL |
(f) | In June 2014, Talen Energy Supply's state deferred tax assets primarily relate to Pennsylvania net operating loss carryforwards. Pennsylvania requires that each corporation filelargest IBEW local ratified a separate income tax return and has significant annual limitations onnew three-year labor agreement. In connection with the deduction for net operating loss carryforwards. Currently, Pennsylvania allows an annual maximum deduction equal to the greaternew agreement, estimated bargaining unit one-time voluntary retirement benefits of $3$17 million or 20%were recorded. In addition, 2014 includes separation costs of taxable income. Recent legislation increased the annual maximum deduction to the greater of $5$16 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 filingspinoff transaction. |
| |
(g) | Operations were suspended and the Corette plant was retired in March 2015. |
| |
(h) | Represents net realized gains on certain derivative contracts that were early-terminated due to the spinoff transaction. |
| |
(i) | Relates to a prior period revenue adjustment for the receipt 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. |
| revenue under a transmission operating agreement with Talen Energy Supply's former affiliate, PPL Electric. See Note 51 to the Financial Statements for additional informationinformation. |
| |
(j) | Costs related to the spinoff transaction, including expenses associated with the FERC-required mitigation and legal and professional fees. |
| |
(k) | All periods include OCI amortization on income taxes.non-active derivative positions and 2015 includes a gain on the sale of Talen Renewable Energy. |
Changes in Adjusted EBITDA
The following table shows Adjusted EBITDA by segment for the years ended December 31 as well as the change between periods. The factors that gave rise to the changes are described following the table.
|
| | | | | | | | | | | | | | | | | | | |
| | | Change |
| 2015 | | 2014 | | 2013 | | 2015 vs. 2014 |
| 2014 vs. 2013 |
East | $ | 1,080 |
| | $ | 898 |
| | $ | 1,122 |
| | $ | 182 |
| | $ | (224 | ) |
West | 56 |
| | 40 |
| | 24 |
| | 16 |
| | 16 |
|
Other | (134 | ) | | (179 | ) | | (177 | ) | | 45 |
| | (2 | ) |
Total | $ | 1,002 |
| | $ | 759 |
| | $ | 969 |
| | $ | 243 |
| | $ | (210 | ) |
PPL Electric: Earnings, Margins and StatementTable of
Income AnalysisContents
East Segment
Earnings
| | | 2013 | | 2012 | | 2011 |
| | | | | | | | | | |
Net Income Available to PPL | | $ | 209 | | $ | 132 | | $ | 173 |
Excluding special items, pre-tax earningsThe increase in 2013the East segment in 2015 compared with 2012 increased2014 was primarily due to higher distribution base ratesMargins driven by the addition of the Raven and Sapphire operations, higher realized energy prices, improved spark spreads, higher nuclear availability and lower average fuel prices. These factors were partially offset by lower capacity prices, gains that became effective January 1, 2013, higher transmission margins from additional capital investments,were realized in 2014 on certain commodity positions, the net effect of unusual market and weather volatility in the first quarter of 2014, lower operationvolumes on full-requirements sales contracts, and maintenance expense and higher distributionretail electric sales volume due to weather,activity. The net improvements in Margins were partially offset by higher depreciation.operation and maintenance expenses, reflecting the addition of the Raven and Sapphire operations partially offset by lower outage costs for coal-fired units and other cost reductions attributable to the spinoff from PPL.
Excluding special items, pre-tax earningsThe decrease in 2012the East segment in 2014 compared with 2011 decreased2013 was primarily due to higher operationlower Margins driven by lower realized energy and maintenance expense, higher incomecapacity prices, partially offset by favorable asset performance, gains on certain commodity positions and non-income taxes, lower distribution margins as a resultnet benefits of mildunusual market and weather earlyvolatility in the year, higher depreciation,first quarter of 2014.
West Segment
The increase in the West segment in 2015 compared with 2014 was primarily due to the addition of the Jade operations in Texas, partially offset by higher transmission revenue and lower financing costscoal-fired plant outage costs.
The increase in the West segment in 2014 compared with 2013 was primarily due to the redemptionelimination of $250 million of preferred securities.
The table below quantifiesrent expense associated with the changesColstrip lease, which was terminated in the components of Net Income Available to PPL between these periods, which reflect amounts classified as Pennsylvania Gross Delivery Margins on a separate 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 the Statements of Income that are included in this non-GAAP financial measure and a reconciliation to "Operating Income."
| | | | | | 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 |
December 2013.
Other Operation and Maintenance
The increase (decrease) in other operation and maintenance was due to:
| | 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 20132015 compared with 2012, and by $14 million in 2012 compared with 2011,2014 was primarily due to net PP&E additions.
Taxes, Other Than Income
Taxes, other than income increased by $1 million in 2012 compared with 2011. The increase waslower corporate expenses, which were 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 increase (decrease) in financing costs was due to:
| | 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 increase was due to debt issuances in August 2012 and July 2013. |
(b) | The decrease was due to the June 2012 redemption of all 2.5 million shares of preference stock. |
Income Taxes
The increase (decrease) in income taxes was due to:
| | 2013 vs. 2012 | | 2012 vs. 2011 |
| | | | | | |
Change in pre-tax income | | $ | 47 | | $ | (22) |
Federal and state tax reserve adjustments (a) | | | (1) | | | 1 |
Federal and state tax return adjustments (b) | | | (8) | | | 11 |
Depreciation not normalized (c) | | | 2 | | | 9 |
Other | | | | | | 1 |
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 relatedcost reductions attributable to the flow-through impact of Pennsylvania regulated 100% bonus tax depreciation.
(c) | During 2011, the Pennsylvania Department of Revenue issued interpretive guidance on the treatment of bonus depreciation for Pennsylvania income tax purposes. The guidance allows 100% bonus depreciation for qualifying assets in the same year bonus depreciation is allowed for federal income tax purposes. The 100% Pennsylvania bonus depreciation deduction created a current state income tax benefit for the flow-through impact of Pennsylvania regulated state tax depreciation. The federal provision for 100% bonus depreciation generally applies to property placed in service before January 1, 2012. The placed in-service deadline 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. |
spinoff from PPL.
See Note 5 to"Margins" and "Statement of Income Analysis" above for a more detailed analysis of the Financial Statements for additional information on income taxes.changes.
LKE: Earnings, Margins and Statement of Income AnalysisFinancial Condition
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."
| | | | | | 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. |
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.
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 | | | | | | | | | | |
(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.
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 |
| | | | | | 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. |
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.
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
(All Registrants)
The Registrants expect to continue to have adequate liquidity available through operating cash flows, cash and cash equivalents, credit facilities and commercial paper issuances. Additionally, subject to market 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.
The Registrants'Talen Energy's cash flows from operations and access to cost-effectivecost effective bank and capital markets are subject to risks and uncertainties including, but not limited to:
· | any adverse outcome of legal proceedings and investigations with respect to the Registrants' current and past business activities; |
· | changes 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 the Registrants' or their rated subsidiaries' credit ratings that could adversely affect their 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. |
(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)
uncertainties. See "Item 1A. Risk Factors" for furthera discussion of risks and uncertainties that could affect the Registrants'Talen Energy's cash flows.
The RegistrantsTalen Energy had the following at:at December 31:
| | | | 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 | | | 901 | | | 413 | | | 140 | | | 43 | | | 22 | | | 21 |
Short-term debt | | | 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 | | | | | | | | | | | | |
(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. |
|
| | | | | | | | | | | |
| 2015 | | 2014 | | 2013 |
Cash and cash equivalents | $ | 141 |
| | $ | 352 |
| | $ | 239 |
|
Short-term debt | 608 |
| | 630 |
| | — |
|
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 | 2015 | | 2014 | | 2013 | | 2015 vs. 2014 | | 2014 vs. 2013 |
2013 | | | | | | | | | | | | | | | | | | | |
Operating activities | | $ | 2,857 | | $ | 410 | | $ | 523 | | $ | 911 | | $ | 356 | | $ | 495 | $ | 768 |
| | $ | 462 |
| | $ | 410 |
| | $ | 306 |
| | $ | 52 |
|
Investing activities | | | (4,295) | | | (631) | | | (1,080) | | | (1,493) | | | (567) | | | (853) | (915 | ) | | 497 |
| | (631 | ) | | (1,412 | ) | | 1,128 |
|
Financing activities | | | 1,631 | | | 47 | | | 442 | | | 574 | | | 197 | | | 358 | (64 | ) | | (846 | ) | | 47 |
| | 782 |
| | (893 | ) |
| | | | | | | | | | | | | | | | | | | |
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 | |
Operating Activities
The components of the change in cash provided by (used in) operating activities were 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) |
| | | | | | | |
| 2015 vs. 2014 | | 2014 vs. 2013 |
Change - Cash Provided (Used) | | | |
Net income | $ | (751 | ) | | $ | 639 |
|
Non-cash components | 919 |
| | (656 | ) |
Working capital | 199 |
| | (46 | ) |
Defined benefit plan funding | (39 | ) | | 78 |
|
Other operating activities | (22 | ) | | 37 |
|
Total | $ | 306 |
| | $ | 52 |
|
A significant portion of PPL's Supply segment and PPL Energy Supply'sTalen Energy's operating cash flows is derived from its competitive baseload generation activities. PPLTalen Energy 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 1915 to the Financial Statements for further discussion. Despite PPL'sTalen Energy's hedging practices, future cash flows from operating activities from its Supply segment are influenced by energy and capacity prices and, therefore, will fluctuate from period to period.
PPL's and PPL Energy Supply'sTalen Energy's contracts for the sale and purchase of electricity and fuel often require cash collateral or cash equivalents (e.g. letters of credit), 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' or PPLTalen 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 PPLor as a result of a downgrade in credit ratings, Talen Energy Supply estimateestimates that, based on theirits December 31, 20132015 positions, theyit would have been required to post additional collateral of approximately $406$227 million for PPL and approximately $318 million for PPL Energy Supply with respect to electricity and fuel contracts. PPL and PPLTalen Energy Supply had adequate liquidity sources at December 31, 20132015 if theyit would have been required to post this additional collateral. PPL and PPLTalen Energy Supply havehas in place 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)Talen Energy had a $306 million increase in cash provided by operating activities in 2015 compared with 2014.
PPL'sNet income (loss) decreased by $751 million between the periods. However, the decrease was more than offset by $919 million of non-cash components. The non-cash components consisted primarily of an increase in goodwill and other asset impairments of $642 million, a decrease in gains on the sale of assets of $306 million, an increase in non-cash amortization of $59 million, partially offset by an increase in unrealized gains on hedging and other hedging activities of $123 million. The increase in cash from operating activities from changes in working capital was partially due to a decrease in accounts receivable, fuel, materials and supplies, prepayments and increases in counterparty collateral (due in part to market price movement), partially offset by decreases in accounts payable. The decrease in fuel, materials and supplies related to increases that occurred in 2014 from coal inventory build-up and increases in fuel oil inventory at higher average prices. The decrease to accounts payable was related to the timing of certain plant outage payments, the change in market prices of gas and the settlement of the PPL affiliated accounts payable in advance of the June 1, 2015 spinoff. The decrease in prepayments was primarily due to income tax payments made in 2014.
Pension funding was $39 million higher in 2015.
Talen Energy had a $52 million increase in cash provided by operating activities in 2014 compared with 2013.
Net income improved by $639 million between the periods, however, this included an additional $656 million of net non-cash benefits, including a $315 million pre-tax gain in 2014 on the sale of the Montana hydroelectric generating facilities, a $426 million charge in 2013 to terminate the operating lease arrangement for interests in the Montana Colstrip facility and acquire the previously leased interests, and $167 million of lower unrealized losses on hedging activities. These non-cash benefits were partially offset by a $270 million decrease in deferred income tax benefits. The net $17 million decline from net income forand non-cash adjustments in 2014 compared with 2013 includesreflects lower Margins, higher operation and maintenance expenses and other factors. Cash provided by operating activities in 2014 included a $176 million payment to PPL in November 2014 to satisfy the tax liability related to the gain on the sale of the Talen Montana hydroelectric facilities. Cash provided by operating activities in 2013 included a $271 million
payment made in December 2013 related toin connection with terminating the operating lease arrangement for interests in the Montana Colstrip facility in Montana and acquiring the previously leased interests. A portion of this payment
Pension funding 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$78 million lower 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 2012 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 Corette facility, offset by a $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 was partially due to net proceeds of $104 million for the settlement in 2013 of forward starting interest rate swaps.2014.
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 from changes in components of working capital was primarily due to changes in prepayments (primarily due to the receipt in 2011 of a 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 $156 million in returns of counterparty collateral. Included in the change in cash from 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 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.
For 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 from 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 was 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 accounts 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 proceeds 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.
(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 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 lower taxable income in 2012, partially offset by changes in receivables and unbilled revenues due to milder December weather in 2011 than in 2012 and 2010.
Investing Activities
(All Registrants)
The components of the change in cash provided by (used in) investing activities were as follows.follows |
| | | | | | | |
| 2015 vs. 2014 | | 2014 vs. 2013 |
Change - Cash Provided (Used) | | | |
Expenditures for PP&E | $ | (35 | ) | | $ | 167 |
|
Acquisitions & divestitures, net | (1,387 | ) | | 900 |
|
Restricted cash and cash equivalent activity | 195 |
| | (86 | ) |
Purchase and sale of investments, net | — |
| | (1 | ) |
Other investing activities | (185 | ) | | 148 |
|
Total | $ | (1,412 | ) | | $ | 1,128 |
|
| | | | | | | 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 2013In 2015 compared with 2012,2014, "Acquisitions & divestitures, net" primarily reflects the changeNovember 2015 purchase of MACH Gen for $603 million and 2014 includes proceeds from the sale of the Talen Montana hydroelectric generating facilities, partially offset by proceeds of $116 million from the sale of the Talen Renewable Energy in "ExpendituresNovember 2015. See Note 6 to the Financial Statements for PP&E" was due to increases for projects to enhance system reliability at WPDinformation on the acquisition 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.divestitures. The change in "Restricted cash and cash equivalent activity" relates to collateral requirements to support Talen Energy's commodity hedging program. This change is primarily due to changes in forward energy commodity prices. The change in "Other investing activities" was primarily due to the 2014 receipt of $164 million related to margin deposit returns in 2012 at PPL Energy Supply.a U.S. Department of the Treasury grant for the Rainbow Dam and Holtwood hydroelectric expansion capital projects.
For PPL, in 2012In 2014 compared with 2011,2013, the changedecrease in "Expenditures for PP&E" was partially 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,made in 2013 compared with 2012,for the change inHoltwood hydroelectric expansion project. "Acquisitions & divestitures, net" related toreflects the disbursement in 2012 for2014 sale of the Ironwood Acquisition.Talen Montana hydroelectric generating facilities. See Note 106 to the Financial StatementStatements for additional information.information on the sale. 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""Other investing activities" was due to increasesthe receipt of $164 million in 2014 from U.S. Department of Treasury grants for projects to enhance system reliabilitythe Rainbow Dam and the Susquehanna-Roseland transmission project.Holtwood hydroelectric expansion capital projects.
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 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 for the years 2014 through 2018.
For LKE, LG&E and KU, in 2012 compared with 2011, cash used in investing activities changed as a result of an increase in expenditures 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 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 the remarketing agent in 2008.
Financing Activities
(All Registrants)
The components of the change in cash provided by (used in) financing activities were 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 |
| | | | | | | 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 |
|
| | | | | | | |
| 2015 vs. 2014 | | 2014 vs. 2013 |
Change - Cash Provided (Used) | | | |
Capital contributions from/distributions to predecessor member, net | $ | 1,032 |
| | $ | (2,336 | ) |
Debt issuances/redemptions, net | 574 |
| | 438 |
|
Change in short-term debt, net | (792 | ) | | 986 |
|
Other | (32 | ) | | 19 |
|
Total | $ | 782 |
| | $ | (893 | ) |
(a) | Includes net increase (decrease) in notes payable with affiliates. |
Talen Energy required $783 million less in financing sources for 2015 compared with 2014. In 2015, as a result of the terms of the spinoff transaction, the improvement in capital contributions/distributions to predecessor member, net resulted from a reduction in activity with PPL Energy Funding Corporation. Changes in cash used related to short-term debt resulted from proceeds from 2014 borrowings of $630 million that were needed at that time to fund increased collateral requirements to support Talen Energy's commodity hedging program that were then repaid in 2015 using the $591 million of net proceeds from the issuance of long-term debt. In addition, in 2015, in connection with the RJS Power acquisition, $38 million of short-term debt borrowings under the then-outstanding RJS Power Holdings, LLC credit facility were repaid and the facility was terminated in connection with the acquisition.
(PPL)In 2014, financing activities included distributions of $836 million to PPL of the proceeds from the Talen Montana hydroelectric generating facilities sale, net of a tax liability payment and proceeds from the U.S. Department of Treasury grant for the Holtwood hydroelectric expansion capital project.
In 2013, financing activities included net capital contributions of $1.1 billion from PPL in 2013 compared with 2012, 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 contributedEnergy Funding Corporation to PPLTalen Energy Supply to fund a $300 million debt maturity, tomaturities, repay short-term debt and terminate the operating lease arrangement for interests in the Montana Colstrip facility in Montana and acquire the previously leased interests for $271interests. Debt repayments included a $300 million debt maturity and fund athe $437 million repayment by an unconsolidated trust 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 2013 of $1.1 billion that were contributed to PPL 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.
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 issuances 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 LKE in 2011.
(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 the Registrants'Talen Energy's plans to issue debt and equity securities,access the capital markets, as well as a discussion of credit facility capacity available to the Registrants.Talen Energy Supply. Also see "Forecasted Uses of Cash" for a discussion of PPL's plans to pay dividends on common securities in the future, as well as the Registrants'Talen Energy Supply's and a subsidiary's maturities of long-term debt.
Long-term Debt and Equity Securities (All Registrants)
Long-term debt and equity securitiesTalen Energy activity for 20132015 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 | | | |
|
| | | | | | | | | | | | |
| | Debt | | Stock Issuances |
| | Issuances (a) | | Retirements | |
| | | | | | |
Cash Transactions | | $ | 600 |
| | $ | 335 |
| | $ | — |
|
Non-cash Transactions (b) | | 1,950 |
| | 231 |
| | 902 |
|
| |
(a) | Issuances are net of pricing discounts, where applicable and excludeexcludes the impact of debt issuance costs. |
| |
(b) | Net stock issuances"Debt Issuances" include activity related to various stocklong-term debt that remained outstanding as part of the RJS Power and incentive compensation plans and other equity transactions. See Overview - "Financial and Operational Developments" for information regarding issuance s from the equity forward agreementsMACH Gen acquisitions and the 2010 Equity Units. The activity is netremarketing and exchange of $74 million forPEDFA debt. "Retirements" represents the repurchaseremarketing and exchange of PPLPEDFA debt. "Stock Issuances" only applies to Talen Energy Corporation and includes common stock. |
(c) | The transaction primarily includes $1.150 billion relatingstock issued 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.Riverstone Holders in connection with the RJS Power acquisition based on the June 1, 2015 closing "when-issued" market price. |
See Note 75 to the Financial Statements for additional information about long-term debt securities and Note 1 to the Financial Statements for additional information on equity securities.issued as part of the spinoff from PPL and simultaneous acquisition of RJS Power.
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
(All Registrants)
The Registrants expectTalen Energy expects to continue to have adequate liquidity available from operating cash flows, cash and cash equivalents and credit facilities and commercial paper issuances.arrangements. Additionally, subjectalthough Talen Energy currently does not plan to market conditions, the Registrants and their subsidiaries may borrow inaccess the capital markets, and PPLit may decide to do so based on market conditions. The discussion below regarding credit arrangements of Talen Energy Supply PPL Electric, LKE, LG&E and KU anticipate receiving equity contributions from their parent or member in 2014.apply to Talen Energy Corporation through consolidation.
Revolving Credit Facilities
At December 31, 2013,Talen Energy Supply and a subsidiary maintain credit facilities to enhance liquidity and provide credit support. The amounts "Borrowed" below are recorded as "Short-term debt" on the Balance Sheets. The total committed borrowing capacity under outstanding credit facilities and the use of this borrowing capacity at December 31, were:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2015 | | 2014 |
| Committed Capacity | | Borrowed | | Letters of Credit Issued | | Unused Capacity | | Committed Capacity | | Borrowed | | Letters of Credit Issued | | Unused Capacity |
Credit Facilities | $ | 2,010 |
| | $ | 608 |
| | $ | 194 |
| | $ | 1,208 |
| | $ | 3,150 |
| | $ | 630 |
| | $ | 259 |
| | $ | 2,261 |
|
ExternalOn June 1, 2015, in connection with the completion of the spinoff transaction, Talen Energy Supply entered into the Talen Energy Supply RCF and replaced Talen Energy Supply's previously existing $3 billion unsecured syndicated credit facility that existed at December 31, 2014. At December 31, 2014, the $630 million of outstanding principal amount under the old facility was repaid prior to the termination of the old facility and any outstanding letters of credit were transferred to the Talen Energy Supply RCF.
The Talen Energy Supply RCF provides capacity for letters of credit and short-term borrowings and requires Talen Energy Supply to maintain a senior secured net debt to adjusted EBITDA ratio (as defined in the agreement) of less than or equal to 4.50 to 1.00 as of the last day of any fiscal quarter. Talen Energy Supply pays customary fees on the facility and borrowings bear interest at its option at either a defined base rate or LIBOR-based rates, in each case plus an applicable margin.
| | | | | | | | | 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 |
Table of ContentsThe commitments at December 31, 2015 under the Talen Energy Supply RCF are provided by a diverse bank group, with no one bank or its affiliates providing an aggregate commitment of more than 8% of the total committed capacity. In February 2016, Talen Energy repaid all $600 million of its then-outstanding short-term debt obligations under the Talen Energy Supply RCF, primarily with cash proceeds from the sale of Ironwood.
(a) | The syndicated credit facilities, as well as KU's letter of credit facility, each contain a financial covenant requiring debt to total capitalization not to exceed 65% for PPL Energy Supply and 70% for PPL, PPL Electric, LKE, LG&E and KU, as calculated in accordance with the facility, and other customary covenants. See Note 7 to the Financial Statements for additional information regarding these credit facilities. |
(b) | The commitments under the domestic credit facilities are provided by a diverse bank group, with no one bank and its affiliates providing an aggregate commitment of more than the following percentages of the total committed capacity: PPL - 8%, PPL Energy Supply - 10%, PPL Electric - 6%, LKE - 12%, LG&E - 6% and KU - 22%. |
(c) | Each company pays customary fees under its respective syndicated credit facility, as does KU under its letter of credit facility, and borrowings generally bear interest at LIBOR-based ratesThe New MACH Gen RCF remained outstanding after the November 2015 MACH Gen acquisition. The New MACH Gen RCF provides capacity for short-term borrowings and up to $120 million of letters of credit. New MACH Gen pays customary fees on the facility and borrowings bear interest at 12-month LIBOR plus an applicable margin. |
(d) | The facilities 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 RAV, 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. |
In addition to the financial covenants noted in the table above, the credit agreements governing the above credit facilities contain various other covenants. Failure to comply with the covenants after applicable grace periods could result in acceleration of repayment of borrowings and/or termination of the agreements. The Registrants monitorTalen Energy monitors compliance with the covenants on a regular basis. At December 31, 2013, the Registrants were2015, Talen Energy was in compliance with these covenants. At this time the Registrants believeTalen Energy believes that these covenants and other borrowing conditions will not limit access to these funding sources.
83
Talen Energy Supply maintains a $1.3 billion secured energy marketing and trading facility whereby Talen Energy Supply will receive credit to be applied to satisfy collateral posting obligations related to Talen Energy's energy marketing and trading activities with counterparties participating in the facility.See Note 75 to the Financial Statements for further discussion of the Registrants'Talen Energy's credit facilities.and other arrangements.
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, 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 are supported by the respective Registrant's Syndicated Credit Facility.
When outstanding, the amounts are reflected in "Short-term debt" on the Balance Sheets. The following amounts were outstanding at:
| | 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 and its subsidiaries 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 PPL Capital 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 additional shares of common stock in 2014.
(PPL Energy Supply)
Subject to market conditions, PPL Energy Supply may issue long-term debt securities in 2014 to 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 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.
(LKE, LG&E and KU)
LKE, LG&E and KU currently do not plan to issue long-term debt securities in 2014.
Contributions from Parent/Member (All Registrants except PPL)
From time to time, PPL Energy Supply's and LKE's members or the parents of PPL Electric, LG&E and KU make capital contributions to subsidiaries. The proceeds from these contributions are used to fund capital expenditures and for other general corporate purposes and, in the case of LKE, to make contributions to 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, the RegistrantsTalen Energy currently expectexpects to incur future cash outflows for capital expenditures, various contractual obligations payment of dividends on its common stock, distributions by PPL Energy Supply and LKE to their members, and possibly thecould purchase or redemption ofredeem a portion of its or a subsidiary's outstanding debt securities.
Capital Expenditures
The table below shows the Registrants'Talen Energy's current capital expenditure projections for the years 20142016 through 2018. Expenditures for the domestic regulated utilities are expected to be recovered through rates, pending regulatory approval.2020.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Projected |
| | Total | | 2016 | | 2017 | | 2018 | | 2019 | | 2020 |
| | | | | | | | | | | | |
Sustenance | | $ | 1,310 |
| | $ | 233 |
| | $ | 305 |
| | $ | 295 |
| | $ | 257 |
| | $ | 220 |
|
Nuclear fuel | | 608 |
| | 82 |
| | 114 |
| | 132 |
| | 137 |
| | 143 |
|
Growth | | 113 |
| | 108 |
| | 3 |
| | 1 |
| | 1 |
| | — |
|
Information technology | | 120 |
| | 54 |
| | 15 |
| | 20 |
| | 17 |
| | 14 |
|
Environmental | | 137 |
| | 17 |
| | 15 |
| | 16 |
| | 50 |
| | 39 |
|
Regulatory | | 61 |
| | 26 |
| | 26 |
| | 8 |
| | 1 |
| | — |
|
Discretionary | | 31 |
| | 6 |
| | 6 |
| | 7 |
| | 6 |
| | 6 |
|
Total (a) (b) | | $ | 2,380 |
| | $ | 526 |
| | $ | 484 |
| | $ | 479 |
| | $ | 469 |
| | $ | 422 |
|
| | | | | | | 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 |
| | | | | | | 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 expendituresDoes not include the Holtwood and Lake Wallenpaupack hydroelectric projects, the Ironwood natural gas combined-cycle plant, and the C.P. Crane coal-fired power plant, which have been sold or are under an agreement to sell. See Note 6 to the Financial Statements for additional information on the divestitures. |
| |
(b) | Includes capitalized interest, and AFUDC, which, areover all years, is expected to total approximately $174 million for PPL; $73 million for PPL Energy Supply and $57 million for PPL Electric.$60 million. |
(b) | Includes expenditures for certain intangible assets. |
(c) | The 2014 total excludes amounts included in accounts payable as of December 31, 2013. |
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 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 to 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 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 information on significant development plans. See "Item 2. Properties" for information on planned projects to expand capacity.
The Registrants plan to fund capital expenditures in 2014 with proceeds from the sources noted below.50
| | | | | Energy | | | | | | | | | | | | |
Source | | PPL | | Supply | | PPL Electric | | LKE | | LG&E | | KU |
| | | | | | | | | | | | | | | | | | |
Cash on hand | | | X | | | X | | | X | | | X | | | X | | | X |
Cash from operations | | | X | | | X | | | X | | | X | | | X | | | X |
Issuance of common stock | | | X | | | | | | | | | | | | | | | |
Issuance of long-term debt securities | | | X | | | | | | X | | | | | | | | | |
Equity contributions from parent/member | | | | | | X | | | X | | | X | | | X | | | X |
Short-term debt | | | X | | | X | | | X | | | X | | | X | | | X |
| | | | | | | | | | | | | | | | | | |
X = Expected funding source. | | | | | | | | | | | | | | | | | | |
Contractual Obligations
The RegistrantsTalen Energy Supply and its subsidiaries have assumed various financial obligations and commitments in the ordinary course of conducting business. At December 31, 2013,2015, estimated contractual cash obligations were as follows.
| | | Total | | 2014 | | 2015 - 2016 | | 2017 - 2018 | | After 2018 |
PPL | | | | | | | | | | | | | | | |
Long-term Debt (a) | | $ | 20,935 | | $ | 314 | | $ | 2,118 | | $ | 757 | | $ | 17,746 |
Interest on Long-term Debt (b) | | | 17,550 | | | 960 | | | 1,838 | | | 1,736 | | | 13,016 |
Operating Leases (c) | | | 201 | | | 59 | | | 70 | | | 30 | | | 42 |
Purchase Obligations (d) | | | 7,060 | | | 2,379 | | | 2,476 | | | 981 | | | 1,224 |
Other Long-term Liabilities | | | | | | | | | | | | | | | |
| Reflected on the Balance | | | | | | | | | | | | | | | |
| Sheet under GAAP (e) (f) | | | 1,048 | | | 303 | | | 637 | | | 108 | | | |
Total Contractual Cash Obligations | | $ | 46,794 | | $ | 4,015 | | $ | 7,139 | | $ | 3,612 | | $ | 32,028 |
PPL Energy Supply | | | | | | | | | | | | | | | |
Long-term Debt (a) | | $ | 2,547 | | $ | 304 | | $ | 658 | | $ | 407 | | $ | 1,178 |
Interest on Long-term Debt (b) | | | 1,025 | | | 137 | | | 209 | | | 147 | | | 532 |
Operating Leases (c) | | | 83 | | | 31 | | | 36 | | | 13 | | | 3 |
Purchase Obligations (d) | | | 2,559 | | | 738 | | | 826 | | | 643 | | | 352 |
Other Long-term Liabilities | | | | | | | | | | | | | | | |
| Reflected on the Balance | | | | | | | | | | | | | | | |
| Sheet under GAAP (e) (f) | | | 30 | | | 30 | | | | | | | | | |
Total Contractual Cash Obligations | | $ | 6,244 | | $ | 1,240 | | $ | 1,729 | | $ | 1,210 | | $ | 2,065 |
| | | 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 |
|
| | | | | | | | | | | | | | | | | | | | |
| | Total | | 2016 | | 2017-2018 | | 2019-2020 | | After 2020 |
Long-term Debt (a) | | $ | 4,228 |
| | $ | 396 |
| | $ | 429 |
| | $ | 1,423 |
| | $ | 1,980 |
|
Interest on Long-term Debt (b) | | 1,560 |
| | 236 |
| | 408 |
| | 306 |
| | 610 |
|
Operating Leases (c) | | 81 |
| | 19 |
| | 26 |
| | 10 |
| | 26 |
|
Purchase Obligations (d) | | 2,703 |
| | 621 |
| | 948 |
| | 319 |
| | 815 |
|
Other Long-term Liabilities Reflected on the Balance Sheet under GAAP (e)(f) | | 40 |
| | 40 |
| | — |
| | — |
| | — |
|
Total Contractual Cash Obligations | | $ | 8,612 |
| | $ | 1,312 |
| | $ | 1,811 |
| | $ | 2,058 |
| | $ | 3,431 |
|
| |
(a) | Reflects principal maturities only based on stated maturity dates, except for PPL Energy Supply's 5.70% REset Put Securities (REPS).dates. 2016 includes the $41 million redemption of the Senior Secured Notes of a Talen Ironwood Holdings, LLC subsidiary. See Note 75 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 PPLadditional information. Talen Energy Supply, LG&E and KU. The Registrants dodoes not have any significant capital lease obligations. |
| |
(b) | Assumes interest payments through stated maturity except for PPL Energy Supply's REPS, for which interest is reflected to theor earlier put date. For PPL, PPL Energy Supply, LKE, LG&E and KU thedates. The payments herein are subject to change, as payments for debt that is or becomes variable-rate debt have been estimated and for PPL, payments denominatedestimated. 2016 includes the $14 million make whole premium paid in British pounds sterling have been translated to U.S. dollars atconnection with the redemption of the Senior Secured Notes of a current foreign currency exchange rate. |
(c) | Talen Ironwood Holdings, LLC subsidiary. See Note 115 to the Financial Statements for additional information. |
| |
(c) | See Note 7 to the Financial Statements for additional information. |
| |
(d) | The amounts primarily 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 obligations of electricity, coal, nuclear fuel and limestone as well as certain construction expenditures, which are also included in the Capital Expenditures"Capital 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. The amounts also include a $132 million contract related to the Ironwood facility, which was sold in February 2016. |
| |
(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 theTalen Energy's contributions relating to the plan deficit. The amounts also include contributions made or committed to be made in 20142016 for PPL's and LKE's U.S.its 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.plans. |
| |
(f) | At December 31, 2013,2015, total unrecognized tax benefits of $22$31 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 54 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. |
Dividends/Distributions
(PPL)
PPL views dividends as an integral component of shareowner return and expects to continueTalen Energy Corporation does not expect 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, 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.
(All Registrant except PPL)
2016. From time to time, as determined by their respective Board of Directors orits Board of Managers, the Registrants other than PPLTalen Energy Supply may pay dividends or distributions as applicable, to their respective shareholders or members.its member. Certain of the credit facilities of PPLTalen Energy Supply, PPL Electric, LKE, LG&E and KUSupply's debt agreements include minimum debt covenant ratioscovenants that could effectively restrict the payment of dividends.
(All Registrants except PPLdistributions, loans or advances, either directly to Talen Energy Supply)Corporation or to Talen Energy Supply or one of its subsidiaries.
See "Item 1A. Risk Factors" and Note 75 to the Financial Statements for these and other restrictions related to distributions on capital interests for the Registrants and their subsidiaries.Talen Energy.
Purchase or Redemption of Debt Securities
The RegistrantsTalen Energy will continue to evaluate outstanding debt securities and may decide to purchase or redeem these securities depending upon prevailing market conditions and available cash.
Rating Agency Actions
Moody's, S&PAgencies and Fitch periodically review the credit ratings of the debt of the Registrants and their subsidiaries. Based on their respective independent reviews, the rating agencies may make certain ratings revisions or ratings affirmations.Credit Considerations
A credit rating reflects an assessment by the rating agency of the creditworthiness associated with an issuer and particular securities that it issues. The credit ratings of the Registrants and their subsidiaries are based on information providedissued by the Registrants and other sources. The ratings of Moody's, S&P and Fitchrating agencies are not a recommendationrecommendations to buy, sell or hold any debt securities of the Registrants or their subsidiaries.Talen Energy, and they are often based in part on information provided by Talen Energy and other sources. 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. TheTalen Energy's credit ratings of the Registrants and their subsidiariesmay affect theirits liquidity, access to capital markets and cost of borrowing under their credit facilities.borrowing.
The following table sets forth the Registrants'credit ratings issued by Moody's and their subsidiaries' credit ratingsStandard & Poor's for outstanding debt securities or commercial paper programscredit facilities of Talen Energy Supply as of December 31, 2013.2015.
|
| | Senior Unsecured | | Senior Secured | | Commercial Paper |
| | | | | | | | | | | | | | | | | | |
Issuer | | Moody's | | S&P | | Fitch | | Moody's | | S&P | | Fitch | | Moody's | | S&P | | Fitch |
PPL | | | | | | | | | | | | | | | | | | |
PPL WEM | | Baa3 | | BBB- | | | | | | | | | | | | | | |
WPD (East Midlands) | | Baa1 | | BBB | | | | | | | | | | | | | | |
WPD (West Midlands) | | Baa1 | | BBB | | | | | | | | | | | | | | |
PPL WW | | Baa3 | | BBB- | | BBB | | | | | | | | | | | | |
WPD (South Wales) | | Baa1 | | BBB | | A- | | | | | | | | | | | | |
WPD (South West) | | Baa1 | | BBB | | A- | | | | | | | | P-2 | | | | |
PPL Capital Funding | | Baa3 | | BBB- | | BBB | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | Senior Unsecured | | Senior SecuredBa3 | | Commercial PaperB+ |
| | | | | | | | | | | | | | | | | | |
Issuer | | Moody's | | S&P | | Fitch | | Moody's | | S&P | | Fitch | | Moody's | | S&P | | Fitch |
PPL and PPL Energy Supply | | | | | | | | | | | | | | | | | | |
PPL Energy SupplySenior Secured | | Baa2 | | BBBBB |
Corporate Issuer Rating | | BBB-Ba2 | | B+ |
Outlook | | Negative | | | | P-2 | | A-2 | | F3 |
| | | | | | | | | | | | | | | | | | |
PPL and PPL Electric | | | | | | | | | | | | | | | | | | |
PPL Electric | | | | | | | | A3 | | A- | | A- | | P-2 | | A-2 | | F2 |
| | | | | | | | | | | | | | | | | | |
PPL and LKE | | | | | | | | | | | | | | | | | | |
LKE | | Baa2 | | BBB- | | BBB+ | | | | | | | | | | | | |
LG&E | | | | | | | | A2 | | A- | | A+ | | P-2 | | A-2 | | F2 |
KU | | | | | | | | A2 | | A- | | A+ | | P-2 | | A-2 | | F2Stable |
Various derivative and non-derivative contracts, including contracts for the sale and purchase of electricity and fuel, commodity transportation and storage and interest rate instruments contain provisions that require the posting of additional collateral, or permit the counterparty to terminate those contracts, upon a downgrade in Talen Energy Supply's credit rating. See Note 15 to the Financial Statements for a discussion of "Credit Risk-Related Contingent Features," including a discussion of the potential additional collateral requirements for Talen Energy for derivative contracts in a net liability position at December 31, 2015.
A downgrade in the Registrants' or their subsidiaries' credit ratings could result in higher borrowing costs and reduced access to capital markets. The Registrants and their subsidiaries haveTalen Energy has no credit rating triggers that, by themselves, would result in the reduction of access to capital markets or the acceleration of maturity dates of outstanding debt.
In addition to the credit ratings noted above, the rating agencies have taken the following actions related to the Registrants and their subsidiaries.
(PPL)
In March 2013, Moody's, S&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 ratings with a stable outlook:
· | the long-term issuer default and senior unsecured ratings for PPL WW, WPD (South Wales) and WPD (South West); and |
· | the short-term issuer default ratings for WPD (South Wales) and WPD (South West). |
In September 2013, Moody's and S&P assigned ratings of Baa1 and BBB to WPD (East Midlands') £65 million 1.676% Index-Linked Senior Notes due 2052.
In October 2013, Moody's and S&P assigned ratings of Baa1 and BBB to WPD (West Midlands') £400 million 3.875% Senior Notes due 2024.
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 ratings and revised its outlook to stable for PPL.
(PPL and PPL Energy Supply)
In 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 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.
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 rating and revised its outlook from negative to stable on PPL Montana's pass-through certificates due 2020.
In December 2013, Fitch downgraded its long-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 Energy Supply.
In January 2014, 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 stable outlook and S&P assigned a recovery rating of 1+ to these notes.
In November 2013, Moody's placed the ratings of PPL Electric on review for upgrade.
In December 2013, Fitch affirmed its long-term issuer default rating, short-term issuer default rating, secured debt and commercial paper rating with a stable outlook for PPL Electric.
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 ratings 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 stable for LKE.
In 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.
(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 and PPLTalen Energy Supply guaranteeguarantees 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 1511 to the Financial Statements for additional information about guarantees.
Off-Balance Sheet Arrangements(All Registrants)
The Registrants haveTalen Energy has entered into certain agreements that may contingently require payment to a guaranteed or indemnified party. See Note 1511 to the Financial Statements for a discussion of these agreements.
Market Risk
(All Registrants)
See Notes 1, 18,14 and 1915 to the Financial Statements for information about the Registrants'Talen Energy'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, LKE, LG&E, and KU)
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 excessTalen Energy's non-trading activity includes 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-requirement energy supply contracts for the majority of its PLR obligations. These supply contracts transfer the volumetric risk associated with the PLR obligation to the energy suppliers.
(PPL and PPL Energy Supply)
PPL Energy Supply segregates its non-trading activities into two categories: hedge activity and economic activity. Transactions that are accounted for as hedge activity qualify for hedge accounting treatment. The economic activity category includes transactions that address a specific risk, but were not eligible for hedge accounting or for which hedge accounting was not elected.risk. This activity includes the changes in fair value of positions used to hedge a portion of the economic value of PPL Energy Supply'sTalen Energy'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 1915 to the Financial Statements for additional information.
To hedge the impact of market price volatility on PPL Energy Supply'sTalen Energy's energy-related assets, liabilities and other contractual arrangements, PPLTalen Energy Supplysubsidiaries both sellssell and purchasespurchase physical energy at the wholesale level under FERC market-based tariffs throughout the U.S. and entersenter into financial exchange-traded and over-the-counter contracts. PPL Energy Supply'sTalen Energy's non-trading commodity derivative contracts range in maturity through 2019.2020.
The following tablestable sets forth the changes in the net fair value of non-trading commodity derivative contracts atfor the years ended December 31. See Notes 1814 and 1915 to the Financial Statements for additional information.
|
| | | | | | | | |
| | Gains (Losses) |
| | 2015 | | 2014 |
Fair value of contracts outstanding at the beginning of the period | | $ | 53 |
| | $ | 107 |
|
Contracts realized or otherwise settled during the period | | (133 | ) | | 328 |
|
Fair value of new contracts entered into during the period (a) | | 5 |
| | (12 | ) |
Other changes in fair value | | 220 |
| | (370 | ) |
Fair value of contracts outstanding at the end of the period |
| $ | 145 |
| | $ | 53 |
|
| | | 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 |
52
| |
(a) | Represents the fair value of contracts at the end of the quarter of their inception. Includes the impact of contracts acquired as part of the RJS Power and MACH Gen acquisitions. |
The following table segregates the net fair value of non-trading commodity derivative contracts at December 31, 20132015, based on the level of observability of the information used to determine the fair value.
|
| | | | | | | | | | | | | | | | | | | |
| Net Asset (Liability) |
| Maturity Less Than 1 Year | | Maturity 1-3 Years | | Maturity 4-5 Years | | Maturity in Excess of 5 Years | | Total Fair Value |
Source of Fair Value | | | | | | | | | |
Prices based on significant observable inputs (Level 2) | $ | 89 |
| | $ | — |
| | $ | 7 |
| | $ | — |
| | $ | 96 |
|
Prices based on significant unobservable inputs (Level 3) | 31 |
| | 17 |
| | 1 |
| | — |
| | 49 |
|
Fair value of contracts outstanding at the end of the period | $ | 120 |
| | $ | 17 |
| | $ | 8 |
| | $ | — |
| | $ | 145 |
|
| | | 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 |
PPLTalen Energy Supply sellssubsidiaries sell electricity, capacity and related services and buysbuy fuel on a forward basis to hedge the value of energy from itsTalen Energy's generation assets. If PPLthese Talen Energy Supplysubsidiaries were unable to deliver firm capacity and energy or to accept the delivery of fuel under itstheir agreements, under certain circumstances itthey could be required to pay liquidatingliquidated damages. These damages would be based on the difference between the market price and the contract price of the commodity. Depending on price changes in the wholesale energy markets, such damages could be significant. Extreme weather conditions, unplanned power plant outages, transmission disruptions, nonperformance by counterparties (or their counterparties) with which it has energy contracts and other factors could affect PPL Energy Supply'sTalen Energy's ability to meet its obligations, and/or cause significant increases in the market price of replacement energy. Although PPLTalen Energy Supply attempts to mitigate these risks, there can be no assurancethe company cannot assure 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'sTalen Energy's trading commodity derivative contracts range in maturity through 2020.2019. The following table sets forth changes in the net fair value of trading commodity derivative contracts atfor the years ended December 31. See Notes 1814 and 1915 to the Financial Statements for additional information.
| | | Gains (Losses) | | | | | |
| | 2013 | | 2012 | Gains (Losses) |
| | | | | 2015 | | 2014 |
Fair value of contracts outstanding at the beginning of the period | | $ | 29 | | $ | (4) | $ | 48 |
| | $ | 11 |
|
Contracts realized or otherwise settled during the period | | (13) | | 20 | (68 | ) | | (60 | ) |
Fair value of new contracts entered into during the period (a) | | 3 | | 17 | 4 |
| | 5 |
|
Other changes in fair value | | | (8) | | | (4) | 25 |
| | 92 |
|
Fair value of contracts outstanding at the end of the period | | $ | 11 | | $ | 29 | $ | 9 |
| | $ | 48 |
|
| |
(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, 20132015, based on the level of observability of the information used to determine the fair value.
|
| | | | | | | | | | | | | | | | | | | |
| Net Asset (Liability) |
| Maturity Less Than 1 Year | | Maturity 1-3 Years | | Maturity 4-5 Years | | Maturity in Excess of 5 Years | | Total Fair Value |
Source of Fair Value | | | | | | | | | |
Prices based on significant observable inputs (Level 2) | $ | 6 |
| | $ | — |
| | $ | (2 | ) | | $ | — |
| | $ | 4 |
|
Prices based on significant unobservable inputs (Level 3) | 5 |
| | — |
| | — |
| | — |
| | 5 |
|
Fair value of contracts outstanding at the end of the period | $ | 11 |
| | $ | — |
| | $ | (2 | ) | | $ | — |
| | $ | 9 |
|
| | | 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 energycompetitive margins for the tradingnon-trading and non-tradingtrading 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 disciplinedTalen Energy's 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 2013the year ended December 31, 2015 was as follows.
|
| | | | | | | |
| Trading VaR | | Non-Trading VaR |
95% Confidence Level, Five-Day Holding Period | | | |
Period End | $ | — |
| | $ | 37 |
|
Average for the Period | 1 |
| | 18 |
|
High | 4 |
| | 37 |
|
Low | — |
| | 8 |
|
| | | 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 tradingnon-trading and non-tradingtrading FTR positions was insignificantat December 31, 2013.2015.
Interest Rate Risk
Interest Rate Risk (All Registrants)
The Registrants and theirTalen Energy, directly or through its subsidiaries, issueissues debt to finance theirits operations, which exposes themit to interest rate risk. The Registrants and their subsidiariesTalen Energy may utilize various financial derivative instruments to adjust the mix of fixed and floating interest rates in theirits debt portfolios,portfolio, adjust the duration of theirits debt portfoliosportfolio and lock in benchmarkcomponents of current market interest rates in anticipation of future financing, when appropriate. Risk limits under the risk management programpolicy are designed to balance riskmitigate interest rate exposure toand volatility in interest expense and changes in the fair value of the debt portfolios due to changes in the absolute level of interest rates.expense.
The followingTalen Energy had no interest rate hedges were outstanding at December 31.
| | | 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) |
31, 2015 and 2014.
(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 areTalen Energy is exposed to a potential increase in interest expense and to changes in the fair value of theirits debt portfolios.portfolio. The estimated impact of a 10% adverse movement in interest rates at December 31, is shown below.2015 would cause an insignificant increase in interest expense and a $119 million increase in the fair value of debt. At December 31, 2014, the estimated impact of a 10% adverse movement in interest rates would cause an insignificant increase in interest expense and a $46 million increase in the fair value of debt.
| | | | | | 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.
| | | 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 Nuclear maintains trust funds to fund certain costs of decommissioning the PPL Susquehanna nuclear plant (Susquehanna).Nuclear plant. At December 31, 2013,2015, 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.balance sheet. The mix of securities is designed to provide returns sufficient to fund Susquehanna'sSusquehanna Nuclear'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. PPLTalen Energy actively monitors the investment performance and periodically reviews asset allocation in accordance with its nuclear decommissioning trust policy statement. At December 31, 2013,2015, a hypothetical 10% increase in interest rates and a 10% decrease in equity prices would have resulted in an estimated $66$74 million reduction in the fair value of the trust assets compared with $49$73 million at December 31, 2012.2014. See Notes 1814 and 2319 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 Talen Energy plan assets.
Credit Risk
Credit risk is the risk that the RegistrantsTalen Energy would incur a loss as a result of nonperformance by counterparties of their contractual obligations. The Registrants maintainTalen Energy maintains credit policies and procedures with respect to counterparty credit (including requirements that counterparties maintain specified credit ratings)standards) and require other assurances in the form of credit support or collateral in certain circumstances in order to limit counterparty credit risk. However, the Registrants, as applicable, haveTalen Energy has concentrations of suppliers and customers among electric utilities, financial institutions and other energy marketing and trading companies. These
concentrations may impact the Registrants'Talen Energy's overall exposure to credit risk, positively or negatively, as counterparties may be similarly affected by changes in economic, regulatory or other conditions.
(PPL and PPLTalen 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 this case, PPLTalen Energy Supply would have to sell into a lower-priced market or purchase in a higher-priced market. When necessary, PPLTalen Energy Supply records an allowance for doubtful accounts to reflect the probability that a counterparty will not pay for deliveries PPLTalen 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 PLR procurement plan for the period of June 2013 through May 2015. To date, PPL Electric has conducted two of its four 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, 2013, 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 Notes 15, 16, 1814 and 1915 to the Financial Statements for additional information on the competitive 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
The Registrants are not aware of any material ownership interests or operating responsibility by senior management in outside partnerships, including leasing transactions with variable interest entities, or other entities doing business with the Registrants. See Note 16 to the Financial Statements for additional information on related party transactions for PPL Energy Supply, PPL Electric, LKE, LG&E and KU.
Acquisitions, Development and Divestitures
The RegistrantsTalen Energy from time to time evaluateevaluates 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 10Note 6 to the Financial Statements for additional information on the more significant activities.RJS Power acquisition, the MACH Gen acquisition, the Talen Montana hydroelectric sale, and the announced divestitures of assets to satisfy a December 2014 FERC order approving the combination with RJS Power.
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.matters impacting Talen Energy's business this fiscal year. See Note 15 to the Financial Statements and "Item 1. Business - Environmental Matters"Business" for additional information on environmental matters.
CSAPR
Annual and seasonal nitrogen oxide emission allowance trading programs, as well as annual sulfur dioxide emission allowance trading, commenced in 2015 for 28 states under the EPA's CSAPR Rule. In December 2015, the EPA proposed a "CSAPR Update Rule" which recommends more stringent ozone season nitrogen oxide budgets for 23 states, including several where Talen owns affected generation. Additional capital and/or operating and maintenance expenses could be imposed on Talen plants in Maryland, New Jersey, New York, Pennsylvania and Texas as a result of this action.
NAAQS
Regulations to address more stringent National Ambient Air Quality Standard (NAAQS) for ozone established by the EPA advanced in Pennsylvania and Maryland in 2015. In Pennsylvania, these regulations seek to establish reasonably available control technologies (RACT) for fossil-fuel fired power plants nitrogen oxide and volatile organic compound emissions. Maryland coal plants operated at reduced nitrogen oxide emission rates during the 2015 ozone season as a result of an emergency action issued by the Governor (which later became a final rule), and in November 2015 the MDE promulgated additional nitrogen oxide regulations for Maryland coal plants that require even more stringent operations starting no later than June 2020. Actions were taken at the federal level in 2015 to tighten the NAAQS for ozone as well. More specifically, in October 2015, the EPA released a final rule establishing a more stringent national standard for ozone.
Pertaining to the EPA's 2010 NAAQS for sulfur dioxide, the EPA and Sierra Club entered into an approved consent decree on March 2, 2015 that establishes deadlines for remaining area designations. Several of Talen's affected plants are in undesignated areas.
Compliance with these regulations, or those that could be developed to address the EPA's 2010 sulfur dioxide NAAQS and/or 2015 ozone NAAQS, could lead to increased capital and/or operating and maintenance expenses for Talen Energy's fossil-fuel fired power plants.
MATS
Compliance with the EPA's MATS Rule commenced in April 2015 for those plants that did not receive a compliance extension. The rule has increased capital and operating and maintenance expenses for some of Talen Energy's power plants. The U.S. Supreme Court determined in June 2015 that the EPA acted unreasonably by refusing to consider costs when determining whether the MATS regulation was appropriate and necessary. The EPA responded with a proposed supplemental finding in November 2015 claiming that the regulation was appropriate and necessary based on cost. In December 2015, to address the
June 2015 Supreme Court action, the DC Circuit remanded the MATS Rule to the EPA to incorporate a revised appropriate and necessary finding.
Regional Haze
In September 2015, the Third Circuit Court of Appeals vacated portions of the EPA's approval of Pennsylvania's Regional Haze State Implementation Plan and remanded the Rule to the EPA for further consideration. Talen Energy is unable to determine at this time if the future impacts of Regional Haze on Talen Energy's Pennsylvania fossil-fuel fired power plants will have a material adverse effect on its financial condition or results of operations.
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
The EPA's final rules 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.
The EPA's revised proposal for new power plants waswere published in the Federal Register on January 8, 2014,in October 2015, along with comments due on March 10, 2014.a proposed federal implementation plan for those states that fail to submit an acceptable state implementation plan for the existing plant rule. EPA's existing plant rule has been stayed by the U.S. Supreme Court until all legal challenges to the rule have been resolved. The proposed limits for coal plants can only be achieved through capturenew plant rule remains in effect and sequestration, a technology whichchallenges are also outstanding in federal court. Talen Energy is not presently commercially viable and, therefore, effectively precludeunable to determine if the construction of new coal plants. The proposed standards for new gas plants may also not be consistently achievable. Regulation of existing plants couldrules will have a significant industry-widematerial adverse effect on Talen Energy's financial condition or results of operations, but increased capital and operating and maintenance costs could be imposed.
Exemptions for Startup, Shutdown and Malfunction Events
In June 2015, the EPA published a Final Rule which prohibits states from exempting startup, shutdown and malfunction events from compliance requirements in SIPs. Revisions to SIPs or other regulations in states where Talen Energy operates could impact depending on the structureoperations and stringency of the final rule and state implementation plans.financial conditions.
CCRs
The Administration's recent increaseEPA's final rule regulating CCRs as non-hazardous wastes, which imposes extensive new self-implementing requirements on CCR impoundments and landfills, became effective in October 2015. Talen Energy expects that its estimateplants using surface impoundments for management and disposal of CCRs, or that previously managed CCRs and continue to manage wastewaters, will be most impacted by this rule. Talen Energy anticipates incurring capital, operating and/or maintenance costs to address other provisions of the "social costrule, such as groundwater monitoring and disposal facility modifications. The final CCR Rule is being challenged in federal court. During 2015, an increase of carbon" (which is used$41 million was recorded to calculate benefits associatedexisting AROs. Further changes to AROs may be required as estimates are refined and compliance 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 Managementthe rule continues.
ELGs and Budget (OMB) has opened this issue for public comment.Standards
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 itsEPA's 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 spillsELG regulations 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.permits were published in the Federal Register in November 2015. The proposed limitations are based on the EPA review of available treatment technologies and their capacity for reducing pollutants and include newregulations contain 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'sTalen Energy's coal-fired plants. The final regulationAt this point, Talen Energy 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, butcompliance costs. The regulations are being challenged in federal court.
Waters of the costs could be significant.United States (WOTUS)
316(b) Cooling Water Intake Structure Rule
In April 2011,June 2015, the EPA and the U.S. Army Corps of Engineers 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). Thetheir final rule is now expected by April 17, 2014. The proposed regulation would apply to nearly all PPL-owned steam electric generation plantsredefining the term WOTUS, and in Pennsylvania, Kentucky, and Montana, potentially even including those equipped with closed-cycle cooling systems. PPL's, PPL Energy Supply's, LKE's, LG&E's and KU's compliance costs could be significant, especially if the final rule requires closed-cycle systems at plants that do not currently have them or conversions of once-through systems to closed-cycle.
MATS
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 AprilOctober 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.Sixth Circuit issued an order preventing the EPA from implementing the rule nationwide. In the event the stay is lifted, and the regulation survives separate legal challenges, the redefinition could impact future development actions, such as plant and gas infrastructure expansions.
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)New Accounting Guidance
See "Competition" under each of PPL's reportable segments in "Item 1. Business - Segment Information" and "Item 1A. Risk Factors" for a discussion of competitive factors affecting the Registrants.
See Notes 1 and 2521 to the Financial Statements for a discussion of new accounting guidance adopted and pending adoption.
Application of Critical Accounting Policies
Financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies. The following accounting policies are particularly important to 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). Senior management has reviewed with PPL'sTalen Energy Corporation's Audit Committee these critical accounting policies, the following disclosures regarding their application and the estimates and assumptions regarding them.
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
(All Registrants)
CertainTalen Energy Supply and certain of the Registrants'its subsidiaries sponsor or participate in, as applicable, various qualified funded and non-qualified unfunded defined benefit pension plans and both funded and unfunded other postretirement benefit plans. These plans are applicable to the majority of the Registrants'Talen Energy's employees (based on eligibility for their applicable plans). The Registrants and certain of their subsidiaries recordTalen Energy records an asset or liability, with an offsetting entry to AOCI to recognize the funded status of all defined benefit plans with an offsetting entry to AOCIthat it or in the case of PPL Electric, LG&E and KU, regulatory assets and liabilities for amounts that are expected to be recovered through regulated customer rates.its subsidiaries sponsor. Consequently, the funded status of all sponsored defined benefit plans is fully recognized on the Balance Sheets. See Note 139 to the Financial Statements for additional information about the plans and the accounting for defined benefits.benefits including a discussion of the newly created pension and other postretirement benefit plans sponsored by Talen Energy Supply that replaced Talen Energy Supply's participation in similar PPL plans effective with the June 1, 2015 spinoff.
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 Sponsor | | PPL | | Supply | | PPL Electric | | LKE | | LG&E | | KU |
| | | | | | | | | | | | | | | | | | |
PPL Services | | | S | | | P | | | P | | | | | | | | | |
WPD (a) | | | S | | | | | | | | | | | | | | | |
PPL Montana | | | | | | S | | | | | | | | | | | | |
LKE | | | | | | | | | | | | S | | | P | | | P |
LG&E | | | | | | | | | | | | | | | S | | | |
(a) | Does not sponsor or participate in other postretirement benefits plans. |
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 AOCI, or in the case of PPL Electric, LG&E and KU, regulatory assets and liabilities, for amounts that are expected to be recovered through regulated customer rates.AOCI. 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 using a best-estimate of expected returns, volatilities and correlations for each asset 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 the 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 the discount rate for its U.K.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 that will be earned over the life of each plan. These projected returns reduce the net periodic defined benefit costs currently recorded.
Rate of Compensation Increase - Management projects employees' annual pay increases, which are used to project employees' pension plans, WPD starts with a cash flow analysis ofbenefits at retirement.
Health Care Cost Trend Rate - Management projects the expected increases in the cost of health care.
In addition to the economic assumptions above that are evaluated annually, management must also make assumptions regarding the life expectancy of employees covered under their defined benefit payment streampension and other postretirement benefit plans. At December 31, 2014 or June 1, 2015, as applicable, the plan sponsors adopted the mortality tables issued by the Society of Actuaries in October 2014 (RP-2014 base tables) for itsall applicable defined benefit pension and other postretirement benefit plans. At December 31, 2014 or June 1, 2015, as applicable, the plan sponsors also selected the IRS BB 2-Dimensional mortality improvement scale on a generational basis for all applicable defined benefit pension and other postretirement benefit plans. These plan-specific cash flows are matched against a spot-rate yield curvemortality assumptions reflect the recognition of both improved life expectancies and the expectation of continuing improvements in life expectancies.
For the applicable periods ended December 31, 2015, Talen Energy's defined benefit pension and other postretirement benefit plans incurred actuarial losses of $50 million primarily due to determinelower actual return on plan assets compared to the assumed discount rate, which usesexpected return on plan assets partially offset by 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 bonds. 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 bondsincrease in the U.K. is not deep enough to adequately support such an approach.
(All Registrants)discount rate.
In selecting the discount rates for U.S.applicable 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, serving as the base from which those with the lowest and highest yields are eliminated to develop an appropriate subset of bonds. Individual bonds are then selected based on the timing of each
plan's cash flows and parameters are established as to the percentage of each individual bond issue that could be hypothetically purchased and the surplus reinvestment rates to be assumed.
To determine the expected return on plan assets, the plan sponsors project the long-term rates of return on plan assets using a best-estimate of expected returns, volatilities and correlations for each asset class. Each plan's specific current and expected asset allocations are also considered in developing a reasonable return assumption.
In selecting a rate of compensation increase, the plan sponsors consider past experience in light of movements in inflation rates.
The following table provides the weighted-average assumptions used for discount rate, expected return on plan assets and rate of compensation increase at December 31.31, 2015.
|
| | | |
Assumption | | |
Discount Rate | | |
Pension | | 4.65 | % |
Other Postretirement | | 4.60 | % |
Expected return on plan assets | | |
Pension | | 7.00 | % |
Other Postretirement | | 6.37 | % |
Rate of compensation increase | | |
Pension | | 3.98 | % |
Other Postretirement | | 3.98 | % |
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% |
| | | | | | | |
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, the plan sponsors consider past performance and forecasts of health care costs. At December 31, 2013,2015, the health care cost trend rates for all plans were 7.6%6.8% for 2014,2016, gradually declining to an ultimate trend rate of 5.0% in 2020.
A variance in the assumptions listed above could have a significant impact on accrued defined benefit liabilities or assets,pension obligations, reported annual net periodic defined benefitpension costs and AOCI or regulatory assets and liabilities.related AOCI. At December 31, 2013,2015, the defined benefit plansaccrued pension obligations and related items and the portions related to the most significant plan were recorded in the Registrants' financial statements as follows.
|
| | | | | | | | |
| | Total | | Most Significant Plan |
Balance Sheet: | | | | |
Accrued pension obligations | | $ | (340 | ) | | $ | (323 | ) |
AOCI (pre-tax) | | 453 |
| | 390 |
|
Statement of Income: | | | | |
Pension costs | | $ | 48 |
| | $ | 28 |
|
| | | | | | | | | 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 reflecttable reflects the impact of changes in certain assumptions based on the Registrants' primary defined benefit plans.for Talen Energy's most significant plan. The tables reflecttable reflects either an increase or decrease in each assumption. The inverse of this change would impact the accrued defined benefit liabilities or assets,pension obligation, 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.
|
| | | | | | | | | | | | | | |
| | | Increase (Decrease) |
Actuarial assumption | Sensitivity | | Accrued Pension Obligation | | AOCI (pre-tax) | | Pension Costs |
Discount rate | (0.25 | )% | | $ | 51 |
| | $ | 51 |
| | $ | 5 |
|
Expected return on plan assets | (0.25 | )% | | n/a |
| | n/a |
| | 3 |
|
Rate of compensation increase | 0.25 | % | | 7 |
| | 7 |
| | 2 |
|
Actuarial assumption | | | |
| | | |
Discount Rate | | | (0.25%) |
Expected Return on Plan Assets | | | (0.25%) |
Rate of Compensation Increase | | | 0.25% |
Health Care Cost Trend Rate (a) | | | 1% |
(a) | Only impacts other postretirement benefits. |
| | | 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 |
| | | | | | | | | | | | | |
| | | 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. |
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 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 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; |
Table of Contents
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; |
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 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. |
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 revenueenergy, capacity 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.
(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. If the asset (disposal group) no longer qualifies for classification as held for sale, it must be reclassified as held and used and its carrying value must be adjusted to the lower of its estimated fair value at that time or its carrying value when initially classified as held for sale adjusted for depreciation through the reclassification date.
For determining fair value, quoted market prices in active markets are the best evidence. However, when market prices are unavailable, PPL, PPLTalen Energy Supply, LKE, LG&E and KU considerconsiders 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 adjustedrisk-adjusted discount rates.
In 2015, Talen Energy recorded pre-tax impairment charges of $189 million ($113 million after-tax) applicable to certain assets (classified as held and used and held for sale). See Notes 14 and 16 to the Financial Statements for details on the evaluation and charges recorded.
Goodwill is tested for impairment at the reporting unit level. PPLTalen Energy has determined its reporting units to be at the same level as its reportableoperating segments. PPLAt December 31, 2015, Talen Energy Supply, LKE, LG&Eis organized in two operating segments/reporting units: East and KU each operateWest, primarily based on geographic location. Prior to the RJS acquisition, Talen Energy operated within a single reportable segment and single operating segment/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, PPLTalen 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.
When the two-step quantitative impairment test is elected or required as a result of the step zero assessment, in step one, PPL, PPLTalen Energy Supply, LKE, LG&E and KU determinedetermines 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)In 2015, Talen Energy recorded pre-tax goodwill impairment charges of $465 million ($444 million after-tax), 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 onewhich fully impaired all 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. |
Basedgoodwill previously recorded on the overall favorable results of these evaluations, management did not conclude it was more likely than not thatbalance sheet and assigned to the fair value of these East segment/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 consulted, as necessary, to help estimate the probability that a loss has been incurred and the amount (or range) of the loss.
For PPL, seeunit. See Note 616 to the Financial Statements for a discussion ofdetails on the Ofgem Review of Line Loss Calculation, including the increases of $45 million to this liability recorded in 2013 by WPD.evaluation and charges recorded.
Certain other events have been identified that could give rise to a loss, but that do not meet the conditions for accrual. Such events are disclosed, but not recorded, when it is "reasonably possible" that a loss has been incurred. Accounting guidance defines "reasonably possible" as cases in which "the future event or events occurring is more than remote, but less than likely to occur."Asset Retirement Obligations
When an estimated loss is accrued, the triggering events for subsequently adjusting the loss accrual are identified, where applicable. The triggering events generally occur when new information becomes known, the contingency has been resolved and the actual loss is settled or written off, or when the risk of loss has diminished or been eliminated. The following are some of the triggering events that provide for the adjustment of certain recorded loss accruals:
· | Allowances for uncollectible accounts are reduced when accounts are written off after prescribed collection procedures have been exhausted, a better estimate of the allowance is determined or underlying amounts are ultimately collected. |
· | Environmental and other litigation contingencies are reduced when the contingency is resolved 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, business unit management and other parties.
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.
At December 31, 2013,2015, 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 |
|
| | | | | | | | | | | |
| | Most Significant AROs |
Total AROs Recorded | | Amount Recorded | | % of Total | | Description |
$ | 501 |
| | $ | 399 |
| | 79.6 | % | | Nuclear decommissioning |
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, 2013,2015, a 10% change to retirement cost,costs, 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 nonot cause a 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)liability.
See Note 18 to the Financial Statements for additional information on AROs.
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 valuation allowances onthat may be required to offset the related deferred tax assets.
Significant management judgment is requiredIn order to determine the amount of benefit to be recognized relatedin relation to an uncertain tax position. Tax positions are evaluated followingposition, Talen Energy uses a two-step process.process to evaluate tax positions. The first step requires an entity to determine whether, based on the technical merits supporting a particular tax position, it is more likely than not (greater than a 50% chance) that the tax position will be sustained. This determination assumes that the relevant taxing authority will examine the tax position and is aware of all the relevant facts surrounding the tax position. The second step requires an entity to recognize in the financial statements the benefit of a tax position that meets the more-likely-than-not recognition criterion. The benefit recognized is measured atas 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.
At December 31, 2013, it was reasonably possible that during the next 12 months the total amount2015, Talen Energy had $31 million of unrecognized tax benefits could increase or decrease by as much as the following.
| | Increase | | Decrease |
| | | | | | |
PPL | | | | | $ | 22 |
PPL Energy Supply | | | | | | 15 |
These changes could result from subsequent recognition, derecognition and/or changes in the measurement of uncertain tax positionsrecorded related to the timing and utilization ofdeferred tax credits and the related impact on alternative minimumassets acquired with MACH Gen. Unrecognized 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 settlementsbenefits recorded at December 31, 2014 were settled 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 relateprior 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.June 1, 2015 spinoff from PPL.
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 ability to carryback attributes, 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 net 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.
As a result of management's assessment of the realization of deferred tax assets, a valuation allowance of $10 million was recorded at December 31, 2015, primarily related to MACH Gen net operating losses in states where it is expected that a portion of the losses will expire unutilized.
See Note 54 to the Financial Statements for additional information on income tax disclosures.taxes.
Regulatory Assets and LiabilitiesBusiness Combinations - Purchase Price Allocation
(PPL)On June 1, 2015, substantially contemporaneous with the spinoff by PPL to form Talen Energy, RJS Power was contributed by the Riverstone Holders to become a subsidiary of Talen Energy Supply. Additionally, on November 2, 2015, Talen Energy completed the acquisition of the membership interests of MACH Gen. 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.
WPD operates in an incentive-based regulatory structure under distribution licenses granted by Ofgem. WPD's electricity distribution revenues are set every five years (changingThe determination and allocation of fair value to every eight years beginning on April 1, 2015) through price controls that are not directlythe identifiable assets acquired and liabilities assumed was based on cost recovery. Therefore, WPD is not subjectvarious 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 accounting forbase cash flow projections, as well as the effectsassumptions and estimates used to determine cash inflows and outflows. Although the assumptions were reasonable based on information available at the dates of certain typesthe acquisitions, actual results may differ from the forecasted amounts and the difference could be material.
The fair value of regulation as prescribed by GAAP and does not record regulatoryintangible assets and liabilities.
(All Registrants except PPL Energy Supply)
PPL Electric, LG&Eliabilities (e.g. contracts that have favorable or unfavorable terms relative to market), including coal contracts, a pipeline lease and KU, are subject to cost-based rate regulation. As a result,an ash site permit, have been reflected on the effects of regulatory actions are required to be reflected in the financial statements. Assetsbalance sheet. These intangible assets and liabilities are recorded that result frombeing amortized over the regulated ratemaking process that may not berelated contracts' terms.
Goodwill is measured as the excess of consideration transferred over the net of the acquisition date fair value of the assets acquired and liabilities assumed. Goodwill related to the RJS acquisition of $393 million was assigned to the East segment. There was no goodwill 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,provisional purchase price allocation related to the MACH Gen acquisition. During the third quarter of 2015, impairment testing was completed and it was determined that all goodwill was impaired and was written off, including the regulated entity is accountablegoodwill recorded related to the RJS acquisition. See Note 16 to the Financial Statements for any amounts charged pursuantadditional information regarding the goodwill impairment and Note 6 to such rates and not yet expendedthe Financial Statements for additional information regarding the intended purpose.purchase price allocations.
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.
Revenue Recognition - Unbilled Revenue (PPL Electric, LKE, LG&E and KU)regarding the acquisitions.
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.Other Information
| | 2013 | | 2012 |
| | | | | | |
PPL Electric | | $ | 116 | | $ | 110 |
LKE | | | 180 | | | 156 |
LG&E | | | 85 | | | 72 |
KU | | | 95 | | | 84 |
Other Information(All Registrants)
PPL'sTalen Energy Corporation'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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PPLTalen Energy Corporation PPLand Talen 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."
Report of Independent Registered Public Accounting Firm
The Board of Directors and ShareownersStockholders of PPLTalen Energy Corporation
We have audited the accompanying consolidated balance sheets of PPLTalen Energy Corporation and subsidiaries as of December 31, 20132015 and 2012,2014, 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, 2013.2015. 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 and schedule 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. An audit also includesstatements, assessing the accounting principles used and significant estimates made by management, as well asand 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 PPLTalen Energy Corporation and subsidiaries at December 31, 20132015 and 2012,2014, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2013,2015, 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 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, 201426, 2016
Report of Independent Registered Public Accounting Firm
The Board of DirectorsManagers and ShareownersSole Member of PPL CorporationTalen Energy Supply, LLC
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), theaccompanying consolidated balance sheets of Talen Energy Supply, LLC (formerly known as PPL CorporationEnergy Supply, LLC) and subsidiaries as of December 31, 20132015 and 2012,2014, 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
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, 2013.2015. 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 PPLTalen Energy Supply, LLC and subsidiaries at December 31, 20132015 and 2012,2014, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2013,2015, in conformity with U.S. generally accepted accounting principles.
/s/Ernst & Young LLP
Philadelphia, Pennsylvania
February 24, 2014
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 LLP26, 2016
Philadelphia, Pennsylvania
February 24, 2014
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
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
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
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. |
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. |
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. |
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.
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.
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.
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. |
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. |
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. | | | |
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.
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. |
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.
(THIS PAGE LEFT BLANK INTENTIONALLY.)
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. |
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. |
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. |
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.
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. |
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. |
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. |
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. |
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. |
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. |
ContentsCONSOLIDATED 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.
(THIS PAGE LEFT BLANK INTENTIONALLY.)INTENTIONALLY)
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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. |
|
| | | | | | | | | | | |
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, |
Talen Energy Corporation and Subsidiaries | | | | | |
(Millions of Dollars, Except Share Data) | | | | | |
| 2015 | | 2014 | | 2013 |
Operating Revenues | | | | | |
Wholesale energy | $ | 2,828 |
| | $ | 2,653 |
| | $ | 2,890 |
|
Wholesale energy to affiliate | 14 |
| | 84 |
| | 51 |
|
Retail energy | 1,095 |
| | 1,243 |
| | 1,027 |
|
Energy-related businesses | 544 |
| | 601 |
| | 527 |
|
Total Operating Revenues | 4,481 |
| | 4,581 |
| | 4,495 |
|
Operating Expenses | | | | | |
Operation | | | | | |
Fuel | 1,194 |
| | 1,196 |
| | 1,048 |
|
Energy purchases | 676 |
| | 1,054 |
| | 1,153 |
|
Operation and maintenance | 1,052 |
| | 1,007 |
| | 961 |
|
Loss on lease termination | — |
| | — |
| | 697 |
|
Impairments | 657 |
| | — |
| | 65 |
|
Depreciation | 356 |
| | 297 |
| | 299 |
|
Taxes, other than income | 65 |
| | 57 |
| | 53 |
|
Energy-related businesses | 520 |
| | 573 |
| | 512 |
|
Total Operating Expenses | 4,520 |
| | 4,184 |
| | 4,788 |
|
Operating Income (Loss) | (39 | ) | | 397 |
| | (293 | ) |
Other Income (Expense) - net | (118 | ) | | 30 |
| | 32 |
|
Interest Expense | 211 |
| | 124 |
| | 159 |
|
Income (Loss) from Continuing Operations Before Income Taxes | (368 | ) | | 303 |
| | (420 | ) |
Income Taxes | (27 | ) | | 116 |
| | (159 | ) |
Income (Loss) from Continuing Operations After Income Taxes | (341 | ) | | 187 |
| | (261 | ) |
Income (Loss) from Discontinued Operations (net of income taxes) | — |
| | 223 |
| | 32 |
|
Net Income (Loss) | (341 | ) | | 410 |
| | (229 | ) |
Net Income (Loss) Attributable to Noncontrolling Interests | — |
| | — |
| | 1 |
|
Net Income (Loss) Attributable to Talen Energy Corporation Stockholders | $ | (341 | ) | | $ | 410 |
| | $ | (230 | ) |
| | | | | |
Earnings Per Share of Common Stock Attributable to Talen Energy Corporation Stockholders: | | | | | |
Basic: | | | | | |
Income (Loss) from continuing operations after income taxes | $ | (3.10 | ) |
| $ | 2.24 |
|
| $ | (3.13 | ) |
Income (Loss) from discontinued operations (net of income taxes) | — |
|
| 2.67 |
|
| 0.38 |
|
Net Income (Loss) | $ | (3.10 | ) | | $ | 4.91 |
| | $ | (2.75 | ) |
Diluted: | | | | | |
Income (Loss) from continuing operations | $ | (3.10 | ) |
| $ | 2.24 |
|
| $ | (3.13 | ) |
Income (Loss) from discontinued operations (net of income taxes) | — |
|
| 2.67 |
|
| 0.38 |
|
Net Income (Loss) | $ | (3.10 | ) | | $ | 4.91 |
| | $ | (2.75 | ) |
| | | | | |
Weighted-Average Shares of Common Stock Outstanding (in thousands) | | | | | |
Basic | 109,898 |
|
| 83,524 |
|
| 83,524 |
|
Diluted | 109,898 |
|
| 83,524 |
|
| 83,524 |
|
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
|
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. |
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. |
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 |
|
| | | | | | | | | | | |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, |
Talen Energy Corporation and Subsidiaries |
(Millions of Dollars) | | | | | |
| 2015 | | 2014 | | 2013 |
Net income (loss) | $ | (341 | ) | | $ | 410 |
| | $ | (229 | ) |
Other comprehensive income (loss): | | | | | |
Amounts arising during the period - gains (losses), net of tax (expense) benefit: | | | | | |
Available-for-sale securities, net of tax of $5, ($40), ($72) | (6 | ) | | 35 |
| | 67 |
|
Defined benefit plans: | | | | | |
Prior service costs, net of tax of $1, ($6), ($1) | (3 | ) | | 8 |
| | 2 |
|
Net actuarial gain, net of tax of ($30), $83, ($49) | 46 |
| | (120 | ) | | 71 |
|
Reclassifications from AOCI - (gains) losses, net of tax expense (benefit): | | | | | |
Available-for-sale securities, net of tax of $2, $7, $4 | (2 | ) | | (6 | ) | | (6 | ) |
Qualifying derivatives, net of tax of $12, $17, $84 | (19 | ) | | (25 | ) | | (123 | ) |
Defined benefit plans: | | | | | |
Prior service costs, net of tax of $0, ($1), ($3) | (1 | ) | | 3 |
| | 4 |
|
Net actuarial loss, net of tax of $11, ($4), ($10) | (18 | ) | | 5 |
| | 14 |
|
Total other comprehensive income (loss) attributable to Talen Energy Corporation Stockholders | (3 | ) | | (100 | ) | | 29 |
|
Comprehensive income (loss) | (344 | ) | | 310 |
| | (200 | ) |
Comprehensive income attributable to noncontrolling interests | — |
| | — |
| | 1 |
|
Comprehensive income (loss) attributable to Talen Energy Corporation Stockholders | $ | (344 | ) | | $ | 310 |
| | $ | (201 | ) |
(a) | 75,000 shares authorized; 21,294 shares issued and outstanding at December 31, 2013 and December 31, 2012. |
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, |
Talen Energy Corporation and Subsidiaries | | | | | |
(Millions of Dollars) | | | | | |
| 2015 |
| 2014 |
| 2013 |
Cash Flows from Operating Activities | |
| | | |
Net income (loss) | $ | (341 | ) |
| $ | 410 |
|
| $ | (229 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities |
|
|
|
|
|
| |
Pre-tax gain from the sale of Montana hydroelectric generation business | — |
|
| (315 | ) |
| — |
|
Depreciation | 356 |
|
| 313 |
|
| 318 |
|
Amortization | 222 |
|
| 163 |
|
| 156 |
|
Defined benefit plans - expense | 50 |
|
| 42 |
|
| 51 |
|
Deferred income taxes and investment tax credits | (61 | ) |
| (26 | ) |
| (296 | ) |
Impairment of assets | 662 |
|
| 20 |
|
| 65 |
|
Unrealized (gains) losses on derivatives, and other hedging activities | (119 | ) |
| 4 |
|
| 171 |
|
Loss on lease termination | — |
|
| — |
|
| 426 |
|
Other | 46 |
|
| 36 |
|
| 2 |
|
Change in current assets and current liabilities |
|
|
|
| |
Accounts receivable | 115 |
|
| 17 |
|
| 23 |
|
Accounts payable | (147 | ) |
| 2 |
|
| (56 | ) |
Unbilled revenues | 58 |
|
| 68 |
|
| 83 |
|
Fuel, materials and supplies | 12 |
|
| (97 | ) |
| (31 | ) |
Prepayments | 31 |
|
| (53 | ) |
| (5 | ) |
Counterparty collateral | 63 |
|
| (17 | ) |
| (81 | ) |
Price risk management assets and liabilities | (14 | ) |
| (30 | ) |
| 7 |
|
Taxes payable | (23 | ) |
| (3 | ) |
| (31 | ) |
Other | (49 | ) |
| (40 | ) |
| (16 | ) |
Other operating activities | | | | | |
Defined benefit plans - funding | (74 | ) |
| (35 | ) |
| (113 | ) |
Other assets | 4 |
|
| 3 |
|
| (4 | ) |
Other liabilities | (23 | ) |
| — |
|
| (30 | ) |
Net cash provided by operating activities | 768 |
|
| 462 |
|
| 410 |
|
Cash Flows from Investing Activities | |
| | | |
Expenditures for property, plant and equipment | (451 | ) |
| (416 | ) |
| (583 | ) |
Proceeds from the sale of Montana hydroelectric generation business | — |
|
| 900 |
|
| — |
|
Expenditures for intangible assets | (70 | ) |
| (46 | ) |
| (42 | ) |
Acquisition of MACH Gen | (603 | ) | | — |
| | — |
|
Purchases of nuclear plant decommissioning trust investments | (196 | ) |
| (170 | ) |
| (159 | ) |
Proceeds from the sale of nuclear plant decommissioning trust investments | 180 |
|
| 154 |
|
| 144 |
|
Proceeds from the sale of the Renewable business | 116 |
| | — |
| | — |
|
Proceeds from the receipt of grants | — |
|
| 164 |
|
| 3 |
|
Net (increase) decrease in restricted cash and cash equivalents | 87 |
|
| (108 | ) |
| (22 | ) |
Other investing activities | 22 |
|
| 19 |
|
| 28 |
|
Net cash provided by (used in) investing activities | (915 | ) |
| 497 |
|
| (631 | ) |
Cash Flows from Financing Activities | |
| | | |
Issuance of long-term debt | 600 |
|
| — |
|
| — |
|
Retirement of long-term debt | (335 | ) |
| (309 | ) |
| (747 | ) |
Contributions from predecessor member | 82 |
|
| 739 |
|
| 1,577 |
|
Distributions to predecessor member | (217 | ) |
| (1,906 | ) |
| (408 | ) |
Net increase (decrease) in short-term debt | (162 | ) |
| 630 |
|
| (356 | ) |
Other financing activities | (32 | ) |
| — |
|
| (19 | ) |
Net cash provided by (used in) financing activities | (64 | ) |
| (846 | ) |
| 47 |
|
Net Increase (Decrease) in Cash and Cash Equivalents | (211 | ) |
| 113 |
|
| (174 | ) |
Cash and Cash Equivalents at Beginning of Period | 352 |
|
| 239 |
|
| 413 |
|
Cash and Cash Equivalents at End of Period | $ | 141 |
|
| $ | 352 |
|
| $ | 239 |
|
Supplemental Disclosures of Cash Flow Information | | | | | |
Cash paid (received) during the period for: |
|
|
|
|
|
| |
Interest - net of amount capitalized | $ | 169 |
|
| $ | 122 |
|
| $ | 157 |
|
Income taxes - net | $ | 5 |
|
| $ | 310 |
|
| $ | 189 |
|
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
|
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 |
|
| | | | | | | |
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, |
Talen Energy Corporation and Subsidiaries |
|
|
|
(Millions of Dollars, Shares in Thousands) |
|
|
|
| 2015 |
| 2014 |
Assets | |
| |
Current Assets | |
| |
Cash and cash equivalents | $ | 141 |
|
| $ | 352 |
|
Restricted cash and cash equivalents | 106 |
|
| 176 |
|
Accounts receivable (less reserve: 2015, $1; 2014, $2) |
|
|
|
Customer | 205 |
|
| 186 |
|
Other | 62 |
|
| 103 |
|
Accounts receivable from affiliates | — |
|
| 36 |
|
Unbilled revenues | 160 |
|
| 218 |
|
Fuel, materials and supplies | 508 |
|
| 455 |
|
Prepayments | 52 |
|
| 70 |
|
Price risk management assets | 562 |
|
| 1,079 |
|
Assets held for sale | 954 |
|
| — |
|
Other current assets | 12 |
|
| 26 |
|
Total Current Assets | 2,762 |
|
| 2,701 |
|
Investments | |
| |
Nuclear plant decommissioning trust funds | 951 |
|
| 950 |
|
Other investments | 25 |
|
| 30 |
|
Total Investments | 976 |
|
| 980 |
|
Property, Plant and Equipment | |
| |
Generation | 13,468 |
|
| 11,318 |
|
Nuclear fuel | 652 |
|
| 624 |
|
Other | 342 |
|
| 293 |
|
Less: accumulated depreciation | 6,411 |
|
| 6,242 |
|
Property, plant and equipment, net | 8,051 |
|
| 5,993 |
|
Construction work in progress | 536 |
|
| 443 |
|
Total Property, Plant and Equipment, net | 8,587 |
|
| 6,436 |
|
Other Noncurrent Assets | |
| |
Goodwill | — |
|
| 72 |
|
Other intangibles | 310 |
|
| 257 |
|
Price risk management assets | 131 |
|
| 239 |
|
Other noncurrent assets | 60 |
|
| 75 |
|
Total Other Noncurrent Assets | 501 |
|
| 643 |
|
Total Assets | $ | 12,826 |
|
| $ | 10,760 |
|
(a) Shares in thousands. All common shares of LG&E stock are owned by LKE.
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
|
| | | | | | | |
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, |
Talen Energy Corporation and Subsidiaries |
|
|
|
(Millions of Dollars, Shares in Thousands) |
|
|
|
| 2015 |
| 2014 |
Liabilities and Equity | |
| |
Current Liabilities | |
| |
Short-term debt | $ | 608 |
| | $ | 630 |
|
Long-term debt due within one year | 399 |
| | 535 |
|
Accounts payable | 291 |
| | 361 |
|
Accounts payable to affiliates | — |
| | 50 |
|
Taxes | 16 |
| | 28 |
|
Interest | 43 |
| | 16 |
|
Price risk management liabilities | 431 |
| | 1,024 |
|
Liabilities held for sale | 33 |
| | — |
|
Other current liabilities | 267 |
| | 246 |
|
Total Current Liabilities | 2,088 |
| | 2,890 |
|
Long-term Debt | 3,804 |
| | 1,683 |
|
Deferred Credits and Other Noncurrent Liabilities | | | |
Deferred income taxes | 1,587 |
| | 1,223 |
|
Investment tax credits | 15 |
| | 27 |
|
Price risk management liabilities | 108 |
| | 193 |
|
Accrued pension obligations | 340 |
| | 299 |
|
Asset retirement obligations | 490 |
| | 415 |
|
Other deferred credits and noncurrent liabilities | 91 |
| | 123 |
|
Total Deferred Credits and Other Noncurrent Liabilities | 2,631 |
| | 2,280 |
|
Commitments and Contingent Liabilities (Note 11) |
|
|
|
Equity |
|
|
|
|
|
Predecessor Member's Equity (a) | — |
| | 3,930 |
|
Common Stock - $0.001 par value (b) | — |
| | — |
|
Additional paid-in capital | 4,702 |
| | — |
|
Accumulated deficit | (373 | ) | | — |
|
Accumulated other comprehensive income (loss) | (26 | ) | | (23 | ) |
Total Equity | 4,303 |
|
| 3,907 |
|
Total Liabilities and Equity | $ | 12,826 |
|
| $ | 10,760 |
|
(THIS PAGE LEFT BLANK INTENTIONALLY.)
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.Represents Talen Energy Supply's predecessor member's equity prior to the June 1, 2015 spinoff transaction. Upon completion of the spinoff, the predecessor member's equity was transferred to Talen Energy Corporation's additional paid-in capital. See Note 1 for additional information on the spinoff. |
| |
(b) | 1,000,000 shares authorized; 128,509 shares issued and outstanding at December 31, 2015. |
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
CONSOLIDATED STATEMENTS OF EQUITY |
Talen Energy Corporation and Subsidiaries |
(Millions of Dollars) | | | | | | |
| | | | | | | | | | | | | | | | |
| | Common stock shares (a) | | Common stock | | Additional paid-in capital | | Accumulated deficit | | AOCI | | Non-controlling interests | | Predecessor member's equity (b) | | Total |
December 31, 2012 | | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 48 |
| | $ | 18 |
| | $ | 3,782 |
| | $ | 3,848 |
|
Net income (loss) | | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | (230 | ) | | (229 | ) |
Other comprehensive income (loss) | | — |
| | — |
| | — |
| | — |
| | 29 |
| | — |
| | — |
| | 29 |
|
Distributions to predecessor member | | — |
| | — |
| | — |
| | — |
| | — |
| | (19 | ) | | (408 | ) | | (427 | ) |
Contributions from predecessor member | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,577 |
| | 1,577 |
|
December 31, 2013 | | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 77 |
| | $ | — |
| | $ | 4,721 |
| | $ | 4,798 |
|
| | | | | | | | | | | | | | | | |
Net income (loss) | | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 410 |
| | $ | 410 |
|
Other comprehensive income (loss) | | — |
| | — |
| | — |
| | — |
| | (100 | ) | | — |
| | — |
| | (100 | ) |
Distributions to predecessor member | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,940 | ) | | (1,940 | ) |
Contributions from predecessor member | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 739 |
| | 739 |
|
December 31, 2014 | | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (23 | ) | | $ | — |
| | $ | 3,930 |
| | $ | 3,907 |
|
| | | | | | | | | | | | | | | | |
Net income (loss) from January 1, 2015 to May 31, 2015 | | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 32 |
| | $ | 32 |
|
Net income (loss) from June 1, 2015 to December 31, 2015 | | — |
| | — |
| | — |
| | (373 | ) | | — |
| | — |
| | — |
| | (373 | ) |
Other comprehensive income (loss) | | — |
| | — |
| | — |
| | — |
| | (3 | ) | | — |
| | — |
| | (3 | ) |
Distributions to predecessor member | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (410 | ) | | (410 | ) |
Contributions from predecessor member | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 248 |
| | 248 |
|
Common stock issued for acquisition of RJS Power | | 44,975 |
| | — |
| | 902 |
| | — |
| | — |
| | — |
| | — |
| | 902 |
|
Stock issuance | | 10 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Stock issuance expense | | — |
| | — |
| | (2 | ) | | — |
| | — |
| | — |
| | — |
| | (2 | ) |
Stock-based compensation | | — |
| | — |
| | 2 |
| | — |
| | — |
| | — |
| | — |
| | 2 |
|
Consummation of spinoff transaction (b) | | 83,524 |
| | — |
| | 3,800 |
| | — |
| | — |
| | — |
| | (3,800 | ) | | — |
|
December 31, 2015 | | 128,509 |
|
| $ | — |
|
| $ | 4,702 |
|
| $ | (373 | ) |
| $ | (26 | ) | | $ | — |
|
| $ | — |
| | $ | 4,303 |
|
| |
(a) | Shares in thousands. Each share entitles the holder to one vote on any questions presented at any stockholders' meeting. |
| |
(b) | Upon consummation of the spinoff on June 1, 2015, Talen Energy Supply's predecessor member's equity balance was transferred to Talen Energy Corporation's "Additional paid-in capital." See Note 1 for additional information on the spinoff. |
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
|
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. |
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. |
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 |
|
| | | | | | | | | | | |
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, |
Talen Energy Supply, LLC and Subsidiaries | | | | | |
(Millions of Dollars) | | | | | |
| 2015 | | 2014 | | 2013 |
Operating Revenues | | | | | |
Wholesale energy | $ | 2,828 |
| | $ | 2,653 |
| | $ | 2,890 |
|
Wholesale energy to affiliate | 14 |
| | 84 |
| | 51 |
|
Retail energy | 1,095 |
| | 1,243 |
| | 1,027 |
|
Energy-related businesses | 544 |
| | 601 |
| | 527 |
|
Total Operating Revenues | 4,481 |
| | 4,581 |
| | 4,495 |
|
Operating Expenses | | | | | |
Operation | | | | | |
Fuel | 1,194 |
| | 1,196 |
| | 1,048 |
|
Energy purchases | 676 |
| | 1,054 |
| | 1,153 |
|
Operation and maintenance | 1,052 |
| | 1,007 |
| | 961 |
|
Loss on lease termination | — |
| | — |
| | 697 |
|
Impairments | 657 |
| | — |
| | 65 |
|
Depreciation | 356 |
| | 297 |
| | 299 |
|
Taxes, other than income | 65 |
| | 57 |
| | 53 |
|
Energy-related businesses | 520 |
| | 573 |
| | 512 |
|
Total Operating Expenses | 4,520 |
| | 4,184 |
| | 4,788 |
|
Operating Income (Loss) | (39 | ) | | 397 |
| | (293 | ) |
Other Income (Expense) - net | (118 | ) | | 30 |
| | 32 |
|
Interest Expense | 211 |
| | 124 |
| | 159 |
|
Income (Loss) from Continuing Operations Before Income Taxes | (368 | ) | | 303 |
| | (420 | ) |
Income Taxes | (27 | ) | | 116 |
| | (159 | ) |
Income (Loss) from Continuing Operations After Income Taxes | (341 | ) | | 187 |
| | (261 | ) |
Income (Loss) from Discontinued Operations (net of income taxes) | — |
| | 223 |
| | 32 |
|
Net Income (Loss) | (341 | ) | | 410 |
| | (229 | ) |
Net Income (Loss) Attributable to Noncontrolling Interests | — |
| | — |
| | 1 |
|
Net Income (Loss) Attributable to Talen Energy Supply Member | $ | (341 | ) | | $ | 410 |
| | $ | (230 | ) |
Amounts Attributable to Talen Energy Supply Member: | | | | | |
Income (Loss) from Continuing Operations After Income Taxes | $ | (341 | ) | | $ | 187 |
| | $ | (262 | ) |
Income (Loss) from Discontinued Operations (net of income taxes) | — |
| | 223 |
| | 32 |
|
Net Income (Loss) | $ | (341 | ) | | $ | 410 |
| | $ | (230 | ) |
(a) 80,000 shares authorized; 37,818 shares issued and outstanding at December 31, 2013 and December 31, 2012.
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, |
Talen Energy Supply, LLC and Subsidiaries |
(Millions of Dollars) | | | | | |
| 2015 | | 2014 | | 2015 |
Net income (loss) | $ | (341 | ) | | $ | 410 |
| | $ | (229 | ) |
Other comprehensive income (loss): | | | | | |
Amounts arising during the period - gains (losses), net of tax (expense) benefit: | | | | | |
Available-for-sale securities, net of tax of $5, ($40), ($72) | (6 | ) | | 35 |
| | 67 |
|
Defined benefit plans: | | | | | |
Prior service costs, net of tax of $1, ($6), ($1) | (3 | ) | | 8 |
| | 2 |
|
Net actuarial gain, net of tax of ($30), $83, ($49) | 46 |
| | (120 | ) | | 71 |
|
Reclassifications from AOCI - (gains) losses, net of tax expense (benefit): | | | | | |
Available-for-sale securities, net of tax of $2, $7, $4 | (2 | ) | | (6 | ) | | (6 | ) |
Qualifying derivatives, net of tax of $12, $17, $84 | (19 | ) | | (25 | ) | | (123 | ) |
Defined benefit plans: | | | | | |
Prior service costs, net of tax of $0, ($1), ($3) | (1 | ) | | 3 |
| | 4 |
|
Net actuarial loss, net of tax of $11, ($4), ($10) | (18 | ) | | 5 |
| | 14 |
|
Total other comprehensive income (loss) attributable to Talen Energy Supply Member | (3 | ) | | (100 | ) | | 29 |
|
Comprehensive income (loss) | (344 | ) |
| 310 |
|
| (200 | ) |
Comprehensive income attributable to noncontrolling interests | — |
| | — |
| | 1 |
|
Comprehensive income (loss) attributable to Talen Energy Supply Member | $ | (344 | ) | | $ | 310 |
| | $ | (201 | ) |
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, |
Talen Energy Supply, LLC and Subsidiaries | | | | | |
(Millions of Dollars) | | | | | |
| 2015 | | 2014 | | 2013 |
Cash Flows from Operating Activities | | | | | |
Net income (loss) | $ | (341 | ) | | $ | 410 |
| | $ | (229 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities |
|
| |
|
| | |
Pre-tax gain from the sale of Montana hydroelectric generation business | — |
| | (315 | ) | | — |
|
Depreciation | 356 |
| | 313 |
| | 318 |
|
Amortization | 222 |
| | 163 |
| | 156 |
|
Defined benefit plans - expense | 50 |
| | 42 |
| | 51 |
|
Deferred income taxes and investment tax credits | (61 | ) | | (26 | ) | | (296 | ) |
Impairment of assets | 662 |
| | 20 |
| | 65 |
|
Unrealized (gains) losses on derivatives, and other hedging activities | (119 | ) | | 4 |
| | 171 |
|
Loss on lease termination | — |
| | — |
| | 426 |
|
Other | 46 |
| | 36 |
| | 2 |
|
Change in current assets and current liabilities |
| |
| | |
Accounts receivable | 115 |
| | 17 |
| | 23 |
|
Accounts payable | (147 | ) | | 2 |
| | (56 | ) |
Unbilled revenues | 58 |
| | 68 |
| | 83 |
|
Fuel, materials and supplies | 12 |
| | (97 | ) | | (31 | ) |
Prepayments | 31 |
| | (53 | ) | | (5 | ) |
Counterparty collateral | 63 |
| | (17 | ) | | (81 | ) |
Price risk management assets and liabilities | (14 | ) | | (30 | ) | | 7 |
|
Taxes payable | (23 | ) | | (3 | ) | | (31 | ) |
Other | (49 | ) | | (40 | ) | | (16 | ) |
Other operating activities | | | | | |
Defined benefit plans - funding | (74 | ) | | (35 | ) | | (113 | ) |
Other assets | 4 |
| | 3 |
| | (4 | ) |
Other liabilities | (23 | ) | | — |
| | (30 | ) |
Net cash provided by operating activities | 768 |
| | 462 |
| | 410 |
|
Cash Flows from Investing Activities | | | | | |
Expenditures for property, plant and equipment | (451 | ) | | (416 | ) | | (583 | ) |
Proceeds from the sale of Montana hydroelectric generation business | — |
| | 900 |
| | — |
|
Expenditures for intangible assets | (70 | ) | | (46 | ) | | (42 | ) |
Acquisition of MACH Gen | (603 | ) | | — |
| | — |
|
Purchases of nuclear plant decommissioning trust investments | (196 | ) | | (170 | ) | | (159 | ) |
Proceeds from the sale of nuclear plant decommissioning trust investments | 180 |
| | 154 |
| | 144 |
|
Proceeds from the sale of the Renewable business | 116 |
| | — |
| | — |
|
Proceeds from the receipt of grants | — |
| | 164 |
| | 3 |
|
Net (increase) decrease in restricted cash and cash equivalents | 87 |
| | (108 | ) | | (22 | ) |
Other investing activities | 22 |
| | 19 |
| | 28 |
|
Net cash provided by (used in) investing activities | (915 | ) | | 497 |
| | (631 | ) |
Cash Flows from Financing Activities | | | | | |
Issuance of long-term debt | 600 |
| | — |
| | — |
|
Retirement of long-term debt | (335 | ) | | (309 | ) | | (747 | ) |
Contributions from member | 82 |
| | 739 |
| | 1,577 |
|
Distributions to member | (219 | ) | | (1,906 | ) | | (408 | ) |
Net increase (decrease) in short-term debt | (162 | ) | | 630 |
| | (356 | ) |
Other financing activities | (30 | ) | | — |
| | (19 | ) |
Net cash provided by (used in) financing activities | (64 | ) | | (846 | ) | | 47 |
|
Net Increase (Decrease) in Cash and Cash Equivalents | (211 | ) | | 113 |
| | (174 | ) |
Cash and Cash Equivalents at Beginning of Period | 352 |
| | 239 |
| | 413 |
|
Cash and Cash Equivalents at End of Period | $ | 141 |
| | $ | 352 |
| | $ | 239 |
|
Supplemental Disclosures of Cash Flow Information | | | | | |
Cash paid (received) during the period for: | | | | | |
Interest - net of amount capitalized | $ | 169 |
| | $ | 122 |
| | $ | 157 |
|
Income taxes - net | $ | 5 |
| | $ | 310 |
| | $ | 189 |
|
The accompanying Notes to Consolidated Financial Statements are an integral part of the financial statements.
|
| | | | | | | |
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, |
Talen Energy Supply, LLC and Subsidiaries | | | |
(Millions of Dollars) | | | |
| 2015 | | 2014 |
Assets | | | |
Current Assets | | | |
Cash and cash equivalents | $ | 141 |
| | $ | 352 |
|
Restricted cash and cash equivalents | 106 |
| | 176 |
|
Accounts receivable (less reserve: 2015, $1; 2014, $2) |
| |
|
Customer | 205 |
| | 186 |
|
Other | 62 |
| | 103 |
|
Accounts receivable from affiliates | — |
| | 36 |
|
Unbilled revenues | 160 |
| | 218 |
|
Fuel, materials and supplies | 508 |
| | 455 |
|
Prepayments | 52 |
| | 70 |
|
Price risk management assets | 562 |
| | 1,079 |
|
Assets held for sale | 954 |
| | — |
|
Other current assets | 12 |
| | 26 |
|
Total Current Assets | 2,762 |
| | 2,701 |
|
Investments | | | |
Nuclear plant decommissioning trust funds | 951 |
| | 950 |
|
Other investments | 25 |
| | 30 |
|
Total Investments | 976 |
| | 980 |
|
Property, Plant and Equipment | | | |
Generation | 13,468 |
| | 11,318 |
|
Nuclear fuel | 652 |
| | 624 |
|
Other | 342 |
| | 293 |
|
Less: accumulated depreciation | 6,411 |
| | 6,242 |
|
Property, plant and equipment, net | 8,051 |
| | 5,993 |
|
Construction work in progress | 536 |
| | 443 |
|
Total Property, Plant and Equipment, net | 8,587 |
| | 6,436 |
|
Other Noncurrent Assets | | | |
Goodwill | — |
| | 72 |
|
Other intangibles | 310 |
| | 257 |
|
Price risk management assets | 131 |
| | 239 |
|
Other noncurrent assets | 60 |
| | 75 |
|
Total Other Noncurrent Assets | 501 |
| | 643 |
|
Total Assets | $ | 12,826 |
| | $ | 10,760 |
|
The accompanying Notes to the Consolidated Financial Statements are an integral part of the financial statements.
|
| | | | | | | |
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, |
Talen Energy Supply, LLC and Subsidiaries | | | |
(Millions of Dollars) | | | |
| 2015 | | 2014 |
Liabilities and Equity | | | |
Current Liabilities | | | |
Short-term debt | $ | 608 |
| | $ | 630 |
|
Long-term debt due within one year | 399 |
| | 535 |
|
Accounts payable | 291 |
| | 361 |
|
Accounts payable to affiliates | — |
| | 50 |
|
Taxes | 16 |
| | 28 |
|
Interest | 43 |
| | 16 |
|
Price risk management liabilities | 431 |
| | 1,024 |
|
Liabilities held for sale | 33 |
| | — |
|
Other current liabilities | 267 |
| | 246 |
|
Total Current Liabilities | 2,088 |
| | 2,890 |
|
Long-term Debt | 3,804 |
| | 1,683 |
|
Deferred Credits and Other Noncurrent Liabilities | | | |
Deferred income taxes | 1,587 |
| | 1,223 |
|
Investment tax credits | 15 |
| | 27 |
|
Price risk management liabilities | 108 |
| | 193 |
|
Accrued pension obligations | 340 |
| | 299 |
|
Asset retirement obligations | 490 |
| | 415 |
|
Other deferred credits and noncurrent liabilities | 91 |
| | 123 |
|
Total Deferred Credits and Other Noncurrent Liabilities | 2,631 |
| | 2,280 |
|
Commitments and Contingent Liabilities (Note 11) |
| |
|
Member's Equity | 4,303 |
| | 3,907 |
|
Total Liabilities and Equity | $ | 12,826 |
| | $ | 10,760 |
|
The accompanying Notes to the Consolidated Financial Statements are an integral part of the financial statements.
|
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 |
|
| | | | | | | | | | | |
CONSOLIDATED STATEMENTS OF EQUITY | | | | | |
Talen Energy Supply, LLC and Subsidiaries | | | | | |
(Millions of Dollars) | | | | | |
| Member's equity | | Non- controlling interests | | Total |
| | |
December 31, 2012 | $ | 3,830 |
| | $ | 18 |
| | $ | 3,848 |
|
Net income (loss) | (230 | ) | | 1 |
| | (229 | ) |
Other comprehensive income (loss) | 29 |
| | — |
| | 29 |
|
Distributions to member | (408 | ) | | (19 | ) | | (427 | ) |
Contributions from member | 1,577 |
| | — |
| | 1,577 |
|
December 31, 2013 | $ | 4,798 |
| | $ | — |
| | $ | 4,798 |
|
| | | | | |
Net income | $ | 410 |
| | — |
| | $ | 410 |
|
Other comprehensive income (loss) | (100 | ) | | — |
| | (100 | ) |
Distributions to member | (1,940 | ) | | — |
| | (1,940 | ) |
Contributions from member | 739 |
| | — |
| | 739 |
|
December 31, 2014 | $ | 3,907 |
| | — |
| | $ | 3,907 |
|
| | | | | |
Net income (loss) | $ | (341 | ) | | — |
| | $ | (341 | ) |
Other comprehensive income (loss) | (3 | ) | | — |
| | (3 | ) |
Distributions to member (a) | (412 | ) | | — |
| | (412 | ) |
Contributions from member (a) | 1,152 |
| | — |
| | 1,152 |
|
December 31, 2015 | $ | 4,303 |
| | — |
| | $ | 4,303 |
|
(a) Shares in thousands. All common sharesIncludes the contribution of KU stock are owned by LKE.RJS Power as of the acquisition date. See Notes 1 and 6 for additional information.
(b) See Note 24 for disclosure of balances of each component of AOCI.
The accompanying Notes to the Consolidated Financial Statements are an integral part of the financial statements.
COMBINED NOTES TO FINANCIAL STATEMENTSCombined Notes to the Financial Statements
1. Summary of Significant Accounting Policies
(All Registrants)
General
Capitalized terms and abbreviations appearing in the combined notes to the financial statements are defined in the glossary. Dollars are in millions, except per share data, unless otherwise noted. TheAs Talen Energy Corporation is substantially comprised of Talen Energy Supply, LLC and its subsidiaries, to avoid repetition, most disclosures refer to Talen Energy which indicates the disclosure applies to Talen Energy Corporation and Talen Energy Supply, LLC. 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. When identification of a particular registrant or subsidiary is considered important to understanding the matter being disclosed, the specific Registrantentity's name is used, in particular, for those few disclosures that apply only to which disclosures are applicable is identified in parenthetical headings in italics above the applicableTalen Energy Corporation. Each disclosure or within the applicablereferring to a subsidiary applies to both Talen Energy Corporation and Talen Energy Supply and each disclosure for its related activities and disclosures. Within combined disclosures, amounts are disclosed for any Registrant when significant.referring to Talen Energy Supply applies to Talen Energy Corporation through consolidation.
Business and ConsolidationBasis of Presentation
(PPL)Business - Spinoff from PPL and formation of Talen Energy Corporation
PPLTalen Energy Corporation, through its principal subsidiary Talen Energy Supply, is ana competitive energy and utility holdingpower generation company that, through its subsidiaries, is primarily engaged in: 1) the regulated distribution of electricity in the U.K.; 2) the regulated generation, transmission, distributionproduction and sale of electricity, capacity 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. Headquarteredrelated products. Talen Energy is headquartered in Allentown, PA, PPL's principal subsidiaries are PPL Global, LKE (including its principal subsidiaries, LG&EPennsylvania 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 aregeneration assets principally located in Pennsylvaniathe Northeast, Mid-Atlantic 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 inSouthwest regions of the northeastern and northwestern U.S.
In June 2014, PPL and Talen Energy Supply executed definitive agreements with the Riverstone Holders to combine their competitive power generation businesses into a new, stand-alone, publicly traded company named Talen Energy Corporation. On April 13, 2012, an indirect,June 1, 2015, PPL completed the spinoff to PPL shareowners of a newly formed entity, Talen Energy Holdings, Inc. (Holdco), which at such time owned all of the membership interests of Talen Energy Supply and all of the common stock of Talen Energy Corporation. Immediately following the spinoff, Holdco merged with a special purpose subsidiary of Talen Energy Corporation, with Holdco continuing as the surviving company to the merger and as a wholly owned subsidiary of Talen Energy Corporation and the sole owner of Talen Energy Supply. PPL does not have an ownership interest in Talen Energy Corporation after completion of the spinoff. Substantially contemporaneous with the spinoff and merger, RJS Power was contributed by the Riverstone Holders to become a subsidiary of Talen Energy Supply completed(referred to as the Ironwood Acquisition."combination" or the "acquisition"). Subsequent to the acquisition, RJS Power was merged into Talen Energy Supply. Talen Energy has treated the combination with RJS Power as an acquisition, with Talen Energy Supply considered the accounting acquirer in accordance with business combination accounting guidance. See Note 103 for information on Talen Energy Corporation's common shares issued as a result of the formation of Talen Energy Corporation. See Note 6 for additional information.information on the acquisition.
(PPLFollowing the announcement of the transaction to form Talen Energy, efforts were initiated to identify the appropriate staffing for Talen Energy following completion of the spinoff. Organizational plans were substantially completed in 2014. The organizational plans identified the need to resize and PPL Electric)restructure the Talen Energy organization and as a result, in 2014, charges of $16 million for employee separation benefits were recorded in "Operation and maintenance" on the Statement of Income and in "Other current liabilities" on the Balance Sheet, related to 112 eliminated positions. The separation benefits include cash severance compensation, lump sum COBRA reimbursement payments and outplacement services. At December 31, 2014, the recorded liability related to separation benefits was $9 million and included in "Other current liabilities" on the Balance Sheets. Most separations and payment of separation benefits have now been completed and the recorded liability at December 31, 2015 was insignificant.
In connection with the spinoff transaction, additional employee-related costs were incurred primarily related to accelerated stock-based compensation and pro-rated performance-based cash incentive and stock-based compensation awards previously issued under PPL Electric is a cost-based rate-regulated utility subsidiarystock incentive programs, primarily for Talen Energy Supply employees and for PPL employees who became Talen Energy Supply employees in connection with the transaction. These costs were recognized at the closing of PPL.the spinoff. During 2015, Talen Energy Supply recorded $25 million related to these accelerated stock-based compensation and pro-rated stock-based compensation awards at spinoff. As the vesting for all Talen Energy Supply employees was accelerated and all remaining unrecognized compensation expense accelerated concurrently with the spinoff, Talen Energy does not expect to recognize future compensation costs for equity awards from 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.stock incentive programs held by Talen Energy Supply employees. See Note 8 for additional information on stock-based compensation.
(PPL, LKE, LG&EIn addition, during 2015, Talen Energy incurred $12 million of restructuring costs related to the spinoff transaction which are recorded in "Operation and KU)maintenance" on the Statements of Income.
LKEPrior to completion of the spinoff, Talen Energy Supply's financial statements included certain transactions with affiliates of PPL, which were disclosed as related party transactions. After June 1, 2015, all transactions with PPL or its affiliates are no longer related party transactions. See Note 12 for additional information on related party transactions.
Following the spinoff, certain services, including information technology, financial and accounting, human resource and other specified services are provided by PPL on a transition basis pursuant to the TSA. The TSA with PPL is for a period of up to two years from the date of the spinoff. For 2015, the costs incurred for these services were $23 million. See Note 12 for information on the TSA with Topaz Power Management, LP.
In connection with the FERC approval of the combination of Talen Energy Supply with RJS Power, PPL, Talen Energy and RJS Power agreed that within twelve months following the closing of the transaction, Talen Energy would enter into an agreement to divest between 1,300 MW and 1,400 MW of assets in one of two groups of assets (both of which include the Sapphire facilities within PJM and the first of which also included the Holtwood, Lake Wallenpaupack and C.P. Crane facilities and the other of which includes the Ironwood facility) and to limit PJM energy market offers from assets it would retain in the other group to cost-based offers. In September 2015, Talen Energy requested that the FERC approve a third option for complying with the mitigation requirement that consists of divesting the Holtwood, Lake Wallenpaupack, C.P. Crane and Ironwood facilities, and will have the ability to retain the Sapphire facilities located in PJM, provided PJM energy market offers from such retained assets are limited to cost-based offers. In October 2015, Talen Energy entered into agreements to sell the Holtwood, Lake Wallenpaupack, Ironwood and C.P. Crane facilities. In November 2015, the FERC accepted the alternative plan on the terms requested. See Note 6 for information on the sales.
Basis of Presentation
Talen Energy Corporation's obligation to report under the Securities and Exchange Act of 1934, as amended, commenced on May 1, 2015, the date Talen Energy Corporation's Registration Statement on Form S-1 relating to the spinoff transaction was declared effective by the SEC. Talen Energy Supply is a utility holding companyseparate registrant and is considered the accounting predecessor of Talen Energy Corporation. Therefore, the financial information prior to June 1, 2015 presented in this Annual Report on Form 10-K for both registrants includes only legacy Talen Energy Supply information. From June 1, 2015, upon completion of the spinoff and acquisition, Talen Energy Corporation's and Talen Energy Supply's consolidated financial information also includes RJS. As such, Talen Energy Corporation's and Talen Energy Supply's consolidated financial information presented in this Annual Report on Form 10-K for the 2015 period represents twelve months of legacy Talen Energy Supply information consolidated with cost-based rate-regulated utility operations through its subsidiaries, LG&Eseven months of RJS information, while the 2014 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.earlier periods represent only legacy Talen Energy Supply information.
(PPL, PPL Energy SupplyThe assets and LKE)liabilities related to the Holtwood, Lake Wallenpaupack, C.P. Crane and Ironwood facilities have been classified as "Assets held for sale" and "Liabilities held for sale" at December 31, 2015 but their operating results have not been reclassified to "Income (Loss) from Discontinued Operations (net of income taxes)" on the Statements of Income in accordance with the new accounting guidance on reporting discontinued operations. See Note 6 for additional information on these announced divestitures and "New Accounting Guidance Adopted - Reporting of Discontinued Operations" below for additional information on this new accounting guidance.
"Income (Loss) from Discontinued Operations (net of income taxes)" on the 2014 and 2013 Statements of Income includesrepresents the activitiesoperating results of various businesses that wereTalen Montana's hydroelectric generating facilities sold or distributed. See Note 9 for additional information.in the fourth quarter of 2014. The Statements of Cash Flows do not separately report the cash flows of the Discontinued Operations.discontinued operations. See Note 6 for additional information.
(All Registrants)As described above, as part of the FERC approval of the combination with RJS Power as part of the spinoff transaction, certain assets were required to be disposed of under a mitigation plan. Under GAAP, assets acquired through a business combination that are immediately classified as held for sale should be classified as a discontinued operation from the date of acquisition. The Sapphire portfolio was included in both of the original divestiture packages approved by the FERC when approving the combination with RJS Power. Therefore, the Sapphire portfolio met the criteria for classification as assets and liabilities held for sale on the balance sheet and as discontinued operations on the statement of income upon acquisition. In November 2015, when the FERC approved the third mitigation package excluding the Sapphire portfolio as discussed above, the assets and liabilities and operating results were reclassified to held and used and to continuing operations as the sale of the Sapphire portfolio was no longer probable and therefore, no longer met the held for sale criteria. When this reclassification occurred, an
impairment charge was recorded based on the then current estimated fair values of the facilities. See Notes 14 and 16 for additional information on the impairment charges for the Sapphire plants.
The financial statements of the RegistrantsTalen Energy 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 consolidateTalen Energy consolidates 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 PPLTalen Energy Supply, see Note 22 for information regarding a previously consolidated VIE.is not the primary beneficiary in any material VIEs. 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, PPLTalen 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 1410 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.
(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 RegistrantsTalen Energy continuously assessassesses 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.Reclassifications
Changes in Classification
The classification of certainCertain amounts in the 2012 and 2011prior period financial statements have been changedreclassified to conform to current period's presentation, including the current presentation.change in presentation discussed below. The changes in classificationreclassifications did not affect the Registrants'operating income, net income or equity.
In these financial statements, revenue and expense from derivatives is recorded based on Talen Energy's economic hedging strategy. For example, all purchases and sales associated with economic hedging of the sale of energy using contracts accounted for as derivatives are recorded within "Operating Revenues" and all purchases and sales associated with economic hedging of the procurement of fuel or purchasing energy using contracts accounted for as derivatives are recorded as "Operating Expenses" on the Statements of Income. Prior to 2015, Talen Energy classified all non-trading commodity hedge transactions as revenue or expense based upon whether each specific transaction was a sale or purchase, which in certain instances, created losses within revenue and gains within expense. As a result of this change in presentation, there was an equal and offsetting increase of $845 million in 2014 and a decrease of $19 million in 2013 primarily in "Wholesale energy" and "Energy purchases" on the Statements of Income.
Earnings Per Share for Talen Energy Corporation
See Note 3 for information on the calculation of EPS.
(PPL)Price Risk Management
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 competitive generating units and marketing activities, as well as for trading purposes at PPL Energy Supply.purposes. Interest rate contracts are usedmay be utilized 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 deliversettle within a year are included in "Current Assets" and "Current Liabilities," while the portion of derivative positions that deliversettle beyond a year are recorded in "Other Noncurrent Assets" and "Deferred Credits and Other Noncurrent Liabilities." PPLTalen Energy 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 1915 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:
· | 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 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.
· | 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. |
Only contracts where physical delivery is deemed probable throughout the entire term of the contract can qualify for NPNS.
· | Certain purchased option contracts or net purchased option collars may receive cash flow hedge treatment. |
Derivative transactions that do not qualify for NPNS, or for which NPNS treatment is not elected, are recorded at fair value through earnings.
· | 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. |
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 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 haveTalen Energy has 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.
PPLTalen Energy Supply reflects its net realized and unrealized gains and losses associated with all derivatives that are held for trading purposes in "Unregulated wholesale"Wholesale energy" on the Statements of Income.
See Notes 1814 and 1915 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:
| | | | 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 from the sale of energy, capacity and ancillary services are recognized when the product or service is delivered to a customer or contractually earned, unless they meet the definition of and are accounted for as derivatives. See "Accounting and Reporting" in Note 15 for additional information on the accounting for derivatives.
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 differenceImmaterial differences between estimated and actual revenues isare 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'sTalen Energy'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$18 million and $12$20 million at December 31, 20132015 and 2012,2014, and the amount of billings in excess of costs and estimated earnings was $75$44 million and $70$41 million at December 31, 20132015 and 2012.2014.
During 2015, Talen Energy recorded a $7 million decrease to "Retail energy" revenues on the Statements of Income. Prior to the spinoff, Talen Energy billed and collected amounts from a third party that had a transmission operating agreement with Talen Energy's former affiliate, PPL Electric. Such amounts should have been recognized as an affiliate payable, but were inadvertently recorded as revenue. The $4 million after-tax impact ($0.04 per share for Talen Energy Corporation) of correcting this overstatement of "Retail energy" revenues decreased "Income (Loss) from Continuing Operations after Income Taxes" and "Net Income (Loss)" on the 2015 Statement on Income. The impact of the overstatement was not material to the previously-issued financial statements and the correction was not material to the full year results for 2015.
During 2014, Talen Energy recorded a $17 million increase to "Energy-related businesses" revenues and "Income (Loss) from Continuing Operations before Income Taxes" on the 2014 Statement of Income related to the timing of revenue recognition for a mechanical contracting and engineering subsidiary in prior periods. The $10 million after-tax impact ($0.13 per share for Talen Energy Corporation) of correcting this error increased "Income (Loss) from Continuing Operations after Income Taxes" and "Net Income (Loss)" in 2014. The impact of the error was not material to the previously-issued financial statements and the correction was not material to the full year results for 2014.
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 | |
|
| | | | | | | | | | | | | | | | | | | |
| | | Additions | | | | |
| Balance at Beginning of Period | | Charged to Income | | Charged to Other Accounts | | Deductions (a) | | Balance at End of Period |
2015 | $ | 2 |
| | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | 1 |
|
2014 | 21 |
| | — |
| | — |
| | 19 | (b) | | 2 |
|
2013 | 23 |
| | 1 |
| | — |
| | 3 |
| | 21 |
|
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 toIn 2011, a wholesale customer filed for bankruptcy protection under Chapter 11 of the SMGT bankruptcy. See Note 15 for additional information. |
(c) | Includes amounts related toU.S. Bankruptcy code. In 2014, Talen Energy Marketing received an insignificant amount of cash, settling the June 2011, FERC approved settlement agreement between PPLoutstanding administrative claim 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 andtherefore, the related allowance for doubtfulreserve balance was offset against the accounts were reversed and the settlement recorded.receivable balance. |
(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)assets."
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 |
|
| | | | | | | |
| 2015 | | 2014 |
Margin deposits posted to counterparties | $ | 91 |
| | $ | 175 |
|
Ironwood debt service reserves | 15 |
| | 17 |
|
Other | — |
| | 1 |
|
| $ | 106 |
| | $ | 193 |
|
(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
Fair Value Measurements (All Registrants)
The Registrants valueTalen Energy values 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,Talen Energy uses, 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 classifyTalen Energy classifies 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. |
· | Level 3 -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'Talen Energy's 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 equal to or 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 1814 and 2319 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.
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 costsCosts associated with planned major maintenance projects are recorded 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.
PPLTalen Energy Supply capitalizes interest costs as part of construction costs. Capitalized interest excluding AFUDCwas as follows for PPL, is as follows.the years ended December 31.
|
| | | | | | | | | | | |
| 2015 | | 2014 | | 2013 |
| $ | 20 |
| | $ | 23 |
| | $ | 37 |
|
| | | | | 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 includingprimarily 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.income.
Following are theThe weighted-average rates of depreciation were 3.18% and 3.28% at December 31.31, 2015 and 2014.
| | 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, PPLTalen Energy 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.
PPLTalen Energy accounts for emission allowances and PPL Energy Supply account for RECsRGGI emission credits (RGGI credits) as intangible assets. PPL and PPLTalen 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 theirits generation facilities' historical emissions experience, and havehas purchased emission allowances generally or RGGI credits when it is expected that additional allowances or RGGI credits will be needed. The carrying value of allocated emission allowances is initially recorded at zero value and purchased allowances and RGGI emissions credits are initially recorded based on their purchase price. When consumed or sold, emission allowances and RGGI credits are removed from the Balance Sheet at their weighted-average carrying value. Since the economic benefits of emission allowances and RGGI credits are not diminished until they are consumed, emission allowances and RGGI credits 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 and RGGI credits are included in "Other operation"Operation and maintenance" on the Statements of Income.
Asset Impairment (Excluding Investments)
The Registrants reviewTalen Energy reviews long-lived assets that are subject to depreciation or amortization, including finite-lived intangibles, for impairment when events or changes in 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 1514 and 1816 for a discussion of the Corette coal-fired plant in Montana which was determined to be impaired in the fourth quarteran impairment of 2013.an asset classified as held and used.
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. See Notes 14 and 16 for a discussion of impairments of an asset group initially classified as held for sale at acquisition and subsequently reclassified as held and used.
PPLTalen 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 reviewreviews 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'sTalen Energy's reporting units are at the operating segment level.
PPL, PPLTalen 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.
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 ofSee Note 16 for information on a goodwill impairment recorded in the fourththird 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.2015, which fully impaired Talen Energy's previously recognized goodwill.
Asset Retirement Obligations
PPL and its subsidiaries recordTalen Energy records 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"Operation and maintenance" on the Statements of Incometo 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 2118 for additional information on AROs.
Compensation and Benefits
Defined Benefits(All Registrants)
Certain PPLTalen Energy Supply and certain of its subsidiaries sponsor or participate in, as applicable, various qualified funded and non-qualified unfunded defined benefit pension plans and both funded and unfunded other postretirement benefit plans. Prior to the June 1, 2015 spinoff, Talen Energy participated in plans sponsored by PPL. An asset or liability is recorded with an offsetting entry to AOCI to recognize the funded status of all defined benefit plans with an offsetting entry to AOCI or, for LG&E, KUsponsored by Talen Energy Supply and PPL Electric, to regulatory assets or liabilities.its subsidiaries. Consequently, the funded status of all sponsored 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.
PPLTalen Energy 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 30% of the plan's projected benefit obligation are amortized on a straight-line basis over one-half of the expected average remaining 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 active plan participants.
See Note 139 for additional information about the plans and the accounting for defined benefits, including a discussion of defined benefits.the newly created pension and other postretirement benefit plans sponsored by Talen Energy Supply that replaced Talen Energy Supply's participation in similar PPL plans effective with the June 1, 2015 spinoff.
Stock-Based Compensation
(All Registrants except LG&E and KU)
PPLTalen Energy Corporation has several stock-based compensation plans for purposes of granting stock options, restricted stock, restricted stock units and performance units to certain employees as well as stock units and restricted stock units to directors. PPL grants most stock-based awardsPrior to the June 1, 2015 spinoff Talen Energy Supply participated in the first quarter of each year. PPL and its subsidiaries recognizeplans sponsored by PPL. Talen Energy recognizes compensation expense for stock-based awards based on the fair value method. Stock options that vest in installments are valued as a single award. PPLTalen Energy Corporation grants stock options with an exercise price that is not less than the fair value of PPL'sTalen Energy Corporation'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.
Stock-based compensation is primarily included in "Other operation"Operation and maintenance" on the Statements of Income. Stock-based compensation expense for PPL Energy Supply, PPL Electric and LKEperiods prior to the June 1, 2015 spinoff also includes an allocation of PPL Services' expense. See Note 8 for additional information on stock-based compensation.
Taxes
Income Taxes
(All Registrants)
PPLTalen Energy Corporation and its domestic subsidiaries file a consolidated U.S. federal income tax return.
Significant management judgment is required in developing the Registrants'Talen Energy's 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 onthat may be required to offset deferred tax assets.
Significant management judgment is also requiredIn order to determine the amount of benefit to be recognized in relation to an uncertain tax position. The Registrants useposition, Talen Energy uses a two-step process to evaluate tax positions. The first step requires an entity to determine whether, based on the technical merits supporting a particular tax position, it is more likely than not (greater than a 50% chance) that the tax position will be sustained. This determination assumes that the relevant taxing authority will examine the tax position and is aware of all the relevant facts surrounding the tax position. The second step requires an entity to recognize in the financial statements the benefit of a tax position that meets the more-likely-than-not recognition criterion. The benefit recognized is measured at the largest amount of benefit that has a likelihood of realization, upon settlement, that exceeds 50%. The amounts ultimately paid upon resolution of issues raised by taxing authorities may differ materially from the amounts accrued and may materially impact the financial statements of the Registrants in 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 lossesloss carryforwards and tax credit carryforwards.
The Registrants recordTalen Energy records valuation allowances to reduce deferred tax assets to the amounts that are more likely than not to be realized. The Registrants considerTalen Energy considers the ability to carryback attributes, 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 the Registrants determineTalen Energy determines that they areit is 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 the Registrants determineTalen Energy determines that they areit is not able to realize all or part of net deferred tax assets in the future, adjustments to the valuation allowances would decrease income by increasing tax expense in the period that such determination is made.
The Registrants deferTalen Energy defers investment tax credits when the credits are utilized and amortizeamortizes the deferred amounts over the average lives of the related assets.
The Registrants recognizeTalen Energy classifies interest and penalties from tax uncertainties in "Income Taxes" on theirits Statements of Income.
See Note 5 for additional discussion regarding income taxes.
(All Registrants except PPLTalen Energy Supply)
The provision for PPL, PPL Electric, LKE, LG&Erecords the receipt of grants related to assets as a reduction to the book basis of the property and KU'sthe related 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 deferredas an immediate reduction to 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."
(All Registrants except PPL)tax expense.
The income tax provision for PPLTalen 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 PPLTalen Energy Supply PPL Electric, LKE, LG&E, KU and any domestic subsidiaries each filed a separate consolidated 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 PPLTalen Energy Corporation filing a consolidated tax return is taken into account in the settlement of current taxes and the recognition of deferred taxes.
Prior to the spinoff, the income tax provision for Talen Energy Supply was calculated in accordance with an intercompany tax sharing agreement with PPL, which provided that taxable income be calculated as if Talen Energy Supply, and any of PPL's domestic subsidiaries, each filed a separate consolidated return. Tax benefits were not shared between companies. The entity that generated a tax benefit was the entity that was entitled to the tax benefit. At December 31, the following2014 Talen Energy Supply had a $105 million intercompany tax receivables (payables) were recorded.
| | 2013 | | 2012 |
| | | | | | |
PPL Energy Supply | | $ | 44 | | $ | (38) |
PPL Electric | | | (19) | | | 22 |
LKE | | | (28) | | | (12) |
LG&E | | | (8) | | | 5 |
KU | | | (27) | | | (15) |
receivable with PPL recorded under the tax sharing agreement, which was settled prior to the spinoff from PPL.
Taxes, Other Than Income(All Registrants)
The Registrants presentTalen Energy presents sales taxes in "Other current liabilities" and PPL presents value-added taxes in "Taxes" on the Balance Sheets.liabilities." These taxes are not reflected on the Statements of Income. See Note 54 for details on taxes included in "Taxes, other than income" on the Statements of Income.
Other
Leases
(All Registrants)
The Registrants evaluateTalen Energy evaluates whether arrangements entered into contain leases for accounting purposes. See Note 117 for a discussion of arrangements under which PPLTalen Energy Supply, LG&E and KU are lesseesis a lessee for accounting purposes.
Fuel, Materials and Supplies
(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. Generally, cost is reduced to market if the value of inventory has declined and it is probable that the utility of inventory in the ordinary course of business will not be recovered through revenue earned. Fuel costs for electric generation are charged to expense as used. For LG&E, natural gas supply costsMaterials and supplies are charged to expense"Operation and maintenance" on the Statements of Income as deliveredthey are used for repairs and maintenance or capitalized to the distribution system. See Note 6PP&E as they are used for further discussion of the fuel adjustment clause and gas supply clause.
(All Registrants except PPL Electric)capital projects.
"Fuel, materials and supplies" on the Balance Sheets consisted of the following at December 31.
| | | | PPL | | PPL Energy Supply | | LKE | | LG&E | | KU | |
| | | | 2013 | | 2012 | | 2013 | | 2012 | | 2013 | | 2012 | | 2013 | | 2012 | | 2013 | | 2012 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | 2015 | | 2014 |
Fuel | Fuel | | $ | 305 | | $ | 284 | | $ | 163 | | $ | 135 | | $ | 141 | | $ | 149 | | $ | 64 | | $ | 61 | | $ | 77 | | $ | 88 | $ | 257 |
| | $ | 250 |
|
Natural gas stored underground (a) | | 49 | | 50 | | 2 | | 8 | | 48 | | 42 | | 48 | | 42 | | | | | |
Materials and supplies | Materials and supplies | | | 348 | | | 339 | | | 193 | | | 184 | | | 89 | | | 85 | | | 42 | | | 39 | | | 47 | | | 46 | 251 |
| | 205 |
|
| | | | $ | 702 | | $ | 673 | | $ | 358 | | $ | 327 | | $ | 278 | | $ | 276 | | $ | 154 | | $ | 142 | | $ | 124 | | $ | 134 | |
Total | | $ | 508 |
| | $ | 455 |
|
(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(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 that only require disclosure. See Note 1511 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.
Foreign Currency Translation and Transactions(PPL)
WPD's functional currency is the GBP, which is the local currency in the 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 period included in PPL's results of operations. Adjustments resulting from foreign currency translation are recorded in AOCI.
Gains or losses relating to foreign currency transactions are recognized in "Other Income (Expense) - net" on the Statements of Income. See Note 17 for additional information.
New Accounting Guidance Adopted(All Registrants)
Improving Disclosures about Offsetting Balance Sheet ItemsReporting of Discontinued Operations
Effective January 1, 2013, the Registrants retrospectively adopted accounting guidance issued to enhance disclosures about derivative instruments that either (1) offset on the balance sheet or (2) are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset on the balance sheet.
The adoption of this guidance resulted in enhanced disclosures but did not have a significant impact on the Registrants. See Note 19 for the new disclosures.
Testing Indefinite-Lived Intangible Assets for Impairment
Effective January 1, 2013, the Registrants2015, Talen Energy prospectively adopted accounting guidance that allowschanges the criteria for determining what should be classified as a discontinued operation and the related presentation and disclosure requirements. A discontinued operation may include a component of an entity to elect the option to first makeor a qualitative evaluation about the likelihoodgroup of components of an impairmententity, or a business activity. A disposal of a component of an indefinite-lived intangible asset. If, basedentity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on this assessment, the entity's operations and financial results when any of the following occurs: (1) the components of an entity determinesor a group of components of an entity meets the criteria to be classified as held for sale, (2) the component of an entity or a group of components of an entity is disposed of by sale, or (3) the component of an entity or a group of components of an entity is disposed of other than by sale (for example, by abandonment or in a distribution to owners in a spinoff). In addition, the guidance provides that upon acquisition, if a business or activity meets the held for sale criteria, 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 needthen also to be performed. If the entity concludes otherwise,classified as a quantitative impairment test must be performed by determining the fair value of the asset and comparing it with the carrying value. The entity would record an impairment charge, if necessary.discontinued operation.
The initial adoption of this guidance did not have a significant impact on Talen Energy but will impact the Registrants.amounts presented as discontinued operations and will enhance the related disclosure requirements related to future disposals or held for sale classifications.
Reporting Amounts Reclassified Out of AOCIAccounting for Measurement-Period Adjustments
Effective January 1, 2013, the RegistrantsSeptember 30, 2015, Talen Energy prospectively adopted accounting guidance issuedthat requires an acquirer in a business combination to improverecognize measurement-period adjustments in the reportingperiod in which the amounts are determined, including the effect on earnings of reclassifications out of AOCI.any amounts that would have been recorded in prior periods as if the accounting would have been completed at the acquisition date. The Registrants are required to provide information about the effects on net income of significant amounts reclassified out of AOCIacquirer must disclose, by their respective statement of income line item, the portion of the adjustment recorded in the current period income statement that would have been recognized in prior periods if the item is required to be reclassified to net income in its entirety. For items not reclassified to net income in their entirety,adjustment had been recognized as of the Registrants are required to reference other disclosures that provide greater detail about these reclassifications.acquisition date.
The guidance applies to open measurement periods as of the adoption date and therefore applies to any measurement period adjustment made for the acquisitions of this guidance resulted in enhanced disclosures but did not have a significant impact on the Registrants.RJS Power and MACH Gen. See Note 246 for the new disclosures.additional information.
Balance Sheet Classification of Deferred Taxes
Effective December 31, 2015, Talen Energy prospectively adopted accounting guidance that requires deferred tax liabilities and assets to be classified as noncurrent in the balance sheet. The prior period amounts were not retrospectively adjusted. The current requirement that deferred tax assets and liabilities of a tax-paying component of an entity be offset and presented as a single amount is not affected by the guidance.
2. Segment and Related Information
Prior to the spinoff transaction, Talen Energy operated within a single reportable segment. Immediately following the spinoff, Talen Energy determined that it operated in two reportable segments: East and West, primarily based on geographic location and energy market characteristics. After the completion of the MACH Gen acquisition in November 2015, management reevaluated its segment composition.
(PPL)
PPL is organized into four segments: U.K. Regulated, Kentucky Regulated, Pennsylvania Regulated and Supply. PPL'sAt December 31, 2015, Talen Energy continues to operate in two reportable segments, are split between its regulated and competitive businesseshowever with its regulated businesses further segmented bya different composition than prior to the November 2015 MACH Gen acquisition, primarily based on geographic location.
The U.K. RegulatedEast segment consists of PPL Global whichnow primarily includes WPD's regulated electricity distribution operationsthe generating, marketing and certain costs, such as U.S. income taxes, administrative coststrading activities in PJM, NYISO and allocated financing costs.ISO-NE. The U.K. RegulatedWest segment includes the operating resultsgenerating, marketing and assets of WPD Midlands sincetrading activities in ERCOT and WECC, including the April 1, 2011 acquisition date, recorded on a one-month lag. The U.K. Regulatedcoal-fired facility, Colstrip, in Montana, which was included in the East segment is also allocated certain WPD Midlands acquisition-related costs and financing costs. See Note 10 for additional information regardingprior to the acquisition.segment reevaluation.
The Kentucky Regulated segment consistsSegment information for prior periods has been revised to reflect the current period presentation as the composition of the operationssegments and the measurement of LKE, which ownssegment performance has changed. Previously, net income was used as the measure of segment performance. Beginning in June 2015, operating income, as well as the non-GAAP measures, Adjusted EBITDA and operates regulated public utilities engaged in the generation, transmission, distribution and saleMargins, is used as a measure of electricity and distribution and sale of natural gas, representing primarily the activities of LG&E and KU. In addition, certain financing costs are allocated to the Kentucky Regulated segment. performance.
The Pennsylvania Regulated segment includes the regulated electricity delivery operations of PPL Electric. In addition, certain financing costs are allocated to the Pennsylvania Regulated segment.
The Supply segment consists primarily of the 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.
"Corporate and Other" primarily includes wages, benefits, services, certain insurance, rent, financing costs incurred primarily at the corporate level thatTalen Energy, which have not been allocated or assigned to the segments as well as certain other unallocated costs, whichand inter-company eliminations, and is presented to reconcile segment information to PPL's consolidated results.
In 2013, costs included in the Corporate and Other category increased, as anticipated, primarily due to an increase in financing at PPL Capital Funding not directly attributable to a particular segment. PPL's growth in rate-regulated businesses provides the organization an enhanced corporate-level financing alternative, through PPL Capital Funding, that further enables PPL to cost-effectively support targeted credit profiles across all89
Financial data for the segments and reconciliation to consolidated results for the years ended December 31 are:
|
| | | | | | | | | | | | | | | | |
| | East | | West | | Other | | Total |
2015 | | | | | | | | |
Revenues from external customers by product | | | | | | | | |
Energy | | $ | 3,653 |
| | $ | 284 |
| | $ | — |
| | $ | 3,937 |
|
Energy-related business | | 544 |
| | — |
| | — |
| | 544 |
|
Total Revenues | | $ | 4,197 |
| | $ | 284 |
| | $ | — |
| | $ | 4,481 |
|
| | | | | | | | |
Operating income (loss) (a) | | $ | 198 |
| | $ | 2 |
| | $ | (239 | ) | | $ | (39 | ) |
Depreciation | | 327 |
| | 26 |
| | 3 |
| | 356 |
|
Amortization (b) | | 200 |
| | 1 |
| | 21 |
| | 222 |
|
Unrealized (gains) losses on derivatives and other hedging activities (c) | | (143 | ) | | 24 |
| | — |
| | (119 | ) |
Impairments (d) | | 657 |
| | — |
| | — |
| | 657 |
|
Expenditures for long-lived assets (e) | | 387 |
| | 39 |
| | 38 |
| | 464 |
|
Total assets (f) | | 11,430 |
| | 1,231 |
| | 165 |
| | 12,826 |
|
| | | | | | | | |
2014 | | | | | | | | |
Revenues from external customers by product | | | | | | | | |
Energy | | $ | 3,771 |
| | $ | 209 |
| | $ | — |
| | $ | 3,980 |
|
Energy-related business | | 601 |
| | — |
| | — |
| | 601 |
|
Total Revenues | | $ | 4,372 |
| | $ | 209 |
| | $ | — |
| | $ | 4,581 |
|
| | | | | | | | |
Operating income (loss) | | $ | 558 |
| | $ | 71 |
| | $ | (232 | ) | | $ | 397 |
|
Depreciation | | 296 |
| | 1 |
| | — |
| | 297 |
|
Amortization (b) | | 154 |
| | — |
| | 9 |
| | 163 |
|
Unrealized (gains) losses on derivatives and other hedging activities (c) | | 35 |
| | (31 | ) | | — |
| | 4 |
|
Expenditures for long-lived assets | | 400 |
| | 31 |
| | — |
| | 431 |
|
Total assets (f) | | 10,308 |
| | 160 |
| | 292 |
| | 10,760 |
|
| | | | | | | | |
2013 | | | | | | | | |
Revenues from external customers by product | | | | | | | | |
Energy | | $ | 3,791 |
| | $ | 177 |
| | $ | — |
| | $ | 3,968 |
|
Energy-related business | | 527 |
| | — |
| | — |
| | 527 |
|
Total Revenues | | $ | 4,318 |
| | $ | 177 |
| | $ | — |
| | $ | 4,495 |
|
| | | | | | | | |
Operating income (loss) (a) | | $ | 652 |
| | $ | (750 | ) | | $ | (195 | ) | | $ | (293 | ) |
Depreciation | | 288 |
| | 11 |
| | — |
| | 299 |
|
Amortization (b) | | 149 |
| | — |
| | 7 |
| | 156 |
|
Unrealized (gains) losses on derivatives and other hedging activities (c) | | 163 |
| | 8 |
| | — |
| | 171 |
|
Impairments (d) | | — |
| | 65 |
| | — |
| | 65 |
|
Expenditures for long-lived assets | | 537 |
| | 31 |
| | — |
| | 568 |
|
Income Statement Data | | 2013 | | 2012 | | 2011 |
Revenues from external customers by product | | | | | | | | | |
| | U.K. Regulated | | | | | | | | | |
| | | Utility service (a) | | $ | 2,359 | | $ | 2,289 | | $ | 1,618 |
| | | Energy-related businesses | | | 44 | | | 47 | | | 35 |
| | | | Total | | | 2,403 | | | 2,336 | | | 1,653 |
| | Kentucky Regulated | | | | | | | | | |
| | | Utility service (a) | | | 2,976 | | | 2,759 | | | 2,793 |
| | Pennsylvania Regulated | | | | | | | | | |
| | | Utility service (a) | | | 1,866 | | | 1,760 | | | 1,881 |
| | Supply | | | | | | | | | |
| | | Energy (b) | | | 4,075 | | | 4,970 | | | 5,938 |
| | | Energy-related businesses | | | 527 | | | 461 | | | 472 |
| | | | Total | | | 4,602 | | | 5,431 | | | 6,410 |
| | Corporate and Other | | | 13 | | | | | | |
Total | | | 11,860 | | | 12,286 | | | 12,737 |
| | | | | | | | | | | | | |
Intersegment electric revenues | | | | | | | | | |
| | Pennsylvania Regulated | | | 4 | | | 3 | | | 11 |
| | Supply (c) | | | 51 | | | 79 | | | 26 |
| | | | | | | | | | | | | |
Depreciation | | | | | | | | | |
| | U.K. Regulated | | | 300 | | | 279 | | | 218 |
| | Kentucky Regulated | | | 334 | | | 346 | | | 334 |
| | Pennsylvania Regulated | | | 178 | | | 160 | | | 146 |
| | Supply | | | 318 | | | 289 | | | 245 |
| | Corporate and Other | | | 31 | | | 26 | | | 17 |
Total | | | 1,161 | | | 1,100 | | | 960 |
| | | | | | | | | | | | | |
Amortization (d) | | | | | | | | | |
| | U.K. Regulated | | | 19 | | | 15 | | | 83 |
| | Kentucky Regulated | | | 22 | | | 27 | | | 27 |
| | Pennsylvania Regulated | | | 19 | | | 18 | | | 7 |
| | Supply | | | 156 | | | 126 | | | 137 |
| | Corporate and Other | | | 6 | | | | | | |
Total | | | 222 | | | 186 | | | 254 |
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 |
| | | As of December 31, |
| | | 2013 | | 2012 |
Balance Sheet Data | | | | | | |
Total Assets | | | | | | |
| U.K. Regulated | | $ | 15,895 | | $ | 14,073 |
| Kentucky Regulated | | | 12,016 | | | 10,670 |
| Pennsylvania Regulated | | | 6,846 | | | 6,023 |
| Supply | | | 11,408 | | | 12,868 |
| Corporate and Other (h) | | | 94 | | | |
Total | | $ | 46,259 | | $ | 43,634 |
| | 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 |
| | | As of December 31, |
| | | 2013 | | 2012 |
Long-Lived Assets | | | | | | |
| U.K. | | $ | 11,145 | | $ | 9,951 |
| U.S. | | | 22,638 | | | 20,776 |
Total | | $ | 33,783 | | $ | 30,727 |
| |
(a) | In 2015, the East segment includes impairment charges of $657 million related to goodwill and other asset impairments. See Note 1Notes 14 and 16 for additional information on Utility Revenue. |
(b) | Includes unrealized gainsinformation. In 2013, the West segment includes a charge of $697 million for the termination of the lease of the Colstrip plant and losses from economic activity.a $65 million impairment charge related to the Corette plant. See Note 19Notes 6 and 14 for additional information. |
(c) | See "PLR Contracts/Purchase of Accounts Receivable" in Note 16 for a discussion of the basis of accounting between reportable segments. |
(d)(b) | Represents non-cash expense items that include the amortization of nuclear fuel, regulatory assets, debt discounts and premiums, debt issuance costs, emission allowances and RECs. |
(e) | Represents both current and deferred income taxes, including investment tax credits. |
(f)(c) | Represents a non-cash expense item that is also included in "Income Taxes." |
(g) | Includes 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 815 for additional information. |
(h) | Primarily |
(d) | See Notes 14 and 16 for additional information. |
| |
(e) | Does not include expenditures for business acquisitions. |
| |
(f) | Other primarily consists of unallocated items, including cash PP&E and the elimination of inter-segment transactions.PP&E. |
3. Earnings (Loss) Per Share for Talen Energy Corporation
(All Registrants except PPL)
PPLOn June 1, 2015, the spinoff date, Talen Energy Supply, PPL Electric, LKE, LG&ECorporation issued 128,499,023 shares of common stock, including 83,524,365 shares issued to PPL's shareholder's and KU each operate within44,974,658 shares issued in a single reportable segment.
(PPL)
Inprivate placement to the Riverstone Holders. To calculate basic and diluted EPS for periods presented prior to June 2012, PPL Electric redeemed all of its preference stock at par value, without premium ($250 million in1, 2015, Talen Energy Corporation used the aggregate). Related dividend requirements of $4 million for 2012 and $16 million for 2011 have been included in "Net Income Attributableshares issued to Noncontrolling Interests"PPL's shareholders on the Statementsdate of Income.
the spinoff as Talen Energy Corporation was a wholly owned subsidiary of PPL is authorizedand no shares were outstanding prior to issue upthat date. The calculation of basic and diluted earnings per share for 2015 utilized the weighted-average shares outstanding during the year assuming the shares issued to 10 millionPPL's shareholders were outstanding during the entire year and reflects the impact of the private placement of shares of preferred stock. No PPL preferred stock wasto the Riverstone Holders on the spinoff date. For 2014 and 2013, weighted average shares outstanding assumed the shares issued orto PPL's shareholders at the spinoff date in 2015 were outstanding in 2013, 2012, or 2011.
(PPL Electric)
PPL Electric is 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.
(PPL)during those entire years.
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.Method.
Reconciliations of the amounts of income and shares of PPLTalen Energy Corporation common stock (in thousands) for the periodsyears 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 |
|
| | | | | | | | | | | | |
| | 2015 | | 2014 | | 2013 |
| | | | | | |
Income (Numerator) | | | | | | |
Attributable to Talen Energy Corporation Stockholders | | | | | | |
Income (Loss) from continuing operations after income taxes | | $ | (341 | ) | | $ | 187 |
| | $ | (262 | ) |
Income (Loss) from discontinued operations (net of income taxes) | | — |
| | 223 |
| | 32 |
|
Net Income (Loss) | | $ | (341 | ) | | $ | 410 |
| | $ | (230 | ) |
Shares of Common Stock (Denominator) | | | | | | |
Weighted-average shares - Basic EPS | | 109,898 |
| | 83,524 |
| | 83,524 |
|
Weighted-average shares - Diluted EPS | | 109,898 |
| | 83,524 |
| | 83,524 |
|
(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-basedShare-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:
(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 following731 thousand were excluded from weighted-average shares in the computationscomputation of diluted EPS for 2015 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 stock-based compensation plans, ESOP and DRIP.
5.4. 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 |
| | | | | | | | |
| | | | 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.
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% |
(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 |
(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:
| | | | | 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 |
|
| | | | | | | | | | | |
| 2015 | | 2014 | | 2013 |
Income Tax Expense (Benefit) | | | | | |
Current - Federal | $ | 43 |
| | $ | 28 |
| | $ | 118 |
|
Current - State | — |
| | 13 |
| | 16 |
|
Total Current Expense | 43 |
| | 41 |
| | 134 |
|
Deferred - Federal | (22 | ) | | 66 |
| | (263 | ) |
Deferred - State | (37 | ) | | 11 |
| | (27 | ) |
Total Deferred Expense (Benefit) | (59 | ) | | 77 |
| | (290 | ) |
Investment tax credit, net - federal | (11 | ) | | (2 | ) | | (3 | ) |
Total income taxes (benefits) from continuing operations (a) | $ | (27 | ) | | $ | 116 |
| | $ | (159 | ) |
Total income tax expense (benefit) - Federal | $ | 10 |
| | $ | 92 |
| | $ | (148 | ) |
Total income tax expense (benefit) - State | (37 | ) | | 24 |
| | (11 | ) |
Total income taxes (benefits) from continuing operations (a) | $ | (27 | ) | | $ | 116 |
| | $ | (159 | ) |
| |
(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 foreignstate tax expense (benefit) recorded to Discontinued Operations of $3$109 million and $17 million in 2011.2014 and 2013. Also excludes federal state and foreignstate tax expense (benefit) recorded to OCI of $(1) million, $(56) million and $47 million in 2015, 2014 and 2013 $(267) million. |
|
| | | | | | | | | | | |
| 2015 | | 2014 | | 2013 |
Reconciliation of Income Tax Expense | | | | | |
Federal income tax on Income from Continuing Operations Before Income Taxes at statutory tax rate - 35% | $ | (129 | ) | | $ | 106 |
| | $ | (147 | ) |
Increase (decrease) due to: | | | | | |
State income taxes, net of federal income tax benefit | (3 | ) | | 17 |
| | (24 | ) |
Federal and state tax reserve adjustments (a) | (12 | ) | | — |
| | — |
|
Federal income tax credits (b) | (9 | ) | | — |
| | (8 | ) |
State deferred tax rate change, net of federal benefit (c) | (17 | ) | | (1 | ) | | 15 |
|
Federal and state income tax return adjustments | (7 | ) | | — |
| | — |
|
Goodwill Impairment (d) | 144 |
| | — |
| | — |
|
Other | 6 |
| | (6 | ) | | 5 |
|
Total increase (decrease) | 102 |
| | 10 |
| | (12 | ) |
Total income taxes | $ | (27 | ) | | $ | 116 |
| | $ | (159 | ) |
Effective income tax rate | 7.4 | % | | 38.3 | % | | 37.9 | % |
| |
(a) | In 2015, open audits for the tax years 2008-2011 were settled by PPL with the IRS resulting in 2012 and $(83) million in 2011. The deferreda tax benefit of operating loss carryforwards was insignificant$12 million for 2011.Talen Energy's portion of the settlement of previously unrecognized tax benefits. |
| | | | | 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) | |
(b) | 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. Due2015, Talen Energy recorded a benefit primarily related to the decreaserecognition of previously unamortized tax credits as a result of the sale of Talen Renewable Energy in projected taxable incomeNovember 2015. During 2013, Talen Energy recorded deferred tax benefits related to bonus depreciationinvestment tax credits on progress expenditures for the Holtwood hydroelectric plant expansion. See Note 6 for additional information. |
| |
(c) | During 2015, 2014 and a decrease in projected future taxable income, PPL2013, Talen 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 |
(d) | A significant portion of the impairment was 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.non-deductible goodwill. See Note 816 for additional information.information on the goodwill impairment. |
|
| | | | | | | | | | | |
| 2015 | | 2014 | | 2013 |
Taxes, other than income | | | | | |
State gross receipts | $ | 41 |
| | $ | 45 |
| | $ | 37 |
|
State capital stock | 1 |
| | 1 |
| | 1 |
|
Property and other | 23 |
| | 11 |
| | 15 |
|
Total | $ | 65 |
| | $ | 57 |
| | $ | 53 |
|
| | | | 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 |
(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.
SignificantAt December 31, significant components of PPL Electric'sTalen Energy's deferred income tax assets and liabilities were as follows.follows |
| | | | | | | |
| 2015 | | 2014 |
Deferred Tax Assets | | | |
Deferred investment tax credits | $ | 6 |
| | $ | 11 |
|
Accrued pension costs | 121 |
| | 98 |
|
Federal net operating loss carryforwards | 110 |
| | 22 |
|
Federal tax credit carryforwards | — |
| | 13 |
|
State net operating loss carryforwards | 19 |
| | 79 |
|
Other | 105 |
| | 79 |
|
Valuation allowances | (10 | ) | | (78 | ) |
Total deferred tax assets | 351 |
| | 224 |
|
|
|
| |
|
|
Deferred Tax Liabilities | | | |
Plant - net | 1,874 |
| | 1,374 |
|
Unrealized gain on qualifying derivatives | 53 |
| | 28 |
|
Other | 10 |
| | 42 |
|
Total deferred tax liabilities | 1,937 |
| | 1,444 |
|
Net deferred tax liability | $ | 1,586 |
| | $ | 1,220 |
|
| | | | 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.
| | | | | 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 |
| | | | | 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 |
LKE expects to have adequate levels of taxable income to realize its recorded deferred income tax assets.
At December 31, LKETalen Energy had the following federal and state net operating loss and tax credit carryforwards.
|
| | | | | |
| 2015 | | Expiration |
Loss carryforwards | | | |
Federal net operating losses (a) (b) | $ | 314 |
| | 2028-2034 |
State net operating losses (a) (b) | 274 |
| | 2016-2035 |
| | | 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 |
(a) The federal and state net operating loss carryforwards presented above are net of unrecognized tax benefits recorded for deferred tax assets.(b) A portion of the net operating loss carryforwards consist of tax losses obtained as a result of the acquisition of MACH Gen. The utilization of these carryforwards are subject to annual limitations imposed by Section 382 of the Internal Revenue Code, which limits a company’s ability to deduct prior net operating losses following a more than 50 percent change in ownership. The Section 382 limitation is not expected to prevent Talen Energy from utilizing its federal loss carryforwards in future years. State net operating loss carryforwards are also dependent upon state taxable income or loss, the state’s proportion of taxable net income and the application of state laws, which can change from year to year and impact the amount of such carryforward utilization.
ChangesValuation allowances have been established for the amount that, more likely than not, will not be realized. The 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% |
(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 |
|
| | | | | | | | | | | | | | | | | | | |
| | | Additions | | | | |
| Balance at Beginning of Period | | Charged to Income | | Charged to Other Accounts (a) | | Reductions | | Balance at End of Period |
2015 | $ | 78 |
| | $ | — |
| | $ | (68 | ) | | $ | — |
| | $ | 10 |
|
2014 | 78 |
| | — |
| | — |
| | — |
| | 78 |
|
2013 | 74 |
| | 4 |
| | — |
| | — |
| | 78 |
|
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 |
| | | | | 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 |
| |
(a) | Excludes2015 decreased by $78 million for valuation allowances against deferred federaltax assets retained by PPL upon spinoff and stateincreased by $10 million for valuation allowances established against deferred tax (benefit) recorded to OCI of less than $1 millionassets acquired in 2013 and $1 millionthe MACH Gen acquisition in 2012.November 2015. |
| | | | | 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 |
|
| | | | | | | |
| 2015 | | 2014 |
Beginning of period | $ | 15 |
| | $ | 15 |
|
Increases based on tax positions of prior years (a) | 31 |
| | — |
|
Decreases relating to settlements with taxing authorities (b) | (15 | ) | | — |
|
End of period | $ | 31 |
| | $ | 15 |
|
| |
(a) | Increased unrecognized tax benefits were established to offset the deferred tax asset related to net operating loss carryforwards as a result of the MACH Gen acquisition in November 2015. |
| |
(b) | Decreased as a result of IRS audit settlements for tax years 1998-2011 during the year ended December 31, 2015. |
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.
|
| | Increase | | Decrease |
| | | | | | |
PPL | | $ | | | $ | 22 |
PPL Energy Supply | | | | | | 15 |
These potential changes could result from subsequent recognition, derecognition and/or changesA change in unrecognized tax benefits is not expected to occur 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.next twelve months.
At December 31, 2015 and 2014 the total unrecognized tax benefits and related indirect effects that, if recognized, would decreaseimpact the effective tax rate were as follows. The amounts for LKE, LG&E$30 million and KU were insignificant.
| | 2013 | | 2012 |
| | | | | | |
PPL | | $ | 21 | | $ | 38 |
PPL Energy Supply | | | 14 | | | 13 |
PPL Electric | | | | | | 3 |
$14 million.
At December 31, the following2014 a receivable (payable) balances werebalance of $16 million was 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 |
positions, which was settled in connection with the 1998-2011 IRS settlement, prior to the spinoff from PPL.
The following interest expense (benefit) was recognized in income taxes. The amountstaxes for LKE, LG&E and KU were insignificant.the years ended December 31.
|
| | | | | | | | | | | |
| 2015 | | 2014 | | 2013 |
| $ | — |
| | $ | (1 | ) | | $ | 5 |
|
| | 2013 | | 2012 | | 2011 |
| | | | | | | | | |
PPL | | $ | (30) | | $ | (4) | | $ | 27 |
PPL Energy Supply | | | 5 | | | (4) | | | 6 |
PPL Electric | | | (7) | | | (4) | | | (5) |
93
PPL or its subsidiaries file tax returns in five major tax jurisdictions. Table of ContentsThe federal and state income tax provisions for PPLTalen 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, PPLTalen 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 returnsprimarily 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 as2015, the tax years in these jurisdictions that are no longerremain subject to examination are:
|
| |
U.S. (federal) | 2009 - present |
Pennsylvania (state) | 2012 - present |
5. Financing Activities
Credit Arrangements and Short-term Debt
Talen Energy maintains credit arrangements to enhance liquidity and provide credit support. For reporting purposes, on a consolidated basis, the credit arrangements of Talen Energy Supply and its subsidiaries also apply to Talen Energy Corporation.
Revolving Credit Facilities
The following secured revolving credit facilities were in place at December 31, 2015:
|
| | | | | | | | | | | | | | | | | | |
| Expiration Date | | Capacity | | Borrowed (c) | | Letters of Credit Issued | | Unused Capacity | |
Talen Energy Supply RCF (a) | June 2020 | | $ | 1,850 |
| | $ | 500 |
| | $ | 163 |
| | $ | 1,187 |
| |
New MACH Gen RCF (b) | July 2021 | | 160 |
| | 108 |
| | 31 |
| | 21 |
| |
Total Credit Facilities | | | $ | 2,010 |
| | $ | 608 |
| | $ | 194 |
| | $ | 1,208 |
| |
| |
(a) | The facility is syndicated and provides capacity available for short-term borrowings and up to $925 million of letters of credit. The facility requires Talen Energy Supply to maintain a senior secured net debt to adjusted EBITDA ratio (as defined in the agreement) of less than or equal to 4.50 to 1.00 as of the last day of any fiscal quarter. Talen Energy Supply pays customary fees on the facility and borrowings bear interest at its option at either a defined base rate or LIBOR-based rates, in each case plus an applicable margin. The weighted average interest rate on outstanding borrowings at December 31, 2015 was 2.67%. |
| |
(b) | The facility provides capacity available for short-term borrowings and up to $120 million of letters of credit. New MACH Gen pays customary fees on the facility and borrowings bear interest at 12-month LIBOR, plus an applicable margin. The weighted average interest rate on outstanding borrowings at December 31, 2015 was 5.04%. |
| |
(c) | The amounts borrowed are recorded as "Short-term debt" on the Balance Sheet. |
The Talen Energy Supply RCF was entered into on June 1, 2015 in connection with the completion of the spinoff transaction and replaced Talen Energy Supply's previously existing unsecured syndicated credit facility. Any outstanding principal amounts under the old facility were repaid prior to the termination of the old facility and outstanding letters of credit were transferred to the Talen Energy Supply RCF. The facility is secured by liens on a majority of Talen Energy Supply's assets and is guaranteed by certain Talen Energy Supply subsidiaries, which guarantees are in turn secured by liens on assets of such subsidiaries with an aggregate carrying value of $7 billion at December 31, 2015. The facility provides the option to raise incremental credit facilities, refinance the loans with debt incurred outside the facility and extend the maturity date of the revolving credit commitments and loans and, if applicable, term loans, subject to certain limitations.
The Talen Energy Supply letter of credit facility and uncommitted credit facilities that existed at December 31, 2014 either expired or matured during the first quarter of 2015. Any previously issued letters of credit under these facilities were either terminated or reissued under the then-outstanding unsecured syndicated credit facility and upon closing of the spinoff were reissued under the Talen Energy Supply RCF described above. During the year ended December 31, 2015, Talen Energy wrote-off $12 million of unamortized fees to "Interest expense" on the Statements of Income as a result of the termination of the prior unsecured syndicated credit facility.
The New MACH Gen RCF is a component of the $642 million First Lien Credit and Guaranty Agreement, which was outstanding when Talen Energy acquired MACH Gen in November 2015. The First Lien Credit and Guaranty Agreement also contains a Term Loan B as described in "Long-term Debt" below. Obligations under the First Lien Credit and Guaranty Agreement are guaranteed by each of New MACH Gen's subsidiaries and are secured by a first priority security interest, subject to possible shared first lien status with certain permitted hedge and power sale agreements, in all of the assets of New MACH Gen and each guarantor, including the equity interests in New MACH Gen and each guarantor, which assets collectively have an aggregate carrying value of approximately $1 billion at December 31, 2015. Talen Energy is not a guarantor or obligor of borrowings under the First Lien Credit and Guaranty Agreement.
Other Facilities
Talen Energy Supply maintains a $500 million agreement expiring June 2017 that provides Talen Energy Supply the ability to request up to $500 million of committed unsecured letter of credit capacity at fees to be agreed upon at the time of each request, based on certain market conditions. At December 31, 2015, Talen Energy Supply had not requested any capacity for the issuance of letters of credit under this arrangement.
In December 2015, Talen Energy Supply and Talen Energy Marketing entered into the Amended Secured Energy Marketing and Trading Facility Agreement (Amended STF Agreement) to amend the $800 million Secured Energy Marketing and Trading Facility Common Agreement, dated as of November 1, 2010. The Amended STF Agreement increased the facility capacity to $1.3 billion. The facility allows Talen Energy Supply to receive credit to satisfy collateral posting obligations related to Talen Energy's energy marketing and trading activities with counterparties participating in the facility. Prior to the Talen Energy spinoff transactions, Montour, LLC and Brunner Island, LLC had guaranteed certain of Talen Energy Marketing's obligations and had granted mortgage liens on their respective generating facilities to secure such guarantees. Brunner Island and Montour have since been released as parties. Obligations under the Amended STF Agreement are secured by the same collateral that secures the Talen Energy Supply RCF described above. The facility is for a five-year term that is subject to an automatic one-year extension each year until termination under the provisions of the Amended STF Agreement. The initial term expires in December 2020. There were $54 million of secured obligations outstanding under this facility at December 31, 2015.
Long-term Debt
The following long-term debt was outstanding at December 31:
|
| | | | | | | | | | | | |
| 2015 | | 2014 |
| Weighted-Average Rate | | Maturities | | | | |
Senior Unsecured Notes | 5.41 | % | | 2016-2038 | | $ | 3,713 |
| | $ | 2,193 |
|
Senior Secured Notes | 8.86 | % | | 2025 | | 41 |
| | 45 |
|
Term Loan B | 6.21 | % | | 2022 | | 474 |
| | — |
|
Total Long-term Debt Before Adjustments | | | | | 4,228 |
| | 2,238 |
|
| | | | | | | |
Fair market value adjustments | | | | | (23 | ) | | (19 | ) |
Unamortized premium and (discount), net | | | | | (2 | ) | | (1 | ) |
Total Long-term Debt | | | | | 4,203 |
| | 2,218 |
|
Less current portion of Long-term Debt, including fair market value adjustment | | | | | 399 |
| | 535 |
|
Total Long-term Debt, noncurrent | | | | | $ | 3,804 |
| | $ | 1,683 |
|
The aggregate maturities of long-term debt are as follows:
| | | | PPL | | | | | | | | |
| | PPL | | Energy Supply | | PPL Electric | | LKE | | LG&E | | KU |
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. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
2016 | | 2017 | | 2018 | | 2019 | | 2020 | | Thereafter | | Total |
$ | 396 |
| | $ | 5 |
| | $ | 424 |
| | $ | 1,244 |
| | $ | 179 |
| | $ | 1,980 |
| | $ | 4,228 |
|
Other(PPL, PPL Energy Supply and PPL Electric)Long-term Debt Activity
PPL changed its methodIn May 2015, Talen Energy Supply issued $600 million of accounting6.50% Senior Unsecured Notes due 2025. Talen Energy Supply received proceeds of $591 million, net of underwriting fees, which were used for repair expendituresrepayment of short-term debt. The notes may be redeemed at Talen Energy Supply's option, in whole at any time or in part from time to time, prior to June 1, 2020 at a price equal to 100% of their principal amount plus a make-whole premium and on or after June 1, 2020 at specified redemption prices. In addition, on or prior to June 1, 2018, up to 35% of the notes may be redeemed by Talen Energy Supply with proceeds from certain equity offerings at a price equal to 106.5% of the principal amount.
In June 2015, Talen Energy Supply assumed $1.25 billion of RJS Power Holdings LLC's 5.125% Senior Notes due 2019 as a result of the merger of RJS Power Holdings LLC into Talen Energy Supply, by which Talen Energy Supply became the obligor of these notes. In connection with this event and pursuant to the terms of the indenture governing the notes, the coupon on the notes was reduced to 4.625% in July 2015.
In September 2015, Talen Energy Supply completed a remarketing of $231 million of Exempt Facilities Revenue Refunding Bonds, Series 2009A due 2038, Series 2009B due 2038, and Series 2009C due 2037 that were issued by PEDFA on behalf of Talen Energy Supply in 2009. All series bore interest at a fixed rate of 3.0% prior to the remarketing. The Series 2009A Bonds, with a principal amount of $100 million, were remarketed at a fixed coupon of 6.40% to maturity. The Series 2009B Bonds and Series 2009C Bonds, with an aggregate principal amount of $131 million, were remarketed at a fixed rate of 5.00% for tax purposes effectivefive years, at which time they will be subject to mandatory repurchase and optional remarketing. This transaction is excluded from the Statement of Cash Flows as a non-cash transaction.
In October 2015, Talen Energy Supply's $300 million of 5.70% REset Put Securities due 2035 (REPS) were subject to mandatory tender to the remarketing dealer. However, the remarketing dealer and Talen Energy Supply mutually agreed to terminate the remarketing dealer's right to remarket the REPS and, in accordance with the terms of the REPS, Talen Energy Supply repurchased the REPS at par. The total aggregate consideration paid to repurchase the REPS was $434 million, which included $300 million of principal and $134 million of remarketing option value paid to the remarketing dealer. The termination payment to the remarketing dealer was recorded to "Other Income (Expense) - net" on the 2015 Statement of Income and is reflected in "Cash from operating activities" on the 2015 Statement of Cash Flows.
Following the MACH Gen acquisition in November 2015, $475 million of New MACH Gen Term Loan B debt secured under the First Lien Credit and Guaranty Agreement, which is described above, remained outstanding. The Term Loan B provides customary annual amortization paid quarterly and may also be repaid, in whole or in part, beginning in the third quarter of 2016 without any make-whole premium. See "Credit Arrangements and Short-term Debt - Revolving Credit Facilities" above for information regarding guarantees of and security interests with respect to the First Lien Credit and Guaranty Agreement.
In December 2015, Talen Energy Supply announced an "exchange offer" for its 2008 tax year6.5% Senior Unsecured Notes due 2025 that were issued in May 2015. Pursuant to the terms of the notes, Talen Energy Supply offered to exchange all of the outstanding notes for Pennsylvania operations. PPL madea like principal amount of its 6.5% Senior Notes due 2025 that, have been registered under the same changeSecurities Exchange Act of 1933, as amended. In January 2016, the exchange offer was completed with all of the notes exchanged.
In connection with the sale of Talen Ironwood Holdings, LLC, in January 2016, a Talen Ironwood Holdings, LLC subsidiary completed the redemption of $41 million of its 8.857% Senior Secured Notes due 2025 prior to the closing of the sale transaction, which occurred in February 2016. The redemption included the payment of a make whole premium of $14 million, which will be recorded as a component of the expected gain on sale in "Operating Income" on the Statement of Income in 2016. See Note 6 for additional information on the sale of Talen Ironwood Holdings, LLC.
Preferred Stock of Talen Energy Corporation
Talen Energy Corporation is authorized under its Montana operationsAmended and Restated Certificate of Incorporation to issue up to 100 million shares of preferred stock. No shares of preferred stock were issued or outstanding at December 31, 2015.
Legal Separateness
The subsidiaries of Talen Energy Corporation are separate legal entities. Talen Energy Corporation's subsidiaries are not liable for the 2009 tax year. In 2011,debts of Talen Energy Corporation. Accordingly, creditors of Talen Energy Corporation may not satisfy their debts from the IRS issued guidanceassets of Talen Energy Corporation's subsidiaries absent a specific contractual undertaking by a subsidiary to pay Talen Energy Corporation's creditors or as required by applicable law or regulation. Similarly, Talen Energy Corporation is not liable for the debts of its subsidiaries, nor are its subsidiaries liable for the debts of one another. Accordingly, creditors of Talen Energy Corporation's subsidiaries may not satisfy their debts from the assets of Talen Energy Corporation or its other subsidiaries absent a specific contractual undertaking by Talen Energy Corporation or its other subsidiaries to pay the creditors or as required by applicable law or regulation.
Similarly, the subsidiaries of Talen Energy Supply are each separate legal entities. These subsidiaries are not liable for the debts of Talen Energy Supply. Accordingly, creditors of Talen Energy Supply may not satisfy their debts from the assets of their subsidiaries absent a specific contractual undertaking by a subsidiary to pay the creditors or as required by applicable law or regulation. Similarly, Talen Energy Supply is not liable for the debts of its subsidiaries, nor are the subsidiaries liable for the debts of one another. Accordingly, creditors of these subsidiaries may not satisfy their debts from the assets of Talen Energy Supply absent a specific contractual undertaking by that parent or other subsidiary to pay such creditors or as required by applicable law or regulation.
As indicated above, certain debt agreements, including, but not limited to, the Talen Energy Supply RCF, the First Lien Credit and Guaranty Agreement and the Amended STF Agreement, include contractual undertakings by certain Talen Energy subsidiaries to guarantee the obligations of other Talen Energy entities arising under those agreements.
Distribution Related Restrictions for Talen Energy Corporation
Certain of Talen Energy's debt agreements include covenants that could effectively restrict the payment of distributions, loans or advances, either directly to Talen Energy Corporation or to Talen Energy Supply or one of its subsidiaries. At December 31, 2015, $3.3 billion of Talen Energy Corporation subsidiaries net assets were restricted for the purposes of transferring funds to Talen Energy Corporation in the form of distributions, loans or advances.
6. Acquisitions, Development and Divestitures
Talen Energy from time to time evaluates opportunities for potential acquisitions, divestitures and development projects. Development projects are periodically reexamined based 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 taxpayersmarket conditions and other factors to determine whether expenditures to maintain, replaceproceed with the projects, sell, cancel or improve steamexpand them, execute tolling agreements or electric generation property mustpursue other options. Any resulting transactions may impact future financial results.
Acquisitions
MACH Gen
On November 2, 2015, Talen Energy completed the acquisition of the membership interests of MACH Gen for $603 million in cash consideration (based on estimated working capital). The final cash purchase price, after post-closing adjustments, was $600 million. The purchase price was funded by a borrowing under the Talen Energy Supply RCF and cash on hand. The Term Loan B and revolving credit facility of New MACH Gen remain outstanding following the completion of the transaction. See Note 5 for additional information. MACH Gen's total generating capacity is 2,344 MW (summer rating).
The MACH Gen acquisition was accounted for as a business combination, with the identifiable tangible and intangible assets and liabilities of MACH Gen, recorded at their estimated fair values on the acquisition date. The acquisition is consistent with management's strategy of business growth, fuel type diversity and replacing the assets being divested as part of the FERC approval of the RJS Power acquisition. The following table summarizes the allocation of the purchase price to the fair values of the major classes of assets and liabilities of MACH Gen.
|
| | | | |
Current assets (a) | | $ | 31 |
|
Intangible assets | | 3 |
|
PP&E | | 1,275 |
|
Short-term debt | | (103 | ) |
Current liabilities | | (28 | ) |
Long-term debt | | (470 | ) |
Deferred income taxes | | (108 | ) |
Total purchase price | | $ | 600 |
|
| |
(a) | Includes gross contractual amounts of accounts receivable acquired of $9 million, which approximates fair value. |
The purchase price allocation is considered by Talen Energy's management to be capitalizedprovisional due to pending finalization of valuations and could change materially in subsequent periods. Any changes to the provisional purchase price allocation during the measurement period that result in material changes to the consolidated financial results will be adjusted prospectively. The measurement period can extend up to a year from the date of acquisition. The items pending finalization include, but are not limited to, the valuation of PP&E, certain other assets and liabilities and deferred income taxes.
Actual operating revenues and net income of MACH Gen, since the November 2, 2015 acquisition, included in Talen Energy's results 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. year ended December 31, 2015 were: |
| | | | | | | |
| Operating Revenues | | Net Income (Loss) |
| $ | 28 |
| | $ | (9 | ) |
RJS Power
On June 1, 2015, substantially contemporaneous with the spinoff by PPL to form Talen Energy, RJS Power was contributed by the Riverstone Holders to become a subsidiary of Talen Energy Supply in exchange for 44,974,658 shares of Talen Energy Corporation common stock. See Notes 1 and 3 for additional information on the spinoff and acquisition. In accordance with business combination accounting guidance, Talen Energy treated the combination with RJS Power as an acquisition and Talen Energy Supply is considered the acquirer of RJS Power. Accordingly, Talen Energy applied acquisition accounting to the assets and liabilities of RJS Power whereby the purchase price was allocated to the underlying tangible and intangible assets and liabilities based on their respective fair values as of June 1, 2015, with the remainder allocated to goodwill.
The total consideration for the acquisition was deemed to be $902 million based on the fair value of the Talen Energy Corporation common stock issued for the acquisition using the June 1, 2015 closing "when-issued" market price.
6. Utility Rate RegulationThe following table summarizes the allocation of the purchase price to the fair values of the major classes of assets and liabilities of RJS, all of which represent non-cash activity excluded from the Statement of Cash Flows for the year ended December 31, 2015. The purchase price allocation is considered by Talen Energy's management to be final as of December 31, 2015.
Regulatory Assets and Liabilities |
| | | | |
Current assets (a) | | $ | 168 |
|
Assets of discontinued operations (b) | | 375 |
|
PP&E | | 1,777 |
|
Other intangibles | | 46 |
|
Short-term debt | | (36 | ) |
Current liabilities | | (224 | ) |
Liabilities of discontinued operations | | (5 | ) |
Long-term debt | | (1,244 | ) |
Deferred income taxes | | (266 | ) |
Other noncurrent liabilities (c) | | (82 | ) |
Net identifiable assets acquired | | 509 |
|
Goodwill (d) | | 393 |
|
Net assets acquired | | $ | 902 |
|
(All Registrants except PPL Energy Supply) | |
(a) | Includes gross contractual amount of the accounts receivable acquired of $41 million, which approximates fair value. |
| |
(b) | See Note 14 for information on impairment charges recorded during 2015 related to the Sapphire plants initial classification as assets held for sale and discontinued operations. See Note 1 for additional information on the subsequent reclassification to assets held and used. |
| |
(c) | Includes $33 million of "out-of-the-money" coal contracts that will be amortized over the life of the contracts terms as the coal is consumed. |
| |
(d) | The allocation above is as of the acquisition date of June 1, 2015. As further discussed in Note 16, goodwill was fully impaired during 2015, which included the goodwill recognized in the acquisition of RJS Power. |
As discussed in Note 1Various purchase accounting valuation adjustments were made during the third and summarized below, PPL, PPL Electric, LKE, LG&E and KU reflect the effects of regulatory actions in the financial statements for their cost-based rate-regulated utility operations. Regulatoryfourth quarters affecting certain current assets and liabilities, are classifiedPP&E, other intangibles and related deferred income taxes resulting in a $5 million reduction in goodwill. The statement of income effect of these adjustments recorded during the measurement period was insignificant.
Goodwill recorded as current if, upon initial recognition,a result of the entire amountacquisition primarily reflected synergies expected to be achieved related to the spinoff and acquisition. The goodwill is not deductible for income tax purposes and was assigned to the East segment. See Note 16 for additional information related to the impairment of goodwill.
Actual operating revenues and net income of RJS, since the June 1 acquisition, included in Talen Energy's results for the year ended December 31, 2015 were: |
| | | | | | | |
| Operating Revenues | | Net Income (Loss) (a) |
| $ | 528 |
| | $ | (74 | ) |
| |
(a) | Includes certain asset impairments and excludes the impact of the goodwill impairment recorded in 2015 subsequent to the acquisition. See Notes 14 and 16 for information on the impairments recorded. |
Pro Forma Information for RJS Power and MACH Gen Acquisitions
Pro forma information (unaudited) for Talen Energy for the year ended December 31, as if both the RJS Power and MACH Gen acquisitions had occurred January 1, 2014, is as follows:
|
| | | | | | | | |
| | Operating Revenues | | Income (Loss) After Tax from Continuing Operations |
2015: | | | | |
Pro forma | | $ | 5,109 |
| | $ | (396 | ) |
Basic and diluted earnings per share (for Talen Energy Corporation) | | | | (3.08 | ) |
2014: | | | | |
Pro forma | | 6,031 |
| | 345 |
|
Basic and diluted earnings per share (for Talen Energy Corporation) | | | | 2.68 |
|
The unaudited pro forma financial information has been presented for illustrative purposes only and is not necessarily indicative of results of operations that itemwould have been achieved had the acquisitions taken place on the date indicated, or the future consolidated results of operations of Talen Energy. The pro forma financial information presented above has been derived from the historical consolidated financial statements of Talen Energy and MACH Gen and from the historical consolidated and combined financial statements of RJS Power.
The pro forma financial information presented above includes adjustments for (1) alignment of accounting policies, (2) incremental depreciation and amortization expense related to fair value adjustments to PP&E and identifiable intangible assets and liabilities, (3) incremental interest expense for outstanding borrowings to reflect the terms of the Talen Energy Supply RCF related to the RJS acquisition, (4) nonrecurring items (discussed below), (5) the tax effect of the above adjustments, and (6) the issuance of Talen Energy Corporation common stock in connection with the spinoff from PPL and the acquisition of RJS Power. The pro forma financial information presented includes the impact of impairments recorded during the third and fourth quarters of 2015. See Notes 14 and 16 for information on the impairments recorded.
Nonrecurring acquisition, integration and other costs directly related to the acquisitions of $20 million were incurred during 2015 and recorded in "Operation and maintenance" on the Statements of Income. Adjustments were made in the calculation of pro forma amounts to remove the effect of these nonrecurring items and related income taxes. The pro forma financial information does not include adjustments for potential future cost savings for either acquisition.
Divestitures
Talen Renewable Energy
In November 2015, Talen Energy completed the sale of Talen Renewable Energy for $116 million in cash and recorded a pre-tax gain on the sale of $10 million in the East segment, which is reflected in "Operation and maintenance" on the Statement of Income.
Announced Divestitures
Ironwood, Holtwood, Lake Wallenpaupack and C.P. Crane Power Plants
In October 2015, Holtwood, LLC, a wholly owned, indirect subsidiary of Talen Energy, entered into an agreement to sell the Holtwood and Lake Wallenpaupack hydroelectric facilities in Pennsylvania for a purchase price of $860 million, subject to customary purchase price adjustments. The facilities have a combined summer rating operating capacity of 308 MW. The transaction is expected to close in March 2016, subject to customary closing conditions.
In October 2015, Talen Generation entered into an agreement to sell Talen Ironwood Holdings, LLC, which through its subsidiaries owns and operates the Ironwood natural gas combined-cycle plant in Pennsylvania, for a purchase price of $657 million, subject to customary purchase price adjustments. In connection with the sale, in January 2016, Talen Energy repaid $41 million of indebtedness, plus a customary debt make-whole premium. The Ironwood unit has a summer rating operating capacity of 660 MW. The sale transaction closed in February 2016, with an estimated gain, net of transaction costs including
the make-whole premium on the debt, of $159 million, which will be recoveredrecorded to "Operating Income" on the Statement of Income in 2016. Proceeds from the sale of Ironwood were used to repay the majority of Talen Energy's short-term debt.
In October 2015, Raven Power Marketing LLC, a wholly owned, indirect subsidiary of Talen Energy, entered into an agreement to sell C.P. Crane LLC, which owns and operates the C.P. Crane coal-fired power plant in Maryland. The C.P. Crane plant has a summer rating operating capacity of 402 MW. The transaction closed in February 2016. The transaction is not expected to have a significant impact on Talen Energy's financial condition or refunded within a yearresults of operations. See Notes 14 and 16 for information on impairments recorded in 2015 for this plant.
The sales are part of the balance sheet date.
WPD is not subjectrequirement to accounting fordivest certain PJM assets to satisfy a December 2014 FERC order approving the effects of certain types of regulation as prescribed by GAAP and does not record regulatory assets and liabilities.combination with RJS Power. See Note 1 for additional information.information on the FERC order.
(PPL, LKE, LGAt December 31, 2015, the major component of assets held for sale related to the sale of these businesses was primarily $936 million of PP&E which was included in the East segment. Talen Ironwood Holdings, LLC is considered an individually significant component whose pretax income (loss) attributable to Talen Energy for 2015, 2014, and KU)2013 was $73 million, $67 million, and $(22) million.
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.Discontinued Operations
LG&E's and KU's Kentucky base rates are calculated based on a return on capitalization (common equity, long-term debt and short-term debt) including adjustments for certain net investments and costs recovered separately through other means. As such, LG&E and KU generally earn a return on regulatory assets.Talen Montana Hydro Sale
As a resultIn November 2014, Talen Montana completed the sale to NorthWestern Corporation of purchase accounting requirements, certain fair value amounts related to contracts that had favorable or unfavorable terms relative to market were recorded on the Balance Sheets with an offsetting regulatory asset or liability. LG&E633 MW of hydroelectric generating facilities located in Montana for approximately $900 million in cash. The sale included 11 hydroelectric power facilities and KU recover in customer rates the cost of coal contracts, power purchases and emission allowances. As a result, management believes the regulatory assets and liabilities created to offset the fair value amounts at LKE's acquisition date meet the recognition criteria established by existing accounting guidance and eliminate any rate-making impact of the fair value adjustments. LG&E's and KU's customer rates will continue to reflect the original contracted prices for these contracts.
(PPL, LKE and KU)
KU's Virginia base rates are calculated based on a return on rate base (net utility plant plus working capital less deferred taxes and miscellaneous deductions). All regulatory assets and liabilities, except the levelized fuel factor, are excluded from the return on rate base utilized in the calculation of Virginia base rates. Therefore, no return is earned on the related assets.
KU's rates to municipal customers for wholesale requirementsFollowing 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 utilizedcomponents of discontinued operations in the developmentStatement of municipal rates. Therefore, no return is earnedIncome for the years ended December 31.
|
| | | | | | | | |
| | 2014 | | 2013 |
Operating revenues | | $ | 117 |
| | $ | 139 |
|
Gain on the sale (pre-tax) | | 306 |
| | — |
|
Interest expense (a) | | 9 |
| | 12 |
|
Income (loss) before income taxes | | 332 |
| | 49 |
|
Income (Loss) from Discontinued Operations (net of income taxes) | | 223 |
| | 32 |
|
| |
(a) | Represents allocated interest expense based upon the discontinued operations share of the net assets of Talen Energy. |
Other
To facilitate the sale of the Montana hydroelectric generating facilities discussed above, Talen Montana terminated, in December 2013, its operating lease arrangement related to partial interests in Units 1, 2 and 3 of the Colstrip coal-fired generating facility and acquired those interests, collectively, for $271 million. At lease termination, the existing lease-related assets on the related assets.
(PPLbalance sheet consisting primarily of prepaid rent 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 taxesleasehold improvements were written off 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 regulatorythe acquired Colstrip 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.
(All Registrants except PPL Energy Supply)
The following table provides information about the regulatory assets and liabilities of cost-based rate-regulated utility operations.
| | | PPL | | PPL Electric |
| | | 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 |
| | | 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) | These liabilities were recorded at fair value as offsets to certain intangible assets that were recorded at fair value upon the acquisition of LKE by 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.
(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 supplydate. Talen Energy recorded a 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 determinedof $697 million ($413 million after-tax) 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.
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 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 projectslease included in the 2009 and 2011 compliance plans. In 2012 and 2011, LG&E and KU were authorized to receive a 10.63% return"Loss 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.
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 receivedlease termination" on the swaps that were terminated in September and November, which are included2013 Statements of Income. The $271 million payment is reflected in "Cash Flows from Operating Activities" on the Statements2013 Statement of Cash Flows. Net realized gainsFlow.
Development
Bell Bend COLA
In 2008, a Talen Energy subsidiary, Bell Bend, LLC (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, Bell Bend submitted Parts I and II of an application for a federal loan guarantee for Bell Bend to the DOE. In February 2014, the DOE announced the first loan guarantee for a nuclear project in Georgia. Although eight of the ten applicants that submitted Part II applications remain active in the DOE program, 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. Bell 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. Bell Bend does not expect to complete the COLA review process with the NRC prior to 2018. Bell Bend has made no decision to proceed with construction and expects that such decision will not be made for several years given the anticipated lengthy NRC license approval process. Additionally, Bell Bend does not expect to proceed with construction absent favorable economics, a joint arrangement with other interested parties and a federal loan guarantee or other acceptable financing. Bell Bend is currently authorized by Talen Energy Corporation's Board of Directors to spend up to $256 million on these swapsthe COLA and other permitting costs necessary for construction. At December 31, 2015 and 2014, $201 million and $188 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." Talen Energy continues to support the Bell Bend licensing project with a near term focus on obtaining the final environmental impact statement. Talen Energy placed the NRC safety review (which supports issuance of their final safety evaluation report, the other key element of the COLA) on hold in 2014, due to a lack of progress by the reactor vendor with respect to its NRC design certification process, which is a prerequisite to the COLA.
Brunner Island Co-firing Project
Talen Energy is in the process of making modifications to its Brunner Island coal-fired generating facility to be able to co-fire using natural gas to better position the plant for low gas price environments. Construction is under way and is expected to be completed by the end of 2016. The project is expected to cost $118 million. At December 31, 2015 and 2014, $23 million and $5 million of costs, which include capitalized interest, associated with the project were capitalized and are included in "Construction work in progress" on the Balance Sheets.
7. Leases
Talen Energy and its subsidiaries have entered into various agreements for the lease of office space, vehicles, land, gas storage and other equipment. At December 31, 2015, Talen Energy's most significant lease, which expires in 2018, relates to its corporate headquarters.
Rent expense for the years ended December 31 for operating leases was as follows:
|
| | | | | | | | | | | |
| 2015 | | 2014 | | 2013 |
| $ | 14 |
| | $ | 29 |
| | $ | 55 |
|
Total future minimum rental payments for all operating leases are estimated to be:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
2016 | | 2017 | | 2018 | | 2019 | | 2020 | | Thereafter | | Total |
$ | 19 |
| | $ | 18 |
| | $ | 8 |
| | $ | 5 |
| | $ | 5 |
| | $ | 26 |
| | $ | 81 |
|
8. Stock-Based Compensation
Stock Incentive Plan
Talen Energy Corporation grants share-based compensation to eligible participants under the Talen Energy Stock Incentive Plan (SIP). Under the SIP, restricted shares of Talen Energy Corporation stock, restricted stock units, performance units, stock options and stock appreciation rights may be granted to officers, directors and other key employees. Additionally, Talen Energy Corporation will match shares of its common stock purchased by certain employees on the open market from June 1, 2015 through March 31, 2018 with grants of restricted stock units, subject to certain restrictions (Matching Grants). Awards under the SIP are made by the Compensation, Governance and Nominating Committee (CGNC) of the Talen Energy Corporation Board of Directors or its delegate.
The total number of shares which may be issued under the plan is 5,630,000 and the maximum number of shares for which stock options may be granted is 2,000,000. Shares delivered under the SIP may be in the form of authorized and unissued Talen Energy Corporation common stock or common stock held in treasury by Talen Energy Corporation.
Restricted Stock Units
Restricted stock units are awards based on the fair value of a share of Talen Energy Corporation common stock on the date of grant. Actual Talen Energy Corporation common shares will be returnedissued upon completion of a vesting period of three years,
aside from Matching Grants that generally vest two years from the date of grant. Substantially all restricted stock unit awards are expected to vest.
The fair value of restricted stock units granted is recognized as compensation expense on a straight-line basis over the service period. Restricted stock units are subject to forfeiture or accelerated payout under the pertinent award agreement provisions for termination, disability and death of employees. Restricted stock units vest fully, in certain situations, as defined by in the applicable award agreement. The total restricted stock units granted, nonvested and outstanding through regulated rates. As such,December 31, 2015 was 265,849 and the net settlements were reclassifiedweighted-average grant date fair value per share was $18.74.
Stock Options
Stock options have been granted with an option exercise price per share not less than the fair value of Talen Energy Corporation's common stock on the date of grant. Options 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 Talen Energy or a subsidiary. The CGNC has discretion to accelerate the exercisability of the options. All options expire no later than ten years from AOCIthe grant date. The options become exercisable immediately in certain situations, as defined by the pertinent award agreement. The fair value of options granted is recognized as compensation expense on a straight-line basis over the service period. Substantially all stock option awards are expected to regulatory liabilitiesvest. The total stock options granted, nonvested and outstanding through December 31, 2015 was 991,101 and the grant date fair value per share was $4.91. The weighted-average exercise price per share is $19.00 and the weighted-average remaining contractual term is 9.4 years. The stock options outstanding at December 31, 2015 are currently out of the money.
The fair value of each option granted is estimated using a Black-Scholes option-pricing model. Talen Energy uses a risk-free interest rate, expected option life and expected volatility to value its stock options. Talen Energy Corporation does not currently expect to pay dividends, therefore a dividend yield assumption is not used to value 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 was calculated using the simplified method described in SEC Staff Accounting Bulletin (SAB) 107/110 (updated by SAB 110). Expected volatility is derived from the historical volatility of a peer group selected by management as Talen Energy Corporation's common stock does not have a trading history.
The assumptions used in the model were: |
| | |
Risk-free interest rate | 2.05 | % |
Expected option life | 6.00 years |
|
Expected stock volatility | 21.55 | % |
Performance Units
Performance units represent a target number of shares of Talen Energy Corporation's common stock that the recipient would receive upon Talen Energy Corporation's attainment of an applicable performance goal. For awards granted in 2015, Talen Energy Corporation uses TSR, which is determined based on TSR during a three-year performance period. At the end of the performance period, payout is determined by comparing Talen Energy Corporation's TSR to the TSR of peer group companies that Talen Energy Corporation has selected. Awards are payable on a graduated basis, based on thresholds that measure Talen Energy Corporation's performance relative to the peer group companies, on which each years' awards are measured. Awards can be paid up to 200% of the target award or forfeited with no payout if performance is below a minimum established performance threshold. Under the pertinent award agreement provisions, performance units are subject to forfeiture upon termination of employment except for in the event of a disability or death of an employee, in which case the total performance units remain outstanding and are beingeligible for vesting through the conclusion of the performance period. The fair value of performance units is recognized as compensation expense on a straight-line basis over the three-year performance period. Performance units vest on a pro rata basis, in "Interest Expense"certain situations, as defined by the applicable award agreement.
The fair value of performance units granted was estimated using a Monte Carlo pricing model that values market based performance conditions such as TSR. The model assumed an expected stock volatility of 31.8% that was based on the Statementshistorical volatility based on daily stock price changes of Income overpeer group companies.
The total performance units granted, nonvested and outstanding through December 31, 2015 was 158,900 and the lifeweighted-average grant date fair value was $21.17 per share.
Directors Deferred Compensation Plan
Under the newly issued debt. ForTalen Energy Corporation Directors Deferred Compensation Plan, or DDCP, stock units are granted to eligible directors of Talen Energy Corporation in connection with their retainers for service on Talen Energy Corporation’s board of directors and its committees. Stock units are based on the fair market value of a share of Talen Energy Corporation’s common stock on the date of grant. The total number of stock units granted under the DDCP through December 31, 2015 was 34,967 and the weighted average grant date fair value was $13.23 per share.
Compensation Expense
The year ended December 31, 2015 includes an insignificant amount of compensation expense for Talen Energy Corporation restricted stock units, performance units and stock options accounted for as equity awards.
The year ended December 31, 2014 includes compensation expense of $33 million and the associated income tax benefit of $14 million for restricted stock, restricted stock units, performance units and stock options accounted for as equity awards from PPL, which included an allocation of PPL Services' expense.
The year ended December 31, 2013 thereincludes compensation expense of $27 million and the associated income tax benefit of $11 million for restricted stock, restricted stock units, performance units and stock options accounted for as equity awards from PPL, which included an allocation of PPL Services' expense.
At December 31, 2015, unrecognized compensation expense and the weighted-average period for recognition related to nonvested restricted stock units, performance units and stock option awards from Talen Energy was no hedge ineffectiveness recorded$11 million and 2.4 years.
Prior to the spinoff, restricted shares of PPL common stock and related restricted stock units, performance units and stock options were granted to officers and other key employees of Talen Energy. At December 31, 2014, these employees of Talen Energy had 1,457,900 of unvested shares of restricted stock and restricted stock units, 291,492 of performance units and 2,745,016 of outstanding stock options issued by PPL. The vesting of these awards was accelerated in 2015 in connection with the spinoff from PPL. See Note 1 for information on the recording of expense related to this acceleration and additional information on the spinoff from PPL. For the year ended December 31, 2015, compensation expense for these awards, excluding the acceleration, but including an allocation of PPL Services' compensation expense for similar awards, was $18 million.
9. Retirement and Postemployment Benefits
Prior to the June 1, 2015 spinoff, the majority of Talen Energy Supply's employees were eligible for pension benefits under a PPL non-contributory defined benefit pension plan, with benefits based on length of service and either career average pay or final average pay, as defined by the plan. Prior to the June 1, 2015 spinoff, this plan was closed to all newly hired employees. Newly hired employees were eligible to participate in a PPL 401(k) savings plan with enhanced employer contributions. Talen Energy was allocated costs of the PPL pension plan based on its employees' participation in the plan. Employees who participated in this PPL pension plan who became employees of Talen Energy Supply transferred into a newly created pension plan sponsored by Talen Energy Supply, which provides benefits similar to that of the PPL pension plan.
Prior to the June 1, 2015 spinoff, the majority of Talen Energy Supply's employees were also eligible for certain health care and life insurance benefits upon retirement through the PPL other postretirement benefit plans, which prior to June 1, 2015, were closed to all newly hired employees. Talen Energy Supply was allocated costs of the PPL plans based on its employees' participation in the plans. Employees who participated in the health care and life insurance plans and who became employees of Talen Energy Supply transferred into the newly created Talen Energy other postretirement benefit plans sponsored by Talen Energy Supply, which provide benefits similar to those of the PPL other postretirement benefit plans.
A remeasurement of the assets and the obligations for the interest rate derivatives. See Note 19PPL pension and other postretirement benefit plans was performed as of May 31, 2015 in order to separate the assets and obligations of the PPL plans attributable to Talen Energy, as required by the spinoff agreements. The Talen Energy pension plan assumed from PPL the pension benefit obligations for additional informationactive plan participants who became employees of Talen Energy in connection with the spinoff and for individuals who terminated employment from Talen Energy Supply on or after July 1, 2000. A portion of the PPL pension plan assets were also allocated to the new Talen Energy pension plan. The asset allocation was based on the rules prescribed by ERISA (Employee Retirement Income Security Act) for allocating assets in connection with a pension plan spinoff. The Talen Energy other postretirement benefit plans assumed the other postretirement benefit obligations from PPL for active plan participants who became
employees of Talen Energy in connection with the spinoff. PPL retained obligations attributable to existing retirees as of the date of the spinoff. A portion of the PPL other postretirement benefit plan assets, which were held in VEBA trusts and a 401(h) account, were also allocated to the new Talen Energy other postretirement benefit plans. The asset allocation was determined separately for each funding vehicle based on the ratio of the accumulated postretirement benefit obligation (APBO) assumed by Talen Energy to the total APBO attributed to each funding vehicle. As a result of the above, the net funded status of the new Talen Energy pension and other postretirement benefit plans at June 1, 2015 was a liability of $257 million.
The majority of Talen Montana's employees are eligible for pension benefits under a cash balance plan. Effective January 1, 2012, that plan was closed to all newly hired salaried employees. Effective September 1, 2014, that plan was closed to all newly hired bargaining unit employees. Newly hired employees are eligible to participate in a 401(k) savings plan with enhanced employer contributions. The majority of Talen Montana's employees are also eligible for certain health care and life insurance benefits upon retirement, under a retiree health plan sponsored by Talen Montana, which is now closed to newly hired employees. There were no changes to the pension and other postretirement benefit plans for employees of Talen Montana as a result of the spinoff transaction. However, PPL retained the liability for other postretirement benefits attributable to existing retirees of Talen Montana as of the date of the spinoff.
Employees of certain of Talen Energy's mechanical contracting companies are eligible for benefits under multiemployer plans sponsored by various unions.
The following table provides the components of net periodic defined benefit costs for Talen Energy pension and other postretirement plans for the years ended December 31, for which the 2015 periods include seven months of costs under the newly formed Talen Energy plans and a full year of Talen Montana plans. |
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Postretirement Benefits |
| 2015 |
| 2014 |
| 2013 | | 2015 | | 2014 | | 2013 |
Net periodic defined benefit costs (credits): | | | | | | | | | | | |
Service cost | $ | 31 |
| | $ | 5 |
| | $ | 7 |
| | $ | 2 |
| | $ | — |
| | $ | 1 |
|
Interest cost | 46 |
| | 9 |
| | 8 |
| | 2 |
| | 1 |
| | — |
|
Expected return on plan assets | (60 | ) | | (11 | ) | | (10 | ) | | (3 | ) | | — |
| | — |
|
Amortization of: | | | | | | | | | | | |
Actuarial (gain) loss | 16 |
| | 2 |
| | 3 |
| | — |
| | — |
| | — |
|
Curtailment charges (credits) | — |
| | — |
| | — |
| | — |
| | (1 | ) | | — |
|
Net periodic defined benefit costs (credits) | $ | 33 |
|
| $ | 5 |
|
| $ | 8 |
|
| $ | 1 |
|
| $ | — |
|
| $ | 1 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Postretirement Benefits |
| 2015 | | 2014 | | 2013 | | 2015 | | 2014 | | 2013 |
Other changes in plan assets and benefit obligations recognized in OCI: | | | | | | | | | | | |
Curtailments | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | — |
|
Net (gain) loss | 54 |
| | 26 |
| | (15 | ) | | — |
| | (1 | ) | | (1 | ) |
Prior service cost (credit) | 3 |
| | — |
| | — |
| | — |
| | — |
| | (3 | ) |
Amortization of: | | | | | | | | | | | |
Actuarial gain (loss) | (16 | ) | | (2 | ) | | (3 | ) | | — |
| | — |
| | — |
|
Prior service credit (cost) | — |
| | — |
| | — |
| | 1 |
| | — |
| | — |
|
Total recognized in OCI | 41 |
| | 24 |
| | (18 | ) | | 1 |
| | — |
| | (4 | ) |
Total recognized in net periodic defined benefit costs and OCI | $ | 74 |
| | $ | 29 |
| | $ | (10 | ) | | $ | 2 |
| | $ | — |
| | $ | (3 | ) |
Actuarial loss of $20 million related to the forward-starting interest rate swaps.these plans is expected to be amortized from AOCI into net periodic defined benefit costs in 2016.
(The following net periodic defined benefit costs (credits) were charged to operating expense, excluding amounts charged to construction and other non-expense accounts.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Postretirement Benefits |
| 2015 | | 2014 | | 2013 | | 2015 | | 2014 | | 2013 |
| $ | 48 |
| | $ | 39 |
| | $ | 45 |
| | $ | 2 |
| | $ | 3 |
| | $ | 6 |
|
In the table above, amounts include costs for the specific plans sponsored by Talen Energy and its subsidiaries and the following allocated costs of the PPL LKEpension and LG&E)other postretirement benefit plans prior to the spinoff, based on Talen Energy Supply's participation in those plans, which management believes were reasonable at the time:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Postretirement Benefits |
| 2015 | | 2014 | | 2013 | | 2015 | | 2014 | | 2013 |
| $ | 16 |
| | $ | 34 |
| | $ | 38 |
| | $ | — |
| | $ | 3 |
| | $ | 5 |
|
At December 31, 2014 or June 1, 2015, as applicable, the plan sponsors adopted the mortality tables issued by the Society of Actuaries in October 2014 (RP-2014 base tables) for all applicable defined benefit pension and other postretirement benefit plans. At December 31, 2014 or June 1, 2015, as applicable, the plan sponsors also selected the IRS BB 2-Dimensional mortality improvement scale on a generational basis for all applicable defined benefit pension and other postretirement benefit plans. These mortality assumptions reflect the recognition of both improved life expectancies and the expectation of continuing improvements in life expectancies.
The following weighted-average assumptions were used in the valuation of the benefit obligations at December 31. |
| | | | | | | | | | | |
| Pension Benefits | | Other Postretirement Benefits |
| 2015 | | 2014 | | 2015 | | 2014 |
Discount rate | 4.65 | % | | 4.28 | % | | 4.60 | % | | 3.81 | % |
Rate of compensation increase | 3.98 | % | | 4.03 | % | | 3.98 | % | | 4.03 | % |
The following weighted-average assumptions were used to determine the net periodic defined benefit costs for Talen Energy's plans for the years ended December 31. |
| | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Postretirement Benefits |
| 2015 | | 2014 | | 2013 | | 2015 | | 2014 | | 2013 |
Discount rate | 4.41 | % | | 5.18 | % | | 4.25 | % | | 4.27 | % | | 4.51 | % | | 3.77 | % |
Rate of compensation increase | 3.99 | % | | 3.94 | % | | 3.95 | % | | 3.99 | % | | 3.94 | % | | 3.95 | % |
Expected return on plan assets (a) | 7.00 | % | | 7.00 | % | | 7.00 | % | | 6.37 | % | | N/A |
| | N/A |
|
| |
(a) | The expected long-term rates of return for pension and other postretirement benefits are based on management's projections using a best-estimate of expected returns, volatilities and correlations for each asset class. Each plan's specific current and expected asset allocations are also considered in developing a reasonable return assumption. |
The following table provides the assumed health care cost trend rates for the years ended December 31.
|
| | | | | | | | |
| 2015 | | 2014 | | 2013 |
Health care cost trend rate assumed for next year | | | | | |
obligations | 6.80 | % | | 7.20 | % | | 7.60 | % |
costs | 7.20 | % | | 7.60 | % | | 8.00 | % |
Rate to which the cost trend rate is assumed to decline (the ultimate trend) | | | | | |
obligations | 5.00 | % | | 5.00 | % | | 5.00 | % |
costs | 5.00 | % | | 5.00 | % | | 5.50 | % |
Year that the rate reaches the ultimate trend rate | | | | | |
obligations | 2020 |
| | 2020 |
| | 2020 |
|
costs | 2020 |
| | 2020 |
| | 2019 |
|
A one percentage point change in the assumed health care costs trend rate assumption would have been insignificant to the other postretirement benefit plans in 2015.
The funded status of Talen Energy's plans at December 31 was as follows:
|
| | | | | | | | | | | | | | | |
| Pension Benefits | | Other Postretirement Benefits |
| 2015 | | 2014 | | 2015 | | 2014 |
Change in Benefit Obligation | | | | | | | |
Benefit obligation, beginning of period | $ | 210 |
| | $ | 163 |
| | $ | 10 |
| | $ | 12 |
|
Transfer of benefit obligation at spinoff (a) | 1,416 |
| | — |
| | 80 |
| | — |
|
Service cost | 31 |
| | 5 |
| | 2 |
| | — |
|
Interest cost | 46 |
| | 9 |
| | 2 |
| | 1 |
|
Plan amendments | 3 |
| | — |
| | — |
| | — |
|
Actuarial (gain) loss | (41 | ) | | 38 |
| | (4 | ) | | (1 | ) |
Net Transfers in (out) | — |
| | — |
| | (3 | ) | | — |
|
Curtailments | — |
| | — |
| | — |
| | (1 | ) |
Gross benefits paid | (51 | ) | | (5 | ) | | — |
| | (1 | ) |
Benefit obligation, end of period | $ | 1,614 |
| | $ | 210 |
| | $ | 87 |
| | $ | 10 |
|
| | | | | | | |
Change in Plan Assets | | | | | | | |
Plan assets at fair value, beginning of period | $ | 170 |
| | $ | 147 |
| | $ | — |
| | $ | — |
|
Transfer of plan assets at fair value at spinoff (a) | 1,159 |
| | — |
| | 80 |
| | — |
|
Actual return on plan assets | (35 | ) | | 22 |
| | (2 | ) | | — |
|
Employer contributions | 32 |
| | 6 |
| | 1 |
| | 1 |
|
Gross benefits paid | (52 | ) | | (5 | ) | | (1 | ) | | (1 | ) |
Plan assets at fair value, end of period | 1,274 |
| | 170 |
| | 78 |
| | — |
|
Funded status end of period | $ | (340 | ) | | $ | (40 | ) | | $ | (9 | ) | | $ | (10 | ) |
| | | | | | | |
Amounts recognized in the Balance Sheets consist of: | | | | | | | |
Current Liability | $ | — |
| | $ | — |
| | $ | — |
| | $ | (1 | ) |
Noncurrent liability | (340 | ) | | (40 | ) | | (9 | ) | | (9 | ) |
Net amount recognized, end of period | $ | (340 | ) | | $ | (40 | ) | | $ | (9 | ) | | $ | (10 | ) |
| | | | | | | |
Amounts recognized in AOCI (pre-tax) consist of: | | | | | | | |
Prior service cost (credit) | $ | 2 |
| | $ | — |
| | $ | (5 | ) | | $ | (4 | ) |
Net actuarial (gain) loss | 451 |
| | 59 |
| | 8 |
| | — |
|
Total | $ | 453 |
| | $ | 59 |
| | $ | 3 |
| | $ | (4 | ) |
| | | | | | | |
Total accumulated benefit obligation for defined benefit pension plans | $ | 1,500 |
| | $ | 210 |
| |
| |
|
| |
(a) | Values determined as of the spinoff date as discussed above. |
Talen Energy's pension plans had projected and accumulated benefit obligations in excess of the fair value of plan assets at December 31, 2015 and 2014.
In addition to the hedges terminatedplans it sponsors, Talen Energy Supply and its subsidiaries were 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 prior to the spinoff, which management believes were reasonable at that time. The actuarially determined obligations of current active employees were used as a resultbasis to allocate total plan activity, including active and retiree costs and obligations. Allocations to Talen Energy Supply resulted in liabilities at December 31, 2014 as follows:
|
| | | |
Pension plans | $ | 259 |
|
Other postretirement benefit plans | 34 |
|
Talen Energy's mechanical contracting subsidiaries make contributions to over 60 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 debt issuance, realized amounts associated with LG&E's interest rate swaps, including a terminated swap contract from 2008, are recoverable through ratesplan may be borne by the remaining participating employers.
If Talen Energy'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 an order from the KPSC, LG&E's unrealized losses and gains are recordedunfunded status of the plan, referred to 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 AROwithdrawal liability.
Gas Line Tracker
InTalen Energy identified the 2012 rate case order,Steamfitters Local Union No. 420 Pension Plan, EIN/Plan Number 23-2004424/001 as the KPSC approvedplan to which the GLT rate recovery mechanism. The GLT authorizes LG&Emost significant contributions are made. Contributions to recover its incremental operating expensesthis plan by Talen Energy's mechanical contracting companies were $5 million for 2015, 2014 and depreciation, and2013. At the date the financial statements were issued, the Form 5500 was not available for the plan year ending in 2015. Therefore, the following disclosures specific 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 effectiveplan are being made based 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 chargedForm 5500s filed for the differences between the actual costsplan years ended December 31, 2014 and actual GLT charges for the preceding year.
Coal Contracts
As2013. Talen Energy's mechanical contracting subsidiary H.T. Lyons was identified individually 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 valuegreater than 5% contributor on the Balance Sheets with offsetsForm 5500s. The plan had a Pension Protection Act zone status of red, without utilizing an extended amortization period, as of December 31, 2014 and 2013. In addition, the plan is subject to regulatory assets for those contracts with unfavorable terms relativea rehabilitation plan and surcharges have been applied 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.
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.participating employer contributions. The regulatory liabilities are being amortized using the units-of-production method until March 2026, the expiration date of the collective-bargaining agreement related to those employees participating in this plan is September 18, 2016. There were no other plans deemed individually significant based on a multifaceted assessment.
Talen Energy's mechanical contracting subsidiaries also participate in multiemployer other postretirement plans that provide for retiree life insurance and health benefits.
The table below details total contributions to all multiemployer pension and other postretirement plans, including the plan identified as significant above. The contribution amounts fluctuate each year based on the volume of work and type of projects undertaken from year to year.
|
| | | | | | | | | | | |
| 2015 | | 2014 | | 2013 |
Pension plans | $ | 34 |
| | $ | 40 |
| | $ | 36 |
|
Other postretirement benefit plans | 26 |
| | 33 |
| | 32 |
|
Total contributions | $ | 60 |
| | $ | 73 |
| | $ | 68 |
|
Plan Assets
At December 31, 2015, Talen Energy's pension plans are invested in the Talen Energy Retirement Plans Master Trust (the Master Trust) that also includes a 401(h) account that is restricted for certain other postretirement benefit obligations of Talen Energy. Prior to the spinoff from PPL, the pension plan assets were invested by PPL in a master trust maintained by PPL.
The investment strategy for the Master Trust is to achieve a risk-adjusted return on a mix of assets that, in combination with Talen Energy's funding policy, will ensure that sufficient assets are available to provide long-term growth and liquidity for benefit payments, while also managing the duration of the assets to complement the duration of the liabilities. The Master Trust benefits from a wide diversification of asset types, investment fund strategies and external investment fund managers, and therefore has no significant concentration of risk.
The investment policy of the Master Trust outlines investment objectives and defines the responsibilities of the Retirement Plan Committee of Talen Energy Corporation, which is the named fiduciary, external investment managers, investment advisor and trustee and custodian. The investment policy is reviewed annually by Talen Energy Corporation's Board of Directors.
The Retirement Plan Committee 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 asset allocation ranges have been developed for the Master Trust based on input from external consultants with a goal of limiting funded status volatility. The Retirement Plan Committee monitors the investments in the Master Trust, and seeks to
obtain a target portfolio that emphasizes reduction of risk of loss from market volatility. In pursuing that goal, the Retirement Plan Committee establishes revised guidelines from time to time.
The asset allocation for the trust and the target allocation prescribed by the investment guidelines by portfolio at December 31 are as follows:
|
| | | | | |
| Percentage of trust assets | | Target Asset Allocation |
| 2015 | | 2015 |
Growth Portfolio | 52 | % | | 55 | % |
Equity securities | 24 | % | | |
Debt securities (a) | 14 | % | | |
Alternative investments | 14 | % | | |
Immunizing Portfolio | 46 | % |
| 44 | % |
Debt securities (a) | 40 | % | | |
Derivatives | 6 | % | | |
Liquidity Portfolio | 2 | % | | 1 | % |
Total | 100 | % |
| 100 | % |
| |
(a) | Includes commingled debt funds, which Talen Energy treats as debt securities for asset allocation purposes. |
Prior to the spinoff, the assets of the Talen Montana pension plan were invested solely in a master trust maintained by PPL. The fair value of this plan's assets of $170 million at December 31, 2014 represented an interest of approximately 4% in PPL's master trust.
The fair value of net assets in the Master Trust by asset class and level within the fair value hierarchy was:
|
| | | | | | | | | | | | | | | |
| December 31, 2015 |
| Fair Value Measurement Using |
| Total | | Level 1 | | Level 2 | | Level 3 |
Talen Energy Retirement Plans Master Trust | | | | | | | |
Cash and cash equivalents | $ | 108 |
| | $ | 108 |
| | $ | — |
| | $ | — |
|
Equity securities: |
| | | | | | |
U.S.: |
| | | | | | |
Large-cap | 90 |
| | 23 |
| | 67 |
| | — |
|
Small-cap | 33 |
| | 33 |
| | — |
| | — |
|
International | 190 |
| | — |
| | 190 |
| | — |
|
Commingled debt | 273 |
| | — |
| | 273 |
| | — |
|
Debt securities: |
| | | | | | |
U.S. Treasury and U.S. government sponsored agency | 192 |
| | 189 |
| | 3 |
| | — |
|
Corporate | 231 |
| | — |
| | 231 |
| | — |
|
International government | 1 |
| | — |
| | 1 |
| | — |
|
Other | 3 |
| | — |
| | 3 |
| | — |
|
Alternative investments: |
| | | | | | |
Commodities | 28 |
| | — |
| | 28 |
| | — |
|
Real estate | 48 |
| | — |
| | 48 |
| | — |
|
Private equity | 31 |
| | — |
| | — |
| | 31 |
|
Hedge funds | 69 |
| | — |
| | 69 |
| | — |
|
Derivatives: |
| | | | | | |
Interest rate swaps | 32 |
| | — |
| | 32 |
| | — |
|
Other | 5 |
| | — |
| | 5 |
| | — |
|
Talen Energy Retirement Plans Master Trust assets, at fair value | $ | 1,334 |
|
| $ | 353 |
|
| $ | 950 |
|
| $ | 31 |
|
| | | | | | | |
Receivables and payables, net (a) | (31 | ) | | | | | | |
401(h) accounts restricted for other postretirement benefit obligations | (29 | ) | | | | | | |
Total Talen Energy Retirement Plans Master Trust pension assets | $ | 1,274 |
| | | | | | |
| |
(a) | Receivables and payables represent amounts for investments sold/purchased, but not yet settled along with interest and dividends earned, but not yet received. |
A reconciliation of the Master Trust assets classified as Level 3 at December 31, 2015 is as follows:
|
| | | |
| Private equity |
Balance at beginning of period | $ | — |
|
Acquisitions (a) | 35 |
|
Purchases, sales and settlements | (4 | ) |
Balance at end of period | $ | 31 |
|
| |
(a) | Transferred from a master trust maintained by PPL. |
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 equity indices.
Investments in commingled equity and debt funds are categorized as equity securities and are classified as Level 2. 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. Investments in commingled equity funds include funds that invest in U.S. and 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 evaluations that reflect observable market information, such as actual trade information for identical securities or for similar securities, adjusted for observable differences. The fair value of debt securities is generally measured using a market approach, including the use of pricing models which incorporate observable inputs. Common inputs include benchmark yields, relevant trade data, 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 payment data, future predicted cash flows, collateral performance and new issue data. For the Master Trust, these securities represent investments in securities issued by U.S. Treasury and U.S. government sponsored agencies; investments securitized by pooled loans; investments in investment grade and non-investment grade bonds issued by U.S. companies across several industries and investments in debt securities issued by foreign governments and corporations.
Investments in commodities represent ownership interest of a commingled fund that is invested in a portfolio of exchange-traded futures and forward contracts in commodities to obtain broad exposure to all principal groups in the global commodity markets, including energy, agriculture, livestock and metals (both precious and industrial) using proprietary commodity trading strategies. Redemptions can be made the 15th calendar day and last calendar day of the month with a specified notification period. The fund's fair value is based upon a value as calculated by the fund's administrator.
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 with more speculative real estate investing strategies. The partnership has limitations on the amounts that may be redeemed based on available cash to fund redemptions. Additionally, the general partner may decline to accept redemptions when necessary to avoid adverse consequences for the partnership, including legal and tax implications, among others. The fair value of the investment is based upon a partnership unit value.
Investments in private equity represent interests in partnerships in private equity fund of funds that use a number of diverse investment strategies. Two of the partnerships have limited lives of ten years, while the third has a life of 15 years, after which liquidating distributions will be received. Prior to the end of each partnership's life, the investment cannot be redeemed with the partnership; however, the interest may be sold to other parties, subject to the general partner's approval. The Master Trust has unfunded commitments of $12 million that may be required during the lives of the partnerships. Fair value is based on an ownership interest in partners' capital to which a proportionate share of net assets is attributed.
Investments in hedge funds represent investments in three hedge fund of funds. Hedge funds seek a return utilizing a number of diverse investment strategies. The strategies, when combined aim to reduce volatility and risk while attempting to deliver
positive returns under most market conditions. Major investment strategies for the hedge fund of funds include long/short equity, market neutral, distressed debt, and relative value. Generally, shares may be redeemed within 60 to 95 days with prior written notice. The funds are subject to short term lockups and have limitations on the amount that may be withdrawn based on a percentage of the total net asset value of the fund, among other restrictions. All withdrawals are subject to the general partner's approval. The fair value for two of the funds has been estimated using the net asset value per share and the third fund's fair value is 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 industry models. These instruments primarily include interest rate swaps, which are valued based on the swap details, such as swap curves, notional amount, index and term of index, reset frequency and payer/receiver credit ratings.
Plan Assets - Other Postretirement Benefit Plans
Prior to the spinoff from PPL, the other postretirement benefit plan assets were invested by PPL in VEBA trusts and a 401(h) account, maintained by PPL.
The investment strategy with respect to other postretirement benefit obligations is to fund VEBA trusts and/or 401(h) accounts with voluntary contributions, when appropriate, and to invest in a tax efficient manner. Excluding the 401(h) accounts included in the Master Trust, 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. Equity securities include investments in domestic large-cap commingled funds. Ownership interests in commingled funds that invest entirely in debt securities are classified as equity securities, but treated as debt securities for asset allocation and target allocation purposes. Ownership interests in money market funds are treated as cash and cash equivalents for asset allocation and target allocation purposes. The asset allocation for the VEBA trusts and the target allocation, by asset class, at December 31 are detailed below.
|
| | | | | |
| Percentage of plan assets | Target Asset Allocation |
| 2015 | | 2015 |
Asset Class | | | |
U.S. Equity securities | 53 | % | | 45 | % |
Debt securities | 46 | % | | 50 | % |
Cash and cash equivalents | 1 | % | | 5 | % |
Total | 100 | % | | 100 | % |
The fair value of assets in the other postretirement benefit plans by asset class and level within the fair value hierarchy was:
|
| | | | | | | | | | | | | | | |
| December 31, 2015 |
| Fair Value Measurement Using |
| Total | | Level 1 | | Level 2 | | Level 3 |
U.S. Equity securities: |
| | | | | | |
Large-cap | $ | 26 |
| | $ | — |
| | $ | 26 |
| | $ | — |
|
Commingled debt | 23 |
| | — |
| | 23 |
| | — |
|
Total VEBA trust assets, at fair value | 49 |
| | $ | — |
| | $ | 49 |
| | $ | — |
|
401(h) account assets | 29 |
| | | | | | |
Total other postretirement benefit plan assets | $ | 78 |
| | | | | | |
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.
Expected Cash Flows - Defined Benefit Plans
Talen Energy Supply's defined benefit pension plans have the option to utilize available prior year credit balances to meet current and future contribution requirements. Talen Energy expects to contribute $40 million to its defined benefit pension plans in 2016.
Talen Energy is not required to make contributions to its other postretirement benefit plans.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid by the plans.
|
| | | | | | | |
| Pension | | Other Postretirement Benefit Payment |
2016 | $ | 75 |
| | $ | 2 |
|
2017 | 81 |
| | 3 |
|
2018 | 87 |
| | 5 |
|
2019 | 92 |
| | 7 |
|
2020 | 98 |
| | 9 |
|
2021-2025 | 538 |
| | 63 |
|
Savings Plans
Substantially all employees of Talen Energy are eligible to participate in deferred savings plans (401(k)s). Employer contributions to the plans were $16 million in 2015, $14 million in 2014 and $12 million in 2013.
Separation Benefits
Talen Energy Supply and certain 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. Generally, applicable employees separated are eligible for cash severance payments, outplacement services and a single sum payment approximating the dollar amount of premium payments that would be incurred for continuation of group health and welfare coverage. Separation benefits for certain bargaining unit employees also include enhanced pension and postretirement medical benefits. Separation benefits are recorded when such amounts are probable and estimable.
See Note 1 for a discussion of separation benefits related to the spinoff and Note 11 for a discussion of separation benefits related to the one-time voluntary retirement window offered in 2014 to certain bargaining unit employees as part of the new three-year labor agreement with IBEW local 1600. Separation benefits were not significant in 2013.
10. Jointly Owned Facilities
At December 31, 2015 and 2014 the Talen Energy Balance Sheets reflect the owned interests in the facilities below. |
| | | | | | | | | | | | | | | | | | |
| Ownership Interest | | Electric Plant | | Other Property | | Accumulated Depreciation | | Construction Work in Progress |
December 31, 2015 | | | | | | | | | |
Generating Plants | | | | | | | | | |
Susquehanna | 90.00 | % | | $ | 4,791 |
| | $ | — |
| | $ | 3,639 |
| | $ | 148 |
|
Conemaugh | 16.25 | % | | 326 |
| | — |
| | 156 |
| | 7 |
|
Keystone | 12.34 | % | | 218 |
| | — |
| | 111 |
| | 3 |
|
Colstrip Units 1 & 2 | 50.00 | % | | 48 |
| | — |
| | 5 |
| | 2 |
|
Colstrip Units 3 | 30.00 | % | | 30 |
| | — |
| | 2 |
| | 3 |
|
Merill Creek Reservoir | 8.37 | % | | — |
| | 22 |
| | 16 |
| | — |
|
| | | | | | | | | |
December 31, 2014 | | | | | | | | | |
Generating Plants | | | | | | | | | |
Susquehanna | 90.00 | % | | $ | 4,746 |
| | $ | — |
| | $ | 3,591 |
| | $ | 117 |
|
Conemaugh | 16.25 | % | | 330 |
| | — |
| | 141 |
| | 2 |
|
Keystone | 12.34 | % | | 213 |
| | — |
| | 102 |
| | 2 |
|
Colstrip Units 1 & 2 | 50.00 | % | | 16 |
| | — |
| | 4 |
| | 3 |
|
Colstrip Unit 3 | 30.00 | % | | 16 |
| | — |
| | 2 |
| | 2 |
|
Merill Creek Reservoir | 8.37 | % | | — |
| | 22 |
| | 15 |
| | — |
|
Each subsidiary owning these interests provides its own funding for its share of the facility. Each receives a portion of the total output of the generating plants equal to its percentage ownership. The share of fuel and other operating costs associated with the plants is included in the corresponding operating expenses on the Statements of Income.
Talen 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.
11. Commitments and Contingencies
Energy Purchase and Sales Commitments
Energy Purchase Commitments
Talen Energy enters into long-term energy and energy related contracts which include commitments to purchase:
|
| | | | | | | | | | | | | |
| Contract Type |
| Fuels (a) | | Limestone | | Natural Gas Storage | | Natural Gas Transportation | | Power, excluding wind | | RECs | | Wind Power |
Maximum Maturity Date | 2027 | | 2030 | | 2026 | | 2034 | | 2021 | | 2020 | | 2027 |
| |
(a) | As a result of depressed wholesale market prices for electricity and natural gas. Talen Energy has experienced a shift in the dispatching of its generation fleet from coal-fired to combined-cycle natural gas-fired generation. This reduction in coal-fired generation output has resulted in a surplus of coal inventory at certain of Talen Energy's Pennsylvania plants. To mitigate the risk of oversupply, Talen Energy incurred pre-tax charges of $41 million during 2015 in connection with an agreement to reduce its 2015 through 2018 contracted coal deliveries. These charges were recorded to "Fuel" on the Statement of Income. |
Energy Sale Commitments
In connection with its marketing activities or hedging strategies for its power plants, Talen Energy has entered into long-term power sales contracts that extend into 2020.
Legal Matters
Legal Proceedings
Talen Energy is involved in the following legal proceedings, claims and litigation. Talen Energy believes that it has meritorious defenses in connection with its current legal proceedings, claims and litigation, and it intends to vigorously contest each of them. However, there can be no assurance that it will be successful in its efforts.
No estimate of the possible loss or range of loss in excess of amounts accrued, if any, can be made at this time regarding any of the matters specifically described below because the inherently unpredictable nature of legal proceedings may be exacerbated by various factors such as ongoing discovery, significant facts that are in dispute, the stage of the proceeding and the wide range of potential outcomes for any such matter. As a result, any losses actually incurred could be substantial.
Sierra Club Litigation
In March 2013, the Sierra Club and MEIC filed a complaint in the U.S. District Court, District of Montana, Billings Division against Talen Montana and the other Colstrip Steam Electric Station (Colstrip) owners: Avista Corporation, Puget Sound Energy, Portland General Electric Company, NorthWestern Corporation and PacifiCorp. Talen Montana operates Colstrip on behalf of the owners. The complaint alleged certain violations of the Clean Air Act, including New Source Review, Title V and opacity requirements and listed 39 separate claims for relief. The complaint requested injunctive relief and civil penalties on average of $36,000 per day per violation, including a request that the owners remediate environmental damage and that $100,000 of the civil penalties be used for beneficial mitigation projects.
In July 2013, the Sierra Club and MEIC filed an additional Notice of Intent to Sue, identifying additional plant projects that are alleged not to be in compliance with the Clean Air Act and, in September 2013, filed an amended complaint. The amended complaint dropped all claims regarding pre-2001 plant projects, as well as the plaintiffs' Title V and opacity claims. It did, 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. Talen Montana and the other Colstrip owners filed a motion to dismiss the amended complaint in October 2013. In May 2014, the court dismissed the plaintiffs' independent Best Available Control Technology claims and their Prevention of Significant Deterioration (PSD) claims for three projects, but denied the owners' motion to dismiss the plaintiffs' other PSD claims on statute of limitation grounds. In August 2014, the Sierra Club and MEIC filed a second amended complaint. This complaint includes the same causes of action articulated in the first amended complaint, but in regard to only eight projects done between 2001 and 2013. In September 2014, the Colstrip owners filed an answer to the second amended complaint. Discovery closed in the first quarter of 2015, and in April, the plaintiffs indicated they intend to pursue claims related to only four of the remaining projects. The magistrate judge entered an order on the parties' motions for summary judgment on December 31, 2015. The judgment dismissed two of the plaintiffs' four remaining claims and provided more preferable legal standards for the remaining two claims. The case has been bifurcated as to liability and remedy, and the liability trial is currently set for May 2016. A trial date with respect to remedy, if there is a finding of liability, has not been scheduled.
Notice of Intent to File Suit
In October 2014, Talen Energy received a notice letter from the Chesapeake Bay Foundation (CBF) alleging violations of the Clean Water Act and Pennsylvania Clean Streams Law at the dateBrunner Island generation plant. The letter was sent to Brunner Island, LLC and the PADEP and is intended to provide notice of the acquisition.alleged violations and CBF's intent to file suit in Federal court after expiration of the 60 day statutory notice period. Among other things, the letter alleges that Brunner Island, LLC failed to comply with the terms of its National Pollutant Discharge Elimination System permit and associated regulations related to the application of nutrient credits to the facility's discharges of nitrogen into the Susquehanna River. The letter also alleges that PADEP has failed to ensure that credits generated from nonpoint source pollution reduction activities that Brunner Island, LLC applies to its discharges meet the eligibility and certification requirements under PADEP's nutrient trading program regulations. If a lawsuit is filed by CBF, Talen Energy would expect CBF to seek injunctive relief, monetary penalties, fees and costs of litigation.
Regulatory Liability Associated with Net Deferred Tax AssetsMontana Regional Haze
LG&E'sIn September 2012, the EPA Region 8 developed a regional haze Federal Implementation Plan (FIP) for Montana. The final FIP assumed no additional controls for Corette or Colstrip Units 3 and KU's regulatory liabilities associated4, but proposed stricter limits for Corette and Colstrip Units 1 and 2. Talen Montana was meeting these stricter permit limits at Corette without any significant changes to operations, although other requirements led to the suspension of operations and retirement of Corette in March 2015. The stricter limits at
Colstrip Units 1 and 2 would require additional controls to meet more stringent nitrogen oxides and sulfur dioxide limits, the cost of which could be significant. Both Talen Montana and environmental groups appealed the final FIP to the U.S. Court of Appeals for the Ninth Circuit where oral argument was heard in May 2014. On June 9, 2015, the Ninth Circuit issued a decision that vacated as arbitrary and capricious the portions of the FIP setting stricter emissions limits for Colstrip Units 1 and 2 and Corette. The Ninth Circuit upheld the EPA's decision not to require further emissions reductions at Colstrip Units 3 and 4. The Ninth Circuit opinion requires the EPA to now reissue a FIP that is consistent with net deferred tax assets represent the future revenue impact fromopinion.
Colstrip Wastewater Facility Administrative Order on Consent
Talen Montana is party to an Administrative Order on Consent (AOC) with the reversalMDEQ related to operation 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 liabilitieswastewater facilities at the Colstrip power plant. In September 2012, Earthjustice, on behalf of Sierra Club, MEIC, and the deferred tax assetsNational Wildlife Federation, filed an affidavit under Montana's Major Facility Siting Act (MFSA) that sought review of the AOC by Montana's Board of Environmental Review. Talen Montana elected to have this proceeding conducted in Montana state district court, and in October 2012, Earthjustice filed a petition for review in Montana state district court in Rosebud County. This matter was stayed in December 2012 pending the outcome of separate litigation where the same environmental groups challenged the AOC in a writ of mandamus. That litigation was resolved in May 2013 when defendants Talen Montana and MDEQ won their motions to dismiss the matter, and the environmental groups did not appeal. In April 2014, Earthjustice filed successful motions for leave to amend the petition for review and to lift the stay. Talen Montana and the MDEQ responded to the amended petition and filed partial motions to dismiss in July 2014, which were denied in October 2014. Discovery closed in October 2015, summary judgment motions on behalf of all parties are pending, and a bench trial is set for April 2016.
Other
In addition to the above matters, from time-to-time in the ordinary course of its business Talen Energy may be subject to other legal proceedings, claims and litigation. While the outcome of these legal proceedings, claims and litigation is uncertain, the likely results are not offset; rather, each is displayed separately.expected, either individually or in the aggregate, to have a material adverse effect on Talen Energy's financial condition or results of operations, although the effect could be material to Talen Energy's results of operations in any interim reporting period.
Regulatory MattersCredit Arrangements and Short-term Debt
Talen Energy maintains credit arrangements to enhance liquidity and provide credit support. For reporting purposes, on a consolidated basis, the credit arrangements of Talen Energy Supply and its subsidiaries also apply to Talen Energy Corporation.
Revolving Credit Facilities
The following secured revolving credit facilities were in place at December 31, 2015:
|
| | | | | | | | | | | | | | | | | | |
| Expiration Date | | Capacity | | Borrowed (c) | | Letters of Credit Issued | | Unused Capacity | |
Talen Energy Supply RCF (a) | June 2020 | | $ | 1,850 |
| | $ | 500 |
| | $ | 163 |
| | $ | 1,187 |
| |
New MACH Gen RCF (b) | July 2021 | | 160 |
| | 108 |
| | 31 |
| | 21 |
| |
Total Credit Facilities | | | $ | 2,010 |
| | $ | 608 |
| | $ | 194 |
| | $ | 1,208 |
| |
| |
(a) | The facility is syndicated and provides capacity available for short-term borrowings and up to $925 million of letters of credit. The facility requires Talen Energy Supply to maintain a senior secured net debt to adjusted EBITDA ratio (as defined in the agreement) of less than or equal to 4.50 to 1.00 as of the last day of any fiscal quarter. Talen Energy Supply pays customary fees on the facility and borrowings bear interest at its option at either a defined base rate or LIBOR-based rates, in each case plus an applicable margin. The weighted average interest rate on outstanding borrowings at December 31, 2015 was 2.67%. |
| |
(b) | The facility provides capacity available for short-term borrowings and up to $120 million of letters of credit. New MACH Gen pays customary fees on the facility and borrowings bear interest at 12-month LIBOR, plus an applicable margin. The weighted average interest rate on outstanding borrowings at December 31, 2015 was 5.04%. |
| |
(c) | The amounts borrowed are recorded as "Short-term debt" on the Balance Sheet. |
The Talen Energy Supply RCF was entered into on June 1, 2015 in connection with the completion of the spinoff transaction and replaced Talen Energy Supply's previously existing unsecured syndicated credit facility. Any outstanding principal amounts under the old facility were repaid prior to the termination of the old facility and outstanding letters of credit were transferred to the Talen Energy Supply RCF. The facility is secured by liens on a majority of Talen Energy Supply's assets and is guaranteed by certain Talen Energy Supply subsidiaries, which guarantees are in turn secured by liens on assets of such subsidiaries with an aggregate carrying value of $7 billion at December 31, 2015. The facility provides the option to raise incremental credit facilities, refinance the loans with debt incurred outside the facility and extend the maturity date of the revolving credit commitments and loans and, if applicable, term loans, subject to certain limitations.
The Talen Energy Supply letter of credit facility and uncommitted credit facilities that existed at December 31, 2014 either expired or matured during the first quarter of 2015. Any previously issued letters of credit under these facilities were either terminated or reissued under the then-outstanding unsecured syndicated credit facility and upon closing of the spinoff were reissued under the Talen Energy Supply RCF described above. During the year ended December 31, 2015, Talen Energy wrote-off $12 million of unamortized fees to "Interest expense" on the Statements of Income as a result of the termination of the prior unsecured syndicated credit facility.
The New MACH Gen RCF is a component of the $642 million First Lien Credit and Guaranty Agreement, which was outstanding when Talen Energy acquired MACH Gen in November 2015. The First Lien Credit and Guaranty Agreement also contains a Term Loan B as described in "Long-term Debt" below. Obligations under the First Lien Credit and Guaranty Agreement are guaranteed by each of New MACH Gen's subsidiaries and are secured by a first priority security interest, subject to possible shared first lien status with certain permitted hedge and power sale agreements, in all of the assets of New MACH Gen and each guarantor, including the equity interests in New MACH Gen and each guarantor, which assets collectively have an aggregate carrying value of approximately $1 billion at December 31, 2015. Talen Energy is not a guarantor or obligor of borrowings under the First Lien Credit and Guaranty Agreement.
Other Facilities
Talen Energy Supply maintains a $500 million agreement expiring June 2017 that provides Talen Energy Supply the ability to request up to $500 million of committed unsecured letter of credit capacity at fees to be agreed upon at the time of each request, based on certain market conditions. At December 31, 2015, Talen Energy Supply had not requested any capacity for the issuance of letters of credit under this arrangement.
In December 2015, Talen Energy Supply and Talen Energy Marketing entered into the Amended Secured Energy Marketing and Trading Facility Agreement (Amended STF Agreement) to amend the $800 million Secured Energy Marketing and Trading Facility Common Agreement, dated as of November 1, 2010. The Amended STF Agreement increased the facility capacity to $1.3 billion. The facility allows Talen Energy Supply to receive credit to satisfy collateral posting obligations related to Talen Energy's energy marketing and trading activities with counterparties participating in the facility. Prior to the Talen Energy spinoff transactions, Montour, LLC and Brunner Island, LLC had guaranteed certain of Talen Energy Marketing's obligations and had granted mortgage liens on their respective generating facilities to secure such guarantees. Brunner Island and Montour have since been released as parties. Obligations under the Amended STF Agreement are secured by the same collateral that secures the Talen Energy Supply RCF described above. The facility is for a five-year term that is subject to an automatic one-year extension each year until termination under the provisions of the Amended STF Agreement. The initial term expires in December 2020. There were $54 million of secured obligations outstanding under this facility at December 31, 2015.
Long-term Debt
The following long-term debt was outstanding at December 31:
|
| | | | | | | | | | | | |
| 2015 | | 2014 |
| Weighted-Average Rate | | Maturities | | | | |
Senior Unsecured Notes | 5.41 | % | | 2016-2038 | | $ | 3,713 |
| | $ | 2,193 |
|
Senior Secured Notes | 8.86 | % | | 2025 | | 41 |
| | 45 |
|
Term Loan B | 6.21 | % | | 2022 | | 474 |
| | — |
|
Total Long-term Debt Before Adjustments | | | | | 4,228 |
| | 2,238 |
|
| | | | | | | |
Fair market value adjustments | | | | | (23 | ) | | (19 | ) |
Unamortized premium and (discount), net | | | | | (2 | ) | | (1 | ) |
Total Long-term Debt | | | | | 4,203 |
| | 2,218 |
|
Less current portion of Long-term Debt, including fair market value adjustment | | | | | 399 |
| | 535 |
|
Total Long-term Debt, noncurrent | | | | | $ | 3,804 |
| | $ | 1,683 |
|
The aggregate maturities of long-term debt are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
2016 | | 2017 | | 2018 | | 2019 | | 2020 | | Thereafter | | Total |
$ | 396 |
| | $ | 5 |
| | $ | 424 |
| | $ | 1,244 |
| | $ | 179 |
| | $ | 1,980 |
| | $ | 4,228 |
|
U.K. Activities(PPL)Long-term Debt Activity
Ofgem ReviewIn May 2015, Talen Energy Supply issued $600 million of Line Loss Calculation6.50% Senior Unsecured Notes due 2025. Talen Energy Supply received proceeds of $591 million, net of underwriting fees, which were used for repayment of short-term debt. The notes may be redeemed at Talen Energy Supply's option, in whole at any time or in part from time to time, prior to June 1, 2020 at a price equal to 100% of their principal amount plus a make-whole premium and on or after June 1, 2020 at specified redemption prices. In addition, on or prior to June 1, 2018, up to 35% of the notes may be redeemed by Talen Energy Supply with proceeds from certain equity offerings at a price equal to 106.5% of the principal amount.
Ofgem is currently consultingIn June 2015, Talen Energy Supply assumed $1.25 billion of RJS Power Holdings LLC's 5.125% Senior Notes due 2019 as a result of the merger of RJS Power Holdings LLC into Talen Energy Supply, by which Talen Energy Supply became the obligor of these notes. In connection with this event and pursuant to the terms of the indenture governing the notes, the coupon on the methodologynotes was reduced to 4.625% in July 2015.
In September 2015, Talen Energy Supply completed a remarketing of $231 million of Exempt Facilities Revenue Refunding Bonds, Series 2009A due 2038, Series 2009B due 2038, and Series 2009C due 2037 that were issued by PEDFA on behalf of Talen Energy Supply in 2009. All series bore interest at a fixed rate of 3.0% prior to the remarketing. The Series 2009A Bonds, with a principal amount of $100 million, were remarketed at a fixed coupon of 6.40% to maturity. The Series 2009B Bonds and Series 2009C Bonds, with an aggregate principal amount of $131 million, were remarketed at a fixed rate of 5.00% for five years, at which time they will be used by all network operatorssubject to calculatemandatory repurchase and optional remarketing. This transaction is excluded from the final line loss incentivesStatement of Cash Flows as a non-cash transaction.
In October 2015, Talen Energy Supply's $300 million of 5.70% REset Put Securities due 2035 (REPS) were subject to mandatory tender to the remarketing dealer. However, the remarketing dealer and penalties forTalen Energy Supply mutually agreed to terminate the DPCR4. WPD had a $74remarketing dealer's right to remarket the REPS and, in accordance with the terms of the REPS, Talen Energy Supply repurchased the REPS at par. The total aggregate consideration paid to repurchase the REPS was $434 million, liabilitywhich included $300 million of principal and $134 million of remarketing option value paid to the remarketing dealer. The termination payment to the remarketing dealer was recorded at December 31, 2013, compared with $94to "Other Income (Expense) - net" on the 2015 Statement of Income and is reflected in "Cash from operating activities" on the 2015 Statement of Cash Flows.
Following the MACH Gen acquisition in November 2015, $475 million at December 31, 2012. Inof New MACH Gen Term Loan B debt secured under the fourthFirst Lien Credit and Guaranty Agreement, which is described above, remained outstanding. The Term Loan B provides customary annual amortization paid quarterly and may also be repaid, in whole or in part, beginning in the third quarter of 2012, based on applying2016 without any make-whole premium. See "Credit Arrangements and Short-term Debt - Revolving Credit Facilities" above for information regarding guarantees of and security interests with respect to the preferred methodology indicated by Ofgem in a consultationFirst Lien Credit and Guaranty Agreement.
In December 2015, Talen Energy Supply announced an "exchange offer" for its 6.5% Senior Unsecured Notes due 2025 that were issued in November 2012,May 2015. Pursuant to the liabilityterms of the notes, Talen Energy Supply offered to exchange all of the outstanding notes for a like principal amount of its 6.5% Senior Notes due 2025 that, have been registered under the Securities Exchange Act of 1933, as amended. In January 2016, the exchange offer was reduced by $79completed with all of the notes exchanged.
In connection with the sale of Talen Ironwood Holdings, LLC, in January 2016, a Talen Ironwood Holdings, LLC subsidiary completed the redemption of $41 million withof its 8.857% Senior Secured Notes due 2025 prior to the closing of the sale transaction, which occurred in February 2016. The redemption included the payment of a creditmake whole premium of $14 million, which will be recorded as a component of the expected gain on sale in "Utility" revenue"Operating Income" on the Statement of Income. In July 2013, Ofgem issued a decision paperIncome in 2016. See Note 6 for additional information on the processsale of Talen Ironwood Holdings, LLC.
Preferred Stock of Talen Energy Corporation
Talen Energy Corporation is authorized under its Amended and Restated Certificate of Incorporation to followissue up to 100 million shares of preferred stock. No shares of preferred stock were issued or outstanding at December 31, 2015.
Legal Separateness
The subsidiaries of Talen Energy Corporation are separate legal entities. Talen Energy Corporation's subsidiaries are not liable for closing out the line loss calculation. Subsequentdebts of Talen Energy Corporation. Accordingly, creditors of Talen Energy Corporation may not satisfy their debts from the assets of Talen Energy Corporation's subsidiaries absent a specific contractual undertaking by a subsidiary to pay Talen Energy Corporation's creditors or as required by applicable law or regulation. Similarly, Talen Energy Corporation is not liable for the debts of its subsidiaries, nor are its subsidiaries liable for the debts of one another. Accordingly, creditors of Talen Energy Corporation's subsidiaries may not satisfy their debts from the assets of Talen Energy Corporation or its other subsidiaries absent a specific contractual undertaking by Talen Energy Corporation or its other subsidiaries to pay the creditors or as required by applicable law or regulation.
Similarly, the subsidiaries of Talen Energy Supply are each separate legal entities. These subsidiaries are not liable for the debts of Talen Energy Supply. Accordingly, creditors of Talen Energy Supply may not satisfy their debts from the assets of their subsidiaries absent a specific contractual undertaking by a subsidiary to pay the creditors or as required by applicable law or regulation. Similarly, Talen Energy Supply is not liable for the debts of its subsidiaries, nor are the subsidiaries liable for the debts of one another. Accordingly, creditors of these subsidiaries may not satisfy their debts from the assets of Talen Energy Supply absent a specific contractual undertaking by that parent or other subsidiary to pay such creditors or as required by applicable law or regulation.
As indicated above, certain debt agreements, including, but not limited to, the July 2013 decision paper, WPD receivedTalen Energy Supply RCF, the First Lien Credit and Guaranty Agreement and the Amended STF Agreement, include contractual undertakings by certain Talen Energy subsidiaries to guarantee the obligations of other Talen Energy entities arising under those agreements.
Distribution Related Restrictions for Talen Energy Corporation
Certain of Talen Energy's debt agreements include covenants that could effectively restrict the payment of distributions, loans or advances, either directly to Talen Energy Corporation or to Talen Energy Supply or one of its subsidiaries. At December 31, 2015, $3.3 billion of Talen Energy Corporation subsidiaries net assets were restricted for the purposes of transferring funds to Talen Energy Corporation in the form of distributions, loans or advances.
6. Acquisitions, Development and Divestitures
Talen Energy from time to time evaluates opportunities for potential acquisitions, divestitures and development projects. Development projects are periodically reexamined based on market conditions and other factors to determine whether to proceed with the projects, sell, cancel or expand them, execute tolling agreements or pursue other options. Any resulting transactions may impact future financial results.
Acquisitions
MACH Gen
On November 2, 2015, Talen Energy completed the acquisition of the membership interests of MACH Gen for $603 million in cash consideration (based on estimated working capital). The final cash purchase price, after post-closing adjustments, was $600 million. The purchase price was funded by a borrowing under the Talen Energy Supply RCF and cash on hand. The Term Loan B and revolving credit facility of New MACH Gen remain outstanding following the completion of the transaction. See Note 5 for additional information. MACH Gen's total generating capacity is 2,344 MW (summer rating).
The MACH Gen acquisition was accounted for as a business combination, with the identifiable tangible and intangible assets and liabilities of MACH Gen, recorded at their estimated fair values on the acquisition date. The acquisition is consistent with management's strategy of business growth, fuel type diversity and replacing the assets being divested as part of the FERC approval of the RJS Power acquisition. The following table summarizes the allocation of the purchase price to the fair values of the major classes of assets and liabilities of MACH Gen.
|
| | | | |
Current assets (a) | | $ | 31 |
|
Intangible assets | | 3 |
|
PP&E | | 1,275 |
|
Short-term debt | | (103 | ) |
Current liabilities | | (28 | ) |
Long-term debt | | (470 | ) |
Deferred income taxes | | (108 | ) |
Total purchase price | | $ | 600 |
|
| |
(a) | Includes gross contractual amounts of accounts receivable acquired of $9 million, which approximates fair value. |
The purchase price allocation is considered by Talen Energy's management to be provisional due to pending finalization of valuations and could change materially in subsequent periods. Any changes to the provisional purchase price allocation during the measurement period that result in material changes to the consolidated financial results will be adjusted prospectively. The measurement period can extend up to a year from the date of acquisition. The items pending finalization include, but are not limited to, the valuation of PP&E, certain other assets and liabilities and deferred income taxes.
Actual operating revenues and net income of MACH Gen, since the November 2, 2015 acquisition, included in Talen Energy's results for the year ended December 31, 2015 were: |
| | | | | | | |
| Operating Revenues | | Net Income (Loss) |
| $ | 28 |
| | $ | (9 | ) |
RJS Power
On June 1, 2015, substantially contemporaneous with the spinoff by PPL to form Talen Energy, RJS Power was contributed by the Riverstone Holders to become a subsidiary of Talen Energy Supply in exchange for 44,974,658 shares of Talen Energy Corporation common stock. See Notes 1 and 3 for additional information on the spinoff and acquisition. In accordance with business combination accounting guidance, Talen Energy treated the combination with RJS Power as an acquisition and Talen Energy Supply is considered the acquirer of RJS Power. Accordingly, Talen Energy applied acquisition accounting to the assets and liabilities of RJS Power whereby the purchase price was allocated to the underlying tangible and intangible assets and liabilities based on their respective fair values as of June 1, 2015, with the remainder allocated to goodwill.
The total consideration for the acquisition was deemed to be $902 million based on the fair value of the Talen Energy Corporation common stock issued for the acquisition using the June 1, 2015 closing "when-issued" market price.
The following table summarizes the allocation of the purchase price to the fair values of the major classes of assets and liabilities of RJS, all of which represent non-cash activity excluded from Ofgem.the Statement of Cash Flows for the year ended December 31, 2015. The purchase price allocation is considered by Talen Energy's management to be final as of December 31, 2015.
|
| | | | |
Current assets (a) | | $ | 168 |
|
Assets of discontinued operations (b) | | 375 |
|
PP&E | | 1,777 |
|
Other intangibles | | 46 |
|
Short-term debt | | (36 | ) |
Current liabilities | | (224 | ) |
Liabilities of discontinued operations | | (5 | ) |
Long-term debt | | (1,244 | ) |
Deferred income taxes | | (266 | ) |
Other noncurrent liabilities (c) | | (82 | ) |
Net identifiable assets acquired | | 509 |
|
Goodwill (d) | | 393 |
|
Net assets acquired | | $ | 902 |
|
| |
(a) | Includes gross contractual amount of the accounts receivable acquired of $41 million, which approximates fair value. |
| |
(b) | See Note 14 for information on impairment charges recorded during 2015 related to the Sapphire plants initial classification as assets held for sale and discontinued operations. See Note 1 for additional information on the subsequent reclassification to assets held and used. |
| |
(c) | Includes $33 million of "out-of-the-money" coal contracts that will be amortized over the life of the contracts terms as the coal is consumed. |
| |
(d) | The allocation above is as of the acquisition date of June 1, 2015. As further discussed in Note 16, goodwill was fully impaired during 2015, which included the goodwill recognized in the acquisition of RJS Power. |
Various purchase accounting valuation adjustments were made during the third and fourth quarters affecting certain current assets and liabilities, PP&E, other intangibles and related deferred income taxes resulting in a $5 million reduction in goodwill. The statement of income effect of these adjustments recorded during the measurement period was insignificant.
Goodwill recorded as a result during 2013, WPD recorded increases of $45 millionthe acquisition primarily reflected synergies expected to be achieved related to the liabilityspinoff and acquisition. The goodwill is not deductible for income tax purposes and was assigned to the East segment. See Note 16 for additional information related to the impairment of goodwill.
Actual operating revenues and net income of RJS, since the June 1 acquisition, included in Talen Energy's results for the year ended December 31, 2015 were: |
| | | | | | | |
| Operating Revenues | | Net Income (Loss) (a) |
| $ | 528 |
| | $ | (74 | ) |
| |
(a) | Includes certain asset impairments and excludes the impact of the goodwill impairment recorded in 2015 subsequent to the acquisition. See Notes 14 and 16 for information on the impairments recorded. |
Pro Forma Information for RJS Power and MACH Gen Acquisitions
Pro forma information (unaudited) for Talen Energy for the year ended December 31, as if both the RJS Power and MACH Gen acquisitions had occurred January 1, 2014, is as follows:
|
| | | | | | | | |
| | Operating Revenues | | Income (Loss) After Tax from Continuing Operations |
2015: | | | | |
Pro forma | | $ | 5,109 |
| | $ | (396 | ) |
Basic and diluted earnings per share (for Talen Energy Corporation) | | | | (3.08 | ) |
2014: | | | | |
Pro forma | | 6,031 |
| | 345 |
|
Basic and diluted earnings per share (for Talen Energy Corporation) | | | | 2.68 |
|
The unaudited pro forma financial information has been presented for illustrative purposes only and is not necessarily indicative of results of operations that would have been achieved had the acquisitions taken place on the date indicated, or the future consolidated results of operations of Talen Energy. The pro forma financial information presented above has been derived from the historical consolidated financial statements of Talen Energy and MACH Gen and from the historical consolidated and combined financial statements of RJS Power.
The pro forma financial information presented above includes adjustments for (1) alignment of accounting policies, (2) incremental depreciation and amortization expense related to fair value adjustments to PP&E and identifiable intangible assets and liabilities, (3) incremental interest expense for outstanding borrowings to reflect the terms of the Talen Energy Supply RCF related to the RJS acquisition, (4) nonrecurring items (discussed below), (5) the tax effect of the above adjustments, and (6) the issuance of Talen Energy Corporation common stock in connection with reductionsthe spinoff from PPL and the acquisition of RJS Power. The pro forma financial information presented includes the impact of impairments recorded during the third and fourth quarters of 2015. See Notes 14 and 16 for information on the impairments recorded.
Nonrecurring acquisition, integration and other costs directly related to "Utility" revenuethe acquisitions of $20 million were incurred during 2015 and recorded in "Operation and maintenance" on the Statements of Income. Adjustments were made in the calculation of pro forma amounts to remove the effect of these nonrecurring items and related income taxes. The pro forma financial information does not include adjustments for potential future cost savings for either acquisition.
Divestitures
Talen Renewable Energy
In November 2015, Talen Energy completed the sale of Talen Renewable Energy for $116 million in cash and recorded a pre-tax gain on the sale of $10 million in the East segment, which is reflected in "Operation and maintenance" 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 RegulationAnnounced Divestitures
Regulation No. 648/2012Ironwood, Holtwood, Lake Wallenpaupack and C.P. Crane Power Plants
In October 2015, Holtwood, LLC, a wholly owned, indirect subsidiary of the European Parliament and of the Council, commonly referred to as the European Market Infrastructure Regulation (EMIR),Talen Energy, entered into force on August 16, 2012an agreement to sell the Holtwood and the European Commission adopted mostLake Wallenpaupack hydroelectric facilities in Pennsylvania for a purchase price 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$860 million, subject to EMIR are certain interest ratecustomary purchase price adjustments. The facilities have a combined summer rating operating capacity of 308 MW. The transaction is expected to close in March 2016, subject to customary closing conditions.
In October 2015, Talen Generation entered into an agreement to sell Talen Ironwood Holdings, LLC, which through its subsidiaries owns and currency derivative contracts utilized by WPD. Althoughoperates the EMIRIronwood natural gas combined-cycle plant in Pennsylvania, for a purchase price of $657 million, subject to customary purchase price adjustments. In connection with the sale, in January 2016, Talen Energy repaid $41 million of indebtedness, plus a customary debt make-whole premium. The Ironwood unit has a summer rating operating capacity of 660 MW. The sale transaction closed in February 2016, with an estimated gain, net of transaction costs including
the make-whole premium on the debt, of $159 million, which will potentially impose significant additional recordkeeping requirementsbe recorded to "Operating Income" on WPD, the effectStatement of Income in 2016. Proceeds from the EMIRsale of Ironwood were used to repay the majority of Talen Energy's short-term debt.
In October 2015, Raven Power Marketing LLC, a wholly owned, indirect subsidiary of Talen Energy, entered into an agreement to sell C.P. Crane LLC, which owns and operates the C.P. Crane coal-fired power plant in Maryland. The C.P. Crane plant has a summer rating operating capacity of 402 MW. The transaction closed in February 2016. The transaction is not currently expected to have a significant adverse impact on WPD'sTalen Energy's financial condition or results of operation.operations. See Notes 14 and 16 for information on impairments recorded in 2015 for this plant.
Kentucky ActivitiesThe sales are part of the requirement to divest certain PJM assets to satisfy a December 2014 FERC order approving the combination with RJS Power. See Note 1 for information on the FERC order.
(PPL, LKE, LGAt December 31, 2015, the major component of assets held for sale related to the sale of these businesses was primarily $936 million of PP&E which was included in the East segment. Talen Ironwood Holdings, LLC is considered an individually significant component whose pretax income (loss) attributable to Talen Energy for 2015, 2014, and KU)2013 was $73 million, $67 million, and $(22) million.
Rate Case ProceedingsDiscontinued Operations
Talen Montana Hydro Sale
In December 2012,November 2014, Talen Montana completed the KPSC approved a rate case settlement agreement providingsale to NorthWestern Corporation of 633 MW of hydroelectric generating facilities located in Montana for increasesapproximately $900 million in annual base electricity rates of $34 million for LG&Ecash. The sale included 11 hydroelectric power facilities 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.related assets.
(PPL, LKE and LG&E)Following are the components of discontinued operations in the Statement of Income for the years ended December 31.
|
| | | | | | | | |
| | 2014 | | 2013 |
Operating revenues | | $ | 117 |
| | $ | 139 |
|
Gain on the sale (pre-tax) | | 306 |
| | — |
|
Interest expense (a) | | 9 |
| | 12 |
|
Income (loss) before income taxes | | 332 |
| | 49 |
|
Income (Loss) from Discontinued Operations (net of income taxes) | | 223 |
| | 32 |
|
| |
(a) | Represents allocated interest expense based upon the discontinued operations share of the net assets of Talen Energy. |
Other
CPCN FilingsTo facilitate the sale of the Montana hydroelectric generating facilities discussed above, Talen Montana terminated, in December 2013, its operating lease arrangement related to partial interests in Units 1, 2 and 3 of the Colstrip coal-fired 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. Talen Energy recorded a charge of $697 million ($413 million after-tax) for the termination of the 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 Statement of Cash Flow.
Development
Bell Bend COLA
In January 2014, LG&E2008, a Talen Energy subsidiary, Bell Bend, LLC (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, Bell Bend submitted Parts I and KU filedII of an application for a CPCNfederal loan guarantee for Bell Bend to the DOE. In February 2014, the DOE announced the first loan guarantee for a nuclear project in Georgia. Although eight of the ten applicants that submitted Part II applications remain active in the DOE program, 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. Bell 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. Bell Bend does not expect to complete the COLA review process with the KPSC requestingNRC prior to 2018. Bell Bend has made no decision to proceed with construction and expects that such decision will not be made for several years given the anticipated lengthy NRC license approval process. Additionally, Bell Bend does not expect to buildproceed with construction absent favorable economics, a NGCC generating unit at KU's Green River generating sitejoint arrangement with other interested parties and a solarfederal loan guarantee or other acceptable financing. Bell Bend is currently authorized by Talen Energy Corporation's Board of Directors to spend up to $256 million on the COLA and other permitting costs necessary for construction. At December 31, 2015 and 2014, $201 million and $188 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." Talen Energy continues to support the Bell Bend licensing project with a near term focus on obtaining the final environmental impact statement. Talen Energy placed the NRC safety review (which supports issuance of their final safety evaluation report, the other key element of the COLA) on hold in 2014, due to a lack of progress by the reactor vendor with respect to its NRC design certification process, which is a prerequisite to the COLA.
Brunner Island Co-firing Project
Talen Energy is in the process of making modifications to its Brunner Island coal-fired generating facility to be able to co-fire using natural gas to better position the plant for low gas price environments. Construction is under way and is expected to be completed by the end of 2016. The project is expected to cost $118 million. At December 31, 2015 and 2014, $23 million and $5 million of costs, which include capitalized interest, associated with the project were capitalized and are included in "Construction work in progress" on the Balance Sheets.
7. Leases
Talen Energy and its subsidiaries have entered into various agreements for the lease of office space, vehicles, land, gas storage and other equipment. At December 31, 2015, Talen Energy's most significant lease, which expires in 2018, relates to its corporate headquarters.
Rent expense for the years ended December 31 for operating leases was as follows:
|
| | | | | | | | | | | |
| 2015 | | 2014 | | 2013 |
| $ | 14 |
| | $ | 29 |
| | $ | 55 |
|
Total future minimum rental payments for all operating leases are estimated to be:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
2016 | | 2017 | | 2018 | | 2019 | | 2020 | | Thereafter | | Total |
$ | 19 |
| | $ | 18 |
| | $ | 8 |
| | $ | 5 |
| | $ | 5 |
| | $ | 26 |
| | $ | 81 |
|
8. Stock-Based Compensation
Stock Incentive Plan
Talen Energy Corporation grants share-based compensation to eligible participants under the Talen Energy Stock Incentive Plan (SIP). Under the SIP, restricted shares of Talen Energy Corporation stock, restricted stock units, performance units, stock options and stock appreciation rights may be granted to officers, directors and other key employees. Additionally, Talen Energy Corporation will match shares of its common stock purchased by certain employees on the open market from June 1, 2015 through March 31, 2018 with grants of restricted stock units, subject to certain restrictions (Matching Grants). Awards under the SIP are made by the Compensation, Governance and Nominating Committee (CGNC) of the Talen Energy Corporation Board of Directors or its delegate.
The total number of shares which may be issued under the plan is 5,630,000 and the maximum number of shares for which stock options may be granted is 2,000,000. Shares delivered under the SIP may be in the form of authorized and unissued Talen Energy Corporation common stock or common stock held in treasury by Talen Energy Corporation.
Restricted Stock Units
Restricted stock units are awards based on the fair value of a share of Talen Energy Corporation common stock on the date of grant. Actual Talen Energy Corporation common shares will be issued upon completion of a vesting period of three years,
aside from Matching Grants that generally vest two years from the date of grant. Substantially all restricted stock unit awards are expected to vest.
The fair value of restricted stock units granted is recognized as compensation expense on a straight-line basis over the service period. Restricted stock units are subject to forfeiture or accelerated payout under the pertinent award agreement provisions for termination, disability and death of employees. Restricted stock units vest fully, in certain situations, as defined by in the applicable award agreement. The total restricted stock units granted, nonvested and outstanding through December 31, 2015 was 265,849 and the weighted-average grant date fair value per share was $18.74.
Stock Options
Stock options have been granted with an option exercise price per share not less than the fair value of Talen Energy Corporation's common stock on the date of grant. Options 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 Talen Energy or a subsidiary. The CGNC has discretion to accelerate the exercisability of the options. All options expire no later than ten years from the grant date. The options become exercisable immediately in certain situations, as defined by the pertinent award agreement. The fair value of options granted is recognized as compensation expense on a straight-line basis over the service period. Substantially all stock option awards are expected to vest. The total stock options granted, nonvested and outstanding through December 31, 2015 was 991,101 and the grant date fair value per share was $4.91. The weighted-average exercise price per share is $19.00 and the weighted-average remaining contractual term is 9.4 years. The stock options outstanding at December 31, 2015 are currently out of the E. W. Brown generating site.money.
The fair value of each option granted is estimated using a Black-Scholes option-pricing model. Talen Energy uses a risk-free interest rate, expected option life and expected volatility to value its stock options. Talen Energy Corporation does not currently expect to pay dividends, therefore a dividend yield assumption is not used to value 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 was calculated using the simplified method described in SEC Staff Accounting Bulletin (SAB) 107/110 (updated by SAB 110). Expected volatility is derived from the historical volatility of a peer group selected by management as Talen Energy Corporation's common stock does not have a trading history.
The assumptions used in the model were: |
| | |
Risk-free interest rate | 2.05 | % |
Expected option life | 6.00 years |
|
Expected stock volatility | 21.55 | % |
Performance Units
Performance units represent a target number of shares of Talen Energy Corporation's common stock that the recipient would receive upon Talen Energy Corporation's attainment of an applicable performance goal. For awards granted in 2015, Talen Energy Corporation uses TSR, which is determined based on TSR during a three-year performance period. At the end of the performance period, payout is determined by comparing Talen Energy Corporation's TSR to the TSR of peer group companies that Talen Energy Corporation has selected. Awards are payable on a graduated basis, based on thresholds that measure Talen Energy Corporation's performance relative to the peer group companies, on which each years' awards are measured. Awards can be paid up to 200% of the target award or forfeited with no payout if performance is below a minimum established performance threshold. Under the pertinent award agreement provisions, performance units are subject to forfeiture upon termination of employment except for in the event of a 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 is recognized as compensation expense on a straight-line basis over the three-year performance period. Performance units vest on a pro rata basis, in certain situations, as defined by the applicable award agreement.
The fair value of performance units granted was estimated using a Monte Carlo pricing model that values market based performance conditions such as TSR. The model assumed an expected stock volatility of 31.8% that was based on the historical volatility based on daily stock price changes of peer group companies.
The total performance units granted, nonvested and outstanding through December 31, 2015 was 158,900 and the weighted-average grant date fair value was $21.17 per share.
Storm CostsDirectors Deferred Compensation Plan
Under the Talen Energy Corporation Directors Deferred Compensation Plan, or DDCP, stock units are granted to eligible directors of Talen Energy Corporation in connection with their retainers for service on Talen Energy Corporation’s board of directors and its committees. Stock units are based on the fair market value of a share of Talen Energy Corporation’s common stock on the date of grant. The total number of stock units granted under the DDCP through December 31, 2015 was 34,967 and the weighted average grant date fair value was $13.23 per share.
Compensation Expense
The year ended December 31, 2015 includes an insignificant amount of compensation expense for Talen Energy Corporation restricted stock units, performance units and stock options accounted for as equity awards.
The year ended December 31, 2014 includes compensation expense of $33 million and the associated income tax benefit of $14 million for restricted stock, restricted stock units, performance units and stock options accounted for as equity awards from PPL, which included an allocation of PPL Services' expense.
The year ended December 31, 2013 includes compensation expense of $27 million and the associated income tax benefit of $11 million for restricted stock, restricted stock units, performance units and stock options accounted for as equity awards from PPL, which included an allocation of PPL Services' expense.
At December 31, 2015, unrecognized compensation expense and the weighted-average period for recognition related to nonvested restricted stock units, performance units and stock option awards from Talen Energy was $11 million and 2.4 years.
Prior to the spinoff, restricted shares of PPL common stock and related restricted stock units, performance units and stock options were granted to officers and other key employees of Talen Energy. At December 31, 2014, these employees of Talen Energy had 1,457,900 of unvested shares of restricted stock and restricted stock units, 291,492 of performance units and 2,745,016 of outstanding stock options issued by PPL. The vesting of these awards was accelerated in 2015 in connection with the spinoff from PPL. See Note 1 for information on the recording of expense related to this acceleration and additional information on the spinoff from PPL. For the year ended December 31, 2015, compensation expense for these awards, excluding the acceleration, but including an allocation of PPL Services' compensation expense for similar awards, was $18 million.
9. Retirement and Postemployment Benefits
Prior to the June 1, 2015 spinoff, the majority of Talen Energy Supply's employees were eligible for pension benefits under a PPL non-contributory defined benefit pension plan, with benefits based on length of service and either career average pay or final average pay, as defined by the plan. Prior to the June 1, 2015 spinoff, this plan was closed to all newly hired employees. Newly hired employees were eligible to participate in a PPL 401(k) savings plan with enhanced employer contributions. Talen Energy was allocated costs of the PPL pension plan based on its employees' participation in the plan. Employees who participated in this PPL pension plan who became employees of Talen Energy Supply transferred into a newly created pension plan sponsored by Talen Energy Supply, which provides benefits similar to that of the PPL pension plan.
Prior to the June 1, 2015 spinoff, the majority of Talen Energy Supply's employees were also eligible for certain health care and life insurance benefits upon retirement through the PPL other postretirement benefit plans, which prior to June 1, 2015, were closed to all newly hired employees. Talen Energy Supply was allocated costs of the PPL plans based on its employees' participation in the plans. Employees who participated in the health care and life insurance plans and who became employees of Talen Energy Supply transferred into the newly created Talen Energy other postretirement benefit plans sponsored by Talen Energy Supply, which provide benefits similar to those of the PPL other postretirement benefit plans.
A remeasurement of the assets and the obligations for the PPL pension and other postretirement benefit plans was performed as of May 31, 2015 in order to separate the assets and obligations of the PPL plans attributable to Talen Energy, as required by the spinoff agreements. The Talen Energy pension plan assumed from PPL the pension benefit obligations for active plan participants who became employees of Talen Energy in connection with the spinoff and for individuals who terminated employment from Talen Energy Supply on or after July 1, 2000. A portion of the PPL pension plan assets were also allocated to the new Talen Energy pension plan. The asset allocation was based on the rules prescribed by ERISA (Employee Retirement Income Security Act) for allocating assets in connection with a pension plan spinoff. The Talen Energy other postretirement benefit plans assumed the other postretirement benefit obligations from PPL for active plan participants who became
employees of Talen Energy in connection with the spinoff. PPL retained obligations attributable to existing retirees as of the date of the spinoff. A portion of the PPL other postretirement benefit plan assets, which were held in VEBA trusts and a 401(h) account, were also allocated to the new Talen Energy other postretirement benefit plans. The asset allocation was determined separately for each funding vehicle based on the ratio of the accumulated postretirement benefit obligation (APBO) assumed by Talen Energy to the total APBO attributed to each funding vehicle. As a result of the above, the net funded status of the new Talen Energy pension and other postretirement benefit plans at June 1, 2015 was a liability of $257 million.
The majority of Talen Montana's employees are eligible for pension benefits under a cash balance plan. Effective January 1, 2012, that plan was closed to all newly hired salaried employees. Effective September 1, 2014, that plan was closed to all newly hired bargaining unit employees. Newly hired employees are eligible to participate in a 401(k) savings plan with enhanced employer contributions. The majority of Talen Montana's employees are also eligible for certain health care and life insurance benefits upon retirement, under a retiree health plan sponsored by Talen Montana, which is now closed to newly hired employees. There were no changes to the pension and other postretirement benefit plans for employees of Talen Montana as a result of the spinoff transaction. However, PPL retained the liability for other postretirement benefits attributable to existing retirees of Talen Montana as of the date of the spinoff.
Employees of certain of Talen Energy's mechanical contracting companies are eligible for benefits under multiemployer plans sponsored by various unions.
The following table provides the components of net periodic defined benefit costs for Talen Energy pension and other postretirement plans for the years ended December 31, for which the 2015 periods include seven months of costs under the newly formed Talen Energy plans and a full year of Talen Montana plans. |
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Postretirement Benefits |
| 2015 |
| 2014 |
| 2013 | | 2015 | | 2014 | | 2013 |
Net periodic defined benefit costs (credits): | | | | | | | | | | | |
Service cost | $ | 31 |
| | $ | 5 |
| | $ | 7 |
| | $ | 2 |
| | $ | — |
| | $ | 1 |
|
Interest cost | 46 |
| | 9 |
| | 8 |
| | 2 |
| | 1 |
| | — |
|
Expected return on plan assets | (60 | ) | | (11 | ) | | (10 | ) | | (3 | ) | | — |
| | — |
|
Amortization of: | | | | | | | | | | | |
Actuarial (gain) loss | 16 |
| | 2 |
| | 3 |
| | — |
| | — |
| | — |
|
Curtailment charges (credits) | — |
| | — |
| | — |
| | — |
| | (1 | ) | | — |
|
Net periodic defined benefit costs (credits) | $ | 33 |
|
| $ | 5 |
|
| $ | 8 |
|
| $ | 1 |
|
| $ | — |
|
| $ | 1 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Postretirement Benefits |
| 2015 | | 2014 | | 2013 | | 2015 | | 2014 | | 2013 |
Other changes in plan assets and benefit obligations recognized in OCI: | | | | | | | | | | | |
Curtailments | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | — |
|
Net (gain) loss | 54 |
| | 26 |
| | (15 | ) | | — |
| | (1 | ) | | (1 | ) |
Prior service cost (credit) | 3 |
| | — |
| | — |
| | — |
| | — |
| | (3 | ) |
Amortization of: | | | | | | | | | | | |
Actuarial gain (loss) | (16 | ) | | (2 | ) | | (3 | ) | | — |
| | — |
| | — |
|
Prior service credit (cost) | — |
| | — |
| | — |
| | 1 |
| | — |
| | — |
|
Total recognized in OCI | 41 |
| | 24 |
| | (18 | ) | | 1 |
| | — |
| | (4 | ) |
Total recognized in net periodic defined benefit costs and OCI | $ | 74 |
| | $ | 29 |
| | $ | (10 | ) | | $ | 2 |
| | $ | — |
| | $ | (3 | ) |
Actuarial loss of $20 million related to these plans is expected to be amortized from AOCI into net periodic defined benefit costs in 2016.
The following net periodic defined benefit costs (credits) were charged to operating expense, excluding amounts charged to construction and other non-expense accounts.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Postretirement Benefits |
| 2015 | | 2014 | | 2013 | | 2015 | | 2014 | | 2013 |
| $ | 48 |
| | $ | 39 |
| | $ | 45 |
| | $ | 2 |
| | $ | 3 |
| | $ | 6 |
|
In August 2011,the table above, amounts include costs for the specific plans sponsored by Talen Energy and its subsidiaries and the following allocated costs of the PPL pension and other postretirement benefit plans prior to the spinoff, based on Talen Energy Supply's participation in those plans, which management believes were reasonable at the time:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Postretirement Benefits |
| 2015 | | 2014 | | 2013 | | 2015 | | 2014 | | 2013 |
| $ | 16 |
| | $ | 34 |
| | $ | 38 |
| | $ | — |
| | $ | 3 |
| | $ | 5 |
|
At December 31, 2014 or June 1, 2015, as applicable, the plan sponsors adopted the mortality tables issued by the Society of Actuaries in October 2014 (RP-2014 base tables) for all applicable defined benefit pension and other postretirement benefit plans. At December 31, 2014 or June 1, 2015, as applicable, the plan sponsors also selected the IRS BB 2-Dimensional mortality improvement scale on a strong storm hit LG&E's service area causinggenerational basis for all applicable defined benefit pension and other postretirement benefit plans. These mortality assumptions reflect the recognition of both improved life expectancies and the expectation of continuing improvements in life expectancies.
The following weighted-average assumptions were used in the valuation of the benefit obligations at December 31. |
| | | | | | | | | | | |
| Pension Benefits | | Other Postretirement Benefits |
| 2015 | | 2014 | | 2015 | | 2014 |
Discount rate | 4.65 | % | | 4.28 | % | | 4.60 | % | | 3.81 | % |
Rate of compensation increase | 3.98 | % | | 4.03 | % | | 3.98 | % | | 4.03 | % |
The following weighted-average assumptions were used to determine the net periodic defined benefit costs for Talen Energy's plans for the years ended December 31. |
| | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Postretirement Benefits |
| 2015 | | 2014 | | 2013 | | 2015 | | 2014 | | 2013 |
Discount rate | 4.41 | % | | 5.18 | % | | 4.25 | % | | 4.27 | % | | 4.51 | % | | 3.77 | % |
Rate of compensation increase | 3.99 | % | | 3.94 | % | | 3.95 | % | | 3.99 | % | | 3.94 | % | | 3.95 | % |
Expected return on plan assets (a) | 7.00 | % | | 7.00 | % | | 7.00 | % | | 6.37 | % | | N/A |
| | N/A |
|
| |
(a) | The expected long-term rates of return for pension and other postretirement benefits are based on management's projections using a best-estimate of expected returns, volatilities and correlations for each asset class. Each plan's specific current and expected asset allocations are also considered in developing a reasonable return assumption. |
The following table provides the assumed health care cost trend rates for the years ended December 31.
|
| | | | | | | | |
| 2015 | | 2014 | | 2013 |
Health care cost trend rate assumed for next year | | | | | |
obligations | 6.80 | % | | 7.20 | % | | 7.60 | % |
costs | 7.20 | % | | 7.60 | % | | 8.00 | % |
Rate to which the cost trend rate is assumed to decline (the ultimate trend) | | | | | |
obligations | 5.00 | % | | 5.00 | % | | 5.00 | % |
costs | 5.00 | % | | 5.00 | % | | 5.50 | % |
Year that the rate reaches the ultimate trend rate | | | | | |
obligations | 2020 |
| | 2020 |
| | 2020 |
|
costs | 2020 |
| | 2020 |
| | 2019 |
|
A one percentage point change in the assumed health care costs trend rate assumption would have been insignificant to the other postretirement benefit plans in 2015.
The funded status of Talen Energy's plans at December 31 was as follows:
|
| | | | | | | | | | | | | | | |
| Pension Benefits | | Other Postretirement Benefits |
| 2015 | | 2014 | | 2015 | | 2014 |
Change in Benefit Obligation | | | | | | | |
Benefit obligation, beginning of period | $ | 210 |
| | $ | 163 |
| | $ | 10 |
| | $ | 12 |
|
Transfer of benefit obligation at spinoff (a) | 1,416 |
| | — |
| | 80 |
| | — |
|
Service cost | 31 |
| | 5 |
| | 2 |
| | — |
|
Interest cost | 46 |
| | 9 |
| | 2 |
| | 1 |
|
Plan amendments | 3 |
| | — |
| | — |
| | — |
|
Actuarial (gain) loss | (41 | ) | | 38 |
| | (4 | ) | | (1 | ) |
Net Transfers in (out) | — |
| | — |
| | (3 | ) | | — |
|
Curtailments | — |
| | — |
| | — |
| | (1 | ) |
Gross benefits paid | (51 | ) | | (5 | ) | | — |
| | (1 | ) |
Benefit obligation, end of period | $ | 1,614 |
| | $ | 210 |
| | $ | 87 |
| | $ | 10 |
|
| | | | | | | |
Change in Plan Assets | | | | | | | |
Plan assets at fair value, beginning of period | $ | 170 |
| | $ | 147 |
| | $ | — |
| | $ | — |
|
Transfer of plan assets at fair value at spinoff (a) | 1,159 |
| | — |
| | 80 |
| | — |
|
Actual return on plan assets | (35 | ) | | 22 |
| | (2 | ) | | — |
|
Employer contributions | 32 |
| | 6 |
| | 1 |
| | 1 |
|
Gross benefits paid | (52 | ) | | (5 | ) | | (1 | ) | | (1 | ) |
Plan assets at fair value, end of period | 1,274 |
| | 170 |
| | 78 |
| | — |
|
Funded status end of period | $ | (340 | ) | | $ | (40 | ) | | $ | (9 | ) | | $ | (10 | ) |
| | | | | | | |
Amounts recognized in the Balance Sheets consist of: | | | | | | | |
Current Liability | $ | — |
| | $ | — |
| | $ | — |
| | $ | (1 | ) |
Noncurrent liability | (340 | ) | | (40 | ) | | (9 | ) | | (9 | ) |
Net amount recognized, end of period | $ | (340 | ) | | $ | (40 | ) | | $ | (9 | ) | | $ | (10 | ) |
| | | | | | | |
Amounts recognized in AOCI (pre-tax) consist of: | | | | | | | |
Prior service cost (credit) | $ | 2 |
| | $ | — |
| | $ | (5 | ) | | $ | (4 | ) |
Net actuarial (gain) loss | 451 |
| | 59 |
| | 8 |
| | — |
|
Total | $ | 453 |
| | $ | 59 |
| | $ | 3 |
| | $ | (4 | ) |
| | | | | | | |
Total accumulated benefit obligation for defined benefit pension plans | $ | 1,500 |
| | $ | 210 |
| |
| |
|
| |
(a) | Values determined as of the spinoff date as discussed above. |
Talen Energy's pension plans had projected and accumulated benefit obligations in excess of the fair value of plan assets at December 31, 2015 and 2014.
In addition to the plans it sponsors, Talen Energy Supply and its subsidiaries were 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 prior to the spinoff, which management believes were reasonable at that time. The actuarially determined obligations of current active employees were used as a basis to allocate total plan activity, including active and retiree costs and obligations. Allocations to Talen Energy Supply resulted in liabilities at December 31, 2014 as follows:
|
| | | |
Pension plans | $ | 259 |
|
Other postretirement benefit plans | 34 |
|
Talen Energy's mechanical contracting subsidiaries make contributions to over 60 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 Talen Energy'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.
Talen Energy identified the Steamfitters Local Union No. 420 Pension Plan, EIN/Plan Number 23-2004424/001 as the plan to which the most significant damagecontributions are made. Contributions to this plan by Talen Energy's mechanical contracting companies were $5 million for 2015, 2014 and widespread outages2013. At the date the financial statements were issued, the Form 5500 was not available for the plan year ending in 2015. Therefore, the following disclosures specific to this plan are being made based on the Form 5500s filed for the plan years ended December 31, 2014 and 2013. Talen Energy's mechanical contracting subsidiary H.T. Lyons was identified individually as a greater than 5% contributor on the Form 5500s. The plan had a Pension Protection Act zone status of red, without utilizing an extended amortization period, as of December 31, 2014 and 2013. 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 September 18, 2016. There were no other plans deemed individually significant based on a multifaceted assessment.
Talen Energy's mechanical contracting subsidiaries also participate in multiemployer other postretirement plans that provide for retiree life insurance and health benefits.
The table below details total contributions to all multiemployer pension and other postretirement plans, including the plan identified as significant above. The contribution amounts fluctuate each year based on the volume of work and type of projects undertaken from year to year.
|
| | | | | | | | | | | |
| 2015 | | 2014 | | 2013 |
Pension plans | $ | 34 |
| | $ | 40 |
| | $ | 36 |
|
Other postretirement benefit plans | 26 |
| | 33 |
| | 32 |
|
Total contributions | $ | 60 |
| | $ | 73 |
| | $ | 68 |
|
Plan Assets
At December 31, 2015, Talen Energy's pension plans are invested in the Talen Energy Retirement Plans Master Trust (the Master Trust) that also includes a 401(h) account that is restricted for certain other postretirement benefit obligations of Talen Energy. Prior to the spinoff from PPL, the pension plan assets were invested by PPL in a master trust maintained by PPL.
The investment strategy for the Master Trust is to achieve a risk-adjusted return on a mix of assets that, in combination with Talen Energy's funding policy, will ensure that sufficient assets are available to provide long-term growth and liquidity for benefit payments, while also managing the duration of the assets to complement the duration of the liabilities. The Master Trust benefits from a wide diversification of asset types, investment fund strategies and external investment fund managers, and therefore has no significant concentration of risk.
The investment policy of the Master Trust outlines investment objectives and defines the responsibilities of the Retirement Plan Committee of Talen Energy Corporation, which is the named fiduciary, external investment managers, investment advisor and trustee and custodian. The investment policy is reviewed annually by Talen Energy Corporation's Board of Directors.
The Retirement Plan Committee 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 asset allocation ranges have been developed for the Master Trust based on input from external consultants with a goal of limiting funded status volatility. The Retirement Plan Committee monitors the investments in the Master Trust, and seeks to
obtain a target portfolio that emphasizes reduction of risk of loss from market volatility. In pursuing that goal, the Retirement Plan Committee establishes revised guidelines from time to time.
The asset allocation for the trust and the target allocation prescribed by the investment guidelines by portfolio at December 31 are as follows:
|
| | | | | |
| Percentage of trust assets | | Target Asset Allocation |
| 2015 | | 2015 |
Growth Portfolio | 52 | % | | 55 | % |
Equity securities | 24 | % | | |
Debt securities (a) | 14 | % | | |
Alternative investments | 14 | % | | |
Immunizing Portfolio | 46 | % |
| 44 | % |
Debt securities (a) | 40 | % | | |
Derivatives | 6 | % | | |
Liquidity Portfolio | 2 | % | | 1 | % |
Total | 100 | % |
| 100 | % |
| |
(a) | Includes commingled debt funds, which Talen Energy treats as debt securities for asset allocation purposes. |
Prior to the spinoff, the assets of the Talen Montana pension plan were invested solely in a master trust maintained by PPL. The fair value of this plan's assets of $170 million at December 31, 2014 represented an interest of approximately 139,000 customers. LG&E filed4% in PPL's master trust.
The fair value of net assets in the Master Trust by asset class and level within the fair value hierarchy was:
|
| | | | | | | | | | | | | | | |
| December 31, 2015 |
| Fair Value Measurement Using |
| Total | | Level 1 | | Level 2 | | Level 3 |
Talen Energy Retirement Plans Master Trust | | | | | | | |
Cash and cash equivalents | $ | 108 |
| | $ | 108 |
| | $ | — |
| | $ | — |
|
Equity securities: |
| | | | | | |
U.S.: |
| | | | | | |
Large-cap | 90 |
| | 23 |
| | 67 |
| | — |
|
Small-cap | 33 |
| | 33 |
| | — |
| | — |
|
International | 190 |
| | — |
| | 190 |
| | — |
|
Commingled debt | 273 |
| | — |
| | 273 |
| | — |
|
Debt securities: |
| | | | | | |
U.S. Treasury and U.S. government sponsored agency | 192 |
| | 189 |
| | 3 |
| | — |
|
Corporate | 231 |
| | — |
| | 231 |
| | — |
|
International government | 1 |
| | — |
| | 1 |
| | — |
|
Other | 3 |
| | — |
| | 3 |
| | — |
|
Alternative investments: |
| | | | | | |
Commodities | 28 |
| | — |
| | 28 |
| | — |
|
Real estate | 48 |
| | — |
| | 48 |
| | — |
|
Private equity | 31 |
| | — |
| | — |
| | 31 |
|
Hedge funds | 69 |
| | — |
| | 69 |
| | — |
|
Derivatives: |
| | | | | | |
Interest rate swaps | 32 |
| | — |
| | 32 |
| | — |
|
Other | 5 |
| | — |
| | 5 |
| | — |
|
Talen Energy Retirement Plans Master Trust assets, at fair value | $ | 1,334 |
|
| $ | 353 |
|
| $ | 950 |
|
| $ | 31 |
|
| | | | | | | |
Receivables and payables, net (a) | (31 | ) | | | | | | |
401(h) accounts restricted for other postretirement benefit obligations | (29 | ) | | | | | | |
Total Talen Energy Retirement Plans Master Trust pension assets | $ | 1,274 |
| | | | | | |
| |
(a) | Receivables and payables represent amounts for investments sold/purchased, but not yet settled along with interest and dividends earned, but not yet received. |
A reconciliation of the Master Trust assets classified as Level 3 at December 31, 2015 is as follows:
|
| | | |
| Private equity |
Balance at beginning of period | $ | — |
|
Acquisitions (a) | 35 |
|
Purchases, sales and settlements | (4 | ) |
Balance at end of period | $ | 31 |
|
| |
(a) | Transferred from a master trust maintained by PPL. |
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 equity indices.
Investments in commingled equity and debt funds are categorized as equity securities and are classified as Level 2. 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 applicationactive market. Investments in commingled equity funds include funds that invest in U.S. and 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 evaluations that reflect observable market information, such as actual trade information for identical securities or for similar securities, adjusted for observable differences. The fair value of debt securities is generally measured using a market approach, including the use of pricing models which incorporate observable inputs. Common inputs include benchmark yields, relevant trade data, 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 payment data, future predicted cash flows, collateral performance and new issue data. For the Master Trust, these securities represent investments in securities issued by U.S. Treasury and U.S. government sponsored agencies; investments securitized by pooled loans; investments in investment grade and non-investment grade bonds issued by U.S. companies across several industries and investments in debt securities issued by foreign governments and corporations.
Investments in commodities represent ownership interest of a commingled fund that is invested in a portfolio of exchange-traded futures and forward contracts in commodities to obtain broad exposure to all principal groups in the global commodity markets, including energy, agriculture, livestock and metals (both precious and industrial) using proprietary commodity trading strategies. Redemptions can be made the 15th calendar day and last calendar day of the month with a specified notification period. The fund's fair value is based upon a value as calculated by the fund's administrator.
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 with more speculative real estate investing strategies. The partnership has limitations on the amounts that may be redeemed based on available cash to fund redemptions. Additionally, the general partner may decline to accept redemptions when necessary to avoid adverse consequences for the partnership, including legal and tax implications, among others. The fair value of the investment is based upon a partnership unit value.
Investments in private equity represent interests in partnerships in private equity fund of funds that use a number of diverse investment strategies. Two of the partnerships have limited lives of ten years, while the third has a life of 15 years, after which liquidating distributions will be received. Prior to the end of each partnership's life, the investment cannot be redeemed with the KPSCpartnership; however, the interest may be sold to other parties, subject to the general partner's approval. The Master Trust has unfunded commitments of $12 million that may be required during the lives of the partnerships. Fair value is based on an ownership interest in September 2011, requesting approvalpartners' capital to which a proportionate share of net assets is attributed.
Investments in hedge funds represent investments in three hedge fund of funds. Hedge funds seek a regulatoryreturn utilizing a number of diverse investment strategies. The strategies, when combined aim to reduce volatility and risk while attempting to deliver
positive returns under most market conditions. Major investment strategies for the hedge fund of funds include long/short equity, market neutral, distressed debt, and relative value. Generally, shares may be redeemed within 60 to 95 days with prior written notice. The funds are subject to short term lockups and have limitations on the amount that may be withdrawn based on a percentage of the total net asset recordedvalue of the fund, among other restrictions. All withdrawals are subject to defer,the general partner's approval. The fair value for two of the funds has been estimated using the net asset value per share and the third fund's fair value is 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 industry models. These instruments primarily include interest rate swaps, which are valued based on the swap details, such as swap curves, notional amount, index and term of index, reset frequency and payer/receiver credit ratings.
Plan Assets - Other Postretirement Benefit Plans
Prior to the spinoff from PPL, the other postretirement benefit plan assets were invested by PPL in VEBA trusts and a 401(h) account, maintained by PPL.
The investment strategy with respect to other postretirement benefit obligations is to fund VEBA trusts and/or 401(h) accounts with voluntary contributions, when appropriate, and to invest in a tax efficient manner. Excluding the 401(h) accounts included in the Master Trust, 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. Equity securities include investments in domestic large-cap commingled funds. Ownership interests in commingled funds that invest entirely in debt securities are classified as equity securities, but treated as debt securities for asset allocation and target allocation purposes. Ownership interests in money market funds are treated as cash and cash equivalents for asset allocation and target allocation purposes. The asset allocation for the VEBA trusts and the target allocation, by asset class, at December 31 are detailed below.
|
| | | | | |
| Percentage of plan assets | Target Asset Allocation |
| 2015 | | 2015 |
Asset Class | | | |
U.S. Equity securities | 53 | % | | 45 | % |
Debt securities | 46 | % | | 50 | % |
Cash and cash equivalents | 1 | % | | 5 | % |
Total | 100 | % | | 100 | % |
The fair value of assets in the other postretirement benefit plans by asset class and level within the fair value hierarchy was:
|
| | | | | | | | | | | | | | | |
| December 31, 2015 |
| Fair Value Measurement Using |
| Total | | Level 1 | | Level 2 | | Level 3 |
U.S. Equity securities: |
| | | | | | |
Large-cap | $ | 26 |
| | $ | — |
| | $ | 26 |
| | $ | — |
|
Commingled debt | 23 |
| | — |
| | 23 |
| | — |
|
Total VEBA trust assets, at fair value | 49 |
| | $ | — |
| | $ | 49 |
| | $ | — |
|
401(h) account assets | 29 |
| | | | | | |
Total other postretirement benefit plan assets | $ | 78 |
| | | | | | |
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.
Expected Cash Flows - Defined Benefit Plans
Talen Energy Supply's defined benefit pension plans have the option to utilize available prior year credit balances to meet current and future recovery, $8contribution requirements. Talen Energy expects to contribute $40 million to its defined benefit pension plans in 2016.
Talen Energy is not required to make contributions to its other postretirement benefit plans.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid by the plans.
|
| | | | | | | |
| Pension | | Other Postretirement Benefit Payment |
2016 | $ | 75 |
| | $ | 2 |
|
2017 | 81 |
| | 3 |
|
2018 | 87 |
| | 5 |
|
2019 | 92 |
| | 7 |
|
2020 | 98 |
| | 9 |
|
2021-2025 | 538 |
| | 63 |
|
Savings Plans
Substantially all employees of Talen Energy are eligible to participate in deferred savings plans (401(k)s). Employer contributions to the plans were $16 million in incremental operation2015, $14 million in 2014 and maintenance expenses$12 million in 2013.
Separation Benefits
Talen Energy Supply and certain 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. Generally, applicable employees separated are eligible for cash severance payments, outplacement services and a single sum payment approximating the dollar amount of premium payments that would be incurred for continuation of group health and welfare coverage. Separation benefits for certain bargaining unit employees also include enhanced pension and postretirement medical benefits. Separation benefits are recorded when such amounts are probable and estimable.
See Note 1 for a discussion of separation benefits related to the storm restoration. An order was receivedspinoff and Note 11 for a discussion of separation benefits related to the one-time voluntary retirement window offered in December 2011 granting the request. On December 20, 2012, the KPSC, in the approval2014 to certain bargaining unit employees as part of the unanimous rate case settlementnew three-year labor agreement authorized regulatory asset recovery effective January 1, 2013, over a five year period.with IBEW local 1600. Separation benefits were not significant in 2013.
10. Jointly Owned Facilities
Pennsylvania Activities(PPLAt December 31, 2015 and PPL Electric)2014 the Talen Energy Balance Sheets reflect the owned interests in the facilities below. |
| | | | | | | | | | | | | | | | | | |
| Ownership Interest | | Electric Plant | | Other Property | | Accumulated Depreciation | | Construction Work in Progress |
December 31, 2015 | | | | | | | | | |
Generating Plants | | | | | | | | | |
Susquehanna | 90.00 | % | | $ | 4,791 |
| | $ | — |
| | $ | 3,639 |
| | $ | 148 |
|
Conemaugh | 16.25 | % | | 326 |
| | — |
| | 156 |
| | 7 |
|
Keystone | 12.34 | % | | 218 |
| | — |
| | 111 |
| | 3 |
|
Colstrip Units 1 & 2 | 50.00 | % | | 48 |
| | — |
| | 5 |
| | 2 |
|
Colstrip Units 3 | 30.00 | % | | 30 |
| | — |
| | 2 |
| | 3 |
|
Merill Creek Reservoir | 8.37 | % | | — |
| | 22 |
| | 16 |
| | — |
|
| | | | | | | | | |
December 31, 2014 | | | | | | | | | |
Generating Plants | | | | | | | | | |
Susquehanna | 90.00 | % | | $ | 4,746 |
| | $ | — |
| | $ | 3,591 |
| | $ | 117 |
|
Conemaugh | 16.25 | % | | 330 |
| | — |
| | 141 |
| | 2 |
|
Keystone | 12.34 | % | | 213 |
| | — |
| | 102 |
| | 2 |
|
Colstrip Units 1 & 2 | 50.00 | % | | 16 |
| | — |
| | 4 |
| | 3 |
|
Colstrip Unit 3 | 30.00 | % | | 16 |
| | — |
| | 2 |
| | 2 |
|
Merill Creek Reservoir | 8.37 | % | | — |
| | 22 |
| | 15 |
| | — |
|
Rate Case ProceedingEach subsidiary owning these interests provides its own funding for its share of the facility. Each receives a portion of the total output of the generating plants equal to its percentage ownership. The share of fuel and other operating costs associated with the plants is included in the corresponding operating expenses on the Statements of Income.
In December 2012,Talen Montana and NorthWestern have a sharing agreement that governs each party's responsibilities and rights relating to the PUC approvedoperation 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 total distribution revenue increaseparticular cost is specific to Colstrip Unit 3 or 4, and is entitled to take up to the same percentage of about $71 million for PPL Electric, including a 10.4% allowed return on equity. The approved rates became effective January 1, 2013.the available generation from Units 3 and 4.
11. Commitments and Contingencies
Energy Purchase and Sales Commitments
Storm Damage Expense RiderEnergy Purchase Commitments
Talen Energy enters into long-term energy and energy related contracts which include commitments to purchase:
|
| | | | | | | | | | | | | |
| Contract Type |
| Fuels (a) | | Limestone | | Natural Gas Storage | | Natural Gas Transportation | | Power, excluding wind | | RECs | | Wind Power |
Maximum Maturity Date | 2027 | | 2030 | | 2026 | | 2034 | | 2021 | | 2020 | | 2027 |
| |
(a) | As a result of depressed wholesale market prices for electricity and natural gas. Talen Energy has experienced a shift in the dispatching of its generation fleet from coal-fired to combined-cycle natural gas-fired generation. This reduction in coal-fired generation output has resulted in a surplus of coal inventory at certain of Talen Energy's Pennsylvania plants. To mitigate the risk of oversupply, Talen Energy incurred pre-tax charges of $41 million during 2015 in connection with an agreement to reduce its 2015 through 2018 contracted coal deliveries. These charges were recorded to "Fuel" on the Statement of Income. |
Energy Sale Commitments
In connection with its December 28, 2012 final rate case order,marketing activities or hedging strategies for its power plants, Talen Energy has entered into long-term power sales contracts that extend into 2020.
Legal Matters
Legal Proceedings
Talen Energy is involved in the PUC directed PPL Electricfollowing legal proceedings, claims and litigation. Talen Energy believes that it has meritorious defenses in connection with its current legal proceedings, claims and litigation, and it intends to filevigorously contest each of them. However, there can be no assurance that it will be successful in its efforts.
No estimate of the possible loss or range of loss in excess of amounts accrued, if any, can be made at this time regarding any of the matters specifically described below because the inherently unpredictable nature of legal proceedings may be exacerbated by various factors such as ongoing discovery, significant facts that are in dispute, the stage of the proceeding and the wide range of potential outcomes for any such matter. As a proposed Storm Damage Expense Rider (SDER). result, any losses actually incurred could be substantial.
Sierra Club Litigation
In March 2013, PPLthe Sierra Club and MEIC filed a complaint in the U.S. District Court, District of Montana, Billings Division against Talen Montana and the other Colstrip Steam Electric Station (Colstrip) owners: Avista Corporation, Puget Sound Energy, Portland General Electric Company, NorthWestern Corporation and PacifiCorp. Talen Montana operates Colstrip on behalf of the owners. The complaint alleged certain violations of the Clean Air Act, including New Source Review, Title V and opacity requirements and listed 39 separate claims for relief. The complaint requested injunctive relief and civil penalties on average of $36,000 per day per violation, including a request that the owners remediate environmental damage and that $100,000 of the civil penalties be used for beneficial mitigation projects.
In July 2013, the Sierra Club and MEIC filed its proposed SDERan additional Notice of Intent to Sue, identifying additional plant projects that are alleged not to be in compliance with the PUCClean Air Act and, in September 2013, filed an amended complaint. The amended complaint dropped all claims regarding pre-2001 plant projects, as partwell as the plaintiffs' Title V and opacity claims. It did, however, add claims with respect to a number of that filing, requested recoverypost-2000 plant projects, which effectively increased the number of projects subject to the 2012 qualifying storm costs related to Hurricane Sandy. PPL Electric proposed that the SDER become effective January 1, 2013 at a zero rate with qualifying storm costs incurred in 2013litigation by about 40. Talen Montana and the 2012 Hurricane Sandy costs includedother Colstrip owners filed a motion to dismiss the amended complaint 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 MayOctober 2013. In November 2013,May 2014, the PUC suspendedcourt dismissed the effective dateplaintiffs' independent Best Available Control Technology claims and their Prevention of Significant Deterioration (PSD) claims for three projects, but denied the riderowners' motion to February 28,dismiss the plaintiffs' other PSD claims on statute of limitation grounds. In August 2014, the Sierra Club and requested additional commentsMEIC filed a second amended complaint. This complaint includes the same causes of action articulated in the first amended complaint, but in regard to only eight projects done between 2001 and reply comments on PPL Electric's proposal. Comments and reply comments have been filed. On February 10,2013. In September 2014, PPL Electric agreedthe Colstrip owners filed an answer to an additional suspension of the 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 reductionsecond amended complaint. Discovery closed in customer electricity usage and peak demand by specified dates. EDCs not meeting the requirements of Act 129 are subject to significant penalties.
Under Act 129, EDCs must file an energy efficiency and conservation plan (EE&C Plan) with the PUC and contract with conservation service providers to implement all or a portion of the EE&C Plan. EDCs are able to recover the costs (capped at 2.0% of the EDC's 2006 revenue) of implementing their EE&C Plans. In October 2009, the PUC approved PPL Electric's Phase 1 EE&C Plan ending May 31, 2013.
Act 129 required EDCs to reduce overall electricity consumption by 1.0% by May 2011 and by 3.0% by May 2013, and reduce peak demand by 4.5% by May 2013. The overall 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 actual 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 peak 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 2014.2015, and in April, the plaintiffs indicated they intend to pursue claims related to only four of the remaining projects. The magistrate judge entered an order on the parties' motions for summary judgment on December 31, 2015. The judgment dismissed two of the plaintiffs' four remaining claims and provided more preferable legal standards for the remaining two claims. The case has been bifurcated as to liability and remedy, and the liability trial is currently set for May 2016. A trial date with respect to remedy, if there is a finding of liability, has not been scheduled.
Notice of Intent to File Suit
In October 2014, Talen Energy received a notice letter from the Chesapeake Bay Foundation (CBF) alleging violations of the Clean Water Act 129and Pennsylvania Clean Streams Law at the Brunner Island generation plant. The letter was sent to Brunner Island, LLC and the PADEP and is intended to provide notice of the alleged violations and CBF's intent to file suit in Federal court after expiration of the 60 day statutory notice period. Among other things, the letter alleges that Brunner Island, LLC failed to comply with the terms of its National Pollutant Discharge Elimination System permit and associated regulations related to the application of nutrient credits to the facility's discharges of nitrogen into the Susquehanna River. The letter also alleges that PADEP has failed to ensure that credits generated from nonpoint source pollution reduction activities that Brunner Island, LLC applies to its discharges meet the eligibility and certification requirements under PADEP's nutrient trading program regulations. If a lawsuit is filed by CBF, Talen Energy would expect CBF to seek injunctive relief, monetary penalties, fees and costs of litigation.
Montana Regional Haze
In September 2012, the EPA Region 8 developed a regional haze Federal Implementation Plan (FIP) for Montana. The final FIP assumed no additional controls for Corette or Colstrip Units 3 and 4, but proposed stricter limits for Corette and Colstrip Units 1 and 2. Talen Montana was meeting these stricter permit limits at Corette without any significant changes to operations, although other requirements led to the suspension of operations and retirement of Corette in March 2015. The stricter limits at
Colstrip Units 1 and 2 would require additional controls to meet more stringent nitrogen oxides and sulfur dioxide limits, the cost of which could be significant. Both Talen Montana and environmental groups appealed the final FIP to the U.S. Court of Appeals for the Ninth Circuit where oral argument was heard in May 2014. On June 9, 2015, the Ninth Circuit issued a decision that vacated as arbitrary and capricious the portions of the FIP setting stricter emissions limits for Colstrip Units 1 and 2 and Corette. The Ninth Circuit upheld the EPA's decision not to require further emissions reductions at Colstrip Units 3 and 4. The Ninth Circuit opinion requires the PUCEPA 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 issuednow reissue 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 targetFIP that is 2.1% of the total energy consumption forecasted by the PUC for the twelve months ended May 31, 2010. The PUC did not establish demand reduction targets for the Phase II program. PPL Electric filed its Phase II EE&C Plan with the PUC on November 15, 2012 and, in March 2013, the PUC approved PPL Electric's Phase II EE&C Plan with minor modifications. PPL Electric filed a Revised Phase II EE&C Plan on May 13, 2013 pursuant to the PUC's March Order. On July 11, 2013, the PUC issued an Order approving PPL Electric's Revised Phase II EE&C Plan. PPL Electric began its Phase II Plan implementation on June 1, 2013. In November 2013, PPL Electric filed 40 modifications to its Phase II Plan which contains programs designed to meet PPL Electric's target of reducing total energy consumption by 2.1%. Parties have filed comments and reply comments on PPL Electric's proposal.
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 sole discretion of the DSP. Act 129 requires a mix of spot market purchases, short-term contracts and long-term contracts (4 to 20 years), with long-term contracts limited to 25% of load unless otherwise approved by the PUC. A DSP is able to recover the costs associated with its default service procurement plan.
The PUC approved PPL Electric's DSP procurement plan for the period January 1, 2011 through May 31, 2013, and PPL Electric has concluded all competitive solicitations to procure power for its PLR obligations under that plan.
The PUC directed all EDCs to file default service procurement plans for the period June 1, 2013 through May 31, 2015. PPL Electric filed its plan in May 2012. In that plan, PPL Electric proposed a process to obtain supply for its default service customers and a number of initiatives designed to encourage more customers to purchase electricity from the competitive retail market. In January 2013, the PUC approved PPL Electric's plan with modifications. PPL Electric filed revised retail competition initiatives and a revised plan consistent with the PUC's January order,opinion.
Colstrip Wastewater Facility Administrative Order on Consent
Talen Montana is party to an Administrative Order on Consent (AOC) with the MDEQ related to operation of the wastewater facilities at the Colstrip power plant. In September 2012, Earthjustice, on behalf of Sierra Club, MEIC, and the National Wildlife Federation, filed an affidavit under Montana's Major Facility Siting Act (MFSA) that sought review of the AOC by Montana's Board of Environmental Review. Talen Montana elected to have this proceeding conducted in Montana state district court, and in October 2012, Earthjustice filed a petition for review in Montana state district court in Rosebud County. This matter was stayed in December 2012 pending the outcome of separate litigation where the same environmental groups challenged the AOC in a writ of mandamus. That litigation was resolved in May 2013 when defendants Talen Montana and MDEQ won their motions to dismiss the PUC approved that filing with minor changes. PPL Electric began implementing its revised planmatter, and the environmental groups did not appeal. In April 2014, Earthjustice filed successful motions for leave to amend the petition for review and to lift the stay. Talen Montana and the MDEQ responded to the amended petition and filed partial motions to dismiss in July 2014, which were denied in October 2014. Discovery closed in October 2015, summary judgment motions on June 1, 2013. PPL Electric anticipates filing its default service procurement planbehalf of all parties are pending, and a bench trial is set for the period beginning June 1, 2015 in the second quarter of 2014.
Smart Meter RiderApril 2016.
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 MarketOther
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 changesaddition to the retail marketabove matters, from time-to-time in the ordinary course of its business Talen Energy may be subject to other legal proceedings, claims and default service model. From December 2011 throughlitigation. While the endoutcome of 2012,these legal proceedings, claims and litigation is uncertain, the PUC issued several orders and other pronouncements related to the investigation. A final implementation order was issued in February 2013, and the PUC created several working groups to address continuing competitive issues. Although the final implementation order contains provisions that will require numerous modifications to PPL Electric's current default service model for retail customers, those modificationslikely results are not expected, either individually or in the aggregate, to have a material adverse effect on PPL Electric'sTalen Energy's financial condition or results of operations.
Distribution System Improvement Charge
Act 11 authorizesoperations, although the PUCeffect could be material to approve two specific ratemaking mechanisms: the useTalen Energy's results of a fully projected future test yearoperations in base rate proceedings and, subject to certain conditions, the use of a DSIC. Such alternative ratemaking procedures and mechanisms provide opportunity for accelerated cost-recovery and, therefore, are important to PPL Electric as it begins a period of significant capital investment to maintain and enhance the reliability of its delivery system, including the replacement of aging distribution assets. In August 2012, the PUC issued a Final Implementation Order adopting procedures, guidelines and a model tariff for the implementation of Act 11. Act 11 requires utilities to file an LTIIP as a prerequisite to filing for recovery through the DSIC. The LTIIP is mandated to be a five- to ten-year plan describing projects eligible for inclusion in the DSIC.
In September 2012, PPL Electric filed its LTIIP describing projects eligible for inclusion in the DSIC. The PUC approved the LTIIP on January 10, 2013 and, on January 15, 2013, PPL Electric filed a petition requesting permission to establish a DSIC. Several parties filed responses to PPL Electric's petition. In an order entered on May 23, 2013, the PUC approved PPL Electric's proposed DSIC with an initial rate effective July 1, 2013, subject to refund after hearings. The PUC also assigned four 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.
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 Electric experienced several PUC-reportable storms during 2011 including Hurricane Irene and a late October snow storm. Total restoration costs were $84 million, of which $54 million were initially recorded in "Other operation and maintenance" on the Statement of Income. Although PPL Electric had storm insurance coverage with a PPL affiliate, the costs associated with the unusually high number of PUC-reportable storms exceeded policy limits. Probable insurance recoveries recorded during 2011 were $26.5 million, of which $16 million were included in "Other operation and maintenance" on the Statements of Income. In December 2011, PPL Electric received orders from the PUC granting permission to defer qualifying storm costs in excess of insurance recoveries associated with Hurricane Irene and a late October 2011 snowstorm. PPL Electric recorded a regulatory asset of $25 million in December 2011 (offset to "Other operation and maintenance" on the Statement of Income). The PUC granted PPL Electric's recovery of the 2011 storm costs in its final order in the 2012 rate case. Recovery began in January 2013 and will continue over a five-yearany interim reporting period.
Federal Matters
FERC Formula Rates (PPL and PPL Electric)
Transmission rates are regulated by the FERC. PPL Electric's transmission revenues are billed in accordance with a FERC-approved PJM open access transmission tariff that utilizes a formula-based rate recovery mechanism. 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 initiated its formula rate 2012, 2011 and 2010 Annual Updates. Each update was subsequently challenged by a group of municipal customers, which challenges have been opposed by PPL Electric. In August 2011, the FERC issued an order substantially rejecting the 2010 formal challenge and the municipal customers filed a request for rehearing of that order. In September 2012, the FERC issued an order setting for evidentiary hearings and settlement judge procedures a number of issues raised in the 2010 and 2011 formal challenges. Settlement conferences were held in late 2012 and early 2013. In February 2013, the FERC issued an order setting for evidentiary hearings and settlement judge procedures a number of issues in the 2012 formal challenge and consolidated that challenge with the 2010 and 2011 challenges. PPL Electric filed a request for rehearing of the February order which remains pending before the FERC. PPL Electric and the group of municipal customers have exchanged confidential settlement proposals and PPL Electric anticipates that there will be additional settlement conferences held in 2014. PPL and PPL Electric cannot predict the outcome of the foregoing proceedings, which remain pending before the FERC.
In May 2013, PPL Electric filed its 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 challenge to the 2013 updated rates.
FERC Formula Rates (KU)
In 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 July 1, 2013.
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 such 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.
Credit Arrangements and Short-term Debt
(All Registrants)
The Registrants maintainTalen Energy maintains credit facilitiesarrangements to enhance liquidity and provide credit support and provide a backup to commercial paper programs.support. For reporting purposes, on a consolidated basis, the credit facilities and commercial paper programsarrangements of PPLTalen Energy Supply PPL Electric, LKE, LG&E and KUits subsidiaries 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. Talen Energy Corporation.
Revolving Credit Facilities
The following secured revolving credit facilities were in place at:at December 31, 2015:
|
| | | | | | | | | | | | | | | | | | |
| Expiration Date | | Capacity | | Borrowed (c) | | Letters of Credit Issued | | Unused Capacity | |
Talen Energy Supply RCF (a) | June 2020 | | $ | 1,850 |
| | $ | 500 |
| | $ | 163 |
| | $ | 1,187 |
| |
New MACH Gen RCF (b) | July 2021 | | 160 |
| | 108 |
| | 31 |
| | 21 |
| |
Total Credit Facilities | | | $ | 2,010 |
| | $ | 608 |
| | $ | 194 |
| | $ | 1,208 |
| |
| | | | | | | 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) | The facilities contain financial covenants to maintain an interest coverage ratio of not less than 3.0 times consolidated earnings before income taxes, depreciationfacility is syndicated and amortizationprovides capacity available for short-term borrowings and total net debt not in excess of 85% of its RAV, calculated in accordance with the credit facility. |
(b) | Under these facilities, WPD (East Midlands) and WPD (West Midlands) each have the ability to request the lenders to issue up to £80$925 million of letters of creditcredit. The facility requires Talen Energy Supply to maintain a senior secured net debt to adjusted EBITDA ratio (as defined in lieuthe agreement) 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 equatedless than or equal to £103 million and £106 million at the time4.50 to 1.00 as of the borrowings and bore interest at 1.87% and 0.85%. At December 31, 2013, the unused capacitylast day of WPD's credit facilities was approximately $1.7 billion. |
(d) | Each companyany fiscal quarter. Talen Energy Supply pays customary fees under its respectiveon the facility and borrowings generally bear interest at its option at either a defined base rate or LIBOR-based rates, in each case plus an applicable margin. |
(e) | The facilities contain a financial covenant requiring 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 facilities and other customary covenants. Additionally, as it relates to the syndicated credit facilities and subject to certain conditions, PPL Energy Supply may request that its facility's capacity be increased by up to $500 million, PPL Electric and KU each may request up to a $100 million 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 credit facility agreement allows for certain payments under the letter of credit facility to be converted to loans rather than requiring immediate payment. |
(g) | PPL Capital Funding's and LKE'sweighted average interest rate on outstanding borrowings at December 31, 2013 bore2015 was 2.67%. |
| |
(b) | The facility provides capacity available for short-term borrowings and up to $120 million of letters of credit. New MACH Gen pays customary fees on the facility and borrowings bear interest at 1.79% and 1.67%, respectively.12-month LIBOR, plus an applicable margin. The weighted average interest rate on outstanding borrowings at December 31, 2015 was 5.04%. |
| |
(c) | The amounts borrowed are recorded as "Short-term debt" on the Balance Sheet. |
The Talen Energy Supply RCF was entered into on June 1, 2015 in connection with the completion of the spinoff transaction and replaced Talen Energy Supply's previously existing unsecured syndicated credit facility. Any outstanding principal amounts under the old facility were repaid prior to the termination of the old facility and outstanding letters of credit were transferred to the Talen Energy Supply RCF. The facility is secured by liens on a majority of Talen Energy Supply's assets and is guaranteed by certain Talen Energy Supply subsidiaries, which guarantees are in turn secured by liens on assets of such subsidiaries with an aggregate carrying value of $7 billion at December 31, 2015. The facility provides the option to raise incremental credit facilities, refinance the loans with debt incurred outside the facility and extend the maturity date of the revolving credit commitments and loans and, if applicable, term loans, subject to certain limitations.
PPLThe Talen Energy Supply PPL Electric, LG&Eletter of credit facility and KU maintain commercial paper programsuncommitted credit facilities that existed at December 31, 2014 either expired or matured during the first quarter of 2015. Any previously issued letters of credit under these facilities were either terminated or reissued under the then-outstanding unsecured syndicated credit facility and upon closing of the spinoff were reissued under the Talen Energy Supply RCF described above. During the year ended December 31, 2015, Talen Energy wrote-off $12 million of unamortized fees to provide an additional financing source to fund short-term liquidity needs, as necessary. Commercial paper issuances, included in "Short-term debt""Interest expense" on the Balance Sheets, are supported byStatements of Income as a result of the respective Registrant's Syndicated Credit Facility. The following commercial paper programs were in place at:termination of the prior unsecured syndicated credit facility.
| | | | | | | 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 |
The New MACH Gen RCF is a component of the $642 million First Lien Credit and Guaranty Agreement, which was outstanding when Talen Energy acquired MACH Gen in November 2015. The First Lien Credit and Guaranty Agreement also contains a Term Loan B as described in "Long-term Debt" below. Obligations under the First Lien Credit and Guaranty Agreement are guaranteed by each of New MACH Gen's subsidiaries and are secured by a first priority security interest, subject to possible shared first lien status with certain permitted hedge and power sale agreements, in all of the assets of New MACH Gen and each guarantor, including the equity interests in New MACH Gen and each guarantor, which assets collectively have an aggregate carrying value of approximately $1 billion at December 31, 2015. Talen Energy is not a guarantor or obligor of borrowings under the First Lien Credit and Guaranty Agreement.
Other Facilities
(PPL and PPL Energy Supply)
PPLTalen Energy Supply maintains a $500 million Facility Agreementagreement expiring June 2017 whereby PPLthat provides Talen Energy Supply has the ability to request up to $500 million of committed unsecured letter of credit capacity at fees to be agreed upon at the time of each request, based on certain market conditions. At December 31, 2013, PPL2015, Talen Energy Supply hashad not requested any capacity for the issuance of letters of credit under this arrangement.
PPLIn December 2015, Talen Energy Supply PPL EnergyPlus, PPL Montour and PPL Brunner Island maintain anTalen Energy Marketing entered into the Amended Secured Energy Marketing and Trading Facility Agreement (Amended STF Agreement) to amend the $800 million secured energy marketingSecured Energy Marketing and tradingTrading Facility Common Agreement, dated as of November 1, 2010. The Amended STF Agreement increased the facility whereby PPL EnergyPlus willcapacity to $1.3 billion. The facility allows Talen Energy Supply to receive credit to be applied to satisfy collateral posting obligations related to itsTalen Energy's energy marketing and trading activities with counterparties participating in the facility. The credit amount is guaranteed by PPLPrior to the Talen Energy Supply, PPLspinoff transactions, Montour, LLC and PPL Brunner Island. PPL Montour and PPL Brunner Island, haveLLC had guaranteed certain of Talen Energy Marketing's obligations and had granted mortgage liens on their respective generating facilities to secure any amount they may owesuch guarantees. Brunner Island and Montour have since been released as parties. Obligations under their guarantees, which had an aggregate carrying value of $2.7 billion at December 31, 2013.the Amended STF Agreement are secured by the same collateral that secures the Talen Energy Supply RCF described above. The facility expires in November 2018, butis for a five-year term that is subject to an automatic one-year renewalsextension each year until termination under certain conditions.the provisions of the Amended STF Agreement. The initial term expires in December 2020. There were no$54 million of secured obligations outstanding under this facility at December 31, 2013.2015.
(All Registrants except PPL)Long-term Debt
See Note 16 for discussion of intercompany borrowings.The following long-term debt was outstanding at December 31:
|
| | | | | | | | | | | | |
| 2015 | | 2014 |
| Weighted-Average Rate | | Maturities | | | | |
Senior Unsecured Notes | 5.41 | % | | 2016-2038 | | $ | 3,713 |
| | $ | 2,193 |
|
Senior Secured Notes | 8.86 | % | | 2025 | | 41 |
| | 45 |
|
Term Loan B | 6.21 | % | | 2022 | | 474 |
| | — |
|
Total Long-term Debt Before Adjustments | | | | | 4,228 |
| | 2,238 |
|
| | | | | | | |
Fair market value adjustments | | | | | (23 | ) | | (19 | ) |
Unamortized premium and (discount), net | | | | | (2 | ) | | (1 | ) |
Total Long-term Debt | | | | | 4,203 |
| | 2,218 |
|
Less current portion of Long-term Debt, including fair market value adjustment | | | | | 399 |
| | 535 |
|
Total Long-term Debt, noncurrent | | | | | $ | 3,804 |
| | $ | 1,683 |
|
2011 Bridge Facility(PPL)
In March 2011, concurrently and in connection with entering into the agreement to acquire WPD Midlands, PPL Capital Funding and PPL WEM, as borrowers, and PPL, as guarantor, entered into a 364-day unsecured £3.6 billion bridge facility to fund the acquisition and pay certain fees and expenses in connection with the acquisition. During 2011, PPL incurred $44 million of fees in connection with establishing the 2011 Bridge Facility, which is reflected in "Interest Expense" on the Statement of Income. On April 1, 2011, concurrent with the closing of the WPD Midlands acquisition, PPL Capital Funding borrowed an aggregate of £1.75 billion and PPL WEM borrowed £1.85 billion under the 2011 Bridge Facility. Borrowings bore interest at approximately 2.62%, determined by one-month LIBOR rates plus a spread, based on PPL Capital Funding's senior unsecured debt rating and the length of time from the date of the acquisition closing that borrowings were outstanding. See Note 10 for additional information on the acquisition.
In accordance with the terms of the 2011 Bridge Facility, PPL Capital Funding's borrowings of £1.75 billion were repaid with approximately $2.8 billion of proceeds received from PPL's issuance of common stock and 2011 Equity Units in April 2011. In April 2011, PPL WEM repaid £650 million of its 2011 Bridge Facility borrowing. Such repayment was funded primarily with proceeds received from PPL WEM's issuance of senior notes. In May 2011, PPL WEM repaid the remaining £1.2 billion of borrowings then-outstanding under the 2011 Bridge Facility, primarily with the proceeds from senior notes issued by WPD (East Midlands) and WPD (West Midlands).
In anticipation of the repayment of a portion of the borrowings under the 2011 Bridge Facility with U.S. dollar proceeds received from PPL's issuance of common stock and 2011 Equity Units and PPL WEM's issuance of U.S. dollar-denominated senior notes, PPL entered into forward contracts to purchase GBP in order to economically hedge the foreign currency exchange rate risk related to the repayment. See Note 19 for additional information.
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 Notes | 5.29% | | 2019 - 2073 | | | 1,908 | | | 2,608 |
| Other | 6.95% | | 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 |
| Other | 6.00% | | 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 |
| Other | 7.38% | | 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 Notes | 3.31% | | 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 |
| | | | | | | | | | | | |
| | | | 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) | Includes $300 million of 5.70% REset Put Securities due 2035 (REPS). The REPS bear interest at a rate of 5.70% per annum to, but excluding, October 15, 2015 (Remarketing Date). The REPS are required to be put by existing holders on the Remarketing Date either for (a) purchase and remarketing by a designated remarketing dealer or (b) repurchase by PPL Energy Supply. If the remarketing dealer elects to purchase the REPS for remarketing, it will purchase the REPS at 100% of the principal amount, and the REPS will bear interest on and after the Remarketing Date at a new fixed rate per annum determined in the remarketing. PPL Energy Supply has the right to terminate the remarketing process. If the remarketing is terminated at the option of PPL Energy Supply or under certain other circumstances, including the occurrence of an event of default by PPL Energy Supply under the related indenture or a failed remarketing for certain specified reasons, PPL Energy Supply will be required to pay the remarketing dealer a settlement amount as calculated in accordance with the related remarketing agreement. |
(b) | 2012 includes lease financing consolidated through a VIE which was repaid in 2013. See Note 22 for additional information. |
(c) | Includes PPL Electric's senior secured and first mortgage bonds that are secured by the lien of PPL Electric'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 $5.1 billion and $4.3 billion at December 31, 2013 and 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.
(d) | Includes PPL Electric's series of senior secured bonds that 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 (c) above. This amount includes $224 million that may be redeemed at par beginning in 2015 and $90 million that may be redeemed, in whole or in part, at par beginning in October 2020 and are subject to mandatory redemption upon determination that the interest rate on the bonds would be included in the holders' gross income for federal tax purposes. |
(e) | Includes LG&E's and KU's series of first mortgage bonds that were issued to 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 (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 rate, weekly rate, term rate of at least one year or, in some cases, an auction rate or a LIBOR index rate. |
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.
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.
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) | Includes £225 million ($368 million at December 31, 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. |
(g) | The principal amount of the notes issued by WPD (South West) and WPD (East Midlands) is adjusted based on changes in a specified index, as detailed in the terms of the related indentures. The adjustment to the principal amounts from 2012 to 2013 was an increase of approximately £12 million ($20 million) resulting from inflation. 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. |
(h) | Includes £3.8 billion ($6.2 billion at December 31, 2013) of notes that 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 which includes the loss of, or a material adverse change to, the distribution licenses under which the issuer operates. |
None of the outstanding debt securities noted above have sinking fund requirements. The aggregate maturities of long-term debt for the periods 2014 through 2018 and thereafter are as follows. follows:
| | | | | 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 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
2016 | | 2017 | | 2018 | | 2019 | | 2020 | | Thereafter | | Total |
$ | 396 |
| | $ | 5 |
| | $ | 424 |
| | $ | 1,244 |
| | $ | 179 |
| | $ | 1,980 |
| | $ | 4,228 |
|
Long-term Debt and Equity Securities ActivitiesActivity
(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 Funding2015, Talen Energy Supply issued $450$600 million of 5.90% Junior Subordinated6.50% Senior Unsecured Notes due 2073. PPL Capital Funding2025. Talen Energy Supply received proceeds of $436$591 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.
(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 expendituresdebt. The notes may be redeemed at Talen Energy Supply's option, in whole at any time or in part from time to time, prior to June 1, 2020 at a price equal to 100% of their principal amount plus a make-whole premium and for other general corporate purposes.on or after June 1, 2020 at specified redemption prices. In addition, on or prior to June 1, 2018, up to 35% of the notes may be redeemed by Talen Energy Supply with proceeds from certain equity offerings at a price equal to 106.5% of the principal amount.
(PPL)
2010 Equity Units
During 2013, several events occurred related to the 2010 Equity Units. In May 2013, PPL Capital Funding remarketed $1.150June 2015, Talen Energy Supply assumed $1.25 billion of 4.625% Junior SubordinatedRJS Power Holdings LLC's 5.125% Senior Notes due 2018 that were originally issued in June 20102019 as a componentresult of PPL's 2010 Equity Units.the merger of RJS Power Holdings LLC into Talen Energy Supply, by which Talen Energy Supply became the obligor of these notes. In connection with this event and pursuant to the terms of the indenture governing the notes, the coupon on the notes was reduced to 4.625% in July 2015.
In September 2015, Talen Energy Supply completed a remarketing PPL Capital Funding issued $300of $231 million of 2.04% Junior Subordinated NotesExempt Facilities Revenue Refunding Bonds, Series 2009A due 20162038, Series 2009B due 2038, and $850 millionSeries 2009C due 2037 that were issued by PEDFA on behalf 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, resultingTalen Energy Supply 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 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.
2011 Equity Units
In April 2011, in connection with the acquisition of WPD Midlands, PPL issued 92 million shares of its common stock2009. All series bore interest at a public offering pricefixed rate of $25.30 per share, for3.0% prior to the remarketing. The Series 2009A Bonds, with a total of $2.328 billion. Proceeds from the issuance were $2.258 billion, net of the $70 million underwriting discount. PPL also issued 19.55 million 2011 Equity Units at a stated amount per unit of $50.00 for a total of $978 million. Proceeds from the issuance were $948 million, net of the $30 million underwriting discount. PPL used the net proceeds to repay PPL Capital Funding's borrowings under the 2011 Bridge Facility, as discussed above, to pay certain acquisition-related fees and expenses and for general corporate purposes.
Each 2011 Equity Unit consists of a 2011 Purchase Contract and, initially, a 5.0% undivided beneficial ownership interest in $1,000 principal amount of PPL Capital Funding 4.32% Junior Subordinated Notes due 2019 (2019 Notes).
Each 2011 Purchase Contract obligates the holder to purchase, and PPL to sell, for $50.00 a number of shares of PPL common stock to be determined by the average VWAP of PPL's common stock for the 20-trading day period ending on the third trading day prior to May 1, 2014, subject to antidilution adjustments and an early settlement upon a Fundamental Change as follows:
· | if the average VWAP equals or exceeds approximately $30.99, then 1.6133 shares (a minimum of 31,540,015 shares); |
· | if the average VWAP is less than approximately $30.99 but greater than $25.30, a number of shares of common stock having a value, based on the average VWAP, equal to $50.00; and |
· | if the average VWAP is less than or equal to $25.30, then 1.9763 shares (a maximum of 38,636,665 shares). |
If holders elect to settle the 2011 Purchase Contract prior to May 1, 2014, they will receive 1.6133 shares of PPL common stock, subject to antidilution adjustments and an early settlement upon a Fundamental Change. In addition to the maximum shares noted above, up to 1.2$100 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 2019 Notes is pledged to PPL to secure the holder's obligation under the related 2011 Purchase Contract. If a holder of a 2011 Purchase Contract chooses at any time no longer to be a holder of the 2019 Notes, such holder's obligation under the 2011 Purchase Contract must be secured by a U.S. Treasury security.
Each 2011 Purchase Contract also requires PPL to make quarterly contract adjustment paymentswere remarketed at a ratefixed coupon of 4.43% per year on the $50.00 stated amount of the 2011 Equity Unit. PPL has the option6.40% to defer these contract adjustment payments until the 2011 Purchase Contract settlement date. Deferred contract adjustment payments will accrue additional contract adjustment payments at the rate of 8.75% per year until paid. Until any deferred contract adjustment payments have been paid, PPL may not declare or pay any dividends or distributions on, or redeem, purchase or acquire or make a liquidation paymentmaturity. The Series 2009B Bonds and Series 2009C Bonds, with respect to, any of its capital stock, subject to certain exceptions.
The 2019 Notes are fully and unconditionally guaranteed by PPL as to payment of principal and interest. The 2019 Notes initially bear interest at 4.32% and are not subject to redemption prior to May 2016. Beginning May 2016, PPL Capital Funding may, at its option, redeem the 2019 Notes, in whole but not in part, at any time, at par plus accrued and unpaid interest. The 2019 Notes are expected to be remarketed in 2014 into two tranches, such that neither tranche will have an aggregate principal amount of less than the lesser of $250$131 million, and 50% of the aggregate principal amount of the 2019 Notes to be remarketed. One tranche will mature on or about the third anniversary of the settlement of the remarketing, and the other tranche will mature on or about the fifth anniversary of such settlement. Upon a successful remarketing, the interest rate on the 2019 Notes may be reset and the maturity of the tranches may be modified as necessary. In connection with a remarketing, PPL Capital Funding may elect with respect to each tranche, to extend or eliminate the early redemption date and/or calculate interest on the notes of a tranche onwere remarketed at a fixed or floating rate basis. If the remarketing fails, holders of the 2019 Notes5.00% for five years, at which time they will have the right to put their notes to PPL Capital Funding on May 1, 2014 for an amount equal to the principal amount plus accrued interest. 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 May 2016, PPL Capital Funding may elect at one or more times to defer interest payments on the 2019 Notes for one or more consecutive interest periods until the earlier of the third anniversary of the interest payment due date and May 2016. Deferred interest payments will accrue additional interest at a rate equal to the interest rate then applicable to the 2019 Notes. Until any deferred interest payments have been paid, PPL may not,be 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 liquidation ranks equal with, or junior in interest to, the subordinated guarantee of the 2019 Notes by PPL as of the date of issuancemandatory repurchase and (iii) make any payments regarding any guarantee by PPL of securities of any of its subsidiaries (other than PPL Capital Funding) if the guarantee ranks equal with, or junior in interest to, the 2019 Notes as of the date of their issuance.
In the financial statements, the proceeds from the sale of the 2011 Equity Units were allocated to the 2019 Notes and the 2011 Purchase Contracts, including the obligation to make contract adjustment payments, based on the underlying fair value of each instrument at the time of issuance. As a result, the 2019 Notes were recorded at $978 million, which approximated fair value, as long-term debt. At the time of issuance, the present value of the contract adjustment payments of $123 million was recorded to other liabilities representing the obligation to make contract adjustment payments, with an offsetting reduction to additional paid-in capital for the issuance of the 2011 Purchase Contracts, which approximated the fair value of each. The liabilityoptional remarketing. This transaction 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 was excluded from the Statement of Cash Flows in 2011. See Note 4 for EPS considerations related to the 2011 Purchase Contracts.as a non-cash transaction.
In October 2015, Talen Energy Supply's $300 million of 5.70% REset Put Securities due 2035 (REPS) were subject to mandatory tender to the remarketing dealer. However, the remarketing dealer and Talen Energy Supply mutually agreed to terminate the remarketing dealer's right to remarket the REPS and, in accordance with the terms of the REPS, Talen Energy Supply repurchased the REPS at par. The total aggregate consideration paid to repurchase the REPS was $434 million, which included $300 million of principal and $134 million of remarketing option value paid to the remarketing dealer. The termination payment to the remarketing dealer was recorded to "Other Income (Expense) - net" on the 2015 Statement of Income and is reflected in "Cash from operating activities" on the 2015 Statement of Cash Flows.
Following the MACH Gen acquisition in November 2015, $475 million of New MACH Gen Term Loan B debt secured under the First Lien Credit and Guaranty Agreement, which is described above, remained outstanding. The Term Loan B provides customary annual amortization paid quarterly and may also be repaid, in whole or in part, beginning in the third quarter of 2016 without any make-whole premium. See "Credit Arrangements and Short-term Debt - Revolving Credit Facilities" above for information regarding guarantees of and security interests with respect to the First Lien Credit and Guaranty Agreement.
In December 2015, Talen Energy Supply announced an "exchange offer" for its 6.5% Senior Unsecured Notes due 2025 that were issued in May 2015. Pursuant to the terms of the notes, Talen Energy Supply offered to exchange all of the outstanding notes for a like principal amount of its 6.5% Senior Notes due 2025 that, have been registered under the Securities Exchange Act of 1933, as amended. In January 2016, the exchange offer was completed with all of the notes exchanged.
In connection with the sale of Talen Ironwood Holdings, LLC, in January 2016, a Talen Ironwood Holdings, LLC subsidiary completed the redemption of $41 million of its 8.857% Senior Secured Notes due 2025 prior to the closing of the sale transaction, which occurred in February 2016. The redemption included the payment of a make whole premium of $14 million, which will be recorded as a component of the expected gain on sale in "Operating Income" on the Statement of Income in 2016. See Note 6 for additional information on the sale of Talen Ironwood Holdings, LLC.
Preferred Stock of Talen Energy Corporation
Talen Energy Corporation is authorized under its Amended and Restated Certificate of Incorporation to issue up to 100 million shares of preferred stock. No shares of preferred stock were issued or outstanding at December 31, 2015.
Legal Separateness(All Registrants)
The subsidiaries of PPLTalen Energy Corporation are separate legal entities. PPL'sTalen Energy Corporation's subsidiaries are not liable for the debts of PPL.Talen Energy Corporation. Accordingly, creditors of PPLTalen Energy Corporation may not satisfy their debts from the assets of PPL'sTalen Energy Corporation's subsidiaries absent a specific contractual undertaking by a subsidiary to pay PPL'sTalen Energy Corporation's creditors or as required by applicable law or regulation. Similarly, PPLTalen Energy Corporation is not liable for the debts of its subsidiaries, nor are its subsidiaries liable for the debts of one another. Accordingly, creditors of PPL'sTalen Energy Corporation's subsidiaries may not satisfy their debts from the assets of PPLTalen Energy Corporation or its other subsidiaries absent a specific contractual undertaking by PPLTalen Energy Corporation or its other subsidiaries to pay the creditors or as required by applicable law or regulation.
Similarly, the subsidiaries of PPLTalen Energy Supply PPL Electric and LKE are each separate legal entities. These subsidiaries are not liable for the debts of PPLTalen Energy Supply, PPL Electric and LKE.Supply. Accordingly, creditors of PPLTalen Energy Supply PPL Electric and LKE may not satisfy their debts from the assets of their subsidiaries absent a specific contractual undertaking by a subsidiary to pay the creditors or as required by applicable law or regulation. Similarly, PPLTalen Energy Supply PPL Electric and LKE areis not liable for the debts of theirits subsidiaries, nor are theirthe subsidiaries liable for the debts of one another. Accordingly, creditors of these subsidiaries may not satisfy their debts from the assets of PPLTalen Energy Supply PPL Electric and LKE (or their other subsidiaries) absent a specific contractual undertaking by that parent or other subsidiary to pay such creditors or as required by applicable law or regulation.
Distributions, Capital ContributionsAs indicated above, certain debt agreements, including, but not limited to, the Talen Energy Supply RCF, the First Lien Credit and Related RestrictionsGuaranty Agreement and the Amended STF Agreement, include contractual undertakings by certain Talen Energy subsidiaries to guarantee the obligations of other Talen Energy entities arising under those agreements.
(PPL)Distribution Related Restrictions for Talen Energy Corporation
In November 2013, PPL declaredCertain of Talen Energy's debt agreements include covenants that could effectively restrict the payment of distributions, loans or advances, either directly to Talen Energy Corporation or to Talen Energy Supply or one of its quarterly common stock dividend, payable January 2, 2014, at 36.75 cents per share (equivalent to $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 depend 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 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 4.32% Junior Subordinated Notes due 2019 have been paid and deferred contract adjustment payments on PPL's 2011 Purchase Contracts have been paid.subsidiaries. At December 31, 2013, no payments were deferred on any series2015, $3.3 billion of junior subordinated notes or the 2011 Purchase Contracts.
(All Registrants except PPLTalen Energy Supply)
PPL relies on dividends or loans from itsCorporation subsidiaries to fund PPL's dividends to its common shareholders. The net assets of certain PPL subsidiaries are subject to legal restrictions. LKE primarily relies on dividends from its subsidiaries to fund its dividends to PPL. LG&E, KU and PPL Electric are subject to Section 305(a) of the Federal Power Act, which makes it unlawful for a public utility to make or pay a dividend from any funds "properly included in capital account." The meaning of this limitation has never been clarified under the Federal Power Act. LG&E, KU and PPL Electric believe, however, that this statutory restriction, as applied to their circumstances, would not be construed or applied by the FERC to prohibit the payment from retained earnings of dividends that are not excessive and are for lawful and legitimate business purposes. In February 2012, LG&E and KU petitioned the FERC requesting authorization to pay dividends in the future based on retained earnings balances calculated without giving effect to the impact of purchase accounting adjustments for the acquisition of LKE by PPL. In May 2012, FERC approved the petitions with the further condition that each utility may not pay dividends if such payment would cause its adjusted equity ratio to fall below 30% of total capitalization. Accordingly, at December 31, 2013, net assets of $2.5 billion ($1.0 billion for LG&E and $1.5 billion for KU) were restricted for the purposes of paying dividendstransferring funds to LKE, and net assetsTalen Energy Corporation in the form 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 Virginia law, KU is prohibited from makingdistributions, loans to affiliates without the prior approval of the VSCC. There are no comparable statutes under Kentucky law applicable to LG&E and KU, or under Pennsylvania law applicable to PPL Electric. However, orders from the KPSC require LG&E and KU to obtain prior consent or approval before lending amounts to PPL.advances.
(PPL)
WPD subsidiaries 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 ability to meet its cash obligations.
(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 |
8.6. Acquisitions, Development and Divestitures
(All Registrants)
The RegistrantsTalen Energy from time to time evaluateevaluates opportunities for potential acquisitions, divestitures and development projects. Development projects are periodically reexamined based on market conditions and other factors to determine whether to proceed with the projects, sell, cancel or expand them, execute tolling agreements or pursue other options. Any resulting transactions may impact future financial results. See Note 9 for information on discontinued operations. See Note 10 for information on completed acquisitions.
Development
(PPL, LKE, LG&E and KU) Acquisitions
Cane Run Unit 7 ConstructionMACH Gen
In September 2011, LG&EOn November 2, 2015, Talen Energy completed the acquisition of the membership interests of MACH Gen for $603 million in cash consideration (based on estimated working capital). The final cash purchase price, after post-closing adjustments, was $600 million. The purchase price was funded by a borrowing under the Talen Energy Supply RCF and KU filed an applicationcash on hand. The Term Loan B and revolving credit facility of New MACH Gen remain outstanding following the completion of the transaction. See Note 5 for additional information. MACH Gen's total generating capacity is 2,344 MW (summer rating).
The MACH Gen acquisition was accounted for as a CPCNbusiness combination, with the KPSC requesting approval to build Cane Run Unit 7. In May 2012,identifiable tangible and intangible assets and liabilities of MACH Gen, recorded at their estimated fair values on the KPSC issued an order approvingacquisition date. The acquisition is consistent with management's strategy of business growth, fuel type diversity and replacing 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 recoveryassets being divested as part of the costs associatedFERC approval of the RJS Power acquisition. The following table summarizes the allocation of the purchase price to the fair values of the major classes of assets and liabilities of MACH Gen.
|
| | | | |
Current assets (a) | | $ | 31 |
|
Intangible assets | | 3 |
|
PP&E | | 1,275 |
|
Short-term debt | | (103 | ) |
Current liabilities | | (28 | ) |
Long-term debt | | (470 | ) |
Deferred income taxes | | (108 | ) |
Total purchase price | | $ | 600 |
|
| |
(a) | Includes gross contractual amounts of accounts receivable acquired of $9 million, which approximates fair value. |
The purchase price allocation is considered by Talen Energy's management to be provisional due to pending finalization of valuations and could change materially in subsequent periods. Any changes to the provisional purchase price allocation during the measurement period that result in material changes to the consolidated financial results will be adjusted prospectively. The measurement period can extend up to a year from the date of acquisition. The items pending finalization include, but are not limited to, the valuation of PP&E, certain other assets and liabilities and deferred income taxes.
Actual operating revenues and net income of MACH Gen, since the November 2, 2015 acquisition, included in Talen Energy's results for the year ended December 31, 2015 were: |
| | | | | | | |
| Operating Revenues | | Net Income (Loss) |
| $ | 28 |
| | $ | (9 | ) |
RJS Power
On June 1, 2015, substantially contemporaneous with the constructionspinoff by PPL to form Talen Energy, RJS Power was not includedcontributed by the Riverstone Holders to become a subsidiary of Talen Energy Supply in exchange for 44,974,658 shares of Talen Energy Corporation common stock. See Notes 1 and 3 for additional information on the CPCN application but certain Cane Run Unit 7 construction work in progress has been included in base ratesspinoff and acquisition. In accordance with business combination accounting guidance, Talen Energy treated the remaining capital costs are expectedcombination with RJS Power as an acquisition and Talen Energy Supply is considered the acquirer of RJS Power. Accordingly, Talen Energy applied acquisition accounting to the assets and liabilities of RJS Power whereby the purchase price was allocated to the underlying tangible and intangible assets and liabilities based on their respective fair values as of June 1, 2015, with the remainder allocated to goodwill.
The total consideration for the acquisition was deemed to be included in future rate proceedings. LG&E$902 million based on the fair value of the Talen Energy Corporation common stock issued for the acquisition using the June 1, 2015 closing "when-issued" market price.
The following table summarizes the allocation of the purchase price to the fair values of the major classes of assets and KU commenced preliminary construction activities inliabilities of RJS, all of which represent non-cash activity excluded from the third quarterStatement of 2012 and project constructionCash Flows for the year ended December 31, 2015. The purchase price allocation is expectedconsidered by Talen Energy's management 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 2013 retirements.
Future Capacity Needs
In January 2014, LG&E and KU filed 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 expected to have approximately 700 MW of capacity at an estimated cost of $700 million and is planned to 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 KU 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 36% undivided interest and KU owning a 64% undivided interest.
(PPL and PPL Energy Supply)
Hydroelectric Expansion Projects
In 2009, in light of the availability of tax incentives and potential federal loan guarantees for renewable projects contained in the Economic Stimulus Package, PPL Energy Supply filed an application with the FERC to expand capacity at its Holtwood and Rainbow hydroelectric facilities, which the FERC approved. In the first quarter of 2013, the Rainbow hydroelectric redevelopment project in Great Falls, Montana, which increased total capacity to 63 MW, was placed in service. In the fourth quarter of 2013, the 125 MW Holtwood project was placed in service.
PPL Energy Supply believes that the projects are eligible for either investment tax credits or Section 1603 Treasury grants. Asfinal as of December 31, 2013, PPL Energy Supply had recognized investment tax credits for both projects and continued to evaluate the desirability of obtaining Treasury grants in lieu of the investment tax credits.2015.
|
| | | | |
Current assets (a) | | $ | 168 |
|
Assets of discontinued operations (b) | | 375 |
|
PP&E | | 1,777 |
|
Other intangibles | | 46 |
|
Short-term debt | | (36 | ) |
Current liabilities | | (224 | ) |
Liabilities of discontinued operations | | (5 | ) |
Long-term debt | | (1,244 | ) |
Deferred income taxes | | (266 | ) |
Other noncurrent liabilities (c) | | (82 | ) |
Net identifiable assets acquired | | 509 |
|
Goodwill (d) | | 393 |
|
Net assets acquired | | $ | 902 |
|
| |
(a) | Includes gross contractual amount of the accounts receivable acquired of $41 million, which approximates fair value. |
| |
(b) | See Note 14 for information on impairment charges recorded during 2015 related to the Sapphire plants initial classification as assets held for sale and discontinued operations. See Note 1 for additional information on the subsequent reclassification to assets held and used. |
| |
(c) | Includes $33 million of "out-of-the-money" coal contracts that will be amortized over the life of the contracts terms as the coal is consumed. |
| |
(d) | The allocation above is as of the acquisition date of June 1, 2015. As further discussed in Note 16, goodwill was fully impaired during 2015, which included the goodwill recognized in the acquisition of RJS Power. |
Various purchase accounting valuation adjustments were made during the third and fourth quarters affecting certain current assets and liabilities, PP&E, other intangibles and related deferred income taxes resulting in a $5 million reduction in goodwill. The statement of December 31, 2013, PPL Energy Supply hadincome effect of these adjustments recorded cumulative deferred investment tax credits of $60 million and $117 million forduring the Rainbow and Holtwood hydroelectric facilities. The credits reduced PPL Energy Supply's tax liability and are amortized over the life of the related assets.measurement period was insignificant.
In 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 Energy Supply has accepted and will account for the receipt of the $56 million grant in 2014. PPL Energy Supply is required to recapture $60 million of investment tax credits previouslyGoodwill recorded related to the Rainbow project as a result of the grant receipt.acquisition primarily reflected synergies expected to be achieved related to the spinoff and acquisition. The accountinggoodwill is not deductible for income tax purposes and was assigned to the East segment. See Note 16 for additional information related to the impairment of goodwill.
Actual operating revenues and net income of RJS, since the June 1 acquisition, included in Talen Energy's results for the grant receiptyear ended December 31, 2015 were: |
| | | | | | | |
| Operating Revenues | | Net Income (Loss) (a) |
| $ | 528 |
| | $ | (74 | ) |
| |
(a) | Includes certain asset impairments and excludes the impact of the goodwill impairment recorded in 2015 subsequent to the acquisition. See Notes 14 and 16 for information on the impairments recorded. |
Pro Forma Information for RJS Power and recaptureMACH Gen Acquisitions
Pro forma information (unaudited) for Talen Energy for the year ended December 31, as if both the RJS Power and MACH Gen acquisitions had occurred January 1, 2014, is as follows:
|
| | | | | | | | |
| | Operating Revenues | | Income (Loss) After Tax from Continuing Operations |
2015: | | | | |
Pro forma | | $ | 5,109 |
| | $ | (396 | ) |
Basic and diluted earnings per share (for Talen Energy Corporation) | | | | (3.08 | ) |
2014: | | | | |
Pro forma | | 6,031 |
| | 345 |
|
Basic and diluted earnings per share (for Talen Energy Corporation) | | | | 2.68 |
|
The unaudited pro forma financial information has been presented for illustrative purposes only and is not necessarily indicative of investmentresults of operations that would have been achieved had the acquisitions taken place on the date indicated, or the future consolidated results of operations of Talen Energy. The pro forma financial information presented above has been derived from the historical consolidated financial statements of Talen Energy and MACH Gen and from the historical consolidated and combined financial statements of RJS Power.
The pro forma financial information presented above includes adjustments for (1) alignment of accounting policies, (2) incremental depreciation and amortization expense related to fair value adjustments to PP&E and identifiable intangible assets and liabilities, (3) incremental interest expense for outstanding borrowings to reflect the terms of the Talen Energy Supply RCF related to the RJS acquisition, (4) nonrecurring items (discussed below), (5) the tax creditseffect of the above adjustments, and (6) the issuance of Talen Energy Corporation common stock in connection with the spinoff from PPL and the acquisition of RJS Power. The pro forma financial information presented includes the impact of impairments recorded during the third and fourth quarters of 2015. See Notes 14 and 16 for information on the impairments recorded.
Nonrecurring acquisition, integration and other costs directly related to the acquisitions of $20 million were incurred during 2015 and recorded in "Operation and maintenance" on the Statements of Income. Adjustments were made in the calculation of pro forma amounts to remove the effect of these nonrecurring items and related income taxes. The pro forma financial information does not include adjustments for potential future cost savings for either acquisition.
Divestitures
Talen Renewable Energy
In November 2015, Talen Energy completed the sale of Talen Renewable Energy for $116 million in cash and recorded a pre-tax gain on the sale of $10 million in the East segment, which is reflected in "Operation and maintenance" on the Statement of Income.
Announced Divestitures
Ironwood, Holtwood, Lake Wallenpaupack and C.P. Crane Power Plants
In October 2015, Holtwood, LLC, a wholly owned, indirect subsidiary of Talen Energy, entered into an agreement to sell the Holtwood and Lake Wallenpaupack hydroelectric facilities in Pennsylvania for a purchase price of $860 million, subject to customary purchase price adjustments. The facilities have a combined summer rating operating capacity of 308 MW. The transaction is expected to close in March 2016, subject to customary closing conditions.
In October 2015, Talen Generation entered into an agreement to sell Talen Ironwood Holdings, LLC, which through its subsidiaries owns and operates the Ironwood natural gas combined-cycle plant in Pennsylvania, for a purchase price of $657 million, subject to customary purchase price adjustments. In connection with the sale, in January 2016, Talen Energy repaid $41 million of indebtedness, plus a customary debt make-whole premium. The Ironwood unit has a summer rating operating capacity of 660 MW. The sale transaction closed in February 2016, with an estimated gain, net of transaction costs including
the make-whole premium on the debt, of $159 million, which will be recorded to "Operating Income" on the Statement of Income in 2016. Proceeds from the sale of Ironwood were used to repay the majority of Talen Energy's short-term debt.
In October 2015, Raven Power Marketing LLC, a wholly owned, indirect subsidiary of Talen Energy, entered into an agreement to sell C.P. Crane LLC, which owns and operates the C.P. Crane coal-fired power plant in Maryland. The C.P. Crane plant has a summer rating operating capacity of 402 MW. The transaction closed in February 2016. The transaction is not expected to have a significant impact on theTalen Energy's financial statementscondition or results of operations. See Notes 14 and 16 for information on impairments recorded in 2014.2015 for this plant.
The sales are part of the requirement to divest certain PJM assets to satisfy a December 2014 FERC order approving the combination with RJS Power. See Note 1 for information on the FERC order.
At December 31, 2015, the major component of assets held for sale related to the sale of these businesses was primarily $936 million of PP&E which was included in the East segment. Talen Ironwood Holdings, LLC is considered an individually significant component whose pretax income (loss) attributable to Talen Energy for 2015, 2014, and 2013 was $73 million, $67 million, and $(22) million.
Discontinued Operations
Talen Montana Hydro Sale
In November 2014, Talen Montana completed the sale to NorthWestern Corporation of 633 MW of hydroelectric generating facilities located in Montana for approximately $900 million in cash. The sale included 11 hydroelectric power facilities and related assets.
Following are the components of discontinued operations in the Statement of Income for the years ended December 31.
|
| | | | | | | | |
| | 2014 | | 2013 |
Operating revenues | | $ | 117 |
| | $ | 139 |
|
Gain on the sale (pre-tax) | | 306 |
| | — |
|
Interest expense (a) | | 9 |
| | 12 |
|
Income (loss) before income taxes | | 332 |
| | 49 |
|
Income (Loss) from Discontinued Operations (net of income taxes) | | 223 |
| | 32 |
|
| |
(a) | Represents allocated interest expense based upon the discontinued operations share of the net assets of Talen Energy. |
Other
To facilitate the sale of the Montana hydroelectric generating facilities discussed above, Talen Montana terminated, in December 2013, its operating lease arrangement related to partial interests in Units 1, 2 and 3 of the Colstrip coal-fired 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. Talen Energy recorded a charge of $697 million ($413 million after-tax) for the termination of the 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 Statement of Cash Flow.
Development
Bell Bend COLA
In 2008, a PPLTalen Energy Supply subsidiary, PPL Bell Bend, LLC (PPL Bell(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.
InAlso in 2008, PPL Bell Bend submitted Parts I and II of an application for a federal loan guarantee for Bell Bend to the DOE. In February 2014, the DOE announced the first loan guarantee for a nuclear project in Georgia. Eight Although eight of the ten applicants that submitted Part II applications remain active in the DOE program; however,program, 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. PPL Bell 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. PPL2018. Bell Bend has made no decision to proceed with construction and expects that such decision will not be made for several years given the anticipated lengthy NRC license approval process. Additionally, PPL Bell Bend does not expect to proceed with construction absent favorable economics, a joint arrangement with other interested parties and a federal loan guarantee or other acceptable financing. PPL Bell Bend is currently authorized by Talen Energy Corporation's Board of Directors to spend up to $224$256 million on the COLA and other permitting costs necessary for construction, which is expected to be sufficient to fund the project through receipt of the license.construction. At December 31, 20132015 and December 31, 2012, $1732014, $201 million and $154$188 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." PPLTalen Energy continues to support the Bell Bend believes thatlicensing project with a near term focus on obtaining the estimated fair valuefinal environmental impact statement. Talen Energy placed the NRC safety review (which supports issuance of their final safety evaluation report, the other key element of the COLA currently exceedsCOLA) on hold in 2014, due to a lack of progress by the costs expectedreactor vendor with respect to its NRC design certification process, which is a prerequisite to the COLA.
Brunner Island Co-firing Project
Talen Energy is in the process of making modifications to its Brunner Island coal-fired generating facility to be capitalized associated withable to co-fire using natural gas to better position the licensing application.
Regional Transmission Line Expansion Plan (PPLplant for low gas price environments. Construction is under way and PPL Electric)
Susquehanna-Roseland
In 2007, PJM directed the construction of a new 150-mile, 500-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 was needed to prevent potential overloads that could occur on several existing transmission lines in the interconnected PJM system. PJM directed PPL Electric to construct the Pennsylvania portion of the Susquehanna-Roseland line and 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 is expected to be completed beforeby the peak summer demand periodend of 2015. At December 31, 2013, PPL Electric's estimated share of the2016. The project is expected to cost was $630$118 million. At December 31, 2013, $3772015 and 2014, $23 million and $5 million of costs, which include capitalized interest, associated with the project were capitalized and are included on the Balance Sheet primarily in "Construction work in progress."
Northeast/Pocono
In October 2012, the FERC issued an order in response to PPL Electric's December 2011 request for ratemaking incentives for the Northeast/Pocono Reliability project (a new 58-mile 230 kV transmission line that includes three new substations and upgrades to adjacent facilities). The FERC granted the incentive for inclusion in rate base of all prudently incurred construction work in progress (CWIP) costs but denied the 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 ensure proper accounting treatment of AFUDC and CWIP for the project, which PPL Electric submitted to the FERC in March 2013 and the FERC subsequently approved in April 2013.
In December 2012, PPL Electric submitted an application to the PUC requesting permission to site and construct the project. A number of parties 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 filed an appeal of the PUC's decision and the deadline for such appeals has passed. PPL Electric expects the project to be completed in 2017. At December 31, 2013, PPL Electric's estimated cost of the project was $335 million, most of which qualifies for the CWIP incentive treatment.
Other (PPL and PPL Energy Supply)
Montana Transactions
In September 2013, PPL Montana 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 second half of 2014, includes 11 hydroelectric power facilities and related assets. The sale is subject to closing conditions, including receipt of regulatory approvals by the FERC and 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 transaction to be classified as held for sale on the balance sheet.
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 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 and PPL Energy Supply recorded a charge of $697 million ($413 million after-tax) for the termination of the 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
Sale of Certain Non-core Generation Facilities(PPL and PPL Energy Supply)
In 2011, PPL Energy Supply subsidiaries completed the sale of their ownership interests in certain non-core generation facilities, which were included in the Supply segment, for $381 million. The transaction included the natural gas-fired facilities in Wallingford, Connecticut and University Park, Illinois and an equity interest in Safe Harbor Water Power Corporation, which owns a hydroelectric facility in Conestoga, Pennsylvania. There was no significant impact on earnings in 2011 from the operation of this business or as a result of the sale.
Distribution 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 book 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 2011 Statement of Cash 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 tolling agreement that expires in 2021. The acquisition provides PPL Energy Supply, through its subsidiaries, operational control of additional combined-cycle gas generation in PJM.
The fair value of the consideration paid for this acquisition was as follows.
Aggregate enterprise consideration | | $ | 326 |
Less: Fair value of long-term debt outstanding assumed through consolidation (a) | | | 258 |
Plus: Restricted cash debt service reserves | | | 17 |
Cash consideration paid for equity interests (including working capital adjustments) | | $ | 85 |
(a) | The long-term debt assumed through consolidation consisted of $226 million aggregate principal amount of 8.857% senior secured bonds to be fully repaid by 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 February 2013 exchange of a portion of long-term debt assumed through consolidation. |
Purchase Price Allocation
The following table summarizes the allocation of the purchase price to the fair value of the major classes of assets acquired and liabilities assumed through consolidation, and the effective settlement of the tolling agreement through consolidation.
PP&E | | $ | 505 |
Long-term debt (current and noncurrent) (a) | | | (258) |
Tolling agreement (b) | | | (170) |
Other net assets (a) | | | 8 |
Net identifiable assets acquired | | $ | 85 |
(a) | Represents non-cash activity excluded from the 2012 Statement of Cash Flows. |
(b)
| Prior to the acquisition, PPL EnergyPlus had recorded primarily an intangible asset, which represented its rights to and the related accounting for the tolling agreement with PPL Ironwood, LLC. On the acquisition date, PPL Ironwood, LLC recorded a liability, recognized at fair value, for its obligation to PPL EnergyPlus. The tolling agreement assets of PPL EnergyPlus and the tolling agreement liability of PPL Ironwood, LLC eliminate in consolidation for PPL and PPL Energy Supply as a result of the acquisition, and therefore the agreement is considered effectively settled. The difference between the tolling agreement assets and liability resulted in an insignificant loss on the effective settlement of the agreement.
|
Acquisition of WPD Midlands(PPL)
On April 1, 2011, PPL, through its indirect, wholly owned subsidiary PPL WEM, completed its acquisition of all of the outstanding ordinary share capital of Central Networks East plc and Central Networks Limited, the sole owner of Central Networks West plc, together with certain other related assets and liabilities (collectively referred to as Central Networks and subsequently renamed WPD Midlands), from subsidiaries of E.ON AG. The consideration for the acquisition consisted of cash of $5.8 billion, including the repayment of $1.7 billion of affiliate indebtedness owed to subsidiaries of E.ON AG, and approximately $800 million of long-term debt assumed through consolidation. WPD Midlands operates two regulated distribution networks that serve 5 million end-users in the Midlands area of England. The acquisition increased the regulated portion of PPL's business and enhances rate-regulated growth opportunities as the regulated businesses 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 this acquisition was as follows (in billions).
Aggregate enterprise consideration | | $ | 6.6 |
Less: Fair value of long-term debt outstanding assumed through consolidation | | | 0.8 |
Total cash consideration paid | | | 5.8 |
Less: Funds used to repay pre-acquisition affiliate indebtedness | | | 1.7 |
Cash consideration paid for Central Networks' outstanding ordinary share capital | | $ | 4.1 |
The total cash consideration paid was primarily funded by borrowings under the 2011 Bridge Facility on the date of acquisition. Subsequently, PPL repaid those borrowings in 2011 using proceeds from the permanent financing, including issuances of common stock and 2011 Equity Units, as well as proceeds from the issuance of debt by PPL WEM, WPD (East Midlands) and WPD (West Midlands). See Note 7 for additional information.
Purchase Price Allocation
The following table summarizes (in billions) the allocation of the purchase price to the fair value of the major classes of assets acquired and liabilities assumed.
Current assets (a) | | $ | 0.2 |
PP&E | | | 4.9 |
Intangible assets | | | 0.1 |
Other noncurrent assets | | | 0.1 |
Current liabilities (b) | | | (0.4) |
PPL WEM affiliate indebtedness | | | (1.7) |
Long-term debt (current and noncurrent) (b) | | | (0.8) |
Other noncurrent liabilities (b) | | | (0.7) |
Net identifiable assets acquired | | | 1.7 |
Goodwill | | | 2.4 |
Net assets acquired | | $ | 4.1 |
(a) | Includes gross contractual amount of the accounts receivable acquired of $122 million, which approximates fair value. |
(b) | Represents non-cash activity excluded from the 2011 Statement of Cash Flows. |
The purchase price allocation resulted in goodwill of $2.4 billion that was assigned to the U.K. Regulated segment. The goodwill is attributable to the expected continued growth of a rate-regulated business with a defined service area operating under a constructive regulatory framework, expected cost savings, efficiencies and other benefits resulting from a contiguous service area with WPD (South West) and WPD (South Wales), as well as the ability to leverage WPD (South West)'s and WPD (South Wales)'s existing management team's high level of performance in capital cost efficiency, system reliability and customer service. The goodwill is not deductible for U.K. income tax purposes.
Separation Benefits - U.K. Regulated Segment
In 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 reorganization, 729 employees of WPD Midlands were terminated.
The separation benefits, before income taxes, associated with the reorganization were as follows.
Severance compensation | | $ | 61 |
Early retirement deficiency costs (ERDC) under applicable pension plans | | | 46 |
Outplacement services | | | 1 |
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 $45 million related to ERDC. WPD Midlands recorded an additional $15 million of total separation benefits in 2012, of which $13 million related to severance compensation and $2 million related to ERDC. The accrued severance compensation is reflected in "Other current liabilities" and the ERDC reduced "Other noncurrent assets"progress" 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 and included in the U.K. Regulated segment were as follows.
Operating Revenues | | | | | $ | 790 |
Net Income Attributable to PPL Shareowners | | | | | | 137 |
Pro forma Information
The pro forma financial information, which includes WPD Midlands as if the acquisition had occurred January 1, 2010, is as follows.
| | | | | | | | 2011 |
| | | | | | | | | | | |
Operating Revenues - PPL consolidated pro forma (unaudited) | | | | | | | | | | $ | 13,140 |
Net Income Attributable to PPL Shareowners - PPL consolidated pro forma (unaudited) | | | | | | | | | | | 1,800 |
The pro forma financial information presented above has been derived from the historical combined financial statements of WPD Midlands, which was acquired on April 1, 2011. Income (loss) from discontinued operations (net of income taxes), which was not significant for 2011, was excluded from the pro forma amounts above.
The pro forma financial information presented above includes adjustments to depreciation, net periodic pension costs, interest expense and the related income tax effects to reflect the impact of the acquisition. The pre-tax nonrecurring credits (expenses) presented in the following table were directly attributable to the acquisition and adjustments were included in the calculation of pro forma operating revenue and net income to remove the effect of these nonrecurring items and the related income tax effects.
| | | Income Statement | | | | |
| | | Line Item | | | | | | | | | 2011 |
| | | | | | | | | | | | | | | |
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) |
(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." |
Lessee Transactions
(PPL and PPL Energy Supply)
Kerr Dam
Under the Kerr Hydroelectric Project No. 5 joint operating license issued by the FERC, PPL Montana is responsible to make payments to the Confederated Salish and Kootenai Tribes of the Flathead Nation for the use of certain of their tribal lands in connection with the operation of Kerr Dam. This 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, at 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 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)
Other7. Leases
PPLTalen Energy and its subsidiaries have entered into various agreements for the lease of office space, vehicles, land, gas storage and other equipment.
Rent - Operating Leases At December 31, 2015, Talen Energy's most significant lease, which expires in 2018, relates to its corporate headquarters.
Rent expense for the years ended December 31 for operating leases was as follows:
| | | 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 |
|
| | | | | | | | | | | |
| 2015 | | 2014 | | 2013 |
| $ | 14 |
| | $ | 29 |
| | $ | 55 |
|
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 |
Total future minimum rental payments for all operating leases are estimated to be: |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
2016 | | 2017 | | 2018 | | 2019 | | 2020 | | Thereafter | | Total |
$ | 19 |
| | $ | 18 |
| | $ | 8 |
| | $ | 5 |
| | $ | 5 |
| | $ | 26 |
| | $ | 81 |
|
8. Stock-Based Compensation
12. Stock-Based CompensationStock Incentive Plan
(All Registrants except LG&E and KU)
In 2012, shareowners approved the PPL SIP. This new equity plan replaces the PPL ICP and incorporates the following changes:
· | Eliminates the potential to pay dividend equivalents on stock options. |
· | Eliminates the automatic lapse of restrictions on all equity awards in the event of a "potential" change in control and requires that a termination of employment occur in the event of a change in control before restrictions lapse. |
· | Changes the treatment of outstanding stock options upon retirement to limit the exercise period to the earlier of the end of the term (ten years from grant) or five years after retirement. |
To further align the executives' interests with those of PPL shareowners, this plan provides that each restricted stock unit entitles the executiveTalen Energy Corporation grants share-based compensation 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 grantedeligible participants under the ICP and ICPKE are currently paid in cash when dividends are declared by PPL.
Talen Energy Stock Incentive Plan (SIP). Under the ICP, SIP, and the ICPKE (together, the Plans), restricted shares of PPL commonTalen Energy Corporation stock, restricted stock units, performance units, stock options and stock optionsappreciation rights may be granted to officers, directors and other key employees. Additionally, Talen Energy Corporation will match shares of its common stock purchased by certain employees on the open market from June 1, 2015 through March 31, 2018 with grants of PPL, PPL Energy Supply, PPL Electric, LKE and other affiliated companies.restricted stock units, subject to certain restrictions (Matching Grants). Awards under the PlansSIP are made by the Compensation, Governance and Nominating Committee (CGNC) of the PPLTalen Energy Corporation 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.or its delegate.
The following table details the award limits under eachtotal number of the plans.
| | | | Annual Grant Limit | | | | Annual Grant Limit |
| | | | Total As % of | | | | For Individual Participants - |
| | Total Plan | | Outstanding | | Annual Grant | | Performance Based Awards |
| | Award | | PPL Common Stock | | Limit | | For awards | | For awards |
| | Limit | | On First Day of | | Options | | denominated in | | denominated in |
Plan | | (Shares) | | Each Calendar Year | | (Shares) | | shares (Shares) | | cash (in dollars) |
| | | | | | | | | | | |
ICP (a) | | 15,769,431 | | 2% | | 3,000,000 | | | | | |
SIP | | 10,000,000 | | | | 2,000,000 | | 750,000 | | $ | 15,000,000 |
ICPKE | | 14,199,796 | | 2% | | 3,000,000 | | | | | |
(a) | Applicable to outstanding awards granted from January 27, 2006 to January 26, 2012. During 2012, the total plan award limit was reached and the ICP was replaced by the SIP. |
Any portion of these awards that has not been grantedshares which may be carried overissued under the plan is 5,630,000 and used in any subsequent year. If any award lapses,the maximum number of shares for which stock options may be granted is forfeited or the rights of the participant terminate, the shares of PPL common stock underlying such an award are again available for grant.2,000,000. Shares delivered under the PlansSIP may be in the form of authorized and unissued PPLTalen Energy Corporation common stock or 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.Talen Energy Corporation.
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 plan provisions for termination, retirement, disability and death of employees. Restricted shares vest fully, 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 PPLa share of Talen Energy Corporation common stock on the date of grant. Actual PPLTalen Energy Corporation common shares will be issued upon completion of a vesting period of three years,
aside from Matching Grants that generally three years.vest two years from the date of grant. Substantially all restricted stock unit awards are expected to vest.
The fair value of restricted stock and restricted stock units granted is recognized as compensation expense on a straight-line basis over the service period or through the date at which the employee reaches retirement eligibility. The fair value of 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.period. Restricted stock and restricted stock units are subject to forfeiture or accelerated payout under the planpertinent award agreement provisions for termination, retirement, disability and death of employees. Restricted stock and restricted stock units vest fully, in certain situations, as defined by each ofin the Plans.
applicable award agreement. The total restricted stock units granted, nonvested and outstanding through December 31, 2015 was 265,849 and the weighted-average grant date fair value of restricted stock and restricted stock units granted was:per share was $18.74.
| | | 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 | | | |
Stock Options
RestrictedStock options have been granted with an option exercise price per share not less than the fair value of Talen Energy Corporation's common stock and restricted stock unit activity for 2013 was:
| | | | | | Weighted- |
| | | | | | Average |
| | | | Restricted | | Grant Date Fair |
| | | | Shares/Units | | Value Per Share |
PPL | | | | | | |
Nonvested, beginning of period | | | 2,503,770 | | $ | 27.73 |
| Granted | | | 1,307,951 | | | 30.30 |
| Vested | | | (638,421) | | | 29.19 |
| Forfeited | | | (32,700) | | | 28.61 |
Nonvested, end of period | | | 3,140,600 | | | 28.50 |
| | | | | | | |
PPL Energy Supply | | | | | | |
Nonvested, beginning of period | | | 1,060,686 | | $ | 27.95 |
| Transferred | | | 3,820 | | | 27.31 |
| Granted | | | 527,440 | | | 30.42 |
| Vested | | | (236,382) | | | 29.10 |
| Forfeited | | | (12,160) | | | 29.04 |
Nonvested, end of period | | | 1,343,404 | | | 28.71 |
| | | | | | | |
PPL Electric | | | | | | |
Nonvested, beginning of period | | | 261,228 | | $ | 27.30 |
| Transferred | | | (5,810) | | | 27.48 |
| Granted | | | 108,990 | | | 30.55 |
| Vested | | | (94,008) | | | 28.41 |
| Forfeited | | | (4,850) | | | 28.61 |
Nonvested, end of period | | | 265,550 | | | 28.22 |
| | | | | | 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 |
on the date of grant. Options 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 Talen Energy or a subsidiary. The CGNC has discretion to accelerate the exercisability of the options. All options expire no later than ten years from the grant date. The options become exercisable immediately in certain situations, as defined by the pertinent award agreement. The fair value of options granted is recognized as compensation expense on a straight-line basis over the service period. Substantially all restricted stock and restricted stock unitoption awards are expected to vest.
The total stock options granted, nonvested and outstanding through December 31, 2015 was 991,101 and the grant date fair value per share was $4.91. The weighted-average exercise price per share is $19.00 and the weighted-average remaining contractual term is 9.4 years. The stock options outstanding at December 31, 2015 are currently out of the money.
The total fair value of restrictedeach option granted is estimated using a Black-Scholes option-pricing model. Talen Energy uses a risk-free interest rate, expected option life and expected volatility to value its stock and restrictedoptions. Talen Energy Corporation does not currently expect to pay dividends, therefore a dividend yield assumption is not used to value stock units vestingoptions. The risk-free interest rate reflects the yield for a U.S. Treasury Strip available on the years ended December 31 was:date of grant with constant rate maturity approximating the option's expected life. Expected life was calculated using the simplified method described in SEC Staff Accounting Bulletin (SAB) 107/110 (updated by SAB 110). Expected volatility is derived from the historical volatility of a peer group selected by management as Talen Energy Corporation's common stock does not have a trading history.
| | | 2013 | | 2012 | | 2011 |
| | | | | | | | | | |
PPL | | $ | 19 | | $ | 27 | | $ | 19 |
PPL Energy Supply | | | 7 | | | 6 | | | 6 |
PPL Electric | | | 3 | | | 2 | | | 2 |
LKE | | | 1 | | | 4 | | | 1 |
The assumptions used in the model were: |
| | |
Risk-free interest rate | 2.05 | % |
Expected option life | 6.00 years |
|
Expected stock volatility | 21.55 | % |
Performance Units
Performance units are intended to encourage and reward future corporate performance. Performance units represent a target number of shares (Target Award) of PPL'sTalen Energy Corporation's common stock that the recipient would receive upon PPL'sTalen Energy Corporation's attainment of thean applicable performance goal. PerformanceFor awards granted in 2015, Talen Energy Corporation uses TSR, which is determined based on total shareowner returnTSR during a three-year performance period. At the end of the performance period, payout is determined by comparing PPL's performanceTalen Energy Corporation's TSR to the total shareowner returnTSR of thepeer group companies included in an index group, in the 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.that Talen Energy Corporation has selected. Awards are payable on a graduated basis, based on thresholds that measure PPL'sTalen Energy Corporation's performance relative to peers that comprise the applicable indexpeer group companies, on which each years' awards are measured. Awards can be paid up to 200% of the Target Awardtarget award or forfeited with no payout if performance is below 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 planpertinent award agreement provisions, performance units are subject to forfeiture upon termination of employment except for retirement,in the event of a 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, in certain situations, as defined by each of the Plans.applicable award agreement.
The fair value of each performance unitunits granted was estimated using a Monte Carlo pricing model that considers stock beta, a risk-free interest rate,values market based performance conditions such as TSR. The model assumed an expected stock volatility and expected life. The stock betaof 31.8% that was calculated comparingbased on the risk of the individual securities to the average risk of the companies in the index group. The risk-free interest rate reflects the yieldhistorical volatility based on a U.S. Treasury bond commensurate with the expected life of the performance unit. Volatility over the expected term of the performance unit is calculated using daily stock price observations for PPL and all companies in the indexchanges of peer 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.companies.
The weighted-average assumptions used intotal performance units granted, nonvested and outstanding through December 31, 2015 was 158,900 and the model were:
| | | | 2013 | | | 2012 | | | 2011 |
| | | | | | | | | | |
Risk-free interest rate | | | 0.36% | | | 0.30% | | | 1.00% |
Expected stock volatility | | | 15.50% | | | 19.30% | | | 23.40% |
Expected life | | | 3 years | | | 3 years | | | 3 years |
The weighted-average grant date fair value of performance units granted was:was $21.17 per share.
| | | 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 |
102
| | | | | | 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 OptionsDirectors Deferred Compensation Plan
Under the Plans,Talen Energy Corporation Directors Deferred Compensation Plan, or DDCP, stock options may beunits are granted to eligible directors of Talen Energy Corporation in connection with an option exercise price per share not less thantheir retainers for service on Talen Energy Corporation’s board of directors and its committees. Stock units are based on the fair market value of PPL'sa share of Talen Energy Corporation’s common stock on the date of grant. Options outstanding atThe total number of stock units granted under the DDCP through 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. 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 in certain situations, as defined by each of the Plans. The fair value of options granted is recognized as compensation expense on a straight-line basis over the service period or through the date at which the employee reaches retirement eligibility. The fair value of options granted to retirement-eligible employees is recognized as compensation expense immediately upon the date of grant.
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, expected 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 and 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 date2015 was 34,967 and the forecasted stock price. The assumptions used in the model were:
| | | 2013 | | 2012 | | 2011 |
| | | | | | | | | | |
Risk-free interest rate | | | 1.15% | | | 1.13% | | | 2.34% |
Expected option life | | | 6.48 years | | | 6.17 years | | | 5.71 years |
Expected stock volatility | | | 18.50% | | | 20.60% | | | 21.60% |
Dividend yield | | | 5.00% | | | 5.00% | | | 5.93% |
The weighted-averageweighted average grant date fair value of options granted was:
| | | 2013 | | 2012 | | 2011 |
| | | | | | | | | | |
PPL | | $ | 2.18 | | $ | 2.48 | | $ | 2.47 |
PPL Energy Supply | | | 2.19 | | | 2.51 | | | 2.47 |
PPL Electric | | | 2.19 | | | 2.50 | | | 2.47 |
LKE | | | 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 2013 was $6 million and was not significant for 2012 and 2011.$13.23 per share.
Compensation Expense
CompensationThe year ended December 31, 2015 includes an insignificant amount of compensation expense for Talen Energy Corporation restricted stock units, performance units and stock options accounted for as equity awards.
The year ended December 31, 2014 includes compensation expense of $33 million and the associated income tax benefit of $14 million for restricted stock, restricted stock units, performance units and stock options accounted for as equity awards was as follows:from PPL, which included an allocation of PPL Services' expense.
| | | 2013 | | 2012 | | 2011 |
| | | | | | | | | | |
PPL | | $ | 52 | | $ | 49 | | $ | 36 |
PPL Energy Supply | | | 27 | | | 23 | | | 16 |
PPL Electric | | | 10 | | | 11 | | | 8 |
LKE | | | 8 | | | 8 | | | 5 |
The year ended December 31, 2013 includes compensation expense of $27 million and the associated income tax benefit related to above compensation expense was as follows:
| | | 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 exercisedof $11 million for 2013 was not significant.
At December 31, 2013, unrecognized compensation expense related to nonvested restricted stock, restricted stock units, performance units and stock options accounted for as equity awards from PPL, which included an allocation of PPL Services' expense.
At December 31, 2015, unrecognized compensation expense and the weighted-average period for recognition related to nonvested restricted stock units, performance units and stock option awards was:from Talen Energy was $11 million and 2.4 years.
Prior to the spinoff, restricted shares of PPL common stock and related restricted stock units, performance units and stock options were granted to officers and other key employees of Talen Energy. At December 31, 2014, these employees of Talen Energy had 1,457,900 of unvested shares of restricted stock and restricted stock units, 291,492 of performance units and 2,745,016 of outstanding stock options issued by PPL. The vesting of these awards was accelerated in 2015 in connection with the spinoff from PPL. See Note 1 for information on the recording of expense related to this acceleration and additional information on the spinoff from PPL. For the year ended December 31, 2015, compensation expense for these awards, excluding the acceleration, but including an allocation of PPL Services' compensation expense for similar awards, was $18 million.
| | | | | 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 |
13.9. Retirement and Postemployment Benefits
(All Registrants)
Defined Benefits
ThePrior to the June 1, 2015 spinoff, the majority of PPL's subsidiaries domesticTalen Energy Supply's employees arewere eligible for pension benefits under a PPL non-contributory defined benefit pension plansplan, with benefits based on length of service and either career average pay or final average pay, as defined by the plans. Effective Januaryplan. Prior to the June 1, 2012, PPL's domestic qualified pension plans were2015 spinoff, this plan was closed to all newly hired salaried employees. Newly hired bargaining unit employees continue to be eligible under the plans based on their collective bargaining agreements. Salaried employees hired on or after January 1, 2012 arewere eligible to participate in thea PPL Retirement Savings Plan, a 401(k) savings plan with enhanced employer matching.contributions. Talen Energy was allocated costs of the PPL pension plan based on its employees' participation in the plan. Employees who participated in this PPL pension plan who became employees of Talen Energy Supply transferred into a newly created pension plan sponsored by Talen Energy Supply, which provides benefits similar to that of the PPL pension plan.
Prior to the June 1, 2015 spinoff, the majority of Talen Energy Supply's employees were also eligible for certain health care and life insurance benefits upon retirement through the PPL other postretirement benefit plans, which prior to June 1, 2015, were closed to all newly hired employees. Talen Energy Supply was allocated costs of the PPL plans based on its employees' participation in the plans. Employees who participated in the health care and life insurance plans and who became employees of Talen Energy Supply transferred into the newly created Talen Energy other postretirement benefit plans sponsored by Talen Energy Supply, which provide benefits similar to those of the PPL other postretirement benefit plans.
A remeasurement of the assets and the obligations for the PPL pension and other postretirement benefit plans was performed as of May 31, 2015 in order to separate the assets and obligations of the PPL plans attributable to Talen Energy, as required by the spinoff agreements. The Talen Energy pension plan assumed from PPL the pension benefit obligations for active plan participants who became employees of Talen Energy in connection with the spinoff and for individuals who terminated employment from Talen Energy Supply on or after July 1, 2000. A portion of the PPL pension plan assets were also allocated to the new Talen Energy pension plan. The asset allocation was based on the rules prescribed by ERISA (Employee Retirement Income Security Act) for allocating assets in connection with a pension plan spinoff. The Talen Energy other postretirement benefit plans assumed the other postretirement benefit obligations from PPL for active plan participants who became
employees of Talen Energy in connection with the spinoff. PPL retained obligations attributable to existing retirees as of the date of the spinoff. A portion of the PPL other postretirement benefit plan assets, which were held in VEBA trusts and a 401(h) account, were also allocated to the new Talen Energy other postretirement benefit plans. The asset allocation was determined separately for each funding vehicle based on the ratio of the accumulated postretirement benefit obligation (APBO) assumed by Talen Energy to the total APBO attributed to each funding vehicle. As a result of the above, the net funded status of the new Talen Energy pension and other postretirement benefit plans at June 1, 2015 was a liability of $257 million.
The majority of PPL MontanaTalen Montana's employees are eligible for pension benefits under a cash balance pension plan. Effective January 1, 2012, that plan was closed to all newly hired salaried employees. Eligibility ofEffective September 1, 2014, that plan was closed to all newly hired bargaining unit employees under the plan is based on their collective bargaining agreements. Salaried employeesemployees. Newly hired on or after January 1, 2012employees are eligible to participate in the PPL Retirement Savings Plan.
a 401(k) savings plan with enhanced employer contributions. The defined benefit pension plansmajority of LKETalen Montana's employees are also eligible for certain health care and its subsidiaries werelife insurance benefits upon retirement, under a retiree health plan sponsored by Talen Montana, which is now closed to new salariednewly hired employees. There were no changes to the pension and bargaining unitother postretirement benefit plans for employees hired after December 31, 2005. Employees hired after December 31, 2005 receive additional company contributions aboveof Talen Montana as a result of the standard matching contributionsspinoff transaction. However, PPL retained the liability for other postretirement benefits attributable to their savings plans.existing retirees of Talen Montana as of the date of the spinoff.
Employees of certain of PPL Energy Supply'sTalen Energy's mechanical contracting companies are eligible for benefits under multiemployer plans sponsored by various unions.
Effective April 1, 2010, PPL 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 plans 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.
The majority of employees of PPL's domestic subsidiaries are eligible for certain health care and life insurance benefits upon retirement through contributory plans. Effective January 1, 2014, the PPL Postretirement Medical Plan was closed to newly hired salaried employees. Postretirement health benefits may be paid from 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 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 table provides the components of net periodic defined benefit costs for PPL's domestic (U.S.) and WPD (U.K.)Talen Energy pension and other postretirement benefit plans for the years ended December 31.31, for which the 2015 periods include seven months of costs under the newly formed Talen Energy plans and a full year of Talen Montana plans. |
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Postretirement Benefits |
| 2015 |
| 2014 |
| 2013 | | 2015 | | 2014 | | 2013 |
Net periodic defined benefit costs (credits): | | | | | | | | | | | |
Service cost | $ | 31 |
| | $ | 5 |
| | $ | 7 |
| | $ | 2 |
| | $ | — |
| | $ | 1 |
|
Interest cost | 46 |
| | 9 |
| | 8 |
| | 2 |
| | 1 |
| | — |
|
Expected return on plan assets | (60 | ) | | (11 | ) | | (10 | ) | | (3 | ) | | — |
| | — |
|
Amortization of: | | | | | | | | | | | |
Actuarial (gain) loss | 16 |
| | 2 |
| | 3 |
| | — |
| | — |
| | — |
|
Curtailment charges (credits) | — |
| | — |
| | — |
| | — |
| | (1 | ) | | — |
|
Net periodic defined benefit costs (credits) | $ | 33 |
|
| $ | 5 |
|
| $ | 8 |
|
| $ | 1 |
|
| $ | — |
|
| $ | 1 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Postretirement Benefits |
| 2015 | | 2014 | | 2013 | | 2015 | | 2014 | | 2013 |
Other changes in plan assets and benefit obligations recognized in OCI: | | | | | | | | | | | |
Curtailments | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | — |
|
Net (gain) loss | 54 |
| | 26 |
| | (15 | ) | | — |
| | (1 | ) | | (1 | ) |
Prior service cost (credit) | 3 |
| | — |
| | — |
| | — |
| | — |
| | (3 | ) |
Amortization of: | | | | | | | | | | | |
Actuarial gain (loss) | (16 | ) | | (2 | ) | | (3 | ) | | — |
| | — |
| | — |
|
Prior service credit (cost) | — |
| | — |
| | — |
| | 1 |
| | — |
| | — |
|
Total recognized in OCI | 41 |
| | 24 |
| | (18 | ) | | 1 |
| | — |
| | (4 | ) |
Total recognized in net periodic defined benefit costs and OCI | $ | 74 |
| | $ | 29 |
| | $ | (10 | ) | | $ | 2 |
| | $ | — |
| | $ | (3 | ) |
| | | | Pension Benefits | | | | | | | | | |
| | | | U.S. | | U.K. | | Other Postretirement Benefits |
| | | | 2013 | | 2012 | | 2011 | | 2013 | | 2012 | | 2011 | | 2013 | | 2012 | | 2011 |
Net periodic defined benefit costs | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (credits): | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Service cost | | $ | 126 | | $ | 103 | | $ | 95 | | $ | 69 | | $ | 54 | | $ | 44 | | $ | 14 | | $ | 12 | | $ | 12 |
Interest cost | | | 213 | | | 220 | | | 217 | | | 320 | | | 340 | | | 282 | | | 29 | | | 31 | | | 33 |
Expected return on plan assets | | | (293) | | | (259) | | | (245) | | | (465) | | | (458) | | | (338) | | | (25) | | | (23) | | | (23) |
Amortization of: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Transition (asset) obligation | | | | | | | | | | | | | | | | | | | | | | | | 2 | | | 2 |
| | Prior service cost (credit) | | | 22 | | | 24 | | | 24 | | | 1 | | | 4 | | | 4 | | | | | | 1 | | | |
| | Actuarial (gain) loss | | | 80 | | | 42 | | | 30 | | | 150 | | | 79 | | | 57 | | | 6 | | | 4 | | | 6 |
Net periodic defined benefit costs | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (credits) prior to settlement | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| charges and termination benefits | | | 148 | | | 130 | | | 121 | | | 75 | | | 19 | | | 49 | | | 24 | | | 27 | | | 30 |
Settlement charges | | | | | | 11 | | | | | | | | | | | | | | | | | | | | | |
Termination benefits (a) | | | | | | | | | | | | 3 | | | 2 | | | 50 | | | | | | | | | |
Net periodic defined benefit costs | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (credits) | | $ | 148 | | $ | 141 | | $ | 121 | | $ | 78 | | $ | 21 | | $ | 99 | | $ | 24 | | $ | 27 | | $ | 30 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other Changes in Plan Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| and Benefit Obligations | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Recognized in OCI and | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Regulatory Assets/Liabilities - | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gross: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Settlements | | | | | $ | (11) | | | | | | | | | | | | | | | | | | | | | |
Net (gain) loss | | $ | (319) | | | 372 | | $ | 117 | | $ | 76 | | $ | 1,073 | | $ | 152 | | $ | (68) | | $ | 13 | | $ | (9) |
Prior service cost | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (credit) | | | | | | | | | 8 | | | | | | | | | | | | (3) | | | (1) | | | 10 |
Amortization of: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Transition asset (obligation) | | | | | | | | | | | | | | | | | | | | | | | | (2) | | | (2) |
| | Prior service (cost) credit | | | (22) | | | (24) | | | (24) | | | (1) | | | (4) | | | (4) | | | | | | (1) | | | |
| | Actuarial gain (loss) | | | (80) | | | (42) | | | (30) | | | (150) | | | (79) | | | (57) | | | (6) | | | (4) | | | (6) |
Total recognized in OCI and | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| regulatory assets/liabilities (b) | | | (421) | | | 295 | | | 71 | | | (75) | | | 990 | | | 91 | | | (77) | | | 5 | | | (7) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total recognized in net periodic | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| defined benefit costs, OCI and | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| regulatory assets/liabilities (b) | | $ | (273) | | $ | 436 | | $ | 192 | | $ | 3 | | $ | 1,011 | | $ | 190 | | $ | (53) | | $ | 32 | | $ | 23 |
(a) | Related to the WPD Midlands separations in the U.K. |
(b) | WPD is not subject to accounting for the effects of certain types of regulation as prescribed by GAAP. As a result, WPD does not record regulatory assets/liabilities. |
For PPL's U.S. pension benefits and for other postretirement benefits, the amounts recognized in OCI and regulatory assets/liabilities for the years ended December 31 were as follows:
| | | U.S. Pension Benefits | | | Other Postretirement Benefits |
| | | | 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 2014 are as follows:
| | | | | | |
| | Pension Benefits |
| | U.S. | | U.K. |
| | | | | | |
Prior service cost (credit) | | $ | 20 | | | |
Actuarial (gain) loss | | | 30 | | $ | 131 |
Total | | $ | 50 | | $ | 131 |
| | | | | | |
Amortization from Balance Sheet: | | | | | | |
AOCI | | $ | 22 | | $ | 131 |
Regulatory assets/liabilities | | | 28 | | | |
Total | | $ | 50 | | $ | 131 |
(PPL Energy Supply)
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$20 million related to PPL Energy Supply's pension planthese plans is expected to be amortized from AOCI into net periodic defined benefit costs in 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 |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | 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 LKE's pension and other postretirement benefits, the amounts 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 regulatory assets/liabilities into 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 |
| | | | 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)2016.
The following net periodic defined benefit costs (credits) were charged to operating expense, excluding amounts charged to construction and other non-expense accounts. The U.K. pension benefits apply to PPL only.
| | Pension Benefits | | | | | | | | | |
| | U.S. | | U.K. | | Other Postretirement Benefits |
| | 2013 | | 2012 | | 2011 | | 2013 | | 2012 | | 2011 | | 2013 | | 2012 | | 2011 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
PPL | | $ | 117 | | $ | 119 | | $ | 98 | | $ | 33 | | $ | 25 | | $ | 82 | | $ | 19 | | $ | 22 | | $ | 24 |
PPL Energy Supply | | | 45 | | | 37 | | | 27 | | | | | | | | | | | | 6 | | | 6 | | | 7 |
PPL Electric (a) | | | 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 |
Table of Contents
(a) | PPL Electric and KU 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 their participation in those plans, which management believes are reasonable. |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Postretirement Benefits |
| 2015 | | 2014 | | 2013 | | 2015 | | 2014 | | 2013 |
| $ | 48 |
| | $ | 39 |
| | $ | 45 |
| | $ | 2 |
| | $ | 3 |
| | $ | 6 |
|
In the table above, for PPL Energy Supply and LG&E, amounts include costs for the specific plans each sponsorssponsored by Talen Energy and its subsidiaries and the following allocated costs of definedthe PPL pension and other postretirement benefit plans sponsored by PPL Services (for PPL Energy Supply) and by LKE (for LG&E),prior to the spinoff, based on theirTalen Energy Supply's participation in those plans, which management believes are reasonable:
were reasonable at the time:
| | | | 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 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Postretirement Benefits |
| 2015 | | 2014 | | 2013 | | 2015 | | 2014 | | 2013 |
| $ | 16 |
| | $ | 34 |
| | $ | 38 |
| | $ | — |
| | $ | 3 |
| | $ | 5 |
|
(All Registrants except PPL ElectricAt December 31, 2014 or June 1, 2015, as applicable, the plan sponsors adopted the mortality tables issued by the Society of Actuaries in October 2014 (RP-2014 base tables) for all applicable defined benefit pension and KU)other postretirement benefit plans. At December 31, 2014 or June 1, 2015, as applicable, the plan sponsors also selected the IRS BB 2-Dimensional mortality improvement scale on a generational basis for all applicable defined benefit pension and other postretirement benefit plans. These mortality assumptions reflect the recognition of both improved life expectancies and the expectation of continuing improvements in life expectancies.
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 | | Other Postretirement Benefits |
| 2015 | | 2014 | | 2015 | | 2014 |
Discount rate | 4.65 | % | | 4.28 | % | | 4.60 | % | | 3.81 | % |
Rate of compensation increase | 3.98 | % | | 4.03 | % | | 3.98 | % | | 4.03 | % |
| | | 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% |
| | | | | | | | | | | | | | | | | | |
| | | 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 Talen Energy's plans for the years ended December 31. The U.K. pension benefits apply to PPL only.
|
| | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Postretirement Benefits |
| 2015 | | 2014 | | 2013 | | 2015 | | 2014 | | 2013 |
Discount rate | 4.41 | % | | 5.18 | % | | 4.25 | % | | 4.27 | % | | 4.51 | % | | 3.77 | % |
Rate of compensation increase | 3.99 | % | | 3.94 | % | | 3.95 | % | | 3.99 | % | | 3.94 | % | | 3.95 | % |
Expected return on plan assets (a) | 7.00 | % | | 7.00 | % | | 7.00 | % | | 6.37 | % | | 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 pension and other postretirement benefits are based on management's projections using a best-estimate of expected returns, volatilities and correlations for each asset class. Each plan's specific current and expected asset allocations are also considered in developing a reasonable return assumption. |
(PPL, PPL Energy Supply and LKE)
The following table provides the assumed health care cost trend rates for the years ended December 31:31.
|
| | | | | | | | |
| 2015 | | 2014 | | 2013 |
Health care cost trend rate assumed for next year | | | | | |
obligations | 6.80 | % | | 7.20 | % | | 7.60 | % |
costs | 7.20 | % | | 7.60 | % | | 8.00 | % |
Rate to which the cost trend rate is assumed to decline (the ultimate trend) | | | | | |
obligations | 5.00 | % | | 5.00 | % | | 5.00 | % |
costs | 5.00 | % | | 5.00 | % | | 5.50 | % |
Year that the rate reaches the ultimate trend rate | | | | | |
obligations | 2020 |
| | 2020 |
| | 2020 |
|
costs | 2020 |
| | 2020 |
| | 2019 |
|
| | | | | 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 |
A one percentage point change in the assumed health care costs trend rate assumption would have had the following effects onbeen insignificant to the other postretirement benefit plans in 2013:2015.
| | | One Percentage Point |
| | | Increase | | Decrease |
Effect on accumulated postretirement benefit obligation | | | | | | |
| PPL | | $ | 6 | | $ | (5) |
| LKE | | | 5 | | | (4) |
Table of ContentsThe effects on PPL Energy Supply's other postretirement benefit plan would not have been significant.
(PPL)
The funded status of PPL'sTalen Energy's plans at December 31 was as follows:
| | | | | Pension Benefits | | | | | | | | | | | | | |
| | | | U.S. | | U.K. | | Other Postretirement Benefits | Pension Benefits | | Other Postretirement Benefits |
| | | | 2013 | | 2012 | | 2013 | | 2012 | | 2013 | | 2012 | 2015 | | 2014 | | 2015 | | 2014 |
Change in Benefit Obligation | Change in Benefit Obligation | | | | | | | | | | | | | | | | | | | | |
Benefit Obligation, beginning of period | | $ | 5,046 | | $ | 4,381 | | $ | 7,888 | | $ | 6,638 | | $ | 722 | | $ | 687 | |
| | Service cost | | | 126 | | 103 | | 69 | | 54 | | 14 | | 12 | |
| | Interest cost | | | 213 | | 220 | | 320 | | 340 | | 29 | | 31 | |
| | Participant contributions | | | | | | | 15 | | 15 | | 12 | | 6 | |
| | Plan amendments | | | | | | | | | | | (4) | | (1) | |
| | Actuarial (gain) loss | | | (540) | | 546 | | 46 | | 1,081 | | (54) | | 31 | |
| | Settlements | | | | | (25) | | | | | | | | | |
| | Termination benefits | | | | | | | 3 | | 2 | | | | | |
| | Net transfer in (out) | | | | | | | | | 12 | | | | | |
| | Actual expenses paid | | | | | (3) | | | | | | | | | |
| | Gross benefits paid (a) | | | (254) | | (176) | | (375) | | (397) | | (57) | | (46) | |
| | Federal subsidy | | | | | | | | | | | | | 2 | |
| | Currency conversion | | | | | | | | | 177 | | | 143 | | | | | | | |
Benefit Obligation, end of period | | | 4,591 | | | 5,046 | | | 8,143 | | | 7,888 | | | 662 | | | 722 | |
Benefit obligation, beginning of period | | $ | 210 |
| | $ | 163 |
| | $ | 10 |
| | $ | 12 |
|
Transfer of benefit obligation at spinoff (a) | | 1,416 |
| | — |
| | 80 |
| | — |
|
Service cost | | 31 |
| | 5 |
| | 2 |
| | — |
|
Interest cost | | 46 |
| | 9 |
| | 2 |
| | 1 |
|
Plan amendments | | 3 |
| | — |
| | — |
| | — |
|
Actuarial (gain) loss | | (41 | ) | | 38 |
| | (4 | ) | | (1 | ) |
Net Transfers in (out) | | — |
| | — |
| | (3 | ) | | — |
|
Curtailments | | — |
| | — |
| | — |
| | (1 | ) |
Gross benefits paid | | (51 | ) | | (5 | ) | | — |
| | (1 | ) |
Benefit obligation, end of period | | $ | 1,614 |
| | $ | 210 |
| | $ | 87 |
| | $ | 10 |
|
| | | | | | | | | | | | | | | | | | | | | | |
Change in Plan Assets | Change in Plan Assets | | | | | | | | | | | | | | | | | | | | |
Plan assets at fair value, beginning of period | Plan assets at fair value, beginning of period | | | 3,939 | | 3,471 | | 6,911 | | 6,351 | | 421 | | 391 | $ | 170 |
| | $ | 147 |
| | $ | — |
| | $ | — |
|
Transfer of plan assets at fair value at spinoff (a) | | 1,159 |
| | — |
| | 80 |
| | — |
|
Actual return on plan assets | | (35 | ) | | 22 |
| | (2 | ) | | — |
|
Employer contributions | | 32 |
| | 6 |
| | 1 |
| | 1 |
|
Gross benefits paid | | (52 | ) | | (5 | ) | | (1 | ) | | (1 | ) |
Plan assets at fair value, end of period | | 1,274 |
| | 170 |
| | 78 |
| | — |
|
Funded status end of period | | $ | (340 | ) | | $ | (40 | ) | | $ | (9 | ) | | $ | (10 | ) |
| | Actual return on plan assets | | | 72 | | 432 | | 438 | | 476 | | 37 | | 42 | | | | | | | |
| | Employer contributions | | | 399 | | 239 | | 134 | | 341 | | 30 | | 27 | |
| | Participant contributions | | | | | | | 15 | | 15 | | 12 | | 5 | |
| | Settlements | | | | | (25) | | | | | | | | | |
| | Actual expenses paid | | | | | (2) | | | | | | | | | |
| | Gross benefits paid (a) | | | (254) | | (176) | | (375) | | (397) | | (54) | | (44) | |
| | Currency conversion | | | | | | | | | 161 | | | 125 | | | | | | | |
Plan assets at fair value, end of period | | | 4,156 | | | 3,939 | | | 7,284 | | | 6,911 | | | 446 | | | 421 | |
| | | | | | | | | | | | | | | | |
Funded Status, end of period | | $ | (435) | | $ | (1,107) | | $ | (859) | | $ | (977) | | $ | (216) | | $ | (301) | |
| | | | | | | | | | | | | | | | |
Amounts recognized in the Balance | | | | | | | | | | | | | | |
| Sheets consist of: | | | | | | | | | | | | | | |
| | Current liability | | $ | (8) | | $ | (8) | | | | | | $ | (1) | | $ | (1) | |
| | Noncurrent liability | | | (427) | | | (1,099) | | $ | (859) | | $ | (977) | | | (215) | | | (300) | |
Amounts recognized in the Balance Sheets consist of: | | | | | | | | |
Current Liability | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (1 | ) |
Noncurrent liability | | (340 | ) | | (40 | ) | | (9 | ) | | (9 | ) |
Net amount recognized, end of period | Net amount recognized, end of period | | $ | (435) | | $ | (1,107) | | $ | (859) | | $ | (977) | | $ | (216) | | $ | (301) | $ | (340 | ) | | $ | (40 | ) | | $ | (9 | ) | | $ | (10 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Amounts recognized in AOCI and | | | | | | | | | | | | | | |
| regulatory assets/liabilities (pre-tax) | | | | | | | | | | | | | | |
| consist of: | | | | | | | | | | | | | | |
Amounts recognized in AOCI (pre-tax) consist of: | | | | | | | | |
Prior service cost (credit) | Prior service cost (credit) | | $ | 69 | | $ | 91 | | | | $ | 1 | | $ | (11) | | $ | (7) | $ | 2 |
| | $ | — |
| | $ | (5 | ) | | $ | (4 | ) |
Net actuarial (gain) loss | Net actuarial (gain) loss | | | 842 | | | 1,241 | | $ | 2,112 | | | 2,184 | | | 33 | | | 106 | 451 |
| | 59 |
| | 8 |
| | — |
|
Total (b) | | $ | 911 | | $ | 1,332 | | $ | 2,112 | | $ | 2,185 | | $ | 22 | | $ | 99 | |
Total | | $ | 453 |
| | $ | 59 |
| | $ | 3 |
| | $ | (4 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Total accumulated benefit obligation | | | | | | | | | | | | | | |
| for defined benefit pension plans | | $ | 4,191 | | $ | 4,569 | | $ | 7,542 | | $ | 7,259 | | | | | |
Total accumulated benefit obligation for defined benefit pension plans | | $ | 1,500 |
| | $ | 210 |
| |
| |
|
| |
(a) | Certain U.S.Values determined as of the spinoff date as discussed above. |
Talen Energy'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 result of $64 million of lump-sum cash payments made to terminated vested participants in 2013 in connection with these offerings.
(b) | WPD is not subject to accounting for the effects of certain types of regulation as prescribed by GAAP. As a result, WPD does not record regulatory assets/liabilities. |
For PPL's U.S. pension 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 |
| | | 2013 | | 2012 | | 2013 | | 2012 |
| | | | | | | | | |
AOCI | | $ | 430 | | $ | 659 | | $ | 19 | | $ | 59 |
Regulatory assets/liabilities | | | 481 | | | 673 | | | 3 | | | 40 |
Total | | $ | 911 | | $ | 1,332 | | $ | 22 | | $ | 99 |
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:
| | 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 plan had projected and accumulated benefit obligations in excess of the fair value of plan assets at December 31, 20132015 and 2012.2014.
In addition to the plans it sponsors, PPLTalen Energy Supply and its subsidiaries arewere 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 prior to the spinoff, which management believes are reasonable.were reasonable at that time. The actuarially determined obligations of current active employees arewere used as a basis to allocate total plan activity, including active and retiree costs and obligations. Allocations to PPLTalen Energy Supply resulted in liabilities at December 31, 2014 as follows:
| | 2013 | | 2012 |
| | | | | | |
Pension | | $ | 96 | | $ | 268 |
Other postretirement benefits | | | 35 | | | 60 |
|
| | | |
Pension plans | $ | 259 |
|
Other postretirement benefit plans | 34 |
|
(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:
| | 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 a portion of the funded status and costs of certain 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 liabilities at December 31 as follows:
| | 2013 | | 2012 |
| | | | | | |
Pension | | $ | 9 | | $ | 58 |
Other postretirement benefits | | | 73 | | | 81 |
(PPL and PPL Energy Supply)
PPL Energy Supply'sTalen Energy's mechanical contracting subsidiaries make contributions to over 7060 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:
| · | 106
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'sIf Talen Energy'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. |
PPLTalen Energy Supply identified the Steamfitters Local Union No. 420 Pension Plan, EIN/Plan Number 23-2004424/001 as the only significant plan to which the most significant contributions are made. Contributions to this plan by PPL Energy Supply'sTalen Energy's mechanical contracting companies were $5 million for 2013, 20122015, 2014 and 2011.2013. At the date the financial statements were issued, the Form 5500 was not available for the plan year ending in 2013.2015. Therefore, the following disclosures specific to this plan are being made based on the Form 5500s filed for the plan years ended December 31, 20122014 and 2011. PPL Energy Supply's2013. Talen Energy's mechanical contracting subsidiaries were notsubsidiary H.T. Lyons was identified individually as a greater than 5% contributorscontributor 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, 20122014 and 2011.2013. 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.September 18, 2016. 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.assessment.
PPL Energy Supply'sTalen Energy's mechanical contracting subsidiaries also participate in multiemployer other postretirement plans that provide for retiree life insurance and health benefits.
The table below details total contributions to all multiemployer pension and other postretirement plans, including the plan identified as significant above. The contribution amounts fluctuate each year based on the volume of work and type of projects undertaken from year to year.
| | 2013 | | 2012 | | 2011 |
| | | | | | | | | |
Pension Plans | | $ | 36 | | $ | 31 | | $ | 36 |
Other Postretirement Benefit Plans | | | 32 | | | 28 | | | 31 |
Total Contributions | | $ | 68 | | $ | 59 | | $ | 67 |
|
| | | | | | | | | | | |
| 2015 | | 2014 | | 2013 |
Pension plans | $ | 34 |
| | $ | 40 |
| | $ | 36 |
|
Other postretirement benefit plans | 26 |
| | 33 |
| | 32 |
|
Total contributions | $ | 60 |
| | $ | 73 |
| | $ | 68 |
|
(PPL Electric)Plan Assets
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 actuarially determined obligations of current active employees are used as a basis to allocate total plan activity, including active and retiree costs and obligations. Allocations to PPL Electric resulted in liabilities atAt December 31, as follows.
| | 2013 | | 2012 |
| | | | | | |
Pension | | $ | 96 | | $ | 237 |
Other postretirement benefits | | | 41 | | | 61 |
(KU)
Although KU does not directly sponsor any defined benefit plans, it is allocated a portion of the funded status and costs of 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 liabilities at December 31 as follows.
| | 2013 | | 2012 |
| | | | | | |
Pension | | $ | 11 | | $ | 104 |
Other postretirement benefits | | | 42 | | | 53 |
Plan Assets - U.S. Pension Plans
(All Registrants except PPL Electric and KU)
PPL's primary legacy pension plan, the2015, Talen Energy's pension plans sponsored by LKE and the pension plan in which employees of PPL Montana participate are invested in the PPL Services CorporationTalen Energy Retirement Plans Master Trust (the Master Trust) that also includes a 401(h) accountsaccount that areis restricted for certain other postretirement benefit obligations of Talen Energy. Prior to the spinoff from PPL, and LKE. the pension plan assets were invested by PPL in a master trust maintained by PPL.
The investment strategy for the Master Trust is to achieve a risk-adjusted return on a mix of assets that, in combination with PPL'sTalen Energy's funding policy, will ensure that sufficient assets are available to provide long-term growth and liquidity for benefit payments, while also managing the duration of the assets to complement the duration of the liabilities. The Master Trust benefits from a wide diversification of asset types, investment fund strategies and external investment fund managers, and therefore has no significant concentration of risk.
The investment policy of the Master Trust outlines investment objectives and defines the responsibilities of the EBPB,Retirement Plan Committee of Talen Energy Corporation, which is the named fiduciary, external investment managers, investment advisor and trustee and custodian. The investment policy is reviewed annually by PPL'sTalen Energy Corporation's Board of Directors.
The EBPBRetirement Plan Committee 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 asset allocation ranges have been developed for each portfolio on a plan basisthe Master Trust based on input from external consultants with a goal of limiting funded status volatility. The EBPBRetirement Plan Committee monitors the investments in each portfolio on a plan basis,the Master Trust, and seeks to
obtain a target portfolio that emphasizes reduction of risk of loss from market volatility. In pursuing that goal, the EBPBRetirement Plan Committee 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 presented below.
The asset allocation for the truststrust and the target allocation prescribed by the investment guidelines by portfolio at December 31 are as follows:
| | | | | | | | 2013 Target Asset Allocation (a) | |
| | | Percentage of trust assets | | | Weighted | | | | | | | | |
| | | | 2013 (a) | | | 2012 | | | Average | | | PPL Plans | | | LKE Plans | Percentage of trust assets | | Target Asset Allocation |
| | | | | | | | | | | | | | | | 2015 | | 2015 |
Growth Portfolio | Growth Portfolio | | 59% | | 58% | | 55% | | 55% | | 55% | 52 | % | | 55 | % |
| Equity securities | | 30% | | 31% | | | | | | | |
| Debt securities (b) | | 17% | | 18% | | | | | | | |
| Alternative investments | | 12% | | 9% | | | | | | | |
Equity securities | | 24 | % | | |
Debt securities (a) | | 14 | % | | |
Alternative investments | | 14 | % | | |
Immunizing Portfolio | Immunizing Portfolio | | 39% | | 41% | | 43% | | 43% | | 43% | 46 | % |
| 44 | % |
| Debt securities (b) | | 40% | | 40% | | | | | | | |
| Derivatives | | (1%) | | 1% | | | | | | | |
Debt securities (a) | | 40 | % | | |
Derivatives | | 6 | % | | |
Liquidity Portfolio | Liquidity Portfolio | | | 2% | | | 1% | | | 2% | | | 2% | | | 2% | 2 | % | | 1 | % |
Total | Total | | | 100% | | | 100% | | | 100% | | | 100% | | | 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)(a) | Includes commingled debt funds, which PPLTalen Energy treats as debt securities for asset allocation purposes. |
(PPL Energy Supply)
PPLPrior to the spinoff, the assets of the Talen Montana a subsidiary of PPL Energy Supply, has a pension plan whose assets arewere invested solely in the PPL Services Corporation Master Trust, which is fully disclosed below.a master trust maintained by PPL. The fair value of this plan's assets of $147 million and $149$170 million at December 31, 2013 and 2012 represents2014 represented 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 pension plan whose assets are invested solely in the PPL Services Corporation Master Trust, which is fully disclosed below. The fair value of this plan's assets of $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)PPL's master trust.
The fair value of net assets in the U.S. pension plan trustsMaster Trust by asset class and level within the fair value hierarchy was:
| | | | | December 31, 2013 | | December 31, 2012 | |
| | | | | | | | Fair Value Measurements Using | | | | | Fair Value Measurements Using | |
| | | | | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | |
PPL Services Corporation Master Trust | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 120 | | $ | 120 | | | | | | $ | 84 | | $ | 84 | | | | | |
Equity securities: | | | | | | | | | | | | | | | | | | |
| | U.S.: | | | | | | | | | | | | | | | | | | |
| | Large-cap | | | 480 | | 134 | | $ | 346 | | | | 558 | | 206 | | $ | 352 | | | | | | | | | | | |
| | Small-cap | | | 137 | | 137 | | | | | | 124 | | 124 | | | | | December 31, 2015 |
| | Commingled debt | | | 749 | | 13 | | 736 | | | | 676 | | 56 | | 620 | | | Fair Value Measurement Using |
| | International | | | 630 | | 163 | | 467 | | | | 557 | | 184 | | 373 | | | Total | | Level 1 | | Level 2 | | Level 3 |
Talen Energy Retirement Plans Master Trust | | | | | | | | |
Cash and cash equivalents | | $ | 108 |
| | $ | 108 |
| | $ | — |
| | $ | — |
|
Equity securities: | |
| | | | | | |
U.S.: | |
| | | | | | |
Large-cap | | 90 |
| | 23 |
| | 67 |
| | — |
|
Small-cap | | 33 |
| | 33 |
| | — |
| | — |
|
International | | 190 |
| | — |
| | 190 |
| | — |
|
Commingled debt | | 273 |
| | — |
| | 273 |
| | — |
|
Debt securities: | Debt securities: | | | | | | | | | | | | | | | | | |
| | | | | | |
| | U.S. Treasury and U.S. government sponsored | | | | | | | | | | | | | | | | | | |
| | agency | | | 617 | | 563 | | 54 | | | | 704 | | 634 | | 70 | | | |
| | Residential/commercial backed securities | | | 12 | | | | 11 | | $ | 1 | | 12 | | | | 11 | | $ | 1 | |
| | Corporate | | | 963 | | | | 940 | | 23 | | 874 | | | | 847 | | 27 | |
| | Other | | | 24 | | | | 24 | | | | 24 | | | | 23 | | 1 | |
| | International | | | 7 | | | | 7 | | | | 7 | | | | 7 | | | |
U.S. Treasury and U.S. government sponsored agency | | 192 |
| | 189 |
| | 3 |
| | — |
|
Corporate | | 231 |
| | — |
| | 231 |
| | — |
|
International government | | 1 |
| | — |
| | 1 |
| | — |
|
Other | | 3 |
| | — |
| | 3 |
| | — |
|
Alternative investments: | Alternative investments: | | | | | | | | | | | | | | | | | |
| | | | | | |
| | Commodities | | | 108 | | | | 108 | | | | 59 | | | | 59 | | | |
| | Real estate | | | 134 | | | | 134 | | | | 93 | | | | 93 | | | |
| | Private equity | | | 80 | | | | | | 80 | | 75 | | | | | | 75 | |
| | Hedge funds | | | 210 | | | | 210 | | | | 125 | | | | 125 | | | |
Commodities | | 28 |
| | — |
| | 28 |
| | — |
|
Real estate | | 48 |
| | — |
| | 48 |
| | — |
|
Private equity | | 31 |
| | — |
| | — |
| | 31 |
|
Hedge funds | | 69 |
| | — |
| | 69 |
| | — |
|
Derivatives: | Derivatives: | | | | | | | | | | | | | | | | | |
| | | | | | |
| | Interest rate swaps and swaptions | | | (49) | | | | (49) | | | | 36 | | | | 36 | | | |
| | Other | | | 12 | | | | 12 | | | | 2 | | | | 2 | | | |
Insurance contracts | | | 37 | | | | | | 37 | | 42 | | | | | | 42 | |
PPL Services Corporation Master Trust assets, at | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate swaps | | 32 |
| | — |
| | 32 |
| | — |
|
Other | | 5 |
| | — |
| | 5 |
| | — |
|
Talen Energy Retirement Plans Master Trust assets, at fair value | | $ | 1,334 |
|
| $ | 353 |
|
| $ | 950 |
|
| $ | 31 |
|
| 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) | | | | | | | (31 | ) | | | | | | |
401(h) account restricted for other | | | | | | | | | | | | | | | | | | |
| postretirement benefit obligations | | | (115) | | | | | | | | | (102) | | | | | | | |
Total PPL Services Corporation Master Trust | | | | | | | | | | | | | | | | | | |
| pension assets | | $ | 4,156 | | | | | | | | $ | 3,939 | | | | | | | |
401(h) accounts restricted for other postretirement benefit obligations | | (29 | ) | | | | | | |
Total Talen Energy Retirement Plans Master Trust pension assets | | $ | 1,274 |
| | | | | | |
| |
(a) | Receivables and payables represent amounts for investments sold/purchased, but not yet settled along with interest and dividends earned, but not yet received. |
A reconciliation of U.S. pension trustthe Master Trust assets classified as Level 3 at December 31, 20132015 is as follows:
| | | | Residential/ | | | | | | | | | | | |
| | | | commercial | | | | | | | | | | | |
| | | | backed | | Corporate | | Private | | Insurance | | Other | | | |
| | | | securities | | debt | | equity | | contracts | | debt | | Total | | | |
| | | | | | | | | | | | | | | | | | | | | Private equity |
Balance at beginning of period | 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) | |
Acquisitions (a) | | 35 |
|
Purchases, sales and settlements | | (4 | ) |
Balance at end of period | Balance at end of period | | $ | 1 | | $ | 23 | | $ | 80 | | $ | 37 | | $ | | | $ | 141 | $ | 31 |
|
A reconciliation of U.S. pension trust assets classified as Level 3 at December 31, 2012 is as follows:
| | | | | | Residential/ | | | | | | | | | | | | | | | |
| | | | | | commercial | | | | | | | | | | | | | | |
| | | | | | backed | | Corporate | | Private | | Insurance | | Other | | | |
| | | | | | securities | | debt | | equity | | contracts | | debt | | Total |
| | | | | | | | | | | | | | | | | | | | | | |
Balance at beginning of period | | | | | $ | 7 | | $ | 45 | | $ | 46 | | | | | $ | 98 |
| Actual return on plan assets | | | | | | | | | | | | | | | | | | |
| | | Relating to assets still held | | | | | | | | | | | | | | | | | | |
| | | | at the reporting date | | | | | | 1 | | | 10 | | | 3 | | | | | | 14 |
| | | Relating to assets sold during the period | | | | | | 2 | | | | | | | | | | | | 2 |
| Purchases, sales and settlements | | $ | 1 | | | 21 | | | 20 | | | (7) | | | | | | 35 |
| Transfers from level 2 to level 3 | | | | | | | | | | | | | | $ | 1 | | | 1 |
| Transfers from level 3 to level 2 | | | | | | (4) | | | | | | | | | | | | (4) |
Balance at end of period | | $ | 1 | | $ | 27 | | $ | 75 | | $ | 42 | | $ | 1 | | $ | 146 |
| |
(a) | Transferred from a master trust maintained by PPL. |
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 equity indices.
Investments in commingled equity and debt funds are categorized as equity securities. These investmentssecurities and are classified as Level 2, except for exchange-traded funds, which are classified as Level 1 based on quoted prices in active markets.2. 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. Investments in commingled equity funds include funds that invest in U.S. and 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 pricesevaluations that reflect observable market information, such as actual trade information for identical securities or for similar securities, adjusted for observable differences. The fair value of debt securities is generally measured using a market approach, including the use of pricing models which incorporate observable inputs. Common inputs include benchmark yields, reported trades,relevant trade data, 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 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;industries and investments in debt securities issued by foreign governments and corporations; and exchange traded funds. corporations.
Investments in commodities represent ownership of unitsinterest of a commingled fund that is invested asin a long-only, unleveraged portfolio of exchange-traded futures and forward contracts in tangible commodities to obtain broad exposure to all principal groups in the global commodity markets, including energies,energy, agriculture, livestock and metals (both precious and industrial) using proprietary commodity trading strategies. The fund has daily liquidityRedemptions can be made the 15th calendar day and last calendar day of the month with a specified notification period. The fund's fair value is based upon a unit value as calculated by the fund's trustee.administrator.
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 with more speculative real estate investing strategies. The partnership has limitations on the amounts that may be redeemed based on available cash to fund redemptions. Additionally, the general partner may decline to accept redemptions when necessary to avoid adverse consequences for the partnership, including legal and tax implications, among others. The fair value of the investment is based upon a partnership unit value.
Investments in private equity represent interests in partnerships in multiple early-stage venture capital funds and private equity fund of funds that use a number of diverse investment strategies. FourTwo of the partnerships have limited lives of ten years, while the fifththird has a life of 15 years, after which liquidating distributions will be received. Prior to the end of each partnership's life, the investment cannot be redeemed with the partnership; however, the interest may be sold to other parties, subject to the general partner's approval. The PPL Services Corporation Master Trust has unfunded commitments of $76$12 million that may be required during the lives of the partnerships. Fair value is based on an ownership interest in partners' capital to which a proportionate share of net assets is attributed.
Investments in hedge funds represent investments in three hedge fund of funds. Hedge funds seek a return utilizing a number of diverse investment strategies. The strategies, when combined aim to reduce volatility and risk while attempting to deliver
positive returns under allmost market conditions. Major investment strategies for the hedge fund of funds include long/short equity, market neutral, distressed debt, and relative value. Generally, shares may be redeemed with 65within 60 to 95 days with prior written notice. The funds are subject to short term lockups and have limitations on the amount that may be withdrawn based on a percentage of the total net asset value of the fund, among other restrictions. All withdrawals are subject to the general partner's approval. The fair value for two of the funds has been estimated using the net asset value per share and the third fund's fair value is 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 securitiesinstruments primarily represent investments ininclude interest rate swaps, and swaptions (the option to enter into an interest rate swap) which are valued based on the swap details, such as swap curves, notional amount, index and term of index, reset frequency volatility and payer/receiver credit ratings.
Insurance contracts, classified as Level 3, 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
Prior to the spinoff from PPL, the other postretirement benefit plan assets were invested by PPL in VEBA trusts and a 401(h) account, maintained by PPL.
The investment strategy with respect to other postretirement benefit obligations is to fund VEBA trusts and/or 401(h) accounts with voluntary contributions, when appropriate, and to invest in a tax efficient manner. Excluding the 401(h) accounts included in the PPL Services Corporation Master Trust, 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. Equity securities include investments in domestic large-cap commingled funds. Ownership interests in commingled funds that invest entirely in debt securities are classified as equity securities, but treated as debt securities for asset allocation and target allocation purposes. Ownership interests in money market funds are treated 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.
| | | | | 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 money market funds. |
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. |
| | | | | |
| Percentage of plan assets | Target Asset Allocation |
| 2015 | | 2015 |
Asset Class | | | |
U.S. Equity securities | 53 | % | | 45 | % |
Debt securities | 46 | % | | 50 | % |
Cash and cash equivalents | 1 | % | | 5 | % |
Total | 100 | % | | 100 | % |
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, 2013 | | December 31, 2012 |
| | | | | | | | Fair Value Measurement Using | | | | | Fair Value Measurement Using |
| | | | | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 |
Money market funds | | $ | 12 | | $ | 12 | | | | | | | | $ | 13 | | $ | 13 | | | | | | |
U.S. Equity securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| | Large-cap | | | 182 | | | | | $ | 182 | | | | | | 145 | | | | | $ | 145 | | | |
| | Commingled debt | | | 100 | | | | | | 100 | | | | | | 119 | | | | | | 119 | | | |
Debt securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| | Municipalities | | | 36 | | | | | | 36 | | | | | | 41 | | | | | | 41 | | | |
Total VEBA trust assets, at fair value | | | 330 | | $ | 12 | | $ | 318 | | | | | | 318 | | $ | 13 | | $ | 305 | | | |
Receivables and payables, net (a) | | | 1 | | | | | | | | | | | | 1 | | | | | | | | | |
401(h) account assets (b) | | | 115 | | | | | | | | | | | | 102 | | | | | | | | | |
Total other postretirement benefit plan | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 money market funds represent investments in funds that invest primarily in a diversified portfolio of investment grade money market instruments, including, but not limited to, commercial paper, notes, repurchase agreements and other evidences of indebtedness with a maturity not exceeding 13 months from the date of purchase. The primary objective of the fund is a high level of current income consistent with stability of principal and liquidity. Redemptions can be made daily on this fund. |
| | | | | | | | | | | | | | | |
| December 31, 2015 |
| Fair Value Measurement Using |
| Total | | Level 1 | | Level 2 | | Level 3 |
U.S. Equity securities: |
| | | | | | |
Large-cap | $ | 26 |
| | $ | — |
| | $ | 26 |
| | $ | — |
|
Commingled debt | 23 |
| | — |
| | 23 |
| | — |
|
Total VEBA trust assets, at fair value | 49 |
| | $ | — |
| | $ | 49 |
| | $ | — |
|
401(h) account assets | 29 |
| | | | | | |
Total other postretirement benefit plan assets | $ | 78 |
| | | | | | |
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. The fair value measurements for these securities are based on recently executed transactions for identical securities or for similar securities.110
Plan Assets - U.K. Pension Plans(PPL)
The asset allocation and target allocation at December 31 of WPD's pension plans are detailed below.
| | | | | | | | | 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, 2013 | | December 31, 2012 |
| | | | | | | | Fair Value Measurement Using | | | | | Fair Value Measurement Using |
| | | | | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 10 | | $ | 10 | | | | | | | | $ | 14 | | $ | 14 | | | | | | |
Equity securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.K. companies | | | 523 | | | 267 | | $ | 256 | | | | | | 440 | | | 223 | | $ | 217 | | | |
| | European companies (excluding the U.K.) | | | 355 | | | 275 | | | 80 | | | | | | 956 | | | 720 | | | 236 | | | |
| | Asian-Pacific companies | | | 226 | | | 180 | | | 46 | | | | | | | | | | | | | | | |
| | North American companies | | | 352 | | | 254 | | | 98 | | | | | | | | | | | | | | | |
| | Emerging markets companies | | | 411 | | | 126 | | | 285 | | | | | | 231 | | | | | | 231 | | | |
| | Global Equities | | | 161 | | | | | | 161 | | | | | | | | | | | | | | | |
| | Currency | | | 485 | | | | | | 485 | | | | | | 127 | | | | | | 127 | | | |
| | Global Tactical Asset Allocation | | | 1,384 | | | | | | 1,384 | | | | | | 1,220 | | | | | | 1,220 | | | |
| | Commingled debt: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | U.K. corporate bonds | | | 504 | | | | | | 504 | | | | | | 593 | | | | | | 593 | | | |
| | | U.K. gilts | | | 2,426 | | | | | | 2,426 | | | | | | 2,907 | | | | | | 2,907 | | | |
Alternative investments: | | | | | | | | | | | | | | | | | | | | | | | | |
| | Real estate | | | 447 | | | | | | 447 | | | | | | 423 | | | | | | 423 | | | |
Fair 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 equity securities represent actively and passively managed funds that are measured against various equity 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.
U.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.Talen Energy Supply's defined benefit pension plans have the option to utilize available prior year credit balances to meet current and future contribution requirements. However, PPL contributed $96Talen Energy expects to contribute $40 million to its U.S.defined benefit pension plans in January 2014.
PPL sponsors various non-qualified supplemental pension plans for which no assets are segregated from corporate assets. PPL expects to make approximately $8 million of benefit payments under these plans in 2014.2016.
PPLTalen Energy 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 $21 million to its other postretirement benefit plans 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 PPL.
| | | | | 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 $6 million to its pension plan in January 2014.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid by the plans.
| | | | | 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 |
(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)
The pension plans of WPD are subject to formal actuarial valuations every three years, which are used to determine funding requirements. Contribution requirements for periods after April 1, 2014 were evaluated in accordance with the draft 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 for the PPL WW plan. WPD expects to make contributions of approximately $313 million in 2014. WPD is currently permitted to recover in rates approximately 75% of their deficit funding requirements for their primary pension plans.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid by the plans.
| | Pension | |
| | | | | | | |
2014 | | $ | 387 | |
2015 | | 392 | |
| | Pension | | Other Postretirement Benefit Payment |
2016 | | 397 | $ | 75 |
| | $ | 2 |
|
2017 | | 402 | 81 |
| | 3 |
|
2018 | | 410 | 87 |
| | 5 |
|
2019-2023 | | 2,128 | |
2019 | | 92 |
| | 7 |
|
2020 | | 98 |
| | 9 |
|
2021-2025 | | 538 |
| | 63 |
|
Savings Plans(All Registrants)
Substantially all employees of PPL's domestic subsidiariesTalen Energy are eligible to participate in deferred savings plans (401(k)s). Employer contributions to the plans were:were $16 million in 2015, $14 million in 2014 and $12 million in 2013.
| | 2013 | | 2012 | | 2011 |
| | | | | | | | | |
PPL | | $ | 41 | | $ | 36 | | $ | 31 |
PPL Energy Supply | | | 12 | | | 12 | | | 11 |
PPL Electric | | | 6 | | | 5 | | | 5 |
LKE | | | 13 | | | 12 | | | 11 |
LG&E | | | 7 | | | 6 | | | 5 |
KU | | | 6 | | | 6 | | | 6 |
(PPL, PPL Energy Supply and PPL Electric)
Employee Stock Ownership Plan
PPL sponsors a non-leveraged ESOP in which 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.
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 2012 and 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 at December 31, 2013 were 7,699,472, or 1% of total common shares outstanding, and are included in all EPS calculations.
Separation Benefits
Certain PPLTalen Energy Supply and certain 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. Until December 1, 2012, certainGenerally, applicable employees separated wereare 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. As 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 premium payments that would be incurred for continuation of group health and welfare coverage. Separation benefits for certain bargaining unit employees also include enhanced pension and postretirement medical benefits. Separation benefits are recorded when such amounts are probable and estimable.
See Note 1 for a discussion of separation benefits related to the spinoff and Note 11 for a discussion of separation benefits related to the one-time voluntary retirement window offered in 2014 to certain bargaining unit employees as part of the new three-year labor agreement with IBEW local 1600. Separation benefits were not significant in 2013 and 2012.2013.
See Note 10 for separation benefits recorded in 2011 in connection with a reorganization following the acquisition111
10. Jointly Owned Facilities
14. Jointly Owned Facilities
(All Registrants except PPL Electric)
At December 31, 20132015 and 2012,2014 the Talen Energy Balance Sheets reflect the owned interests in the facilities listed below.
| | | | | | | | | | | | | | Construction |
| | | | | Ownership | | | | | Other | | Accumulated | | Work |
| | | | | Interest | | Electric Plant | | Property | | Depreciation | | in Progress |
PPL | | | | | | | | | | | | | | | |
| December 31, 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 | | | |
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 | | | |
| | | | | | | | | | | | | | 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 |
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 |
|
| | | | | | | | | | | | | | | | | | |
| Ownership Interest | | Electric Plant | | Other Property | | Accumulated Depreciation | | Construction Work in Progress |
December 31, 2015 | | | | | | | | | |
Generating Plants | | | | | | | | | |
Susquehanna | 90.00 | % | | $ | 4,791 |
| | $ | — |
| | $ | 3,639 |
| | $ | 148 |
|
Conemaugh | 16.25 | % | | 326 |
| | — |
| | 156 |
| | 7 |
|
Keystone | 12.34 | % | | 218 |
| | — |
| | 111 |
| | 3 |
|
Colstrip Units 1 & 2 | 50.00 | % | | 48 |
| | — |
| | 5 |
| | 2 |
|
Colstrip Units 3 | 30.00 | % | | 30 |
| | — |
| | 2 |
| | 3 |
|
Merill Creek Reservoir | 8.37 | % | | — |
| | 22 |
| | 16 |
| | — |
|
| | | | | | | | | |
December 31, 2014 | | | | | | | | | |
Generating Plants | | | | | | | | | |
Susquehanna | 90.00 | % | | $ | 4,746 |
| | $ | — |
| | $ | 3,591 |
| | $ | 117 |
|
Conemaugh | 16.25 | % | | 330 |
| | — |
| | 141 |
| | 2 |
|
Keystone | 12.34 | % | | 213 |
| | — |
| | 102 |
| | 2 |
|
Colstrip Units 1 & 2 | 50.00 | % | | 16 |
| | — |
| | 4 |
| | 3 |
|
Colstrip Unit 3 | 30.00 | % | | 16 |
| | — |
| | 2 |
| | 2 |
|
Merill Creek Reservoir | 8.37 | % | | — |
| | 22 |
| | 15 |
| | — |
|
Each subsidiary owning these interests provides its own funding for its share of the facility. Each receives a portion of the total output of the generating plants equal to its percentage ownership. The share of fuel and other operating costs associated with the plants 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. PPLTalen 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.
15.11. Commitments and Contingencies
Energy Purchases, EnergyPurchase and Sales and Other Commitments
Energy Purchase Commitments
(PPL and PPLTalen Energy Supply)
PPL Energy Supply enters into long-term energy and energy related contracts which include commitments to purchase:
| | Maximum |
| | Maturity |
Contract Type | | Date |
| | |
Fuels (a) | | 2023 |
Limestone | | 2030 |
Natural Gas Storage | | 2015 |
Natural Gas Transportation | | 2032 |
Power, excluding wind | | 2021 |
RECs | | 2021 |
Wind Power | | 2027 |
|
| | | | | | | | | | | | | |
| Contract Type |
| Fuels (a) | | Limestone | | Natural Gas Storage | | Natural Gas Transportation | | Power, excluding wind | | RECs | | Wind Power |
Maximum Maturity Date | 2027 | | 2030 | | 2026 | | 2034 | | 2021 | | 2020 | | 2027 |
| |
(a) | PPLAs a result of depressed wholesale market prices for electricity and natural gas. Talen Energy Supplyhas experienced a shift in the dispatching of its generation fleet from coal-fired to combined-cycle natural gas-fired generation. This reduction in coal-fired generation output has resulted in a surplus of coal inventory at certain of Talen Energy's Pennsylvania plants. To mitigate the risk of oversupply, Talen Energy incurred pre-tax charges of $29$41 million during 20122015 in connection with an agreement to reduce its 2012 and 20132015 through 2018 contracted coal deliveries. These charges were recorded to "Fuel" on the Statement of Income. |
(PPL, LKE, LG&E and KU)
LG&E and KU enter into purchase contracts to supply the coal and natural gas requirements for generation facilities and LG&E's gas supply operations. These contracts include the following commitments:
| | Maximum |
| | Maturity |
Contract Type | | Date |
| | |
Coal | | 2019 |
Coal Transportation and Fleeting Services | | 2024 |
Natural Gas Storage | | 2024 |
Natural Gas Transportation | | 2024 |
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 power purchase contract. Future obligations for power purchases from OVEC are unconditional demand payments, comprised of annual minimum debt service payments, as well as contractually required reimbursement of plant operating, maintenance and other 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 for the years ended December 31 as follows:
| | 2013 | | 2012 | | 2011 |
| | | | | | | | | |
LG&E | | $ | 18 | | $ | 20 | | $ | 22 |
KU | | | 8 | | | 9 | | | 10 |
Total | | $ | 26 | | $ | 29 | | $ | 32 |
(PPL and PPL Electric)
In May 2012, PPL Electric filed a plan with the PUC to purchase its electricity supply for default customers for the period June 2013 through May 2015. The PUC approved the plan in January 2013. The approved plan provides that PPL Electric procure this electricity through competitive solicitations twice each plan year beginning in April 2013. The solicitations will include layered short-term full-requirement products ranging from three months to 12 months for residential and small commercial and industrial PLR customers as well as a recurring 12 month spot market product for large commercial and industrial PLR customers. To date, two of four solicitations have been completed.
(PPL Electric)
See Note 16 for information on the power supply agreements between PPL EnergyPlus and PPL Electric.
Energy SalesSale Commitments
(PPL and PPL Energy Supply)
In connection with its marketing activities or hedging strategystrategies for its power plants, PPLTalen Energy Supply has entered into long-term power sales contracts that extend into 2020, excluding long-term renewable energy agreements that extend into 2038.2020.
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)
The Kerr Dam Project license (50-year term) was issued by the FERC jointly to Montana Power and the Confederated Salish and Kootenai Tribes of the Flathead Nation 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.
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 $29 million between 2014 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
(All Registrants)Legal Proceedings
PPLTalen Energy is involved in the following legal proceedings, claims and litigation. Talen Energy believes that it has meritorious defenses in connection with its subsidiaries are involved incurrent legal proceedings, claims and litigation, and it intends to vigorously contest each of them. However, there can be no assurance that it will be successful 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.efforts.
WKE Indemnification(PPL and LKE)
See footnote (h) toNo estimate of the tablepossible loss or range of loss in "Guarantees and Other Assurances"excess of amounts accrued, if any, can be made at this time regarding any of the matters specifically described below for information on an LKE indemnity relating to its former WKE lease, including relatedbecause the inherently unpredictable nature of legal proceedings.
(PPL and PPL Energy Supply)
Montana Hydroelectric Litigation
As previously reported,proceedings may be exacerbated by various factors such as ongoing discovery, significant facts that are in February 2012dispute, the U.S. Supreme Court issued a decision overturning decisions bystage of the Montana First Judicial District Courtproceeding and the Montana Supreme Court which had held that the streambeds underlying PPL Montana's hydroelectric generating facilities were owned by the Statewide range of Montana and that PPL Montana owed the State of Montana compensationpotential outcomes for its prior use of those streambeds.any such matter. 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 contract was accounted for as NPNS by PPL EnergyPlus.
The SMGT Contract provided for fixed volume purchases on a monthly basis at established prices. Pursuant to a court order and subsequent stipulations entered into between the SMGT bankruptcy trustee and PPL EnergyPlus, since the date of its Chapter 11 filing through January 2012, SMGT continued to purchase electricity from PPL EnergyPlus at the price specified in the SMGT Contract and made timely payments for such purchases, but at lower volumes than as prescribed in the SMGT Contract. In January 2012, the trustee notified PPL EnergyPlus that SMGT would not purchase electricity under the SMGT Contract for the month of February. In March 2012, the Bankruptcy Court issued an order 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 canany losses actually incurred could be given as to the collectability of the claim and, therefore, no amounts have been recorded in the 2013 financial statements.substantial.
Sierra Club Litigation
In July 2012, PPLMarch 2013, the Sierra Club and MEIC filed a complaint in the U.S. District Court, District of Montana, received a Notice of Intent to Sue (Notice) for violations ofBillings Division against Talen Montana and the Clean Air Act atother 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:owners: Avista Corporation, Puget Sound Energy, Portland General Electric Company, Northwestern EnergyNorthWestern Corporation and PacificCorp.PacifiCorp. Talen Montana operates Colstrip on behalf of the owners. The Notices allegecomplaint alleged certain violations of the Clean Air Act, including New Source Review, Title V and opacity requirements.
On March 6, 2013, the Sierra Clubrequirements and MEIC filed a complaint against PPL Montana and the other Colstrip co-owners in the U.S. District Court, District of Montana, Billings Division. PPL Montana operates Colstrip on behalf of the co-owners. The complaint is generally consistent with the prior Notices and listslisted 39 separate claims for relief. All but three of the claims allege Prevention of Significant Deterioration (PSD) related violations under the federal Clean Air Act for various plant maintenance projects completed since 1992. For each such project or set of projects, there are separate claims for failure to obtain a PSD permit, for failure to obtain a Montana Air Quality Permit to operate after the project(s) were completed and for operating after completion of such project(s) without "Best Available Control Technology". The remaining three claims relate to the alleged failure to update the Title V operating permit for Colstrip to reflect the alleged major modifications described in the other claims, allege that the previous Title V compliance certifications were incomplete because they did not address the major plant modifications, and that numerous opacity violations have occurred at the plant since 2007. The complaint requestsrequested injunctive relief and civil penalties on average of $36,000 per day per violation, including a request that the owners remediate environmental damage and that $100,000 of the civil penalties be used for beneficial mitigation
projects. 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.
OnIn July 27, 2013, the Sierra Club and MEIC filed an additional Notice of Intent to Sue, identifying additional plant projects that are alleged not to be in compliance with the Clean Air Act. OnAct and, in September 27, 2013, the plaintiffs filed an amended complaint. ThisThe amended complaint dropsdropped all claims regarding pre-2001 plant projects, as well as the plaintiffs' Title V and opacity claims. It does,did, 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. PPLTalen Montana and the other Colstrip Ownersowners filed a motion to dismiss the amended complaint in October 2013. In May 2014, the court dismissed the plaintiffs' independent Best Available Control Technology claims and their Prevention of Significant Deterioration (PSD) claims for three projects, but denied the owners' motion to dismiss the plaintiffs' other PSD claims on October 11,statute of limitation grounds. In August 2014, the Sierra Club and MEIC filed a second amended complaint. This complaint includes the same causes of action articulated in the first amended complaint, but in regard to only eight projects done between 2001 and 2013. Although PPL Montana believes itIn September 2014, the Colstrip owners filed an answer to the second amended complaint. Discovery closed in the first quarter of 2015, and in April, the plaintiffs indicated they intend to pursue claims related to only four of the remaining projects. The magistrate judge entered an order on the parties' motions for summary judgment on December 31, 2015. The judgment dismissed two of the plaintiffs' four remaining claims and provided more preferable legal standards for the remaining two claims. The case has been bifurcated as to liability and remedy, and the liability trial is currently set for May 2016. A trial date with respect to remedy, if there is a finding of liability, has not been scheduled.
Notice of Intent to File Suit
In October 2014, Talen Energy received a notice letter from the Chesapeake Bay Foundation (CBF) alleging violations of the Clean Water Act and Pennsylvania Clean Streams Law at the Brunner Island generation plant. The letter was sent to Brunner Island, LLC and the PADEP and is intended to provide notice of the alleged violations and CBF's intent to file suit in Federal court after expiration of the 60 day statutory notice period. Among other co-owners have numerous defensesthings, the letter alleges that Brunner Island, LLC failed to comply with the terms of its National Pollutant Discharge Elimination System permit and associated regulations related to the allegations set forthapplication of nutrient credits to the facility's discharges of nitrogen into the Susquehanna River. The letter also alleges that PADEP has failed to ensure that credits generated from nonpoint source pollution reduction activities that Brunner Island, LLC applies to its discharges meet the eligibility and certification requirements under PADEP's nutrient trading program regulations. If a lawsuit is filed by CBF, Talen Energy would expect CBF to seek injunctive relief, monetary penalties, fees and costs of litigation.
Montana Regional Haze
In September 2012, the EPA Region 8 developed a regional haze Federal Implementation Plan (FIP) for Montana. The final FIP assumed no additional controls for Corette or Colstrip Units 3 and 4, but proposed stricter limits for Corette and Colstrip Units 1 and 2. Talen Montana was meeting these stricter permit limits at Corette without any significant changes to operations, although other requirements led to the suspension of operations and retirement of Corette in March 2015. The stricter limits at
Colstrip Units 1 and 2 would require additional controls to meet more stringent nitrogen oxides and sulfur dioxide limits, the cost of which could be significant. Both Talen Montana and environmental groups appealed the final FIP to the U.S. Court of Appeals for the Ninth Circuit where oral argument was heard in May 2014. On June 9, 2015, the Ninth Circuit issued a decision that vacated as arbitrary and capricious the portions of the FIP setting stricter emissions limits for Colstrip Units 1 and 2 and Corette. The Ninth Circuit upheld the EPA's decision not to require further emissions reductions at Colstrip Units 3 and 4. The Ninth Circuit opinion requires the EPA to now reissue a FIP that is consistent with the opinion.
Colstrip Wastewater Facility Administrative Order on Consent
Talen Montana is party to an Administrative Order on Consent (AOC) with the MDEQ related to operation of the wastewater facilities at the Colstrip power plant. In September 2012, Earthjustice, on behalf of Sierra Club, MEIC, and the National Wildlife Federation, filed an affidavit under Montana's Major Facility Siting Act (MFSA) that sought review of the AOC by Montana's Board of Environmental Review. Talen Montana elected to have this complaintproceeding conducted in Montana state district court, and will vigorously assertin October 2012, Earthjustice filed a petition for review in Montana state district court in Rosebud County. This matter was stayed in December 2012 pending the outcome of separate litigation where the same PPLenvironmental groups challenged the AOC in a writ of mandamus. That litigation was resolved in May 2013 when defendants Talen Montana cannot predictand MDEQ won their motions to dismiss the ultimatematter, and the environmental groups did not appeal. In April 2014, Earthjustice filed successful motions for leave to amend the petition for review and to lift the stay. Talen Montana and the MDEQ responded to the amended petition and filed partial motions to dismiss in July 2014, which were denied in October 2014. Discovery closed in October 2015, summary judgment motions on behalf of all parties are pending, and a bench trial is set for April 2016.
Other
In addition to the above matters, from time-to-time in the ordinary course of its business Talen Energy may be subject to other legal proceedings, claims and litigation. While the outcome of this matter at this time.these legal proceedings, claims and litigation is uncertain, the likely results are not expected, either individually or in the aggregate, to have a material adverse effect on Talen Energy's financial condition or results of operations, although the effect could be material to Talen Energy's results of operations in any interim reporting period.
Regulatory IssuesMatters
(All Registrants except PPLTalen Energy Supply)is subject to regulation by federal and state agencies in the various regions where it conducts business, including with respect to the following matters.
See Note 6 for information on regulatory matters related to utility rate regulation.
Enactment of Financial Reform Legislation(All Registrants)
The Dodd-Frank Act became effective in July 2010 and includes provisions that impose derivative transaction reporting requirements and require most over-the-counter derivative transactions to be executed through an exchange and to be centrally cleared. The Dodd-Frank Act also provides that the U.S. Commodity Futures Trading Commission (CFTC) may impose collateral and margin requirements for over-the-counter derivative transactions, as well as capital requirements for certain entity classifications. 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 Business Conduct Standards, enhanced recordkeeping and reporting, clearing and exchange trading of CFTC-mandated swaps and other complex requirements under other CFTC regulations. The Dodd-Frank Act and its implementing regulations, however, have imposed on the Registrants significant additional and costly 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. Additionally, the burden that the Dodd-Frank Act and implementing 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 its implementing regulations, but could incur significant costs related to compliance with the Act and regulations.
(PPL, PPL Energy Supply and PPL Electric)
New Jersey Capacity Legislation
In January 2011, New Jersey enacted a law (the Act) that intervenesTalen Energy believes would intervene in the wholesale capacity market exclusively regulated by the FERC: S. No. 2381, 214th Leg. (N.J. 2011) (the Act). Toto create incentives for the development of new, in-state electricelectricity generation facilities the Act implements a "long-term capacity agreement pilot program (LCAPP)." The Act requires New Jersey utilities to pay a guaranteed fixed price for wholesale capacity, imposed by the New Jersey Board of Public Utilities (BPU), to certain new generators participating in PJM, with the ultimate costs of that guarantee to be borne by New Jersey ratepayers. PPL believes the intent and effect of the LCAPP is to encourage the construction of new generation in New Jersey even when, under the FERC-approved PJM economic model, such new generation would not be economic. The Act could depresshave the effect of depressing capacity prices in PJM in the short term, impacting PPL Energy Supply'swhich could impact Talen Energy's revenues, and also could harm the long-term ability of the PJM capacity market to incentencourage necessary generation investment throughout PJM.
In February 2011, the PJM Power Providers Group (P3), an organization in which PPL is a member, filed a complaint before the FERC seeking changes in PJM's capacity market rules designed to ensure that subsidized generation, such as the generation that may result from the implementation of the LCAPP, will not be able to set capacity prices artificially low as a result of their exercise of buyer market power. In April 2011, the FERC issued an order granting in part and denying in part P3's complaint and ordering changes in PJM's capacity rules consistent with a significant portion of P3's requested changes. Several parties have filed
appeals of the FERC's order. PPL, PPLcertain Talen Energy Supply and PPL Electric cannot predict the outcome of this proceeding or the economic impact on their businesses or operations, or the markets in which they transact business.
In addition, in February 2011, PPL,subsidiaries and several other generating companies and utilities filed a complaint in U.S. District Court in New Jersey challenging the Act on the grounds that it violates well-established principles under the Supremacy Clause and the Commerce Clauseclauses of the U.S. Constitution and requesting declaratory and injunctive relief barring implementation of the Act by the BPU Commissioners. In October 2011, the court denied the BPU's motion to dismiss the proceeding and in September 2012 the U.S. District Court denied all summary judgment motions. Trial of this matter was completed in June 2013.implementation. In October 2013, the U.S. District Court in New Jersey issued a decision finding the Act unconstitutional under the Supremacy Clause on the grounds that it infringes upon the FERC's exclusive authority to regulate the wholesale sale of electricity in interstate commerce. The decision has beenwas appealed to the U.S. Court of Appeals for the Third Circuit (Third Circuit) by CPV Power Development, Inc., Hess Newark, LLC and the State of New Jersey. Oral arguments are scheduledJersey (the Appellants). In September 2014, the Third Circuit affirmed the District Court's decision. In December 2014, the Appellants filed a petition for certioraribefore the U.S. Supreme Court. In March 27, 2014. PPL, PPL2015, the U.S. Supreme Court requested the U. S. Solicitor General to submit briefs expressing its views as to the issues raised in this case. In September 2015, the U.S. Solicitor General filed a brief expressing the view of the United States that the case was rightly decided and that the petition for certiorari should be denied. Talen Energy Supply and PPL Electric cannot predictbelieves, though no assurances can be given, that the proceeding may be delayed pending the outcome of the Maryland Public Service Commission (MD PSC) action described below. Based upon information currently available to it, Talen Energy cannot estimate a range of reasonably possible losses, if any, related to this proceeding or the economic impact on their businesses or operations, or the markets in which they transact business.matter.
Maryland Capacity Order
In April 2012, the Maryland Public Service Commission (MD PSC)MD PSC ordered (Order) three electric utilities in Maryland to enter into long-term contracts to support the construction of new electricelectricity generating facilities in Maryland, specifically a 661 MW natural gas-fired combined-cycle generating facility to be owned by CPV Maryland, LLC. PPL believes the intent and effect of the action by the MD PSC iswhich, Talen Energy believed, was to encourage the construction of new generation in Maryland even when, under the FERC-approved PJM economic model, such new generation would not be economic. The MD PSC action could depresshave the effect of depressing capacity prices in PJM in the short term, impacting PPL Energy Supply'swhich could impact Talen Energy's revenues, and also could harm the long-term ability of the PJM capacity market to encourage necessary generation investment throughout PJM.
In April 2012, PPLTalen Energy subsidiaries and several other generating companies filed a complaint in U.S. District Court (District Court) in Maryland challenging the MD PSC orderOrder on the grounds that it violates well-established principles under the Supremacy and Commerce clauses of the U.S. Constitution, and requested declaratory and injunctive relief barring implementation of the orderOrder by the MD PSC Commissioners. In August 2012, the court denied the MD PSC and CPV Maryland, LLC motions to dismiss the proceeding. Trial of this matter was completed in March 2013. In September 2013, the U.S. District Court in Maryland issued a decision finding the MD PSC order unconstitutional under the Supremacy Clause on the grounds that it infringes upon the FERC's exclusive authority to regulate the wholesale sale of electricity in interstate commerce. The decision has beenwas appealed to the U.S. Court of Appeals for the Fourth Circuit (Fourth Circuit) by CPV Power Development, Inc. and the State of Maryland. PPL, PPLMaryland (the Appellants). In June 2014, the Fourth Circuit affirmed the District Court's opinion and subsequently denied the Appellants' motion for rehearing. In December 2014, the Appellants filed a petition for certiorari before the U.S. Supreme Court. In March 2015, the U.S. Supreme Court requested the U.S. Solicitor General to submit briefs expressing its views as to the issues raised in this case. In September 2015, the U.S. Solicitor General filed a brief expressing the view of the United States that the case was rightly decided and that the petition for certiorari should be denied. In October 2015, the U.S. Supreme Court granted certiorari of the case, and oral arguments are scheduled for February 2016. Based upon information currently available to it, Talen Energy Supply, and PPL Electric cannot predict the outcomeestimate a range of reasonable possible losses, if any, related to this proceeding or the economic impact on their businesses or operations, or the markets in which they transact business.matter.
Pacific Northwest Markets(PPL and PPL Energy Supply)
Through its subsidiaries, PPLTalen Energy SupplyMarketing and Talen Montana made spot market bilateral sales of power in the Pacific Northwest during the period from December 2000 through June 2001. Several parties subsequently claimed refunds at the FERC as a result of these sales. In June 2003, the FERC terminated proceedings to consider whether to order refunds for spot market bilateral sales made in the Pacific Northwest, including sales made by PPLTalen 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. In October 2011, the FERC initiated proceedings to consider additional evidence. In December 2015, the United States Court of Appeals for the Ninth Circuit affirmed the FERC's October 2011 order setting out the remand process that the FERC has followed from 2011 to the present.
In July 2012, PPLTalen Montana and the City of Tacoma, one of the two parties claiming refunds at the FERC, reached a settlement whereby PPLTalen 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 (ALJ) regarding the City of Seattle's refund claims were completed in October 2013. Briefing2013 and briefing was completed in January 2014. In March 2014, andthe ALJ issued an initial decision is expecteddenying the City of Seattle's complaint against Talen Montana. In May 2015, the FERC issued an order affirming the ALJ's March 2014 decision, and in mid-March 2014.January 2016 the FERC denied requests for a rehearing of its order affirming the ALJ's decision. In February 2016 the City of Seattle appealed the FERC's decision to the United States Court of Appeals for the Ninth Circuit.
Although PPLTalen Energy and its subsidiaries believe they have not engaged in any improper trading or marketing practices affecting the Pacific Northwest markets, PPL and PPLTalen Energy Supply cannot predict the outcome of the above-described proceedings or whether any subsidiaries will be the subject of any additional governmental investigations or named in other lawsuits or refund proceedings. Consequently, PPL and PPLTalen Energy Supply cannot estimate a range of reasonably possible losses, if any, related to this matter.
(All Registrants)
FERC Market-Based Rate Authority
In 1998, the FERC authorized LG&E, KU and PPL EnergyPlus to make wholesale sales of electricity and related products at market-based rates. In 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 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 Southeast region, including LG&E and KU in addition to PPL EnergyPlus. Also, in June 2011, the FERC issued an order approving LG&E's and KU's request for a determination that they no longer be deemed to have market power in the BREC balancing area and removing restrictions on their market-based rate authority in such region. In December 2013, PPL filed market-based rate updates for the Eastern and Western regions. PPL cannot predict the ultimate outcome of these update filings at this time.
Electricity - Reliability Standards
The NERC is responsible for establishing and enforcing mandatory reliability standards (Reliability Standards) regarding the bulk power system. The FERC oversees this process and independently enforces the Reliability Standards.
The Reliability Standards have the force and effect of law and apply to certain users of the bulk power electricity system, including electric utility companies, generators and marketers. Under the Federal Power Act, the FERC may assess civil penalties of up to $1 million per day, per violation, for certain violations.
LG&E, KU, PPL Electric and certain subsidiaries115
Talen Energy Supply monitor theirmonitors its subsidiaries' compliance with the Reliability Standards and continue to self-reportself-reports potential violations of certain applicable reliability requirements and submit accompanying mitigation plans, as required. The resolution of a number of potential violations is pending. Any Regional Reliability Entity (including RFC or SERC) determination concerning the resolution of violations of the Reliability Standards remains subject to the approval of the NERC and the FERC.
In the course of implementing their programs to ensure compliance with the Reliability Standards by those PPL affiliatesTalen Energy subsidiaries subject to the standards, certain other instances of potential non-compliance may be identified from time to time. The RegistrantsTalen Energy cannot predict the outcome of these matters, and cannot estimate a range of reasonably possible losses, if any, other than the amounts currently recorded.any.
Other
In October 2012,addition to the FERC initiatedregulatory matters discussed above, Talen Energy and its considerationsubsidiaries are party to other regulatory proceedings arising in the ordinary course of proposed changesbusiness or have other regulatory exposure. While the outcome of these other regulatory matters and proceedings is uncertain, the likely results are not expected, either individually or in the aggregate, to Reliability Standardshave a material adverse effect on Talen Energy's financial condition or results of operations, although the effect could be material to address the impactsTalen Energy's results 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 approvaloperations 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 modifications to their facilities to comply with the new requirements. The Registrants are unable to predict the amount of any expenditures that may be required as a result of the adoption of any Reliability Standards for Geomagnetic Disturbances.interim reporting period.
Settled Litigation (PPL and PPL Energy Supply)
Spent Nuclear Fuel Litigation
In May 2011, PPL Susquehanna entered into a settlement agreement with the U.S. Government relating to PPL Susquehanna's lawsuit, seeking damages for the Department of Energy's failure to accept spent nuclear fuel from the PPL Susquehanna plant. PPL Susquehanna recorded credits 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 United 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 new agreement with the Department of Energy to extend the settlement agreement on the same terms as the prior agreement for an additional three years to the end of 2016.Environmental Matters
Environmental Matters - DomesticLaws and Regulations
(All Registrants)Extensive federal, state and local environmental laws and regulations are applicable to Talen Energy's air emissions, water discharges and the management of hazardous and solid waste, as well as other aspects of its business. In addition, many of these environmental 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 Talen Energy's services.
Due to the environmental issues discussed below or other environmental matters, itIt may be necessary for the RegistrantsTalen Energy to modify, curtail, replace or cease operation of certain facilities or performance of certain operations to comply with statutes, regulations and other requirements ofimposed by regulatory bodies, courts or courts. In addition, legalenvironmental groups. Talen Energy may incur costs to comply with environmental laws and regulations, including increased capital expenditures or operating and maintenance expenses, monetary fines, penalties or other restrictions, which could be material. Legal challenges to new environmental permits or rules add to the uncertainty of estimating the future cost impact of complying with these permits and rules. In addition, costs may increase significantly if the requirements or scope of environmental laws or regulations, or similar rules, are expanded or changed.
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 Electric)
Air
CSAPR (formerly Clean Air Transport Rule) and CAIR
In July 2011, the EPA adopted the CSAPR. The CSAPR replaced the EPA's previous CAIR which was invalidated in July 2008 by the U.S. Court of Appeals for the District of Columbia Circuit (D.C. Circuit Court). CAIR subsequently was effectively reinstated by the D.C. Circuit Court in December 2008, pending finalization of the CSAPR. Like CAIR, CSAPR targeted sources in the eastern U.S. and would have required reductions in sulfur dioxide and nitrogen oxides in two phases (2012 and 2014).
In December 2011, the D.C. Circuit Court stayed implementation of the CSAPR and left CAIR in effect pending a final decision on the validity of the rule. In August 2012, the D.C. Circuit Court issued a ruling invalidating CSAPR, remanding the rule to the EPA for further action, and leaving CAIR in place during the interim. In June 2013, the U.S. Supreme Court granted the EPA's petition for review of the D.C. Circuit Court's August 2012 decision. Oral 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 Kentucky fossil-fueled generating plants can meet the CAIR sulfur dioxide emission requirements by utilizing sulfur dioxide allowances (including banked allowances and optimizing existing controls). To meet standards for nitrogen oxides under the CAIR, the Kentucky companies will need to buy allowances and/or make operational changes. LG&E and KU do not currently anticipate that the costs of meeting these reinstated CAIR standards will be significant.
PPL Energy Supply's Pennsylvania fossil-fueled generating plants can meet the CAIR sulfur dioxide emission requirements with the existing scrubbers that were placed in service in 2008 and 2009. To meet the CAIR standards for nitrogen oxides, PPL Energy Supply will need to buy allowances and/or make operational changes, the costs of which are not anticipated to be significant.
National Ambient Air Quality Standards
PPL fossil-fueled generating plants may face further reductions in emissions as a result of more stringent national ambient air quality standards for ozone, nitrogen oxides, sulfur dioxide and/or fine particulates.
In 2010, the EPA finalized a new one-hour standard for sulfur dioxide and required states to identify areas that meet those standards and areas that are in non-attainment. In July 2013, the EPA finalized non-attainment designations for parts of the country, including part of Yellowstone County in Montana (Billings area) and part of Jefferson County in Kentucky. Attainment must be achieved by 2018. States are working on designations for other areas.
In December 2012, the EPA issued final rules that strengthen the fine particulate standards. Under the final rules, states and the EPA have until 2015 to identify non-attainment areas, and states have until 2020 to achieve attainment for those areas.
PPL, PPL Energy Supply, LKE, LG&E and KU anticipate that some of the measures required for compliance with the CAIR, or the MATS, or the Regional Haze requirements (as discussed below), such as upgraded or new sulfur dioxide scrubbers at certain plants and, in the case of LG&E and KU, the previously announced retirement of coal-fired generating units at the Cane Run, Green River and Tyrone plants, will help to achieve compliance with the new one-hour sulfur dioxide standard. If additional reductions were to be required, the financial impact could be significant. The short-term impact on the Corette plant from the EPA's final designation of part of Yellowstone County in Montana as non-attainment (as noted above) is not expected to be significant, as PPL Energy Supply previously announced its intent to place the plant in long-term reserve status beginning in April 2015.
Until particulate matter and sulfur dioxide maintenance and compliance plans are developed by the EPA and state or local agencies, including identification and finalization of attainment designations for particulate matter, PPL, PPL Energy Supply, LKE, LG&E and KU cannot predict the impact of the new standards.
MATS
In May 2011, the EPA published a proposed regulation requiring stringent reductions of mercury and other hazardous air pollutants from power plants. In February 2012, the EPA published the final rule, known as the MATS, with an effective date of April 2012. The rule is being challenged by industry groups and states in the D.C. Circuit Court, where oral 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 be significant. For the Corette plant, PPL Energy Supply announced in September 2012 its intention, beginning in April 2015, to place the plant in long-term reserve status, suspending the plant's operation due to expected market conditions and the costs to comply with the MATS requirements. The Corette plant 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 below.
Regional Haze and Visibility
The EPA's regional haze programs were developed under the Clean Air Act to eliminate man-made visibility degradation by 2064. Under the programs, states are required to take action via state plans to make reasonable progress every decade, including the application of Best Available Retrofit Technology (BART) on power plants commissioned between 1962 and 1977.
The primary power plant emissions affecting visibility are sulfur dioxide, nitrogen 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 requirements 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 and Kentucky, exposed to reductions in sulfur dioxide and nitrogen oxides as required by BART, unless the D.C. Circuit Court's decision, now pending before the U.S. Supreme Court, is overturned.
In addition to this exposure stemming from the remand of CSAPR, LG&E's Mill Creek Units 3 and 4 are required to reduce sulfuric acid mist emissions because they were determined to have a significant regional haze impact. These reductions are in the Kentucky Division of Air Quality's regional haze state implementation plan that was submitted to the EPA. LG&E is currently installing sorbent injection technology to comply with these reductions, the costs of which are not expected to be significant.
In Montana, the EPA Region 8 developed the regional haze plan as the MDEQ declined to develop a BART state implementation plan. 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, but proposed tighter limits for Corette and Colstrip Units 1 and 2. PPL Energy Supply expects to meet these tighter permit limits at Corette without any significant changes to operations, although other requirements have led to the planned suspension of operations at Corette beginning in April 2015 (see "MATS" above). Under the final FIP, Colstrip Units 1 and 2 may require additional controls, including the possible installation of an SNCR and other technology, to meet more stringent nitrogen 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 final FIP rules to the U.S. Court of Appeals for the Ninth Circuit.
New Source Review (NSR)
The EPA has continued its NSR enforcement efforts targeting coal-fired generating plants. The EPA has asserted that modification of these plants has increased their emissions and, consequently, that they are subject to stringent NSR requirements under the Clean Air Act. In April 2009, PPL received EPA information requests for its Montour and Brunner Island plants, and PPL and the EPA have exchanged certain information regarding this matter. In January 2009, PPL, PPL Energy Supply and other companies that own or operate the Keystone plant in Pennsylvania received a notice of violation from the EPA alleging that certain projects were undertaken without proper NSR compliance. In May and November 2012, PPL Montana received information requests from the EPA regarding projects undertaken during a Spring 2012 maintenance outage at Colstrip Unit 1. In September 2012, PPL Montana received an information request from the Montana Department of Environmental Quality regarding Colstrip Unit 1 and other projects. PPL and PPL Energy Supply cannot predict the outcome of these matters, and cannot estimate a range of reasonably possible losses, if any.
In March 2009, KU received an EPA notice alleging that KU violated certain provisions of the Clean Air Act's rules governing NSR and prevention of significant deterioration by installing sulfur dioxide scrubbers and SCR controls at its Ghent plant without assessing potential increased sulfuric acid mist emissions. KU contends that the projects in question were pollution control projects, and therefore exempt from the requirements cited by the EPA. In December 2009, the EPA issued an information request on this matter. In September 2012, the parties reached a tentative settlement addressing the Ghent NSR matter that seeks to resolve a September 2007 notice of violation alleging opacity violations at the plant. The parties subsequently entered into a consent decree which was approved by the court on September 11, 2013. The consent decree requires the incurrence of non-material costs that have already been accrued.
In August 2007, LG&E received information requests for the Mill Creek and Trimble County plants, and KU received requests for the Ghent plant, but they have received no further communications from the EPA since providing their responses. PPL, LKE, LG&E and KU cannot predict the outcome of these matters, and cannot estimate a range of reasonably possible losses, if any.
States and environmental groups also have commenced litigation alleging violations of the NSR regulations by coal-fired generating plants across the nation. See "Legal Matters" above for information on a lawsuit filed by environmental groups in March 2013 against PPL Montana and other owners of Colstrip.
If PPL subsidiaries are found to have violated NSR regulations 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 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.
TC2 Air Permit (PPL, LKE, LG&E and KU)
The Sierra Club and other environmental groups petitioned the Kentucky Environmental and Public Protection Cabinet to overturn the air permit issued for the TC2 baseload generating unit, but the agency upheld the permit in an order issued in September 2007. In response to subsequent petitions by environmental groups, the EPA ordered certain non-material changes to the permit which, in January 2010, were incorporated into a final revised permit issued by the KDAQ. In March 2010, the environmental groups petitioned the EPA to object to the revised state permit. Until the EPA issues a final ruling
on the pending petition and all available appeals are exhausted, PPL, LKE, LG&E and KU cannot predict the outcome of this matter or the potential impact on the capital costs of this project, if any.
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.
(All Registrants)
GHG Regulations and Tort Litigation
As a result of the April 2007 U.S. Supreme Court decision that the EPA has authority under the Clean Air Act to regulate GHG emissions from new motor vehicles, in April 2010, the EPA and the U.S. Department of Transportation issued new light-duty vehicle emissions standards that applied beginning with 2012 model year vehicles. The EPA also clarified that this standard, beginning in 2011, authorized regulation of GHG emissions from stationary sources under the NSR and Title V operating permit provisions of the Clean Air Act. As a result, any new sources or major modifications to existing GHG sources causing a net significant emissions increase now require adherence to the BACT permit limits for GHGs. The rules were challenged, and in June 2012 the D.C. Circuit Court upheld the EPA's regulations. In December 2012, the D.C. Circuit Court denied petitions for rehearing pertaining to its June 2012 opinion. On October 15, 2013, the U.S. Supreme Court granted certiorari for several petitions to decide whether the NSR provisions of the Clean Air Act require the EPA to regulate GHG emissions from stationary sources, such as power plants.
In June 2013, President Obama released his Climate Action Plan which reiterates the goal of reducing greenhouse gas emissions in the U.S. "in the range of" 17% below 2005 levels by 2020 through such actions as regulating power plant emissions, promoting increased use of renewables and clean energy technology, and establishing tighter energy efficiency standards. Also, by Presidential Memorandum the EPA was directed to issue a revised proposal for new power plants (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 2012 and may not be consistently achievable. In addition, the EPA deleted the explicit exemption previously proposed for simple-cycle natural gas plants.
At the regional level, ten northeastern states have been participating in a cap-and-trade program called the Regional Greenhouse Gas Initiative (RGGI). The program commenced in January 2009 and covers electric power plants greater than 25 MW. The program calls for a 10% reduction in carbon dioxide emissions from these plants by 2019 compared to 2005 levels. Pennsylvania has not stated an intention to join the RGGI, but enacted the Pennsylvania Climate Change Act of 2008 (PCCA). The PCCA established a Climate Change Advisory Committee to advise the PADEP on the development of a Climate Change Action Plan. In December 2013, the Advisory Committee issued an updated Climate Change Action Report and identified specific actions that could result in reducing GHG emissions by 30% by 2020. The 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 PA AEPS Act to include additional waste-to-energy facilities, providing incentives for coal mine methane usage, providing incentives for alternative fuel vehicles and addressing the long-term viability issues of carbon capture and 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. In November 2011, the Council issued a final report 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 part, further legislative or regulatory actions. The impact of any such plan is not now determinable, but the costs to comply with the plan could be significant.
A number of lawsuits have been filed asserting common law claims including nuisance, trespass and negligence against various companies with GHG emitting plants and, although the decided cases to date have not sustained claims brought on the basis of these theories of liability, the law remains unsettled on these claims. In September 2009, the U.S. Court of Appeals for the Second Circuit in the case of AEP v. Connecticut reversed a federal district court's decision and ruled that several states and public interest groups, as well as the City of New York, could sue five electric utility companies under federal common law for allegedly causing a public nuisance as a result of their emissions of GHGs. In June 2011, the U.S. Supreme Court overturned the Second Circuit and held that such federal common law claims were displaced by the Clean Air Act and regulatory actions of the EPA. In addition, in Comer v. Murphy Oil (Comer case), the U.S. Court of Appeals for the Fifth Circuit (Fifth Circuit) declined to overturn a district court ruling that plaintiffs did not have standing to pursue state common law claims against companies that emit GHGs. The complaint in the Comer case named the previous indirect parent of LKE as a defendant based upon emissions from the Kentucky plants. In January 2011, the Supreme Court denied a petition to reverse the Fifth Circuit's ruling. In May 2011, the plaintiffs in the Comer case filed a substantially similar complaint in federal district court in Mississippi against 87 companies, including KU and three other indirect subsidiaries of LKE, under a Mississippi statute that allows the re-filing of an action in certain circumstances. In March 2012, the Mississippi federal district court granted defendants' motions to dismiss the state common law claims. Plaintiffs appealed to the U.S. Court of Appeals for the Fifth Circuit, and in May 2013, the Fifth Circuit affirmed the district court's dismissal of the case. Additional litigation in federal and state courts over such issues is continuing. PPL, LKE and KU cannot predict the outcome of these lawsuits or estimate a range of reasonably possible losses, if any.
In 2013, PPL's power plants emitted approximately 62 million tons of carbon dioxide compared with 70 million tons in 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. Federal legislation on renewable energy is not expected to be enacted this year. In Pennsylvania, bills were introduced calling for an increase in AEPS Tier 1 obligations and to 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 2014 session to double the state's RPS requirement from 20% to 40% and provide exceptions for specific types of energy sources.
The Registrants believe there are financial, regulatory and logistical uncertainties related to the implementation of renewable energy mandates that will need to be resolved before the impact of such requirements on them can be estimated. Such uncertainties, among others, include the need to provide back-up supply to augment intermittent renewable generation, potential generation over-supply 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 sources. These uncertainties are not directly addressed by proposed legislation. PPL and PPL Energy Supply cannot predict at this time the effect on their competitive plants' future competitive position, results of operation, cash flows and financial position of renewable energy mandates that may be adopted, although the costs to implement and comply with any such requirements could be significant.
Water/Waste
Coal Combustion Residuals (CCRs) (All Registrants except PPL Electric)
In June 2010, the EPA proposed two approaches to regulating the disposal and management of CCRs (as either hazardous or non-hazardous) under the Resource Conservation and Recovery Act (RCRA). CCRs include fly ash, bottom ash and sulfur dioxide scrubber wastes. Regulating CCRs as a hazardous waste under Subtitle C of the RCRA would materially increase costs and result in early retirements of many coal-fired plants, as it would require plants to retrofit their operations to comply with full hazardous waste requirements for the generation of CCRs and associated waste waters through generation, transportation and disposal. This would also have a negative impact on the beneficial use of CCRs and could eliminate existing markets for CCRs. The EPA's proposed approach to regulate CCRs as non-hazardous waste under Subtitle D of the RCRA would mainly affect disposal and most significantly affect any wet disposal operations. Under this approach, many of the current markets for beneficial uses would not be affected. Currently, PPL expects that several of its plants in Kentucky and Montana could be significantly impacted by the EPA's proposed non-hazardous waste regulations, as these plants are using surface impoundments for management and disposal of CCRs.
The EPA has issued information requests on CCR management practices at numerous plants throughout the power industry as it considers whether or not to regulate CCRs as hazardous waste. PPL has provided information on CCR management practices at most of its plants in response to the EPA's requests. In addition, the EPA has conducted follow-up inspections to evaluate the structural stability of CCR management facilities at several PPL plants and PPL has implemented or is implementing certain actions in response to recommendations from these inspections.
The EPA is continuing to evaluate the unprecedented number of comments it received on its June 2010 proposed regulations. In October 2011, the EPA issued a Notice of Data Availability (NODA) requesting comments on selected documents it received during the comment period for the proposed regulations. On September 20, 2013, in response to the proposed Effluent Limitation Guidelines, PPL submitted comments on the proposed CCR regulations. Also, on September 3, 2013, PPL commented on a second CCR NODA seeking comment on additional information related to the EPA's proposal.
A coalition of environmental groups and two CCR recycling companies have filed lawsuits against the EPA seeking a deadline for final rulemaking and, in settlement of that litigation, the EPA has agreed to issue its final rulemaking by the end of 2014.
In July 2013, the U.S. House of Representatives passed House Bill H.R. 2218, the Coal Residuals and Reuse Management Act of 2013, which would preempt the EPA from issuing final CCR regulations and would set non-hazardous CCR standards under RCRA and authorize state permit programs. It remains uncertain whether similar legislation will likely be passed by the U.S. Senate. PPL, PPL Energy Supply, LKE, LG&E and KU cannot predict at this time the final requirements of the EPA's CCR regulations or potential changes to the RCRA and what impact they would have on their facilities, but the financial and operational impact is expected to be material if CCRs are regulated as hazardous waste and significant if regulated as non-hazardous.
Trimble County Landfill Permit (PPL, LKE, LG&E and KU)
In May 2011, LG&E submitted an application for a special waste landfill permit to handle coal combustion residuals generated at the Trimble County plant. After extensive review of the permit application in May 2013, the Kentucky Division of Waste Management denied the permit application on the grounds that the proposed facility would violate the Kentucky Cave Protection Act because it would eliminate an on-site karst feature considered to be a cave. After assessing additional options for managing coal combustion residuals, in January 2014, LG&E submitted to the Kentucky Division of Waste Management a landfill permit application for an alternate site adjacent to the plant. PPL, LKE, LG&E and KU are unable to determine the precise impact of this matter until a landfill permit is issued and any resulting legal challenges are concluded.
Seepages and Groundwater Infiltration - Pennsylvania, Montana and Kentucky
(All Registrants except PPL Electric)
Seepages or groundwater infiltration have been detected at active and retired wastewater basins and landfills at various PPL, PPL Energy Supply, LKE, LG&E and KU plants. PPL, PPL Energy Supply, LKE, LG&E and KU have completed or are completing assessments of seepages or groundwater infiltration at various facilities and have completed or are working with agencies to implement assessment or abatement measures, where required. A range of reasonably possible losses cannot currently be estimated.
(PPL and PPL Energy Supply)
In August 2012, PPL Montana entered into an Administrative Order on Consent (AOC) with the MDEQ which establishes a comprehensive process to investigate and remediate groundwater seepage impacts related to the wastewater facilities at the Colstrip power plant. The AOC requires that within five years, PPL Montana provide financial assurance to the MDEQ for the costs associated with closure and future monitoring of the waste-water treatment facilities. PPL Montana cannot predict at this time if the actions required under the AOC will create the need to adjust the existing ARO related to these facilities.
In September 2012, Earthjustice filed an affidavit pursuant to Montana's Major Facility Siting Act (MFSA) that sought review of the AOC by Montana's Board of Environmental Review (BER) on behalf of the Sierra Club, the MEIC, and the National Wildlife Federation (NWF). In September 2012, PPL Montana filed an election with the BER to have this proceeding conducted in Montana state district court as contemplated by the MFSA. In October 2012, Earthjustice filed a petition for review of the AOC in the Montana state district court in Rosebud County.
(All Registrants except PPL Electric)
Clean Water Act 316(b)
The EPA published proposed rule 316(b) for existing facilities in April 2011. The EPA has been evaluating the comments it received to the proposed rule and meeting with industry groups to discuss options. The proposed rule contains two requirements to reduce impact to aquatic organisms at cooling water intake structures. The first requires all existing facilities to meet standards for the reduction of mortality of aquatic organisms that become trapped against water intake screens (impingement) regardless of the levels of mortality actually occurring or the cost to achieve the standards. The second requirement is to determine and install the best technology available to reduce mortality of aquatic organisms pulled through a plant's cooling water system (entrainment). A form of cost-benefit analysis is allowed for this second requirement involving a site-specific evaluation based on nine factors, including impacts to energy delivery reliability and the remaining useful life of the plant. The final rule is expected 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 well as new limits for scrubber wastewater and landfill leachate. The EPA's proposed ELG regulations contain requirements that would affect the inspection and operation of CCR facilities, if finalized. The EPA has indicated that it will coordinate these regulations with the regulation of CCRs discussed above. The proposal contains alternative approaches, some of which could significantly impact PPL's coal-fired plants. PPL, PPL Energy Supply, LKE, LG&E and KU worked with industry groups to comment on the proposed regulation on September 20, 2013. The final regulation is expected to be issued in May 2014 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.
Other Issues
The EPA is reassessing its polychlorinated biphenyls (PCB) regulations under the Toxic Substance Control Act, which currently allow certain PCB articles to remain in use. In April 2010, the EPA issued an Advanced Notice of Proposed Rulemaking for changes to these regulations. This rulemaking could lead to a phase-out of all or some PCB-containing equipment. The 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 their facilities, but the costs could be significant.
PPL Energy Supply has investigated alternatives to exclude fish from the discharge channel at its Brunner Island plant, but the subsidiary and the PADEP have concluded that a barrier method to exclude fish is not workable. In June 2012, a Consent Order and Agreement (COA) was signed that allows the subsidiary to study a change in a cooling tower operational method that may keep fish from entering the channel. Should this approach fail, the COA requires a retrofit of impingement control technology at the intakes to the cooling towers, the cost of which could be significant.
In May 2010, the Kentucky Waterways Alliance and other environmental groups filed a petition with the Kentucky Energy and Environment Cabinet challenging the Kentucky Pollutant Discharge Elimination System permit issued in April 2010, which covers water discharges from the Trimble County plant. In November 2010, the Cabinet issued a final order upholding the permit. In December 2010, the environmental groups appealed the order to the Trimble Circuit Court, but the case was subsequently transferred to the Franklin Circuit Court. In September 2013, the court reversed the Cabinet order upholding the permit and remanded the permit to the agency for further proceedings. In October 2013, LG&E filed a notice of appeal with the Kentucky Court of Appeals. PPL, LKE, LG&E and KU are unable to predict the outcome of this matter or estimate a range of reasonably possible losses, if any.
The EPA and the Army Corps of Engineers are working on a guidance document that will expand the federal government's interpretation of what constitutes "waters of the U.S." subject to regulation under the Clean Water Act. This change has the potential to affect generation and delivery operations, with the most significant effect being the potential elimination of the existing regulatory exemption for plant waste water treatment systems. The costs that may be imposed on the Registrants as a result of any eventual expansion of this interpretation cannot reliably be estimated at this time but could be significant.
Superfund and Other Remediation(All Registrants)
PPL Electric is potentially responsible for costs at several sites listed by the EPA under the federal Superfund program, including the Columbia Gas Plant site, the Metal Bank site and the Ward Transformer site. Clean-up actions have been or are being undertaken at all of these sites, the costs of which have not been significant to PPL Electric. However, should the EPA require different or additional measures in the future, or should PPL Electric's share of costs at multi-party sites increase substantially more than currently expected, the costs could be significant.
PPL Electric, LG&E and KU are remediating or have completed the remediation of several sites that were not addressed under a regulatory program such as Superfund, but for which PPL Electric, LG&E and KU may be liable for remediation. These include a number of former coal gas manufacturing plants in Pennsylvania and Kentucky previously owned or operated or currently owned by predecessors or affiliates of PPL Electric, LG&E and KU. There are additional sites, formerly owned or operated by PPL Electric, LG&E and KU predecessors or affiliates, for which PPL Electric, LG&E and KU lack information on current site conditions and are therefore unable to predict what, if any, potential liability they may have.
Depending on the outcome of investigations at sites where investigations have not begun or been completed or developments at sites for which PPL Electric, LG&E and KU currently lack information, the costs of remediation and other liabilities could be material. PPL, PPL Electric, LKE, LG&E and KU cannot estimate a range of reasonably possible losses, if any, related to these matters.
The EPA is evaluating the risks associated with polycyclic aromatic hydrocarbons and naphthalene, chemical by-products of coal gas manufacturing. As a result of the EPA's evaluation, individual states may establish stricter standards for water quality and soil cleanup. This could require several PPL subsidiaries to take more extensive assessment and remedial actions at former coal gas manufacturing plants. PPL, PPL Electric, LKE, LG&E and KU cannot estimate a range of reasonably possible losses, if any, related to these matters.
Under the Pennsylvania Clean Streams Law, subsidiariesa subsidiary of PPLTalen Generation areis obligated to remediate acid mine drainage at a former mine sitessite and may be required to take additional steps to prevent potential acid mine drainage at the previously capped refuse piles. One PPL Generationpile at this mine site. The subsidiary is currently pumping and treating mine water at twothe former 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
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, 2013, PPL Energy Supply2015, Talen Generation had accrued a discounted liability of $21$19 million to cover the costs of pumping and treating groundwater at the tworemaining mine sitessite for 50 years and for operating and maintaining passive wetlands treatment at the third site. PPLyears. Talen Energy Supply discounted this liability based on a risk-free ratesrate of 8.41% at the time of the mine closures. The weighted-average rate used was 8.21%.closure. Expected undiscounted payments are estimated at $1 millionto be insignificant for each of the years from 20142016 through 2018,2020 and $107$92 million for work after 2018.2020.
From time to time, PPLtime-to-time, Talen Energy Supply, PPL Electric, LG&E and KU undertakeundertakes investigative or remedial actionactions in response to notices of violations, spills or other releases at various on-site and off-site locations, negotiatenegotiates with the EPA and state and local agencies regarding actions necessary for compliance with applicable requirements, negotiatenegotiates with property owners and other third parties alleging impacts from PPL'sTalen Energy's operations and undertakeundertakes similar actions necessary to resolve environmental matters which arise in the course of normal operations. Based on analyses to date,analysis to-date, resolution of these known environmental matters is not expected to have a significantmaterial adverse impacteffect on these Registrants'Talen Energy's financial condition or results of operations.
Future cleanupinvestigation or remediation work at sites currently under review, or at sites not currently identified, may result in significant additional costs for the Registrants.Talen Energy, but at this time Talen Energy is unable to determine if such investigation or remediation work will have a material adverse effect on Talen Energy's financial condition or results of operations.
Environmental Matters - WPD (PPL)116
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 protectionTable of the environment.ContentsOther
In addition to the environmental matters discussed above, from time-to-time in the ordinary course of its business Talen Energy may become involved in other environmental matters or become subject to other environmental statutes, regulations or requirements. In the opinion of management, based upon information currently available to Talen Energy, while the outcome of these other environmental matters and proceedings is uncertain, the likely results are not expected, either individually or in the aggregate, to have a material adverse effect on Talen Energy's financial condition or results of operations, although the effect could be material to Talen Energy's results of operations in any interim reporting period.
Other Commitments and Contingencies
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.facility. It also seeks to limit the liability of nuclear reactor owners for such claims from any single incident. Effective September 10, 2013,At December 31, 2015, the liability limit per incident was $13.6is $13.3 billion for such claims which is funded by insurance coverage from American Nuclear Insurers (ANI) and an industry assessment program.
Under the industry retroactive assessment program, in the event of a nuclear incident at any of the reactors covered by The Price-Anderson Act, as amended, PPL Susquehanna Nuclear could be assessed deferred premiums of up to $255 million per incident, payable at a maximum of $38 million per year.
Additionally, PPL Susquehanna Nuclear purchases property insurance programs from NEIL, an industry mutual insurance company of which PPL Susquehanna Nuclear is a member. Effective April 1, 2013,2015, facilities at the Susquehanna plant are insured against property damage losses up to $2.50$2.0 billion. PPL Susquehanna Nuclear also purchases an insurance program that provides 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 Nuclear could be assessed retrospective premiums in the event of the insurers' adverse loss experience. Effective April 1, 2013, thisThis maximum assessment was $46is $55 million. Talen Energy has additional coverage that, under certain conditions, may reduce this exposure.
Labor Unions(All Registrants)Union Agreements
In May 2014, certainTalen Energy's bargaining agreement with its largest IBEW local expired. Talen Energy finalized a new three-year labor agreement negotiations are scheduled to begin or have begun. For PPL, PPL Energy Supply and PPL Electric, negotiations with the IBEW commenced in January 2014. The current agreement expireslocal 1600 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 expireswas ratified in August 2015. Additionally, KU's negotiationsearly June 2014.
As part of efforts to reduce operations and maintenance expenses, the new agreement offered a one-time voluntary retirement window to certain bargaining unit employees. The benefits offered under this provision are consistent with the United Steelworkersstandard separation program benefits for bargaining unit employees. In 2014, the following charges for separation benefits were recorded.
|
| | | | |
Pension Benefits | | $ | 11 |
|
Severance Compensation | | 6 |
|
Total Separation Benefits | | $ | 17 |
|
Number of Employees | | 105 |
|
The separation benefits are included in "Operation and maintenance" on the Statement of America labor union will beginIncome. The liability for pension benefits is included in July 2014 and"Accrued pension obligations" on the current agreement expires in August 2014. The Registrants cannot predict the outcomeBalance Sheets. All of the union labor negotiations.severance compensation was paid in 2014.
The labor agreements expiring in 2014 covered the following employees at December 31, 2013:
| | 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
(All Registrants)
In the normal course of business, the Registrants enterTalen Energy enters into agreements that provide financial performance assurance to third parties on behalf of certain subsidiaries. Such agreements include, for example, guarantees, stand-by letters of credit issued by financial institutions and surety bonds issued by insurance companies. These agreements are entered into primarily to support or enhance the creditworthiness attributed to a subsidiary on a stand-alone basis or to facilitate the commercial activities in which these subsidiaries engage.
(All Registrants)
The table below details guarantees provided as of December 31, 2013.2015. "Exposure" represents the estimated maximum potential amount of future payments that could be required to be made under the guarantee. The probability of expected payment/performance under each of thesefor the guarantees described below is remote except for "WPD guarantee of pension and other obligations of unconsolidated entities" and "Indemnification of lease termination and other divestitures." The totalremote. There was no recorded liability at December 31, 2013 and 20122015. The recorded liability at December 31, 2014 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$13 million.
Talen Energy Supply (other thanhas indemnifications related to sales of assets that are governed by the lettersspecific sales agreement and include breach of credit), PPL Electric, LKE, LG&Ethe representations, warranties and KU also applycovenants, and liabilities for certain other matters. Talen Energy's maximum exposure with respect to PPL,certain indemnifications and all guaranteesthe expiration of LG&Ethe indemnifications cannot be estimated because the maximum potential liability is not capped by the transaction documents and KU also applythe expiration date is based on the applicable statute of limitations. The exposure and expiration date noted is based on those cases in which the agreements provide for specific limits. The exposure at December 31, 2015 includes amounts related to LKE.the sale of the Talen Montana hydroelectric facilities. See Note 6 for additional information related to the sale. Talen Energy's exposure and related expiration dates are:
| | | 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) | Indemnifications 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 liability is not capped and the expiration date is not specified in the transaction documents. |
(b) | Indemnification to the liquidators 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. |
250 |
| | | | | |
| December 31, 2015 | | Expiration Date |
Indemnifications for sales of assets | $ | 1,150 |
| | 2016 - 2025 |
In connection with their salesthe acquisition of various businesses, WPDRJS Power and the spinoff from PPL, Talen Energy Supply agreed to indemnify PPL and its affiliates have providedfollowing the purchasers with indemnifications that are standardspinoff for such transactions, including indemnificationsliabilities primarily relating to the Talen Energy Supply business prior to the spinoff, as well as for losses arising out of breaches of Talen Energy's failure to perform covenants and agreements in the transaction agreements following the spinoff or arising out of breaches by the Riverstone Holders of certain pre-existing liabilitiesrepresentations and environmental and tax matters or havewarranties in the transaction agreements. Talen Energy Supply also agreed to continue theirindemnify PPL for liabilities relating to the employment or termination of service of PPL employees who primarily supported the Talen Energy Supply business prior to the spinoff (excluding however defined benefit pension obligations under existing third-party guarantees, either for a set period of PPL employees who terminated service prior to July 1, 2000 or who were not employed by Talen Energy Supply or its subsidiaries at the time of termination). Talen Energy Supply also agreed to indemnify PPL from tax liabilities resulting from actions by Talen Energy following the transactions or uponclosing resulting in the condition that the purchasers make reasonable effortstransaction failing to terminate the guarantees. Finally, WPD andqualify for 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 arrangements under PPL Energy Supply's credit facilities for the purposes of protecting various third parties against nonperformance by PPL. This is not a guarantee by PPL on a consolidated basis |
(e) | Indemnifications are governed by the specific sales agreement and include breach of the representations, warranties and covenants, and liabilities for certain other matters. PPL Energy Supply's maximum exposure with respect to certain indemnifications and the expiration of the indemnifications cannot be estimated because the maximum potential liability is not capped by the transaction documents and the expiration date is based on the applicable statute of limitations. The exposure and expiration date noted is based on those cases in which the agreements provide for specific limits. |
(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 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 believes its indemnification obligations in this matter remain subject to various uncertainties, including potential for additional legal challenges regarding the arbitration decision as well as future prices, availability and demand for the subject excess power. LKE continues to evaluate various legal and commercial options with respect to this indemnification matter. The ultimate outcomes of the WKE termination-related indemnifications cannot be predicted at this time. Additionally, LKE has indemnified various third parties related to historical obligations for other divested subsidiaries and affiliates. The indemnifications vary by entity and the maximum exposures range from being capped at the sale price to no specified maximum; however, LKE is not aware of formal claims under such indemnities made by any party at this time. LKE could be required to perform on these indemnifications in the event of covered losses or liabilities being claimed by an indemnified party. In the second quarter of 2012, LKE adjusted its estimated liability for certain of these indemnifications by $9 million ($5 million after-tax), which is reflected in "Income (Loss) from Discontinued Operations (net of income taxes)" on the Statement of Income. The adjustment was recorded in the Kentucky Regulated segment for PPL. LKE cannot predict the ultimate outcomes of such indemnification circumstances, but does not currently expect such outcomes to result in significant losses above the amounts recorded. |
(i) | Pursuant to the OVEC power purchase contract, LG&E and KU are obligated to pay for 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 cover these costs over the term of the contract. 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 and the expiration date of these potential obligations are not presently determinable. See "Energy Purchases Commitments" above for additional information on the OVEC power purchase contract. |
intended tax-free treatment.
The RegistrantsTalen Energy and/or its subsidiaries provide other miscellaneous guarantees through contracts entered into in the normal course of business. These guarantees are primarily in the form of indemnification or warranties related to services or equipment and vary in duration. The amounts of these guarantees often are not explicitly stated, and the overall maximum amount of the obligation under such guarantees cannot be reasonably estimated. Historically, no significant payments have been made with respect to these types of guarantees and the probability of payment/performance under these guarantees is remote.
PPL,Talen Energy, on behalf of itself and certain of its subsidiaries, maintains insurance that covers liability assumed under contract for bodily injury and property damage. The coverage provides maximum aggregate coverage of $225$100 million. This insurance may be applicable to obligations under certain of these contractual arrangements.
16.12. Related Party Transactions
Prior to the spinoff, PPL Electric and PPL Services were affiliates of Talen Energy. The disclosures below provide information regarding transactions that occurred prior to June 1, 2015. After June 1, 2015, transactions with PPL Electric and PPL Services, or any other PPL subsidiaries are not related party transactions.
PLR Contracts/PurchaseSales of Accounts Receivable(PPL Energy Supply and PPL Electric)
PPL Electric holds competitive solicitations for PLR generatinggeneration supply. PPL EnergyPlusTalen Energy Marketing has been awarded a portion of the PLR generation supply through these competitive solicitations. The sales and purchases between PPL EnergyPlusTalen Energy Marketing and PPL Electric for the five months ended May 31, 2015 and the years ended December 31, 2014 and 2013 are included in the Statements of Income as "Unregulated wholesale"Wholesale energy to affiliate" by PPL Energy Supply and as "Energy purchases from affiliate" by PPL Electric.
Under the standard Default Service Supply Master Agreement for the solicitation process, PPL Electric requires all suppliers to post collateral once credit exposures exceed defined credit limits. PPL EnergyPlus is required to post collateral with PPL Electric: (a) when the market price of electricity to be delivered by PPL EnergyPlus exceeds the contract price for the forecasted quantity of electricity to be delivered and (b) this market price exposure exceeds a contractual credit limit. Based on the current credit rating of PPL Energy Supply, as guarantor, PPL EnergyPlus' credit limit was $20 million at December 31, 2013. In no instance is PPL Electric required to post collateral to suppliers under these supply contracts.Talen Energy.
PPL Electric's customers may choose an alternative supplier for their generation supply. See Note 1 for additional information regardingAs part of a PUC-approved purchase of accounts receivable program, PPL Electric'sElectric purchases ofcertain accounts receivable from alternative electricity suppliers including PPL EnergyPlus.
At(including Talen Energy Marketing) at a discount. During the five month period up to the spinoff included in the year ended December 31, 2013, PPL2015, Talen 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 itsMarketing sold accounts receivable to PPL Electric.Electric of $146 million, $336 million for the year ended December 31, 2014 and $294 million for the year ended December 31, 2013. Losses resulting from the sales of accounts receivable to PPL Electric during these periods were not material.
Support Costs
Wholesale 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 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 customers and its generation cost is lower than that of LG&E, LG&E purchases electricity from KU. These transactions are reflected in the Statements of Income as "Electric revenue from affiliate" and "Energy purchases from affiliate" and are recorded at a price equalPrior to the seller's fuel cost. Savings realized from such intercompany transactions are shared equally between both companies. The volume of energy each company has to sell to the other is dependent on its retail customers' needs and its available generation.
Support Costs(All Registrants except PPL)
Both PPL Services and LKS provide the respective PPL and LKE subsidiariesspinoff, Talen Energy was provided with administrative, management and support services.services, primarily from PPL Services. Where applicable, the costs of these services arewere charged to the respective subsidiariesTalen Energy Supply as direct support costs. General costs that cannotcould not be directly attributed to a specific subsidiary areaffiliate were allocated and charged to the respective subsidiariesaffiliates, including Talen Energy Supply, as indirect support costs. PPL Services usesused a three-factor methodology that includes the subsidiaries'affiliates invested capital, operation and maintenance expenses and number of 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.costs, which methodology Talen Energy believes was reasonable.
Talen Energy Supply was charged, primarily by PPL Services, and LKS charged the following amounts for the years ended December 31, and believe these amounts are reasonable, including amounts applied to accounts that are further distributed between capital and expense.
|
| | | | | | | | | | | |
| | 2015 | | 2014 | | 2013 |
| | $ | 67 |
| | $ | 218 |
| | 218 |
|
| | | 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 | |
Transition Services Agreement
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 forAs part of 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 PPLspinoff transaction, Talen Energy Supply subsidiary periodically holds revolving linesentered into a TSA with Topaz Power Management, LP (an affiliate of credit and demand notes fromRiverstone) for certain affiliates. No balance was outstanding atbusiness administrative services. For the year ended December 31, 20132015, these costs which are recorded in "Operation and 2012. Interest earned on these revolving facilities is included in "Interest Income from Affiliates"maintenance" on the Statement of Income. Interest earned on borrowings was not significant for 2013 and 2012. For 2011, interest earned on borrowings was $8 million, which was primarily attributable to borrowings by PPL Energy Funding with an interest rate of 3.77%.Income, were $6 million.
(PPL Electric)Gas Supply Contract
A PPL Electric subsidiary periodically holds revolving demand notes from certain affiliates. Atof Jade has a gas supply contract in place with TrailStone NA Logistics LLC (TrailStone), an affiliate of Riverstone, under which TrailStone supplies gas to the generation facilities owned by Jade. For the year ended December 31, 2013, $150 million was outstanding and was reflected in "Notes receivable from affiliate" on the Balance Sheet. No balance was outstanding at December 31, 2012. The interest rates on borrowings are equal to one-month LIBOR plus a spread. The interest rate on the outstanding borrowing at December 31, 2013, was 1.92%. Interest earned on these revolving facilities was not significant for 2013, 2012 and 2011.
(LKE)
LKE maintains a revolving line of credit with a PPL2015, Talen 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 "Notes payable with affiliates" on the Balance Sheet. The interest rate on the outstanding borrowing at December 31, 2012 was 1.71%. Interest on the revolving line of 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 reflected 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 KU)
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 additional information on intercompany derivatives.
(PPL Energy Supply)
Trademark Royalties
A PPL subsidiary owned PPL trademarks and billed certain affiliates for their use under a licensing agreement. This agreement was terminated in December 2011. PPL Energy Supply was charged $40incurred $52 million of license feescosts for these gas purchases, which are primarily recorded in 2011. These charges were primarily included in "Other operation and maintenance""Fuel" on the Statement of Income.
Distribution of Interest in PPL Global to Parent
In January 2011, PPL Energy Supply distributed its membership interest in PPL Global to its parent, PPL Energy Funding. See Note 9 for additional information.
Other(All Registrants except PPL)
See Note 1, for discussions regarding the intercompany tax sharing agreementallocations associated with income taxes and stock-based compensation, and Note 79 for a discussion regarding capital transactions by PPL Energy Supply, PPL Electric, LKE, LG&E and KU. 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 associated with defined benefits.
13. Other Income (Expense) - net
Talen Energy's "Other Income (Expense) - net" for the year ended December 31, 2015 was primarily related to a charge for a termination payment to a remarketing dealer in conjunction with an October 2015 redemption of debt. See Note 5 for additional information on the redemption. For the years ended December 31, 2014 and 2013, the activity was primarily related to the earnings on securities in NDT funds.
17. Other Income (Expense) - net |
| | | | | |
| | | | | | | | | | | | | | | | | | | | |
(All Registrants) |
| | | | | | | | | | | | | | | | | | | | |
The breakdown of "Other Income (Expense) - net" for the years ended December 31 was: |
| | | | 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" for 2013, 2012 and 2011 was primarily the equity component of AFUDC. The components of "Other Income (Expense) - net" 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.
18.14. Fair Value Measurements and Credit Concentration
(All Registrants)
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). A market approach (generally, data from market transactions), an income approach (generally, present value techniques and option-pricing models), and/or a cost approach (generally, replacement cost) are used to measure the fair value of an asset or liability, as appropriate. These valuation approaches incorporate inputs such as observable, independent market data and/or unobservable data that management believes are predicated on the assumptions market participants would use to price an asset or liability. These inputs may incorporate, as applicable, certain risks such as nonperformance risk, which includes credit risk. The fair value of a group of financial assets and liabilities is measured on a net basis. Transfers between levels are recognized at end-of-reporting-period values. During 20132015 and 2012,2014, 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, 2015 | | December 31, 2014 |
| Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 |
Assets | | | | | | | | | | | | | | | |
Cash and cash equivalents | $ | 141 |
| | $ | 141 |
| | $ | — |
| | $ | — |
| | $ | 352 |
| | $ | 352 |
| | $ | — |
| | $ | — |
|
Restricted cash and cash equivalents (a) | 106 |
| | 106 |
| | — |
| | — |
| | 193 |
| | 193 |
| | — |
| | — |
|
Price risk management assets: | | | | | | | | | | | | | | | |
Energy commodities | 693 |
| | — |
| | 597 |
| | 96 |
| | 1,318 |
| | 6 |
| | 1,171 |
| | 141 |
|
Total price risk management assets | 693 |
| | — |
| | 597 |
| | 96 |
| | 1,318 |
| | 6 |
| | 1,171 |
| | 141 |
|
NDT funds: | | | | | | | | | | | | | | | |
Cash and cash equivalents | 11 |
| | 11 |
| | — |
| | — |
| | 19 |
| | 19 |
| | — |
| | — |
|
Equity securities | | | | | | | | | | | |
| | |
| | |
U.S. large-cap | 616 |
| | 457 |
| | 159 |
| | — |
| | 611 |
| | 454 |
| | 157 |
| | — |
|
U.S. mid/small-cap | 87 |
| | 37 |
| | 50 |
| | — |
| | 89 |
| | 37 |
| | 52 |
| | — |
|
Debt securities | | | | | | | | | | | |
| | |
| | |
|
U.S. Treasury | 98 |
| | 98 |
| | — |
| | — |
| | 99 |
| | 99 |
| | — |
| | — |
|
U.S. government sponsored agency | 6 |
| | — |
| | 6 |
| | — |
| | 9 |
| | — |
| | 9 |
| | — |
|
Municipality | 83 |
| | — |
| | 83 |
| | — |
| | 76 |
| | — |
| | 76 |
| | — |
|
Investment-grade corporate | 47 |
| | — |
| | 47 |
| | — |
| | 42 |
| | — |
| | 42 |
| | — |
|
Other | 3 |
| | — |
| | 3 |
| | — |
| | 3 |
| | — |
| | 3 |
| | — |
|
Receivables (payables), net | — |
| | (2 | ) | | 2 |
| | — |
| | 2 |
| | — |
| | 2 |
| | — |
|
Total NDT funds | 951 |
| | 601 |
| | 350 |
| | — |
| | 950 |
| | 609 |
| | 341 |
| | — |
|
Auction rate securities (b) | 6 |
| | — |
| | — |
| | 6 |
| | 8 |
| | — |
| | — |
| | 8 |
|
Total assets | $ | 1,897 |
| | $ | 848 |
| | $ | 947 |
| | $ | 102 |
| | $ | 2,821 |
| | $ | 1,160 |
|
| $ | 1,512 |
|
| $ | 149 |
|
Liabilities | | | | | | | | | | | | | | | |
Price risk management liabilities: | | | | | | | | | | | | | | | |
Energy commodities | $ | 539 |
| | $ | — |
| | $ | 497 |
| | $ | 42 |
| | $ | 1,217 |
| | $ | 5 |
| | $ | 1,182 |
| | $ | 30 |
|
Total price risk management liabilities | $ | 539 |
| | $ | — |
| | $ | 497 |
| | $ | 42 |
| | $ | 1,217 |
| | $ | 5 |
|
| $ | 1,182 |
|
| $ | 30 |
|
| | | | | 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 |
| | | | | 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 | | | | | | |
| | | | | 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 for the years ended December 31, is as follows:(d) | Included in "Other noncurrent assets" on the Balance Sheets. |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| 2015 | | 2014 |
| Energy Commodities, net | | Auction Rate Securities | | Total | | Energy Commodities, net | | Auction Rate Securities | | Total |
Balance at beginning of period | $ | 111 |
| | $ | 8 |
| | $ | 119 |
| | $ | 24 |
| | $ | 16 |
| | $ | 40 |
|
Total realized/unrealized gains (losses) | | | | | | | | | | | |
Included in earnings | (91 | ) | | — |
| | (91 | ) | | (32 | ) | | — |
| | (32 | ) |
Included in OCI | — |
| | — |
| | — |
| | — |
| | 1 |
| | 1 |
|
Purchases (a) | (39 | ) | | — |
| | (39 | ) | | (6 | ) | | — |
| | (6 | ) |
Sales | 65 |
| | (2 | ) | | 63 |
| | 67 |
| | (9 | ) | | 58 |
|
Settlements | (24 | ) | | — |
| | (24 | ) | | 50 |
| | — |
| | 50 |
|
Transfers into Level 3 | 19 |
| | — |
| | 19 |
| | 7 |
| | — |
| | 7 |
|
Transfers out of Level 3 | 13 |
| | — |
| | 13 |
| | 1 |
| | — |
| | 1 |
|
Balance at end of period | $ | 54 |
|
| $ | 6 |
|
| $ | 60 |
|
| $ | 111 |
|
| $ | 8 |
|
| $ | 119 |
|
A reconciliation of net assets and liabilities classified as Level 3 for the years ended December 31 is as follows: |
| | | | | | | | | | | | | | | | |
| | | | | | PPL |
| | | | | | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| | | | | | Energy | | Auction | | Cross- | | | |
| | | | | | Commodities, | | Rate | | Currency | | | |
| | | | | | net | | Securities | | Swaps | | Total |
2013 | | | | | | | | | | | | |
Balance at beginning of period | | $ | 22 | | $ | 16 | | $ | 1 | | $ | ��39 |
| | Total realized/unrealized gains (losses) | | | | | | | | | | | | |
| | | | Included in earnings | | | (5) | | | | | | | | | (5) |
| | | | Included in OCI (a) | | | | | | | | | 1 | | | 1 |
| | Sales | | | (2) | | | | | | | | | (2) |
| | Settlements | | | (3) | | | | | | | | | (3) |
| | Transfers into Level 3 | | | 10 | | | 3 | | | 3 | | | 16 |
| | Transfers out of Level 3 | | | 2 | | | | | | (5) | | | (3) |
Balance at end of period | | $ | 24 | | $ | 19 | | $ | | | $ | 43 |
| | | | | | 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) | "Energy Commodities" and "Cross-Currency Swaps" are included in "Qualifying derivatives" and "Auction Rate Securities" are included in "Available-for-sale securities" on2015 includes positions acquired through the Statementsacquisition of Comprehensive Income.RJS Power. |
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, net | | | | Significant | | Range |
| | | Asset | | Valuation | | Unobservable | | (Weighted |
| | | (Liability) | | Technique | | Input(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 flow | | Modeled from SIFMA Index | | 10% - 80% (63%) |
| | | | | | | | | |
| | | | | | | | | | | | |
Table of Contents |
| | | | | | | | | |
| December 31, 2015 |
Talen Energy | Fair Value, net Asset (Liability) | | Valuation Technique | | Significant Unobservable Input(s) | | Range (Weighted Average) (a) |
Energy commodities | | | | | | | |
Natural gas contracts (b) | $ | 55 |
| | Discounted cash flow | | Proprietary model used to calculate forward prices | | 10% - 100% (50%) |
Power sales contracts (c) | 13 |
| | Discounted cash flow | | Proprietary model used to calculate forward prices | | 10% - 100% (100%) |
FTR purchase contracts (d) | (2 | ) | | Discounted cash flow | | Historical settled prices used to model forward prices | | 100% (100%) |
Heat rate call options (e) | (10 | ) | | Discounted cash flow | | Proprietary model used to calculate forward prices | | 100% (100%) |
CRR purchase contracts (g) | (2 | ) | | Discounted cash flow | | Proprietary model used to calculate forward prices | | 100% (100%) |
Auction rate securities (f) | 6 |
| | Discounted cash flow | | Modeled from SIFMA Index | | 46% - 47% (46.5%) |
257 |
| | | | | | | | | |
| December 31, 2014 |
Talen Energy | Fair Value, net Asset (Liability) | | Valuation Technique | | Significant Unobservable Input(s) | | Range (Weighted Average) (a) |
Energy commodities | | | | | | | |
Natural gas contracts (b) | $ | 59 |
| | Discounted cash flow | | Proprietary model used to calculate forward prices | | 11% - 100% (52%) |
Power sales contracts (c) | (1 | ) | | Discounted cash flow | | Proprietary model used to calculate forward prices | | 10% - 100% (59%) |
FTR purchase contracts (d) | 3 |
| | Discounted cash flow | | Historical settled prices used to model forward prices | | 100% (100%) |
Heat rate call options (e) | 50 |
| | Discounted cash flow | | Proprietary model used to calculate forward prices | | 23% - 51% (45%) |
Auction rate securities (f) | 8 |
| | Discounted cash flow | | Modeled from SIFMA Index | | 51% - 69% (63%) |
| | | December 31, 2013 |
| | | Fair Value, net | | | | Significant | | Range |
| | | Asset | | Valuation | | Unobservable | | (Weighted |
| | | (Liability) | | Technique | | Input(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 Index | | 10% - 80% (63%) |
| | | December 31, 2012 |
| | | Fair Value, net | | | | Significant | | Range |
| | | Asset | | Valuation | | Unobservable | | (Weighted |
| | | (Liability) | | Technique | | Input(s) | | Average) (a) |
PPL | | | | | | | | | | | |
Energy commodities | | | | | | | |
| Retail natural gas sales contracts (b) | $ | 24 | | Discounted cash flow | | Observable wholesale prices used as proxy for retail delivery points | | 21% - 100% (75%) |
| Power sales contracts (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 flow | | Modeled from SIFMA Index | | 54% - 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 Index | | 57% - 74% (65%) |
(a) | For energy commodities and auction rate securities, theThe 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) | As the forward price of natural gas increases/(decreases), the fair value of purchase contracts increases/(decreases). As the forward price of natural gas increases/(decreases), the fair value of sales 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 the contracts (decreases)/increases. |
(d) | As the forward price of basis increases/(decreases), the fair value of contracts (decreases)/increases. |
(e)(d) | As the forward implied spread increases/(decreases), the fair value of the contracts increases/(decreases). |
| |
(e) | The proprietary model used to calculate fair value incorporates market heat rates, correlations and volatilities. As the market implied heat rate increases/(decreases), the fair value of purchased calls increases/(decreases). As the market implied heat rate increases/(decreases), the fair value of sold calls (decreases)/increases. |
| |
(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 estimated recovery rates. As the credit valuation adjustmentforward implied spread increases/(decreases), the fair value of the swaps contracts increases/(decreases)/increases.. |
Net gains and losses on assets and liabilities classified as Level 3 and included in earnings for the years ended December 31 wereare reported in the Statements of Income as follows:
| | | | | | | | | | | | 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 | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | 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 | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Energy Commodities, net |
| | Wholesale Energy | | Retail Energy | | Energy Purchases |
| | 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 |
Total gains (losses) included in earnings | | $ | (80 | ) | | $ | (77 | ) | | $ | (2 | ) | | $ | 23 |
| | $ | (9 | ) | | $ | 22 |
|
Change in unrealized gains (losses) relating to positions still held at the reporting date | | (7 | ) | | 50 |
| | 29 |
| | 37 |
| | (6 | ) | | (4 | ) |
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 contracts, which are valued using the market approach and are classified as Level 1. When the lowest level inputs that are significant to the fair value measurement of a contract are observable, the contract is classified as Level 2. Level 2 contracts are valued using inputs which may include quotes obtained from an exchange (where there is insufficient market liquidity to warrant inclusion in Level 1), binding and non-binding broker quotes, prices posted by ISOs or published tariff rates. Furthermore, independent quotes are obtained from the market to validate the forward price curves. Energy commodity contracts include forwards, futures, swaps, options
and structured transactions and may be offset with similar positions in exchange-traded markets. To the extent possible, fair value measurements utilize various inputs that include quoted prices for similar contracts or market-corroborated inputs. In certain instances, these contracts may be valued using models, including standard option valuation models and other standard industry models. When the lowest level inputs that are significant to the fair value measurement of a contract are observable, the contract is classified as Level 2.
When unobservable inputs are significant to the fair value measurement, a contract is classified as Level 3. Level 3 contracts are valued using PPLTalen Energy's 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, volumetric assumptions, implied volatilities, implied correlations, and market implied heat rates. Forward transactions, including forward transactions classified as Level 3, are analyzed by PPL'sTalen Energy's Risk Management department, which reports to the Chief Financial Officer (CFO).department. Accounting personnel who also report to the CFO, interpret the analysis quarterly to appropriately classify the forward transactionsfair value measurements 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'sTalen Energy's own creditworthiness (for net liabilities) and its counterparties' creditworthiness (for net assets). PPL'sTalen Energy's credit department assesses all reasonably available market information which is used by accounting personnel to calculate the credit valuation adjustment.
In certain instances, energy commodity contracts are transferred between Level 2 and Level 3. The primary reasons for the transfers during 2013 and 20122015 were changes in the availability of market information and changes in the significance of the unobservable inputs utilized in the valuation of the contract. As the delivery period of a contract becomes closer, market information may become available. When this occurs, the model's unobservable inputs are replaced with observable market information.
Price Risk Management Assets/Liabilities - Interest Rate Swaps/Foreign Currency Contracts/Cross-Currency Swaps(PPL, LKE, LG&E and KU)
To manage interest rate risk, PPL, LKE, LG&E and KU use interest rate contracts such as forward-starting swaps, floating-to-fixed swaps and fixed-to-floating swaps. To manage foreign currency exchange risk, PPL uses foreign currency contracts such as forwards, options, and cross-currency swaps that contain characteristics of both interest rate and foreign currency contracts. An income approach is used to measure the fair value of these contracts, utilizing readily observable inputs, such as forward interest rates (e.g., LIBOR and government security rates) and forward foreign currency exchange rates (e.g., GBP), as well as inputs that may not be observable, such as credit valuation adjustments. In certain cases, market information cannot practicably be obtained to value credit risk and therefore internal models are relied upon. These models use projected probabilities of default and estimated recovery rates based on historical observances. When the credit valuation adjustment is significant to the overall valuation, the contracts are classified as Level 3. For PPL, the primary reason for the transfers during 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.
(PPL and PPL Energy Supply)
NDT Funds
The market approach is used to measure the fair value of equity securities held in theNDT funds.
· | The fair value measurements of equity securities classified as Level 1 are based on quoted prices in active markets. |
· | The fair value measurements of investments in commingled equity funds are classified as Level 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. |
The fair value of debt securities is generally measured using a market approach, including the use of pricing models which incorporate observable inputs. Common inputs include benchmark yields, reported trades,relevant trade data, 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 monthly payment data, future predicted cash flows, collateral performance and new issue data.
Auction Rate Securities
Auction rate securities include Federal Family Education Loan Program guaranteed student loan revenue bonds, as well as various municipal bond issues. The probability of realizing losses on these securities is not significant.
The fair value of auction rate securities is estimated using an income approach that includes readily observable inputs, such as principal payments and discount curves for bonds with credit ratings and maturities similar to the securities, and unobservable inputs, such as future interest rates that are estimated based on the SIFMA Index, creditworthiness, and liquidity assumptions driven by the impact of auction failures. The probability of realizing losses on these securities is not significant. When the present value of future interest payments is significant to the overall valuation, the auction rate securities are classified as Level 3. The primary reason for the transfers in and out of Level 3 in 2013 and 2012 was the change in discount rates and SIFMA Index.
Auction rate securities are valued by PPL'sthe Treasury department, which reports to the CFO.department. Accounting personnel who also report to the CFO, interpret the analysis quarterly to classify the contractsfair value measurements in the fair value hierarchy. Valuation techniques are evaluated periodically.
Nonrecurring Fair Value Measurements(All Registrants except PPL Electric and LG&E)
The following nonrecurring fair value measurements occurred during the reporting periods, resulting in asset impairments.impairments:
|
| | | | | | | | | | | |
| Carrying Amount (a) | | Fair Value Measurements Using Level 3 (b) | | Pre-tax Loss (c) |
Sapphire plants (November 30, 2015) | $ | 270 |
| | $ | 204 |
| | $ | 66 |
|
Sapphire plants and C.P. Crane plant (September 30, 2015) | 388 |
| | 266 |
| | 122 |
|
Kerr Dam Project (March 31, 2014) (d) | 47 |
| | 29 |
| | 18 |
|
Corette plant and emission allowances (December 31, 2013) | 65 |
| | — |
| | 65 |
|
| | | | 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 |
| | | | | | | | | | | | | | |
Table of Contents | |
(a) | Represents carrying value before fair value measurement. |
| |
(b) | For the Sapphire plants, also reflects estimated cost to sell at September 30, 2015. |
| |
(c) | The lossimpairment on the Corette plant and emission allowances was recorded in the Supply segment andKerr Dam Project is included in "Other operation and maintenance""Income (Loss) from Discontinued Operations (net of income taxes)" on the Statement of Income. The lossimpairments on the EEI investment was recorded inC.P. Crane plant and the Kentucky Regulated segment andSapphire plants are included in "Other-Than-Temporary Impairments""Impairments" on the Statement of Income. Losses on RECs were recorded |
| |
(d) | The Kerr Dam Project was included in the Supply segmentsale of the Talen Montana hydroelectric facilities and included in "Other operation and maintenance" on the Statements of Income. |
(c) | Current and long-term RECs are included in "Other current assets" and "Other intangibles" in their respective areas onassets were removed from the Balance Sheets.Sheet. See Note 6 for additional information. |
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, net Asset (Liability) | | Valuation Technique | | Significant Unobservable Input(s) | | Range (Weighted Average)(a) |
|
|
| Sapphire plants (November 30, 2015) | $ | 204 |
| | Discounted cash flow | | Proprietary model used to calculate plant value | | 100% (100%) |
| Sapphire plants and C.P. Crane plant (September 30, 2015) | 266 |
| | Discounted cash flow | | Proprietary model used to calculate plant value | | 100% (100%) |
| Kerr Dam Project (March 31, 2014) | 29 |
| | Discounted cash flow | | Proprietary model used to calculate plant value | | 38% (38%) |
| Corette plant and emission allowances (December 31, 2013) | — |
| | Discounted cash flow | | Long-term forward prices and a proprietary model used to calculate plant value | | 100% (100%) |
| |
(a) | The range and weighted average represent the percentage of fair value derived from the unobservable inputs. |
Sapphire Plants and C.P. Crane Plant
In the third quarter of 2015, Talen Energy updated its fundamental pricing models in conjunction with market information gained as a result of the 2018/2019 planning year PJM capacity auction completed in August 2015. As a result, Talen Energy assessed certain long-lived assets for impairment and determined that the C.P. Crane coal-fired plant failed a recoverability test and as a result, recorded an impairment charge based on the plant's estimated fair value at September 30, 2015. Additionally, because the Sapphire plants were classified as held for sale and had to be carried at the lower of their current carrying value or fair value less cost to sell, Talen Energy used updated cash flow information to calculate the estimated fair value of the Sapphire plants at September 30, 2015 and determined a write-down was necessary at that time based on estimated fair value. The Sapphire plants were reclassified from held for sale to held and used as of November 30, 2015 and updated cash flow information was used to calculate the estimated fair value on that date of reclassification to held and used and an additional write-down was necessary at that time based on the updated estimated fair value.
To estimate the fair value of the Sapphire plants and C.P. Crane plant, Talen Energy performed an internal analysis primarily using an income approach based on discounted cash flows (a proprietary Talen Energy model) to assess the fair value of these assets. Assumptions used in the Talen Energy proprietary model were the forward energy and capacity price curves, forecasted generation, and forecasted operation, maintenance and capital expenditures and a market participant discount rate. Through this analysis, Talen Energy determined the fair value of the C.P. Crane plant at September 30, 2015 and the Sapphire plants at September 30 and November 30, 2015. See Note 1 for additional information on the initial assets held for sale classification and subsequent reclassification to assets held and used for the Sapphire plants and Note 6 for additional information on the sale of the C.P. Crane plant.
The assets were valued by Talen Energy's financial planning and analysis personnel and accounting personnel interpreted the analysis to appropriately classify the fair value measurements in the fair value hierarchy.
Kerr Dam Project
Talen Montana previously held a joint operating license issued for the Kerr Dam Project. The license extends until 2035 and, between 2015 and 2025, the Confederated Salish and Kootenai Tribes of the Flathead Nation (the Tribes) have the option to purchase, hold and operate the Kerr Dam Project. The parties submitted the issue of the appropriate amount of the conveyance price to arbitration in February 2013. In March 2014, the arbitration panel issued its final decision holding that the conveyance price payable by the Tribes to Talen Montana was $18 million. As a result of the decision, Talen Energy performed a recoverability test on the Kerr Dam Project and recorded an impairment charge. Talen Energy performed an internal analysis using an income approach based on discounted cash flows (a proprietary Talen Energy model) to assess the fair value of the Kerr Dam Project. Assumptions used in the Talen Energy proprietary model were the conveyance price, forward energy price curves, forecasted generation, and forecasted operation and maintenance expenditures that were consistent with assumptions used in the business planning process and a market participant discount rate. Through this analysis, Talen Energy determined the estimated fair value of the Kerr Dam Project at March 31, 2014. The Kerr Dam Project was included in the November 2014 sale of the Talen Montana hydroelectric facilities. See Note 6 for additional information on the sale of the Talen Montana hydroelectric facilities.
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, net | | | | Significant | | Range |
| | | Asset | | Valuation | | Unobservable | | (Weighted |
| | | (Liability) | | Technique | | Input(s) | | Average) |
| | | | | | | | | | | | |
PPL and PPL Energy Supply | | | | | | | | | | | |
Corette plant and emission allowances: | | | | | | | | | | | |
| December 31, 2013 | | $ | | Discounted cash flow | | Long-term forward price curves and capital expenditure projections | | 100% (100%) |
PPL, LKE and KU | | | | | | | | | | | |
Equity investment in EEI: | | | | | | | | |
| December 31, 2012 | | $ | | Discounted cash flow | | Long-term forward price curves and capital expenditure projections | | 100% (100%) |
(PPL and PPLThe assets were valued by the Talen Energy Supply)Financial Department. Accounting personnel interpreted the analysis to appropriately classify the assets in the fair value hierarchy.
Corette Plant and Emission Allowances
During the fourth quarter 2013, PPLTalen Montana recorded an impairment loss on the Corette plant and related emission allowances. In connection with the completion of its 2013 annual business planning process that included revised long-term power and gas price assumptions and other factors, PPLTalen Energy Supply has now determined that it is less likelyaltered its expectations regarding the probability that the Corette plant will restart after operations are suspendedwould operate subsequent to initially placing it in long-term reserve status and determined the carrying amount for Corette was no later than April 2015. PPLlonger recoverable. As a result, Talen Energy Supply performed an internal analysis using an income approach based on discounted cash flows (a proprietary Talen Energy model) 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.process and a market participant discount rate. Through this analysis, PPLTalen Energy Supply determined the fair value of the asset group to be negligible. Operations were suspended and the Corette plant was retired in the first quarter of 2015.
The assets were valued by the PPLTalen Energy Supply Financial Department, which reports to the President of PPL Energy Supply.Department. 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, PPL Energy Supply assessed the recoverability of certain RECs not expected to be used. Observable market prices (Level 2) were used to value the RECs.
Equity Investment in EEI (PPL, LKE and KU)
During the fourth quarter 2012, KU recorded an other-than-temporary decline in the value of its equity investment in EEI. KU performed an internal analysis using an income approach based on discounted cash flows to assess the current fair value of its investment based on several factors. KU considered the following factors: long-dated forward power and fuel price curves, the cost of compliance with environmental standards, and the majority owner and operator's announcement in the fourth quarter 2012 to exit from the merchant generation business. Assumptions used in the fair value assessment were forward energy price curves, expectations for capacity (demand) for energy in EEI's market, and expected capital expenditures used in the calculation that were comparable to assumptions used by KU for internal budgeting and forecasting purposes. Through this analysis, KU determined the fair value to be zero.
Financial Instruments Not Recorded at Fair Value(All Registrants)
The carrying amounts of contract adjustment payments related to the Purchase Contract component of the Equity Units and long-term debt on the Balance Sheets and theirits estimated fair values are set forth below. The fair values of these instruments werevalue was primarily estimated using an income approach by discounting future cash flows at estimated current cost of funding rates, which incorporateincorporates the credit risk of the Registrants. These instruments areTalen Energy Supply. Long-term debt is classified as Level 2. The effect of third-party credit enhancements is not included in the fair value measurement.
| | | December 31, 2013 | | December 31, 2012 |
| | | Carrying | | | | | Carrying | | | |
| | | Amount | | Fair Value | | Amount | | Fair Value |
PPL | | | | | | | | | | | | |
| Contract adjustment payments (a) | | $ | 21 | | $ | 22 | | $ | 105 | | $ | 106 |
| Long-term debt | | | 20,907 | | | 22,177 | | | 19,476 | | | 21,671 |
PPL Energy Supply | | | | | | | | | | | | |
| Long-term debt | | | 2,525 | | | 2,658 | | | 3,272 | | | 3,556 |
PPL Electric | | | | | | | | | | | | |
| Long-term debt | | | 2,315 | | | 2,483 | | | 1,967 | | | 2,333 |
LKE | | | | | | | | | | | | |
| Long-term debt | | | 4,565 | | | 4,672 | | | 4,075 | | | 4,423 |
LG&E | | | | | | | | | | | | |
| Long-term debt | | | 1,353 | | | 1,372 | | | 1,112 | | | 1,178 |
KU | | | | | | | | | | | | |
| Long-term debt | | | 2,091 | | | 2,155 | | | 1,842 | | | 2,056 |
(a) | Included in "Other current liabilities" and "Other deferred credits and noncurrent liabilities" on the Balance Sheets. |
|
| | | | | | | | | | | | | | | |
| December 31, 2015 | | December 31, 2014 |
| Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Long-term debt | $ | 4,203 |
| | $ | 3,343 |
| | $ | 2,218 |
| | $ | 2,204 |
|
The carrying value of short-term debt, (including notes between affiliates), when outstanding, and MACH Gen's Term Loan B approximates fair value due to the variable interest rates associated with the short-term debt and is classified as Level 2.
Credit Concentration Associated with Financial Instruments
(All Registrants)
Contracts are entered into with many entities for the purchase and sale of energy. 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 1915 for information on credit policiesprocedures used to manage credit risk, including master netting arrangements and collateral requirements.
(PPL)
At December 31, 2013, PPL2015, Talen Energy had credit exposure of $1.0 billion$574 million from energy trading partners, excluding the effects of netting arrangements, reserves and collateral. As a result of netting arrangements, reserves and collateral, PPL'sTalen Energy's credit exposure was reduced to $539$368 million. The top ten counterparties, including their affiliates, accounted for $281$173 million, or 52%47%, of this exposure.these exposures. Nine of these counterparties had an investment grade credit rating from S&P or Moody's and accounted for 95%90% of the top ten 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, 2013, PPL Energy Supply had credit exposure of $1.0 billion from energy trading partners, excluding exposure from related parties and the effects of netting arrangements, reserves and collateral. As a result of netting arrangements, reserves and collateral, this credit exposure was reduced to $536 million. The top ten counterparties including their affiliates accounted for $281 million, or 52%, of this exposure. Nine of these counterparties had an investment grade credit rating from S&P or Moody's and accounted for 95% of the top ten exposures. The remaining counterparty has not been rated by S&P or Moody's, but is current on its obligations. See Note 16 for information regarding the related party credit exposure.
(PPL Electric)
PPL Electric is exposed to credit risk under energy supply contracts (including its supply contracts with PPL EnergyPlus); however, its PUC-approved 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.
19.15. Derivative Instruments and Hedging Activities
Risk Management Objectives
(All Registrants)
PPLTalen Energy has a risk management policy approved by the Talen Energy Corporation Board of Directors to manage market risk associated with commodities, interest rates on debt issuances and foreign exchange (including price, liquidity and volumetric risk) and credit risk (including non-performance risk and payment default risk). The RMC,A risk management committee, comprised of senior management and chaired by the Chief Risk Officer,Director-Risk Management, oversees the risk management function. Key risk control activities designed to ensure compliance with the risk policy and detailed programs include, but are not limited to, credit review and approval, validation of transactions and market prices, verification of risk and transaction limits, VaR analyses,analysis, portfolio stress tests, gross margincash flow at risk analyses,analysis, sensitivity analysesanalysis and daily portfolio reporting, including open positions, determinationsreporting.
Market Risk
Market risk includes the potential loss that may be incurred as a result of price changes associated with a particular financial or commodity instrument as well as market liquidity and volumetric risks. Forward contracts,and 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 and 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 theTalen Energy is subject to market risks, that affect PPL and its Subsidiary Registrants.which are actively mitigated through the risk management policy described above. Such risks include:
| | | | | | PPL | | PPL | | | | | | | | | |
| | | PPL | | Energy Supply | | Electric | | LKE | | LG&E | | KU |
Commodity price risk, including basis and volumetric risk Interest rate risk (including basis and | | | | | | | | | | | | | | | | | | |
| volumetric risk) | | X | | X | | M | | M | | M | | M |
Interest rate risk: | | | | | | | | | | | | | | | | | | |
| Debt issuances | | X | | X | | M | | M | | M | | M |
| Defined benefit plans | | X | | X | | M | | M | | M | | M |
| NDT securities | | X | | X | | | | | | | | |
Equity securities price risk: | | | | | | | | | | | | | | | | | | |
| Defined benefit plans | | X | | X | | M | | M | | M | | M |
| NDT securities | | X | | X | | | | | | | | |
| Future stock transactions | | X | | | | | | | | | | |
Foreign currency risk - WPD investment and | | | | | | | | | | | | |
| earnings | | X | | | | | | | | | | |
X | = PPL and PPL Energy Supply actively mitigate market risks through their risk management programs described above. |
M | = The regulatory environments for PPL's regulated entities, by definition, significantly mitigate market risk. |
Commodity price risk
· | PPL is exposed to commodity price risk through its domestic subsidiaries as described below. Volumetric risk is significantly mitigated at WPD as a result of the method of regulation in the U.K. |
Talen Energy 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 and the purchase of fuel and fuel-related commodities for generating assets, as well as for proprietary trading activities.
· | 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 and the purchase of fuel and fuel-related commodities for generating assets, as well as for proprietary trading activities. |
· | PPL Electric is exposed to commodity price risk from its obligation as PLR; however, its PUC-approved cost recovery mechanism substantially eliminates its exposure to this risk. PPL Electric also mitigates its exposure to volumetric risk by entering into full-requirement supply agreements to serve its PLR customers. These supply agreements transfer the volumetric risk associated with the PLR obligation to the energy suppliers. |
· | LG&E's and KU's rates include certain mechanisms for fuel, gas supply and environmental expenses. These mechanisms generally provide for timely recovery of market price and volumetric fluctuations associated with these expenses. |
Interest rate risk
· | PPL and its subsidiaries areTalen Energy is 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 that may be incurred due to a counterparty's non-performance.
PPL is exposed to credit risk from "in-the-money" interest rate and foreign currency derivatives with financial institutions, as well as additional credit risk through certain of its subsidiaries, as discussed below.
PPLTalen Energy Supply is exposed to credit risk from "in-the-money" commodity derivatives with its energy trading partners, which include other energy companies, fuel suppliers, financial institutions and other wholesale customers and retail customers.
LKE and LG&E are exposed to credit risk from interest rate derivatives with third-party financial institutions.
The majority of PPL and PPL Energy Supply'sTalen Energy's credit risk stems from commodity derivatives for multi-year contracts for energy sales and purchases. If PPL Energy Supply'sTalen Energy's counterparties fail to perform their obligations under such contracts and PPLTalen Energy Supply could not replace the sales or purchases at the same or better prices as those under the defaulted contracts, PPLTalen Energy Supply would incur financial losses. Those losses would be recognized immediately or through lower revenues or higher costs in future years, depending on the accounting treatment for the defaulted contracts. In the event a supplier of LKE (through its subsidiaries LG&E and KU) or PPL Electric defaults on its obligation, those entities would be required to seek replacement power or replacement fuel in the market. In general, incremental costs incurred by these entities would be recoverable from customers in future rates, thus mitigating the financial risk for these entities.
PPL and its subsidiaries haveTalen Energy has credit policiesprocedures in place to manage credit risk, including the use of an established credit approval process, daily monitoring of counterparty positions and the use of master netting agreements or provisions. These agreements generally include credit mitigation provisions, such as margin, prepayment or collateral requirements. PPL and its subsidiariesTalen Energy may request additional credit assurance, in certain circumstances, in the event that the counterparties' credit ratings fall below investment grade their tangible net worth falls below specified percentages or their exposures exceed an established credit limit. See Note 1814 for credit concentration associated with energy trading partners.
Master Netting Arrangements
Net derivative positions on the balance sheets are not offset against the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) under master netting arrangements.
PPL's and PPLTalen Energy Supply'sdid not have any obligation to return counterparty cash collateral under master netting arrangements was $9 million and $112 million at December 31, 20132015 and 2012.
PPL Electric, LKE and LG&E had noan $11 million obligation to return cash collateral under master netting arrangements at December 31, 2013 and 2012.2014.
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.
PPLTalen Energy Supply, PPL Electric and KU haddid not postedpost any cash collateral under master netting arrangements at December 31, 20132015 and 2012.2014.
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.
Commodity Price Risk (Non-trading)
Commodity price risk, including basis and volumetric risk, is among PPL's and PPL Energy Supply'sTalen Energy's most significant risks due to the level of investment that PPL and PPLTalen Energy Supply maintainmaintains in theirits competitive generation assets, as well as the extent of their marketing activities.assets. Several factors influence price levels and volatilities. These factors include, but are not limited to, seasonal changes in demand, weather conditions, available generating assets within regions, transportation/transmission availability and reliability within and between regions, market liquidity, and the nature and extent of current and potential federal and state regulations.
PPLTalen 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 7,369has a generation capacity of 17,379 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. Talen Energy's portfolio also 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 and retail natural gas and electricity sales contracts and other marketing activities.sale contracts. The strategies that PPLTalen Energy Supply uses to hedge its full-requirement sales contracts include supplying the energy, capacity and RECs from its generation assets and 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.market.
PPL and PPLTalen Energy Supply enterenters 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 are non-derivatives or NPNS is elected and therefore they are not reflected in the financial statements until delivery. PPL and PPLTalen Energy Supply segregate theirsegregates its non-trading activities into two categories: cash flow hedges and economic activity as discussed below.
Cash Flow Hedges
Certain derivative contracts have qualified for hedge accounting so that the effective portion of a derivative's gain or loss is deferred in AOCI and reclassified into earnings when the forecasted transaction occurs. Certain cash flow hedge positions were dedesignated during 2013In 2015 and 2012 and the unamortized portion remained in AOCI because the original forecasted transaction is still expected to occur. There2014, there were no active cash flow hedges at December 31, 2013.and there was no hedge ineffectiveness associated with energy derivatives. At December 31, 2013,2015, the accumulated net unrecognized after-tax gains (losses) that are expected to be reclassified into earnings during the next 12 months were $25 million for PPL and PPL Energy Supply.$12 million. Cash flow hedges are discontinued if it is no longer probable that the original forecasted transaction will occur by the end of the originally specified time periods and any amounts previously recorded in AOCI are reclassified into earnings once it is determined that the hedge transaction is probable of not occurring. For 2013, thereThere were no reclassifications, while in 2012 and 2011, such reclassifications were insignificant.for 2015, 2014 and 2013.
For 2013 and 2012, hedge ineffectiveness associated with energy derivatives was insignificant. For 2011, hedge ineffectiveness associated with energy derivatives was an after-tax gain (loss) of $(22) million.
Economic Activity
Many derivative contracts economically hedge the commodity price risk associated with electricity, natural gas, oil and other commodities but do not receive hedge accounting treatment because they were not eligible for hedge accounting or because hedge accounting was not elected. These derivatives hedge a portion of the economic value of PPL Energy Supply'sTalen Energy's competitive generation assets and unregulatedcompetitive full-requirement and retail contracts, which are subject to changes in fair value due to market price volatility and volume expectations. Additionally, economic activity would also include the ineffective portion of qualifying cash flow hedges (see "Cash Flow Hedges" above). The derivative contracts in this category that existed at December 31, 20132015 range in maturity through 2019.2020.
Examples of economic activity may include hedges on sales of baseloadnuclear, coal and hydroelectric generation, certain purchase contracts used to supply full-requirement sales contracts, FTRs, CRRs, or basis swaps used to hedge basis risk associated with the sale of competitive generation or supplying full-requirement sales contracts, Spark Spread hedging contracts, retail electric and natural gas activities, and fuel oil swaps used to hedge price escalation clauses in coal transportation and other fuel-related contracts. PPLTalen Energy Supply also uses options, which include the sale of call options and the purchase of put options tied to a particular generating unit. Since the physical generating capacity is owned, price exposure is generally capped at the price at which the generating unit would be dispatched and therefore does not expose PPLTalen 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. The unrealized gains (losses) for economic activity for the years ended December 31 were as follows.
|
| | | | | | | | | | | |
| 2015 | | 2014 | | 2013 |
Operating Revenues | | | | | |
Wholesale energy (a) | $ | 115 |
| | $ | 72 |
| | $ | (267 | ) |
Retail energy | (9 | ) | | 29 |
| | 12 |
|
Operating Expenses | | | | | |
Fuel | 15 |
| | (27 | ) | | (4 | ) |
Energy purchases (a) | 60 |
| | (74 | ) | | 132 |
|
| | | 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) |
Table of Contents
| |
(a) | In the third quarter of 2015, Talen Energy refined an input used in its valuation technique for certain PJM basis curves as observable inputs became available. This change resulted in the recording of a $30 million net unrealized gain, primarily reflected in "Wholesale energy" revenue on the Statement of Income. |
Commodity Price Risk (Trading)
PPLTalen Energy Supply has a proprietary trading strategy which is utilized to take advantage of market opportunities.opportunities primarily in its geographic footprint. As a result, PPLTalen Energy Supply may at times create a net open position in its portfolio that could result in losses if prices do not move in the manner or direction anticipated. Net energy trading margins, which are included in "Unregulated wholesale"Wholesale energy" on the Statements of Income, were $75 million in 2014 and insignificant for 2013, 20122015 and 2011.2013.
Commodity Volumes
At December 31, 2013,2015, the net volumes of derivative (sales)/purchase contracts used in support of the various strategies discussed above were as follows.
| | | | | | Volumes (a) | | | | Volumes (a) |
Commodity | | Unit of Measure | | 2014 | | 2015 | | 2016 | | Thereafter | | Unit of Measure | | 2016 | | 2017 | | 2018 | | Thereafter |
| | | | | | | | | | | |
Power | | MWh | | (33,278,963) | | (14,421,817) | | 4,348,927 | | 18,931,370 | | MWh | | (36,420,569 | ) | | (4,474,975 | ) | | (568,082 | ) | | (334,101 | ) |
Capacity | | MW-Month | | (19,575) | | (3,929) | | 501 | | 9 | | MW-Month | | (5,953 | ) | | 6 |
| | 3 |
| | — |
|
Gas | | MMBtu | | 25,869,617 | | (33,082,289) | | 19,082,945 | | (9,202,403) | | MMBtu | | 146,474,333 |
| | 17,898,993 |
| | 14,987,372 |
| | 3,063,441 |
|
Coal | | Tons | | 495,900 | | | | | | | |
FTRs | | MW-Month | | 9,581 | | 1,705 | | | | | | MW-Month | | 8,724 |
| | 200 |
| | — |
| | — |
|
Oil | | Barrels | | 150,000 | | 380,869 | | 274,137 | | 101,261 | | Barrels | | 65,559 |
| | — |
| | — |
| | — |
|
CRRs | | | MWh | | 2,491,444 |
| | 538,584 |
| | — |
| | — |
|
Emission Allowances | | | Tons | | 75,617 |
| | — |
| | — |
| | — |
|
| |
(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. |
Interest Rate Risk
(PPL, LKE, LG&E and KU)
PPL and its subsidiaries issue debt to finance their operations, which exposes them to interest rate risk. Various financial derivative instruments are utilized to adjust the mix of fixed and floating interest rates in their debt portfolio, adjust the duration of the debt portfolio and lock in benchmark interest rates in anticipation of future financing, when appropriate. Risk limits under PPL's risk management program are designed to balance risk exposure to volatility in interest expense and changes in the fair value of the debt portfolio due to changes in benchmark interest rates.
Cash Flow Hedges
(PPL)
Interest rate risks include exposure to adverse interest rate movements for outstanding variable rate debt and for future anticipated financings. Financial interest rate swap contracts that qualify as cash flow hedges may be entered into to hedge floating interest rate risk associated with both existing and anticipated debt issuances. At December 31, 2013, outstanding interest rate swap contracts range in maturity through 2044 for PPL's domestic interest rate swaps. These swaps had an aggregate notional value of $1.3 billion at December 31, 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 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 gain (loss) of $(9) million, which included a gain (loss) of $(4) million attributable to certain interest rate swaps that failed hedge effectiveness testing during the second quarter of 2011.
Cash flow hedges are discontinued if it is no longer probable that the original forecasted transaction will occur by the end of the originally specified time period and any amounts previously recorded in AOCI are reclassified into earnings once it is determined that the hedged transaction is probable of not occurring. PPL had no such reclassifications for 2013, 2012 and 2011.
At December 31, 2013, the accumulated net unrecognized after-tax gains (losses) on qualifying derivatives that are expected to be reclassified into earnings during the next 12 months were $(10) million. Amounts are reclassified as the hedged interest payments are made.
(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 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 over the life of the newly issued debt. For 2013, there was no hedge ineffectiveness recorded for the interest rate derivatives.
Fair Value Hedges
(PPL)
PPL is exposed to changes in the fair value of its debt portfolio. To manage this risk, financial contracts may be entered into to hedge fluctuations in the fair value of existing debt issuances due to changes in benchmark interest rates. In July 2012, contracts held by PPL that ranged in maturity through 2047 and had a notional value of $99 million were canceled without penalties by the counterparties. PPL did not hold any such contracts at December 31, 2013 or 2012. PPL did not recognize gains or losses resulting from the ineffective portion of fair value hedges or from a portion of the hedging instrument being excluded from the assessment of hedge effectiveness or from hedges of debt issuances that no longer qualified as fair value hedges for 2013, 2012 and 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.
Economic Activity(PPL, LKE and LG&E)
LG&E enters into interest rate swap contracts that economically hedge interest payments on variable rate debt. Because realized gains and losses from the swaps, including a terminated swap contract, are recoverable through regulated rates, any subsequent changes in fair value of these derivatives are included in regulatory assets or liabilities until they are realized as interest expense. Realized gains and losses are recognized in "Interest Expense" on the Statements of Income when the hedged transaction occurs. At 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 is exposed to foreign currency risk, primarily through investments in and earnings of U.K. affiliates. PPL has adopted a foreign currency risk management program designed to hedge certain foreign currency exposures, including firm commitments, recognized assets or liabilities, anticipated transactions and net investments. In addition, PPL enters into financial instruments to protect against foreign currency translation risk of expected earnings.
Net Investment Hedges
PPL enters into foreign currency contracts on behalf of a subsidiary to protect the value of a portion of its net investment in WPD. The contracts outstanding at December 31, 2013 had a notional amount of £301 million (approximately $477 million based on contracted rates). The settlement dates of these contracts 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, 2013, the outstanding balances of the intercompany loans were £42 million (approximately $69 million based on spot rates). For 2013 and 2012, PPL recognized insignificant amounts of net investment hedge after-tax gains (losses) on the intercompany loans in the foreign currency translation adjustment component of OCI.
At December 31, 2013 and 2012, PPL had an insignificant amount and $14 million of accumulated net investment hedge after-tax gains (losses) that were included in the foreign currency translation adjustment component of AOCI.
Economic Activity
PPL enters into foreign currency contracts on behalf of a subsidiary to economically hedge GBP-denominated anticipated earnings. At December 31, 2013, the total exposure hedged by PPL was 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 purchase 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 gains (losses) in "Other Income (Expense) - net" on the Statement of Income.
Accounting and Reporting
(All Registrants)
All derivative instruments are recorded at fair value on the Balance Sheet as an asset or liability unless NPNS is elected. NPNS contracts for PPL and PPLTalen Energy Supply include certain full-requirement sales contracts, other physical purchase and sales contracts and certain retail energy and physical capacity contracts, and for PPL Electric include certain full-requirement purchase contracts and other physical purchase contracts. Changes in the fair value of derivatives not designated as NPNS are recognized currently in earnings unless specificearnings. Talen Energy has many physical and financial commodity purchases and sales contracts that economically hedge accounting criteriacommodity price risk. Certain of the economic hedging strategies employed by Talen Energy utilize a combination of financial purchases and sales contracts. Realized and unrealized gains (losses) on these contracts are metrecorded currently in earnings. Generally each contract is considered a unit of account and designated as such, except for the change in fair value of LG&E'sTalen Energy presents gains (losses) on physical and KU's interest rate swaps thatfinancial commodity contracts based upon their economic hedging strategy. Generation revenue hedge strategies are recognized as regulatory assets or regulatory liabilities. See Note 6 for amounts recorded in regulatory assets"Wholesale energy" on the Statements of Income. Retail sales strategies are recorded in "Retail energy" on the Statements of Income. Gas, oil and regulatory liabilities at December 31, 2013coal generation supply strategies are recorded in "Fuel" on the Statements of Income. Non-generation power and 2012.fuel supply strategies are recorded in "Energy purchases" on the Statements of Income. Certain Talen Energy subsidiaries participate in RTOs and ISOs. Talen Energy accounts for these transactions on a net hourly basis because the transactions are settled on a net hourly basis. Talen Energy records realized hourly net sales or purchases of physical power with RTOs and ISOs in its Statements of Income as "Wholesale energy" if in a net sales position and "Energy purchases" if in a net purchase position.
See Note 1 for additional information on accounting policies related to derivative instruments.
(PPL)
The following table presents the fair value and location of commodity derivative instruments not designated as hedging instruments recorded on the Balance Sheets.
|
| | | | | | | | | | | | | | | | |
| | December 31, 2015 | | December 31, 2014 |
| | Assets | | Liabilities | | Assets | | Liabilities |
Current: | | | | | | | | |
Price Risk Management Assets/Liabilities: | | $ | 562 |
| | $ | 431 |
| | $ | 1,079 |
| | $ | 1,024 |
|
Noncurrent: | | | | | | | | |
Price Risk Management Assets/Liabilities: | | 131 |
| | 108 |
| | 239 |
| | 193 |
|
Total derivatives | | $ | 693 |
| | $ | 539 |
| | $ | 1,318 |
| | $ | 1,217 |
|
| | | | | | | 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): | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Interest rate swaps (b) | | $ | 82 | | | | | | | | $ | 4 | | $ | 14 | | $ | 22 | | | | | $ | 5 |
| | | Cross-currency swaps | | | | | $ | 4 | | | | | | | | | | | | 3 | | | | | | |
| | | Foreign currency | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | contracts | | | | | | 16 | | | | | | 55 | | | | | | 2 | | | | | | 23 |
| | | Commodity contracts | | | | | | | | $ | 860 | | | 750 | | | 59 | | | | | $ | 1,452 | | | 1,010 |
| | | | | Total current | | | 82 | | | 20 | | | 860 | | | 809 | | | 73 | | | 27 | | | 1,452 | | | 1,038 |
Noncurrent: | | | | | | | | | | | | | | | | | | | | | | | | |
| Price Risk Management | | | | | | | | | | | | | | | | | | | | | | | | |
| | Assets/Liabilities (a): | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Interest rate swaps (b) | | | 9 | | | | | | | | | 32 | | | 1 | | | | | | | | | 53 |
| | | Cross-currency swaps | | | | | | 28 | | | | | | | | | 14 | | | 1 | | | | | | |
| | | Foreign currency | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | contracts | | | | | | 4 | | | | | | 31 | | | | | | | | | | | | 19 |
| | | Commodity contracts | | | | | | | | | 328 | | | 320 | | | 27 | | | | | | 530 | | | 556 |
| | | | | Total noncurrent | | | 9 | | | 32 | | | 328 | | | 383 | | | 42 | | | 1 | | | 530 | | | 628 |
Total derivatives | | $ | 91 | | $ | 52 | | $ | 1,188 | | $ | 1,192 | | $ | 115 | | $ | 28 | | $ | 1,982 | | $ | 1,666 |
127
(b) | Excludes accrued interest, if applicable. |
The following tables present the pre-tax effect of derivative instruments recognized in income, OCI or regulatory assets and regulatory liabilities.
income.
| 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 |
|
| | | | | | | | | | | | | | |
| | | | Gain (Loss) Reclassified from AOCI into Income (Effective Portion) |
Derivative Relationships | | Location of Gain (Loss) Recognized in Income on Derivative | | 2015 | | 2014 | | 2013 |
Cash Flow Hedges: | | | | | | | | |
Commodity contracts | | Wholesale energy | | $ | (3 | ) | | $ | 1 |
| | $ | 240 |
|
| | Energy purchases | | 33 |
| | 31 |
| | (58 | ) |
| | Depreciation | | 1 |
| | 2 |
| | 2 |
|
| | Discontinued operations | | — |
| | 8 |
| | 23 |
|
| | Total | | $ | 31 |
| | $ | 42 |
| | $ | 207 |
|
| | | | | | | | | | | | | 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) | | | | | | | | |
| | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | |
Derivatives Not Designated as Hedging Instruments | | Location of Gain (Loss) Recognized in Income on Derivative | | 2015 | | 2014 | | 2013 |
Commodity contracts | | Wholesale energy | | $ | 742 |
| | $ | (505 | ) | | $ | (9 | ) |
| | Retail energy | | 22 |
| | 30 |
| | 25 |
|
| | Fuel | | (6 | ) | | (30 | ) | | 2 |
|
| | Energy purchases | | (452 | ) | | 165 |
| | 40 |
|
| | Discontinued operations | | — |
| | 6 |
| | 14 |
|
| | Total | | $ | 306 |
| | $ | (334 | ) | | $ | 72 |
|
| | | | | | | | | | | | | 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 | | | | | | | | |
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, 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 |
| | | | | | | 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) | Represents the location on the Balance Sheet. |
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 | | | | | | |
| 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 |
| | | | | | | | | | | |
2011 | | | | | | | | | | |
| Interest rate swaps | | Fixed rate debt | | Interest Expense | | | | | $ | 2 |
| | | | | | | | | | | | | Gain (Loss) Recognized |
| | | | | | | | | | | | | in Income on Derivative |
| | | | | Derivative Gain | | | | Gain (Loss) Reclassified | | (Ineffective Portion and |
| | | Derivative | | (Loss) Recognized in | | Location of Gain (Loss) | | from AOCI into Income | | Amount Excluded from |
| | | Relationships | | OCI (Effective Portion) | | Recognized in Income | | (Effective Portion) | | Effectiveness Testing) |
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 | | | | | | | | | |
Hedging Instruments | | Income on Derivatives | | | 2013 | | | 2012 | | | 2011 |
| | | | | | | | | | | |
Commodity contracts | | Unregulated wholesale energy | | $ | (85) | | $ | 1,199 | | $ | 1,600 |
| | Unregulated retail energy | | | 25 | | | 30 | | | 39 |
| | Fuel | | | 2 | | | | | | (1) |
| | Energy purchases | | | 130 | | | (965) | | | (1,493) |
| | Total | | $ | 72 | | $ | 264 | | $ | 145 |
(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, 2013 | | December 31, 2012 |
| | | | | | | Assets | | Liabilities | | | Assets | | Liabilities | |
Current: | | | | | | | | | | | | | | |
| Price Risk Management | | | | | | | | | | | | | | |
| | Assets/Liabilities (a): | | | | | | | | | | | | | | |
| | | Interest rate swaps | | | | | | | | | $ | 14 | | | | |
(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, 2013 | | December 31, 2012 |
| | | | | | | Assets | | Liabilities | | | Assets | | Liabilities | |
Current: | | | | | | | | | | | | | | |
| Price Risk Management | | | | | | | | | | | | | | |
| | Assets/Liabilities (a): | | | | | | | | | | | | | | |
| | | Interest rate swaps | | | | | | | | | $ | 7 | | | | |
(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 | | $ | 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, 2013 | | December 31, 2012 |
| | | | | | | Assets | | Liabilities | | | Assets | | Liabilities | |
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.
| | | | | | | 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, PPLCertain subsidiaries of Talen 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 ana FCM to use and apply any property in its possession as a set offsetoff 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, PPLCertain subsidiaries of Talen 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 setoffoffset 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, PPLTalen Energy Supply, LKE, LG&E and KU havehas 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 energy commodities 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 |
| | | | | 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 | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Assets | | Liabilities |
| | | | | | Eligible for Offset | | | | | | Eligible for Offset | | |
| | | | Gross | | Derivative Instruments | | Cash Collateral Received | | Net | | Gross | | Derivative Instruments | | Cash Collateral Pledged | | Net |
December 31, 2015 | | $ | 693 |
| | $ | 437 |
| | $ | 74 |
| | $ | 182 |
| | $ | 539 |
| | $ | 437 |
| | $ | 30 |
| | $ | 72 |
|
| | | | | | | | | | | | | | | | | | |
December 31, 2014 | | $ | 1,318 |
| | $ | 1,060 |
| | $ | 10 |
| | $ | 248 |
| | $ | 1,217 |
| | $ | 1,060 |
| | $ | 58 |
| | $ | 99 |
|
Credit Risk-Related Contingent Features
Certain derivative contracts contain credit risk-related contingent features which, when in a net liability position, would permit the counterparties to require the transfer of additional collateral upon a decrease in the credit ratings of PPL, PPL Energy Supply, LKE, LG&E and KU or certain of their subsidiaries.Talen Energy. Most of these features would require the transfer of additional collateral or permit the counterparty to terminate the contract if the applicable credit rating were to fall below investment grade. Some of these features also would allow the counterparty to require additional collateral upon each downgrade in the credit rating at levels that remain above investment grade. In either case, if the applicable credit rating were to fall below investment grade, (i.e., below BBB- for S&P or Fitch, or Baa3 for Moody's), and assuming no assignment to an investment grade affiliate were allowed, most of these credit contingent features require either immediate payment of the net liability as a termination payment or immediate and ongoing full collateralization on derivative instruments in net liability positions. Talen Energy's credit rating is currently below investment grade.
Additionally, certain derivative contracts contain credit risk-related contingent features that require adequate assurance of performance be provided if the other party has reasonable concerns regarding the performance of PPL'sTalen Energy'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" features.
At December 31, 2013,2015, the effectvalue of a decrease in credit ratings below investment grade on derivative contracts in a net liability position that contain credit risk-related contingent features was $70 million. Collateral posted on those positions was $71 million and the additional potential collateral requirements, primarily related to further adequate assurance features, were in a$34 million, which is net liability position is summarized as follows:of receivables and payables already recorded on the Balance Sheet.
16. Goodwill and Other Asset Impairments
| | | | | | | 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 |
U.S. GAAP requires that a long-lived asset (or asset group) be tested for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Similarly, a goodwill impairment test is performed annually or more frequently if events or changes in circumstances indicate that more likely than not the carrying amount of a reporting unit may be greater than its fair value. During the second quarter of 2015, due to the impairment of its investment in PPL Energy Supply recorded by PPL (Talen Energy's former parent) at the time of the spinoff, coupled with, and, primarily driven by, Talen Energy Corporation's stock price at the spinoff date, Talen Energy's management concluded that these factors could be indicators of potential impairment with respect to certain long-lived assets and goodwill. After considering additional information, Talen Energy determined that the undiscounted cash flows for potentially affected long-lived assets would not be directly impacted by these factors and therefore concluded that the undiscounted cash flows continued to exceed the carrying value and no further testing of long-lived assets was necessary in the second quarter. Management also performed an interim goodwill impairment assessment as of June 1, 2015, the spinoff and acquisition date. The goodwill impairment analysis is a two-step process. The first step, used to identify potential impairment, is a comparison of the reporting unit's estimated fair value to its carrying value, including goodwill. If the fair value of the reporting unit exceeds its carrying value, applicable goodwill is not considered to be impaired. If the carrying value exceeds the fair value, there is an indication of impairment and the second step is performed to measure the amount of the impairment, if any. The second step requires a company to calculate an implied fair value of goodwill based on a hypothetical purchase price allocation. The East reporting unit, which is equivalent to the East segment, failed step one as of June 1, 2015. The step two analysis was not able to be completed by the filing of the second quarter Form 10-Q. As provided for in the applicable accounting guidance, no goodwill impairment charge was recorded based on management's best estimate at that time, which was confirmed when the second quarter analysis was subsequently completed.
| (a) | Includes the effect of net receivables and payables already recorded on the Balance Sheet. |
In the third quarter of 2015, Talen Energy updated its fundamental pricing models in conjunction with market information gained as a result of the 2018/2019 planning year PJM capacity auction completed in August 2015. As a result, Talen Energy assessed certain long-lived assets for impairment and determined that the C.P. Crane coal-fired plant failed a recoverability test and as a result, recorded an impairment charge based on the plant's estimated fair value at September 30, 2015. Additionally, because the Sapphire plants were classified as held for sale and must be carried at the lower of its current carrying value or fair value less cost to sell, Talen Energy used updated cash flow information to calculate the estimated fair value of the Sapphire plants at September 30, 2015 and recorded an impairment charge based on estimated fair value. At November 30, 2015, in connection with the Sapphire plants being reclassified to held and used and continuing operations from held for sale and discontinued operations, management reassessed the fair value of each facility and recorded additional impairment charges. See Note 14 for additional information on these fair value estimates and the resulting non-cash asset impairment charges.
In addition, management's forward view of energy and capacity prices in PJM used in its fundamental pricing models, along with the consideration of other market information, has put pressure on the recoverability assessment of Talen Energy's other coal-fired generation assets. In December 2015, based on the availability of new gas price forecasts, management updated its fundamental view for long-term power, capacity and gas prices. Based upon the change in this fundamental view, management tested its coal-fired generation located primarily within the PJM market for impairment and concluded that the plants were not impaired at December 31, 2015. The recoverability assessment 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 Talen Energy's operations primarily at its PJM based coal-fired facilities and potentially result in impairment charges for some or all of the carrying value of these plants. The carrying value of Talen Energy's coal-fired generation assets was more than $3 billion as of December 31, 2015.
20. Goodwill and Other Intangible Assets |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Goodwill |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(PPL) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
The changes in the carrying amount of goodwill by segment were: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | U.K. Regulated | | Kentucky Regulated | | Supply | | Total |
| | | | | 2013 | | 2012 | | 2013 | | 2012 | | 2013 | | 2012 | | 2013 | | 2012 |
PPL | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at beginning of period (a) | | $ | 3,076 | | $ | 3,032 | | $ | 662 | | $ | 662 | | $ | 420 | | $ | 420 | | $ | 4,158 | | $ | 4,114 |
| Changes during the period (b) | | | 67 | | | 44 | | | | | | | | | | | | | | | 67 | | | 44 |
Balance at end of period (a) | | $ | 3,143 | | $ | 3,076 | | $ | 662 | | $ | 662 | | $ | 420 | | $ | 420 | | $ | 4,225 | | $ | 4,158 |
Finally, Talen Energy Corporation's stock price declined significantly throughout the third quarter of 2015, indicating a significant change in the financial markets' view of the value of Talen Energy's business and/or the industry in which it operates and potential risks associated with an investment in Talen Energy Corporation's common stock. As a result, Talen Energy management concluded that these factors could be indicators of goodwill impairment and reconsidered certain inputs incorporated in its assessment of fair value of both Talen Energy's overall business and the East reporting unit, where all of the goodwill was assigned. These inputs include risk premiums, growth rates, Talen Energy Corporation's stock price expectations and implied multiples from comparable companies' stock prices. Based on this reassessment, the East reporting unit further declined in fair value, when compared to the value calculated in the second quarter of 2015 and again failed step one as of September 30, 2015. The step two analysis was also completed during the third quarter and resulted in a non-cash goodwill impairment charge of $466 million pre-tax recorded for the East segment included within "Income (Loss) from Continuing Operations" in the Statement of Income for the year ended December 31, 2015. The impairment charge represented all of the goodwill reflected on the Balance Sheet. Most of the impaired goodwill is not deductible for tax purposes and there is no cash tax benefit related to the impairment. To estimate the fair value of Talen Energy's overall business and the East reporting unit, Talen Energy performed an internal analysis using a combination of a market approach using comparable businesses and an income approach based on discounted cash flows. Assumptions used in the discounted cash flow model, in addition to those discussed above, were the forward energy and capacity price curves, forecasted generation, and forecasted operation, maintenance and capital expenditures and a market participant discount rate. The market approach primarily applies EBITDA multiples, based on the implied market value of comparable publicly traded companies, to Talen Energy's and the East reporting unit's EBITDA to determine estimated fair values. During the fourth quarter of 2015, Talen Energy recorded various adjustments to the purchase price allocation for the RJS Power acquisition resulting in an adjustment to the goodwill recognized for the acquisition, which resulted in an insignificant adjustment to the previously recorded goodwill impairment.
The changes in carrying amount of Talen Energy's goodwill by segment for the years ended December 31 were as follows.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | East | | West | | Total |
| | 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 |
Balance at beginning of period (a) | | $ | 72 |
| | $ | 72 |
| | $ | — |
| | $ | 14 |
| | $ | 72 |
| | $ | 86 |
|
Goodwill recognized during the period (b) | | 393 |
| | — |
| | — |
| | — |
| | 393 |
| | — |
|
Allocation to discontinued operations (c) | | — |
| | — |
| | — |
| | (14 | ) | | — |
| | (14 | ) |
Impairment | | (465 | ) | | — |
| | — |
| | — |
| | (465 | ) | | — |
|
Balance at end of period (a) | | $ | — |
| | $ | 72 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 72 |
|
| |
(a) | There were was no accumulated impairment lossesloss related to goodwill.goodwill at December 31, 2014 and $465 million at December 31, 2015. |
| |
(b) | Primarily the effect of foreign currency exchange rates. |
Other Intangible Assets |
| | | | | | | | | | | | | | |
(PPL) |
| | | | | | | | | | | | | | |
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: | | | | | | | | | | | | |
| Contracts (a) | | $ | 408 | | $ | 202 | | $ | 408 | | $ | 150 |
| Land and transmission rights | | | 331 | | | 117 | | | 284 | | | 113 |
| Emission allowances/RECs (b) | | | 16 | | | | | | 17 | | | |
| Licenses and other (c) | | | 305 | | | 45 | | | 287 | | | 39 |
Total subject to amortization | | | 1,060 | | | 364 | | | 996 | | | 302 |
| | | | | | | | | | | | | | |
Not subject to amortization due to indefinite life: | | | | | | | | | | | | |
| Land and transmission rights | | | 16 | | | | | | 18 | | | |
| Easements (d) | | | 239 | | | | | | 220 | | | |
Total not subject to amortization due to indefinite life | | | 255 | | | | | | 238 | | | |
Total | | $ | 1,315 | | $ | 364 | | $ | 1,234 | | $ | 302 |
(a) | Gross carrying amount includes the fair value at the acquisition date of coal contracts with terms favorable to market recognizedRecognized as a result of the 2010 acquisition of LKE by PPL. An offsetting regulatory liability was recorded related to these contracts, which is being amortized over the same period as the intangible assets, eliminating any income statement impact. This is referred to as "regulatory offset" in the tables below.RJS Power. See Note 6 for additional information. |
(b) | Emission allowances/ |
(c) | Goodwill allocated to the sale of the Talen Montana hydroelectric generating facilities and written off. See Note 6 for additional information related to the sale. |
In 2014 and 2013, Talen Energy also recorded impairments related to the Kerr Dam project and Corette plant, both in Montana. See Note 14 for additional information.
17. Other Intangible Assets
The gross carrying amount and the accumulated amortization of other intangible assets were:
|
| | | | | | | | | | | | | | | |
| December 31, 2015 | | December 31, 2014 |
| Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
Land and transmission rights | $ | 16 |
| | $ | 13 |
| | $ | 17 |
| | $ | 14 |
|
Emission allowances/RECs (a) | 9 |
| |
| | 10 |
| | |
Licenses and other (b) (c) | 325 |
| | 23 |
| | 270 |
| | 19 |
|
Total | $ | 350 |
| | $ | 36 |
| | $ | 297 |
| | $ | 33 |
|
| |
(a) | Includes emission allowances and RECs that are expensed when consumed or sold; therefore, there is 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: |
| | | 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 86 for additional information on the COLA. |
| |
(c) | "Other" also includes intangibles acquired as part of the RJS Power acquisition including $28 million for a pipeline lease that is being amortized over a 14 year period and $16 million for an ash site permit that is being amortized over a 22 year period. |
Current intangible assets are included in "Other current assets" and long-term intangible assets are presented as "Other intangibles" on the Balance Sheets.
Amortization expense for the years ended December 31, excluding consumption of emission allowances/allowances, RECs and RGGI credits of $44 million, $24 million and $23 million $12 million,in 2015, 2014, and $16 million in 2013, 2012, and 2011 was as follows:
| | | 2013 | | | 2012 | | | 2011 |
| | | | | | | | | |
Amortization expense | | $ | 5 | | $ | 9 | | $ | 20 |
Amortization expense and consumption of emission allowances/RECs is expected to be insignificant in future years. |
(PPL Electric) |
| | | | | | | | | | | | | | |
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 | | $ | 293 | | $ | 102 | | $ | 249 | | $ | 99 |
| Licenses and other | | | 5 | | | 1 | | | 4 | | | 1 |
Total subject to amortization | | | 298 | | | 103 | | | 253 | | | 100 |
| | | | | | | | | | | | | | |
Not subject to amortization due to indefinite life: | | | | | | | | | | | | |
| Land and transmission rights | | | 16 | | | | | | 18 | | | |
Total | | $ | 314 | | $ | 103 | | $ | 271 | | $ | 100 |
Intangible assets are shown as "Intangibles" on the Balance Sheets. |
| | | | | | | | | | | |
| 2015 | | 2014 | | 2013 |
Amortization Expense | $ | 4 |
| | $ | 4 |
| | $ | 5 |
|
Amortization expense, was insignificant in 2013, 2012excluding consumption of emission allowances and 2011 andRGGI credits is expected to be insignificant in future years.
(LKE) |
| | | | | | | | | | | | | | |
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) | | $ | 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) | 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 | | | | | $ | 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 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 | | $ | 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 |
18. Asset Retirement Obligations
21. Asset Retirement Obligations
(PPL)
WPD has recorded conditional AROs required by U.K. law related to treated wood poles, gas-filled switchgear and fluid-filled cables.
(PPL and PPLTalen Energy Supply)
PPL Energy Supply has recorded AROs to reflect various legal obligations associated with the retirement of long-lived assets, the most 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 thatAssets in the NDT funds are legally restricted for the decommissioningpurpose 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.settling this ARO. See Notes 1814 and 2319 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.
PPLTalen Energy Supply has recorded several conditional AROs, the most significant of which is related to the removal and disposal of asbestos-containing material. In addition to the AROs that were recorded for asbestos-containing material, PPLTalen Energy Supply identified other asbestos-related obligations, but was unable to reasonably estimate their fair values. PPLTalen Energy Supply management was unable to reasonably estimate a settlement date or range of settlement dates for the remediation of all of the asbestos-containing material at certain of the generation plants. If economic events or other circumstances change that enable PPLTalen Energy Supply to reasonably estimate the fair value of these retirement obligations, they will be recorded at that time.
PPLTalen Energy Supply also identified legal retirement obligations associated with the retirement of a reservoir that could not be reasonably estimated due to an indeterminable settlement 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 Talen Energy's AROs were as follows.
| | | | PPL | | PPL Energy Supply | |
| | | | 2013 | | 2012 | | 2013 | | 2012 | | | | | |
| | | | | | | | | | | | | 2015 | | 2014 |
ARO at beginning of period | ARO at beginning of period | | $ | 552 | | $ | 497 | | $ | 375 | | $ | 359 | $ | 425 |
| | $ | 404 |
|
| 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) | |
Accretion expense | | 35 |
| | 32 |
|
Changes in estimate of cash flow or settlement date (a) | | 25 |
| | (16 | ) |
Obligations assumed in RJS Power acquisition | | 18 |
| | — |
|
Obligations incurred | | 2 |
| | 13 |
|
Obligations settled | | (4 | ) | | (8 | ) |
ARO at end of period | ARO at end of period | | $ | 705 | | $ | 552 | | $ | 404 | | $ | 375 | $ | 501 |
| | $ | 425 |
|
| | | | 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 |
| |
(a) | Includes increases in 2015 of $41 million as a result of a new CCR rule. Further changes to the AROs may be required as estimates are refined and analysis of the rule continues. |
Substantially all of the ARO balances are classified as noncurrentnon-current at December 31, 20132015 and 2012.2014.
22. Variable Interest Entities
(PPL and PPL Energy Supply)
In December 2001, a subsidiaryTable 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 ended in December 2013. Under a residual value guarantee, if the generation facility was sold at the end of the lease term and the cash proceeds from the sale were less than the original acquisition cost, the subsidiary of PPL Energy Supply was obligated to pay up to 70.52% of the original acquisition cost. This residual value guarantee protected the other variable interest holders from losses related to their investments. LMB Funding, LP could 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 consolidated this VIE.Contents
The lease financing, which included $437 million of debt and $18 million of "Noncontrolling interests" was secured by, among other things, the generation facility, the carrying amount of which is disclosed on the Balance Sheet. As a result of the consolidation, PPL Energy Supply recorded interest expense in lieu of rent expense. For 2013, 2012 and 2011, additional depreciation on the generation facility of $12 million, $16 million and $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.
23.19. Available-for-Sale Securities
(PPL and PPL Energy Supply)
Securities held by theTalen Energy's NDT funds and auction rate securities are classified as available-for-sale.
The following table shows the amortized cost, the gross unrealized gains and losses recorded in AOCI and the fair value of Talen Energy's 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 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2015 | | December 31, 2014 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
NDT funds: | | | | | | | | | | | | | | | |
Cash and cash equivalents | $ | 11 |
| | $ | — |
| | $ | — |
| | $ | 11 |
| | $ | 19 |
| | $ | — |
| | $ | — |
| | $ | 19 |
|
Equity securities | 297 |
| | 406 |
| | — |
| | 703 |
| | 283 |
| | 417 |
| | — |
| | 700 |
|
Debt securities | 230 |
| | 7 |
| | — |
| | 237 |
| | 218 |
| | 11 |
| | — |
| | 229 |
|
Receivables/payables, net | — |
| | — |
| | — |
| | — |
| | 2 |
| | — |
| | — |
| | 2 |
|
Total NDT funds | $ | 538 |
| | $ | 413 |
| | $ | — |
| | $ | 951 |
| | $ | 522 |
| | $ | 428 |
| | $ | — |
| | $ | 950 |
|
| | | | | | | | | | | | | | | |
Auction rate securities | $ | 6 |
| | $ | — |
| | $ | — |
| | $ | 6 |
| | $ | 8 |
| | $ | — |
| | $ | — |
| | $ | 8 |
|
See Note 1814 for details on the securities held by the NDT funds.
There were no securities with credit losses at December 31, 20132015 and 2012.2014.
The following table shows the scheduled maturity dates of debt securities held at December 31, 2013.2015.
|
| | | | | | | | | | | | | | | | | | | |
| Maturity Less Than 1 Year | | Maturity 1-5 Years | | Maturity 6-10 Years | | Maturity in Excess of 10 Years | | Total |
Amortized cost | $ | 7 |
| | $ | 101 |
| | $ | 67 |
| | $ | 61 |
| | $ | 236 |
|
Fair value | 7 |
| | 102 |
| | 69 |
| | 65 |
| | 243 |
|
| | | Maturity | | Maturity | | Maturity | | Maturity | | | |
| | | Less Than | 1-5 | 6-10 | in Excess | | |
| | | 1 Year | Years | Years | of 10 Years | Total |
PPL | | | | | | | | | | | | | | | |
Amortized cost | | $ | 7 | | $ | 97 | | $ | 54 | | $ | 79 | | $ | 237 |
Fair value | | | 7 | | | 99 | | | 55 | | | 79 | | | 240 |
| | | | | | | | | | | | | | | | |
PPL Energy Supply | | | | | | | | | | | | | | | |
Amortized cost | | $ | 7 | | $ | 97 | | $ | 54 | | $ | 76 | | $ | 234 |
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. |
| | | | | | | | | | | |
| 2015 | | 2014 | | 2013 |
Proceeds from sales of NDT securities (a) | $ | 180 |
| | $ | 154 |
| | $ | 144 |
|
Other proceeds from sales | 2 |
| | 9 |
| | — |
|
Gross realized gains (b) | 26 |
| | 23 |
| | 17 |
|
Gross realized losses (b) | 22 |
| | 10 |
| | 7 |
|
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 |
PPL Energy Supply | | | | | | | | | |
Proceeds from sales of NDT securities (a) | | $ | 144 | | $ | 139 | | $ | 156 |
Other proceeds from sales | | | | | | 3 | | | |
Gross realized gains (b) | | | 17 | | | 29 | | | 28 |
Gross realized losses (b) | | | 7 | | | 21 | | | 16 |
| |
(a) | These proceeds are used to pay income taxes and fees related to managing the trust. Remaining proceeds are reinvested in the trust. |
| |
(b) | Excludes the impact of other-than-temporary impairment charges recognized on the Statements of Income. |
Short-term Investments(PPL, LKE and LG&E)
At 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. In 2011, LG&E received $163 million for its investments in these bonds when they were remarketed to unaffiliated investors. No realized or unrealized gains (losses) were recorded on these securities, as the difference between carrying value and fair value was not significant.
NDT Funds(PPL and PPL Energy Supply)
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 Nuclear would be obligated to fund 90% of the shortfall.
24.20. Accumulated Other Comprehensive Income (Loss)
(PPL, PPL Energy Supply and LKE)The after-tax changes in Talen Energy's AOCI by component for the years ended December 31 were as follows.
AOCI, which is presented on the Balance Sheet of PPL and included in Member's equity on the Balance Sheets of PPL Energy Supply and LKE, consisted of the following after-tax gains (losses).
| | | | | 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 |
(a) | See Note 9 for additional information. |
|
| | | | | | | | | | | | | | | | | | | |
| Unrealized gains (losses) | | Defined benefit plans | | |
| Available- for-sale securities | | Qualifying derivatives | | Prior service costs | | Actuarial gain (loss) | | Total |
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 |
|
| | | | | | | | | |
Amounts arising during the period | 35 |
| | — |
| | 8 |
| | (120 | ) | | (77 | ) |
Reclassifications from AOCI | (6 | ) | | (25 | ) | | 3 |
| | 5 |
| | (23 | ) |
Net OCI during the period | 29 |
| | (25 | ) | | 11 |
| | (115 | ) | | (100 | ) |
December 31, 2014 | $ | 202 |
|
| $ | 63 |
|
| $ | 7 |
|
| $ | (295 | ) |
| $ | (23 | ) |
| | | | | | | | | |
Amounts arising during the period | (6 | ) | | — |
| | (3 | ) | | 46 |
| | 37 |
|
Reclassifications from AOCI | (2 | ) | | (19 | ) | | (1 | ) | | (18 | ) | | (40 | ) |
Net OCI during the period | (8 | ) | | (19 | ) | | (4 | ) | | 28 |
| | (3 | ) |
December 31, 2015 | $ | 194 |
| | $ | 44 |
| | $ | 3 |
| | $ | (267 | ) | | $ | (26 | ) |
The following table presents the gains (losses) and related income taxes for reclassifications from Talen Energy's AOCI for the yearyears ended December 31, 2013.31. The defined benefit plan components of AOCI are not reflected in their entirety in the statement of income;income during the years; rather, they are included in the computation of net periodic defined benefit costs (credits). See Note 139 for additional information.
|
| | | | | | | | | | |
| | | | | | Affected Line Item on the |
Details about AOCI | | 2015 | | 2014 | | Statements of Income |
Available-for-sale securities | | $ | 4 |
| | $ | 13 |
| | Other Income (Expense) - net |
Income Taxes | | (2 | ) | | (7 | ) | | |
Total After-tax | | 2 |
| | 6 |
| | |
| | | | | | |
Qualifying derivatives | | | | | | |
Commodity contracts | | (3 | ) | | 1 |
| | Wholesale energy |
| | 33 |
| | 31 |
| | Energy purchases |
| | — |
| | 8 |
| | Discontinued operations |
| | 1 |
| | 2 |
| | Other |
Total Pre-tax | | 31 |
| | 42 |
| | |
Income Taxes | | (12 | ) | | (17 | ) | | |
Total After-tax | | 19 |
| | 25 |
| | |
| | | | | | |
Defined benefit plans | | | | | | |
Prior service costs | | 1 |
| | (4 | ) | | |
Net actuarial loss | | 29 |
| | (9 | ) | | |
Total Pre-tax | | 30 |
| | (13 | ) | | |
Income Taxes | | (11 | ) | | 5 |
| | |
Total After-tax | | 19 |
| | (8 | ) | | |
Total reclassifications during the period | | $ | 40 |
| | $ | 23 |
| | |
| | | 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 |
25.21. New Accounting Guidance Pending Adoption
(All Registrants)Accounting for Revenue from Contracts with Customers
AccountingIn May 2014, the FASB issued accounting guidance that establishes a comprehensive new model for Obligations Resultingthe recognition of revenue from Joint and Several Liability Arrangementscontracts with customers. This model is based on the core principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
EffectiveThis guidance can be applied using either a full retrospective or modified retrospective transition method. In August 2015, the FASB issued guidance that defers the effective date of the standard by one year, which for public business entities, results in initial application of this guidance in annual reporting periods beginning after December 15, 2017 and interim periods within those years. Entities may early adopt the guidance as of the original effective date of the standard, which for public business entities is annual reporting periods beginning after December 15, 2016. Talen Energy expects to adopt this guidance effective January 1, 2018.
Talen Energy is currently assessing the impact of adopting this guidance, as well as the transition method it will use.
Reporting Uncertainties about an Entity's Ability to Continue as a Going Concern
In August 2014, the RegistrantsFASB issued accounting guidance which will retrospectivelyrequire management to assess, for each interim and annual period, whether there are conditions or events that raise substantial doubt about an entity's ability to continue as a going concern. Substantial doubt about an entity's ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date the financial statements are issued.
When management identifies conditions or events that raise substantial doubt about an entity's ability to continue as a going concern, management is required to disclose information that enables users of the financial statements to understand the principal conditions or events that raised substantial doubt about the entity's ability to continue as a going concern and management's evaluation of the significance of those conditions or events. If substantial doubt about the entity's ability to continue as a going concern has been alleviated as a result of management's plan, the entity should disclose information that allows the users of the financial statements to understand those plans. If the substantial doubt about the entity's ability to continue as a going concern is not alleviated by management's plans, management's plans to mitigate the conditions or events that gave rise to the substantial doubt about the entity's ability to continue as a going concern should be disclosed, as well as a statement that there is substantial doubt the entity's ability to continue as a going concern within one year after the date the financial statements are issued.
For all entities, this guidance should be applied prospectively within the annual periods ending after December 15, 2016, and for annual periods and interim periods thereafter. Early adoption is permitted.
Talen Energy will adopt accountingthis 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.
annual period ending December 31, 2016. The adoption of this guidance is not expected to have a significant impact onimpact.
Determining Whether the Registrants.Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity
AccountingIn November 2014, the FASB issued guidance that clarifies how current accounting guidance should be interpreted when evaluating the economic characteristics and risks of a host contract of a hybrid financial instrument issued in the form of a share. This guidance does not change the current criteria for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity ordetermining whether separation of an Investment inembedded derivative feature from a Foreign Entityhybrid financial instrument is required. Entities are still required to evaluate whether the economic risks of the embedded derivative feature are clearly and closely related to those of the host contract, among other relevant criteria.
Effective January 1, 2014, PPL will prospectively adopt accounting guidance that requires a cumulative translation adjustment to be released into earnings when anAn entity ceases to have a controlling financial interest in a subsidiary or group of assets within a consolidated foreign entityshould consider the substantive terms and the sale or transfer results in the complete or substantially complete liquidationfeatures of the foreign entity. entire hybrid financial instrument, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract to determine whether the host contract is more akin to a debt instrument or more akin to an equity instrument. An entity should assess the relative strength of the debt-like and equity-like terms and features when determining how to weight those terms and features.
For the step acquisition of previously held equity method investments that are foreignpublic business entities, this guidance clarifies that the amountis effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 and should be applied using a modified retrospective method for existing hybrid financial instruments
issued in the calculationform of a gain or loss shall include any foreign currency translation adjustment related to that previously held investment.share as of the beginning of the fiscal year the guidance is adopted. Early adoption is permitted. Retrospective application is permitted but not required.
The initial adoption ofTalen Energy will adopt 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
Effectiveeffective January 1, 2014, the Registrants will prospectively adopt accounting guidance that requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax
asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position, or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets.
2016. The adoption of this guidance is not expected to have a significant impactimpact.
Simplifying the Presentation of Debt Issuance Costs
In April 2015, the FASB issued accounting guidance to simplify the presentation of debt issuance costs by requiring debt issuance costs to be presented on the Registrants.balance sheet as a direct deduction from the carrying amount of the associated debt liability, consistent with the presentation of debt discounts. Because this guidance did not address the treatment of debt issuance costs related to line-of-credit arrangements, additional guidance was issued in August 2015 stating that an entity may defer and amortize debt issuance costs over the term of a line-of-credit arrangement, regardless of whether there are any related outstanding borrowings.
For public business entities, this guidance should be applied retrospectively for financial statements issued for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. Early adoption is permitted.
Talen Energy will adopt this guidance effective January 1, 2016. The adoption of this guidance will require Talen Energy to reclassify debt issuance costs from assets to long-term debt, and is not expected to have a significant impact.
Recognition of Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued accounting guidance that affects the accounting for equity investments, financial liabilities under the fair value option, and the disclosure requirements for financial instruments. This guidance generally requires entities to measure equity investments that are not accounted for under the equity method of accounting and do not result in consolidation at fair value and recognize any changes in fair value in net income. Entities may elect to record equity investments without readily determinable fair values at cost, less impairment, adjusted for observable price changes. The impairment model for equity investments subject to this election is a single-step qualitative assessment performed each quarter. For financial liabilities measured using the fair value option, changes in fair value related to instrument-specific credit risk to be presented separately within OCI.
For public business entities, this guidance should generally be applied prospectively for financial statements issued for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is generally not permitted, although entities may early adopt the provision related to financial liabilities under the fair value option.
Talen Energy expects to adopt this guidance effective January 1, 2018. Upon adoption, an entity will record a cumulative-effect adjustment to beginning retained earnings as of the beginning of the first reporting period in which the guidance is adopted, with the exception that the amendments related to equity securities with readily determined fair values should be applied prospectively. Talen Energy is currently assessing the impact of adopting this guidance, which may be significant for equity securities held in the NDT funds.
Accounting for Leases
In February 2016, the FASB issued accounting guidance that updates the accounting for leases. The updated guidance will require lessees to recognize assets and liabilities for the rights and obligations created by their leases with lease terms of more than 12 months. Consistent with current accounting guidance, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance (similar to the current capital lease) or an operating lease. However, unlike current accounting guidance, which requires only capital leases to be recognized on the balance sheet, the new accounting guidance will require both types of leases to be recognized on the balance sheet.
The new accounting guidance also will require disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements.
The accounting by lessors will remain largely unchanged. However, the new accounting guidance contains some targeted improvements that are intended to align, where necessary, lessor accounting with the lessee accounting model and with the updated revenue recognition guidance issued in 2014 and discussed above.
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. |
For public business entities, this guidance is effective for annual reporting periods beginning after December 15, 2018 and interim periods within those years. Early application is permitted. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply. These practical expedients relate to the identification and classification of leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date, and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset. An entity that elects to apply the practical expedients will, in effect, continue to account for leases that commence before the effective date in accordance with previous accounting guidance unless the lease is modified, except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous accounting guidance.
Talen Energy is currently assessing the impact of adopting this guidance and expects to adopt this guidance effective January 1, 2019.
SCHEDULE I - TALEN ENERGY CORPORATION
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 |
| | | | | | | |
CONDENSED UNCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME |
(Millions of Dollars, except share data) | | |
| Year Ended December 31, 2015 (a) | | Inception through December 31, 2014 (a) |
Operating Revenues | $ | — |
| | $ | — |
|
Operating Expenses | — |
| | — |
|
Operating Income (Loss) | — |
| | — |
|
Other Income (Expense) - net | | | |
Equity in earnings of subsidiaries | (373 | ) | | — |
|
Total Other Income (Expense) - net | (373 | ) | | — |
|
Net Income (Loss) Attributable to Talen Energy Corporation Stockholders | $ | (373 | ) | | $ | — |
|
Comprehensive Income (Loss) Attributable to Talen Energy Corporation Stockholders | $ | (449 | ) | | $ | — |
|
Earnings Per Share of Common Stock: | | | |
Net Income (Loss) Available to Talen Energy Corporation Common Stockholders | | | |
Basic | $ | (2.90 | ) | | $ | — |
|
Diluted | $ | (2.90 | ) | | $ | — |
|
Weighted-Average Shares of Common Stock Outstanding (in thousands) (b) | | | |
Basic | 128,509 |
| | — |
|
Diluted | 128,509 |
| | — |
|
| |
(a) | Talen Energy Corporation was incorporated in June 2014 and its business operations began in June 2015 after the completion of its spinoff from PPL. Therefore, the 2015 results are primarily from June 1 to December 31, while the 2014 results are from the same period. See Note 1 to the Unconsolidated Financial Statements for additional information. |
| |
(b) | Weighted average shares were calculated for the seven month period from June 1, 2015 to December 31, 2015. |
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. |
Schedule I - LG&E and KU Energy LLC
The accompanying Notes to Condensed Unconsolidated Financial Statements are an integral part of the financial statements.
|
| | | | | | | |
SCHEDULE I - TALEN ENERGY CORPORATION |
CONDENSED UNCONSOLIDATED STATEMENTS OF CASH FLOWS |
(Millions of Dollars) | | |
| Year Ended December 31, 2015 (a) | | Inception through December 31, 2014 (a) |
Cash Flows from Operating Activities | | | |
Net cash provided by (used in) operating activities | $ | — |
| | $ | — |
|
Cash Flows from Investing Activities | | | |
Net cash provided by (used in) investing activities | — |
| | — |
|
Cash Flows from Financing Activities | | | |
Net cash provided by (used in) financing activities | — |
| | — |
|
Net Increase (Decrease) in Cash and Cash Equivalents | — |
| | — |
|
Cash and Cash Equivalents at Beginning of Period | — |
| | — |
|
Cash and Cash Equivalents at End of Period | $ | — |
| | $ | — |
|
| |
(a) | Talen Energy Corporation was incorporated in June 2014 and its business operations began in June 2015 after the completion of its spinoff from PPL. Therefore, the 2015 results are primarily from June 1 to December 31, while the 2014 results are from the same period. See Note 1 to the Unconsolidated Financial Statements for additional information. |
The accompanying Notes to Condensed Unconsolidated Financial Statements are an integral part of the financial statements.
|
| | | | | | | |
SCHEDULE I - TALEN ENERGY CORPORATION | | | |
CONDENSED UNCONSOLIDATED BALANCE SHEETS AT DECEMBER 31, |
(Millions of Dollars, shares in thousands) | | |
| 2015 | | 2014 |
Assets | | | |
Investments | | | |
Affiliated companies at equity | $ | 4,303 |
| | $ | — |
|
| | | |
Total Assets | $ | 4,303 |
| | $ | — |
|
| | | |
Liabilities and Equity | | | |
Equity | | | |
Common stock - $0.001 par value (a) | $ | — |
| | $ | — |
|
Additional paid-in capital | 4,702 |
| | — |
|
Accumulated deficit | (373 | ) | | — |
|
Accumulated other comprehensive loss | (26 | ) | | — |
|
Total Equity | 4,303 |
| | — |
|
Total Liabilities and Equity | $ | 4,303 |
| | $ | — |
|
(a) 1,000,000 shares authorized; 128,509 shares issued and outstanding at December 31, 2015.
The accompanying Notes to Condensed Unconsolidated Financial Statements are an integral part of the financial statements.
SCHEDULE I - TALEN ENERGY CORPORATION
NOTES TO CONDENSED UNCONSOLIDATED FINANCIAL STATEMENTS
LG&EIn June 2014, Talen Energy Corporation was incorporated in connection with PPL and KUTalen Energy LLC (LKE) isSupply executing definitive agreements with the Riverstone Holders to combine their competitive power generation businesses into a holdingnew, stand-alone, publicly traded company named Talen Energy Corporation. On June 1, 2015, PPL completed the spinoff to PPL shareowners of a newly formed entity, Talen Energy Holdings, Inc. (Holdco), which at such time owned all of the membership interests of Talen Energy Supply and all of the common stock of Talen Energy Corporation. Immediately following the spinoff, Holdco merged with a special purpose subsidiary of Talen Energy Corporation, with Holdco continuing as the surviving company to the merger and as a wholly owned subsidiary of Talen Energy Corporation and the sole owner of Talen Energy Supply. As a result, the operating results reflected on the Statement of Income represent activity that occurred after June 1, 2015. Talen Energy Corporation 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 unconsolidated financial statements and related footnotes have been prepared in accordance with Reg.Reg §210.12-04 of Regulation S-X. On an unconsolidated basis, there is no comparable information for Talen Energy Corporation prior to the June 1, 2015 spinoff from PPL. These statements should be read in conjunction with the consolidated financial statements and notes thereto of LKE.Talen Energy Corporation.
LKETalen Energy Corporation indirectly or directly owns all of the ownership interests of its significant subsidiaries. LKE relies primarilySee Note 5 to Talen Energy Corporation's consolidated financial statements for discussions on dividends fromrestricted net assets of its subsidiaries for the purpose of transferring funds to fund LKE's dividends to its member and to meet its other cash requirements.Talen Energy Corporation in the form of distributions, loans or advances.
| |
2. | Commitments and Contingencies |
See Note 1511 to LKE'sTalen Energy Corporation's consolidated financial statements for commitments and contingencies of its subsidiaries.
Guarantees and Other Assurances
LKE provides certain indemnifications,Talen Energy Corporation's subsidiaries are separate and distinct legal entities and have no obligation to pay any amounts that may become due under Talen Energy Corporation's guarantees or other assurances or to make any funds available for such payment.
In the most significantnormal course of which relatebusiness, Talen Energy Corporation enters into agreements that provide financial assurance to the termination of the WKE lease in July 2009. These guarantees cover the due and punctual payment, performance and discharge by each party of its respective present and future obligations. The most comprehensive of these guarantees is the LKE guarantee covering operational, regulatory and environmental commitments and indemnifications made by WKE under the WKE Transaction Termination Agreement. This guarantee has a term of 12 years ending July 2021, and a cumulative maximum exposure of $200 million. Certain items such as government fines and penalties fall outside the cumulative cap. LKE has contested the applicability of the indemnification requirement relating to one matter presented by a counterparty under this guarantee. Another guarantee with a maximum exposure of $100 million covering other indemnifications expires in 2023. In May 2012, LKE's indemnitee received an arbitration panel's decision affecting this matter, which granted LKE's indemnitee certain rights of first refusal to purchase excess power at a market-based price rather than at an absolute fixed price. In January 2013, LKE's indemnitee commenced a proceeding in the Kentucky Court of Appeals appealing the December 2012 order of the Henderson Circuit Court, confirming the arbitration award. A decision in the appellate matter may occur during 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 relatedon behalf of certain subsidiaries. Such agreements include surety bonds issued by insurance companies. These agreements are entered into primarily to historical obligations for other divestedsupport or enhance the creditworthiness attributed to a subsidiary on a stand-alone basis or to facilitate the commercial activities in which these subsidiaries and affiliates. The indemnifications vary by entity and the maximum exposures range from being capped at the sale price to no specified maximum; however, LKE is not aware of formal claims under such indemnities made by any party at this time. LKE could be required to perform on these indemnifications in the event of covered losses or liabilities being claimed by an indemnified party. In the second quarter of 2012, LKE adjusted its estimated liability for certain of these indemnifications by $9 million ($5 million after-tax), which is reflected in "Equity in Earnings of Subsidiaries" on the Statement of Income. LKE cannot predict the ultimate outcomes of such indemnification circumstances, but does not currently expect such outcomes to result in significant losses above the amounts recorded.engage.
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 |
QUARTERLY FINANCIAL DATA (UNAUDITED)
Talen Energy Corporation and Subsidiaries
(Millions of Dollars, except per share data)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the 2015 Quarters Ended (a) | | For the 2014 Quarters Ended (a) |
| | Mar. 31 | | June 30 | | Sept. 30 | | Dec. 31 | | Mar. 31 | | June 30 | | Sept. 30 | | Dec. 31 |
Operating revenues as previously reported | | $ | 946 |
| | $ | 1,065 |
| | $ | 1,419 |
| |
| | $ | (955 | ) | | $ | 1,007 |
| | $ | 1,601 |
| | $ | 2,083 |
|
Reclassification between revenue and expense (b) | | 145 |
| | (125 | ) | | (135 | ) | | | | 1,901 |
| | 83 |
| | (409 | ) | | (730 | ) |
Reclassification from discontinued operations (c) | | — |
| | 8 |
| | 36 |
| | | | — |
| | — |
| | — |
| | — |
|
Operating revenues | | 1,091 |
|
| 948 |
| | 1,320 |
|
| $ | 1,122 |
|
| 946 |
|
| 1,090 |
|
| 1,192 |
|
| 1,353 |
|
Operating Income (Loss) as previously reported | |
| | 34 |
| | (246 | ) | |
| | | | | | | | |
Reclassification from discontinued operations (c) | | | | 1 |
| | (100 | ) | | | | | | | | | | |
Operating Income (Loss) | | 178 |
| | 35 |
| | (346 | ) | | 94 |
| | (79 | ) | | 16 |
| | 189 |
| | 271 |
|
Income (Loss) from continuing operations after income taxes as previously reported | |
| | 25 |
| | (339 | ) | |
| | | | | | | | |
Reclassification from discontinued operations (c) | | | | 1 |
| | (62 | ) | | | | | | | | | | |
Income (Loss) from continuing operations after income taxes | | 96 |
| | 26 |
| | (401 | ) | | (62 | ) | | (58 | ) | | 2 |
| | 94 |
| | 149 |
|
Income (Loss) from discontinued operations as previously reported | |
| | 1 |
| | (62 | ) | |
| | | | | | | | |
Reclassification from discontinued operations (c) | | | | (1 | ) | | 62 |
| | | | | | | | | | |
Income (Loss) from discontinued operations | | — |
| | — |
| | — |
| | — |
| | (8 | ) | | 11 |
| | 7 |
| | 213 |
|
Net Income (Loss) Attributable to Talen Energy Corporation stockholders (d) | | 96 |
| | 26 |
| | (401 | ) | | (62 | ) | | (66 | ) | | 13 |
| | 101 |
| | 362 |
|
| | | | | | | | | | | | | | | | |
Income (Loss) from continuing operations after income taxes available to Talen Energy Corporation stockholders (e) | | | | | | | | | | | | | | | | |
Basic EPS | | 1.15 |
| | 0.26 |
| | (3.12 | ) | | (0.48 | ) | | (0.69 | ) | | 0.03 |
| | 1.13 |
| | 1.78 |
|
Diluted EPS (f) | | 1.15 |
| | 0.26 |
| | (3.12 | ) | | (0.48 | ) | | (0.69 | ) | | 0.03 |
| | 1.13 |
| | 1.78 |
|
Net Income (Loss) available to Talen Energy Corporation stockholders (e) | | | | | | | | | | | | | | | | |
Basic EPS | | 1.15 |
| | 0.26 |
| | (3.12 | ) | | (0.48 | ) | | (0.79 | ) | | 0.16 |
| | 1.21 |
| | 4.33 |
|
Diluted EPS (f) | | 1.15 |
| | 0.26 |
| | (3.12 | ) | | (0.48 | ) | | (0.79 | ) | | 0.16 |
| | 1.21 |
| | 4.33 |
|
| |
(a) | Quarterly results can vary depending on, among other things, weather and the forward pricing of power. Accordingly, comparisons among quarters of a year may not be indicative of overall trends and changes in operations. |
| |
(b) | In the fourth quarter of 2015, Talen Energy reclassified amounts between "Wholesale energy" within operating revenues and "Energy purchases" within operating expense on the Statements of Income. See Note 1 to the Financial Statements for additional information. |
| |
(c) | In the fourth quarter of 2015, the Sapphire operations, which were originally classified as discontinued operations as part of the RJS Power acquisition, were reclassified to continuing operations. See Note 1 to the Financial Statements for additional information. |
| |
(d) | The third and fourth quarters of 2015 include impairment charges related to goodwill, the Sapphire plants and the C.P. Crane plant. The fourth quarter of 2014 includes a gain of $137 million (after tax) from the sale of hydroelectric generating facilities of Talen Montana. See Note 6 to the Financial Statements for additional information on the sale and Notes 14 and 16 to the Financial Statements for additional information on the impairments. |
| |
(e) | 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. |
(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)(f) | As a result of a reported loss,losses, weighted-average shares used in the diluted earnings per share computations for the three monthsquarters ended September 30 and December 31, 2013 exclude2015 excludes 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. |
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) | PPL Electric's business is seasonal in nature, with peak sales periods generally occurring in the winter and summer months. Accordingly, comparisons among quarters of a year may not be indicative of overall trends and changes in operations. |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
PPLTalen Energy Corporation PPLand Talen Energy Supply, LLC 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, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company |
| | |
| | The registrants' principal executive officers and principal financial officers, based on their evaluation of the Registrants' disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934) have concluded that, as of December 31, 2013, the Registrants' disclosure controls and procedures are effective to ensure that material information relating to the Registrants and their consolidated subsidiaries is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms, particularly during the period for which this 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. |
| | |
(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 |
| | |
| | As reported in the June 30, 2013 Form 10-Q, the principal executive officers and principal financial officers of the Registrants concluded that the implementation of a financial consolidation and reporting system for PPL and its primary U.S. subsidiaries resulted in a material change to the Registrants' internal control over financial reporting. The new system enhances the consolidation of subsidiary accounts, provides reporting tools for analysis and automates certain aspects of financial statement preparation for each of the Registrants. Processes and controls over the consolidation and reporting processes that were previously considered to be effective were replaced with new or modified controls that were also determined to be effective.
The new consolidation and reporting system was subject to extensive testing and data reconciliation during implementation. Post-implementation reviews 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. |
| | |
| | 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's internal control over financial reporting during the Registrant's fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Registrant's internal control over financial reporting.
|
|
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"(2013), our management concluded that our internal control over financial reporting was effective as of December 31, 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.
|
| | |
PPL Energy Supply, LLC, 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, PPL Electric, LKE, 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). Each of the aforementioned companies' internal control over financial reporting is a process designed to provide reasonable assurance to 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 the 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"(2013), management of these companies concluded that our internal control over financial reporting was effective as of December 31, 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 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 these companies to provide only management's report in this annual report.
|
Item 9A. Controls and Procedures
ITEM 9B. OTHER INFORMATION |
|
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 |
|
None. |
Talen Energy Corporation and Talen Energy Supply, LLC
(a) Evaluation of Disclosure Controls and Procedures.
The registrants' principal executive officers and principal financial officers, based on their evaluation of the registrants' disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934) have concluded for their respective companies that, as of December 31, 2015, the registrants' disclosure controls and procedures were effective to ensure that information required to be disclosed by each registrant in the reports filed by it under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms and that such information is accumulated and communicated to management, including the principal executive and principal financial officers, to allow for timely decisions regarding required disclosure.
(b) Change in Internal Controls over Financial Reporting.
The registrants' principal executive officers and principal financial officers have concluded for the fourth quarter for their respective companies that the June 1, 2015 RJS acquisition and the November 1, 2015 MACH Gen acquisition created material changes to its internal control over financial reporting. RJS collectively is a significant subsidiary, representing as of and for the year ended December 31, 2015 approximately 17% and 12% of Talen Energy's total consolidated assets and revenue. MACH Gen is a significant subsidiary, representing as of December 31, 2015 approximately 10% of Talen Energy's total consolidated assets. The registrants are transitioning the processes, information technology systems and other components of internal control over financial reporting of RJS Power and MACH Gen to the internal control structure of the registrants. The registrants have expanded their consolidation and disclosure controls and procedures related to the acquired companies, and the registrants continue to assess the current internal control over financial reporting at RJS and MACH Gen. Accordingly, as permitted under SEC guidance, each of the registrants has elected to exclude RJS and MACH Gen from its management's assessment of the effectiveness of internal controls as of December 31, 2015. Except for the RJS and MACH Gen acquisitions, the aforementioned principal executive officers and principal financial officers have concluded for their respective companies 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.
Management's Report on Internal Control over Financial Reporting
Management of each of the registrants 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). Internal control over financial reporting for each registrant 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. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
The management of each registrant, with the participation of their respective principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of its internal control over financial reporting as of the end of the fiscal year based on the framework in "Internal Control - Integrated Framework" (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on their evaluation under the framework in "Internal Control - Integrated Framework" (2013), the management of each of the registrants concluded for their respective companies that each registrant's internal control over financial reporting was effective as of December 31, 2015.
As permitted by SEC guidance and for the reasons set forth under "Change in Internal Controls over Financial Reporting" above each of the registrants has elected to exclude RJS and MACH Gen from management's assessment of internal controls as of December 31, 2015. RJS collectively is a significant subsidiary, representing as of and for the year ended December 31, 2015 approximately 17% and 12% of Talen Energy's total consolidated assets and revenue. The RJS entities were acquired in
June 2015. MACH Gen is a significant subsidiary, representing as of December 31, 2015 approximately 10% of Talen Energy's total consolidated assets. MACH Gen and its subsidiaries were acquired in November 2015.
With respect to Talen Energy Corporation, this annual report does not include an attestation report of Ernst & Young LLP, its independent registered public accounting firm, regarding effectiveness of internal control over financial reporting due to a transition period established by the SEC for newly public companies.
With respect to Talen Energy Supply, this annual report does not include an attestation report of Ernst & Young LLP, its independent registered public accounting firm, regarding effectiveness of internal control over financial reporting based upon rules of the SEC that permit a non-accelerated filer to provide only management's report on internal control over financial reporting in its annual report.
ITEM 9B. OTHER INFORMATION
Talen Energy Corporation and Talen Energy Supply, LLC
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PPLTalen Energy Corporation
Additional information forrequired by this item will be set forth inincluded under the sections entitled "Nominees forcaptions "Proposals - Proposal 1: Election of Directors," "Board"Corporate Governance - Board Committees - Compensation, Governance and Nominating Committee - Governance and Director Nominations," "Security Ownership of Certain Beneficial Owners and Management - Section 16(a) Beneficial Ownership Reporting Compliance," "Corporate Governance - The Board - Code of Ethics," and "Corporate Governance - Board Committees - Audit Committee" and "Section 16(a) Beneficial Ownership Reporting Compliance" in PPL's 2014 Notice ofTalen Energy Corporation's Proxy Statement related to the 2016 Annual Meeting and Proxy Statement,of Stockholders, which will be filed with the SEC not later than 120 days after December 31, 2013,2015, 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 2013 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 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 PPLTalen Energy Supply, PPL Electric, LKE, LG&E and KU). The "Standards of Integrity" are posted on PPL's Internet website: www.pplweb.com/about-us/corporate-governance. A description of any amendment to the "Standards of 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 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-us/corporate-governance.
PPL Energy Supply, LLC PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company
Item 10 is omitted as PPLTalen Energy Supply PPL Electric, LKE, LG&E and KU meetmeets the conditions set forth in General Instruction (I)(1)(a) and (b) of Form 10-K.
EXECUTIVE OFFICERS OF THE REGISTRANTSTALEN ENERGY
OfficersExecutive officers of the RegistrantsTalen Energy Corporation are elected annually by their Boardsits board of Directors (or Boarddirectors. The officers of ManagersTalen Energy Corporation are the same for PPLTalen Energy Supply) to serve at the pleasureSupply. Each holds office for a term of the respective Boards. There are no family relationships among any of the executive officers, norone year until his successor is there any arrangementduly elected and qualified, or understanding between any executive officer and any other person pursuant to which the officer was selected.until his earlier death, resignation or removal.
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 of Talen Energy Corporation at December 31, 2013.2015.
|
| | | | | | | |
Name | | Age | | Positions Held During the Past Five Years | | | Dates |
| | | | | | | |
William H. Spence | | 56 | | Chairman, President and Chief Executive Officer | | | April 2012 - present |
| | | | President and Chief Executive Officer | | | November 2011 - March 2012 |
| | | | President and Chief Operating Officer | | | July 2011 - November 2011 |
| | | | Executive Vice President and Chief Operating Officer | | | June 2006 - July 2011 |
| | | | | | | Position |
Paul A. Farr | | 4648 | | Executive ViceDirector, President and Chief FinancialExecutive Officer |
Jeremy R. McGuire | | | April 2007 - present |
| | | | | | | |
Robert J. Grey | | 63 | | Executive Vice President, General Counsel and Secretary | | | November 2012 - present |
| | 44 | | Senior Vice President, General CounselChief Financial Officer and SecretaryChief Accounting Officer |
Clarence J. Hopf | | | March 1996 - November 2012 |
59 | | Senior Vice President and Chief Commercial Officer |
Timothy S. Rausch | | 51 | | | Senior Vice President and Chief Nuclear Officer |
David G. DeCampli (a)James E. Schinski | | 56 | | President-PPL Energy SupplySenior Vice President and Chief Administrative Officer |
Paul M. Breme | | | March 2012 - present |
| | | | President-PPL Electric | | | April 2007 - March 2012 |
Gregory N. Dudkin (a) | | 56 | | President-PPL Electric | | | March 2012 - present |
| | | | Senior Vice President-Operations-PPL Electric | | | June 2009 - March 2012 |
| | | | Independent Consultant | | | February 2009 - June 2009 |
| | | | Senior Vice-President of Technical Operations and | | | June 2006 - January 2009 |
| | | | Fulfillment-Comcast Corporation | | | |
| | | | | | | |
Robert D. Gabbard (a) | | 54 | | President-PPL EnergyPlus | | | June 2008 - present |
| | | | | | | |
Rick L. Klingensmith (a) | | 53 | | President-PPL Global | | | August 2004 - present |
| | | | | | | |
Victor A. Staffieri (a)
| | 58
| | Chairman of the Board, Chief Executive
Officer and President-LKE
| | | May 2001 - present
|
| | | | | | | |
Mark F. Wilten | | 46 | | Vice President-Finance and Treasurer | | | June 2012 - present |
| | | | Treasurer-Nissan North America and Nissan Motor | | | August 2010 - May 2012 |
| | | | Acceptance Corporation | | | |
| | | | Assistant Treasurer-Nissan Motor Acceptance Corporation | | | August 2008 - August 2010 |
| | | | | | | |
Vincent Sorgi | | 4244 | | Vice President, General Counsel and Controller | | | March 2010 - present |
| | | | Controller-Supply Accounting | | | June 2008 - March 2010 |
| | | | | | | |
| | |
(a) | | Designated an executive officer of PPL by virtue of their respective positions at a PPL subsidiary.Corporate Secretary |
Paul A. Farr has served as Director, President and Chief Executive Officer since June 2015. He served as president of PPL Energy Supply, LLC (currently known as Talen Energy Supply, LLC) and PPL Generation, LLC (currently known as Talen Energy Generation, LLC) from June 2014 until June 2015. He also previously served as executive vice president and chief financial officer of PPL Corporation from April 2007 until June 2014.
Jeremy R. McGuire has served as Senior Vice President and Chief Financial Officer since June 2015. In August 2015, Mr. McGuire assumed the role of acting Chief Accounting Officer. Mr. McGuire, a former investment banker, joined PPL Corporation in 2008 and led the strategic planning function at that company from 2008 until June 2015.
Clarence J. Hopf, Jr. has served as Senior Vice President and Chief Commercial Officer since June 2015. He served as senior vice president - Fossil and Hydro Generation for PPL Energy Supply, LLC (currently known as Talen Energy Supply, LLC) from August 2014 until June 2015. Mr. Hopf joined PPL Corporation in October 2005 but left in 2008 to accept a position with Public Service Enterprise Group Incorporated (PSEG) as president of its energy marketing and trading subsidiary. He rejoined PPL EnergyPlus, LLC (currently known as Talen Energy Marketing, LLC) in 2012 and directed coal trading and supply, and later the wholesale marketing function, before being named eastern trading vice president in March 2014.
Timothy S. Rausch has served as Senior Vice President and Chief Nuclear Officer since June 2015. He served as senior vice president and chief nuclear officer of PPL Generation, LLC (currently known as Talen Generation, LLC) with responsibility for the Susquehanna nuclear plant, from July 2009 until June 2015.
James E. Schinski has served as Senior Vice President and Chief Administrative Officer since June 2015. He joined PPL Services in 2009 as vice president-chief information officer and served in that role until July 2014. From July 2014 until June 2015 he served in a vice president role to assist Talen Energy senior management in the transition from PPL Corporation to Talen Energy.
Paul M. Breme has served as Vice President, General Counsel and Corporate Secretary since June 2015. He joined PPL Corporation's Office of General Counsel in 2008 from the law firm of Cahill, Gordon & Reindel LLP, where he specialized in corporate law and finance. At PPL Corporation, he served as counsel from 2008 to 2009, as senior counsel until 2012 and as associate general counsel from 2012 until June 2015.
ITEM 11. EXECUTIVE COMPENSATION
PPLTalen Energy Corporation
Information for this item will be set forth in the sections entitled "Compensation of Directors,"Corporate Governance - Board Compensation," "Compensation"Corporate Governance - Board Committees - Compensation, Governance and Nominating Committee - Compensation Committee Interlocks and Insider Participation" and "Executive Compensation" in PPL's 2014 Notice ofTalen Energy Corporation's Proxy Statement related to the 2016 Annual Meeting and Proxy Statement,of Stockholders, which will be filed with the SEC not later than 120 days after December 31, 2013,2015, and which information is incorporated herein by reference.
PPLTalen Energy Supply, LLC PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company
Item 11 is omitted as PPLTalen Energy Supply PPL Electric, LKE, LG&E and KU meetmeets 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
PPLTalen Energy Corporation
Information for this item will be set forth in the section entitled "Stock Ownership""Security Ownership of Certain Beneficial Owners and Management - Principal Stockholders" in PPL's 2014 Notice ofTalen Energy Corporation's Proxy Statement in connection with its 2016 Annual Meeting and Proxy Statement,of Stockholders, which will be filed with the SEC not later than 120 days after December 31, 2013,2015, and which information is incorporated herein by reference. In addition, provided below in tabular format is information as of December 31, 2013,2015, with respect to compensation plans (including individual compensation arrangements) under which equity securities of PPLTalen Energy Corporation are authorized for issuance.
Equity Compensation Plan Information |
| | | | | | |
| Number of securities to be | | | Number of securities |
| issued upon exercise of | Weighted-average exercise | remaining available for future |
| outstanding options, warrants | price of outstanding options, | issuance under equity |
| and rights (3) | warrants and rights (3) | compensation plans (4) |
Equity compensation | | | | | | |
plans approved by | 4,126,523 | - ICP | $ 31.34 | - ICP | 3,163,654 | - ICPKE |
security holders (1) | 2,206,230 | - SIP | $ 29.26 | - SIP | 7,727,573 | - SIP |
| 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) | | | | | | |
Equity Compensation Plan Information |
| | | | | | |
Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights ($) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
| (a) | (b) | (c) |
Equity compensation plans approved by security holders (1) | 1,415,850 (2) | 4.91 (4) | 4,214,150 (5) |
| 34,967 (3) | | 465,033 (6) |
Equity compensation plans not approved by security holders | - | - | - |
Total | 1,450,817 | 4.91 | 4,679,183 |
(1) | |
(1) | Includes (a) the Amended and Restated Incentive Compensation Plan (ICP),Talen Energy Corporation 2015 SIP under which stock options, restricted stock, restricted stock units, performance units dividend equivalents and other stock-based awards may be awarded to executive officers and directors of PPL;Talen Energy Corporation and its subsidiaries and (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 other stock-based awards may be awarded to executive officers of PPL and its subsidiaries; and (d) theTalen Energy Directors Deferred Compensation Plan (DDCP), under which stock units may be awarded to directors of PPL.Talen Energy Corporation. See Note 128 to the Financial Statements for additional information. |
| | |
(2) | Total includes (i) 991,101 stock options, (ii) 265,849 restricted stock units and (iii) 158,900 performance units issued under the SIP. |
| 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) | Represents stock units issued under the DDCP. |
| Relates |
(4) | The weighted average exercise price relates only to common stock issuable upon the exercise of stock options awardedgranted under the ICP, SIP and ICPKESIP. The calculation of the weighted average exercise price does not include outstanding equity awards that are received or exercised for no consideration. |
| |
(5) | These shares are available for grant as of December 31, 2013. In addition,2015 under the SIP. The total number of shares which may be issued under the SIP is 5,630,000, of which the maximum number of shares for which incentive stock options may be issued is 2,000,000. |
| |
(6) | These shares are available for grant as of December 31, 2013, the following other securities had been awarded and are outstanding2015 under the ICP, SIP, ICPKE and DDCP: 30,400DDCP. The total number of shares of restricted stock, 321,450 restricted stock units and 238,319 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, 2,473,624 restricted stock units and 388,271 performance units under the ICPKE; and 500,049 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 awardsthat have been registered 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 (d)issuance under the DDCP 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.is 500,000. |
PPLTalen Energy Supply, LLC PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company
Item 12 is omitted as PPLTalen Energy Supply PPL Electric, LKE, LG&E and KU meetmeets 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
Talen Energy Corporation
Information for this item will be set forth in the sections entitled "Certain Relationships and Related Party Transactions" and "Corporate Governance - The Board - Director Independence" in Talen Energy Corporation's Proxy Statement in connection with the 2016 Annual Meeting of Stockholders, which will be filed with the SEC not later than 120 days after December 31, 2015, and is incorporated herein by reference.
PPLTalen Energy Supply, LLC
Item 13 is omitted as Talen Energy Supply meets the conditions set forth in General Instructions (I)(1)(a) and (b) of Form 10-K.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Talen Energy Corporation
Information for this item will be set forth in the sectionssection entitled "Transactions"Corporate Governance - Board Committees - Audit Committee - Fees to the Independent Auditor for 2015 and 2014" and "Approval of Fees" in Talen Energy Corporation's Proxy Statement in connection with Related Persons" and "Independence of Directors" in PPL's 2014 Notice ofthe 2016 Annual Meeting and Proxy Statement,of Stockholders, which will be filed with the SEC not later than 120 days after December 31, 2013, and is incorporated herein by reference.
PPL Energy Supply, LLC, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company
Item 13 is omitted as PPL Energy Supply, 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 2013 and 2012" in PPL's 2014 Notice of Annual Meeting and Proxy Statement, which will be filed with the SEC not later than 120 days after December 31, 2013,2015, and which information is incorporated herein by reference.
PPLTalen Energy Supply, LLC
The following table presents an allocation of fees billed, including expenses, by Ernst & Young LLP (EY) to Talen Energy Corporation and PPL (for services prior to June 1, 2015) for the fiscal years ended December 31, 20132015 and 2012,2014, for professional services rendered for the audit of PPLTalen Energy Supply's annual financial statements and for fees billed for other services rendered by EY.
| | 2013 | | 2012 |
| | (in thousands) |
| | | | | | |
Audit fees (a) | | $ | 1,612 | | $ | 2,132 |
Audit-related fees (b) | | | 9 | | | 54 |
Tax fees (c) | | | 70 | | | 163 |
|
| | | | | | | |
| 2015 | | 2014 |
| (in thousands) |
Audit fees (a) | $ | 2,646 |
| | $ | 1,483 |
|
Audit-related fees (b) | 287 |
| | — |
|
Tax fees (c) | 371 |
| | 49 |
|
All other fees | — |
| | — |
|
Total Fees | $ | 3,304 |
| | $ | 1,532 |
|
(a) | |
(a) | Includes estimated fees for the audit of the annual financial statements and the review of the financial statements included in PPLTalen Energy Supply's Quarterly Reports on Form 10-Q (which includes subsidiaries added during 2015, such as Raven, Jade, Sapphire and MACH Gen) 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.SEC (e.g. re-marketing of certain financings). |
| | |
(b) | | Fees forIncludes performance of specific agreed-upon procedures.due diligence and consultation services in connections with merger and acquisition activities. |
| | |
(c) | | Includes fees for tax advice in connection with amerger and acquisition activities as well as tax basis and earnings and profit study and review, consultation and analysisadvice related to investment tax credits and related capital expenditures on certain hydro-electric plant upgrades.upgrades and various state and local tax issues. |
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 |
(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. |
(c) | Includes fees for an analysis related to the deductibility of certain transmission and distribution costs. |
LG&E and KU Energy LLC
The following table presents an allocation of fees billed, including expenses, by EY to LKE for the fiscal years ended December 31, 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.Committee. As a result, of this approval process, the Audit Committee
of PPLTalen Energy Corporation has pre-approved specific categories ofspecified services and authorization levels. All services outside ofother than those specified in the specified categoriesprocedures and all amounts exceeding the authorization levels are approved in advance 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 20132015 and 20122014 services provided by EY.
PART IVEY were pre-approved in accordance with applicable policies.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Talen Energy Corporation and Talen Energy Supply, LLC
(a) The following documents are filed as part of this report:
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 | |
|
(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 - Talen Energy Corporation's 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.
| | |
| | Schedule I - LG&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.
SHAREOWNER AND INVESTOR INFORMATION
Annual Meetings: The 2014 annual meeting of shareowners of PPL will be held on Wednesday, May 21, 2014, at the Radisson Blu Hotel located at the Herald Way Pegasus Business Park East Midlands Airport, DE74 2TZ, in Derby, United Kingdom.
Proxy and Information Statement Material: A proxy statement and notice of PPL's annual meeting is provided to all shareowners of record as of February 28, 2014. The latest proxy statement can be accessed at www.pplweb.com.
PPL Annual Report: The report is published in the beginning of April and provided to all shareowners of record as of February 28, 2014. The latest annual report can be accessed at www.pplweb.com.
Dividends: Subject to the declaration of dividends on PPL common stock by the PPL Board of Directors or its Executive Committee, dividends are paid on the first business day of April, July, October and January. The 2014 record dates for dividends are expected to be March 10, June 10, September 10 and December 10.
PPL's Website(www.pplweb.com): Shareowners can access PPL publications such as annual and quarterly reports to the Securities and Exchange Commission (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.com will be mailed without charge upon request by 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:
Shareowner Services, toll-free at 1-800-345-3085; or
PPL Corporate Offices at 610-774-5151.
Online Account Access: Registered shareowners can activate their account for online access by visiting shareowneronline.com.
Dividend Reinvestment and Direct Stock Purchase Plan (Plan): PPL offers investors the opportunity to acquire shares of PPL common stock through its Plan. Through the Plan, participants are eligible to invest up to $25,000 per calendar month in PPL common stock. Shareowners may choose to have dividends on their PPL common stock fully or 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 converted to book entry form within the 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: PPLPRW)
PPL Capital Funding, Inc.:
2007 Series A Junior Subordinated Notes due 2067 (Code: PPL/67)
2013 Series B Junior Subordinated Notes due 2073 (Code: PPX)
Fiscal Agents:
Stock Transfer Agent and Registrar; Dividend Reinvestment Plan Agent
Wells Fargo Bank, N.A.
Shareowner Services
1110 Centre Pointe Curve, Suite 101
Mendota Heights, MN 55120
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 contact Shareowner Services, toll-free, at 1-800-345-3085
1945 Mortgage Bond Trustee, Transfer and Bond Interest Paying Agent
Deutsche Bank Trust Company Americas
5022 Gate Parkway (Suite 200)
Jacksonville, FL 32256
Toll Free: 1-800-735-7777
FAX: 615-866-3887
Indenture Trustee
The Bank of New York Mellon
101 Barclay Street
New York, NY 10286
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PPL Corporation
(Registrant)
By /s/ William H. Spence | | | | |
William H. Spence - | | | | |
Chairman, President and | | | | Talen Energy Corporation |
Chief Executive Officer | | | | (Registrant) |
| | | | |
| | | | |
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/ William H. Spence | | | | |
William H. Spence - | | | | |
Chairman, President and | | | | |
Chief Executive Officer | | | | |
(Principal Executive Officer) | | | | |
| | | | |
| | | | |
By /s/ Paul A. Farr | | |
Paul A. Farr | | |
Director, President and Chief Executive Officer | | |
| | |
Date: February 26, 2016 | | |
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/ Paul A. Farr | | |
Paul A. Farr - | | |
Director, President and Chief Executive Officer | | |
| | |
Executive Vice President and | | By /s/ Jeremy R. McGuire | | |
Chief Financial Officer | | Jeremy R. McGuire | | |
(PrincipalSenior Vice President, Chief Financial Officer)Officer and Chief Accounting Officer | | |
| | |
| | | | |
| | Ralph Alexander, Director | | |
By /s/ Vincent Sorgi | | Frederick M. Bernthal, Director | | |
Vincent Sorgi - | | Edward J. Casey Jr., Director | | |
Vice President and Controller | | Philip G. Cox, Director | | |
(Principal Accounting Officer)Louise K. Goeser, Director | | |
Stuart E. Graham, Director | | |
Michael B. Hoffman, Director | | |
| | |
By /s/ Jeremy R. McGuire | | |
| | Jeremy R. McGuire, Attorney-in-fact | | |
| | | | |
Directors: | | | | |
| | | | |
Frederick M. Bernthal | | Stuart Heydt | | |
John W. Conway | | Venkata Rajamannar Madabhushi | | |
Philip G. Cox | | Craig A. Rogerson | | |
Steven G. Elliott | | William H. Spence | | |
Louise K. Goeser | | Natica von Althann | | |
Stuart E. Graham | | Keith H. Williamson | | |
| | | | |
By /s/ William H. Spence | | | | |
William H. Spence, Attorney-in-fact | | Date: February 24, 201426, 2016 | | |
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/ David G. DeCampli | | | | |
David G. DeCampli - | | | | |
President | | | | Talen Energy Supply, LLC |
| | | | (Registrant) |
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/ David G. DeCampli | | | | |
David G. DeCampli - | | | | |
President | | | | |
(Principal Executive Officer) | | | | |
| | | | |
By /s/ Paul A. Farr | | | | |
Paul A. Farr - | | | | |
Manager, President and Chief Executive Vice President | | | | |
(Principal Financial Officer) | | Officer | | |
| | |
Date: February 26, 2016 | | |
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/ Vincent Sorgi | | | | |
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 | | Manager, President and Chief Executive Officer | | |
| | | | |
/s/ William H. Spence | | By /s/ Jeremy R. McGuire | | |
William H. SpenceJeremy R. McGuire | | |
Manager, Senior Vice President, Chief Financial Officer and Chief Accounting Officer | | |
| | |
By /s/ Clarence J. Hopf Jr. | | |
Clarence J. Hopf Jr. | | |
Manager | | |
| | |
By /s/ Paul M. Breme | | |
Paul M. Breme | | |
Manager | | |
| | | | |
| | | | |
| | | | |
Date: February 24, 2014 | | 26, 2016 | | |
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/ Gregory N. Dudkin | | | | |
Gregory 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. |
| | | | |
| | | | |
| | | | |
By /s/ Gregory N. Dudkin | | | | |
Gregory N. Dudkin - | | | | |
President | | | | |
(Principal Executive Officer) | | | | |
| | | | |
By /s/ Dennis A. Urban, Jr. | | | | |
Dennis A. Urban, Jr. - | | | | |
Controller
(Principal Financial Officer and Principal Accounting Officer)
| | | | |
| | | | |
| | | | |
Directors: | | | | |
| | | | |
/s/ William H. Spence | | /s/ Gregory N. Dudkin | | |
William H. Spence | | Gregory N. Dudkin | | |
| | | | |
/s/ Paul A. Farr | | /s/ Robert J. Grey | | |
Paul A. Farr | | Robert J. Grey | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Date: February 24, 2014 | | | | |
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. Farr | | William H. Spence | | |
/s/ Victor A. Staffieri
| | /s/ Paul W. Thompson
| | |
Victor A. Staffieri | | Paul W. Thompson | | |
/s/ S. Bradford Rives
| | | | |
S. Bradford Rives | | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Date: February 24, 2014 | | | | |
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. Farr | | William H. Spence | | |
/s/ Victor A. Staffieri
| | /s/ Paul W. Thompson
| | |
Victor A. Staffieri | | Paul W. Thompson | | |
/s/ S. Bradford Rives
| | | | |
S. Bradford Rives | | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Date: February 24, 2014 | | | | |
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. Farr | | William H. Spence | | |
/s/ Victor A. Staffieri
| | /s/ Paul W. Thompson
| | |
Victor A. Staffieri | | Paul W. Thompson | | |
/s/ S. Bradford Rives
| | | | |
S. Bradford Rives | | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Date: February 24, 2014 | | | | |
The following Exhibits indicated by an asterisk preceding the Exhibit number are filed herewith. The balance of the Exhibits havehas 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) |
| | |
2.1 | - | Final TermsSeparation Agreement, dated as of WPD West Midlands £800,000,000 5.75 per cent Notes due 2032 (Exhibit 1.1June 9, 2014, among PPL Corporation, Talen Energy Holdings, Inc., Talen Energy Corporation, PPL Energy Supply, LLC, Raven Power Holdings LLC, C/R Energy Jade, LLC and Sapphire Power Holdings LLC (incorporated by reference to Exhibit 2.1 to PPL Energy Supply, LLC Form 8-K Report (File No. 1-32944) filed on June 12, 2014) |
2.2 | - | Transaction Agreement, dated as of June 9, 2014, among PPL Corporation, Talen Energy Holdings, Inc., Talen Energy Corporation, PPL Energy Supply, LLC, Talen Energy Merger Sub, Inc., C/R Energy Jade, LLC, Sapphire Power Holdings LLC and Raven Power Holdings LLC (incorporated by reference to Exhibit 2.2 to PPL Energy Supply, LLC Form 8-K Report (File No. 1-32944)) filed on June 12, 2014) |
2.3 | - | Amendment No. 1, dated as of October 23, 2014, to the Transaction Agreement, dated as of June 9, 2014, among PPL Corporation, Talen Energy Holdings, Inc., Talen Energy Corporation, PPL Energy Supply, LLC, Talen Energy Merger Sub, Inc., C/R Energy Jade, LLC, Sapphire Power Holdings LLC and Raven Power Holdings LLC (incorporated by reference to Exhibit 2.3 to Talen Energy Corporation Registration Statement on Form S-1 (File No. 333-199888) filed on November 5, 2014) |
2.4 | - | Purchase and Sale Agreement, dated as of July 18, 2015, by and among Talen Energy Supply, LLC, the sellers named therein, Silver Oak Capital, LLC, as seller representative and MACH Gen, LLC, with respect to 100% of the membership interests in MACH Gen, LLC (incorporated by reference to Exhibit 2.1 to Talen Energy Corporation Form 8-K Report (File No. 1-11459) dated May 17, 2011)1-37388)) filed on July 20, 2015) |
| | |
1(b)2.5 | - | Final TermsAsset Purchase Agreement, dated as of WPD East Midlands £600,000,000 5.25 per cent Notes due 2023 (Exhibit 1.2October 7, 2015, by and between Holtwood, LLC and BIF III Holtwood LLC (incorporated by reference to PPLExhibit 2.1 to Talen Energy Corporation Form 8-K Report (File No. 1-11459 ) dated May 17, 2011)1-37388) filed on October 9, 2015) |
| | |
1(c)2.6* | - | Final TermsAmended and Restated Purchase and Sale Agreement, dated as of WPD East Midlands £100,000,000 Index Linked Notes due 2043 (Exhibit 1.1December 22, 2015, by and between Talen Generation, LLC and TransCanada Facility USA, Inc. |
3.1 | - | Amended and Restated Certificate of Incorporation of Talen Energy Corporation (incorporated by reference to PPLExhibit 3.1 to Talen Energy Corporation Form 8-K Report (File No. 1-11459) dated1-37388) filed on June 2, 2011)2015) |
| | |
1(d)3.2 | - | Final TermsAmended and Restated Bylaws of WPD East Midlands £100,000,000 5.25% Notes due 2023 (Exhibit 1.1Talen Energy Corporation (incorporated by reference to PPLExhibit 3.2 to Talen Energy Corporation Form 8-K Report (File No. 1-11459) dated April 19, 2012)1-37388) filed on June 2, 2015) |
| | |
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 15, 2013 (Exhibit 3(i) to PPL Corporation Form 8-K Report (File No. 1-11459) dated May 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 September 30, 2013) |
| | |
3(c)-13.3 | - | Certificate of Formation of Talen Energy Supply (f/k/a PPL Energy Supply, LLC, effective as of November 14, 2000 (ExhibitLLC) (incorporated by reference to Exhibit 3.1 to PPL Energy Supply, LLC Form S-4 (Registration Statement No. 333-74794)) filed on December 7, 2001) |
| | |
3(c)-23.4 | - | Certificate of Amendment of Talen Energy Supply (f/k/a PPL Energy Supply, LLC, effective as of November 12, 2002 (ExhibitLLC) (incorporated by reference to 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)3.5 | - | Amended and Restated BylawsCertificate of Amendment of Talen Energy Supply, LLC (f/k/a PPL Corporation, effective as of May 15, 2013 (Exhibit 3(ii)Energy Supply, LLC) dated June 1, 2015 (incorporated by reference to PPL Corporation Form 8-K Report (File No. 1-11459) dated May 20, 2013) |
| | |
3(e) | - | Amended and Restated Bylaws of PPL Electric Utilities Corporation, effective as of October 31, 2013 (Exhibit 3(b)Exhibit 3.5 to PPL Electric UtilitiesTalen Energy Corporation Form 10-Q Report (File No. 1-905)1-37388) for the quarter ended September 30, 2013)2015) |
| | |
3(f)3.6 | - | Limited Liability Company Agreement of Talen Energy Supply (f/k/a PPL Energy Supply, LLC, effective as of March 20, 2001 (ExhibitLLC) (incorporated by reference to Exhibit 3.2 to PPL Energy Supply, LLC Form S-4 (Registration Statement No. 333-74794)) filed on December 7, 2001) |
| | |
3(g)4.1 | - | 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)) |
| | |
| - | 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 LoanStockholder Agreement, dated as of MayJune 1, 1973,2015, by and between PPL Electric UtilitiesRaven Power Holdings LLC, C/R Energy Jade, LLC and Sapphire Power Holdings LLC and Talen Energy Corporation and the Lehigh County Industrial Development Authority (Exhibit 5(z)(incorporated by reference 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 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 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 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) |
| | |
4(b)-5 | - | Amendment No. 4 to said Employee Stock Ownership Plan, dated December 2, 2009 (Exhibit 4(a)-5 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2009) |
| | |
4(b)-6 | - | Amendment No. 5 to said Employee Stock Ownership Plan, dated November 17, 2010 (Exhibit 4(b)-6 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(b)-7 | - | Amendment No. 6 to said Employee Stock Ownership Plan, dated January 18, 2012 (Exhibit 4(a) to PPL Corporation Form 10-Q Report (File No. 1-11459) for the quarter ended March 31, 2012) |
| | |
4(b)-8 | - | Amendment No. 7 to said Employee Stock Ownership Plan, dated May 30, 2012 (Exhibit 4(a) to PPL Corporation Form 10-Q Report (File No. 1-11459) for the quarter ended June 30, 2012) |
| | |
4(b)-9 | - | Amendment No. 8 to said Employee Stock Ownership Plan, dated July 17, 2012 (Exhibit 4(b) to PPL Corporation Form 10-Q Report (File No. 1-11459) for the quarter ended June 30, 2012) |
| | |
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 (ExhibitExhibit 4.1 to PPLTalen Energy Corporation Form 8-K Report (File No. 1-11459) dated November 12, 1997)1-37388) filed on June 2, 2015) |
| | |
4(d)-2 | - | Supplemental Indenture No. 8, dated as of June 14, 2012, to said Indenture (Exhibit 4(b) to PPL Corporation Form 8-K Report (File No. 1-11459) dated June 14, 2012) |
| | |
4(d)-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 | - | 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) |
| | |
4(f)-3 | - | 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 | - | 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 | - | 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 | - | Supplemental Indenture No. 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)-7 | - | 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 The Bank of New York Mellon, as successor to JPMorgan Chase Bank (formerly The Chase Manhattan Bank), as Trustee (Exhibit(incorporated by reference to Exhibit 4.1 to PPL Energy Supply, LLC Form S-4 (Registration Statement No. 333-74794)) filed on December 7, 2001) |
| | |
4(g)- 24.3 | - | Supplemental Indenture No. 2, dated as of August 15, 2004, to said Indenture (Exhibit(incorporated by reference to 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)-34.4 | - | Supplemental Indenture No. 3, dated as of October 15, 2005, to said Indenture (Exhibit(incorporated by reference to Exhibit 4(a) to PPL Energy Supply, LLC Form 8-K Report (File No. 333-74794) datedfiled on October 28, 2005) |
| | |
4(g)-4 | | |
4.5 | - | Form of Note for PPL Energy Supply, LLC's $300 million aggregate principal amount of 5.70% REset Put Securities due 2035 (REPSSM) (Exhibit(REPSSM) (incorporated by reference to Exhibit 4(b) to PPL Energy Supply, LLC Form 8-K Report (File No. 333-74794) datedfiled on October 28, 2005) |
| | |
4(g)-54.6 | - | Supplemental Indenture No. 4, dated as of May 1, 2006, to said Indenture (Exhibit(incorporated by reference to 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)-64.7 | - | Supplemental Indenture No. 6, dated as of July 1, 2006, to said Indenture (Exhibit(incorporated by reference to 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)-74.8 | - | Supplemental Indenture No. 7, dated as of December 1, 2006, to said Indenture (Exhibit(incorporated by reference to 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)-84.9 | - | Supplemental Indenture No. 8, dated as of December 1, 2007, to said Indenture (Exhibit(incorporated by reference to Exhibit 4(b) to PPL Energy Supply, LLC Form 8-K Report (File No. 333-74794) datedfiled on December 20, 2007) |
| | |
4(g)-94.10 | - | Supplemental Indenture No. 9, dated as of March 1, 2008, to said Indenture (Exhibit(incorporated by reference to Exhibit 4(b) to PPL Energy Supply, LLC Form 8-K Report (File No. 333-74794) datedfiled on March 14, 2008) |
| | |
4(g)-104.11 | - | Supplemental Indenture No. 10, dated as of July 1, 2008, to said Indenture (Exhibit(incorporated by reference to Exhibit 4(b) to PPL Energy Supply, LLC Form 8-K Report (File No. 1-32944) datedfiled on July 21, 2008) |
| | |
4(g)-114.12 | - | Supplemental Indenture No. 11, dated as of December 1, 2011, to said Indenture (Exhibit(incorporated by reference to Exhibit 4(a) to PPL Energy Supply, LLC Form 8-K Report (File No. 1-32944) datedfiled on December 16, 2011) |
| | |
4(g)-124.13 | - | Supplemental Indenture No. 12, dated as of February 12, 2013, to said Indenture (Exhibit(incorporated by reference to Exhibit 4.1 to PPL Energy Supply, LLC Form 8-K Report (File No. 1-32944) datedfiled on 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)-24.14 | - | Supplemental Indenture No. 1,13, dated as of March 1, 2007,May 19, 2015, to said Subordinated Indenture (Exhibit 4(b)(incorporated by reference to Exhibit 4.1 to PPL CorporationEnergy Supply, LLC Form 8-K Report (File No. 1-11459) dated March 20, 2007)1-32944) filed on May 19, 2015) |
| | |
4(m)-34.15 | - | Officer's Certificate, dated May 19, 2015, pursuant to Supplemental Indenture No. 2, dated as13, establishing the form and certain terms of June 28, 2010,the Notes (incorporated by reference to said Subordinated Indenture (Exhibit 4.3Exhibit 4.2 to PPL CorporationEnergy Supply, LLC Form 8-K Report (File No. 1-11459) dated June 30, 2010)1-32944) filed on May 19, 2015) |
| | |
4(m)-44.16 | - | Supplemental Indenture No. 3, dated asForm of April 15, 2011,6.500% Senior Notes due 2025 (incorporated by reference to said Subordinated Indenture (ExhibitExhibit 4.3 to PPL CorporationEnergy Supply, LLC Form 8-K Report (File No. 1-11459) dated April1-32944) filed on May 19, 2011)2015) |
| | |
4(m)-54.17 | - | Supplemental Indenture No. 4,Registration Rights Agreement, dated May 19, 2015, among PPL Energy Supply, LLC and Citigroup Global Markets Inc., BNP Paribas Securities Corp, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Goldman, Sachs & Co., J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC, as representatives of March 15, 2013,the initial purchasers (incorporated by reference to said Subordinated Indenture (Exhibit 4(b)Exhibit 4.4 to PPL CorporationEnergy Supply, LLC Form 8-K Report (File No. 1-11459) dated March 15, 2013)1-32944) filed on May 19, 2015) |
| | |
4(n)-14.18 | - | Series 2009A Exempt Facilities Loan Agreement, dated as of April 1, 2009, between PPL Energy Supply, LLC and Pennsylvania Economic Development Financing Authority (Exhibit(incorporated by reference to Exhibit 4(a) to PPL Energy Supply, LLC Form 8-K Report (File No. 1-32944) datedfiled on April 9, 2009) |
4.19 | - | First Supplement to Series 2009A Exempt Facilities Loan Agreement, dated September 1, 2015, between Talen Energy Supply, LLC and Pennsylvania Economic Development Financing Authority (incorporated by reference to Exhibit 4(a) to Talen Energy Corporation Form 8-K Report (File No. 1-37388) filed on September 1, 2015) |
4(n)-24.20 | - | Series 2009B Exempt Facilities Loan Agreement, dated as of April 1, 2009, between PPL Energy Supply, LLC and Pennsylvania Economic Development Financing Authority (Exhibit(incorporated by reference to Exhibit 4(b) to PPL Energy Supply, LLC Form 8-K Report (File No. 1-32944) datedfiled on April 9, 2009) |
4.21 | - | First Supplement to Series 2009B Exempt Facilities Loan Agreement, dated September 1, 2015, between Talen Energy Supply, LLC and Pennsylvania Economic Development Financing Authority (incorporated by reference to Exhibit 4(b) to Talen Energy Corporation Form 8-K Report (File No. 1-37388) filed on September 1, 2015) |
4(n)-34.22 | - | Series 2009C Exempt Facilities Loan Agreement, dated as of April 1, 2009, between PPL Energy Supply, LLC and Pennsylvania Economic Development Financing Authority (Exhibit(incorporated by reference to Exhibit 4(c) to PPL Energy Supply, LLC Form 8-K Report (File No. 1-32944) datedfiled on April 9, 2009) |
| | |
4(o)4.23 | - | Trust Deed constituting £200 million 5.75 percent Notes due 2040,First Supplement to Series 2009C Exempt Facilities Loan Agreement, dated March 23, 2010,September 1, 2015, between Western Power Distribution (South Wales) plcTalen Energy Supply, LLC and HSBC Corporate Trustee Company (UK) Limited (Exhibit 4(a)Pennsylvania Economic Development Financing Authority (incorporated by reference to PPLExhibit 4(c) to Talen Energy Corporation Form 10-Q8-K Report (File No. 1-11459) for the quarter ended March 31, 2010)1-37388) filed on September 1, 2015) |
|
| | |
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)-14.24 | - | Indenture, dated as of October 1, 2010, between Kentucky Utilities CompanyJuly 10, 2014, among RJS Power Holdings LLC, the guarantors party thereto and The Bank of New York Mellon, as Trustee (Exhibit 4(q)-1(incorporated by reference to Exhibit 4.16 to Talen Energy Corporation Registration Statement on Form S-1 (File No. 333-199888) filed on November 5, 2014) |
4.25 | - | Supplemental Indenture No. 1, dated as of June 1, 2015, among PPL Energy Supply, LLC, RJS Power Holdings LLC, RJS Power LLC and The Bank of New York Mellon, as Trustee (incorporated by reference to Exhibit 4.3 to Talen Energy Corporation Form 8-K Report (File No. 1-37388) filed on June 2, 2015) |
4.26 | - | 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 (incorporated by reference to Exhibit 10(hh) to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010)2013) |
| | |
4(q)-210.1 | - | 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) |
| | |
4(s)-2 | - | Supplemental Indenture No. 1, dated as of November 1, 2010, to said Indenture (Exhibit 4(s)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(s)-3 | - | Supplemental Indenture No. 2, dated as of September 1, 2011, to said Indenture (Exhibit 4(a) to PPL Corporation Form 8-K Report (File No. 1-11459) dated September 30, 2011) |
| | |
4(t)-1 | - | 2002 Series A Carroll County Loan Agreement, dated February 1, 2002, by and between Kentucky Utilities Company, and County of Carroll, Kentucky (Exhibit 4(w)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(t)-2 | - | Amendment No. 1 dated as of September 1, 2010 to said Loan Agreement by and between Kentucky Utilities Company, and County of Carroll, Kentucky (Exhibit 4(w)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(u)-1 | - | 2002 Series B Carroll County Loan Agreement, dated February 1, 2002, by and between Kentucky Utilities Company, and County of Carroll, Kentucky (Exhibit 4(x)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(u)-2 | - | Amendment No. 1 dated as of September 1, 2010, to said Loan Agreement by and between Kentucky Utilities Company, and County of Carroll, Kentucky (Exhibit 4(x)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(v)-1 | - | 2002 Series C Carroll County Loan Agreement, dated July 1, 2002, by and between Kentucky Utilities Company, and County of Carroll, Kentucky (Exhibit 4(y)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(v)-2 | - | Amendment No. 1 dated as of September 1, 2010, to said Loan Agreement by and between Kentucky Utilities Company, and County of Carroll, Kentucky (Exhibit 4(y)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(w)-1 | - | 2004 Series A Carroll County Loan Agreement, dated October 1, 2004 and amended and restated as of September 1, 2008, by and between Kentucky Utilities Company, and County of Carroll, Kentucky (Exhibit 4(z)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(w)-2 | - | Amendment No. 1 dated as of September 1, 2010, to said Loan Agreement by and between Kentucky Utilities Company, and County of Carroll, Kentucky (Exhibit 4(z)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(x)-1 | - | 2006 Series B Carroll County Loan Agreement, dated October 1, 2006 and amended and restated September 1, 2008, by and between Kentucky Utilities Company, and County of Carroll, Kentucky (Exhibit 4(aa)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(x)-2 | - | Amendment No. 1 dated as of September 1, 2010, to said Loan Agreement by and between Kentucky Utilities Company, and County of Carroll, Kentucky (Exhibit 4(aa)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(y)-1 | - | 2007 Series A Carroll County Loan Agreement, dated March 1, 2007, by and between Kentucky Utilities Company and County of Carroll, Kentucky (Exhibit 4(bb)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(y)-2 | - | Amendment No. 1 dated September 1, 2010, to said Loan Agreement by and between Kentucky Utilities Company, and County of Carroll, Kentucky (Exhibit 4(bb)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(z)-1 | - | 2008 Series A Carroll County Loan Agreement, dated August 1, 2008 by and between Kentucky Utilities Company, and County of Carroll, Kentucky (Exhibit 4(cc)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(z)-2 | - | Amendment No. 1 dated September 1, 2010, to said Loan Agreement by and between Kentucky Utilities Company, and County of Carroll, Kentucky (Exhibit 4(cc)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(aa)-1 | - | 2000 Series A Mercer County Loan Agreement, dated May 1, 2000 and amended and restated as of September 1, 2008, by and between Kentucky Utilities Company, and County of Mercer, Kentucky (Exhibit 4(dd)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(aa)-2 | - | Amendment No. 1 dated September 1, 2010, to said Loan Agreement by and between Kentucky Utilities Company, and County of Mercer, Kentucky (Exhibit 4(dd)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(bb)-1 | - | 2002 Series A Mercer County Loan Agreement, dated February 1, 2002, by and between Kentucky Utilities Company, and County of Mercer, Kentucky (Exhibit 4(ee)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(bb)-2 | - | Amendment No. 1 dated September 1, 2010, to said Loan Agreement by and between Kentucky Utilities Company, and County of Mercer, Kentucky (Exhibit 4(ee)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(cc)-1 | - | 2002 Series A Muhlenberg County Loan Agreement, dated February 1, 2002, by and between Kentucky Utilities Company, and County of Muhlenberg, Kentucky (Exhibit 4(ff)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(cc)-2 | - | Amendment No. 1 dated September 1, 2010, to said Loan Agreement by and between Kentucky Utilities Company, and County of Muhlenberg, Kentucky (Exhibit 4(ff)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(dd)-1 | - | 2007 Series A Trimble County Loan Agreement, dated March 1, 2007, by and between Kentucky Utilities Company, and County of Trimble, Kentucky (Exhibit 4(gg)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(dd)-2 | - | Amendment No. 1 dated September 1, 2010, to said Loan Agreement by and between Kentucky Utilities Company, and County of Trimble, Kentucky (Exhibit 4(gg)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(ee)-1 | - | 2000 Series A Louisville/Jefferson County Metro Government Loan Agreement, dated May 1, 2000 and amended and restated as of September 1, 2008, by and between Louisville Gas and Electric Company, and Louisville/Jefferson County Metro Government, Kentucky (Exhibit 4(hh)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(ee)-2 | - | Amendment No. 1 dated September 1, 2010, to said Loan Agreement by and between Louisville Gas and Electric Company, and Louisville/Jefferson County Metro Government, Kentucky (Exhibit 4(hh)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(ee)-3 | - | Amendment No. 2 dated as of October 1, 2011, to said Loan Agreement by and between Louisville Gas and Electric Company, and Louisville/Jefferson County Metro Government, Kentucky (Exhibit 4(ee)-3 to Louisville Gas and Electric Company Form 10-K Report (File No. 1-2893) for the year ended December 31, 2011) |
| | |
4(ff)-1 | - | 2001 Series A Jefferson County Loan Agreement, dated July 1, 2001, by and between Louisville Gas and Electric Company, and Jefferson County, Kentucky (Exhibit 4(ii)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(ff)-2 | - | Amendment No. 1 dated September 1, 2010, to said Loan Agreement by and between Louisville Gas and Electric Company, and Jefferson County, Kentucky (Exhibit 4(ii)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(gg)-1 | - | 2001 Series A Jefferson County Loan Agreement, dated November 1, 2001, by and between Louisville Gas and Electric Company, and Jefferson County, Kentucky (Exhibit 4(jj)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(gg)-2 | - | Amendment No. 1 dated September 1, 2010, to said Loan Agreement by and between Louisville Gas and Electric Company, and Jefferson County, Kentucky (Exhibit 4(jj)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(hh)-1 | - | 2001 Series B Jefferson County Loan Agreement, dated November 1, 2001, by and between Louisville Gas and Electric Company, and Jefferson County, Kentucky (Exhibit 4(kk)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(hh)-2 | - | Amendment No. 1 dated September 1, 2010, to said Loan Agreement by and between Louisville Gas and Electric Company, and Jefferson County, Kentucky (Exhibit 4(kk)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(ii)-1 | - | 2003 Series A Louisville/Jefferson County Metro Government Loan Agreement, dated October 1, 2003, by and between Louisville Gas and Electric Company and Louisville/Jefferson County Metro Government, Kentucky (Exhibit 4(ll)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(ii)-2 | - | Amendment No. 1 dated September 1, 2010, to said Loan Agreement by and between Louisville Gas and Electric Company, and Louisville/Jefferson County Metro Government, Kentucky (Exhibit 4(ll)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(jj)-1 | - | 2005 Series A Louisville/Jefferson County Metro Government Loan Agreement, dated February 1, 2005 and amended and restated as of September 1, 2008, by and between Louisville Gas and Electric Company, and Louisville/Jefferson County Metro Government, Kentucky (Exhibit 4(mm)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(jj)-2 | - | Amendment No. 1 dated September 1, 2010, to said Loan Agreement by and between Louisville Gas and Electric Company, and Louisville/Jefferson County Metro Government, Kentucky (Exhibit 4(mm)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(kk)-1 | - | 2007 Series A Louisville/Jefferson County Metro Government Loan Agreement, dated as of March 1, 2007 and amended and restated as of September 1, 2008, by and between Louisville Gas and Electric Company, and Louisville/Jefferson County Metro Government, Kentucky (Exhibit 4(nn)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(kk)-2 | - | Amendment No. 1 dated September 1, 2010, to said Loan Agreement by and between Louisville Gas and Electric Company, and Louisville/Jefferson County Metro Government, Kentucky (Exhibit 4(nn)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(ll) | - | 2007 Series B Louisville/Jefferson County Metro Government Amended and Restated Loan Agreement, dated November 1, 2010, by and between Louisville Gas and Electric Company and Louisville/Jefferson County Metro Government, Kentucky (Exhibit 4(oo) to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(mm)-1 | - | 2000 Series A Trimble County Loan Agreement, dated August 1, 2000, by and between Louisville Gas and Electric Company, and County of Trimble, Kentucky (Exhibit 4(pp)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(mm)-2 | - | Amendment No. 1 dated September 1, 2010, to said Loan Agreement by and between Louisville Gas and Electric Company, and County of Trimble, Kentucky (Exhibit 4(pp)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(nn)-1 | - | 2001 Series A Trimble County Loan Agreement, dated November 1, 2001, by and between Louisville Gas and Electric Company, and County of Trimble, Kentucky (Exhibit 4(qq)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(nn)-2 | - | Amendment No. 1 dated September 1, 2010, to said Loan Agreement by and between Louisville Gas and Electric Company, and the County of Trimble, Kentucky (Exhibit 4(qq)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(oo)-1 | - | 2001 Series B Trimble County Loan Agreement, dated November 1, 2001, by and between Louisville Gas and Electric Company, and County of Trimble, Kentucky (Exhibit 4(rr)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(oo)-2 | - | Amendment No. 1 dated September 1, 2010, to said Loan Agreement by and between Louisville Gas and Electric Company, and County of Trimble, Kentucky (Exhibit 4(rr)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(pp)-1 | - | 2002 Series A Trimble County Loan Agreement, dated July 1, 2002, by and between Louisville Gas and Electric Company, and County of Trimble, Kentucky (Exhibit 4(ss)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(pp)-2 | - | Amendment No. 1 dated September 1, 2010, to said Loan Agreement by and between Louisville Gas and Electric Company, and County of Trimble, Kentucky (Exhibit 4(ss)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(qq)-1 | - | 2007 Series A Trimble County Loan Agreement, dated March 1, 2007, by and between Louisville Gas and Electric Company, and County of Trimble, Kentucky (Exhibit 4(tt)-1 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(qq)-2 | - | Amendment No. 1 dated September 1, 2010, to said Loan Agreement by and between Louisville Gas and Electric Company, and County of Trimble, Kentucky (Exhibit 4(tt)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
4(rr)-1 | - | Indenture, dated April 21, 2011, between PPL WEM Holdings PLC, as Issuer, and The Bank of New York Mellon, as Trustee (Exhibit 10.2 to PPL Corporation Form 8-K Report (File No. 1-11459) dated April 21, 2011) |
| | |
4(rr)-2 | - | Supplemental Indenture No. 1, dated April 21, 2011, to said Indenture (Exhibit 10.3 to PPL Corporation Form 8-K Report (File No. 1-11459) dated April 21, 2011) |
| | |
4(ss)-1 | - | Trust Deed, dated April 27, 2011, by and among Western Power Distribution (East Midlands) plc and Western Power Distribution (West Midlands) plc, as Issuers, and HSBC Corporate Trustee Company (UK) Limited as Note Trustee (Exhibit 4.1 to PPL Corporation Form 8-K Report (File No.1-11459) dated May 17, 2011) |
| | |
4(ss)-2 | - | 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) |
| | |
10(a) | - | Generation SupplyEmployee Matters 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, 2000,9, 2014, among PPL Corporation, PPLTalen Energy Funding Corporation, C/R Energy Jade, LLC, Sapphire Power Holdings LLC and its direct and indirect subsidiaries in various tiers, PPL Capital Funding, Inc., PPL Gas Utilities Corporation, PPL Services Corporation and CEP Commerce,Raven Power Holdings LLC (Exhibit 10.20(incorporated by reference 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) |
| | |
10(j)-2 | - | Amendment No. 1, 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, dated as of July 28, 2009, 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, 2009) |
| | |
10(j)-5 | - | Amendment No. 2, dated as of July 27, 2010, to said Credit and Security Agreement (Exhibit 10(g) to PPL Electric Utilities Corporation Form 10-Q Report (File No. 1-905) for the quarter ended June 30, 2010) |
| | |
10(j)-6 | - | Amendment No. 3, dated as 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 March 31, 2011, to said Credit and Security Agreement (Exhibit 10(c) to PPL Corporation Form 10-Q Report (File No. 1-11459) for the quarter ended March 31, 2011) |
| | |
10(j)-8 | - | Amendment No. 5, dated as of 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 of September 24, 2012, to said Credit and Security Agreement (Exhibit 10(b) to PPL Electric Utilities Corporation Form 10-Q Report (File No. 1-905) for the quarter ended September 30, 2012) |
| | |
10(k)-1 | - | Reimbursement Agreement, dated as of March 31, 2005, among PPL Energy Supply, LLC, The Bank of Nova Scotia, as Issuer and Administrative Agent, and the Lenders party thereto from time to time (Exhibit 10(a) to PPL Energy Supply, LLC Form 10-Q Report (File No. 333-74794) for the quarter ended March 31, 2005) |
| | |
10(k)-2 | - | First Amendment, 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(k)-3 | - | Second Amendment, 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(k)-4 | - | Third Amendment, 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(k)-5 | - | Fourth Amendment, dated as of April 12, 2006, to said Reimbursement Agreement (Exhibit 10(b) to PPL Energy Supply, LLC Form 10-Q Report (File No. 333-74794) for the quarter ended September 30, 2006) |
| | |
10(k)-6 | - | Fifth Amendment, 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(k)-7 | - | Sixth Amendment, 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(k)-8 | - | Seventh Amendment, 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(k)-9 | - | Eighth Amendment, 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(k)-10 | - | Ninth Amendment, dated as of March 31, 2010, to said Reimbursement Agreement (Exhibit 99.1Exhibit 10.1 to PPL Energy Supply, LLC Form 8-K Report (File No. 1-32944) dated April 6, 2010)June 12, 2014) |
| | |
10(k)-1110.2 | - | Tenth Amendment,Transition Services Agreement, dated as of February 22, 2012,June 1, 2015, by and between PPL Corporation and PPL Energy Supply, LLC (incorporated by reference to said ReimbursementExhibit 10.4 to Talen Energy Corporation Form 8-K Report (File No. 1-37388) filed on June 2, 2015) |
10.3 | - | Transition Services Agreement, (Exhibit 10(k)-11dated as of May 4, 2015, by and between Topaz Power Management, LP and PPL Energy Supply, LLC (incorporated by reference to Exhibit 10.1 to PPL Energy Supply, LLC Form 10-K8-K Report (File No. 1-32944) for the year ended December 31, 2011)333-199888) filed on May 8, 2015) |
| | |
10(k)-1210.4 | - | Eleventh Amendment,Credit Agreement, dated as of February 28, 2013, to said Reimbursement Agreement (Exhibit 10(k)-12 toJune 1, 2015, among PPL Energy Supply, LLC, Form 10-K Report (File No. 1-32944) for the year ended December 31, 2012) |
| | |
10(l) | - | Purchaselenders and Sale Agreement, datedarrangers party thereto and Citibank, N.A., as of April 28, 2010,administrative agent (incorporated by and between E.ON US Investments Corp., PPL Corporation and E.ON AG (Exhibit No. 99.1reference to PPLExhibit 10.1 to Talen Energy Corporation Form 8-K Report (File No. 1-11459) dated April 30, 2010)1-37388) filed on June 2, 2015) |
| | |
10(m)10.5 | - | $500 million FacilityGuarantee and Collateral Agreement, dated as of May 14, 2010,June 1, 2015, among PPL Energy Supply, LLC, the subsidiaries of the borrower from time to time party thereto and Citibank, N.A., as Borrower, and Morgan Stanley Bank, as Issuer (Exhibit 10(b)collateral trustee (incorporated by reference to PPLExhibit 10.2 to Talen Energy Supply, LLC Form 10-Q Report (File No. 1-32944) for the quarter ended June 30, 2010) |
| | |
10(n) | - | Purchase and Sale Agreement, dated as of September 9, 2010, by and between PPL Holtwood, LLC and LSP Safe Harbor Holdings, LLC (Exhibit 10.1 to PPL Corporation Form 8-K Report (File No. 1-11459) dated September 13, 2010)1-37388) filed on June 2, 2015) |
| | |
10(o)10.6 | - | PurchaseCollateral Trust and SaleIntercreditor Agreement, dated as of September 9, 2010,June 1, 2015, among PPL Energy Supply, LLC, the subsidiary guarantors party thereto from time to time and Citibank, N.A., as administrative agent and as collateral trustee (incorporated by and between PPL Generation, LLC and Harbor Gen Holdings, LLC (Exhibit 10.2reference to PPLExhibit 10.3 to Talen Energy Corporation Form 8-K Report (File No. 1-11459) dated September 13, 2010)1-37388) filed on June 2, 2015) |
10.7 | - | Secured Energy Marketing and Trading Facility Common Agreement, dated as of November 1, 2010, among PPL EnergyPlus, LLC, PPL Energy Supply, LLC, PPL Brunner Island, LLC, PPL Montour, LLC, Wilmington Trust FSB, as Collateral Agent and the Secured Counterparties thereto (incorporated by reference to Exhibit 10.8 to Talen Energy Corporation Registration Statement on Form S-1 (File No. 333-199888) filed on March 18, 2015) |
10(p)10.8 | - | 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(incorporated by reference to Exhibit 10(w) to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
10(q)10.9 | - | 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(incorporated by reference to Exhibit 10(x) to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
10(r)10.10 | - | 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(incorporated by reference to Exhibit 10(y) to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2010) |
| | |
10(s)10.11 | - | £300,000,000 Multicurrency Revolving CreditSecured Energy Marketing and Trading Facility Amended and Restated Common Agreement dated April 4, 2011,as of December 15, 2015 among Western Power Distribution (West Midlands) plc and Royal Bank of CanadaTalen Energy Marketing, LLC, Talen Energy Supply, LLC, Brunner Island, LLC, Montour, LLC, Wilmington Trust, National Association, as Lead Arranger, Bank of America Securities Limited as Bookrunner and Facility Agent, Bank of America, N.A. as Issuing Bankcollateral agent, and the other banks partysecured counterparties thereto as Mandated Lead Arrangers (Exhibit(incorporated by reference to Exhibit 10.1 to PPLTalen Energy Corporation Form 8-K Report (File No. 1-11459) dated April 8, 2011)1-37388) filed on December 21, 2015) |
| | |
10(t)10.12 | - | £300,000,000 Multicurrency Revolving Credit FacilityFirst Amendment to Collateral Trust and Intercreditor Agreement dated April 4, 2011,as of November 13, 2015 among Western Power Distribution (East Midlands) plcTalen Energy Supply, LLC, the subsidiary guarantors identified on the signature pages thereto and Royal Bank of CanadaCitibank, N.A., as Lead Arranger, Bank of America Securities Limited as Bookrunneradministrative agent and Facility Agent, Bank of America, N.A. as Issuing Bank and the other banks party thereto as Mandated Lead Arrangers (Exhibitcollateral trustee (incorporated by reference to Exhibit 10.2 to PPLTalen Energy Corporation Form 8-K Report (File No. 1-11459) dated April 8, 2011)1-37388) filed on December 21, 2015) |
| | |
10(u)-110.13 | - | Amendment and RestatementAccession 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,December 15, 2015 among Kentucky Utilities Company,Wilmington Trust, National Association, 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) forcredit parties identified on 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 partysignature pages thereto and Banco Bilbao Vizcaya Argentaria, S.A., New York Branch,Citibank, N.A, as Administrative Agent and Sumitomo Mitsui Banking Corporation, New York Branchcollateral trustee, as Issuing Lender (Exhibit 10(a)acknowledged by Talen Energy Supply, LLC (incorporated by reference 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,Exhibit 10.2 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 PPLTalen Energy 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) |
| | 1-37388) filed on December 21, 2015) |
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) |
| | |
| - | 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) |
| | |
| - | 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) | - | $300,000,000 Amended and Restated Revolving Credit Agreement, dated as of November 6, 2012, among PPL Electric Utilities Corporation, the Lenders party thereto and Wells Fargo Bank, National Association, as Administrative Agent, Issuing Lender and Swingline Lender (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(dd) to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2012) |
| | |
10(ee) | - | $500,000,000 Amended and Restated Revolving Credit Agreement, dated as of November 6, 2012, among Louisville Gas and Electric Company, the Lenders party thereto and Wells Fargo Bank, National Association, as Administrative Agent, Swingline Lender and Issuing Lender (Exhibit 10(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) |
| | |
10.14 | - | 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 |
| | |
| - | Third Supplemental Indenture, dated as of February 12, 2013, (incorporated by reference 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 |
| | |
| - | $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 13, 2013) |
| | |
[_]10(kk)-1 | - | Amended and Restated Directors Deferred Compensation Plan, dated June 12, 2000 (Exhibit 10(h)Exhibit 10(gg) to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2000)2013) |
| | |
[_]10(kk)-210.15* | - | Amendment No. 1 to said 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(kk)-3 | - | Amendment No. 2 to said 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(kk)-4 | - | Amendment No. 3 to said 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(kk)-5 | - | Amendment No. 4 to said 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(kk)-6 | - | Amendment No. 5 to said Directors Deferred Compensation Plan, dated May 28, 2010 (Exhibit 10(a) to PPL Corporation Form 10-Q Report (File No. 1-11459) for the quarter ended June 30, 2010) |
| | |
[_]10(ll)-1 | - | PPL Corporation Directors Deferred Compensation Plan TrustFirst Lien Credit and Guaranty Agreement, dated as of April 1, 2001, between PPL Corporation28, 2014, among New MACH Gen, LLC as borrower, the guarantors named therein, the lenders party thereto and Wachovia Bank, N.A. (as successorCLMG Corp., as administrative agent |
10.16*` | - | First Amendment, dated as of March 30, 2015, 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(ll)-2 | - | PPL Officers Deferred Compensation Plan, PPL Supplemental Executive Retirement PlanLien Credit and PPL Supplemental Compensation Pension Plan TrustGuaranty Agreement, dated as of April 1, 2001, between PPL Corporation28, 2014, among New MACH Gen, LLC as borrower, the guarantors named therein, the lenders party thereto and Wachovia Bank, N.A. (as successor to First Union National Bank)CLMG Corp., as Trustee (Exhibit 10(hh)-2 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2012)administrative agent |
| | |
[_]10(ll)-310.17* | - | PPL Revocable Employee Nonqualified Plans TrustFirst Lien Security Agreement dated as of March 20, 2007,April 28, 2014 between PPL Corporationthe Grantors named therein and Wachovia Bank, N.A.CLMG Corp., as Trustee (Exhibit 10(c) to PPL Corporation Form 10-Q Report (File No. 1-1149) for the quarter ended March 31, 2007)First Lien Collateral Agent |
| | |
[_]10(ll)-410.18* | - | PPL Employee Change in Control Agreements TrustCollateral Agency and Intercreditor Agreement dated as of March 20, 2007, between PPL Corporation and Wachovia Bank, N.A.April 28, 2014 among New MACH Gen, LLC, the guarantors party thereto, CLMG Corp., as Trustee (Exhibit 10(d) to PPL Corporation Form 10-Q Report (File No. 1-11459) for the quarter ended March 31, 2007)First Lien Administrative Agent, and CLMG Corp., as First Lien Collateral Agent |
| | |
[_]10(ll)-510.19+ | - | 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)Talen Energy 2015 Stock Incentive Plan (incorporated by reference to PPL Corporation Form 10-Q Report (File No. 1-11459) for the quarter ended March 31, 2007) |
| | |
[_]10(mm)-1 | - | Amended and Restated Officers Deferred Compensation Plan, dated December 8, 2003 (Exhibit 10(r)Exhibit 10.5 to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2003) |
| | |
[_]10(mm)-2 | - | Amendment No. 1 to said 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(mm)-3 | - | Amendment No. 2 to said 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(mm)-4 | - | Amendment No. 3 to said 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(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(nn)-2 | - | Amendment No. 1 to said Supplemental Executive Retirement Plan, dated December 16, 2004 (Exhibit 99.1 to PPLTalen Energy Corporation Form 8-K Report (File No. 1-11459) dated December 17, 2004)1-37388) filed on June 2, 2015) |
| | |
[_]10(nn)-310.20+ | - | 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(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(nn)-5 | - | Amendment No. 4 to said Supplemental 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(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 IncentiveTalen Energy Directors Deferred Compensation Plan effective January 1, 2003 (Exhibit 10(p)(incorporated by reference to PPL Corporation Form 10-K Report (File No. 1-11459) for the year ended December 31, 2002) |
| | |
[_]10(oo)-2 | - | Amendment No. 1Exhibit 10.6 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(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(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(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(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) |
| | |
[_]10(oo)-7 | - | Form of Stock Option Agreement for stock option awards under the Incentive Compensation Plan (Exhibit 10(a) to PPLTalen Energy Corporation Form 8-K Report (File No. 1-11459) dated February 1, 2006)1-37388) filed on June 2, 2015) |
10.21+ | - | Talen Energy Executive Deferred Compensation Plan (incorporated by reference to Exhibit 10.7 to Talen Energy Corporation Form 8-K Report (File No. 1-37388) filed on June 2, 2015) |
[_]10(oo)-810.22+ | - | Talen Energy Supplemental Compensation Pension Plan (incorporated by reference to Exhibit 10.8 to Talen Energy Corporation Form 8-K Report (File No. 1-37388) filed on June 2, 2015) |
10.23+ | - | Talen Energy Executive Severance Plan (incorporated by reference to Exhibit 10.9 to Talen Energy Corporation Form 8-K Report (File No. 1-37388) filed on June 2, 2015) |
10.24+ | - | Form of Nonqualified Stock Option Agreement (incorporated by reference to Exhibit 10.10 to Talen Energy Corporation Form 8-K Report (File No. 1-37388) filed on June 2, 2015) |
10.25+ | - | Form of Restricted Stock Unit Agreement for restricted stock unit awards under the Incentive Compensation Plan (Exhibit 10(b)(incorporated by reference to PPLExhibit 10.11 to Talen Energy Corporation Form 8-K Report (File No. 1-11459) dated February 1, 2006)1-37388) filed on June 2, 2015) |
| | |
[_]10(oo)-910.26+ | - | Form of Performance Unit Agreement for performance unit awards under the Incentive Compensation Plan (Exhibit 10(ss)(incorporated by reference to PPLExhibit 10.12 to Talen Energy Corporation Form 10-K8-K Report (File No. 1-11459) for the year ended December 31, 2007)1-37388) filed on June 2, 2015) |
| | |
[_]10(pp)-110.27+ | - | Amended and Restated Incentive Compensation PlanTalen Energy Form of Performance Unit Agreement for Key Employees, effective January 1, 2003 (Schedule BFiscal 2015 Awards (incorporated by reference to Proxy Statement of PPL Corporation, dated March 17, 2003) |
| | |
[_]10(pp)-2 | - | Exhibit 10.12 to Amendment No. 1 to said Incentive Compensation Plan for Key Employees, dated as of January 1, 2005 (Exhibit (hh)-1 to PPLTalen Energy Corporation Registration Statement on Form 10-K ReportS-1 (File 1-11459) for the year ended December 31, 2005)No. 333-207033) filed on October 29, 2015) |
| | |
[_]10(pp)-310.28+ | - | Talen Energy Short-Term Incentive Plan (incorporated by reference to Exhibit 10.18 to Amendment No. 21 to said Incentive Compensation Plan for Key Employees, dated as of January 26, 2007 (Exhibit 10(ee)-3 to PPL CorporationTalen Energy's Registration Statement on Form 10-K ReportS-1 (File No. 1-11459) for the year ended December 31, 2006)333-207033) filed on October 29, 2015) |
| | |
[_]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(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(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 April 6, 2011) |
| | |
[_]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(ss)10.29+ | - | Form of RetentionTalen Energy 2015 Stock Incentive Plan Restricted Stock Unit Agreement entered into between PPL Corporation and Messrs. DeCampli, Dudkin, Farr and Gabbard (Exhibit 10(h)(Matching Grants on Purchased Shares) (incorporated by reference to PPLExhibit 10.1 to Talen Energy Corporation Form 10-Q8-K Report (File No. 1-11459) for the quarter ended March 31, 2007)1-37388) filed on December 22, 2015) |
| | |
[_]10(tt)-110.30+
| - | Form of Severance Agreement entered into between PPLTalen Energy 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(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(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) |
| | |
[_]10(vv)-1 | - | Form of Change in Control Severance Protection Agreement as adopted March 5, 2012 (Exhibit 10(b)(incorporated by reference to PPLExhibit 10.1 to Talen Energy Corporation Form 10-Q8-K Report (File No. 1-11459) for the quarter ended March 31, 2012)1-37388) filed on December 29, 2015) |
| | |
[_]10(vv)-212(a)* | - | 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) |
| | |
| - | PPLTalen Energy Corporation and Subsidiaries Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends |
| | |
| - | PPLTalen Energy Supply, LLC and Subsidiaries Computation of Ratio of Earnings to Fixed Charges |
| | |
| - | PPL Electric Utilities Corporation and Subsidiaries Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends |
| | |
| - | LG&E and KU Energy LLC and Subsidiaries Computation of Ratio of Earnings to Fixed Charges |
| | |
| - | Louisville Gas and Electric Company Computation of Ratio of Earnings to Fixed Charges |
| | |
| - | Kentucky Utilities Company Computation of Ratio of Earnings to Fixed Charges |
| | |
21* | - | Subsidiaries of PPLTalen Energy Corporation |
| | |
23* | - | Consent of Ernst & Young LLP - PPLTalen Energy Corporation |
24* | - | Power of Attorney |
Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the period ended December 31, 2015 filed by the following officers for the following companies:
|
| | |
| | |
| - | Consent of Ernst & Young LLP Talen Energy Corporation's principal executive officer |
31(b)* | - PPL | Talen Energy Corporation's principal financial officer |
31(c)* | - | Talen Energy Supply, LLCLLC's principal executive officer |
31(d)* | - | Talen Energy Supply, LLC's principal financial officer |
|
Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the period ended December 31, 2015 furnished by the following officers for the following companies:
|
| | |
| | |
| - | Consent of Ernst & Young LLP - PPL Electric Utilities Corporation |
| | |
| - | Consent of Ernst & Young LLP - LG&E and KUTalen Energy LLC |
| | |
| - | Consent of Ernst & Young LLP - Louisville Gas and Electric Company |
| | |
| - | Consent of Ernst & Young LLP - Kentucky Utilities Company |
| | |
| - | Power of Attorney |
| | |
| - | Certificate of PPL's principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
| - | Certificate of PPL's principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
| - | Certificate of PPL Energy Supply's principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
| - | Certificate of PPL Energy Supply's principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
| - | Certificate of PPL Electric's principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
| - | Certificate of PPL Electric's principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
| - | Certificate of LKE's principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
| - | Certificate of LKE's principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
| - | Certificate of LG&E's principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
| - | Certificate of LG&E's principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
| - | Certificate of KU's principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
| - | Certificate of KU's principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
| - | Certificate of PPL's principal executive officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | |
| - | Certificate of PPL Energy Supply'sCorporation's principal executive officer and principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | |
| - | Certificate of PPL Electric'sTalen Energy Supply, LLC's principal executive officer and principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
| | |
| - | Certificate of LKE's principal executive officer and principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | |
| - | Certificate of LG&E's principal executive officer and principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | |
| - | Certificate of KU's principal executive officer and principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | |
| - | PPL Corporation and Subsidiaries Long-term Debt Schedule |
| | |
101.INS | - | XBRL Instance Document for PPLTalen Energy Corporation PPLand Talen 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 PPLTalen Energy Corporation PPL Corporation, PPLand Talen 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 PPLTalen Energy Corporation PPL Corporation, PPLand Talen 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 PPLTalen Energy Corporation PPL Corporation, PPLand Talen 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 PPLTalen Energy Corporation PPL Corporation, PPLand Talen 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 PPLTalen Energy Corporation PPL Corporation, PPLand Talen Energy Supply, LLC PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company |
327