UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
 
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended June 30, 2012March 31, 2013
OR
[   ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from _________ to ___________

Commission File
Number
Registrant; State of Incorporation;
Address and Telephone Number
IRS Employer
Identification No.
   
1-11459
PPL Corporation
(Exact name of Registrant as specified in its charter)
(Pennsylvania)
Two North Ninth Street
Allentown, PA  18101-1179
(610) 774-5151
23-2758192
   
1-32944
PPL Energy Supply, LLC
(Exact name of Registrant as specified in its charter)
(Delaware)
Two North Ninth Street
Allentown, PA  18101-1179
(610) 774-5151
23-3074920
   
1-905
PPL Electric Utilities Corporation
(Exact name of Registrant as specified in its charter)
(Pennsylvania)
Two North Ninth Street
Allentown, PA  18101-1179
(610) 774-5151
23-0959590
   
333-173665
LG&E and KU Energy LLC
(Exact name of Registrant as specified in its charter)
(Kentucky)
220 West Main Street
Louisville, KY  40202-1377
(502) 627-2000
20-0523163
   
1-2893
Louisville Gas and Electric Company
(Exact name of Registrant as specified in its charter)
(Kentucky)
220 West Main Street
Louisville, KY  40202-1377
(502) 627-2000
61-0264150
   
1-3464
Kentucky Utilities Company
(Exact name of Registrant as specified in its charter)
(Kentucky and Virginia)
One Quality Street
Lexington, KY  40507-1462
(502) 627-2000
61-0247570

Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.

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

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

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

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

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

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

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

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

 PPL CorporationCommon stock, $0.01 par value, 580,736,054592,339,687 shares outstanding at July 31, 2012.April 30, 2013.
   
 PPL Energy Supply, LLCPPL Corporation indirectly holds all of the membership interests in PPL Energy Supply, LLC.
   
 PPL Electric Utilities CorporationCommon stock, no par value, 66,368,056 shares outstanding and all held by PPL Corporation at July 31, 2012.April 30, 2013.
   
 LG&E and KU Energy LLCPPL Corporation directly holds all of the membership interests in LG&E and KU Energy LLC.
   
 Louisville Gas and Electric CompanyCommon stock, no par value, 21,294,223 shares outstanding and all held by LG&E and KU Energy LLC at July 31, 2012.April 30, 2013.
   
 Kentucky Utilities CompanyCommon stock, no par value, 37,817,878 shares outstanding and all held by LG&E and KU Energy LLC at July 31, 2012.April 30, 2013.

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

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

FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2012MARCH 31, 2013


Table of Contents

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

Unless otherwise specified, references within this Report, individually, to PPL Corporation, PPL Energy Supply, LLC, PPL Electric LKE,Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company are references to such entities directly or to one or more of their subsidiaries, as the case may be, the financial results of which are consolidated into such Registrants in accordance with GAAP.  This presentation has been applied where identification of particular subsidiaries is not material to the matter being disclosed, and to conform narrative disclosures to the presentation of financial information on a consolidated basis.
  Page
  
PART I.  FINANCIAL INFORMATION 
 Item 1.  Financial Statements 
  PPL Corporation and Subsidiaries 
   
   
   
   
   
  PPL Energy Supply, LLC and Subsidiaries 
   
   
   
   
   
  PPL Electric Utilities Corporation and Subsidiaries 
   
   
   
   
  LG&E and KU Energy LLC and Subsidiaries 
   
   
   
   



  Louisville Gas and Electric Company 
   
   
   
   

  Kentucky Utilities Company 
   
   
   
   
 Combined Notes to Condensed Financial Statements (Unaudited) 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
 Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations 
   
   
   
   
   
   
 
 
PART II.  OTHER INFORMATION 
 
 
 
 
 
 

 
 

 
GLOSSARY OF TERMS AND ABBREVIATIONS

PPL Corporation and its current and former subsidiaries

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

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

LG&E - Louisville Gas and Electric Company, a public utility subsidiary of LKE engaged in the regulated generation, transmission, distribution and sale of electricity and the distribution and sale of natural gas in Kentucky.  The subsidiary was acquired by PPL through the acquisition of LKE in November 2010.

LKE - LG&E and KU Energy LLC, (formerly E.ON U.S. LLC), a subsidiary of PPL and the parent of LG&E, KU and other subsidiaries.  PPL acquired E.ON U.S. LLC in November 2010 and changed the name to LG&E and KU Energy LLC.  Within the context of this document, references to LKE also relate to the consolidated entity.

LKS - LG&E and KU Services Company, a subsidiary of LKE that provides services for LKE and its subsidiaries.The subsidiary was acquired by PPL through the acquisition of LKE in November 2010.

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

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

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

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

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

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

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

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

PPL Global - PPL Global, LLC, a subsidiary of PPL Energy Funding that primarily owns and operates a businessWPD, the businesses in the U.K., WPD, that isare focused on the regulated distribution of electricity.  In January 2011,

PPL Energy Supply,Ironwood - PPL Global's former parent, distributed its membership interest in PPL Global, representing 100% of the outstanding membership interestIronwood LLC, an indirect subsidiary of PPL Global, to its parent, PPL Energy Funding.Generation that owns generating operations in Pennsylvania.

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

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


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

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

i

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

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

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

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

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

WPD Midlands - refers to Central Networks, which was renamed after the acquisition.WPD (East Midlands) and WPD (West Midlands), collectively.

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

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

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

WKE - Western Kentucky Energy Corp., a subsidiary of LKE that leased certain non-utility generating plants in western Kentucky until July 2009.  The subsidiary was acquired by PPL through the acquisition of LKE in November 2010.


Other terms and abbreviations

£ - British pound sterling.

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

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

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

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

2011 Form 10-K - Annual Report to the SEC on Form 10-K for the year ended December 31, 2011.

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

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

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

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

iiAEPS - Alternative Energy Portfolio Standard.


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

ii

AOCI - accumulated other comprehensive income or loss.

ARO - asset retirement obligation.

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

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

Bcf - billion cubic feet.

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

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

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

CAIR - the EPA's Clean Air Interstate Rule.

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

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

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

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

CSAPR - Cross-State Air Pollution Rule, the CSAPR implements Clean Air Act requirements concerning the transport of air pollution from power plants across state boundaries.  The CSAPR replaces the 2005 CAIR, which the U.S. Court of Appeals for the D.C. Circuit ordered the EPA to revise in 2008.  The court has granted a stay allowing CAIR to remain in place pending a ruling on the legal challenges to the CSAPR.Rule.

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

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

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

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

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

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

DRIP - Dividend Reinvestment and Direct Stock Purchase Plan.

iiiDSIC - a distribution system improvement charge authorized under Act 11, which is an alternative ratemaking mechanism providing more-timely cost recovery of qualifying distribution system capital expenditures.


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

ECR - Environmental Cost Recovery.  Pursuant to Kentucky Revised Statute 278.183, effective January 1993, Kentucky electric utilities are entitled to the current recovery of costs of complying with the Clean Air Act, as amended, and those federal, state or local environmental requirements which apply to coal combustion and by-products from the production of energy from coal.

E.ON AGEEI - Electric Energy, Inc., owns and operates a German corporationcoal-fired plant and the parent of E.ON UK plc, the former parent of Central Networks, and the indirect parent of E.ON US Investments Corp., the former parent of LKE.a natural gas facility in southern Illinois.  KU's 20% ownership interest in EEI is accounted for as an equity method investment.

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

EPS - earnings per share.

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

ESOP - Employee Stock Ownership Plan.

iii

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

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

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

FTRFTRs - financial transmission rights, which are financial instruments established to manage price risk related to electricity transmission congestion.  Theycongestion that they entitle the holder to receive compensation or require the holder to remit payment for certain congestion-related transmission charges based on the level of congestion in the transmission grid.

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

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

GBP - British pound sterling.

GHG - greenhouse gas(es).

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

If-Converted Method - When a company has convertible debt outstanding the following method needs to be applied to calculate diluted EPS: Interest charges (after tax) applicable to the convertible debt shall be added back to net income and the convertible debt shall be assumed to have been converted to equity at the beginning of the period and the resulting common shares shall be included with outstanding shares.  Both adjustments are only done for purposes of calculating diluted EPS.  This method was applied to PPL's Equity Units beginning in the first quarter of 2013.

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

Ironwood Acquisition - In April 2012, PPL Ironwood Holdings, LLC, an indirect, wholly owned subsidiary of PPL Energy Supply, completed the acquisition from a subsidiary of The AES Corporation of all of the equity interests of AES Ironwood, L.L.C. (subsequently renamed PPL Ironwood, LLC) and AES Prescott, L.L.C. (subsequently renamed PPL Prescott, LLC), which own and operate, respectively, the Ironwood Facility.

Ironwood Facility -a natural gas-fired power plant in Lebanon, Pennsylvania with a summer rating of 657 MW.Pennsylvania.

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

ISO - Independent System Operator.
iv

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

LIBOR - London Interbank Offered Rate.

Long Island generation businessLTIIP - includesLong Term Infrastructure Improvement Plan.

MATS - Mercury and Air Toxics Standards.

MDEQ - Montana Department of Environmental Quality.

MEIC - Montana Environmental Information Center.

MMBtu - One million British Thermal Units.

Montana Power - The Montana Power Company, a 79.9 MW gas-fired plantMontana-based company that sold its generating assets to PPL Montana in December 1999.  Through a series of transactions consummated during the Edgewood sectionfirst quarter of Brentwood, New York and a 79.9 MW oil-fired plant in Shoreham, New York and related tolling agreements.  This2002, Montana Power sold its electricity delivery business was sold in February 2010.to NorthWestern.

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

MW - megawatt, one thousand kilowatts.

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

iv

NDT - PPL Susquehanna's nuclear plant decommissioning trust.

NERC - North American Electric Reliability Corporation.

NGCCNorthWestern - natural gas-fired combined-cycle turbine.NorthWestern Corporation, a Delaware corporation, and successor in interest to Montana Power's electricity delivery business, including Montana Power's rights and obligations under contracts with PPL Montana.

NPDES - National Pollutant Discharge Elimination System.

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

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

OCI - other comprehensive income or loss.

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

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

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

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

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

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

PP&E - property, plant and equipment.

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

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

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

Purchase Contract(s) - refers collectively to the 2010 and 2011 Purchase Contracts.Contracts (which are components of the 2010 and 2011 Equity Units.)

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

RECs - renewable energy credits.

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


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

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

v

Rev. Proc(s). -RFC Revenue Procedure(s), an official published statement by- Reliability First Corporation, one of eight regional entities with delegated authority from NERC that work to safeguard the IRS of a matter of procedural importance to both taxpayers and the IRS concerning administrationreliability of the tax laws.bulk power systems throughout North America.

RMC - Risk Management Committee.

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

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

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

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

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

Securities Act of 1933SERC - SERC Reliability Corporation, one of eight regional entities with delegated authority from NERC that work to safeguard the Securities Actreliability of 1933, 15 U.S. Code, Sections 77a-77aa, as amended.the bulk power systems throughout North America.

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

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

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

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

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

SuccessorSpark Spread - refersa measure of gross margin representing the price of power on a per MWh basis less the equivalent measure of the natural gas cost to produce that power.  This measure is used to describe the LKE, LG&Egross margin of PPL and KU post-acquisition activity coveringits subsidiaries' competitive natural gas-fired generating fleet.  This term is also used to describe a derivative contract in which PPL and its subsidiaries sell power and buy natural gas on a forward basis in the time period after October 31, 2010.same contract.

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

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

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

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

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

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

VIE - variable interest entity.

vi

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

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

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

 


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viii

 
FORWARD-LOOKING INFORMATION

Statements contained in this Form 10-Q concerning expectations, beliefs, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements which are other than statements of historical fact are "forward-looking statements" within the meaning of the federal securities laws.  Although the Registrants believe that the expectations and assumptions reflected in these statements are reasonable, there can be no assurance that these expectations will prove to be correct.  Forward-looking statements are subject to many risks and uncertainties, and actual results may differ materially from the results discussed in forward-looking statements.  In addition to the specific factors discussed in each Registrant's 20112012 Form 10-K and in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Form 10-Q, report, the following are among the important factors that could cause actual results to differ materially from the forward-looking statements.

·fuel supply cost and availability;
·continuing ability to recover fuel costs and environmental expenditures in a timely manner at LG&E and KU, and natural gas supply costs at LG&E;
·weather conditions affecting generation, customer energy use and operating costs;
·operation, availability and operating costs of existing generation facilities;
·the lengthduration of and cost, ofincluding lost revenue, associated with scheduled and unscheduled outages at our generating facilities;
·transmission and distribution system conditions and operating costs;
·expansion of alternative sources of electricity generation;
·laws or regulations to reduce emissions of "greenhouse" gases or the physical effects of climate change;
·collective labor bargaining negotiations;
·the outcome of litigation against the Registrants and their subsidiaries;
·potential effects of threatened or actual terrorism, war or other hostilities, cyber-based intrusions or natural disasters;
·the commitments and liabilities of the Registrants and their subsidiaries;
·volatility in market demand and prices for energy, capacity, transmission services, emission allowances RECs and delivered fuel;RECs;
·competition in retail and wholesale power and natural gas markets;
·liquidity of wholesale power markets;
·defaults by counterparties under energy, fuel or other power product contracts;
·market prices of commodity inputs for ongoing capital expenditures;
·capital market conditions, including the availability of capital or credit, changes in interest rates and certain economic indices, and decisions regarding capital structure;
·stock price performance of PPL;
·volatility in the fair value of debt and equity securities and its impact on the value of assets in the NDT funds and in defined benefit plans, and the potential cash funding requirements if fair value declines;
·interest rates and their effect on pension, retiree medical, and nuclear decommissioning liabilities and interest payable on certain debt securities;
·volatility in or the impact of other changes in financial or commodity markets and economic conditions;
·new accounting requirements or new interpretations or applications of existing requirements;
·changes in securities and credit ratings;
·changes in foreign currency exchange rates;rates for British pound sterling;
·current and future environmental conditions, regulations and other requirements and the related costs of compliance, including environmental capital expenditures, emission allowance costs and other expenses;
·legal, regulatory, political, market or other reactions to the 2011 incident at the nuclear generating facility at Fukushima, Japan, including additional NRC requirements;
·changes in political, regulatory or economic conditions in states, regions or countries where the Registrants or their subsidiaries conduct business;
·receipt of necessary governmental permits, approvals and rate relief;
·new state, federal or foreign legislation or regulatory developments;
·the outcome of any rate cases or other cost recovery filings by PPL Electric at the PUC or the FERC, by LG&E at the KPSC or the FERC, by KU at the KPSC, VSCC, TRA or the FERC, or by WPD at Ofgem in the U.K.;
·the impact of any state, federal or foreign investigations applicable to the Registrants and their subsidiaries and the energy industry;
·the effect of any business or industry restructuring;
·development of new projects, markets and technologies;
·performance of new ventures; and
·business dispositions or acquisitions and our ability to successfully operate such acquired businesses and realize expected benefits from business acquisitions, including PPL's 2011 acquisition of WPD Midlands and 2010 acquisition of LKE.acquisitions.


 
1

 

Any such forward-looking statements should be considered in light of such important factors and in conjunction with other documents of the Registrants on file with the SEC.

New factors that could cause actual results to differ materially from those described in forward-looking statements emerge from time to time, and it is not possible for the Registrants to predict all such factors, or the extent to which any such factor or combination of factors may cause actual results to differ from those contained in any forward-looking statement.  Any forward-looking statement speaks only as of the date on which such statement is made, and the Registrants undertake no obligation to update the information contained in such statement to reflect subsequent developments or information.

 
2

 

PART I. FINANCIAL INFORMATION
PART I. FINANCIAL INFORMATION
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
                    
CONDENSED CONSOLIDATED STATEMENTS OF INCOMEPPL Corporation and Subsidiaries
(Unaudited)(Unaudited)        (Unaudited)        
(Millions of Dollars, except share data)(Millions of Dollars, except share data)    (Millions of Dollars, except share data)    
          
   Three Months Ended Six Months Ended          
   June 30, June 30,     Three Months Ended March 31,
   2012  2011   2012   2011         2013   2012 
Operating RevenuesOperating Revenues        Operating Revenues        
Utility
 $ 1,605  $ 1,484  $ 3,319  $ 3,020 
Utility
 $ 1,950  $ 1,714 
Unregulated retail electric and gas
  179   181   402   328 
Unregulated retail electric and gas
  237   223 
Wholesale energy marketing        Wholesale energy marketing    
 
Realized
  1,083   732   2,291   1,770  
Realized
  976   1,208 
 
Unrealized economic activity (Note 14)
  (458)  (44)  394   13  
Unrealized economic activity (Note 14)
  (822)  852 
Net energy trading margins
  10   10   18   21 
Net energy trading margins
  (11)  8 
Energy-related businesses
   130    126    237    247 
Energy-related businesses
   127    107 
Total Operating Revenues
   2,549    2,489    6,661    5,399 
Total Operating Revenues
   2,457    4,112 
                 
Operating ExpensesOperating Expenses        Operating Expenses        
Operation        Operation        
 
Fuel
  411   414   835   889  
Fuel
  529   424 
 Energy purchases         Energy purchases    
 
Realized
  787   434   1,670   1,105  
Realized
  691   883 
 
Unrealized economic activity (Note 14)
  (442)  (109)  149   (127) 
Unrealized economic activity (Note 14)
  (634)  591 
 
Other operation and maintenance
  739   723   1,445   1,306  
Other operation and maintenance
  676   706 
Depreciation
  271   237   535   445 
Depreciation
  284   264 
Taxes, other than income
  87   75   178   148 
Taxes, other than income
  96   91 
Energy-related businesses
   124    120    226    233 
Energy-related businesses
   122    102 
Total Operating Expenses
   1,977    1,894    5,038    3,999 
Total Operating Expenses
   1,764    3,061 
                    
Operating Income
Operating Income
  572   595   1,623   1,400 
Operating Income
  693   1,051 
                    
Other Income (Expense) - net
Other Income (Expense) - net
  30   (34)  13   (39)
Other Income (Expense) - net
  122   (17)
                  
Other-Than-Temporary Impairments
  1     1   1 
          
Interest Expense
Interest Expense
   236    264    466    438 
Interest Expense
   251    230 
                    
Income from Continuing Operations Before Income Taxes
  365   297   1,169   922 
Income Before Income Taxes
Income Before Income Taxes
  564   804 
                    
Income Taxes
Income Taxes
   88    96    347    319 
Income Taxes
   151    259 
          
Income from Continuing Operations After Income Taxes
  277   201   822   603 
          
Income (Loss) from Discontinued Operations (net of income taxes)
   (6)   (1)   (6)   2 
                    
Net Income
Net Income
  271   200   816   605 
Net Income
  413   545 
                    
Net Income Attributable to Noncontrolling Interests
Net Income Attributable to Noncontrolling Interests
      4    4    8 
Net Income Attributable to Noncontrolling Interests
      4 
                    
Net Income Attributable to PPL Corporation
 $ 271  $ 196  $ 812  $ 597 
          
Amounts Attributable to PPL Corporation:        
Income from Continuing Operations After Income Taxes
 $ 277  $ 197  $ 818  $ 595 
Income (Loss) from Discontinued Operations (net of income taxes)
   (6)   (1)   (6)   2 
Net Income Attributable to PPL Shareowners
Net Income Attributable to PPL Shareowners
 $ 413  $ 541 
Net Income
 $ 271  $ 196  $ 812  $ 597           
                    
Earnings Per Share of Common Stock:Earnings Per Share of Common Stock:        Earnings Per Share of Common Stock:    
Income from Continuing Operations After Income Taxes Available to PPL  
 Corporation Common Shareowners:        
 
Basic
 $ 0.47  $ 0.35  $1.40  $1.13 
 
Diluted
 $ 0.47  $ 0.35  $1.40  $1.13 
Net Income Available to PPL Corporation Common Shareowners:        
 
Basic
 $ 0.46  $ 0.35  $1.39  $1.14  
Basic
 $0.70  $0.93 
 
Diluted
 $ 0.46  $ 0.35  $1.39  $1.14  
Diluted
 $0.65  $0.93 
                    
Dividends Declared Per Share of Common Stock
Dividends Declared Per Share of Common Stock
 $ 0.36  $ 0.35  $ 0.72  $ 0.70 
Dividends Declared Per Share of Common Stock
 $0.3675  $0.3600 
                    
Weighted-Average Shares of Common Stock Outstanding (in thousands)
Weighted-Average Shares of Common Stock Outstanding (in thousands)
        
Weighted-Average Shares of Common Stock Outstanding (in thousands)
    
 
Basic
  579,881   561,652  579,462  522,897  
Basic
  582,640  579,041 
 
Diluted
  580,593   562,019  580,062  523,184  
Diluted
  657,020  579,527 
                    
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
3

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
PPL Corporation and Subsidiaries(Unaudited)(Millions of Dollars)
                    
   Three Months Ended Six Months Ended     Three Months Ended March 31,
   June 30, June 30,       2013  2012 
   2012  2011  2012  2011             
           
Net income
Net income
 $ 271  $ 200  $ 816  $ 605 
Net income
 $ 413  $ 545 
                       
Other comprehensive income (loss):Other comprehensive income (loss):        Other comprehensive income (loss):          
Amounts arising during the period - gains (losses), net of tax (expense)         
Amounts arising during the period - gains (losses), net of tax (expense) benefit:Amounts arising during the period - gains (losses), net of tax (expense) benefit:     
 
Foreign currency translation adjustments, net of tax of ($6), $2
   (245)  76 
 
Available-for-sale securities, net of tax of ($25), ($26)
   23   24 
 
Qualifying derivatives, net of tax of ($20), ($50)
   62   78 
 
Equity investees' other comprehensive income (loss), net of tax of $0, $2
     (4)
Reclassifications from AOCI - (gains) losses, net of tax expense (benefit):Reclassifications from AOCI - (gains) losses, net of tax expense (benefit):     
benefit:          
Available-for-sale securities, net of tax of $1, $0
   (1)  (5)
 
Foreign currency translation adjustments, net of tax of ($2), $0, $0, $1
  (179)  93    (103)  160  
Qualifying derivatives, net of tax of $35, $75
   (80)  (134)
 
Available-for-sale securities, net of tax of $8, ($1), ($20), ($13)
  (7)  1    15   13  Defined benefit plans:          
 
Qualifying derivatives, net of tax of $7, $21, ($55), ($11)
  2   (30)   68   7   
Prior service costs, net of tax of ($1), ($1)
   1   3 
 Equity investees' other comprehensive income (loss), net of          
Net actuarial loss, net of tax of ($13), ($4)
   34    20 
 
tax of $0, $0, $2, $0
  1      (3)  (1)           
 Defined benefit plans:         
 
Net actuarial gain (loss), net of tax of $28, $0, $28, $0
  (85)    (85)  
Reclassifications to net income - (gains) losses, net of tax expense         
(benefit):         
 
Available-for-sale securities, net of tax of $1, $0, $3, $5
  (1)  (1)   (4)  (8)
 
Qualifying derivatives, net of tax of $84, $55, $171, $106
  (140)  (89)   (262)  (158)
 Equity investees' other comprehensive (income) loss, net of         
 
tax of $0, $0, $0, $0
    1      3 
 Defined benefit plans:         
  
Prior service costs, net of tax of ($2), ($1), ($3), ($3)
  2   2   5   5 
  
Net actuarial loss, net of tax of ($7), ($6), ($11), ($10)
   17    12    37    23 
Total other comprehensive income (loss) attributable to PPL        
Corporation
   (390)   (11)   (332)   44 
Total other comprehensive income (loss) attributable to PPL Shareowners
Total other comprehensive income (loss) attributable to PPL Shareowners
   (206)  58 
                       
Comprehensive income (loss)
Comprehensive income (loss)
  (119)  189   484   649 
Comprehensive income (loss)
   207   603 
 
Comprehensive income attributable to noncontrolling interests
      4    4    8            
            
Comprehensive income attributable to noncontrolling interests
      4 
Comprehensive income (loss) attributable to PPL Corporation
 $ (119) $ 185  $ 480  $ 641 
            
Comprehensive income (loss) attributable to PPL Shareowners
Comprehensive income (loss) attributable to PPL Shareowners
 $ 207  $ 599 
                     
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
4

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
PPL Corporation and Subsidiaries(Unaudited)(Millions of Dollars)
              
   Six Months Ended June 30,   Three Months Ended March 31,
   2012  2011    2013  2012 
Cash Flows from Operating ActivitiesCash Flows from Operating Activities    Cash Flows from Operating Activities    
Net income
 $ 816  $ 605 
Net income
 $ 413  $ 545 
Adjustments to reconcile net income to net cash provided by operating activities    Adjustments to reconcile net income to net cash provided by operating activities    
 
Depreciation
  535   446  
Depreciation
  284   264 
 
Amortization
  88   126  
Amortization
  64   55 
 
Defined benefit plans - expense
  84   71  
Defined benefit plans - expense
  51   42 
 
Deferred income taxes and investment tax credits
  364   337  
Deferred income taxes and investment tax credits
  80   257 
 
Unrealized (gains) losses on derivatives, and other hedging activities
  (209)  (165) 
Unrealized (gains) losses on derivatives, and other hedging activities
  98   (235)
 
Other
  25   67  
Other
  30   20 
Change in current assets and current liabilities    Change in current assets and current liabilities    
 
Accounts receivable
  21   (36) 
Accounts receivable
  (187)  32 
 
Accounts payable
  (126)  (60) 
Accounts payable
  (138)  (99)
 
Unbilled revenues
  72   194  
Unbilled revenues
  137   59 
 
Prepayments
  (97)  111  
Prepayments
  (117)  (100)
 
Counterparty collateral
  57   (258) 
Counterparty collateral
  (64)  65 
 
Taxes
  29   (63) 
Taxes
  122   66 
 
Accrued interest
  (87)  (9) 
Other
  (74)  (8)
 
Other
  (71)  36 Other operating activities    
Other operating activities     
Defined benefit plans - funding
  (429)  (208)
 
Defined benefit plans - funding
  (493)  (550) 
Other assets
  33   (12)
 
Other assets
  (16)  (42) 
Other liabilities
   (59)   (15)
 
Other liabilities
   (45)   4  
Net cash provided by operating activities
   244    728 
 
Net cash provided by operating activities
   947    814 
Cash Flows from Investing ActivitiesCash Flows from Investing Activities     Cash Flows from Investing Activities     
Expenditures for property, plant and equipment
  (1,309)  (1,003)
Proceeds from the sale of certain non-core generation facilities
    381 
Ironwood Acquisition, net of cash acquired
  (84)  
Acquisition of WPD Midlands
    (5,763)
Expenditures for property, plant and equipment
  (828)  (682)
Purchases of nuclear plant decommissioning trust investments
  (85)  (107)
Purchases of nuclear plant decommissioning trust investments
  (28)  (38)
Proceeds from the sale of nuclear plant decommissioning trust investments
  79   100 
Proceeds from the sale of nuclear plant decommissioning trust investments
  24   34 
Proceeds from the sale of other investments
  21   163 
Proceeds from the sale of other investments
    16 
Net (increase) decrease in restricted cash and cash equivalents
  54   (22)
Net (increase) decrease in restricted cash and cash equivalents
  (52)  (22)
Other investing activities
   (29)   (48)
Other investing activities
   (15)   (19)
 
Net cash provided by (used in) investing activities
   (1,353)   (6,299) 
Net cash provided by (used in) investing activities
   (899)   (711)
Cash Flows from Financing ActivitiesCash Flows from Financing Activities     Cash Flows from Financing Activities     
Issuance of long-term debt
  575   4,350 
Issuance of long-term debt
  450   
Issuance of common stock
  35   2,266 
Retirement of long-term debt
  (8)  
Payment of common stock dividends
  (413)  (340)
Issuance of common stock
  20   16 
Redemption of preference stock of a subsidiary
  (250)  
Payment of common stock dividends
  (210)  (203)
Net increase (decrease) in short-term debt
  311   (321)
Debt issuance and credit facility costs
  (18)  (3)
Other financing activities
   (67)   (108)
Contract adjustment payments
  (24)  (23)
  
Net cash provided by (used in) financing activities
   191    5,847 
Net increase (decrease) in short-term debt
  416   93 
Other financing activities
   (5)   (4)
  
Net cash provided by (used in) financing activities
   621    (124)
Effect of Exchange Rates on Cash and Cash Equivalents
Effect of Exchange Rates on Cash and Cash Equivalents
   (6)   (18)
Effect of Exchange Rates on Cash and Cash Equivalents
   (14)   8 
Net Increase (Decrease) in Cash and Cash Equivalents
Net Increase (Decrease) in Cash and Cash Equivalents
   (221)  344 
Net Increase (Decrease) in Cash and Cash Equivalents
   (48)  (99)
Cash and Cash Equivalents at Beginning of Period
Cash and Cash Equivalents at Beginning of Period
   1,202    925 
Cash and Cash Equivalents at Beginning of Period
   901    1,202 
Cash and Cash Equivalents at End of Period
Cash and Cash Equivalents at End of Period
 $ 981  $ 1,269 
Cash and Cash Equivalents at End of Period
 $ 853  $ 1,103 
            
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.
5

 
CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED CONSOLIDATED BALANCE SHEETS
PPL Corporation and Subsidiaries(Unaudited)(Millions of Dollars, shares in thousands)
   June 30, December 31,   March 31, December 31,
   2012  2011    2013  2012 
AssetsAssets    Assets    
            
Current AssetsCurrent Assets    Current Assets    
Cash and cash equivalents
 $ 981  $ 1,202 
Short-term investments
    16 
Cash and cash equivalents
 $ 853  $ 901 
Restricted cash and cash equivalents
  101   152 
Restricted cash and cash equivalents
  119   54 
Accounts receivable (less reserve:  2012, $64; 2011, $54)    Accounts receivable (less reserve:  2013, $64; 2012, $64)    
 
Customer
  750   736  
Customer
  936   745 
 
Other
  63   91  
Other
  60   79 
Unbilled revenues
  754   830 
Unbilled revenues
  708   857 
Fuel, materials and supplies
  719   654 
Fuel, materials and supplies
  616   673 
Prepayments
  252   160 
Prepayments
  281   166 
Price risk management assets
  2,483   2,548 
Price risk management assets
  1,284   1,525 
Regulatory assets
  17   9 
Regulatory assets
  37   19 
Other current assets
   31    28 
Other current assets
   95    49 
Total Current Assets
   6,151    6,426 
Total Current Assets
   4,989    5,068 
            
InvestmentsInvestments    Investments    
Nuclear plant decommissioning trust funds
  681   640 
Nuclear plant decommissioning trust funds
  764   712 
Other investments
   68    78 
Other investments
   48    47 
Total Investments
   749    718 
Total Investments
   812    759 
            
Property, Plant and EquipmentProperty, Plant and Equipment    Property, Plant and Equipment    
Regulated utility plant
  23,584   22,994 
Regulated utility plant
  25,054   25,196 
Less:  accumulated depreciation - regulated utility plant
   3,813    3,534 
Less:  accumulated depreciation - regulated utility plant
   4,258    4,164 
 
Regulated utility plant, net
   19,771    19,460  
Regulated utility plant, net
   20,796    21,032 
Non-regulated property, plant and equipment    Non-regulated property, plant and equipment    
 
Generation
  11,182   10,514  
Generation
  11,545   11,295 
 
Nuclear fuel
  524   457  
Nuclear fuel
  666   524 
 
Other
  674   637  
Other
  737   726 
Less:  accumulated depreciation - non-regulated property, plant and equipment
   5,762    5,676 
Less:  accumulated depreciation - non-regulated property, plant and equipment
   6,039    5,942 
 
Non-regulated property, plant and equipment, net
  6,618   5,932  
Non-regulated property, plant and equipment, net
  6,909   6,603 
Construction work in progress
   1,880    1,874 
Construction work in progress
   2,270    2,397 
Property, Plant and Equipment, net (a)
   28,269    27,266 
Property, Plant and Equipment, net (a)
   29,975    30,032 
    
Other Noncurrent AssetsOther Noncurrent Assets    Other Noncurrent Assets    
Regulatory assets
  1,335   1,349 
Regulatory assets
  1,464   1,483 
Goodwill
  4,036   4,114 
Goodwill
  3,995   4,158 
Other intangibles (a)
  909   1,065 
Other intangibles (a)
  910   925 
Price risk management assets
  1,112   920 
Price risk management assets
  598   572 
Other noncurrent assets
   947    790 
Other noncurrent assets
   598    637 
Total Other Noncurrent Assets
   8,339    8,238 
Total Other Noncurrent Assets
   7,565    7,775 
         
Total Assets
Total Assets
 $ 43,508  $ 42,648 
Total Assets
 $ 43,341  $ 43,634 

(a)Both June 30, 2012At March 31, 2013 and December 31, 2011 include $4162012, includes $426 million and $428 million of PP&E, consisting primarily of "Generation," including leasehold improvements, and both periods include $10 million and $11 million of "Other intangibles" from the consolidation of a VIE that is the owner/lessor of the Lower Mt. Bethel plant.   

The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.
 
6

 

CONDENSED CONSOLIDATED BALANCE SHEETSPPL Corporation and Subsidiaries(Unaudited)(Millions of Dollars, shares in thousands)
   June 30, December 31,   March 31, December 31,
   2012  2011    2013  2012 
Liabilities and EquityLiabilities and Equity     Liabilities and Equity    
             
Current LiabilitiesCurrent Liabilities     Current Liabilities    
Short-term debt
 $ 889  $ 578 
Short-term debt
 $ 1,061  $ 652 
Long-term debt due within one year
   12   
Long-term debt due within one year
  751   751 
Accounts payable
   1,037   1,214 
Accounts payable
  1,071   1,252 
Taxes
   94   65 
Taxes
  138   90 
Interest
   201   287 
Interest
  352   325 
Dividends
   210   207 
Dividends
  215   210 
Price risk management liabilities
   1,595   1,570 
Price risk management liabilities
  972   1,065 
Regulatory liabilities
   58   73 
Regulatory liabilities
  61   61 
Other current liabilities
   1,222    1,261 
Other current liabilities
   1,029    1,219 
Total Current Liabilities
   5,318    5,255 
Total Current Liabilities
   5,650    5,625 
             
Long-term Debt
Long-term Debt
   18,698    17,993 
Long-term Debt
   18,881    18,725 
             
Deferred Credits and Other Noncurrent LiabilitiesDeferred Credits and Other Noncurrent Liabilities     Deferred Credits and Other Noncurrent Liabilities    
Deferred income taxes
   3,638   3,326 
Deferred income taxes
  3,577   3,387 
Investment tax credits
   305   285 
Investment tax credits
  340   328 
Price risk management liabilities
   1,016   840 
Price risk management liabilities
  533   629 
Accrued pension obligations
   1,093   1,313 
Accrued pension obligations
  1,596   2,076 
Asset retirement obligations
   497   484 
Asset retirement obligations
  540   536 
Regulatory liabilities
   1,003   1,010 
Regulatory liabilities
  1,016   1,010 
Other deferred credits and noncurrent liabilities
   960    1,046 
Other deferred credits and noncurrent liabilities
   666    820 
Total Deferred Credits and Other Noncurrent Liabilities
   8,512    8,304 
Total Deferred Credits and Other Noncurrent Liabilities
   8,268    8,786 
             
Commitments and Contingent Liabilities (Notes 6 and 10)     
Commitments and Contingent Liabilities (Notes 5, 6 and 10)Commitments and Contingent Liabilities (Notes 5, 6 and 10)    
             
EquityEquity     Equity    
PPL Corporation Shareowners' Common Equity     PPL Shareowners' Common Equity    
 
Common stock - $0.01 par value (a)
   6   6  
Common stock - $0.01 par value (a)
  6   6 
 
Additional paid-in capital
   6,886   6,813  
Additional paid-in capital
  6,988   6,936 
 
Earnings reinvested
   5,190   4,797  
Earnings reinvested
  5,676   5,478 
 
Accumulated other comprehensive loss
   (1,120)   (788) 
Accumulated other comprehensive loss
   (2,146)   (1,940)
 
Total PPL Corporation Shareowners' Common Equity
   10,962   10,828  
Total PPL Shareowners' Common Equity
  10,524   10,480 
Noncontrolling Interests
   18    268 
Noncontrolling Interests
   18    18 
Total Equity
   10,980    11,096 
Total Equity
   10,542    10,498 
             
Total Liabilities and Equity
Total Liabilities and Equity
 $ 43,508  $ 42,648 
Total Liabilities and Equity
 $ 43,341  $ 43,634 

(a)780,000 shares authorized; 580,213583,214 and 578,405581,944 shares issued and outstanding at June 30, 2012March 31, 2013 and December 31, 2011.2012.

The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.
7

 
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
PPL Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)
    PPL Corporation Shareowners      
    Common                  
     stock           Accumulated      
    shares     Additional     other  Non-   
    outstanding  Common  paid-in  Earnings  comprehensive  controlling   
    (a)  stock  capital  reinvested  loss  interests  Total
                    
March 31, 2012
  579,520  $ 6  $ 6,862  $ 5,129  $ (730) $ 268  $ 11,535 
Common stock issued (b)
  693       18             18 
Stock-based compensation (c)
        6             6 
Net income
           271          271 
Dividends, dividend equivalents,                    
 
redemptions and distributions (e)
           (210)      (250)   (460)
Other comprehensive                    
 
income (loss)
              (390)      (390)
June 30, 2012
  580,213  $ 6  $ 6,886  $ 5,190  $ (1,120) $ 18  $ 10,980 
                       
December 31, 2011
  578,405  $ 6  $ 6,813  $ 4,797  $ (788) $ 268  $ 11,096 
Common stock issued (b)
  1,808       50             50 
Stock-based compensation (c)
        23             23 
Net income
           812       4    816 
Dividends, dividend equivalents,                    
 
redemptions and distributions (e)
           (419)      (254)   (673)
Other comprehensive                    
 
income (loss)
              (332)      (332)
June 30, 2012
  580,213  $ 6  $ 6,886  $ 5,190  $ (1,120) $ 18  $ 10,980 
                       
March 31, 2011
  484,618  $ 5  $ 4,637  $ 4,312  $ (424) $ 268  $ 8,798 
Common stock issued (b)
  92,647    1    2,273             2,274 
Purchase Contracts (d)
        (141)            (141)
Stock-based compensation (c)
        5             5 
Net income
           196       4    200 
Dividends, dividend equivalents                    
 
and distributions (e)
           (202)      (4)   (206)
Other comprehensive                    
 
income (loss)
              (11)      (11)
June 30, 2011
  577,265  $ 6  $ 6,774  $ 4,306  $ (435) $ 268  $ 10,919 
                       
December 31, 2010
  483,391  $ 5  $ 4,602  $ 4,082�� $ (479) $ 268  $ 8,478 
Common stock issued (b)
  93,874    1    2,312             2,313 
Purchase Contracts (d)
        (141)            (141)
Stock-based compensation (c)
        1             1 
Net income
           597       8    605 
Dividends, dividend equivalents                    
 
and distributions (e)
           (373)      (8)   (381)
Other comprehensive                    
 
income (loss)
              44       44 
June 30, 2011
  577,265  $ 6  $ 6,774  $ 4,306  $ (435) $ 268  $ 10,919 
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
PPL Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)
    PPL Shareowners      
    Common                  
     stock           Accumulated      
    shares     Additional     other  Non-   
    outstanding  Common  paid-in  Earnings  comprehensive  controlling   
    (a)  stock  capital  reinvested  loss  interests  Total
                    
December 31, 2012 (b)
  581,944  $ 6  $ 6,936  $ 5,478  $ (1,940) $ 18  $ 10,498 
Common stock issued (c)
  1,270       37             37 
Stock-based compensation (d)
        15             15 
Net income
           413          413 
Dividends, dividend equivalents                    
 
and distributions (e)
           (215)         (215)
Other comprehensive                    
 
income (loss)
              (206)      (206)
March 31, 2013 (b)
  583,214  $ 6  $ 6,988  $ 5,676  $ (2,146) $ 18  $ 10,542 
                       
December 31, 2011
  578,405  $ 6  $ 6,813  $ 4,797  $ (788) $ 268  $ 11,096 
Common stock issued (c)
  1,115       32             32 
Stock-based compensation (d)
        17             17 
Net income
           541       4    545 
Dividends, dividend equivalents                    
 
and distributions (e)
           (209)      (4)   (213)
Other comprehensive                    
 
income (loss)
              58       58 
March 31, 2012
  579,520  $ 6  $ 6,862  $ 5,129  $ (730) $ 268  $ 11,535 

(a)Shares in thousands.  Each share entitles the holder to one vote on any question presented toat any shareowners' meeting.
(b)See Note 18 for disclosure of balances of each component of AOCI.
(c)Each period includes shares of common stock issued through various stock and incentive compensation plans.  The 2011 periods include the April issuance of 92 million shares of common stock.
(c)(d)The three and six months ended June 30,March 31, 2013 and 2012 include $6$28 million and $35 million and the three and six months ended June 30, 2011 include $5 million and $22$29 million of stock-based compensation expense related to new and existing unvested equity awards.  The six months ended June 30, 2012 and 2011These periods also include $(12)$(13) million and $(21)$(12) 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.
(d)The 2011 periods include $123 million for the 2011 Purchase Contracts and $18 million of related fees and expenses, net of tax.
(e)"Earnings reinvested" includes dividends and dividend equivalents on PPL Corporation common stock and restricted stock units.  "Noncontrolling interests" includes dividends redemptions and distributions to noncontrolling interests.  In June 2012, PPL Electric redeemed all of its outstanding preference stock at par value, $250 million in the aggregate.  See Note 7 for additional information.

The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.
 
8

 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
PPL Energy Supply, LLC and Subsidiaries
(Unaudited)(Unaudited)        (Unaudited)    
(Millions of Dollars)(Millions of Dollars)    (Millions of Dollars)    
          
   Three Months Ended Six Months Ended         ��
   June 30, June 30,     Three Months Ended March 31,
   2012  2011  2012  2011        2013  2012 
Operating RevenuesOperating Revenues        Operating Revenues        
Wholesale energy marketing        Wholesale energy marketing        
 
Realized
 $ 1,083  $ 732  $ 2,291  $ 1,770  
Realized
 $ 976  $ 1,208 
 
Unrealized economic activity (Note 14)
  (458)  (44)  394   13  
Unrealized economic activity (Note 14)
  (822)  852 
Wholesale energy marketing to affiliate
  17   4   38   10 
Wholesale energy marketing to affiliate
  14   21 
Unregulated retail electric and gas
  180   181   404   328 
Unregulated retail electric and gas
  238   224 
Net energy trading margins
  10   10   18   21 
Net energy trading margins
  (11)  8 
Energy-related businesses
   112    114    208    224 
Energy-related businesses
   113    96 
Total Operating Revenues
   944    997    3,353    2,366 
Total Operating Revenues
   508    2,409 
                    
Operating ExpensesOperating Expenses        Operating Expenses        
Operation        Operation        
 
Fuel
  196   208   407   468  
Fuel
  298   211 
 Energy purchases         Energy purchases    
 
Realized
  635   226   1,294   540  
Realized
  434   659 
 
Unrealized economic activity (Note 14)
  (442)  (109)  149   (127) 
Unrealized economic activity (Note 14)
  (634)  591 
 
Energy purchases from affiliate
    1   1   2  
Energy purchases from affiliate
  1   1 
 
Other operation and maintenance
  294   288   549   533  
Other operation and maintenance
  235   255 
Depreciation
  69   60   133   119 
Depreciation
  78   64 
Taxes, other than income
  17   16   35   32 
Taxes, other than income
  17   18 
Energy-related businesses
   109    112    201    220 
Energy-related businesses
   110    92 
Total Operating Expenses
   878    802    2,769    1,787 
Total Operating Expenses
   539    1,891 
                    
Operating Income
  66   195   584   579 
Operating Income (Loss)
Operating Income (Loss)
  (31)  518 
                    
Other Income (Expense) - net
Other Income (Expense) - net
  5   4   10   18 
Other Income (Expense) - net
  4   5 
                    
Other-Than-Temporary Impairments
  1     1   1 
          
Interest Income from Affiliates
  1   1   1   4 
          
Interest Expense
Interest Expense
   43    51    80    98 
Interest Expense
   46    37 
                    
Income from Continuing Operations Before Income Taxes
  28   149   514   502 
Income (Loss) Before Income Taxes
Income (Loss) Before Income Taxes
  (73)  486 
                    
Income Taxes
Income Taxes
   9    59    186    201 
Income Taxes
   (35)   177 
                    
Income from Continuing Operations After Income Taxes
  19   90   328   301 
          
Income (Loss) from Discontinued Operations (net of income taxes)
      (1)      2 
          
Net Income Attributable to PPL Energy Supply
 $ 19  $ 89  $ 328  $ 303 
Net Income (Loss) Attributable to PPL Energy Supply Member
Net Income (Loss) Attributable to PPL Energy Supply Member
 $ (38) $ 309 
                    
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.
 
9

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
PPL Energy Supply, LLC and Subsidiaries(Unaudited)(Millions of Dollars)
                    
   Three Months Ended Six Months Ended     Three Months Ended March 31,
   June 30, June 30,       2013  2012 
   2012  2011  2012  2011             
            
Net income
 $ 19  $ 89  $ 328  $ 303 
Net income (loss)
Net income (loss)
 $ (38) $ 309 
                        
Other comprehensive income (loss):Other comprehensive income (loss):          Other comprehensive income (loss):          
Amounts arising during the period - gains (losses), net of tax (expense)          
Amounts arising during the period - gains (losses), net of tax (expense) benefit:Amounts arising during the period - gains (losses), net of tax (expense) benefit:     
benefit:           
Available-for-sale securities, net of tax of ($25), ($26)
   23   24 
 
Available-for-sale securities, net of tax of $8, ($1), ($20), ($13)
   (7)  1    15   13  
Qualifying derivatives, net of tax of $0, ($45)
     68 
 
Qualifying derivatives, net of tax of $5, $13, ($52), ($21)
   (9)  (21)   47   29 
Reclassifications to net income - (gains) losses, net of tax expense          
Reclassifications from AOCI - (gains) losses, net of tax expense (benefit):Reclassifications from AOCI - (gains) losses, net of tax expense (benefit):     
(benefit):           
Available-for-sale securities, net of tax of $1, $0
   (1)  (5)
 
Available-for-sale securities, net of tax of $1, $0, $3, $5
   (1)  (1)   (4)  (8) 
Qualifying derivatives, net of tax of $21, $81
   (30)  (151)
 
Qualifying derivatives, net of tax of $75, $49, $168, $103
   (108)  (68)   (247)  (147) Defined benefit plans:          
 Equity investee's other comprehensive (income) loss, net of            
Prior service costs, net of tax of ($1), ($1)
   1   1 
 
tax of $0, $0, $0, $0
    1      3   
Net actuarial loss, net of tax of ($2), $2
   4    5 
 Defined benefit plans:                     
Total other comprehensive income (loss) attributable to PPL Energy SupplyTotal other comprehensive income (loss) attributable to PPL Energy Supply     
  
Prior service costs, net of tax of $0, ($1), ($1), ($2)
   2   1    3   2 
Member
   (3)   (58)
  
Net actuarial loss, net of tax of ($2), ($1), $0, ($1)
   1    1    6    2             
Total other comprehensive income (loss) attributable to          
PPL Energy Supply
   (122)   (86)   (180)   (106)
            
            
Comprehensive income (loss) attributable to PPL Energy Supply
 $ (103) $ 3  $ 148  $ 197 
Comprehensive income (loss) attributable to PPL Energy Supply Member
Comprehensive income (loss) attributable to PPL Energy Supply Member
 $ (41) $ 251 
                    
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.
 
10

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
PPL Energy Supply, LLC and Subsidiaries(Unaudited)(Millions of Dollars)
            
   Six Months Ended June 30,   Three Months Ended March 31,
   2012  2011    2013  2012 
Cash Flows from Operating ActivitiesCash Flows from Operating Activities    Cash Flows from Operating Activities    
Net income
 $ 328  $ 303 
Net income (loss)
 $ (38) $ 309 
Adjustments to reconcile net income to net cash provided by operating activities    Adjustments to reconcile net income (loss) to net cash provided by operating activities    
 
Depreciation
  133   120  
Depreciation
  78   64 
 
Amortization
  57   50  
Amortization
  44   38 
 
Defined benefit plans - expense
  22   17  
Defined benefit plans - expense
  12   10 
 
Deferred income taxes and investment tax credits
  165   186  
Deferred income taxes and investment tax credits
  (21)  161 
 
Unrealized (gains) losses on derivatives, and other hedging activities
  (216)  (163) 
Unrealized (gains) losses on derivatives, and other hedging activities
  214   (260)
 
Other
  28   29  
Other
  19   17 
Change in current assets and current liabilities    Change in current assets and current liabilities    
 
Accounts receivable
  (2)  57  
Accounts receivable
  71   37 
 
Accounts payable
  (57)  (104) 
Accounts payable
  (108)  (24)
 
Unbilled revenues
  61   126  
Unbilled revenues
  123   6 
 
Fuel, materials and supplies
  (74)  (26) 
Fuel, materials and supplies
  11   (51)
 
Taxes
  (58)  31  
Prepayments
  (104)  (7)
 
Counterparty collateral
  57   (258) 
Counterparty collateral
  (64)  65 
 
Other
  (40)  (43) 
Other
  23   (29)
Other operating activities    Other operating activities    
 
Defined benefit plans - funding
  (69)  (137) 
Defined benefit plans - funding
  (105)  (69)
 
Other assets
  (19)  (25) 
Other assets
  44   (12)
 
Other liabilities
   (8)   25  
Other liabilities
   (74)   (1)
 
Net cash provided by operating activities
   308    188  
Net cash provided by operating activities
   125    254 
Cash Flows from Investing ActivitiesCash Flows from Investing Activities    Cash Flows from Investing Activities    
Expenditures for property, plant and equipment
  (316)  (324)
Expenditures for property, plant and equipment
  (124)  (199)
Proceeds from the sale of certain non-core generation facilities
    381 
Expenditures for intangible assets
  (10)  (13)
Ironwood Acquisition, net of cash acquired
  (84)  
Purchases of nuclear plant decommissioning trust investments
  (28)  (38)
Purchases of nuclear plant decommissioning trust investments
  (85)  (107)
Proceeds from the sale of nuclear plant decommissioning trust investments
  24   34 
Proceeds from the sale of nuclear plant decommissioning trust investments
  79   100 
Net (increase) decrease in notes receivable from affiliates
    198 
Net (increase) decrease in notes receivable from affiliates
  198   (37)
Net (increase) decrease in restricted cash and cash equivalents
  (59)  (19)
Net (increase) decrease in restricted cash and cash equivalents
  57   (14)
Other investing activities
   2    (4)
Other investing activities
   (22)   (35) 
Net cash provided by (used in) investing activities
   (195)   (41)
 
Net cash provided by (used in) investing activities
   (173)   (36)
Cash Flows from Financing ActivitiesCash Flows from Financing Activities    Cash Flows from Financing Activities    
Contributions from member
  472   168 
Distributions to member
  (657)  (134)
Cash included in net assets of subsidiary distributed to member
    (325)
Retirement of long-term debt
  (8)  
Net increase (decrease) in short-term debt
  120   (100)
Distributions to member
  (313)  (557)
Other financing activities
   (3)   
Net increase (decrease) in short-term debt
   125    100 
 
Net cash provided by (used in) financing activities
   (68)   (391) 
Net cash provided by (used in) financing activities
   (196)   (457)
Net Increase (Decrease) in Cash and Cash Equivalents
Net Increase (Decrease) in Cash and Cash Equivalents
  67   (239)
Net Increase (Decrease) in Cash and Cash Equivalents
  (266)  (244)
Cash and Cash Equivalents at Beginning of Period
   379    661 
Cash and Cash Equivalents at Beginning of Period
   413    379 
Cash and Cash Equivalents at End of Period
 $ 446  $ 422 
Cash and Cash Equivalents at End of Period
 $ 147  $ 135 
            
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.
 
11

 

CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED CONSOLIDATED BALANCE SHEETS
PPL Energy Supply, LLC and Subsidiaries(Unaudited)(Millions of Dollars)
   June 30, December 31,   March 31, December 31,
   2012  2011    2013  2012 
AssetsAssets    Assets    
            
Current AssetsCurrent Assets    Current Assets    
Cash and cash equivalents
 $ 446  $ 379 
Restricted cash and cash equivalents
  93   145 
Cash and cash equivalents
 $ 147  $ 413 
Accounts receivable (less reserve:  2012, $23; 2011, $15)    
Restricted cash and cash equivalents
  105   46 
 
Customer
  181   169 Accounts receivable (less reserve:  2013, $22; 2012, $23)    
 
Other
  22   31  
Customer
  209   183 
Accounts receivable from affiliates
  89   89  
Other
  37   31 
Unbilled revenues
  341   402 
Accounts receivable from affiliates
  56   125 
Note receivable from affiliate
    198 
Unbilled revenues
  246   369 
Fuel, materials and supplies
  372   298 
Fuel, materials and supplies
  316   327 
Prepayments
  44   14 
Prepayments
  119   15 
Price risk management assets
  2,471   2,527 
Price risk management assets
  1,194   1,511 
Other current assets
   12    11 
Other current assets
   21    10 
Total Current Assets
   4,071    4,263 
Total Current Assets
   2,450    3,030 
          
InvestmentsInvestments    Investments    
Nuclear plant decommissioning trust funds
  681   640 
Nuclear plant decommissioning trust funds
  764   712 
Other investments
   42    40 
Other investments
   42    41 
Total Investments
   723    680 
Total Investments
   806    753 
          
Property, Plant and EquipmentProperty, Plant and Equipment    Property, Plant and Equipment    
Non-regulated property, plant and equipment    Non-regulated property, plant and equipment    
 
Generation
  11,191   10,517  
Generation
  11,555   11,305 
 
Nuclear fuel
  524   457  
Nuclear fuel
  666   524 
 
Other
  253   245  
Other
  295   294 
Less:  accumulated depreciation - non-regulated property, plant and equipment
   5,649    5,573 
Less:  accumulated depreciation - non-regulated property, plant and equipment
   5,908    5,817 
 
Non-regulated property, plant and equipment, net
  6,319   5,646  
Non-regulated property, plant and equipment, net
  6,608   6,306 
Construction work in progress
   810    840 
Construction work in progress
   659    987 
Property, Plant and Equipment, net (a)
   7,129    6,486 
Property, Plant and Equipment, net (a)
   7,267    7,293 
          
Other Noncurrent AssetsOther Noncurrent Assets    Other Noncurrent Assets    
Goodwill
  86   86 
Goodwill
  86   86 
Other intangibles (a)
  244   386 
Other intangibles (a)
  255   252 
Price risk management assets
  1,035   896 
Price risk management assets
  482   557 
Other noncurrent assets
   387    382 
Other noncurrent assets
   361    404 
Total Other Noncurrent Assets
   1,752    1,750 
Total Other Noncurrent Assets
   1,184    1,299 
          
Total Assets
Total Assets
 $ 13,675  $ 13,179 
Total Assets
 $ 11,707  $ 12,375 

(a)Both June 30, 2012At March 31, 2013 and December 31, 2011 include $4162012, includes $426 million and $428 million of PP&E, consisting primarily of "Generation," including leasehold improvements, and both periods include $10 million and $11 million of "Other intangibles" from the consolidation of a VIE that is the owner/lessor of the Lower Mt. Bethel plant.

The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.
 
12

 

CONDENSED CONSOLIDATED BALANCE SHEETSPPL Energy Supply, LLC and Subsidiaries(Unaudited)(Millions of Dollars)
   June 30, December 31,   March 31, December 31,
   2012  2011    2013  2012 
Liabilities and EquityLiabilities and Equity    Liabilities and Equity    
            
Current LiabilitiesCurrent Liabilities    Current Liabilities    
Short-term debt
 $ 520  $ 400 
Long-term debt due within one year
  12   
Short-term debt
 $ 481  $ 356 
Accounts payable
  428   472 
Long-term debt due within one year
  741   751 
Accounts payable to affiliates
  5   14 
Accounts payable
  344   438 
Taxes
  32   90 
Accounts payable to affiliates
  25   31 
Interest
  31   30 
Taxes
  31   62 
Price risk management liabilities
  1,570   1,560 
Interest
  57   31 
Counterparty collateral
  205   148 
Price risk management liabilities
  951   1,010 
Deferred income taxes
  296   315 
Deferred income taxes
  59   158 
Other current liabilities
   209    196 
Other current liabilities
   251    319 
Total Current Liabilities
   3,308    3,225 
Total Current Liabilities
   2,940    3,156 
            
Long-term Debt
Long-term Debt
   3,267    3,024 
Long-term Debt
   2,523    2,521 
         
Deferred Credits and Other Noncurrent LiabilitiesDeferred Credits and Other Noncurrent Liabilities    Deferred Credits and Other Noncurrent Liabilities    
Deferred income taxes
  1,286   1,223 
Deferred income taxes
  1,311   1,232 
Investment tax credits
  159   136 
Investment tax credits
  200   186 
Price risk management liabilities
  958   785 
Price risk management liabilities
  481   556 
Accrued pension obligations
  156   214 
Accrued pension obligations
  193   293 
Asset retirement obligations
  359   349 
Asset retirement obligations
  370   365 
Other deferred credits and noncurrent liabilities
   182    186 
Other deferred credits and noncurrent liabilities
   195    218 
Total Deferred Credits and Other Noncurrent Liabilities
   3,100    2,893 
Total Deferred Credits and Other Noncurrent Liabilities
   2,750    2,850 
            
Commitments and Contingent Liabilities (Note 10)Commitments and Contingent Liabilities (Note 10)    Commitments and Contingent Liabilities (Note 10)    
         
EquityEquity    Equity    
Member's equity
  3,982   4,019 
Member's equity
  3,476   3,830 
Noncontrolling interests
   18    18 
Noncontrolling interests
   18    18 
Total Equity
   4,000    4,037 
Total Equity
   3,494    3,848 
            
Total Liabilities and Equity
Total Liabilities and Equity
 $ 13,675  $ 13,179 
Total Liabilities and Equity
 $ 11,707  $ 12,375 
            
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.
 
13

 

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
PPL Energy Supply, LLC and Subsidiaries
(Unaudited)         
(Millions of Dollars)
          
     Non-   
  Member's controlling   
  equity interests Total
          
March 31, 2012
 $ 3,713  $ 18  $ 3,731 
Net income
   19       19 
Other comprehensive income (loss)
   (122)      (122)
Contributions from member
   472       472 
Distributions
   (100)      (100)
June 30, 2012
 $ 3,982  $ 18  $ 4,000 
          
December 31, 2011
 $ 4,019  $ 18  $ 4,037 
Net income
   328       328 
Other comprehensive income (loss)
   (180)      (180)
Contributions from member
   472       472 
Distributions
   (657)      (657)
June 30, 2012
 $ 3,982  $ 18  $ 4,000 
          
March 31, 2011
 $ 3,316  $ 18  $ 3,334 
Net income
   89       89 
Other comprehensive income (loss)
   (86)      (86)
Contributions from member
   168       168 
Distributions
   (53)      (53)
June 30, 2011
 $ 3,434  $ 18  $ 3,452 
          
December 31, 2010
 $ 4,491  $ 18  $ 4,509 
Net income
   303       303 
Other comprehensive income (loss)
   (106)      (106)
Contributions from member
   168       168 
Distributions
   (134)      (134)
Distribution of membership interest in PPL Global (a)
   (1,288)      (1,288)
June 30, 2011
 $ 3,434  $ 18  $ 3,452 
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
PPL Energy Supply, LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
          
     Non-   
  Member's controlling   
  equity interests Total
          
December 31, 2012 (a)
 $ 3,830  $ 18  $ 3,848 
Net income (loss)
   (38)      (38)
Other comprehensive income (loss)
   (3)      (3)
Distributions to member
   (313)      (313)
March 31, 2013 (a)
 $ 3,476  $ 18  $ 3,494 
          
December 31, 2011
 $ 4,019  $ 18  $ 4,037 
Net income (loss)
   309       309 
Other comprehensive income (loss)
   (58)      (58)
Distributions to member
   (557)      (557)
March 31, 2012
 $ 3,713  $ 18  $ 3,731 

(a)In January 2011, PPL Energy Supply distributed its entire membership interest in PPL Global to PPL Energy Supply's parent, PPL Energy Funding.  The distribution was made based on the book valueSee Note 18 for disclosure of the assets and liabilitiesbalances of PPL Global with financial effect aseach component of January 1, 2011, and no gains or losses were recognized on the distribution.AOCI.

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

 
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15

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)(Unaudited)        (Unaudited)        
(Millions of Dollars)(Millions of Dollars)    (Millions of Dollars)    
          
   Three Months Ended Six Months Ended          
   June 30, June 30,     Three Months Ended March 31,
   2012  2011  2012  2011        2013  2012 
Operating RevenuesOperating Revenues        Operating Revenues        
Retail electric
 $ 403  $ 436  $ 860  $ 990 
Retail electric
 $ 512  $ 457 
Electric revenue from affiliate
   1 ��  4    2    8 
Electric revenue from affiliate
   1    1 
Total Operating Revenues
   404    440    862    998 
Total Operating Revenues
   513    458 
                    
Operating ExpensesOperating Expenses        Operating Expenses        
Operation        Operation        
 
Energy purchases
  120   169   273   420  
Energy purchases
  172   153 
 
Energy purchases from affiliate
  17   4   38   10  
Energy purchases from affiliate
  14   21 
 
Other operation and maintenance
  143   126   283   256  
Other operation and maintenance
  133   140 
Depreciation
  39   37   78   70 
Depreciation
  43   39 
Taxes, other than income
   22    22    48    57 
Taxes, other than income
   30    26 
Total Operating Expenses
   341    358    720    813 
Total Operating Expenses
   392    379 
                    
Operating Income
Operating Income
  63   82   142   185 
Operating Income
  121   79 
                    
Other Income (Expense) - net
Other Income (Expense) - net
  1   1   3   1 
Other Income (Expense) - net
  1   1 
                    
Interest Income from Affiliate
Interest Income from Affiliate
    1 
          
Interest Expense
Interest Expense
   24    24    48    48 
Interest Expense
   25    24 
                    
Income Before Income Taxes
Income Before Income Taxes
  40   59   97   138 
Income Before Income Taxes
  97   57 
                    
Income Taxes
Income Taxes
   11    19    31    42 
Income Taxes
   33    20 
                    
Net Income (a)
Net Income (a)
  29   40   66   96 
Net Income (a)
  64   37 
               
Distributions on Preference Stock
Distributions on Preference Stock
      4    4    8 
Distributions on Preference Stock
      4 
                    
Net Income Available to PPL Corporation
 $ 29  $ 36  $ 62  $ 88 
Net Income Available to PPL
Net Income Available to PPL
 $ 64  $ 33 

(a)Net income approximates comprehensive income.

 The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.
 
16

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
PPL Electric Utilities Corporation and Subsidiaries(Unaudited)(Millions of Dollars)
            
   Six Months Ended   Three Months Ended March 31,
   June 30,   2013  2012 
   2012  2011 
Cash Flows from Operating ActivitiesCash Flows from Operating Activities    Cash Flows from Operating Activities    
Net income
 $ 66  $ 96 
Adjustments to reconcile net income to net cash provided by (used in) operating activities    
Net income
 $ 64  $ 37 
 
Depreciation
  78   70 Adjustments to reconcile net income to net cash provided by (used in) operating activities    
 
Amortization
  9    
Depreciation
  43   39 
 
Defined benefit plans - expense
  11   9  
Amortization
  5   4 
 
Deferred income taxes and investment tax credits
  59   (19) 
Defined benefit plans - expense
  7   9 
 
Other
  5   2  
Deferred income taxes and investment tax credits
  45   58 
Change in current assets and current liabilities     
Other
  3   5 
 
Accounts receivable
  19   (48)Change in current assets and current liabilities    
 
Accounts payable
  (37)  (75) 
Accounts receivable
  (87)  (11)
 
Unbilled revenues
  11   47  
Accounts payable
  (40)  (25)
 
Prepayments
  (18)  38  
Unbilled revenues
  5   23 
 
Regulatory assets and liabilities
  (12)  63  
Prepayments
  (28)  (70)
 
Taxes
    10  
Taxes
  15   
 
Other
  (11)  (16) 
Other
  (26)  (1)
Other operating activities    Other operating activities    
 
Defined benefit plans - funding
  (54)  (102) 
Defined benefit plans - funding
  (88)  (54)
 
Other assets
  2   (7) 
Other assets
  8   
 
Other liabilities
   (27)   (5) 
Other liabilities
   (3)   (24)
 
Net cash provided by (used in) operating activities
   101    63  
Net cash provided by (used in) operating activities
   (77)   (10)
            
Cash Flows from Investing ActivitiesCash Flows from Investing Activities    Cash Flows from Investing Activities    
Expenditures for property, plant and equipment
  (256)  (244)
Expenditures for property, plant and equipment
  (189)  (121)
Other investing activities
   (1)   4 
Other investing activities
   (3)   (1)
 
Net cash provided by (used in) investing activities
   (257)   (240) 
Net cash provided by (used in) investing activities
   (192)   (122)
            
Cash Flows from Financing ActivitiesCash Flows from Financing Activities    Cash Flows from Financing Activities    
Redemption of preference stock
  (250)  
Contributions from parent
  60   
Payment of common stock dividends to parent
  (56)  (52)
Payment of common stock dividends to parent
  (25)  (35)
Net increase (decrease) in note payable to affiliate
    37 
Net increase (decrease) in short-term debt
  125   
Net increase (decrease) in short-term debt
  195   
Other financing activities
      (4)
Distributions on preference stock   (8)   (8) 
Net cash provided by (used in) financing activities
   160    (39)
 
Net cash provided by (used in) financing activities
   (119)   (23)      
      
Net Increase (Decrease) in Cash and Cash Equivalents
Net Increase (Decrease) in Cash and Cash Equivalents
  (275)  (200)
Net Increase (Decrease) in Cash and Cash Equivalents
  (109)  (171)
Cash and Cash Equivalents at Beginning of Period
Cash and Cash Equivalents at Beginning of Period
   320    204 
Cash and Cash Equivalents at Beginning of Period
   140    320 
Cash and Cash Equivalents at End of Period
Cash and Cash Equivalents at End of Period
 $ 45  $ 4 
Cash and Cash Equivalents at End of Period
 $ 31  $ 149 
            
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
17

 

CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED CONSOLIDATED BALANCE SHEETS
PPL Electric Utilities Corporation and Subsidiaries(Unaudited)(Millions of Dollars, shares in thousands)
            
   June 30, December 31,   March 31, December 31,
   2012  2011    2013  2012 
AssetsAssets    Assets    
            
Current AssetsCurrent Assets    Current Assets    
Cash and cash equivalents
 $ 31  $ 140 
Cash and cash equivalents
 $ 45  $ 320 Accounts receivable (less reserve: 2013, $19; 2012, $18)    
Accounts receivable (less reserve: 2012, $18; 2011, $17)     
Customer
  325   249 
 
Customer
  261   271  
Other
  4   5 
 
Other
  6   9 
Accounts receivable from affiliates
  30   29 
Accounts receivable from affiliates
  30   35 
Unbilled revenues
  105   110 
Unbilled revenues
  87   98 
Materials and supplies
  40   39 
Materials and supplies
  38   42 
Prepayments
  104   76 
Prepayments
  96   78 
Deferred income taxes
  49   45 
Other current assets
   29    30 
Other current assets
   17    4 
Total Current Assets
   592    883 
Total Current Assets
   705    697 
            
Property, Plant and EquipmentProperty, Plant and Equipment    Property, Plant and Equipment    
Regulated utility plant
  6,024   5,830 
Regulated utility plant
  6,416   6,286 
Less: accumulated depreciation - regulated utility plant
   2,269    2,217 
Less: accumulated depreciation - regulated utility plant
   2,354    2,316 
 
Regulated utility plant, net
  3,755   3,613  
Regulated utility plant, net
  4,062   3,970 
Other, net
  2   2 
Other, net
  2   2 
Construction work in progress
   262    242 
Construction work in progress
   427    370 
Property, Plant and Equipment, net
   4,019    3,857 
Property, Plant and Equipment, net
   4,491    4,342 
            
Other Noncurrent AssetsOther Noncurrent Assets    Other Noncurrent Assets    
Regulatory assets
  734   729 
Regulatory assets
  860   853 
Intangibles
  161   155 
Intangibles
  176   171 
Other noncurrent assets
   80    81 
Other noncurrent assets
   35    55 
Total Other Noncurrent Assets
   975    965 
Total Other Noncurrent Assets
   1,071    1,079 
            
Total Assets
Total Assets
 $ 5,586  $ 5,705 
Total Assets
 $ 6,267  $ 6,118 
            
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
18

 

CONDENSED CONSOLIDATED BALANCE SHEETSPPL Electric Utilities Corporation and Subsidiaries(Unaudited)(Millions of Dollars, shares in thousands)
            
   June 30, December 31,   March 31, December 31,
   2012  2011    2013  2012 
Liabilities and EquityLiabilities and Equity    Liabilities and Equity    
            
Current LiabilitiesCurrent Liabilities    Current Liabilities    
Short-term debt
 $ 195   
Short-term debt
 $ 125   
Accounts payable
  154  $ 171 
Long-term debt due within one year
  10   
Accounts payable to affiliates
  49   64 
Accounts payable
  241  $ 259 
Interest
  23   24 
Accounts payable to affiliates
  60   63 
Regulatory liabilities
  42   53 
Taxes
  17   12 
Customer deposits and prepayments
  29   39 
Interest
  19   26 
Vacation
  23   22 
Regulatory liabilities
  57   52 
Other current liabilities
   39    47 
Other current liabilities
   99    93 
Total Current Liabilities
   554    420 
Total Current Liabilities
   628    505 
            
Long-term Debt
Long-term Debt
   1,718    1,718 
Long-term Debt
   1,957    1,967 
            
Deferred Credits and Other Noncurrent LiabilitiesDeferred Credits and Other Noncurrent Liabilities    Deferred Credits and Other Noncurrent Liabilities    
Deferred income taxes
  1,168   1,115 
Deferred income taxes
  1,274   1,233 
Investment tax credits
  4   5 
Investment tax credits
  3   3 
Accrued pension obligations
  139   186 
Accrued pension obligations
  152   237 
Regulatory liabilities
  9   7 
Regulatory liabilities
  13   8 
Other deferred credits and noncurrent liabilities
   113    129 
Other deferred credits and noncurrent liabilities
   79    103 
Total Deferred Credits and Other Noncurrent Liabilities
   1,433    1,442 
Total Deferred Credits and Other Noncurrent Liabilities
   1,521    1,584 
            
Commitments and Contingent Liabilities (Notes 6 and 10)Commitments and Contingent Liabilities (Notes 6 and 10)    Commitments and Contingent Liabilities (Notes 6 and 10)    
            
Shareowners' Equity    
Preference stock    250 
Stockholder's EquityStockholder's Equity    
Common stock - no par value (a)
  364   364 
Common stock - no par value (a)
  364   364 
Additional paid-in capital
  979   979 
Additional paid-in capital
  1,195   1,135 
Earnings reinvested
   538    532 
Earnings reinvested
   602    563 
Total Equity
   1,881    2,125 
Total Equity
   2,161    2,062 
            
Total Liabilities and Equity
Total Liabilities and Equity
 $ 5,586  $ 5,705 
Total Liabilities and Equity
 $ 6,267  $ 6,118 

(a)170,000 shares authorized; 66,368 shares issued and outstanding at June 30, 2012March 31, 2013 and December 31, 2011.2012.

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

 
19

 

CONDENSED CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
CONDENSED CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
CONDENSED CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
PPL Electric Utilities Corporation and Subsidiaries(Unaudited)(Millions of Dollars)
                           
   Common            Common          
   stock            stock          
   shares     Additional      shares     Additional    
   outstanding Preference Common  paid-in Earnings    outstanding Preference Common  paid-in Earnings  
    (a)  stock  stock  capital  reinvested Total   (a) stock  stock  capital  reinvested Total
                           
March 31, 2012
  66,368  $ 250  $ 364  $ 979  $ 530  $ 2,123 
December 31, 2012
December 31, 2012
  66,368    $ 364  $ 1,135  $ 563  $ 2,062 
Net income
Net income
          29   29 
Net income
          64   64 
Redemption of preference stock (b)
    (250)        (250)
Capital contributions from PPL
Capital contributions from PPL
        60     60 
Cash dividends declared on common stock
Cash dividends declared on common stock
              (21)   (21)
Cash dividends declared on common stock
              (25)   (25)
June 30, 2012
  66,368  $  $ 364  $ 979  $ 538  $ 1,881 
March 31, 2013
March 31, 2013
  66,368     $ 364  $ 1,195  $ 602  $ 2,161 
                           
December 31, 2011
December 31, 2011
  66,368  $ 250  $ 364  $ 979  $ 532  $ 2,125 
December 31, 2011
  66,368  $ 250  $ 364  $ 979  $ 532  $ 2,125 
Net income
Net income
          66   66 
Net income
          37   37 
Redemption of preference stock (b)
    (250)        (250)
Cash dividends declared on preference stock          (4)  (4)
Cash dividends declared onCash dividends declared on            
preference stock
          (4)  (4)
Cash dividends declared on common stock
Cash dividends declared on common stock
              (56)   (56)
Cash dividends declared on common stock
              (35)   (35)
June 30, 2012
  66,368  $  $ 364  $ 979  $ 538  $ 1,881 
              
March 31, 2011
  66,368  $ 250  $ 364  $ 879  $ 485  $ 1,978 
Net income
          40   40 
Cash dividends declared on preference stock          (4)  (4)
Cash dividends declared on common stock
              (34)   (34)
June 30, 2011
  66,368  $ 250  $ 364  $ 879  $ 487  $ 1,980 
              
December 31, 2010
  66,368  $ 250  $ 364  $ 879  $ 451  $ 1,944 
Net income
          96   96 
Cash dividends declared on preference stock          (8)  (8)
Cash dividends declared on common stock
              (52)   (52)
June 30, 2011
  66,368  $ 250  $ 364  $ 879  $ 487  $ 1,980 
March 31, 2012
March 31, 2012
  66,368  $ 250  $ 364  $ 979  $ 530  $ 2,123 

(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 7 for additional information.

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

 
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21

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)(Unaudited)        (Unaudited)        
(Millions of Dollars)(Millions of Dollars)    (Millions of Dollars)    
          
   Three Months Ended Six Months Ended          
   June 30, June 30,     Three Months Ended March 31,
   2012  2011   2012   2011         2013   2012 
                 
Operating Revenues
Operating Revenues
 $ 658  $ 638  $ 1,363  $ 1,404 
Operating Revenues
 $ 800  $ 705 
                 
Operating ExpensesOperating Expenses        Operating Expenses        
Operation        Operation        
 
Fuel
  215   206   428   421  
Fuel
  231   213 
 
Energy purchases
  34   40   108   147  
Energy purchases
  86   74 
 
Other operation and maintenance
  197   198   403   379  
Other operation and maintenance
  197   206 
Depreciation
  86   84   172   165 
Depreciation
  82   86 
Taxes, other than income
   12    9    23    18 
Taxes, other than income
   12    11 
Total Operating Expenses
   544    537    1,134    1,130 
Total Operating Expenses
   608    590 
                    
Operating Income
Operating Income
  114   101   229   274 
Operating Income
  192   115 
                    
Other Income (Expense) - net
Other Income (Expense) - net
  (7)    (10)  (1)
Other Income (Expense) - net
  (2)  (3)
                 
Interest Expense
Interest Expense
   37    36    75    72 
Interest Expense
   37    38 
                    
Income from Continuing Operations Before Income Taxes
  70   65   144   201 
Income Before Income Taxes
Income Before Income Taxes
  153   74 
                    
Income Taxes
Income Taxes
   20    24    41    73 
Income Taxes
   57    21 
                    
Income from Continuing Operations After Income Taxes
  50   41   103   128 
Net Income (a)
Net Income (a)
 $ 96  $ 53 
                    
Income (Loss) from Discontinued Operations (net of income taxes)
   (6)      (6)   
          
Net Income (a)
 $ 44  $ 41  $ 97  $ 128 
                    
(a) Net income approximates comprehensive income.
                    
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
22

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
LG&E and KU Energy LLC and Subsidiaries(Unaudited)(Millions of Dollars)
            
 Six Months Ended June 30,  Three Months Ended March 31,
   2012  2011    2013  2012 
Cash Flows from Operating ActivitiesCash Flows from Operating Activities    Cash Flows from Operating Activities    
Net income
 $ 97  $ 128 
Net income
 $ 96  $ 53 
Adjustments to reconcile net income to net cash provided by operating activities    Adjustments to reconcile net income to net cash provided by operating activities    
 
Depreciation
  172   165  
Depreciation
  82   86 
 
Amortization
  14   13  
Amortization
  7   7 
 
Defined benefit plans - expense
  20   25  
Defined benefit plans - expense
  17   10 
 
Deferred income taxes and investment tax credits
  56   146  
Deferred income taxes and investment tax credits
  45   32 
 
Other
  (2)  (15) 
Other
  1   (1)
Change in current assets and current liabilities    Change in current assets and current liabilities    
 
Accounts receivable
  (11)  17  
Accounts receivable
  (78)  
 
Accounts payable
  17   (20) 
Accounts payable
  31   16 
 
Unbilled revenues
  1   38  
Accounts payable to affiliates
  1   4 
 
Fuel, materials and supplies
  1   42  
Unbilled revenues
    29 
 
Income tax receivable
  2   40  
Fuel, materials and supplies
  47   29 
 
Taxes
  33   (6) 
Accrued interest
  30   30 
 
Other
  (8)  (18) 
Taxes
  (2)  9 
Other operating activities     
Other
  (29)  (19)
 
Defined benefit plans - funding
  (62)  (157)Other operating activities    
 
Other assets
    (1) 
Defined benefit plans - funding
  (154)  (58)
 
Other liabilities
   24    10  
Other assets
  2   (1)
 
Net cash provided by operating activities
   354    407  
Other liabilities
   (11)   6 
 
Net cash provided by operating activities
   85    232 
Cash Flows from Investing ActivitiesCash Flows from Investing Activities     Cash Flows from Investing Activities     
Expenditures for property, plant and equipment
  (324)  (180)
Proceeds from the sale of other investments
    163 
Expenditures for property, plant and equipment
  (271)  (174)
Net (increase) decrease in notes receivable from affiliates
  3   (29)
Net (increase) decrease in notes receivable from affiliates
    10 
Net (increase) decrease in restricted cash and cash equivalents
   (2)   (4)
Net (increase) decrease in restricted cash and cash equivalents
   4    2 
 
Net cash provided by (used in) investing activities
   (323)   (50) 
Net cash provided by (used in) investing activities
   (267)   (162)
Cash Flows from Financing ActivitiesCash Flows from Financing Activities      Cash Flows from Financing Activities      
Net increase (decrease) in short-term debt
    (163)
Net increase (decrease) in notes payable with affiliates
  60   
Debt issuance and credit facility costs
  (1)  (3)
Net increase (decrease) in short-term debt
  60   
Distributions to member
   (60)   (146)
Distributions to member
  (4)  (25)
  
Net cash provided by (used in) financing activities
   (61)    (312)
Contributions from member
   75    
  
Net cash provided by (used in) financing activities
   191    (25)
Net Increase (Decrease) in Cash and Cash Equivalents
Net Increase (Decrease) in Cash and Cash Equivalents
   (30)  45 
Net Increase (Decrease) in Cash and Cash Equivalents
   9   45 
Cash and Cash Equivalents at Beginning of Period
Cash and Cash Equivalents at Beginning of Period
   59    11 
Cash and Cash Equivalents at Beginning of Period
   43    59 
Cash and Cash Equivalents at End of Period
Cash and Cash Equivalents at End of Period
 $ 29  $ 56 
Cash and Cash Equivalents at End of Period
 $ 52  $ 104 
            
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
23

 

CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED CONSOLIDATED BALANCE SHEETS
LG&E and KU Energy LLC and Subsidiaries(Unaudited)(Millions of Dollars)
            
   June 30, December 31,   March 31, December 31,
   2012  2011    2013  2012 
AssetsAssets    Assets    
            
Current AssetsCurrent Assets    Current Assets    
Cash and cash equivalents
 $ 29  $ 59 
Cash and cash equivalents
 $ 52  $ 43 
Accounts receivable (less reserve: 2012, $19; 2011, $17)    Accounts receivable (less reserve: 2013, $18; 2012, $19)    
 
Customer
  145   129  
Customer
  218   133 
 
Other
  13   20  
Other
  10   20 
Unbilled revenues
  145   146 
Unbilled revenues
  156   156 
Fuel, materials and supplies
  281   283 
Accounts receivable from affiliates
  1   1 
Prepayments
  28   22 
Fuel, materials and supplies
  229   276 
Notes receivable from affiliates
  12   15 
Prepayments
  23   28 
Income taxes receivable
  1   3 
Price risk management assets from affiliates
  24   14 
Deferred income taxes
  104   17 
Deferred income taxes
  13   13 
Regulatory assets
  17   9 
Regulatory assets
  32   19 
Other current assets
   4    3 
Other current assets
   5    4 
Total Current Assets
   779    706 
Total Current Assets
   763    707 
            
Investments
   21    31 
      
Property, Plant and EquipmentProperty, Plant and Equipment    Property, Plant and Equipment    
Regulated utility plant
  7,758   7,519 
Regulated utility plant
  8,137   8,073 
Less: accumulated depreciation - regulated utility plant
   397    277 
Less: accumulated depreciation - regulated utility plant
   578    519 
 
Regulated utility plant, net
  7,361   7,242  
Regulated utility plant, net
  7,559   7,554 
Other, net
  2   2 
Other, net
  3   3 
Construction work in progress
   574    557 
Construction work in progress
   917    750 
Property, Plant and Equipment, net
   7,937    7,801 
Property, Plant and Equipment, net
   8,479    8,307 
            
Other Noncurrent AssetsOther Noncurrent Assets    Other Noncurrent Assets    
Regulatory assets
  601   620 
Regulatory assets
  604   630 
Goodwill
  996   996 
Goodwill
  996   996 
Other intangibles
  290   314 
Other intangibles
  258   271 
Other noncurrent assets
   113    108 
Other noncurrent assets
   104    108 
Total Other Noncurrent Assets
   2,000    2,038 
Total Other Noncurrent Assets
   1,962    2,005 
            
Total Assets
Total Assets
 $ 10,737  $ 10,576 
Total Assets
 $ 11,204  $ 11,019 
            
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
24

 


CONDENSED CONSOLIDATED BALANCE SHEETSLG&E and KU Energy LLC and Subsidiaries(Unaudited)(Millions of Dollars)
   June 30, December 31,   March 31, December 31,
   2012  2011    2013  2012 
Liabilities and EquityLiabilities and Equity    Liabilities and Equity    
            
Current LiabilitiesCurrent Liabilities    Current Liabilities    
Accounts payable
 $ 214  $ 224 
Short-term debt
 $ 185  $ 125 
Accounts payable to affiliates
  2   2 
Notes payable with affiliates
  85   25 
Customer deposits
  47   45 
Accounts payable
  291   283 
Taxes
  58   25 
Accounts payable to affiliates
  2   1 
Regulatory liabilities
  16   20 
Customer deposits
  49   48 
��
Interest
  22   23 
Taxes
  24   26 
Price risk management liabilities
  5   5 
Regulatory liabilities
  4   9 
Salaries and benefits
  51   59 
Interest
  51   21 
Other current liabilities
   45    35 
Other current liabilities
   79    100 
Total Current Liabilities
   455    433 
Total Current Liabilities
   775    643 
            
Long-term Debt
Long-term Debt
   4,074    4,073 
Long-term Debt
   4,075    4,075 
         
Deferred Credits and Other Noncurrent LiabilitiesDeferred Credits and Other Noncurrent Liabilities    Deferred Credits and Other Noncurrent Liabilities    
Deferred income taxes
  563   413 
Deferred income taxes
  587   541 
Investment tax credits
  141   144 
Investment tax credits
  138   138 
Accrued pension obligations
  313   359 
Accrued pension obligations
  265   414 
Asset retirement obligations
  118   116 
Asset retirement obligations
  127   125 
Regulatory liabilities
  994   1,003 
Regulatory liabilities
  1,003   1,002 
Price risk management liabilities
  57   55 
Price risk management liabilities
  49   53 
Other deferred credits and noncurrent liabilities
   248    239 
Other deferred credits and noncurrent liabilities
   233    242 
Total Deferred Credits and Other Noncurrent Liabilities
   2,434    2,329 
Total Deferred Credits and Other Noncurrent Liabilities
   2,402    2,515 
            
Commitments and Contingent Liabilities (Notes 6 and 10)Commitments and Contingent Liabilities (Notes 6 and 10)    Commitments and Contingent Liabilities (Notes 6 and 10)    
            
Member's equity
Member's equity
   3,774    3,741 
Member's equity
   3,952    3,786 
            
Total Liabilities and Equity
Total Liabilities and Equity
 $ 10,737  $ 10,576 
Total Liabilities and Equity
 $ 11,204  $ 11,019 
            
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
25

 

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
    
  Member's
  Equity
    
MarchDecember 31, 2012
 $ 3,7653,786 
Net income
   4496 
Contributions from member
 75 
Distributions to member
   (35)(4)
June 30, 2012Other comprehensive income (loss)
 (1)
March 31, 2013
 $ 3,7743,952 
    
December 31, 2011
 $3,741 
Net income
   9753 
Distributions to member
   (60)(25)
Other comprehensive income (loss)
   (4)
June 30,March 31, 2012
 $ 3,774 
March 31, 2011
$4,042 
Net income
 41 
Distributions to member
 (92)
June 30, 2011
$ 3,991 
December 31, 2010
$4,011 
Net income
 128 
Distributions to member
 (146)
Other comprehensive income (loss)
 (2)
June 30, 2011
$ 3,9913,765 

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

 
26

 






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27

 

CONDENSED STATEMENTS OF INCOME
CONDENSED STATEMENTS OF INCOME
CONDENSED STATEMENTS OF INCOME
Louisville Gas and Electric Company
(Unaudited)(Unaudited)        (Unaudited)        
(Millions of Dollars)(Millions of Dollars)    (Millions of Dollars)    
          
   Three Months Ended Six Months Ended          
   June 30, June 30,     Three Months Ended March 31,
   2012  2011   2012   2011         2013   2012 
Operating RevenuesOperating Revenues        Operating Revenues        
Retail and wholesale
 $ 286  $ 280  $ 615  $ 651 
Retail and wholesale
 $ 369  $ 329 
Electric revenue from affiliate
   18    17    42    44 
Electric revenue from affiliate
   21    24 
Total Operating Revenues
   304    297    657    695 
Total Operating Revenues
   390    353 
                    
Operating ExpensesOperating Expenses        Operating Expenses        
Operation        Operation        
 
Fuel
  92   82   181   167  
Fuel
  96   89 
 
Energy purchases
  23   32   92   131  
Energy purchases
  80   69 
 
Energy purchases from affiliate
  2   7   6   18  
Energy purchases from affiliate
  1   4 
 
Other operation and maintenance
  92   91   190   181  
Other operation and maintenance
  91   98 
Depreciation
  38   37   76   73 
Depreciation
  36   38 
Taxes, other than income
   6    5    11    9 
Taxes, other than income
   6    5 
Total Operating Expenses
   253    254    556    579 
Total Operating Expenses
   310    303 
                    
Operating Income
Operating Income
  51   43   101   116 
Operating Income
  80   50 
                    
Other Income (Expense) - net
Other Income (Expense) - net
  (1)  1     
Other Income (Expense) - net
  (1)  1 
                    
Interest Expense
Interest Expense
   10    12    21    23 
Interest Expense
   10    11 
                    
Income Before Income Taxes
Income Before Income Taxes
  40   32   80   93 
Income Before Income Taxes
  69   40 
                    
Income Taxes
Income Taxes
   14    12    29    34 
Income Taxes
   25    15 
                    
Net Income (a)
Net Income (a)
 $ 26  $ 20  $ 51  $ 59 
Net Income (a)
 $ 44  $ 25 
                    
(a) Net income approximates comprehensive income.
          
(a) Net income equals comprehensive income.(a) Net income equals comprehensive income.
                    
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
28

 

CONDENSED STATEMENTS OF CASH FLOWS
CONDENSED STATEMENTS OF CASH FLOWS
CONDENSED STATEMENTS OF CASH FLOWS
Louisville Gas and Electric Company(Unaudited)(Millions of Dollars)
              
 Six Months Ended June 30,  Three Months Ended March 31,
   2012  2011    2013  2012 
Cash Flows from Operating ActivitiesCash Flows from Operating Activities    Cash Flows from Operating Activities    
Net income
 $ 51  $ 59 
Net income
 $ 44  $ 25 
Adjustments to reconcile net income to net cash provided by operating activities    Adjustments to reconcile net income to net cash provided by operating activities    
 
Depreciation
  76   73  
Depreciation
  36   38 
 
Amortization
  6   6  
Amortization
  3   
 
Defined benefit plans - expense
  9   11  
Defined benefit plans - expense
  6   4 
 
Deferred income taxes and investment tax credits
  28   27  
Deferred income taxes and investment tax credits
  11   16 
 
Other
  (6)   
Other
  (5)  (1)
Change in current assets and current liabilities    Change in current assets and current liabilities    
 
Accounts receivable
  (11)  24  
Accounts receivable
  (37)  (9)
 
Accounts payable
  11   (11) 
Accounts payable
  9   14 
 
Accounts payable to affiliates
  (10)  (7) 
Accounts payable to affiliates
  (7)  (10)
 
Unbilled revenues
  6   27  
Unbilled revenues
  1   16 
 
Fuel, materials and supplies
  6   41  
Fuel, materials and supplies
  37   19 
 
Other
  19   (9) 
Taxes
  17   5 
Other operating activities     
Other
  11   8 
 
Defined benefit plans - funding
  (25)  (67)Other operating activities    
 
Other assets
  (1)   
Defined benefit plans - funding
  (43)  (24)
 
Other liabilities
   1    3  
Other liabilities
   2    1 
 
Net cash provided by operating activities
   160    177  
Net cash provided by operating activities
   85    102 
Cash Flows from Investing ActivitiesCash Flows from Investing Activities     Cash Flows from Investing Activities     
Expenditures for property, plant and equipment
  (120)  (79)
Expenditures for property, plant and equipment
  (98)  (60)
Proceeds from the sale of other investments
    163 
Net (increase) decrease in restricted cash and cash equivalents
   4    2 
Net (increase) decrease in notes receivable from affiliates
  (6)   
Net cash provided by (used in) investing activities
   (94)   (58)
Net (increase) decrease in restricted cash and cash equivalents
   (2)   (4)
 
Net cash provided by (used in) investing activities
   (128)   80 
Cash Flows from Financing ActivitiesCash Flows from Financing Activities     Cash Flows from Financing Activities     
Net increase (decrease) in notes payable with affiliates
    (12)
Net increase (decrease) in short-term debt
    (163)
Net increase (decrease) in short-term debt
  15   
Debt issuance and credit facility costs
  (1)  (1)
Payment of common stock dividends to parent
  (19)  (15)
Payment of common stock dividends to parent
   (31)   (42)
Contributions from parent
   25    
  
Net cash provided by (used in) financing activities
   (32)    (218)  
Net cash provided by (used in) financing activities
   21    (15)
Net Increase (Decrease) in Cash and Cash Equivalents
Net Increase (Decrease) in Cash and Cash Equivalents
     39 
Net Increase (Decrease) in Cash and Cash Equivalents
   12   29 
Cash and Cash Equivalents at Beginning of Period
Cash and Cash Equivalents at Beginning of Period
   25    2 
Cash and Cash Equivalents at Beginning of Period
   22    25 
Cash and Cash Equivalents at End of Period
Cash and Cash Equivalents at End of Period
 $ 25  $ 41 
Cash and Cash Equivalents at End of Period
 $ 34  $ 54 
            
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
29

 

CONDENSED BALANCE SHEETS
CONDENSED BALANCE SHEETS
CONDENSED BALANCE SHEETS
Louisville Gas and Electric Company(Unaudited)(Millions of Dollars, shares in thousands)
            
   June 30, December 31,   March 31, December 31,
   2012  2011    2013  2012 
AssetsAssets    Assets    
            
Current AssetsCurrent Assets    Current Assets    
Cash and cash equivalents
 $ 25  $ 25 
Accounts receivable (less reserve: 2012, $2; 2011, $2)    
 
Customer
  64   60 
Cash and cash equivalents
 $ 34  $ 22 
 
Other
  6   9 Accounts receivable (less reserve: 2013, $1; 2012, $1)    
Unbilled revenues
  59   65  
Customer
  99   59 
Accounts receivable from affiliates
  21   11  
Other
  6   16 
Fuel, materials and supplies
  136   142 
Unbilled revenues
  71   72 
Prepayments
  10   7 
Accounts receivable from affiliates
  12   14 
Notes receivable from affiliates
  6   
Fuel, materials and supplies
  105   142 
Income taxes receivable
    4 
Prepayments
  9   7 
Deferred income taxes
  2   2 
Price risk management assets from affiliates
  12   7 
Regulatory assets
  13   9 
Regulatory assets
  21   19 
Other current assets
   1    
Other current assets
      1 
Total Current Assets
   343    334 
Total Current Assets
   369    359 
            
Property, Plant and EquipmentProperty, Plant and Equipment    Property, Plant and Equipment    
Regulated utility plant
  3,077   2,956 
Regulated utility plant
  3,226   3,187 
Less: accumulated depreciation - regulated utility plant
   168    116 
Less: accumulated depreciation - regulated utility plant
   251    220 
 
Regulated utility plant, net
  2,909   2,840  
Regulated utility plant, net
  2,975   2,967 
Construction work in progress
   182    215 
Construction work in progress
   319    259 
Property, Plant and Equipment, net
   3,091    3,055 
Property, Plant and Equipment, net
   3,294    3,226 
            
Other Noncurrent AssetsOther Noncurrent Assets    Other Noncurrent Assets    
Regulatory assets
  391   403 
Regulatory assets
  388   400 
Goodwill
  389   389 
Goodwill
  389   389 
Other intangibles
  155   166 
Other intangibles
  138   144 
Other noncurrent assets
   42    40 
Other noncurrent assets
   39    44 
Total Other Noncurrent Assets
   977    998 
Total Other Noncurrent Assets
   954    977 
            
Total Assets
Total Assets
 $ 4,411  $ 4,387 
Total Assets
 $ 4,617  $ 4,562 
            
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
30

 


CONDENSED BALANCE SHEETSLouisville Gas and Electric Company(Unaudited)(Millions of Dollars, shares in thousands)
   June 30, December 31,   March 31, December 31,
   2012  2011    2013  2012 
Liabilities and EquityLiabilities and Equity    Liabilities and Equity    
            
Current LiabilitiesCurrent Liabilities    Current Liabilities    
Short-term debt
 $ 70  $ 55 
Accounts payable
 $ 93  $ 94 
Accounts payable
  131   117 
Accounts payable to affiliates
  16   26 
Accounts payable to affiliates
  16   23 
Customer deposits
  23   22 
Customer deposits
  24   23 
Taxes
  28   13 
Taxes
  19   2 
Regulatory liabilities
  7   10 
Price risk management liabilities
  5   5 
Interest
  6   6 
Regulatory liabilities
  3   4 
Salaries and benefits
  13   14 
Interest
  11   5 
Other current liabilities
   20    14 
Other current liabilities
   29    34 
Total Current Liabilities
   206    199 
Total Current Liabilities
   308    268 
            
Long-term Debt
Long-term Debt
   1,112    1,112 
Long-term Debt
   1,112    1,112 
         
Deferred Credits and Other Noncurrent LiabilitiesDeferred Credits and Other Noncurrent Liabilities    Deferred Credits and Other Noncurrent Liabilities    
Deferred income taxes
  506   475 
Deferred income taxes
  555   544 
Investment tax credits
  41   43 
Investment tax credits
  40   40 
Accrued pension obligations
  71   95 
Accrued pension obligations
  59   102 
Asset retirement obligations
  55   55 
Asset retirement obligations
  57   56 
Regulatory liabilities
  472   478 
Regulatory liabilities
  471   471 
Price risk management liabilities
  57   55 
Price risk management liabilities
  49   53 
Other deferred credits and noncurrent liabilities
   109    113 
Other deferred credits and noncurrent liabilities
   106    106 
Total Deferred Credits and Other Noncurrent Liabilities
   1,311    1,314 
Total Deferred Credits and Other Noncurrent Liabilities
   1,337    1,372 
            
Commitments and Contingent Liabilities (Notes 6 and 10)Commitments and Contingent Liabilities (Notes 6 and 10)    Commitments and Contingent Liabilities (Notes 6 and 10)    
            
Stockholder's EquityStockholder's Equity    Stockholder's Equity    
Common stock - no par value (a)
  424   424 
Common stock - no par value (a)
  424   424 
Additional paid-in capital
  1,278   1,278 
Additional paid-in capital
  1,303   1,278 
Earnings reinvested
   80    60 
Earnings reinvested
   133    108 
Total Equity
   1,782    1,762 
Total Equity
   1,860    1,810 
            
Total Liabilities and Equity
Total Liabilities and Equity
 $ 4,411  $ 4,387 
Total Liabilities and Equity
 $ 4,617  $ 4,562 

(a)75,000 shares authorized; 21,294 shares issued and outstanding at June 30, 2012March 31, 2013 and December 31, 2011.2012.

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

 
31

 

 
CONDENSED STATEMENTS OF EQUITY
 Louisville Gas and Electric Company            
 (Unaudited)            
 (Millions of Dollars)            
            
    Common            
    stock            
    shares     Additional      
    outstanding  Common  paid-in  Earnings   
    (a)  stock  capital  reinvested  Total
                 
 
March 31, 2012
  21,294  $424  $1,278  $70  $1,772 
 
Net income
           26    26 
 
Cash dividends declared on common stock
           (16)   (16)
 
June 30, 2012
 21,294  $ 424  $ 1,278  $ 80  $ 1,782 
                 
 
December 31, 2011
 21,294  $424  $1,278  $60  $1,762 
 
Net income
           51    51 
 
Cash dividends declared on common stock
           (31)   (31)
 
June 30, 2012
 21,294  $ 424  $ 1,278  $ 80  $ 1,782 
                 
 
March 31, 2011
 21,294  $424  $1,278  $41  $1,743 
 
Net income
           20    20 
 
Cash dividends declared on common stock
           (25)   (25)
 
June 30, 2011
  21,294  $ 424  $ 1,278  $ 36  $ 1,738 
                 
 
December 31, 2010
 21,294  $424  $1,278  $19  $1,721 
 
Net income
           59    59 
 
Cash dividends declared on common stock
           (42)   (42)
 
June 30, 2011
  21,294  $ 424  $ 1,278  $ 36  $ 1,738 
CONDENSED STATEMENTS OF EQUITY
Louisville Gas and Electric Company            
(Unaudited)            
(Millions of Dollars)            
           
  Common            
  stock            
  shares    Additional      
  outstanding Common paid-in Earnings   
  (a) stock capital reinvested Total
               
December 31, 2012
 21,294  $424  $1,278  $108  $1,810 
Net income
           44    44 
Capital contributions from LKE
        25       25 
Cash dividends declared on common stock
           (19)   (19)
March 31, 2013
 21,294  $ 424  $ 1,303  $ 133  $ 1,860 
               
December 31, 2011
 21,294  $424  $1,278  $60  $1,762 
Net income
           25    25 
Cash dividends declared on common stock
           (15)   (15)
March 31, 2012
 21,294  $ 424  $ 1,278  $ 70  $ 1,772 

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

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

 
32

 







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33

 

CONDENSED STATEMENTS OF INCOME
CONDENSED STATEMENTS OF INCOME
CONDENSED STATEMENTS OF INCOME
Kentucky Utilities Company
(Unaudited)(Unaudited)        (Unaudited)        
(Millions of Dollars)(Millions of Dollars)    (Millions of Dollars)    
          
   Three Months Ended Six Months Ended          
   June 30, June 30,     Three Months Ended March 31,
   2012  2011   2012   2011         2013   2012 
Operating RevenuesOperating Revenues        Operating Revenues        
Retail and wholesale
 $ 372  $ 358  $ 748  $ 753 
Retail and wholesale
 $ 431  $ 376 
Electric revenue from affiliate
   2    7    6    18 
Electric revenue from affiliate
   1    4 
Total Operating Revenues
   374    365    754    771 
Total Operating Revenues
   432    380 
                    
Operating ExpensesOperating Expenses        Operating Expenses        
Operation        Operation        
 
Fuel
  123   124   247   254  
Fuel
  135   124 
 
Energy purchases
  11   8   16   16  
Energy purchases
  6   5 
 
Energy purchases from affiliate
  18   17   42   44  
Energy purchases from affiliate
  21   24 
 
Other operation and maintenance
  98   100   193   184  
Other operation and maintenance
  97   95 
Depreciation
  48   47   96   92 
Depreciation
  46   48 
Taxes, other than income
   6    4    12    9 
Taxes, other than income
   6    6 
Total Operating Expenses
   304    300    606    599 
Total Operating Expenses
   311    302 
                    
Operating Income
Operating Income
  70   65   148   172 
Operating Income
  121   78 
                    
Other Income (Expense) - net
Other Income (Expense) - net
  (5)    (6)  1 
Other Income (Expense) - net
  (1)  (1)
                    
Interest Expense
Interest Expense
   17    17    34    35 
Interest Expense
   17    17 
                    
Income Before Income Taxes
Income Before Income Taxes
  48   48   108   138 
Income Before Income Taxes
  103   60 
                    
Income Taxes
Income Taxes
   18    18    40    50 
Income Taxes
   39    22 
                    
Net Income (a)
Net Income (a)
 $ 30  $ 30  $ 68  $ 88 
Net Income (a)
 $ 64  $ 38 
                    
          
(a) Net income approximates comprehensive income.
                    
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
34

 

CONDENSED STATEMENTS OF CASH FLOWS
CONDENSED STATEMENTS OF CASH FLOWS
CONDENSED STATEMENTS OF CASH FLOWS
Kentucky Utilities Company(Unaudited)(Millions of Dollars)
              
 Six Months Ended June 30,  Three Months Ended March 31,
   2012  2011    2013  2012 
Cash Flows from Operating ActivitiesCash Flows from Operating Activities    Cash Flows from Operating Activities    
Net income
 $ 64  $ 38 
Adjustments to reconcile net income to net cash provided by operating activities    
Net income
 $ 68  $ 88  
Depreciation
  46   48 
Adjustments to reconcile net income to net cash provided by operating activities     
Amortization
  4   
 
Depreciation
  96   92  
Defined benefit plans - expense
  5   3 
 
Amortization
  7   6  
Deferred income taxes and investment tax credits
  35   25 
 
Defined benefit plans - expense
  5   7  
Other
  9   6 
 
Deferred income taxes and investment tax credits
  53   49 Change in current assets and current liabilities    
 
Other
    (10) 
Accounts receivable
  (31)  (7)
Change in current assets and current liabilities     
Accounts payable
  32   10 
 
Accounts receivable
  (24)  15  
Accounts payable to affiliates
  8   3 
 
Accounts payable
  12   2  
Unbilled revenues
  (1)  13 
 
Accounts payable to affiliates
  1   (19) 
Fuel, materials and supplies
  10   10 
 
Unbilled revenues
  (5)  11  
Taxes
  (17)  4 
 
Fuel, materials and supplies
  (3)  1  
Accrued interest
  15   15 
 
Other
  15   (15) 
Other
  (20)  (3)
Other operating activities    Other operating activities    
 
Defined benefit plans - funding
  (18)  (45) 
Defined benefit plans - funding
  (60)  (17)
 
Other assets
    (1) 
Other assets
  1   (1)
 
Other liabilities
   10    4  
Other liabilities
   (15)   5 
 
Net cash provided by operating activities
   217    185  
Net cash provided by operating activities
   85    152 
Cash Flows from Investing ActivitiesCash Flows from Investing Activities     Cash Flows from Investing Activities     
Expenditures for property, plant and equipment
   (203)   (101)
Expenditures for property, plant and equipment
   (172)   (113)
 
Net cash provided by (used in) investing activities
   (203)   (101) 
Net cash provided by (used in) investing activities
   (172)   (113)
Cash Flows from Financing ActivitiesCash Flows from Financing Activities     Cash Flows from Financing Activities     
Net increase (decrease) in notes payable with affiliates
   6   (10)
Net increase (decrease) in short-term debt
  45   
Debt issuance and credit facility costs
    (2)
Payment of common stock dividends to parent
  (13)  (24)
Payment of common stock dividends to parent
   (48)   (68)
Contributions from parent
   50    
  
Net cash provided by (used in) financing activities
   (42)    (80)  
Net cash provided by (used in) financing activities
   82    (24)
Net Increase (Decrease) in Cash and Cash Equivalents
Net Increase (Decrease) in Cash and Cash Equivalents
   (28)   4 
Net Increase (Decrease) in Cash and Cash Equivalents
   (5)   15 
Cash and Cash Equivalents at Beginning of Period
Cash and Cash Equivalents at Beginning of Period
   31    3 
Cash and Cash Equivalents at Beginning of Period
   21    31 
Cash and Cash Equivalents at End of Period
Cash and Cash Equivalents at End of Period
 $ 3  $ 7 
Cash and Cash Equivalents at End of Period
 $ 16  $ 46 
            
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
35

 

CONDENSED BALANCE SHEETS
CONDENSED BALANCE SHEETS
CONDENSED BALANCE SHEETS
Kentucky Utilities Company(Unaudited)(Millions of Dollars, shares in thousands)
            
   June 30, December 31,   March 31, December 31,
   2012  2011    2013  2012 
AssetsAssets    Assets    
            
Current AssetsCurrent Assets    Current Assets    
Cash and cash equivalents
 $ 3  $ 31 
Cash and cash equivalents
 $ 16  $ 21 
Accounts receivable (less reserve: 2012, $2; 2011, $2)    Accounts receivable (less reserve: 2013, $2; 2012, $2)    
 
Customer
  81   69  
Customer
  119   74 
 
Other
  7   9  
Other
  3   13 
Unbilled revenues
  86   81 
Unbilled revenues
  85   84 
Accounts receivable from affiliates
  15   
Accounts receivable from affiliates
  1   7 
Fuel, materials and supplies
  145   141 
Fuel, materials and supplies
  124   134 
Prepayments
  11   7 
Prepayments
  7   10 
Income taxes receivable
  1   5 
Price risk management assets from affiliates
  12   7 
Deferred income taxes
  5   5 
Deferred income taxes
  3   3 
Regulatory assets
  4   
Regulatory assets
  11   
Other current assets
   5    3 
Other current assets
   5    3 
Total Current Assets
   363    351 
Total Current Assets
   386    356 
            
Investments
   20    31 
Property, Plant and EquipmentProperty, Plant and Equipment    
      
Regulated utility plant
  4,911   4,886 
Property, Plant and Equipment    
Regulated utility plant
  4,681   4,563 
Less: accumulated depreciation - regulated utility plant
   327    299 
Less: accumulated depreciation - regulated utility plant
   229    161  
Regulated utility plant, net
  4,584   4,587 
 
Regulated utility plant, net
  4,452   4,402 
Other, net
  1   1 
Construction work in progress
   390    340 
Construction work in progress
   596    490 
Property, Plant and Equipment, net
   4,842    4,742 
Property, Plant and Equipment, net
   5,181    5,078 
            
Other Noncurrent AssetsOther Noncurrent Assets    Other Noncurrent Assets    
Regulatory assets
  210   217 
Regulatory assets
  216   230 
Goodwill
  607   607 
Goodwill
  607   607 
Other intangibles
  135   148 
Other intangibles
  120   127 
Other noncurrent assets
   60    60 
Other noncurrent assets
   58    57 
Total Other Noncurrent Assets
   1,012    1,032 
Total Other Noncurrent Assets
   1,001    1,021 
            
Total Assets
Total Assets
 $ 6,237  $ 6,156 
Total Assets
 $ 6,568  $ 6,455 
            
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
36

 

CONDENSED BALANCE SHEETSKentucky Utilities Company(Unaudited)(Millions of Dollars, shares in thousands)
   June 30, December 31,   March 31, December 31,
   2012  2011    2013  2012 
Liabilities and EquityLiabilities and Equity    Liabilities and Equity    
            
Current LiabilitiesCurrent Liabilities    Current Liabilities    
Notes payable with affiliates
 $ 6   
Accounts payable
  111  $ 112 
Short-term debt
 $ 115  $ 70 
Accounts payable to affiliates
  35   33 
Accounts payable
  151   147 
Customer deposits
  24   23 
Accounts payable to affiliates
  41   33 
Taxes
  23   11 
Customer deposits
  25   25 
Regulatory liabilities
  9   10 
Taxes
  9   26 
Interest
  10   11 
Regulatory liabilities
  1   5 
Salaries and benefits
  13   15 
Interest
  25   10 
Other current liabilities
   20    13 
Other current liabilities
   27    33 
Total Current Liabilities
   251    228 
Total Current Liabilities
   394    349 
            
Long-term Debt
Long-term Debt
   1,842    1,842 
Long-term Debt
   1,842    1,842 
         
Deferred Credits and Other Noncurrent LiabilitiesDeferred Credits and Other Noncurrent Liabilities    Deferred Credits and Other Noncurrent Liabilities    
Deferred income taxes
  537   484 
Deferred income taxes
  621   587 
Investment tax credits
  100   101 
Investment tax credits
  98   98 
Accrued pension obligations
  71   83 
Accrued pension obligations
  45   104 
Asset retirement obligations
  63   61 
Asset retirement obligations
  70   69 
Regulatory liabilities
  522   525 
Regulatory liabilities
  532   531 
Other deferred credits and noncurrent liabilities
   90    87 
Other deferred credits and noncurrent liabilities
   82    92 
Total Deferred Credits and Other Noncurrent Liabilities
   1,383    1,341 
Total Deferred Credits and Other Noncurrent Liabilities
   1,448    1,481 
            
Commitments and Contingent Liabilities (Notes 6 and 10)Commitments and Contingent Liabilities (Notes 6 and 10)    Commitments and Contingent Liabilities (Notes 6 and 10)    
            
Stockholder's EquityStockholder's Equity    Stockholder's Equity    
Common stock - no par value (a)
  308   308 
Common stock - no par value (a)
  308   308 
Additional paid-in capital
  2,348   2,348 
Additional paid-in capital
  2,398   2,348 
Accumulated other comprehensive income (loss)
  (4)  
Accumulated other comprehensive income (loss)
  1   1 
Earnings reinvested
   109    89 
Earnings reinvested
   177    126 
Total Equity
   2,761    2,745 
Total Equity
   2,884    2,783 
            
Total Liabilities and Equity
Total Liabilities and Equity
 $ 6,237  $ 6,156 
Total Liabilities and Equity
 $ 6,568  $ 6,455 

(a)80,000 shares authorized; 37,818 shares issued and outstanding at June 30, 2012March 31, 2013 and December 31, 2011.2012.

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

 
37

 

CONDENSED STATEMENTS OF EQUITY
CONDENSED STATEMENTS OF EQUITY
CONDENSED STATEMENTS OF EQUITY
Kentucky Utilities CompanyKentucky Utilities Company        Kentucky Utilities Company        
(Unaudited)(Unaudited)        (Unaudited)        
(Millions of Dollars)(Millions of Dollars)        (Millions of Dollars)        
                 
 Common       Accumulated   Common       Accumulated  
 stock       other   stock       other  
 shares   Additional   comprehensive   shares   Additional   comprehensive  
 outstanding Common paid-in Earnings income   outstanding Common paid-in Earnings income  
 (a) stock capital reinvested (loss) Total (a) stock capital reinvested (loss) Total
                        
March 31, 2012
  37,818  $308  $2,348  $103  $ (4) $ 2,755 
December 31, 2012
 37,818  $308  $2,348  $126   1  $2,783 
Net income
        30     30         64     64 
Cash dividends declared on common stock
           (24)      (24)
June 30, 2012
 37,818  $ 308  $ 2,348  $ 109  $ (4) $ 2,761 
Capital contributions from LKE
      50       50 
Cash dividends declared on common            
stock
           (13)      (13)
March 31, 2013
 37,818  $ 308  $ 2,398  $ 177  $ 1  $ 2,884 
                        
December 31, 2011
 37,818  $308  $2,348  $89    $2,745  37,818  $308  $2,348  $89    $2,745 
Net income
        68     68         38     38 
Cash dividends declared on common stock
        (48)    (48)
Cash dividends declared on common            
stock
        (24)    (24)
Other comprehensive income (loss)
            $ (4)   (4)            $ (4)   (4)
June 30, 2012
 37,818  $ 308  $ 2,348  $ 109  $ (4) $ 2,761 
            
March 31, 2011
 37,818  $308  $2,348  $62  $ (1) $2,717 
Net income
        30     30 
Cash dividends declared on common stock
           (37)      (37)
June 30, 2011
 37,818  $ 308  $ 2,348  $ 55  $ (1) $ 2,710 
            
December 31, 2010
 37,818  $308  $2,348  $35    $2,691 
Net income
        88     88 
Cash dividends declared on common stock
        (68)    (68)
Other comprehensive income (loss)
            $ (1)   (1)
June 30, 2011
 37,818  $ 308  $ 2,348  $ 55  $ (1) $ 2,710 
March 31, 2012
 37,818  $ 308  $ 2,348  $ 103  $ (4) $ 2,755 

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

The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.
 
38

 
Combined Notes to Condensed Financial Statements (Unaudited)


1.  Interim Financial Statements

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

Capitalized terms and abbreviations appearing in the unaudited combined notes to condensed financial statements are defined in the glossary.  Dollars are in millions, except per share data, unless otherwise noted.

The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements.  In the opinion of management, all adjustments considered necessary for a fair presentation in accordance with accounting principles generally accepted in the U.S. are reflected in the condensed financial statements.  All adjustments are of a normal recurring nature, except as otherwise disclosed.  Each Registrant's Balance Sheet at December 31, 20112012 is derived from that Registrant's 20112012 audited Balance Sheet.  The financial statements and notes thereto should be read in conjunction with the financial statements and notes contained in each Registrant's 20112012 Form 10-K.  The results of operations for the three and six months ended June 30, 2012,March 31, 2013, are not necessarily indicative of the results to be expected for the full year ending December 31, 2012,2013, or other future periods, because results for interim periods can be disproportionately influenced by various factors, developments and seasonal variations.

The classification of certain prior period amounts has been changed to conform to the presentation in the June 30, 2012March 31, 2013 financial statements.

(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.  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.  Therefore, the periods ended June 30, 2012 include three and six months of WPD Midlands' results, compared with two months for the same periods in 2011.  See Note 8 for additional information on the acquisition.

(PPL and PPL Energy Supply)

In April 2012, an indirect, wholly owned subsidiary of PPL Energy Supply completed the Ironwood Acquisition.  See Note 8 for additional information.

22..  Summary of Significant Accounting Policies

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

The following accounting policy disclosures represent updates to Note 1 in each Registrant's 20112012 Form 10-K and should be read in conjunction with those disclosures.

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

PPL Electric's customers may choose an alternative supplier for their generation supply.  In accordance with a PUC-approved purchase of accounts receivable program, PPL Electric continues to purchasepurchases certain accounts receivable from alternative suppliers (including PPL EnergyPlus) at a nominal discount, which reflects a provision for uncollectible accounts.  The alternative suppliers (including PPL Electric's affiliate, PPL EnergyPlus) have no continuing involvement or interest in the purchased accounts receivable.  The purchased accounts receivable are initially recorded at fair value using a market approach based on the purchase price paid and are classified as Level 2 in the fair value hierarchy.  PPL Electric receives a nominal fee for administering its program.  During the three and six months ended June 30, 2012,March 31, 2013, PPL Electric purchased $184 million and $422$259 million of accounts receivable from unaffiliated third parties and $74$77 million and $156 million from its affiliate, PPL EnergyPlus.  During the three and six months ended June 30, 2011,March 31, 2012, PPL Electric purchased $198 million and $452$238 million of accounts receivable from unaffiliated third parties and $59 million and $120$82 million from its affiliate, PPL EnergyPlus.

39Depreciation (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 will result in lower depreciation of approximately $19 million ($9 million for LG&E and $10 million for KU) in 2013, exclusive of net additions to PP&E.

New Accounting Guidance Adopted (PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and KU)

Fair Value MeasurementsImproving Disclosures about Offsetting Balance Sheet Items

Effective January 1, 2012,2013, the Registrants prospectivelyretrospectively adopted accounting guidance that was issued to clarify existing fair value measurement guidance andenhance disclosures about derivative instruments that either (1) offset on the balance sheet or (2) are subject to enhance fair value disclosures.  The additional disclosures required by this guidance include quantitative information about significant unobservable inputs used for Level 3 measurements, qualitative information aboutan enforceable master netting arrangement or similar agreement, irrespective of whether they are offset on the sensitivity of recurring Level 3 measurements, information about any transfers between Levels 1 and 2 of the fair value hierarchy, information about when the current use of a non-financial asset is different from the highest and best use, and the fair value hierarchy classification for assets and liabilities whose fair value is disclosed only in the notes to the financial statements.balance sheet.

The adoption of this standardguidance resulted in additional footnoteenhanced disclosures but did not have a significant impact on the Registrants.  See Note 1314 for additional disclosures required by this guidance.the new disclosures.

39

Testing GoodwillIndefinite-Lived Intangible Assets for Impairment

Effective January 1, 2012,2013, the Registrants prospectively adopted accounting guidance whichthat allows an entity to elect the option to first make a qualitative evaluation about the likelihood of an impairment of goodwill.an indefinite-lived intangible asset.  If, based on this assessment, the entity determines that it is not more likely than not that the fair value of a reporting unit is less thanthe indefinite-lived intangible asset exceeds the carrying amount, the two-step goodwilla quantitative impairment test isdoes not necessary.  However,need to be performed.  If the first step of theentity concludes otherwise, a quantitative impairment test is required if an entity concludes it is more likely than notmust be performed by determining the fair value of a reporting unit is less thanthe asset and comparing it with the carrying amount based on the qualitative assessment.value.  The entity would record an impairment charge, if necessary.

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

Reporting Amounts Reclassified Out of AOCI

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

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

3.  Segment and Related Information

(PPL)

See Note 2 in PPL's 20112012 Form 10-K for a discussion of reportable segments.  In"Corporate and Other" primarily represents costs incurred at the corporate level that have not been allocated or assigned to the segments, which is presented to reconcile segment information to PPL's consolidated results.  For 2012, the International Regulated segment was renamed the U.K. Regulated segment to more specifically reflect the focus of this segment.  Other than the name change, there were no other changessignificant costs or assets in this category.

Beginning in 2013, PPL anticipates more costs to thisbe included in the Corporate and Other category primarily due to an anticipated increase in financing at PPL Capital Funding not directly attributable to a particular segment.  BecausePPL's recent growth in rate-regulated businesses provides the acquisitionorganization an enhanced corporate-level financing alternative, through PPL Capital Funding, that further enables PPL to support targeted credit profiles cost effectively across all of WPD Midlands occurred on April 1, 2011, andPPL's rated companies.  As a result, PPL consolidates WPD Midlands on a one-month lag,plans to further utilize PPL Capital Funding in addition to continued direct financing by the operating results of the U.K. Regulated segmentcompanies, as appropriate.  The financing costs associated primarily with PPL Capital Funding's future securities issuances are not comparable between 2012expected to be directly assignable or allocable to any segment and 2011.generally will be reflected in Corporate and Other beginning in 2013.

Financial data for the segments for the periods ended June 30March 31 are:

   Three Months Six Months       Three Months
 2012  2011  2012  2011       2013  2012 
Income Statement DataIncome Statement Data        Income Statement Data        
Revenues from external customersRevenues from external customers        Revenues from external customers        
Kentucky Regulated     $ 800  $ 705 
Kentucky Regulated $ 658  $ 638  $ 1,363  $ 1,404 U.K. Regulated      648   562 
U.K. Regulated  557   420   1,119   645 Pennsylvania Regulated      512   457 
Pennsylvania Regulated  403   436   860   990 Supply (a)      494   2,388 
Supply (a)   931    995    3,319    2,360 Corporate and Other       3    
TotalTotal $ 2,549  $ 2,489  $ 6,661  $ 5,399 Total     $ 2,457  $ 4,112 
                    
Intersegment electric revenuesIntersegment electric revenues        Intersegment electric revenues        
Pennsylvania Regulated $ 1  $ 4  $ 2  $ 8 Pennsylvania Regulated     $ 1  $ 1 
Supply  17   4   38   10 Supply      14   21 
                    
Net Income Attributable to PPL        
Net Income Attributable to PPL ShareownersNet Income Attributable to PPL Shareowners        
Kentucky Regulated     $ 85  $ 42 
Kentucky Regulated $ 34  $ 31  $ 76  $ 106 U.K. Regulated (a)      313   165 
U.K. Regulated  196   38   361   93 Pennsylvania Regulated      64   33 
Pennsylvania Regulated  29   36   62   88 Supply (a)      (46)  301 
Supply (a)   12    91    313    310 Corporate and Other       (3)   
TotalTotal $ 271  $ 196  $ 812  $ 597 Total     $ 413  $ 541 
 
40

 

  June 30, December 31,  March 31, December 31,
  2012  2011   2013  2012 
Balance Sheet DataBalance Sheet Data    Balance Sheet Data    
AssetsAssets    Assets    
Kentucky Regulated $ 10,288  $ 10,229 Kentucky Regulated $ 10,870  $ 10,670 
U.K. Regulated  13,445   13,364 U.K. Regulated  13,816   14,073 
Pennsylvania Regulated  5,532   5,610 Pennsylvania Regulated  6,267   6,023 
Supply   14,243    13,445 Supply  12,041   12,868 
Corporate and Other (b)   347    
Total assetsTotal assets $ 43,508  $ 42,648 Total assets $ 43,341  $ 43,634 

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

4.  Earnings Per Share

(PPL)

Basic EPS is computed by dividing income available to PPL common shareowners by the weighted-average number of common shares outstanding during the applicable period.  Diluted EPS is computed by dividing income available to PPL common shareowners by the weighted-average number of common shares outstanding, that are increased for additionalby incremental shares that would be outstanding if potentially dilutive non-participating securities were converted to common shares as calculated using the treasury stock method.  In 2012 and 2011, these securities included stock options and performance units granted under incentive compensation plans andmethod or the Purchase Contracts associated withIf-Converted Method, as applicable.  The If-Converted Method was applied to the Equity Units.  In 2012, these securities also included the PPL common stock forward sale agreements.  See Note 7 for additional information on the forward sale agreements.

The forward sale agreements were dilutive under the treasury stock method for the three and six months ended June 30, 2012 because the average stock price of PPL's common shares exceeded the forward sale price indicatedUnits beginning in the forward sale agreements.

The Purchase Contracts will befirst quarter of 2013.  Incremental non-participating securities that have a dilutive under the treasury stock method if the average VWAP of PPL common stock for a certain period exceeds approximately $30.99 and $28.80, for the 2011 and 2010 Purchase Contracts.  The Purchase Contracts were excluded from the diluted EPS calculations for 2012 and 2011 because they did not meet this criterion during the three and six months ended June 30, 2012 and 2011.  Subject to antidilution adjustments at June 30, 2012, the maximum number of shares issuable to settle the Purchase Contracts was 97.8 million shares, including 86.5 million shares that could be issued under standard provisions of the Purchase Contracts and 11.3 million shares that could be issued under make-whole provisionsimpact are detailed in the event of early settlement upon a Fundamental Change.table below.

Reconciliations of the amounts of income and shares of PPL common stock (in thousands) for the periods ended June 30March 31 used in the EPS calculation are:

     Three Months Six Months
     2012  2011  2012  2011 
Income (Numerator)            
Income from continuing operations after income taxes attributable to PPL $ 277  $ 197  $ 818  $ 595 
Less amounts allocated to participating securities   2    1    5    3 
Income from continuing operations after income taxes available to PPL            
 common shareowners $ 275  $ 196  $ 813  $ 592 
                
Income (loss) from discontinued operations (net of income taxes) available            
 to PPL $ (6) $ (1) $ (6) $ 2 
                
Net income attributable to PPL $ 271  $ 196  $ 812  $ 597 
Less amounts allocated to participating securities   2    1    5    3 
Net income available to PPL common shareowners $ 269  $ 195  $ 807  $ 594 
                
Shares of Common Stock (Denominator)            
Weighted-average shares - Basic EPS   579,881    561,652    579,462    522,897 
Add incremental non-participating securities:            
  Stock options and performance units   444    367    465    287 
  Forward sale agreements   268       135    
Weighted-average shares - Diluted EPS   580,593    562,019    580,062    523,184 

41


    Three Months Six Months        Three Months
    2012  2011  2012  2011         2013  2012 
Basic EPS        
Available to PPL common shareowners:        
Income (Numerator)Income (Numerator)        
Net income attributable to PPL shareownersNet income attributable to PPL shareowners     $ 413  $ 541 
Less amounts allocated to participating securitiesLess amounts allocated to participating securities       2    3 
Net income available to PPL common shareowners - BasicNet income available to PPL common shareowners - Basic      411   538 
Plus interest charges (net of tax) related to Equity UnitsPlus interest charges (net of tax) related to Equity Units     15    
Net income available to PPL common shareowners - DilutedNet income available to PPL common shareowners - Diluted     $ 426  $ 538 
           
Shares of Common Stock (Denominator)Shares of Common Stock (Denominator)        
Weighted-average shares - Basic EPSWeighted-average shares - Basic EPS      582,640   579,041 
Add incremental non-participating securities:Add incremental non-participating securities:        
 Income from continuing operations after income taxes $ 0.47  $ 0.35  $ 1.40  $ 1.13  Share-based payment awards      810   486 
 Income (loss) from discontinued operations (net of income taxes)   (0.01)      (0.01)   0.01  Equity Units      71,990   
 Net Income $ 0.46  $ 0.35  $ 1.39  $ 1.14  Forward sale agreements       1,580    
Weighted-average shares - Diluted EPSWeighted-average shares - Diluted EPS       657,020    579,527 
           
Basic EPSBasic EPS        
 Net Income Available to PPL common shareowners     $ 0.70  $ 0.93 
                      
Diluted EPSDiluted EPS        Diluted EPS        
Available to PPL common shareowners:        
 Income from continuing operations after income taxes $ 0.47  $ 0.35  $ 1.40  $ 1.13  Net Income Available to PPL common shareowners     $ 0.65  $ 0.93 
 Income (loss) from discontinued operations (net of income taxes)   (0.01)      (0.01)   0.01 
 Net Income $ 0.46  $ 0.35  $ 1.39  $ 1.14 

For the periods ended June 30, 2012,March 31, PPL issued common stock related to stock-based compensation plans, ESOP and DRIP as follows:

(Shares in thousands)(Shares in thousands) Three Months Six Months(Shares in thousands) Three Months
         2013  2012 
Stock-based compensation plans (a)Stock-based compensation plans (a)  76   353 Stock-based compensation plans (a)  446   277 
ESOPESOP    280 ESOP  275   280 
DRIPDRIP  617   1,175 DRIP  549   558 

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

In April 2013, PPL settled certain forward sale agreements.  See Note 7 for additional information.

For the periods ended June 30,March 31, the following options to purchase PPL common stock and performance units were excluded from the computations of diluted EPS because the effect would have been antidilutive.

  Three Months Six Months
(Shares in thousands) 2012  2011  2012  2011 
             
Stock options   6,250    5,045    5,966    5,829 
Performance units   34    1    115    4 
41

        Three Months
(Shares in thousands)     2013  2012 
             
Stock options         6,589    5,682 
Performance units         206    195 
Restricted stock units         116    

5.  5.  Income Taxes

Reconciliations of income tax expensetaxes for the periods ended June 30March 31 are:

(PPL)
                      
    Three Months Six Months      Three Months
    2012  2011  2012  2011         2013  2012 
Reconciliation of Income Tax Expense        
Federal income tax on Income from Continuing Operations Before        
 Income Taxes at statutory tax rate - 35% $ 128  $ 104  $ 409  $ 323 
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%Federal income tax on Income Before Income Taxes at statutory tax rate - 35% $ 197  $ 281 
Increase (decrease) due to:Increase (decrease) due to:        Increase (decrease) due to:        
State income taxes, net of federal income tax benefit  7   14   32   39 State income taxes, net of federal income tax benefit      3   24 
State valuation allowance adjustments (a)        11 Impact of lower U.K. income tax rates      (38)  (21)
Impact of lower U.K. income tax rates (b)  (24)  (11)  (45)  (19)U.S. income tax on foreign earnings - net of foreign tax credit      2   2 
U.S. income tax on foreign earnings - net of foreign tax credit (c)  (1)  (11)  1   (17)Foreign tax reserve adjustments        3 
Federal and state tax reserve adjustments  (4)  (2)  (5)  (3)Federal income tax credits      (3)  (4)
Foreign tax reserve adjustments (d)  (8)    (5)  Amortization of investment tax credit      (3)  (2)
Federal income tax credits  (3)  (2)  (7)  (7)Depreciation not normalized      (3)  (2)
Amortization of investment tax credit  (3)  (1)  (5)  (4)State deferred tax rate change (a)        (11)
Depreciation not normalized (a)  (2)  (2)  (4)  (6)Net operating loss carryforward adjustments (b)        (6)
State deferred tax rate change (e)      (11)  Other       (4)   (5)
Net operating loss carryforward adjustments (f)  (3)    (9)    Total increase (decrease)       (46)   (22)
Nondeductible acquisition-related costs (g)    8     8 
Other   1    (1)   (4)   (6)
  Total increase (decrease)   (40)   (8)   (62)   (4)
Total income taxes from continuing operations $ 88  $ 96  $ 347  $ 319 
Total income taxesTotal income taxes     $ 151  $ 259 

(a)In February 2011, the Pennsylvania Department of Revenue issued interpretive guidance on the treatment of bonus depreciation for Pennsylvania income tax purposes.  In accordance with Corporation Tax Bulletin 2011-01, Pennsylvania allows 100% bonus depreciation for qualifying assets in the same year bonus depreciation is allowed for federal tax purposes.  Due to the decrease in projected taxable income related to bonus depreciation, PPL recorded state deferred income tax expense during the six months ended June 30, 2011 related to valuation allowances.

42


Additionally, the 100% Pennsylvania bonus depreciation deduction created a current state income tax benefit for the flow-through impact of Pennsylvania regulated state tax depreciation.  The federal provision for 100% bonus depreciation generally applies to property placed into service before January 1, 2012.  The placed in service deadline is extended to January 1, 2013 for property that exceeds $1 million, has a production period longer than one year and has a tax life of at least ten years.
(b)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 from 26% to 25% effective April 1, 2012.

The U.K. Finance Act of 2010, enacted in July 2010, reduced the U.K. statutory income tax rate from 28% to 27% effective April 1, 2011.
(c)During the three and six months ended June 30, 2011, PPL recorded a $7 million and $14 million federal income tax benefit related to U.K. pension contributions.
(d)During the three and six months ended June 30,March 31, 2012, PPL recorded a tax benefit following resolution of a U.K. tax issue related to interest expense.
(e)During the six months ended June 30, 2012, PPL recorded an adjustmentadjustments related to state deferred tax liabilities.
(f)(b)During the three and six months ended June 30,March 31, 2012, PPL recorded adjustments to deferred taxes related to net operating loss carryforwards of LKE based on income tax return adjustments.
(g)During the three and six months ended June 30, 2011, PPL recorded non-deductible acquisition-related costs (primarily the U.K. stamp duty tax) associated with its acquisition of WPD Midlands.

PPL has evaluated the impact of the change in earnings estimates on its projected annual effective tax rate.  The result of the change in estimate reduced income tax expense for the three months ended June 30, 2012 by $13 million ($0.02 per share, basic and diluted).

In July 2012, the U.K. Finance Act of 2012 (the Act) was enacted.  The Act reduced the U.K.'s statutory income tax rate from 25% to 24%, effective April 1, 2012 and from 24% to 23%, effective April 1, 2013.  As a result of these changes, PPL expects to record a deferred tax benefit in the range of $65 million to $75 million in the third quarter of 2012.     

(PPL Energy Supply)(PPL Energy Supply)        (PPL Energy Supply)        
                      
    Three Months Six Months      Three Months
    2012  2011  2012  2011         2013  2012 
Reconciliation of Income Tax Expense        
Federal income tax on Income from Continuing Operations Before        
 Income Taxes at statutory tax rate - 35% $ 10  $ 52  $ 180  $ 176 
Federal income tax on Income (Loss) Before Income Taxes at statutory tax rate - 35%Federal income tax on Income (Loss) Before Income Taxes at statutory tax rate - 35% $ (26) $ 170 
Increase (decrease) due to:Increase (decrease) due to:        Increase (decrease) due to:        
State income taxes, net of federal income tax benefit  1   10   24   27 State income taxes, net of federal income tax benefit      (6)  23 
State valuation allowance adjustments (a)        6 Federal income tax credits      (3)  (4)
Federal income tax credits  (2)  (1)  (6)  (6)State deferred tax rate change (a)        (11)
State deferred tax rate change (b)      (11)  Other          (1)
Other      (2)   (1)   (2)  Total increase (decrease)       (9)   7 
  Total increase (decrease)   (1)   7    6    25 
Total income taxes from continuing operations $ 9  $ 59  $ 186  $ 201 
Total income taxesTotal income taxes     $ (35) $ 177 

(a)In February 2011,During the Pennsylvania Department of Revenue issued interpretive guidance on the treatment of bonus depreciation for Pennsylvania income tax purposes.  In accordance with Corporation Tax Bulletin 2011-01, Pennsylvania allows 100% bonus depreciation for qualifying assets in the same year bonus depreciation is allowed for federal tax purposes.  Due to the decrease in projected taxable income related to bonus depreciation, PPL Energy Supply recorded state deferred income tax expense during the sixthree months ended June 30, 2011 related to valuation allowances.
(b)During the six months ended June 30,March 31, 2012, PPL Energy Supply recorded an adjustmentadjustments related to state deferred tax liabilities.

(PPL Electric)(PPL Electric)        (PPL Electric)        
                      
    Three Months Six Months      Three Months
    2012  2011  2012  2011         2013  2012 
Reconciliation of Income Tax Expense        
Federal income tax on Income Before Income Taxes at statutory        
 tax rate - 35% $ 14  $ 21  $ 34  $ 48 
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%Federal income tax on Income Before Income Taxes at statutory tax rate - 35% $ 34  $ 20 
Increase (decrease) due to:Increase (decrease) due to:        Increase (decrease) due to:        
State income taxes, net of federal income tax benefit  3   3   5   7 State income taxes, net of federal income tax benefit      5   2 
Federal and state tax reserve adjustments  (2)  (2)  (3)  (4)Federal and state tax reserve adjustments      (2)  (1)
Federal and state income tax return adjustments (a)        (2)Depreciation not normalized      (3)  (1)
Depreciation not normalized (a)  (3)  (2)  (4)  (5)Other       (1)   
Other   (1)   (1)   (1)   (2)  Total increase (decrease)       (1)   
  Total increase (decrease)   (3)   (2)   (3)   (6)
Total income taxesTotal income taxes $ 11  $ 19  $ 31  $ 42 Total income taxes     $ 33  $ 20 

(a)In February 2011, the Pennsylvania Department of Revenue issued interpretive guidance on the treatment of bonus depreciation for Pennsylvania income tax purposes.  In accordance with Corporation Tax Bulletin 2011-01, Pennsylvania allows 100% bonus depreciation for qualifying assets in the same year bonus depreciation is allowed for federal 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.

 
4342

 

(LKE)(LKE)        (LKE)        
                      
    Three Months Six Months      Three Months
    2012  2011  2012  2011         2013  2012 
Reconciliation of Income Tax Expense        
Federal income tax on Income from Continuing Operations Before        
 Income Taxes at statutory tax rate - 35% $ 25  $ 23  $ 50  $ 70 
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%Federal income tax on Income Before Income Taxes at statutory tax rate - 35%    $ 54  $ 26 
Increase (decrease) due to:Increase (decrease) due to:        Increase (decrease) due to:        
State income taxes, net of federal income tax benefit    2   2   7 State income taxes, net of federal income tax benefit      5   2 
Amortization of investment tax credit  (1)  (1)  (3)  (3)Net operating loss carryforward adjustments (a)        (6)
Net operating loss carryforward adjustments (a)  (3)    (9)  Other       (2)   (1)
Other   (1)      1    (1)  Total increase (decrease)       3    (5)
  Total increase (decrease)   (5)   1    (9)   3 
Total income taxes from continuing operations $ 20  $ 24  $ 41  $ 73 
Total income taxesTotal income taxes     $ 57  $ 21 

(a)
During the three and six months ended June 30,March 31, 2012, LKE recorded adjustments to deferred taxes related to net operating loss carryforwards based on income tax return adjustments.        The impact of these adjustments was not material to any previously reported financial statements, and is not expected to be material to the financial statements for the full year of 2012.

(LG&E)(LG&E)        (LG&E)        
                      
    Three Months Six Months      Three Months
    2012  2011  2012  2011         2013  2012 
Reconciliation of Income Tax Expense        
Federal income tax on Income Before Income Taxes at statutory        
  tax rate - 35% $ 14  $ 11  $ 28  $ 33 
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%Federal income tax on Income Before Income Taxes at statutory tax rate - 35%   $ 24  $ 14 
Increase (decrease) due to:Increase (decrease) due to:        Increase (decrease) due to:        
State income taxes, net of federal income tax benefit  1   1   3   3 State income taxes, net of federal income tax benefit      3   1 
Other   (1)      (2)   (2)Other       (2)   
  Total increase (decrease)      1    1    1   Total increase (decrease)       1    1 
Total income taxesTotal income taxes $ 14  $ 12  $ 29  $ 34 Total income taxes     $ 25  $ 15 

(KU)            
                
     Three Months Six Months
     2012  2011  2012  2011 
Reconciliation of Income Tax Expense            
 Federal income tax on Income Before Income Taxes at statutory            
  tax rate - 35% $ 17  $ 17  $ 38  $ 48 
Increase (decrease) due to:            
 State income taxes, net of federal income tax benefit   2    2    4    4 
 Other   (1)   (1)   (2)   (2)
   Total increase (decrease)   1    1    2    2 
Total income taxes $ 18  $ 18  $ 40  $ 50 
(KU)            
                
       Three Months
         2013  2012 
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%    $ 36  $ 21 
Increase (decrease) due to:            
 State income taxes, net of federal income tax benefit         4    2 
 Other         (1)   (1)
   Total increase (decrease)         3    1 
Total income taxes       $ 39  $ 22 

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

Changes to unrecognized tax benefits for the periods ended June 30March 31 were as follows.follows:

  Three Months Six Months      Three Months
  2012  2011  2012  2011       2013  2012 
PPLPPL        PPL        
Beginning of period $121  $251  $145  $251 
Additions based on tax positions of prior years     
Reductions based on tax positions of prior years (4)   (31)  Beginning of period     $92  $145 
Additions based on tax positions related to the current year       Additions based on tax positions of prior years       
Reductions based on tax positions related to the current year (2) (1) (2) (2)Reductions based on tax positions of prior years       (27)
Lapse of applicable statutes of limitations (2) (3) (4) (5)Additions based on tax positions related to the current year       
Effects of foreign currency translation          Lapse of applicable statutes of limitations      (2)  (2)
End of period $113  $250  $113  $250 End of period     $90  $121 
                  
PPL Energy SupplyPPL Energy Supply        PPL Energy Supply        
Beginning of period $31  $28  $28  $183 Beginning of period     $30  $28 
Additions based on tax positions of prior years       Additions based on tax positions of prior years       
Reductions based on tax positions of prior years     (1)  Reductions based on tax positions of prior years         (1)
Derecognize unrecognized tax benefits (a)           (155)End of period     $30  $31 
End of period $31  $28  $31  $28          
PPL ElectricPPL Electric        
Beginning of period     $26  $73 
Reductions based on tax positions of prior years       (26)
Additions based on tax positions related to the current year       
Lapse of applicable statutes of limitations      (2)  (2)
End of period     $24  $46 

 
4443

 

   Three Months Six Months
   2012  2011  2012  2011 
PPL Electric            
 Beginning of period $46  $59  $73  $62 
 Reductions based on tax positions of prior years  (1)     (27)   
 Additions based on tax positions related to the current year           
 Reductions based on tax positions related to the current year           (1)
 Lapse of applicable statutes of limitations  (2)  (3)  (4)  (5)
 End of period $43  $56  $43  $56 

(a)Represents unrecognized tax benefits derecognized as a result of PPL Energy Supply's distribution of its membership interest in PPL Global to PPL Energy Supply's parent, PPL Energy Funding.  See Note 9 in PPL Energy Supply's 2011 Form 10-K for additional information on the distribution.

LKE's, LG&E's and KU's unrecognized tax benefits and changes in those unrecognized tax benefits are insignificant for the three and six months ended June 30, 2012March 31, 2013 and 2011.2012.

At June 30, 2012,March 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 LKE, LG&E and KU, no significant changes in unrecognized tax benefits are projected over the next 12 months.

   Increase Decrease   Increase Decrease
            
PPLPPL $ 21  $ 106 PPL $ 10  $ 88 
PPL Energy SupplyPPL Energy Supply  1   31 PPL Energy Supply    30 
PPL ElectricPPL Electric  22   38 PPL Electric  10   22 

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

At June 30,March 31, the total unrecognized tax benefits and related indirect effects that, if recognized, would decrease the effective income tax rate were as follows.  The amounts for LKE, LG&E and KU were insignificant.

        
 2012  2011  2013  2012 
        
PPL $36  $185  $37  $41 
PPL Energy Supply 14  12  13  14 
PPL Electric  10   

Other (PPL, PPL Energy Supply and PPL Electric)

PPL changed its method of accounting for repair expenditures for tax purposes effective for its 2008 tax year for the Pennsylvania generation, transmission and distribution operations.  ThePPL made the same change was made for theits Montana generation operations for 2009.

In August 2011, the IRS issued Rev. Procs. 2011-42 and 2011-43.  Rev. Proc. 2011-42 provides guidance regarding the use and evaluation of statistical samples and sampling estimates.  Rev. Proc. 2011-43 provideson repair expenditures related to network assets providing a safe harbor method of determining whether the repair expenditures for electric transmission and distribution property can be currently deducted for tax purposes.  PPL will adoptOn April 30, 2013, the safe harbor method with the filing of its 2011 federal income tax return, expected to occur in the third quarter of 2012.  The adoption of the safe harbor method is not expected to result in a material change to income tax expense.

The IRS has not issued Revenue Procedure 2013-24 providing guidance to provide a safe harbor methodtaxpayers to determine whether expenditures to maintain, replace or improve steam or electric generation property must be capitalized for repair expenditures for generation property.tax purposes.  PPL is evaluating the impact of this guidance.  The IRS may assert, and ultimately conclude, that PPL's deduction for generation-related expenditures should be disallowed in whole or in part.  PPL believes that it has established an adequate reserve for this contingency.

45


Tax Litigation (PPL)

In 1997, the U.K. imposed a Windfall Profits Tax (WPT) on privatized utilities, including WPD.  PPL filed its tax returns for years subsequent to its 1997 and 1998 claimclaims for refund on the basis that the U.K. WPT was creditable.  In September 2010, the U.S. Tax Court (Tax Court) ruled in PPL's favor in a dispute with the IRS, concluding that the U.K. WPT is a creditable tax for U.S. tax purposes.  As a result, and with finalization of other issues, PPL recorded a $42 million tax benefit in 2010.  In January 2011, the IRS appealed the Tax Court's decision to the U.S. Court of Appeals for the Third Circuit (Third Circuit).  In December 2011, the Third Circuit issued its opinion reversing the Tax Court's decision, holding that the U.K. WPT is not a creditable tax.  As a result of the Third Circuit's adverse determination, PPL recorded a $39 million expense in the fourth quarter of 2011.  In February 2012, PPL filed a petition for rehearing of the Third Circuit's opinion.  In March 2012, the Third Circuit denied PPL's petition.  In June 2012, the U.S. Court of Appeals for the Fifth Circuit issued a contrary opinion in an identical case involving another company.  In July 2012, PPL filed a petition for a writ of certiorari seeking U.S. Supreme Court review of the Third Circuit's opinion.  The Supreme Court granted PPL's petition on October 29, 2012, and oral argument was held on February 20, 2013.  PPL expects the case to be decided before the end of the Supreme Court's current term in June 2013 and cannot predict the outcome of this matter.

44

6.  Utility Rate Regulation

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

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

  PPL PPL Electric
  June 30, December 31, June 30, December 31,  PPL PPL Electric
  2012  2011  2012  2011   March 31, December 31, March 31, December 31,
           2013  2012  2013  2012 
Current Regulatory Assets:Current Regulatory Assets:        Current Regulatory Assets:        
Transmission formula rate $ 5    $ 5   
Gas supply clause  12  $ 11     
Gas supply clause $ 7  $ 6     Fuel adjustment clause  14   6     
Fuel adjustment clause   10    3       Other   6    2       
Total current regulatory assetsTotal current regulatory assets $ 17  $ 9       Total current regulatory assets $ 37  $ 19  $ 5    
                  
Noncurrent Regulatory Assets:Noncurrent Regulatory Assets:        Noncurrent Regulatory Assets:        
Defined benefit plans $ 595  $ 615  $ 270  $ 276 Defined benefit plans $ 714  $ 730  $ 356  $ 362 
Taxes recoverable through future rates  297   289   297   289 Taxes recoverable through future rates  295   293   295   293 
Storm costs  148   154   32   31 Storm costs  163   168   58   59 
Unamortized loss on debt  103   110   71   77 Unamortized loss on debt  94   96   63   65 
Interest rate swaps  71   69     Interest rate swaps  62   67     
Accumulated cost of removal of utility plant  62   53   62   53 Accumulated cost of removal of utility plant  85   71   85   71 
Coal contracts (a)  7   11     AROs  30   26     
AROs  23   18     Other   21    32    3    3 
Other   29    30    2    3 
Total noncurrent regulatory assetsTotal noncurrent regulatory assets $ 1,335  $ 1,349  $ 734  $ 729 Total noncurrent regulatory assets $ 1,464  $ 1,483  $ 860  $ 853 
             
Current Regulatory Liabilities:            
 Generation supply charge $ 28  $ 27  $ 28  $ 27 
 ECR      4       
 Gas supply clause   1    4       
 Transmission service charge   12    6    12    6 
 Universal service rider   15    17    15    17 
 Other   5    3    2    2 
Total current regulatory liabilities $ 61  $ 61  $ 57  $ 52 
              
Noncurrent Regulatory Liabilities:            
 Accumulated cost of removal of utility plant $ 687  $ 679       
 Coal contracts (a)   130    141       
 Power purchase agreement - OVEC (a)   107    108       
 Net deferred tax assets   33    34       
 Act 129 compliance rider   13    8  $ 13  $ 8 
 Defined benefit plans   17    17       
 Interest rate swaps   24    14       
 Other   5    9       
Total noncurrent regulatory liabilities $ 1,016  $ 1,010  $ 13  $ 8 

Current Regulatory Liabilities:            
 Generation supply charge $ 21  $ 42  $ 21  $ 42 
 ECR   9    7       
 Gas supply clause   5    6       
 Transmission service charge   4    2    4    2 
 Transmission formula rate   7       7    
 Universal service rider   7       7    
 Other   5    16    3    9 
Total current regulatory liabilities $ 58  $ 73  $ 42  $ 53 
              
Noncurrent Regulatory Liabilities:            
 Accumulated cost of removal of utility plant $ 666  $ 651       
 Coal contracts (a)   161    180       
 Power purchase agreement - OVEC (a)   112    116       
 Net deferred tax assets   37    39       
 Act 129 compliance rider   9    7  $ 9  $ 7 
 Defined benefit plans   10    9       
 Other   8    8       
Total noncurrent regulatory liabilities $ 1,003  $ 1,010  $ 9  $ 7 
   LKE LG&E KU
   March 31, December 31, March 31, December 31, March 31, December 31,
   2013  2012  2013  2012  2013  2012 
Current Regulatory Assets:                  
 Gas supply clause $ 12  $ 11  $ 12  $ 11       
 Fuel adjustment clause   14    6    7    6  $ 7    
 Other   6    2    2    2    4    
Total current regulatory assets $ 32  $ 19  $ 21  $ 19  $ 11    
                    
Noncurrent Regulatory Assets:                  
 Defined benefit plans $ 358  $ 368  $ 225  $ 232  $ 133  $ 136 
 Storm costs   105    109    57    59    48    50 
 Unamortized loss on debt   31    31    20    20    11    11 
 Interest rate swaps   62    67    62    67       
 AROs   30    26    17    15    13    11 
 Other   18    29    7    7    11    22 
Total noncurrent regulatory assets $ 604  $ 630  $ 388  $ 400  $ 216  $ 230 
 
4645

 

   LKE LG&E KU
   June 30, December 31, June 30, December 31, June 30, December 31,
   2012  2011  2012  2011  2012  2011 
                    
Current Regulatory Assets:                  
 Gas supply clause $ 7  $ 6  $ 7  $ 6       
 Fuel adjustment clause   10    3    6    3  $ 4    
Total current regulatory assets $ 17  $ 9  $ 13  $ 9  $ 4    
                    
Noncurrent Regulatory Assets:                  
 Defined benefit plans $ 325  $ 339  $ 215  $ 225  $ 110  $ 114 
 Storm costs   116    123    63    66    53    57 
 Unamortized loss on debt   32    33    21    21    11    12 
 Interest rate swaps   71    69    71    69       
 Coal contracts (a)   7    11    3    5    4    6 
 AROs   23    18    12    11    11    7 
 Other   27    27    6    6    21    21 
Total noncurrent regulatory assets $ 601  $ 620  $ 391  $ 403  $ 210  $ 217 

  LKE LG&E KU
  March 31, December 31, March 31, December 31, March 31, December 31,
  2013  2012  2013  2012  2013  2012 
Current Regulatory Liabilities:Current Regulatory Liabilities:            Current Regulatory Liabilities:            
 ECR   $ 4        $ 4 
 DSM $ 1        $ 1   
 ECR $ 9  $ 7      $ 9  $ 7  Gas supply clause  1   4  $ 1  $ 4     
 Gas supply clause  5   6  $ 5  $ 6      Gas line tracker  2     2       
 Other   2    7    2    4       3  Other      1             1 
Total current regulatory liabilitiesTotal current regulatory liabilities $ 16  $ 20  $ 7  $ 10  $ 9  $ 10 Total current regulatory liabilities $ 4  $ 9  $ 3  $ 4  $ 1  $ 5 
                            
Noncurrent Regulatory Liabilities:Noncurrent Regulatory Liabilities:            Noncurrent Regulatory Liabilities:            
Accumulated cost of removal            Accumulated cost of removal            
 of utility plant $ 666  $ 651  $ 291  $ 286  $ 375  $ 365  of utility plant $ 687  $ 679  $ 299  $ 297  $ 388  $ 382 
Coal contracts (a)  161   180   70   78   91   102 Coal contracts (a)  130   141   57   61   73   80 
Power purchase agreement - OVEC (a)  112   116   78   80   34   36 Power purchase agreement - OVEC (a)  107   108   74   75   33   33 
Net deferred tax assets  37   39   30   31   7   8 Net deferred tax assets  33   34   27   28   6   6 
Defined benefit plans  10   9       10   9 Defined benefit plans  17   17       17   17 
Other   8    8    3    3    5    5 Interest rate swaps  24   14   12   7   12   7 
Other   5    9    2    3    3    6 
Total noncurrent regulatory liabilitiesTotal noncurrent regulatory liabilities $ 994  $ 1,003  $ 472  $ 478  $ 522  $ 525 Total noncurrent regulatory liabilities $ 1,003  $ 1,002  $ 471  $ 471  $ 532  $ 531 

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

Regulatory Matters

Kentucky Activities (PPL, LKE, LG&E and KU)

CPCN Filing

In September 2011, LG&E and KU filed a CPCN with the KPSC requesting approval to build a 640 MW NGCC at the existing Cane Run plant site in Kentucky.  In May 2012, the KPSC issued an order approving the request to build the NGCC.  LG&E will own a 22% undivided interest, and KU will own a 78% undivided interest in the new NGCC.  A formal request for recovery of the costs associated with the NGCC construction was not included in the CPCN filing with the KPSC but is expected to be included in future rate proceedings.  See Note 8 for additional information.

In conjunction with this construction and to meet new, stricter EPA regulations with a 2015 compliance date, LG&E and KU anticipate retiring three coal-fired generating units at LG&E's Cane Run plant, one coal-fired generating unit at KU's Tyrone plant and two coal-fired generating units at KU's Green River plant.  These generating units represent 797 MW of combined summer capacity.

The CPCN application also requested approval to purchase the Bluegrass CTs.  The May 2012 KPSC approval included authority to complete the Bluegrass CT acquisition.  In November 2011, LG&E and KU filed an application with the FERC under the Federal Power Act requesting approval to purchase the Bluegrass CTs.  In May 2012, the FERC issued an order conditionally authorizing the acquisition of the Bluegrass CTs, subject to approval by the FERC of satisfactory mitigation measures to address market-power concerns.  After a review of potentially available mitigation options, LG&E and KU determined that the options were not commercially justifiable.  In June 2012, LG&E and KU terminated the purchase contract for the Bluegrass CTs in accordance with its terms and made applicable filings with the KPSC and FERC.  LG&E and KU are currently assessing the impact of the Bluegrass contract termination and potential future generation capacity options.  See Note 8 for additional information.
47


Kentucky Acquisition Commitments

In connection with the September 2010 approval of PPL's acquisition of LKE, LG&E and KU agreed to implement the Acquisition Savings Sharing Deferral (ASSD) methodology whereby LG&E's and KU's adjusted jurisdictional revenues, expenses, and net operating income are calculated each year.  If LG&E's or KU's actual earned rate of return on common equity exceeds 10.75%, half of the excess amount will be deferred as a regulatory liability and ultimately returned to customers.  The first ASSD filing with the KPSC was made on March 30, 2012 based on the 2011 calendar year.  On July 2, 2012, the KPSC issued an order approving the calculations contained in the 2011 ASSD filing and determined that such calculations produced no deferral amounts for the purpose of establishing regulatory liabilities and are proper and in accordance with the settlement agreement.  The ASSD methodology for each of LG&E's and KU's utility operations will terminate on the earlier of the end of 2015 or the first day of the calendar year during which new base rates go into effect, currently expected to be 2013.  Therefore, due to the timing of the current rate case in Kentucky, no further ASSD filings are expected.

Rate Case Proceedings

In JuneDecember 2012, LG&E and KU filed requests with the KPSC approved a rate case settlement agreement providing for increases in annual base electricelectricity rates of approximately $62$34 million atfor LG&E and approximately $82$51 million atfor KU and an increase in annual base gas rates of approximately $17$15 million at LG&E.  The proposed base rate increases would result in electric rate increases of 6.9% atfor LG&E and 6.5% at KU andusing a gas rate increase of 7.0% at LG&E and would be10.25% return on equity.  The approved rates became effective in January 1, 2013.  LG&E's and KU's applications include requests for authorized returns-on-equity at LG&E and KU of 11% each.  A hearing on these matters is expected to be scheduled during the fourth quarter of 2012.  LG&E and KU cannot predict the outcome of these proceedings.

Pennsylvania Activities (PPL and PPL Electric)

PUC Investigation of Retail Market

In April 2011, the PUC opened an investigation of Pennsylvania's retail electricity market to be conducted in two phases.  Phase one addressed the status of the existing retail market and explored potential changes.  Questions issued by the PUC for this phase of the investigation focused primarily on default service issues.  Phase two was initiated in July 2011 to develop specific proposals for changes to the retail market and default service model.  In December 2011, the PUC issued a final order providing guidance to EDCs on the design of their next default service procurement plan filings.  In December 2011, the PUC also issued a tentative order proposing an intermediate work plan to address issues raised in the investigation.  In March 2012, the PUC entered a final order on the intermediate work plan.  In March 2012, the PUC Staff issued three possible models for the default service "end state" and the PUC held a hearing regarding those three models.  PPL Electric cannot predict the outcome of the investigation or its impact on PPL Electric's financial condition or results of operation.

Legislation - Regulatory Procedures and Mechanisms

In June 2011, the Pennsylvania House Consumer Affairs Committee approved legislation authorizing the PUC to approve regulatory procedures and mechanisms to provide more timely recovery of a utility's costs.  In the first quarter of 2012, the Governor signed an amended version of the legislation (Act 11 of 2012), which became effective April 14, 2012.  The legislation authorizes the PUC to approve two specific ratemaking mechanisms -- a fully projected future test year and, subject to certain conditions, a distribution system improvements charge.  Such alternative ratemaking procedures and mechanisms 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.  The PUC staff has initiated a process to develop filing guidelines and a model tariff for the distribution system improvements charge.  In August 2012, the PUC issued a Final Implementation Order adopting procedures, guidelines and a model tariff for the implementation of Act 11 of 2012.  No petition requesting permission to establish a distribution system improvements charge may be filed with the PUC before January 1, 2013.

Rate Case Proceeding

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

Storm Damage Expense Rider

In its December 28, 2012 final rate case proceeding order, the PUC directed PPL Electric to file a proposed Storm Damage Expense Rider within 90 days following the order.  PPL Electric filed a requestits proposed Storm Damage Expense Rider with the PUC on March 28, 2013, including requested recovery of the 2012 qualifying storm costs related to increase distribution ratesHurricane Sandy which were previously approved by approximately $105 million.  Thethe PUC for deferral.  PPL Electric proposed distribution revenue rate increase would result in a 2.9% increase over PPL Electric's total rates atthat the time of filing and beStorm Damage Expense Rider become effective on January 1, 2013.  PPL Electric's application includes a request2013 for an authorized returnstorm costs incurred in 2013, with those costs and the 2012 Hurricane Sandy costs included in rates effective on equity of 11.25%.   Hearings on this matter are scheduled during August 2012 and a decision is expected inJanuary 1, 2014.  Several parties have filed comments opposing the fourth quarter of 2012.Storm Damage Expense Rider.  PPL Electric cannot predict the outcome of this proceeding.will file reply comments by May 6, 2013.
48


ACT 129

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

46

Under Act 129, EDCs must file an energy efficiency and conservation plan (EE&C Plan) with the PUC and contract with conservation service providers to implement all or a portion of the EE&C Plan.  Act 129 requires EDCs to cause reducedreduce overall electricity consumption ofby 1.0% by May 2011 and, 3.0% by May 2013, reduce overall electricity consumption by 3.0% and reducedreduce peak demand by 4.5%.  Although PPL Electric believes it has met the May 2011 requirement, the PUC is not expected formally to determine compliance for any EDC before the first quarter of 4.5%2014.  The peak demand reduction must occur for the 100 hours of highest demand, which is determined by May 2013 (which will be measuredactual demand reduction during the June 2012 through September 2012 period).period.  EDCs will beare able to recover the costs (capped at 2%2.0% of the EDC's 2006 revenue) of implementing their EE&C Plans.  In October 2009, the PUC approved PPL Electric's EE&C Plan.  To date, PPL Electric haswill determine if it met the 2011 requirement, subject topeak demand reduction target and the PUC's verification.May 2013 energy reduction target after it completes the final program evaluation in the fourth quarter of 2013.

Act 129 requires the PUC to evaluate the costs and benefits of the EE&C program by November 30, 20122013 and adopt additional reductions if the benefits of the program exceed the costs.  In March 2012, the PUC began the process of designing Phase II of the EE&C program.  In August 2012, after receiving input from stakeholders, the PUC issued a Final Implementation Order establishing a three-year Phase II program, ending May 31, 2016, with individual consumption reduction targets for each EDC.  PPL Electric's Phase II reduction target is 2.1%. of the total energy consumption forecasted by the PUC for the June 1, 2009 through May 31, 2010 baseline year.  The PUC did not establish any demand reduction targets for the Phase II program.  EDCs must filePPL Electric filed its Phase II plansEE&C Plan with the PUC byon November 1, 2012.15, 2012 and the PUC issued its decision in March 2013, approving PPL Electric's Phase II program with minor modifications to a related tariff provision.

Act 129 also requires the Default Service Provider (DSP) to provide electric generation supply service to customers pursuant to a PUC-approved competitivedefault 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 the load unless otherwise approved by the PUC.  The DSP will be able to recover the costs associated with a competitive procurement plan.

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

The PUC has directed all EDCs to file default service procurement plans for the period June 1, 2013 through May 31, 2015.  PPL Electric filed its plan in May 2012.  In that plan, PPL Electric proposesproposed a process to obtain supply for its default service customers and it proposes a number of initiatives designed to encourage more customers to purchase electricity from the competitive retail market.  TheIn its January 24, 2013 final order, the PUC has assignedapproved PPL Electric's plan with modifications and directed PPL Electric to an Administrative Law Judge for hearingsestablish collaborative processes to address several retail competition issues.  In February 2013, PPL Electric filed a revised Default Service Supply Master Agreement and a recommended decision.  revised Request for Proposals Process and Rules which the PUC approved.  PPL Electric has filed revised retail competition initiatives and a revised plan consistent with the PUC's January order.  These filings remain pending before the PUC.  See Note 10 for additional information.

Smart Meter Rider

Act 129 also requires installation of smart meters for new construction, upon the request of consumers and at their cost, or on a depreciation schedule not exceeding 15 years.  Under Act 129, EDCs are able to recover the costs of providing smart metering technology.  All of PPL Electric's metered customers currently have advanced meters installed at their service locations capable of many of the functions required under Act 129. PPL Electric continues to conduct pilot projects to determine if its current advanced metering technology satisfies 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 2012, PPL Electric filed with the PUC an annual report describing the actions it was taking under its Smart Meter Plan in 2012 and its planned actions for 2013.  PPL Electric also submitted revised SMR charges which became effective January 1, 2013.  PPL Electric will submit its final Smart Meter Plan by June 30, 2014.

PUC Investigation of Retail Electricity Market

In April 2011, the PUC opened an investigation of Pennsylvania's retail electricity market to be conducted in two phases.  Phase one addressed the status of the existing retail market and explored potential changes.  Questions issued by the PUC for phase one of the investigation focused primarily on default service issues.  Phase two was initiated in July 2011 to develop specific proposals for changes to the retail market and default service model.  From December 2011 through the end of 2012, the PUC issued several orders and other pronouncements related to the investigation.  A final implementation order was issued on February 15, 2013.  Although the final implementation order contains provisions that will require numerous modifications to PPL Electric's current default service model for retail customers, those modifications are not expected to have a material adverse effect on PPL Electric's results of operations.
47

Legislation - Regulatory Procedures and Mechanisms

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

The PUC is expectedapproved the LTIIP on January 10, 2013 and, on January 15, 2013, PPL Electric filed a petition requesting permission to rule onestablish a DSIC.  Several parties have filed responses to PPL Electric's petition.  The case remains pending before the plan inPUC.  PPL Electric does not expect any new rates to be effective before the third quarter of 2013.

Federal Matters

Federal MattersFERC Formula Rates(PPL (PPL and PPL Electric)

FERC Formula Rates

Transmission rates are regulated by the FERC.  PPL Electric's transmission revenues are billed in accordance with a FERC-approved PJM open access transmission tariff that utilizes a formula-based rate recovery mechanism.  The formula rate is calculated, in part, based on financial results as reported in PPL Electric's annual FERC Form No. 1, filed under FERC's Uniform System of Accounts (USOA).  PPL Electric must follow FERC's USOA, which requires subsidiaries to be presented, for FERC reporting purposes, using the equity method of accounting unless a waiver has been issued.  The FERC has granted waivers of this requirement to other utilities when such waiver would more accurately present the integrated operations of the utilities and their subsidiaries.  In March 2013, as part of a routine FERC audit of PPL and its subsidiaries, PPL Electric determined that it never obtained a waiver of the use of the equity method of accounting for PPL Receivables Corporation (PPL Receivables).  PPL Receivables is a wholly owned subsidiary of PPL Electric, formed in 2004 to purchase eligible accounts receivable and unbilled revenue of PPL Electric to collateralize commercial paper issuances to reduce borrowing costs.  In March 2013, PPL Electric filed a request for waiver with FERC that, if approved, would allow it to continue to consolidate the results of PPL Receivables with the results of PPL Electric, as it has done since 2004.  While PPL Electric may ultimately be successful in obtaining a waiver from FERC, FERC may require PPL Electric to re-issue one or more of its prior FERC Form No. 1 filings in either the audit proceeding or the waiver proceeding.  If re-issuance of FERC Form No. 1 filings were required by FERC, PPL Electric's revenue requirement calculated under the formula rate could be negatively impacted.  The impact, if any, is not known at this time but could range between $0 and $40 million, pre-tax.  PPL Electric cannot predict the outcome of the waiver or audit proceedings, which remain pending before the FERC.

In May 2010, PPL Electric has initiated its formula rate 2012, 2011 and 2010 Annual Update.  In November 2010,Updates.  Each update has been subsequently challenged by a group of municipal customers, taking transmission service inwhich challenges have been opposed by PPL Electric's transmission zone filed a preliminary challenge to the update and, in December 2010, filed a formal challenge.Electric.  In August 2011, the FERC issued an order substantially rejecting the 2010 formal challenge and accepting PPL Electric's 2010 Annual Update.  The group ofthe municipal customers filed a request for rehearing of that order.

In MaySeptember 2012, the FERC issued an order setting for evidentiary hearings and settlement judge procedures a number of issues raised in the 2010 and 2011 PPL Electric initiated its formula rateformal challenges.  Settlement conferences were held in late 2012 and early 2013.  In February 2013, the FERC set for evidentiary hearings and settlement judge procedures a number of issues in the 2012 formal challenge and consolidated that challenge with the 2010 and 2011 Annual Update.  In October 2011, the group of municipal customers filed a preliminary challenge to the update and, in December 2011, filed a formal challenge.  In January 2012,challenges.  PPL Electric filed a response to that formal challenge.
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In May 2012,request for rehearing of the February Order which remains pending before the FERC.  PPL Electric initiated its formula rate 2012 Annual Update which currently isanticipates that there will be additional settlement conferences held in 2013.  Several of the 180-day reviewmunicipal customers have filed Notice of Withdrawal of Intervention.  PPL and challenge period. PPL Electric cannot predict the outcome of the foregoing proceedings, which remain pending before the FERC.

In March 2012, PPL Electric filed a request with the FERC seeking recovery, over a 34-year period beginning in June 2012, of its unrecovered regulatory asset related to the deferred state tax liability that existed at the time of the transition from the flow-through treatment of state income taxes to full normalization.  This change in tax treatment occurred in 2008 as a result
of prior FERC initiatives that transferred regulatory jurisdiction of certain transmission assets from the PUC to FERC.  A regulatory asset of approximately $50 million related to this transition, classified as taxes recoverable through future rates, is included in "Other Noncurrent Assets - Regulatory assets" on the Balance Sheets at June 30, 2012 and December 31, 2011.  In May 2012, the FERC issued an order approving PPL Electric's request effective June 1, 2012.

U. K.U.K. Activities (PPL)

Ofgem Review of Line Loss Calculation 

WPD has a $167 million liability recorded at June 30, 2012 compared with $170 million at December 31, 2011, calculated in accordance with Ofgem's accepted methodology, related to the close-out of line losses for the prior price control period, DPCR4.  Ofgem is currently consulting on the methodology to be used by all network operators to calculate the final line loss incentive/penalty for the DPCR4.  In October 2011,April 2013, Ofgem issued a consultation paper citing two potential changesstated that their current expectation was to the methodology, both of which would result in a reduction of the liability.  In March 2012, Ofgem issuedissue a decision regardingin the preferred methodology.  In July 2012, Ofgem issued a consultation paper regarding certain aspectssecond half of the preferred methodology as it relates to the DPCR4 line loss incentive/penalty and a proposal to delay the target date for making a final decision until April 2013 together with a proposal to remove the line loss incentive/penalty for DPCR5.2013.  PPL cannot predict when this matter will be resolved.  WPD had an $89 million liability recorded at March 31, 2013 compared with $94 million at December 31, 2012, related to the outcomeclose-out of this matter.line losses for the DPCR4, with the change due to foreign exchange movements.       

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7.  Financing Activities

Credit Arrangements and Short-term Debt

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

The Registrants maintain credit facilities to enhance liquidity, provide credit support, and provide a backstop to commercial paper programs.  For reporting purposes, on a consolidated basis, the credit facilities of PPL Energy Supply, PPL Electric, LG&E and KU also apply to PPL and the credit facilities of LG&E and KU also apply to LKE.  The following credit facilities were in place at:

  June 30, 2012 December 31, 2011  March 31, 2013 December 31, 2012
         Letters of     Letters of         Letters of     Letters of
         Credit Issued     Credit Issued         Credit Issued     Credit Issued
         and     and         and     and
         Commercial     Commercial         Commercial     Commercial
  Expiration   Borrowed Paper Unused Borrowed Paper  Expiration   Borrowed Paper Unused Borrowed Paper
   Date Capacity (a) Backstop Capacity (a) Backstop   Date Capacity (a) Backup Capacity (a) Backup
PPLPPL              PPL              
WPD Credit Facilities              WPD Credit Facilities              
 PPL WW Syndicated               PPL WW Syndicated              
  Credit Facility (b) Jan. 2013 £ 150  £ 110  n/a £ 40  £ 111  n/a  Credit Facility (b) (c) Dec. 2016 £ 210  £ 109  n/a £ 101  £ 106  n/a
 WPD (South West)               WPD (South West)              
  Syndicated Credit Facility (c) Jan. 2017  245    n/a  245    n/a  Syndicated Credit Facility Jan. 2017  245    n/a  245    n/a
 WPD (East Midlands)               WPD (East Midlands)              
  Syndicated Credit Facility Apr. 2016  300       300    £ 70   Syndicated Credit Facility (c) Apr. 2016  300   65     235     
 WPD (West Midlands)               WPD (West Midlands)              
  Syndicated Credit Facility Apr. 2016  300       300     71   Syndicated Credit Facility Apr. 2016  300       300     
 Uncommitted Credit Facilities     84     £ 4    80       3  Uncommitted Credit Facilities     84     £ 4    80     £ 4 
 Total WPD Credit Facilities (d)   £ 1,079  £ 110  £ 4  £ 965  £ 111  £ 144  Total WPD Credit Facilities (d)   £ 1,139  £ 174  £ 4  £ 961  £ 106  £ 4 
                                
PPL Energy Supply (e)PPL Energy Supply (e)              PPL Energy Supply (e)              
Syndicated Credit Facility Oct. 2016 $ 3,000    $ 662  $ 2,338    $ 541 Syndicated Credit Facility Nov. 2017 $ 3,000    $ 641  $ 2,359    $ 499 
Letter of Credit Facility Mar. 2013   200   n/a   128    72   n/a   89 Letter of Credit Facility (e) Mar. 2014  200  n/a  123   77  n/a  132 
 Total PPL Energy Supply              Uncommitted Credit Facilities     200   n/a   88    112   n/a   40 
  Credit Facilities   $ 3,200     $ 790  $ 2,410     $ 630  Total PPL Energy Supply Credit Facilities $ 3,400     $ 852  $ 2,548     $ 671 
                                  
PPL ElectricPPL Electric              
Syndicated Credit Facility Oct. 2017 $ 300    $ 126  $ 174    $ 1 
Asset-backed Credit Facility (f) Sept. 2013   100      n/a   100      n/a
 Total PPL Electric Credit Facilities   $ 400     $ 126  $ 274     $ 1 
                
LG&ELG&E              
Syndicated Credit Facility Nov. 2017 $ 500     $ 70  $ 430     $ 55 
                
KUKU              
Syndicated Credit Facility Nov. 2017 $ 400    $ 115  $ 285    $ 70 
Letter of Credit Facility (g) Apr. 2014   198       198          198 
 Total KU Credit Facilities   $ 598     $ 313  $ 285     $ 268 
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       June 30, 2012 December 31, 2011
                Letters of      Letters of
                Credit Issued       Credit Issued
                and       and
                Commercial       Commercial
       Expiration    Borrowed Paper Unused Borrowed Paper
        Date Capacity (a) Backstop Capacity (a) Backstop
PPL Electric (e)                    
 Syndicated Credit Facility (f) Oct. 2016 $ 300     $ 196  $ 104     $ 1 
 Asset-backed Credit Facility (g) July 2012   150      n/a   150      n/a
   Total PPL Electric Credit Facilities   $ 450     $ 196  $ 254     $ 1 
                           
LG&E (e) (h)                    
 Syndicated Credit Facility Oct. 2016 $ 400        $ 400       
                           
KU (e) (h)                    
 Syndicated Credit Facility Oct. 2016 $ 400        $ 400       
 Letter of Credit Facility Apr. 2014   198   n/a $ 198      n/a $ 198 
   Total KU Credit Facilities   $ 598     $ 198  $ 400     $ 198 

(a)
Amounts borrowed are recorded as "Short-term debt" on the Balance Sheets.

(b)The borrowing outstanding at June 30,In December 2012, was a USD-denominated borrowing of $174 million, which equated to £110 million at the time of borrowing and bore interest at approximately 1.458%.

(c)In January 2012, WPD (South West) entered into a new £245 million 5-year syndicated credit facility to replace the previous £210 million 3-yearPPL WW syndicated credit facility that was set to expire in July 2012.  UnderJanuary 2013 was replaced and the facility, WPD (South West) hascapacity was increased from £150 million.
(c)PPL WW's amounts borrowed at March 31, 2013 and December 31, 2012 were USD-denominated borrowings of $171 million, which equated to £109 million and £106 million at the ability to make cashtime of borrowings but cannot request the lenders to issue letters of credit.  WPD (South West) pays customary commitment fees under this facility and borrowings bearbore interest at LIBOR-based rates plus1.9034% and 0.8452%.  WPD (East Midlands) amount borrowed at March 31, 2013 was a margin.  The credit facility contains financial covenants that require WPD (South West)GBP-denominated borrowing of £65 million, which equated to maintain an$99 million and bore 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, in each case calculated in accordance with the credit facility.at 1.30%.

(d)At June 30, 2012,March 31, 2013, the U.S. dollarUSD equivalent of unused capacity under WPD's credit facilities was approximately $1.5 billion.

(e)All credit facilities atIn February 2013, PPL Energy Supply PPL Electric, LG&Eextended the expiration date from March 2013 and, KU also applyeffective April 2013, the capacity was reduced to PPL on a consolidated basis for financial reporting purposes.$150 million.

(f)In April 2012, PPL Electric increased the capacity of its syndicated credit facility from $200 million.

(g)PPL Electric participates in an asset-backed commercial paper program through which PPL Electric obtains financing by selling and contributing its eligible accounts receivable and unbilled revenue to a special purpose, wholly owned subsidiary on an ongoing basis.  The subsidiary has pledged these assets to secure loans from a commercial paper conduit sponsored by a financial institution.

 At June 30, 2012March 31, 2013 and December 31, 2011, $2372012, $277 million and $251$238 million of accounts receivable and $87$98 million and $98$106 million of unbilled revenue were pledged by the subsidiary under the credit agreement related to PPL Electric's and the subsidiary's participation in the asset-backed commercial paper program.  Based on the accounts receivable and unbilled revenue pledged at June 30, 2012,March 31, 2013, the amount available for borrowing under the facility was limited to $87$100 million.  PPL Electric's sale to its subsidiary of the accounts receivable and unbilled revenue is an absolute sale of assets, and PPL Electric does not retain an interest in these assets.  However, for financial reporting purposes, the subsidiary's financial results are consolidated in PPL Electric's financial statements.  PPL Electric performs certain record-keeping and cash collection functions with respect to the assets in return for a servicing fee from the subsidiary.

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(g)In July 2012, PPL Electric andMay 2013, KU extended the subsidiary extended this agreementletter of credit facility to September 2012 and reduced the capacity to $100 million.

(h)
All credit facilities at LG&E and KU also apply to LKE on a consolidated basis for financial reporting purposes. 
May 2016.        

(PPL and PPL Energy Supply)

PPL Energy Supply maintains a $500 million Facility Agreement expiring June 2017, whereby PPL Energy Supply has the ability to request up to $500 million of committed letter of credit capacity at fees to be agreed upon at the time of each request, based on certain market conditions.  At June 30, 2012,March 31, 2013, PPL Energy Supply hashad not requested any capacity for the issuance of letters of credit under this arrangement.

PPL Energy Supply, PPL EnergyPlus, PPL Montour and PPL Brunner Island maintain an $800 million secured energy marketing and trading facility, whereby PPL EnergyPlus will receive credit to be applied to satisfy collateral posting obligations related to its energy marketing and trading activities with counterparties participating in the facility.  The credit amount is guaranteed by PPL Energy Supply, PPL Montour and PPL Brunner Island.  PPL Montour and PPL Brunner Island have granted liens on their respective generating facilities to secure any amount they may owe under their guarantees.  The facility expires in November 2016,2017, but is subject to automatic one-year renewals under certain conditions.  There were no secured obligations outstanding under this facility at June 30, 2012.March 31, 2013.

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In April 2012, PPL Energy Supply increased the capacity of itsmaintains a commercial paper program from $500 millionfor up to $750 million to provide an additional financing source to fund its short-term liquidity needs, if and when necessary.  Commercial paper issuances are supported by PPL Energy Supply's Syndicated Credit Facility.  At June 30,March 31, 2013 and December 31, 2012, PPL Energy Supply had $520$481 million and $356 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheet,Sheets, at a weighted-average interest raterates of approximately 0.48%.

In July 2012, PPL Energy Supply entered into uncommitted letter of credit facilities with available capacity of $75 million0.38% and $100 million, respectively, which expire in July 2014 and 2015.  Both facilities contain a financial covenant requiring PPL Energy Supply's debt to capitalization not to exceed 65%, as calculated in accordance with the agreements.  PPL Energy Supply will pay customary fees for letters of credit issued under these facilities.0.50%.

(PPL and PPL Electric)

In May 2012, PPL Electric increased the capacity of itsmaintains a commercial paper program from $200 millionfor up to $300 million to provide an additional financing source to fund its short-term liquidity needs, if and when necessary.  Commercial paper issuances are supported by PPL Electric's Syndicated Credit Facility.  At June 30, 2012,March 31, 2013, PPL Electric had $195$125 million of
commercial paper outstanding, included in "Short-term debt" on the Balance Sheet, at a weighted-average interest rate of approximately 0.49%0.39%.  PPL Electric had no commercial paper outstanding at December 31, 2012.

(PPL, LKE, LG&E and KU)

In February 2012,April 2013, LG&E and KU each established aincreased the capacity of their commercial paper program for upprograms from $250 million to $250$350 million to provide an additional financing source to fund their short-term liquidity needs.needs, if and when necessary.  Commercial paper issuances are supported by LG&E's and KU's Syndicated Credit Facilities.  At March 31, 2013 and December 31, 2012, LG&E had $70 million and KU had no$55 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheets, at June 30, 2012.weighted-average interest rates of 0.36% and 0.42%.  At March 31, 2013 and December 31, 2012, KU had $115 million and $70 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheets, at weighted-average interest rates of 0.36% and 0.42%.

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

See Note 11 for discussion of intercompany borrowings.

Long-term Debt and Equity Securities

(PPL)

In connection with an April 2012 PPL made a registered underwritten public offering of 9.9 million shares of itsPPL common stock.stock, PPL entered into forward sale agreements with two counterparties.  In conjunction with that offering, the underwriters exercised an option to purchase an additional 591 thousand shares of PPL common stock solely to cover over-allotments.

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

In April 2013, PPL settled the subsequentinitial forward sale agreements will occur in July 2013.  Upon any physicalby the issuance of 8.4 million shares of PPL common stock and cash settlement of any forward sale agreement,the remaining 1.5 million shares.  PPL will issue and deliver to the forward counterparties shares of its common stock in exchange forreceived net cash proceeds per share equal to the forward sale price.  The forward sale price will beof $205 million, which was calculated based on an initial forward price of $27.02 per share reduced during the period the contracts arewere 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.  Settlement of the forward sale agreements covering 591 thousand remaining shares will occur no later than July 2013.  PPL may in certain circumstances, elect to issue common stock, cash settlementsettle or net share settlement forsettle all or a portion of its rights or obligations under the forward sale agreements.

PPL will not receive any proceeds or issue any shares of common stock until settlement of the forward sale agreements.  PPL intends to use any net proceeds that it receives upon settlement to repay short-term debt obligations and for other general corporate purposes.
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The forward sale agreements will beare classified as equity transactions.  As a result, no amounts will bewere recorded in the consolidated financial statements until the April 2013 settlement of the initial forward sale agreements.  Prior to those settlements, the only impactHowever, prior to the financial statements will be the inclusion ofApril 2013 settlement, incremental shares were included within the calculation of diluted EPS using the treasury stock method.  See Note 4 for the impact on the calculation of diluted EPS.

In April 2012, WPD (East Midlands) issued £100 million aggregate principal amount of 5.25% Senior Notes due 2023.  WPD (East Midlands) received proceeds of approximately £111 million, which equated to $178 million at the time of issuance, net of underwriting fees.  The net proceeds were used for general corporate purposes.
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In June 2012,March 2013, PPL Capital Funding issued $400$450 million of 4.20% Seniorits 5.90% Junior Subordinated Notes due 2022.  The notes may be redeemed at PPL Capital Funding's option any time prior to maturity at make-whole redemption prices.2073.  PPL Capital Funding received proceeds of $396$436 million, net of a discount and underwriting fees, thatwhich will be loaned to or invested in affiliates of PPL Capital Funding and used forto fund their capital expenditures and other general corporate purposes.
In July 2012, PPL Capital Funding gave notice of its election to redeem at par on August 14, 2012, together with interest accrued to the redemption date, the entire $99 million outstanding principal amount of its 6.85% Senior Notes due 2047.

See Note 7 in PPL's 20112012 Form 10-K for information on the 2011 Bridge Facility,2010 Equity Units (with respect to which the related $1.150 billion of Notes are expected to be remarketed in the second quarter of 2013) and the 2011 Equity Units and the April 2011 issuance of common stock.Units.

(PPL and PPL Energy Supply)

In April 2012, an indirect, wholly owned subsidiary ofFebruary 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 Ironwood Acquisition.  See Note 8 for information on the transactionexisting debt.  As a result, no gain or loss was recorded and the debtexchange was considered non-cash activity that was excluded from the 2013 Statement of PPL Ironwood, LLC assumed through consolidation as part of the acquisition.
(PPL and PPL Electric)

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

(PPL and LKE)

In June 2012, LKE completed an exchange of all its outstanding 4.375% Senior Notes due 2021 issued in September 2011 in a transaction not registered under the Securities Act of 1933, for similar securities that were issued in a transaction registered with the SEC.  See Note 7 in PPL's and LKE's 2011 Form 10-K for additional information.Cash Flows.

Legal Separateness

(PPL, PPL Energy Supply, PPL Electric and LKE)

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

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

Distributions and Capital Contributions

(PPL)

In May 2012,February 2013, PPL declared its quarterly common stock dividend, payable July 2, 2012,April 1, 2013, at 36.036.75 cents per share (equivalent to $1.44$1.47 per annum).  Future dividends, declared at the discretion of the Board of Directors, will be dependent upon future earnings, cash flows, financial and legal requirements and other factors.

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

During the sixthree months ended June 30, 2012,March 31, 2013, the following distributions and capital contributions occurred:

   PPL Energy            PPL Energy         
   Supply  PPL Electric LKE LG&E KU   Supply  PPL Electric LKE LG&E KU
                          
Dividends/distributions paid to parent/memberDividends/distributions paid to parent/member $ 657   $ 56  $ 60  $ 31  $ 48 Dividends/distributions paid to parent/member $ 313   $ 25  $ 4  $ 19  $ 13 
Capital contributions received from parent/memberCapital contributions received from parent/member  472          Capital contributions received from parent/member     60   75   25   50 
 
(PPL, LKE, LG&E and KU)
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Since the payment of dividends from jurisdictional public utilities is governed by the Federal Power Act, 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; however, each utility's adjusted equity ratio must equal or exceed 30% of total capitalization in order to pay dividends.  LG&E and KU do not intend to change their dividend practices as a result of this order.
8.  8.  Acquisitions,, Development and Divestitures

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

The Registrants periodicallyfrom time to time evaluate 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

Ironwood Acquisition (PPL and PPL Energy Supply)

On April 13, 2012, an indirect, wholly owned subsidiary of PPL Energy Supply completed the acquisition from a subsidiary of The AES Corporation of all of the equity interests of AES Ironwood, L.L.C. (subsequently renamed PPL Ironwood, LLC) and AES Prescott, L.L.C. (subsequently renamed PPL Prescott, LLC), which own and operate, respectively, the Ironwood Facility.  The Ironwood Facility began operation in 2001 and, since 2008, PPL EnergyPlus has supplied natural gas for the operation of the Ironwood Facility and received the facility's full electricity output and capacity value pursuant to a tolling agreement that expires in 2021.  See Note 1110 in PPL's and PPL Energy Supply's 20112012 Form 10-K for additional information on the tolling agreement.  The acquisition provides PPL Energy Supply, through its subsidiaries, operational controlApril 13, 2012 Ironwood Acquisition.  See Note 7 for information on the February 2013 exchange of additional combined-cycle gas generation in PJM.

The consideration paid for this acquisition, subject to finalizationa portion of working capital, net indebtedness and fair value adjustments, was as follows.

Aggregate enterprise consideration$326 
Less: Estimated fair value of long-term debt outstanding assumed through consolidation (a)258 
Plus: Restricted cash debt service reserves17 
Cash consideration paid for equity interests (including estimated working capital adjustments)$85 

(a)The estimated long-term debt assumed through consolidation consisted of $226 million aggregate principal amount of 8.857% senior secured bonds to be fully repaid by 2025, plus $8 million of debt service reserve loans, and a $24 million estimated fair value adjustment.

Preliminary Purchase Price Allocation

The following table summarizes the preliminary allocation of the purchase price to the estimated 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 assets eliminated (b) (170)
Other net assets 8 
Net identifiable assets acquired (c)$ 85 

(a)Represents non-cash activity excluded from the Statement of Cash Flows for the six months ended June 30, 2012.
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(b)
Represents PPL EnergyPlus' existing assets, primarily an intangible asset, which represented PPL EnergyPlus' rights to and the related accounting for the tolling agreement with PPL Ironwood, LLC prior to the acquisition.  On the acquisition date, PPL Ironwood, LLC recorded a liability, recognized at estimated 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.  Any difference between the tolling agreement assets and liability will result in a gain or loss on the effective settlement of the agreement.  That amount is currently estimated to be insignificant.
(c)Goodwill is currently estimated to be insignificant.

At the date of acquisition, total future minimum lease payments to be made by PPL EnergyPlus to PPL Ironwood, LLC under the tolling agreement were $270 million.  These payments, which were included in the total minimum lease payments disclosed in Note 11 of PPL's and PPL Energy Supply's 2011 Form 10-K, will continue to be made by PPL EnergyPlus to PPL Ironwood, LLC following the acquisition, but will eliminate in consolidation.

In addition, Note 20 of PPL's and PPL Energy Supply's 2011 Form 10-K included annual forecasted amortization expense of $15 million for each of the years 2012 through 2016 related to the PPL EnergyPlus tolling agreement intangible asset.  This amortization will eliminate in consolidation for PPL and PPL Energy Supply as PPL Ironwood, LLC is now a subsidiary of PPL Energy Supply as a result of the acquisition.
The purchase price allocation is preliminary and could change in subsequent periods.  The preliminary purchase price allocation was based on PPL Energy Supply's best estimates using information obtained as of the reporting date.  Any changes to the purchase price allocation that result in material changes to the consolidated financial results will be adjusted retrospectively.  The final purchase price allocation is expected to be completed by the end of 2012.  The items pending finalization include, but are not limited to, the valuation of PP&E, long-term debt, certain contractual liabilities, including the tolling agreement, the resulting gain (loss) and goodwill.

Acquisition of WPD Midlands(PPL)

See Notes 1 and 10 in PPL's 2011 Form 10-K for information on PPL's April 1, 2011 acquisition of WPD Midlands.

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.  More than 700 employees of WPD Midlands will have received separation benefits as a result of the reorganization by the end of 2012.

Separation benefits totaling $104 million, pre-tax, were associated with the reorganization, of which $93 million was recorded in the second half of 2011.  Additional severance compensation was recorded during the three and six months ended June 30, 2012, as shown in the table below.  The additional severance compensation is included in "Other operation and maintenance" on the Statement of Income.

The changes in the carrying amounts of accrued severance for the periods ended June 30, 2012 was as follows:

  Three Months Six Months
       
Accrued severance at the beginning of period $19  $21 
Severance compensation   4    10 
Severance paid   (15)   (23)
Accrued severance at the end of period $ 8  $ 8 

In addition, during the second quarter of 2011, WPD recognized $6 million of separation costs associated with the dismissal of eight senior executives of WPD Midlands, which is included in "Other operation and maintenance" on the Statements of Income and were not part of the reorganization discussed above.  Of these costs, $2 million relates to early retirement deficiency costs payable under applicable pension plans and $4 million relates to severance compensation.

Pro forma Information

The pro forma operating revenues and net income attributable to PPL for the periods ended June 30, 2011, which includes WPD Midlands as if the acquisition had occurred January 1, 2010, are as follows.

       Three Months Six Months
             
Operating Revenues - PPL consolidated pro forma       $ 2,587  $ 5,802 
Net Income Attributable to PPL - PPL consolidated pro forma         288    814 

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The pro forma financial information presented above has been derived from the historical consolidated financial statements of PPL and from the historical combined financial statements of WPD Midlands.  Income (loss) from discontinued operations (net of income taxes), which was not significant, was excluded from the pro forma amounts above.

The pro forma adjustments include adjustments to depreciation, net periodic pension costs, interest expense, nonrecurring adjustments and the related income tax effects.  Nonrecurring adjustments for the periods ended June 30, 2011 include the following pre-tax credits (expenses):

    Income Statement      
    Line Item Three Months Six Months
           
 2011 Bridge Facility costs Interest Expense $ (36) $ (43)
 Foreign currency loss on 2011 Bridge Facility Other Income (Expense) - net   (58)   (58)
 Net hedge gains associated with the 2011 Bridge Facility Other Income (Expense) - net   63    56 
 Hedge ineffectiveness Interest Expense   (12)   (12)
 U.K. stamp duty tax Other Income (Expense) - net   (21)   (21)
 Other acquisition-related adjustments (a)   (42)   (52)
(a)Primarily includes advisory, accounting and legal fees recorded to "Other Income (Expense) - net" and certain separation benefits recognized during the second quarter of 2011 as noted above recorded in "Other operation and maintenance" on the Statement of Income.       

Terminated Bluegrass CTs Acquisition (PPL, LKE, LG&E and KU)

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

Development

NGCC Construction((PPL, LKE, LG&E and KU)

In September 2011, LG&E and KU filed a CPCN with the KPSC requesting approval to build a 640 MW NGCC at the existing Cane Run plant site in Kentucky.  In May 2012, the KPSC issued an order approving the request.  Subject to finalizing contracting agreements and permitting activities, construction is expected to begin in 2012 and be completed during 2015.  The project, which includes building a natural gas supply pipeline and related transmission projects, has an estimated cost of approximately $600 million ($130 million for LG&E and $470 million for KU).

In conjunction with this construction and to meet new, stricter federal EPA regulations with a 2015 compliance date, LG&E and KU anticipate retiring six older coal-fired electric generating units at the Cane Run, Green River and Tyrone plants, which have a combined summer capacity rating of 797 MW.  The Cane Run and Green River coal units are anticipated to remain operational until the NGCC generation and associated transmission project is completed.  See Note 6 for additional information.

(PPL and PPL Energy Supply)

Bell Bend COLA

The NRC continues to review the COLA submitted by a PPL Energy Supply subsidiary, PPL Bell Bend, LLC (PPL Bell Bend) for the proposed Bell Bend nuclear generating unit (Bell Bend) to be built adjacent to the Susquehanna plant.  PPL Bell Bend does not expect to complete the COLA review process with the NRC prior to 2015.  PPL Bell Bend has made no decision to proceed with construction of Bell Bend and expects that such decision will not be made for several years given the anticipated lengthy NRC license approval process.  Additionally, PPL Bell Bend has announced that it does not expect to proceed with construction absent favorable economics, a joint arrangement with other interested parties and a federal loan guarantee or other acceptable financing.  PPL Bell Bend is currently authorized to spend up to $162$205 million through 20122015 on the COLA and other permitting costs (including land costs) necessary for construction.construction, which is expected to be sufficient to fund the project through receipt of the license.  At June 30, 2012March 31, 2013 and December 31, 2011, $1422012, $159 million and $131$154 million of costs, which includes capitalized interest, associated with the
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licensing application were capitalized and are included on the Balance Sheets in noncurrent "Other intangibles."  PPL Bell Bend believes that the estimated fair value of the COLA currently exceeds the costs expected to be capitalized associated with the licensing application.  PPL Bell Bend remains active in the DOE loan guarantee application process.  See Note 8 in PPL's and PPL Energy Supply's 20112012 Form 10-K for additional information.

Hydroelectric Expansion Project

In the first quarter of 2013, the redevelopment of the Rainbow hydroelectric facility at Great Falls, Montana was placed in service and added 28 MW of capacity to the facility.

Susquehanna-RoselandRegional Transmission Line Expansion Plan (PPL and PPL Electric)

PPL Electric has experienced delays in obtaining necessarySusquehanna-Roseland

On October 1, 2012, the National Park Service (NPS) approvals forissued its Record of Decision (ROD) on the proposed Susquehanna-Roseland transmission line and anticipates a delay of the line's in-service date to 2015.  In March 2012, the NPS announced thataffirming the route proposedchosen by PPL Electric and PSE&G, previously approved by the Pennsylvania and New Jersey public utility commissions, isPublic Service Electric & Gas Company as the preferred route for the linealternative under the NPS's National Environmental Policy Act review.  On October 15, 2012, a complaint was filed in the United States District Court for the District of Columbia by various environmental groups, including the Sierra Club, challenging the ROD and seeking to prohibit its implementation, and on December 6, 2012, the groups filed a petition for injunctive relief seeking to prohibit all construction activities until the court issues a final decision on the complaint.  PPL Electric has intervened in the lawsuit.  On February 25, 2013, the District Court denied Plaintiffs' Motion for Preliminary Injunction and set a briefing schedule.  However, plaintiffs have the right to reinstate the motion if the District Court has not ruled on the lawsuit and construction is imminent.  The NPS has stated that it expects to issue its record of decision in October 2012.  An appeal ofchosen route had previously been approved by the PUC and the New Jersey Board of Public Utilities approvalUtilities.

On December 13, 2012, PPL Electric received federal construction and right of way permits to build on National Park Service lands.
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Construction activities have begun on portions of the 101-mile route in Pennsylvania.  The line is pendingexpected to be completed before the New Jersey Superior Court Appellate Division.peak summer demand period of 2015.  At March 31, 2013, PPL Electric's estimated share of the project cost was $630 million.

PPL and PPL Electric cannot predict the ultimate outcome or timing of the NPS approval or any further legal challenges to the project.  PJM has developed a strategy to manage potential reliability problems until the line is built.  PPL Electric cannot predictproject or what additional actions, if any, PJM might take in the event of a further delay to itsthe scheduled in-service date for the new line.

At June 30,Northeast/Pocono

In October 2012, the FERC issued an order in response to PPL Electric's estimated shareDecember 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 of all prudently incurred construction work in progress (CWIP) costs in rate base but denied the request for a 100 basis point adder to the return on equity incentive.  The order required a follow-up compliance filing from PPL Electric to ensure proper accounting treatment of AFUDC and CWIP for the project, cost has increasedwhich PPL Electric submitted to $560 million from approximately $500 million atthe FERC in March 2013 and the FERC subsequently approved in April 2013.

In December 31, 2011, mainly due to increased material costs.  In July 2012, PPL Electric began pre-construction activities including treesubmitted an application to the PUC requesting permission to site and vegetation removal fromconstruct the transmission line's rightproject.  A number of way and constructionparties have protested the application, which has been assigned to an Administrative Law Judge.  Evidentiary hearings are scheduled in July 2013.  A final Commission order is expected in the first quarter of access roads.2014.  PPL Electric expects the project to be completed in 2017.  At March 31, 2013, PPL Electric estimates the total project costs to be approximately $200 million with approximately $190 million qualifying for the CWIP incentive.

See Note 8 in PPL's and PPL Electric's 20112012 Form 10-K for additional information.

9.  Defined Benefits

(PPL, PPL Energy Supply, and PPL Electric)

Prior to January 1, 2012, the majority of PPL's Montana and Pennsylvania employees were eligible for pension benefits under PPL Montana's cash balance pension plan or PPL's qualified and non-qualified non-contributory defined benefit pension plans with benefits based on length of service and final average pay, as defined by the plans.  Effective January 1, 2012, these plans were closed to newly hired salaried employees.  Newly hired bargaining unit employees will continue to be eligible under these plans based on their collective bargaining agreements.  Salaried employees hired on or after January 1, 2012 will be eligible to participate in the new PPL Retirement Savings Plan, a 401(k) savings plan with enhanced employer matching.  The changes to the plans are not expected to have a significant near-term cost impact.

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

Certain net periodic defined benefit costs are applied to accounts that are further distributed between capital and expense, including certain costs allocated to applicable subsidiaries for plans sponsored by PPL Services and LKE.   Following are the net periodic defined benefit costs (credits) of the plans sponsored by PPL, PPL Energy Supply, LKE and LG&E for the periods ended June 30:March 31:  

   Pension Benefits   Pension Benefits Other Postretirement Benefits
   Three Months Six Months   U.S. U.K.    
   U.S. U.K. U.S. U.K.   Three Months
   2012  2011  2012  2011  2012  2011  2012  2011    2013  2012  2013  2012  2013  2012 
PPLPPL                PPL            
Service costService cost $ 26  $ 23  $ 14  $ 12  $ 52  $ 47  $ 27  $ 17 Service cost $ 31  $ 26  $ 18  $ 13  $ 4  $ 3 
Interest costInterest cost  54   54   85   73   110   109   169   112 Interest cost  54   56   81   84   7   8 
Expected return on plan assetsExpected return on plan assets  (64)  (61)  (114)  (88)  (130)  (123)  (225)  (140)Expected return on plan assets  (74)  (66)  (118)  (111)  (6)  (6)
Amortization of:Amortization of:                Amortization of:            
 Prior service cost  6   6   1   1   12   12   2   2  Transition obligation            1 
 Actuarial (gain) loss   11    8    20    15    21    14    40    29  Prior service cost  6   6     1     
Net periodic defined benefit                
costs (credits) prior to                
termination benefits  33   30   6   13   65   59   13   20 
Termination benefits            2             2 
Net periodic defined benefit                
costs (credits) $ 33  $ 30  $ 6  $ 15  $ 65  $ 59  $ 13  $ 22 
                  
PPL Energy Supply                
Service cost $ 2  $ 1      $ 3  $ 2  ��   
Interest cost  2   2       4    4     
Expected return on plan assets  (3)  (2)      (5)  (4)    
Amortization of:                
 Actuarial (gain) loss      1        1    1      Actuarial (gain) loss   20    10    38    20    1    1 
Net periodic defined benefitNet periodic defined benefit                Net periodic defined benefit            
costs (credits) $ 1  $ 2      $ 3  $ 3     costs (credits) $37  $32  $19  $ $ $

    Pension Benefits
    Three Months
    2013  2012 
PPL Energy Supply      
Service cost $ 2  $ 1 
Interest cost   2    2 
Expected return on plan assets   (3)   (2)
Amortization of:      
  Actuarial (gain) loss   1    1 
Net periodic defined benefit costs (credits) $ 2  $ 2 
 
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    Pension Benefits      
    Three Months   Six Months  
    2012  2011      2012  2011     
                           
LKE                        
Service cost $ 5  $ 6        $ 11  $ 12       
Interest cost   15    17          32    34       
Expected return on plan assets   (17)   (16)         (35)   (32)      
Amortization of:                        
 Prior service cost   1    1          2    2       
 Actuarial (gain) loss   6    6          11    11       
Net periodic defined benefit                        
  costs (credits) $ 10  $ 14        $ 21  $ 27       
                           
LG&E                        
Service cost $ 1  $ 1        $ 1  $ 1       
Interest cost   3    3          7    7       
Expected return on plan assets   (4)   (5)         (9)   (9)      
Amortization of:                        
 Prior service cost      1          1    1       
 Actuarial (gain) loss   2    3          5    6       
Net periodic defined benefit                        
  costs (credits) $ 2  $ 3        $ 5  $ 6       

  Other Postretirement Benefits   Pension Benefits Other Postretirement Benefits
  Three Months Six Months   Three Months
  2012  2011  2012  2011    2013  2012  2013  2012 
         
PPL        
LKELKE        
Service costService cost $ 3  $ 3  $ 6  $ 6 Service cost $ 7  $ 6  $ 1  $ 1 
Interest costInterest cost  8   8   16   16 Interest cost  16   17   2   2 
Expected return on plan assetsExpected return on plan assets  (5)  (5)  (11)  (11)Expected return on plan assets  (21)  (18)  (1)  (1)
Amortization of:Amortization of:        Amortization of:        
Transition obligation    1   1   1  Prior service cost  1   1   1   1 
Actuarial (gain) loss   1    1    2    3  Actuarial (gain) loss   8    5       
Net periodic defined benefit costs (credits)Net periodic defined benefit costs (credits) $ 7  $ 8  $ 14  $ 15 Net periodic defined benefit costs (credits) $ 11  $ 11  $ 3  $ 3 
                   
LKE        
LG&ELG&E        
Service costService cost $ 1  $ 1  $ 2  $ 2 Service cost $ 1       
Interest costInterest cost  2   2   4   5 Interest cost  3  $ 4     
Expected return on plan assetsExpected return on plan assets  (1)  (1)  (2)  (2)Expected return on plan assets  (5)  (5)    
Amortization of:Amortization of:        Amortization of:        
Transition obligation  1   1   1   1  Prior service cost  1   1     
Prior service cost  1     2   1  Actuarial (gain) loss   3    3     
Actuarial (gain) loss   (1)      (1)   
Net periodic defined benefit costs (credits)Net periodic defined benefit costs (credits) $ 3  $ 3  $ 6  $ 7 Net periodic defined benefit costs (credits) $ 3  $ 3     

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

In addition to the specific plans they sponsor, PPL Energy Supply subsidiaries are also allocated costs of defined benefit plans sponsored by PPL Services, and LG&E is allocated costs of defined benefit plans sponsored by LKE based on their participation in those plans, which management believes are reasonable.  PPL Electric and KU do not directly sponsor any defined benefit plans.  PPL Electric is allocated costs of defined benefit plans sponsored by PPL Services, and KU is allocated costs of defined benefit plans sponsored by LKE based on their participation in those plans, which management believes are reasonable.  For the periods ended June 30,March 31, PPL Services allocated the following net periodic defined benefit costs to PPL Energy Supply subsidiaries and PPL Electric, and LKE allocated the following net periodic defined benefit costs to LG&E and KU, including amounts applied to accounts that are further distributed between capital and expense.KU.

  Three Months Six Months
  2012  2011  2012  2011 
             
PPL Energy Supply $ 9  $ 8  $ 19  $ 15 
PPL Electric   7    6    15    12 
LG&E   3    4    6    8 
KU   5    5    9    11 
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Expected Cash Flows - U.K. Pension Plans
    Three Months
      2013  2012 
             
PPL Energy Supply       $ 11  $ 10 
PPL Electric         9    8 
LG&E         3    3 
KU         4    4 

(PPL)

At June 30, 2012, WPD's expected pension contributions for 2012 are $323 million compared with $161 million as disclosed in PPL's 2011 Form 10-K.  During the six months ended June 30, 2012, contributions of $275 million were made.  The additional contributions are being made to prepay future contribution requirements to fund pension plan deficits.
10.  10.  Commitments and Contingencies

Energy Purchase Commitments

(PPL and PPL Energy Supply)

In 2008, PPL EnergyPlus acquired the rights to an existing long-term tolling agreement associated with the output of the Ironwood Facility.  Under the agreement, PPL EnergyPlus has control over the plant's dispatch into the electricity grid and supplies the natural gas necessary to operate the plant.  The tolling agreement extends through 2021.  In April 2012 an indirect, wholly owned subsidiary of PPL Energy Supply acquired the owner of the Ironwood Facility.  See Note 8 for information on the Ironwood Acquisition.

(PPL and PPL Electric)

In 2009, the PUC approved PPL Electric's procurement plan for the period January 2011 through May 2013.  To date, PPL Electric has conducted 12 of its 14 planned competitive solicitations.  The solicitations include a mix of short-term and long-term purchases ranging from five months to ten years to fulfill PPL Electric's obligation to provide for customer supply as a PLR.  In May 2012, PPL Electric filed a plan with the PUC to purchase its electric supply for default customers for the period June 2013 through May 2015.  The PUC approved the plan in January 2013.  The approved plan proposes to buythat PPL Electric procure this electricity through competitive solicitations twice aeach 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, one of four solicitations has been completed.

(PPL Energy Supply and PPL Electric)

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

Legal Matters

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

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

TC2 Construction(PPL, LKE, LG&E and KU)

In June 2006, LG&E and KU, as well as the Indiana Municipal Power Agency and Illinois Municipal Electric Agency (collectively, TC2 Owners), entered into a construction contract regarding the TC2 project.  The contract is generally in the form of a turnkey agreement for the design, engineering, procurement, construction, commissioning, testing and delivery of the project, according to designated specifications, terms and conditions.  The contract price and its components are subject to a number of potential adjustments which may increase or decrease the ultimate construction price.  During 2009 and 2010, the TC2 Owners received contractual notices from the TC2 construction contractor asserting historical force majeure and excusable event claims for a number of adjustments to the contract price, construction schedule, commercial operations date, liquidated damages or other relevant provisions.  In September 2010, the TC2 Owners and the construction contractor agreed to a settlement to resolve the force majeure and excusable event claims occurring through July 2010 under the TC2 construction contract, which settlement provided for a limited, negotiated extension of the contractual commercial operations date and/or relief from liquidated damage calculations.  With limited exceptions, the TC2 Owners took care, custody and control of TC2 in January 2011.  Pursuant to certain amendments to the construction agreement, the contractor has made and may be required to make additional modifications to the combustion system to allow operation of TC2 on all specified fuels categories.  The provisions of the construction agreement relating to liquidated damages were also amended.  In September 2011, the TC2 Owners and the construction contractor entered into subsequent adjustments to the construction agreement addressing, among other matters, certain historical change order, labor rate and prior liquidated damages amounts.  The
 
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remaining issues, plus certain potential warranty matters, are still under discussion with the contractor.  PPL, LKE, LG&E and KU cannot currently predict the outcome of this matter or the potential impact on the capital costs of this project.

WKE Indemnification (PPL and LKE)

See footnote (o)(l) to the table in "Guarantees and Other Assurances" in this Note 10below for information on an LKE indemnity relating to its former WKE lease, including related legal proceedings.

(PPL and PPL Energy Supply)

Montana Hydroelectric Litigation

In November 2004, PPL Montana, Avista Corporation (Avista) and PacifiCorp commenced an action for declaratory judgment in Montana First Judicial District Court seeking a determination that no lease payments or other compensation for their hydroelectric facilities' use and occupancy of certain riverbeds in Montana can be collected by the State of Montana.  This lawsuit followed dismissal on jurisdictional grounds of an earlier federal lawsuit seeking such compensation in the U.S. District Court of Montana.  The federal lawsuit alleged that the beds of Montana's navigable rivers became state-owned trust property upon Montana's admission to statehood, and that the use of them should, under a 1931 regulatory scheme enacted after all but one of the hydroelectric facilities in question were constructed, trigger lease payments for use of land beneath.  In July 2006, the Montana state court approved a stipulation by the State of Montana that it was not seeking compensation for the period prior to PPL Montana's December 1999 acquisition of the hydroelectric facilities.

Following a number of adverse trial court rulings, in 2007 Pacificorp and Avista each entered into settlement agreements with the State of Montana providing, in pertinent part, that each company would make prospective lease payments for use of the State's navigable riverbeds (subject to certain future adjustments), resolving the State's claims for past and future compensation.

Following an October 2007 trial of this matter on damages, in June 2008, the Montana District Court awarded the State retroactive compensation of approximately $35 million for the 2000-2006 period and approximately $6 million for 2007 compensation.  Those unpaid amounts accruedaccrue interest at 10% per year.  The Montana District Court also deferred determination of compensation for 2008 and future years to the Montana State Land Board.  In October 2008, PPL Montana appealed the decision to the Montana Supreme Court, requesting a stay of judgment and a stay of the Land Board's authority to assess compensation for 2008 and future periods.  In March 2010, the Montana Supreme Court substantially affirmed the June 2008 Montana District Court decision.

In August 2010, PPL Montana filed a petition for a writ of certiorari with the U.S. Supreme Court requesting review of this matter.  In June 2011, the U.S. Supreme Court granted PPL Montana's petition, and in February 2012 the U.S. Supreme Court issued a decision overturning the Montana Supreme Court decision and remanded the case to the Montana Supreme Court for further proceedings consistent with the U.S. Supreme Court's opinion.  As a result, in the fourth quarter of 2011, PPL Montana reversed its total loss accrual of $89 million ($53 million after-tax) which had been recorded prior to the U.S. Supreme Court decision.  PPL Montana believes the U.S. Supreme Court decision resolves certain questions of liability in this case in favor of PPL Montana and leaves open for reconsideration by Montana courts, consistent with the findings of the U.S. Supreme Court, certain other questions.
In MarchApril 2012, the case was returned toby the Montana Supreme Court and in April 2012 remanded to the Montana First Judicial District Court.  Further proceedings have not yet been scheduled by the District Court.  PPL Montana has concluded it is no longernot probable, but it remains reasonably possible, that a loss has been incurred.  While unable to estimate a range of loss, PPL Montana believes that any such amount shouldwould not be material.

Bankruptcy of SMGT

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

PPL EnergyPlus' receivable under the SMGT Contract totaled approximately $22 million at June 30, 2012, which has been fully reserved.  No assurance can be given as to the collectability of the receivable.Sierra Club Litigation

In July 2012, PPL EnergyPlus filed its proof of claim in the SMGT bankruptcy proceeding.  The total claim 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.

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

Notice of Intent to Sue Colstrip Owners

On July 30, 2012, PPL Montana received a Notice of Intent to Sue (Notice) for violations of the Clean Air Act at Colstrip Steam Electric Station (Notice)(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, was alsoAmended Notice, Second Amended Notice and Supplemental Notice (the Notices) were all addressed to the Owner or Managing Agent of Colstrip, and to the other Colstrip co-owners: Avista Corporation, Puget Sound Energy, Portland General Electric Company, NorthwestNorthwestern Energy and Pacificorp.PacificCorp.  The Notice allegesNotices allege certain violations of the Clean Air Act, including New Source Review, Title V and opacity requirements.  The Notice states that

On March 6, 2013, the Sierra Club and MEIC will requestfiled a United Statescomplaint against PPL Montana and the other Colstrip co-owners in the U.S. District Court, District of Montana, Billings Division.  PPL Montana operates Colstrip on behalf of the co-owners.  The complaint is generally consistent with the prior Notices and lists 39 separate claims for relief.  All but three of the claims allege Prevention of Significant Deterioration (PSD) related violations under the federal Clean Air Act for various plant maintenance projects completed since 1992.  For each such project or set of projects, there are separate claims for failure to imposeobtain 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.
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The complaint requests injunctive relief and civil penalties requireon 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 environmental project inmitigation projects.  PPL Montana believes it and the areas affected by the alleged air pollution and require reimbursement of Sierra Club's and MEIC's costs of litigation and attorney's fees.  PPL is evaluatingother co-owners have numerous defenses to the allegations set forth in this complaint and will vigorously deny the Notice andsame.  PPL Montana cannot at this time predict the ultimate outcome of this matter.  matter at this time.

Regulatory Issues

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

See Note 6 for information on regulatory matters related to utility rate regulation.

  See Note 15 to the Registrants' 2012 Form 10-K for a discussion of Enactment of Financial Reform Legislation(PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and KU)Legislation.

In July 2010, the Dodd-Frank Act was signed into law.  The Dodd-Frank Act includes provisions that impose derivative transaction reporting requirements and require most over-the-counter derivative transactions to be executed through an exchange and to be centrally cleared.  The Dodd-Frank Act also provides that the U.S. Commodity Futures Trading Commission (CFTC) may impose collateral and margin requirements for over-the-counter derivative transactions, as well as capital requirements for certain entity classifications.  Final rules on major provisions in the Dodd-Frank Act are being established through rulemakings.  The rulemakings are scheduled to become effective at different times following
effectiveness of the definitional rule for the term "swap".  In July 2012, the CFTC approved the rule defining swap, which will become effective 60 days after publication of the rule in the Federal Register.  Additionally, in April 2012, the CFTC approved the Final Rule (Final Rule) defining key terms such as "swap dealer."  The definition of swap dealer, among other things, provides a significantly higher de minimis threshold amount of annual derivative transactions in which a party must have engaged in order to be classified as a swap dealer than was provided for in the CFTC's proposed rule, and is an amount that would not currently result in the Registrants being deemed swap dealers.  There are numerous other provisions in the Final Rule, however, that the Registrants have not yet analyzed that could result in their being subject to the more onerous compliance requirements applicable to swap dealers.  Even if the Registrants are not ultimately subject to the compliance requirements applicable to swap dealers, the Dodd-Frank Act and its implementing regulations nevertheless will impose on them significant additional and potentially costly recordkeeping and reporting requirements.  Also, the Registrants could face significantly higher operating costs or may be required to post additional collateral if they are subject to margin requirements as ultimately adopted in the implementing regulations of the Dodd-Frank Act.  The Registrants will continue to evaluate the provisions of the Dodd-Frank Act and its implementing regulations.  At this time, the Registrants cannot predict the impact
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that the law or its implementing regulations will have on their businesses or operations, or the markets in which they transact business, but could incur material costs related to compliance with the Dodd-Frank Act.

New Jersey Capacity Legislation(PPL, PPL Energy Supply and PPL Electric)

New Jersey Capacity Legislation

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

In addition, in February 2011, PPL and several other generating companies and utilities filed a complaint in U.S. District Court in New Jersey challenging the Act on the grounds that it violates well-established principles under the Supremacy Clause and the Commerce Clause of the U.S. Constitution.  In this action, the plaintiffs requestConstitution and requesting declaratory and injunctive relief barring implementation of the Act by the Commissioners of the BPU.BPU Commissioners.  In October 2011, the court denied the BPU's motion to dismiss the proceeding and in September 2012 the litigationU.S. District Court denied all summary judgment motions.  Trial on this matter is continuing.expected to be completed in May 2013 and is pending decision.  Any decision is expected to be appealed to the U.S. Court of Appeals for the Third Circuit.  PPL, PPL Energy Supply and PPL Electric cannot predict the outcome of this proceeding or the economic impact on their businesses or operations, or the markets in which they transact business.

Maryland Capacity Order

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

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In April 2012, PPL and several other generating companies filed a complaint in U.S. District Court in Maryland challenging the MD PSC order on the grounds that it violates well-established principles under the Supremacy and Commerce clauses of the U.S. Constitution.  In this action, the plaintiffs requestConstitution, and requested declaratory and injunctive relief barring implementation of the order by the Commissioners of the MD PSC.  In August 2012, the court denied the MD PSC and CPV Maryland, LLC motions to dismiss the proceedingproceeding.  Trial on this matter was completed in March 2013 and a decision is expected in the litigationsecond quarter of 2013. Any decision is continuing.  expected to be appealed to the U.S. Court of Appeals for the Fourth Circuit.  PPL, PPL Energy Supply, and PPL Electric cannot predict the outcome of this proceeding or the economic impact on their businesses or operations, or the markets in which they transact business.

Pacific Northwest Markets (PPL and PPL Energy Supply)

Through its subsidiaries, PPL Energy Supply made spot market bilateral sales of power in the Pacific Northwest during the period from December 2000 through June 2001.  Several parties subsequently claimed refunds at FERC as a result of these sales.  In June 2003, the FERC terminated proceedings to consider whether to order refunds for spot market bilateral sales made in the Pacific Northwest, including sales made by PPL Montana, during the period December 2000 through June 2001.  In August 2007, the U.S. Court of Appeals for the Ninth Circuit reversed the FERC's decision and ordered the FERC to consider additional evidence.  In October 2011, FERC initiated proceedings to consider additional evidence.  At June 30, 2012, there were two remaining claims against PPL Energy Supply totaling $73 million.  In July 2012, PPL Montana and the City of Tacoma, one of the two parties claiming refunds at FERC, reached a settlement whereby PPL Montana would paypaid $75 thousand to resolve the City of Tacoma's $23 million claim, $9 million of which represents interest.claim.  The settlement does not resolve the remaining claim.claim outstanding at March 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.
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Although PPL and its subsidiaries believe that they have not engaged in any improper trading or marketing practices affecting the Pacific Northwest markets, PPL and PPL Energy Supply cannot predict the outcome of the above-described proceedings or whether any subsidiaries will be the subject of any additional governmental investigations or named in other lawsuits or refund proceedings.  Consequently, PPL and PPL Energy Supply cannot estimate a range of reasonably possible losses, if any, related to this matter.

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

FERC Market-Based Rate Authority

In 1998, the FERC authorized LG&E, and KU and PPL EnergyPlus to make wholesale sales of electric power 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 region and PPL's market-based rate update for the Western region.regions.  Also, in June 2011, PPL filed its market-based rate update for the Southeast region, including LG&E and KU in addition to PPL EnergyPlus.  In June 2011, the FERC issued an order approving LG&E's and KU's request for a determination that they no longer be deemed to have market power in the BREC balancing area and removing restrictions on their market-based rate authority in such region.

Currently, a seller granted FERC market-based rate authority may enter into power contracts during an authorized time period.  If the FERC determines that the market is not workably competitive or that the seller possesses market power or is not charging "just and reasonable" rates, it may institute prospective action, but any contracts entered into pursuant to the FERC's market-based rate authority remain in effect and are generally subject to a high standard of review before the FERC can order changes.  Recent court decisions by the U.S. Court of Appeals for the Ninth Circuit have raised issues that may make it more difficult for the FERC to continue its program of promoting wholesale electricity competition through market-based rate authority.  These court decisions permit retroactive refunds and a lower standard of review by the FERC for changing power contracts, and could have the effect of requiring the FERC in advance to review most, if not all, power contracts.  In June 2008, the U.S. Supreme Court reversed one of the decisions of the U.S. Court of Appeals for the Ninth Circuit, thereby upholding the higher standard of review for modifying contracts.  At this time, PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and KU cannot predict the impact of these court decisions on the FERC's future market-based rate authority program or on their businesses.

Energy Policy Act of 2005Electric - 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.

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

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

63In October 2012, the FERC issued a Notice of Proposed Rulemaking (NOPR) concerning Reliability Standards for Geomagnetic Disturbances.  The FERC proposes to direct NERC to submit for approval Reliability Standards that address the impact of geomagnetic disturbances on the reliable operation of the bulk-power system including one or more measures to protect against damage to the bulk-power system, such as the installation of equipment that blocks geomagnetically induced currents on implicated transformers.  If the NOPR is adopted by the FERC, it is expected to require the Registrants either or both to make significant expenditures in new equipment or modifications to their facilities.  The Registrants are unable to predict whether the NOPR will be adopted as proposed by the FERC or the amount of any expenditures that may be required as a result of the adoption of any Reliability Standards for geomagnetic disturbances.


Environmental Matters - Domestic

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

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

LG&E and KU are entitled to recover, through the ECR mechanism, certain costs of complying with the Clean Air Act as amended and those federal, state, or local environmental requirements which apply to coal combustion wastes and by-products from facilities utilized for production of energy from coal in accordance with their approved compliance plans.  Costs not covered by the ECR mechanism for LG&E and KU and all such costs for PPL Electric are subject to rate recovery before their respective state regulatory authorities, or the FERC, if applicable.  Because PPL Electric does not own any generating plants, its exposure to environmental compliance costs is reduced.  As PPL Energy Supply is not a rate regulated entity, it does not have any mechanism for seeking rate recovery of environmental compliance costs.  PPL, PPL Electric, LKE, LG&E and KU can provide no assurances as to the ultimate outcome of future environmental or rate proceedings before regulatory authorities.

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

Air

CSAPR (formerly Clean Air Transport Rule) and CAIR

In July 2011, the EPA adopted the CSAPR, which finalizes and renames the Clean Air Transport Rule (Transport Rule) proposed in August 2010.CSAPR.  The CSAPR replacesreplaced the EPA's previous CAIR which was invalidated by the U.S. Court of Appeals for the District of Columbia Circuit (the Court) in July 2008.  CAIR subsequently was effectively reinstated by the Court in December 2008, pending finalization of the Transport Rule.  Like CAIR, and the proposed Transport Rule, the CSAPR only appliesapplied to PPL's fossil-fueled generating plants located in Kentucky and Pennsylvania.

The CSAPR is meant to facilitate attainment of ambient air quality standards for ozonePennsylvania and fine particulates by requiringrequired reductions in sulfur dioxide and nitrogen oxides.  The CSAPR establishes new sulfur dioxideoxides in two phases (2012 and nitrogen oxide emission allowance cap and trade programs that are more restrictive than previously under CAIR.  The CSAPR provides for two-phased programs of sulfur dioxide and nitrogen oxide emissions reductions, with initial reductions in 2012 and more stringent reductions in 2014.2014).

In December 2011, the Court stayed implementation of the CSAPR and left CAIR in effect pending a final decision on the validity of the rule.  In FebruaryAugust 2012, the EPA made revisionsCourt issued a ruling invalidating CSAPR, remanding the rule to the rule.  Oral arguments on legal challenges toEPA for further action, and leaving CAIR in place during the CSAPR were held, and a final decision on the validity of theinterim.  A further revised rule is not expected in 2012.from the EPA for at least two years.

With respect to theThe Kentucky fossil-fueled generating plants, the stay of the CSAPR will initially only impact the unit dispatch order.  With the return of the CAIR and the Kentucky companies' significant number of sulfur dioxide allowances, those units will be dispatched with lower operating cost, but slightly higher sulfur dioxide and nitrogen oxide emissions.  However, a key component of the Court's final decision, even if the CSAPR is upheld, will be whether the ruling delays the implementation of the CSAPR by one year for both Phases I and II, or instead continues to require the significant sulfur dioxide and nitrogen oxide reductions associated with Phase II to begin in 2014.  LG&E's and KU's CSAPR compliance strategy is based on over-compliance during Phase I to generate allowances sufficient to cover the expected shortage during the first two years of Phase II (2014 and 2015) when additional pollution control equipment will be installed.  Should Phase I of the CSAPR be shortened to one year, it will be more difficult and costly to provide enough excess allowances in one year to meet the shortage projected for 2014 and 2015.  LG&E and KU have the ability to recover emission allowance expense through the ECR mechanism; however, actual recovery is subject to the outcome of future review proceedings by the KPSC.

PPL Energy Supply's fossil-fueled generating plants can meet both the CAIR sulfur dioxide emission requirements by utilizing sulfur dioxide allowances (including banked allowances).  To meet nitrogen oxide standards, under the CAIR, the Kentucky companies will need to buy allowances and/or make operational changes.  LG&E and KU do not currently anticipate that the stayed CSAPRcosts of meeting these reinstated CAIR requirements or standards will be significant.
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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 nitrogen oxide standards, under both the CAIR, and the stayed CSAPR, PPL Energy Supply wouldwill need to buy allowances and/or make operational changes, the costs of which are not anticipated to be significant.

National Ambient Air Quality Standards

In addition to the reductions in sulfur dioxide and nitrogen oxide emissions required under the CSAPRCAIR for its Pennsylvania and Kentucky plants, PPL's fossil-fueled generating plants, including those in Montana, may face further reductions in sulfur dioxide and nitrogen oxide emissions as a result of more stringent national ambient air quality standards for ozone, nitrogen oxide, sulfur dioxide and/or fine particulates.
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In 2010, the EPA finalized a new one-hour standard for sulfur dioxide, and states are required to identify areas that meet those standards and areas that are in non-attainment.  ForOn February 15, 2013, the EPA proposed to designate Yellowstone County in Montana (Billings area), and part of Jefferson County in Kentucky, as non-attainment.  Final designations of non-attainment areas states are required to develop plansdue in June 2013, and attainment must be achieved by 2014 to achieve attainment by 2017.  For areas that are in attainment or are unclassifiable, states are required to develop maintenance plans by mid-2013 that demonstrate continued attainment.  2018.

In JuneDecember 2012, the EPA proposed a ruleissued final rules that strengthensstrengthen the particulate standards.  TheUnder the final rule, states and the EPA expects that states wouldhave until 2015 to identify initial non-attainment areas, by the end of 2014 and states have until 2020 to achieve attainment status for those areas.  States could request an extension to 2025 to comply with the rule.  Until the rule is finalized, PPL, PPL Energy Supply, LKE, LG&E and KU cannot predict which of their facilities may be located in a non-attainment area and what measures would be required to meet attainment status.

PPL, PPL Energy Supply, LKE, LG&E and KU anticipate that some of the measures required for compliance with the CAIR, the MATS, or the CSAPRRegional Haze requirements, such as upgraded or new sulfur dioxide scrubbers at some of their plants or,and, in the case of LG&E and KU, upgraded or new sulfur dioxide scrubbers at the Mill Creek plant andpreviously announced retirement of coal-fired generating units at the Cane Run, Green River and Tyrone plants, will also be necessaryhelp to achieve compliance with the new one-hour sulfur dioxide standard.  If additional reductions were to be required, the economicfinancial impact could be significant.

Mercury
Until particulate matter and Other Hazardous Air Pollutantssulfur dioxide maintenance and compliance plans are developed by the EPA and state or local agencies, including identification of and finalization of attainment designations, 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 providing for stringent reductions of mercury and other hazardous air pollutants.  In February 2012, the EPA published the final rule, known as the Mercury and Air Toxics Standards (MATS),MATS, with an effective date of April 16, 2012.  The rule is being challenged by industry groups and states.

The rule provides for a three-year compliance deadline with the potential for a one-year extension as provided under the statute.  Based on their assessment of

Although the needEPA had proposed certain modifications to install pollution control equipmentthe final rule, it has not finalized those proposed rule modifications and has not provided an expected completion date.  PPL does not expect the modifications to meetsignificantly impact its compliance plans even if finalized.

At the provisions oftime the MATs rule was proposed, rule, LG&E and KU filed requests with the KPSC for environmental cost recovery to facilitate moving forward with plansbased on their expectation of needing to install environmental controls including chemical additive and fabric-filter baghouses to remove certain hazardous air pollutants.  Recovery of the cost of certain controls was granted by the KPSC order issued in December 2011.  See Note 6 for information on  LG&E's and KU's anticipated retirement of certain coal-fired electric generating units is in response to this and other environmental regulation.regulations.  With the publication of the final MATS rule, LG&E and KU are currently assessing whether changes in the final rule warrant revisionany revisions of their approved compliance plans.plans will be necessary.

With respect to PPL Energy Supply's Pennsylvania plants, PPL Energy Supply believes that thesecertain coal-fired plants may require installation of chemical additive systems, the capital cost of which is not expected to be significant.  PPL Energy Supply continues to analyze the potential impact on operating cost.  With respect to the PPL Energy Supply's Montana plants, modifications to the current air pollution controls installed on Colstrip may be required, the cost of which is not expected to be significant.  For the Corette plant, additional controls are being evaluated,PPL Energy Supply announced in September 2012 its intention, beginning in April 2015, to place the cost of whichplant in long-term reserve status, suspending the plant's operation, due to expected market conditions and the costs to comply with the MATS requirements.  The Corette plant asset group's carrying amount at March 31, 2013 was $65 million.  Although the Corette plant asset group was not determined to be impaired at March 31, 2013, it is reasonably possible that an impairment could be significant.occur in future periods, as higher priced sales contracts settle, adversely impacting projected cash flows.  PPL Energy Supply, LG&E and KU are continuing to conduct in-depth reviews of the MATS, including the potential implications to scrubber wastewater discharges.  See the discussion of effluent limitations guidelines and standards below.
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On March 29, 2013, the EPA released its final rule revising certain emission limits and related requirements for new power plants under the MATS.  The revised limits are somewhat less onerous than the original proposals, and thereby pose less of an impediment to the construction of new coal-fired power plants.

Regional Haze and Visibility

In January 2012,The Clean Air Act requires protection of visibility in Class I areas and, as such, the EPA proposed limited approval of the PennsylvaniaEPA's regional haze programs were developed to eliminate man-made visibility degradation by 2064.  Under the programs, states are required to take action via state implementation plan (SIP).  That proposal would essentially approve PPL's analysis that further particulate controls at PPL Energy Supply's Pennsylvaniaplans to make reasonable progress every decade, including the application of Best Available Retrofit Technology (BART) on power plants are not warranted.  The limited approval does not address deficienciescommissioned between 1962 and 1977.

To date, the focus of the state plan arising from the remand of the CAIR rule.  Previously, the EPA had determined that implementation of the CAIR requirements would meet regional haze activity has been the western U.S. because, until recently, BART (Best Available Retrofit Technology) requirements for sulfur dioxide and nitrogen oxides.  In 2012,oxide reductions in the eastern U.S. were largely addressed through compliance with other regulatory programs, such as CSAPR and CAIR.  More specifically, the EPA finalizedhad determined, and the U.S. Court of Appeals for the District of Columbia Circuit (Court) had affirmed, that a state could accept region-wide reductions under the CAIR trading program to satisfy BART requirements.  Also, when CAIR was invalidated in 2008, the EPA subsequently completed a final rule providing that implementation ofstates subject to CSAPR (which replaced CAIR) may rely on participation in the CSAPR would also meettrading program as an alternative to BART.  However, the BART.  This rule also addressesCourt's August 2012 decision to vacate and remand CSAPR will likely expose power plants located in the eastern U.S., including PPL's plants in Pennsylvania SIP deficiency arisingand Kentucky, to reductions in sulfur dioxide and nitrogen oxides required by BART.

In addition to this exposure stemming from the CAIR remand; howeverremand 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 rule isKentucky Division of Air Quality's regional haze state implementation plan which it submitted to the EPA.  The costs of these reductions are not expected to be challengedsignificant. LG&E intends to make these reductions through installation of sorbent injection technology after approval of the Kentucky plan by environmental groups.the EPA and revision of the Mill Creek plant's air permit under Title V.

In Montana, the EPA Region 8 is developingdeveloped the regional haze plan as the Montana Department of Environmental Quality declined to develop a BART SIPstate implementation plan at thisthe time.  PPL submitted toIn September 2012, the EPA issued its analyses offinal Federal Implementation Plans (FIP) for the visibility impacts of sulfur dioxide, nitrogen oxides and particulate matter emissionsMontana regional haze rule.  The final FIP indicated that no additional controls were assumed for Colstrip Units 1 and 2 and Corette.  PPL's analyses concluded that further reductions are not warranted.  PPL has also submitted data and a high-level analysis of various air emission control options to reduce air emissions related to the non-BART-affected emission sources ofCorette or Colstrip Units 3 and 4 under the rules.  The analysis shows that any incremental reductions would not be cost effective and that further analysis is not warranted.

In March 2012, the EPA issued its draft Federal Implementation Plan (FIP) of the regional haze rule for Montana.  The draft FIP identified no additional controlsbut proposed tighter limits for Corette orand Colstrip 3Units 1 and 4 but proposed a2.  PPL Energy Supply expects to meet these tighter particulate matter (PM) limit for Corette.permit limits at Corette without any significant changes to operations, although other requirements have led to the planned suspension of operations at Corette beginning in April 2015.  See "Mercury and Other Hazardous Air Pollutants" discussion above.  Under the draftfinal FIP, Colstrip Units 1 and 2 wouldmay require additional controls, including the possible installation of an SNCR and other technology, to meet the proposed more stringent nitrogen oxide and sulfur dioxide limits.  PPL Energy Supply filed comments to the EPA's proposed FIP in June 2012 opposing the nitrogen oxide and sulfur dioxide limits for Colstrip based upon the installation of an SNCR and spare scrubber
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vessel and the PM limit for Corette.  The final FIP is expected in 2012.  The cost of these potential additional controls, if required, could be significant depending on the final outcome of this rulemaking.

LG&E and KU also submitted analysessignificant.  In November 2012, PPL filed a petition for review of the visibility impactsMontana Regional Haze FIP with the U.S. Court of their Kentucky BART-eligible sources toAppeals for the Kentucky DivisionNinth Circuit.  Environmental groups have also filed a petition for Air Quality (KDAQ).  Only LG&E's Mill Creek plant was determined toreview.  The two matters have a significant regional haze impact.  The KDAQ has submitted a regional haze SIP tobeen consolidated, and PPL Montana and the EPA which requires the Mill Creek plant to reduce its sulfuric acid mist emissions from Units 3 and 4.  After approval of the Kentucky SIP by the EPA and revision of the Mill Creek plant's Title V air permit, LG&E intends to install sorbent injection controls at the plant to reduce sulfuric acid mist emissions.environmental groups have each filed opening briefs.

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.  The requests are similar to those that PPL received several years agoin the early 2000s for its Colstrip, Corette and Martins Creek plants.  PPL and the EPA have exchanged certain information regarding this matter.  In January 2009, PPL, PPL Energy Supply and other companies that own or operate the Keystone plant in Pennsylvania received a notice of violation from the EPA alleging that certain projects were undertaken without proper NSR compliance.  In May and November 2012, PPL Montana received an information requestrequests from the EPA regarding projects undertaken during the Spring 2012 maintenance outage at Colstrip Unit 1.  In September 2012, PPL Montana received an information request from the Montana Department of Environmental Quality regarding 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 addition, in August 2007, LG&E and KU received information requests for their Mill Creek, Trimble County, and Ghent plants, but 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.
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In March 2009, KU received a notice alleging that KU violated certain provisions of the Clean Air Act's rules governing NSR and prevention of significant deterioration by installing sulfur dioxide scrubbers and SCR controls at its Ghent plant without assessing potential increased sulfuric acid mist emissions.  KU contends that the work in question, as pollution control projects, was exempt from the requirements cited by the EPA.  In December 2009, the EPA issued an information request on this matter.  KU has exchangedIn September 2012, the parties reached a tentative settlement proposalsaddressing the Ghent NSR matter and other information with the EPA regarding imposition of additional permit limits and emission controls and anticipates continued settlement negotiations.  In addition, any settlement or future litigation could potentially encompass a September 2007 notice of violation alleging opacity violations at the plant.  Depending onA consent decree was entered in the provisionsU.S. District Court for the Eastern District of a final settlement or the results of litigation, if any, resolution of this matter could involve significant increased operating and capital expenditures.Kentucky in December 2012.  PPL, LKE and KU cannot predict the final outcome of this matter until the  consent decree is entered by the Court, but currently do not expect such outcome to result in materialcosts in excess of amounts already accrued, which amounts are not material.

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

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 the respective amounts accrued by KU.for information on an environmental group's lawsuit filed March 6, 2013 against PPL Montana and other owners of Colstrip.

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

StatesColstrip and environmental groups also have initiated enforcement actionsCorette Air Permits (PPL and litigation alleging violationsPPL Energy Supply)

In January 2013, Earthjustice, on behalf of the NSR regulations by coal-fired generating plants,Sierra Club and PPL, PPL Energy Supply, LKE, LG&Ethe MEIC filed an administrative appeal with the Board of Environmental Review, setting forth challenges to certain components of the Title V permits for Colstrip and KU are unable to predict whether such actions will be brought against any of their plants.  See "Legal Matters" aboveCorette.  These challenges include: 1) the regional haze requirements should have been included in the Title V permits for information on a notice of intent to sue receivedCorette and Colstrip; 2) the MATS requirements should have been included in July 2012 bythe Title V permits for Corette and Colstrip; 3) the particulate monitoring methodology is inadequate at Corette and Colstrip; and 4) sulfur dioxide monitoring is inadequate at Corette.  PPL Montana is participating in these proceedings as an intervenor, but cannot predict the outcomes.

On January 31, 2013, the Sierra Club and the other ownersMEIC alleged identical claims in their joint petition to the EPA, requesting that the EPA object to the MDEQ's issuance of Colstrip.Colstrip's and Corette's Title V permits.  PPL Montana cannot predict the outcome of this parallel matter pending before the EPA.

TC2 Air Permit (PPL, LKE, LG&E and KU)

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

Greenhouse GasGHG Regulations and Tort Litigation

As a result of the April 2007 U.S. Supreme Court decision that the EPA has the 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 apply tobeginning with 2012 model year vehicles.  The EPA has also clarified that this standard, beginning in 2011, also 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 requireswill require adherence to the BACT permit limits for GHGs.  TheseThe rules were challenged, and in June 2012, the U.S. Court of Appeals for the D.C.District of Columbia Circuit upheld the EPA's regulations.  In December 2012, the Court denied petitions for rehearing pertaining to the Court's June 2012 opinion.

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In addition, in April 2012, the EPA proposed New Source Performance Standards (NSPS) for carbon dioxide emissions from new coal-fired generating units, combined-cycle natural gas units, and integrated gasification combined-cycle units.  The proposal would require new coal plants to achieve the same stringent limitations on carbon-dioxidecarbon dioxide emissions as the best performing new gas plants.  There presently is no commercially available technology to allow new coal plants to achieve these limitations and, as a result, the EPA's proposal would effectively preclude future construction of new coal-fired generation and could even be difficult for new gas-fired plants to meet.  In December 2012, the U.S. Court of Appeals for the District of Columbia Circuit dismissed consolidated challenges to the NSPS holding that the proposed rule is not a final agency action.  The EPA is expected to finalize the NSPS for new power plants in 2013 and is expected to begin working on a proposal for such emissions from existing power plants.  With respect to existing power plants, the future.impact could be significant, depending on the structure and stringency of the final rule.

At the regional level, ten northeastern states signed a Memorandum of Understanding (MOU) agreeing to establish a GHG emission cap-and-trade program, called the Regional Greenhouse Gas Initiative (RGGI).  The program commenced in January 2009 and calls for stabilizing carbon dioxide emissions, at base levels established in 2005, from electric power plants with capacity greater than 25 MW.  The MOU also provides for a 10% reduction, by 2019, in carbon dioxide emissions from base levels.

Pennsylvania has not stated an intention to join the RGGI, but enacted the Pennsylvania Climate Change Act of 2008 (PCCA).  The PCCA established a Climate Change Advisory Committee to advise the PADEP on the development of a Climate Change Action Plan.  In December 2009, the Advisory Committee finalized its Climate Change Action Report which identifiesand identified specific actions that could result in reducing GHG emissions by 30% by 2020.  Some of the proposed actions, such as a mandatory 5% efficiency improvement at power plants, could be technically unachievable.  To date, there have been no regulatory or legislative actions taken to implement the recommendations of the report.  In addition, legislation has been introduced that would, if enacted, accelerate solar supply requirements, and restrict eligible solar projects to those located in Pennsylvania.Pennsylvania and increase the percentage of electricity that must come from Tier 1 resources.  PPL and PPL Energy Supply cannot predict at this time whether thisany such legislation will be enacted.

Eleven western states and certain Canadian provinces established the Western Climate Initiative (WCI) in 2003.  The WCI established a goal of reducing carbon dioxide emissions by 15% below 2005 levels by 2020 and developed GHG emission allocations, offsets, and reporting recommendations.  Montana was once a partner in the WCI, but by 2011 had withdrawn,withdrew, along with several other western states.

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

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

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

There has been interest in renewable energy legislation at both the state and federal levels.  At the federal level, House and Senate bills proposed in the 111th Congress would have imposed mandatoryFederal legislation on renewable energy supply and energy efficiency requirements in the 15% to 20% range by approximately 2020.  Earlier in 2011, there were discussions regarding a Clean Energy Standard (CES) that addressedis not only renewables but also encouraged clean energy requirements (as yetexpected to be defined).  Atintroduced this time, neitheryear.  In Pennsylvania, bills were recently introduced calling for an increase in AEPS Tier 1 obligations and to create a $25 million permanent funding program for solar generation.  Bills adding new hydropower to Montana's renewable portfolio standard have moved through the renewable energy debate norlegislative process.  PPL cannot predict the CES discussion is expected to gain momentumultimate outcome of this legislation at the federal or state levels (beyond what is otherwise already required in Pennsylvania and Montana) in the near term.this time.

PPL, and PPL Energy Supply, LKE, LG&E and KU believe there are financial, regulatory and logistical uncertainties related to GHG reductions and the implementation of renewable energy mandates.  Thesemandates that will need to be resolved before the impact of such requirements on PPL and PPL Energy Supplythem can be estimated.  Such uncertainties, among others, include the need to provide back-up supply to augment intermittent renewable generation, potential generation oversupplyover-supply that could result from such renewable generation and back-up, impacts to PJM's capacity market and the need for substantial changes to transmission and distribution systems to accommodate renewable energy.energy sources.  These uncertainties are not directly addressed by 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) (PPL, PPL Energy Supply, LKE, LG&E and KU)

In June 2010, the EPA proposed two approaches to regulating the disposal and management of CCRs (as either hazardous or non-hazardous) under the Resource Conservation and Recovery Act (RCRA).  CCRs include fly ash, bottom ash and sulfur dioxide scrubber wastes.  The first approach would regulate CCRs as a hazardous waste under Subtitle C of the RCRA.  This approach would materially increase costs and result in early retirements of many coal-fired plants, as it would require plants to retrofit their operations to comply with full hazardous waste requirements for the generation of CCRs and associated waste waters through generation, transportation and disposal.  This would also have a negative impact on the beneficial use of CCRs and could eliminate existing markets for CCRs.  The second approach would regulate CCRs as a solid (non-hazardous) waste under Subtitle D of the RCRA.  This approach would mainly affect disposal and most significantly affect any wet disposal operations.  Under this approach, many of the current markets for beneficial uses would not be affected.  Currently, PPL expects that several of its plants in Kentucky and Montana could be significantly impacted by the requirements of Subtitle D of the RCRA, as these plants are using surface impoundments for management and disposal of CCRs.

The EPA has issued information requests on CCR management practices at numerous plants throughout the power industry as it considers whether or not to regulate CCRs as hazardous waste.  PPL has provided information on CCR management practices at most of its plants in response to the EPA's requests.  In addition, the EPA has conducted follow-up inspections to evaluate the structural stability of CCR management facilities at several PPL plants and PPL has implemented 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) that requests comments on selected documents that the EPA received during the comment period for the proposed regulations.  In addition, the U.S. House of Representatives in October 2011September 2012 approved a bill that was revised in the Senate to modify Subtitle D of the RCRA to provide for the proper management and disposal of CCRs and to preclude the EPA from regulating CCRs under Subtitle C of the RCRA.  The bill has been introducedSimilar legislation is being considered in the Senate,2013 Congress and the prospect for passage of this legislation is uncertain.

In January 2012, a coalition of environmental groups filed a 60-day notice of intent to sue the EPA for failure to perform nondiscretionary duties under RCRA, which could require a deadline for the EPA to issue strict CCR regulations.  In February 2012, atwo CCR recycling companycompanies also issued a 60-day notice of intent to sue the EPA over its timeliness in issuing CCR regulations, but that companythey requested that the EPA take a Subtitle D approach that would allow for continued recycling of CCRs.  The coalition filed its lawsuit in April 2012.  The EPA has indicated that it will issue another NODA later in 2012 to request comments onand litigation is continuing.

A final rulemaking is currently expected before the extensive data thatend of 2015.  However, the timing of the final regulations could be accelerated by the outcome of the above litigation, which could require the EPA collected from coal-fired power plant operators as part of the EPA's
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Effluent Limitations Guideline rule modification process which the EPA wants to use in the CCR regulatory development process.issue its regulations sooner.

PPL, PPL Energy Supply, LKE, LG&E and KU cannot predict at this time the final requirements of the EPA's CCR regulations or potential changes to the RCRA and what impact they would have on their facilities, but the economicfinancial impact could be material if CCRs are regulated as hazardous waste under Subtitle C and significant if regulated as non-hazardous under Subtitle D.
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Trimble County Landfill Permit (PPL, LKE, LG&E and KU)

In May 2011, LG&E submitted an application for a hazardous waste.special waste landfill permit to handle coal combustion residuals generated at the Trimble County plant.  After extensive review of the permit application, on March 20, 2013, the Kentucky Division of Waste Management issued a preliminary notice of intent to deny the permit 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.  The preliminary decision to deny the permit will be subject to public notice and comment before a final decision is made.  If the Division makes a final decision to deny the permit, the Company will assess additional options for managing coal combustion residuals including construction of a landfill at an alternate site adjacent to the plant.  Submittal of a new permit application for an alternative site may result in additional environmental considerations in the course of the permitting process and substantial additional costs.  The Company is unable to determine the precise impact of this matter until the Division makes a final decision on the permit application and the Company selects an alternate management option and completes a detailed engineering design.

Martins Creek Fly Ash Release (PPL and PPL Energy Supply)

In 2005, approximately 100 million gallons of water containing fly ash was released from a disposal basin at the Martins Creek plant used in connection with the operation of the plant's two 150 MW coal-fired generating units.  This resulted in ash being deposited onto adjacent roadways and fields, and into a nearby creek and the Delaware River.  PPL determined that the release was caused by a failure in the disposal basin's discharge structure.  PPL conducted extensive clean-up and completed studies, in conjunction with a group of natural resource trustees and the Delaware River Basin Commission, evaluating the effects of the release on the river's sediment, water quality and ecosystem.

The PADEP filed a complaint in Pennsylvania Commonwealth Court against PPL Martins Creek and PPL Generation, alleging violations of various state laws and regulations and seeking penalties and injunctive relief.  PPL and the PADEP have settled this matter.  The settlement also required PPL to submit a report on the completed studies of possible natural resource damages.  PPL subsequently submitted the assessment report to the Pennsylvania and New Jersey regulatory agencies and has continued discussing potential natural resource damages and mitigation options with the agencies.  Subsequently, in August 2011 the PADEP submitted its National Resource Damage Assessment report to the court and to the interveners.  In December 2011, the interveners commented on the PADEP report and in February 2012 the PADEP and PPL filed separate responses with the court.  In March 2012, the court dismissed the interveners' case, but the interveners have appealed the dismissal to the Pennsylvania Supreme Court.  The settlement agreement forCourt and a decision by the Natural Resources Damage Claim has not yet been submitted for public comments, whichcourt is the next phase in the process of finalizing the claim.still pending.

Through June 30, 2012,March 31, 2013, PPL Energy Supply has spent $28 million for remediation and related costs and an insignificant remediation liability remains on the balance sheet.  PPL and PPL Energy Supply cannot be certain of the outcome of the natural resource damage assessment or the associated costs, the outcome of any lawsuit that may be brought by citizens or businesses or the exact nature of any other regulatory or legal actions that may be initiated against PPL, PPL Energy Supply or their subsidiaries as a result of the disposal basin release.  However, PPL and PPL Energy Supply currently do not expect such outcomes to result in significant losses above the amounts currently recorded.

Seepages and Groundwater Infiltration - Pennsylvania, Montana and Kentucky

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

Seepages or groundwater infiltration have been detected at active and retired wastewater basins and landfills at various PPL, 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 abatement measures, where required.  A range of reasonably possible losses cannot currently be estimated.

(PPL and PPL Energy Supply)

In 2007, six plaintiffs filed a lawsuit in the Montana Sixteenth Judicial District Court against the Colstrip plant owners asserting property damage due to seepage from plant wastewater ponds.  A settlement agreement was reached in July 2010 which would have resulted in a payment by PPL Montana, but certain of the plaintiffs later argued the settlement was not final.  The Colstrip plant owners filed a motion to enforce the settlement and in October 2011 the court granted the motion and ordered the settlement to be completed in 60 days.  The plaintiffs appealed the October 2011 order to the Montana Supreme Court, which affirmed the district court's order enforcing the settlement on December 31, 2012 and denied plaintiff's motion for rehearing on February 5, 2013.  The parties are still in negotiations regarding the final settlement documents.  PPL Montana's share of the settlement is not expected to be significant.
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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 court's decision is expectedNational 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 second half of 2012.  Therefore, the settlement ordered by theMontana state district court in Rosebud County.

In late October 2012, Earthjustice filed a second complaint against the MDEQ and PPL Montana in state district court in Lewis and Clark County on behalf of the Sierra Club, the MEIC and the NWF.  This complaint alleges that the defendants have failed to take action under the MFSA and the Montana Water Quality Act to effectively monitor and correct issues of coal ash disposal and wastewater ponds at the Colstrip plant.  The complaint seeks a declaration that the operations of the impoundments violate the statutes addressed above, requests a writ of mandamus directing the MDEQ to enforce the same, and seeks recovery of attorneys' fees and costs.  PPL is not final.vigorously defending these allegations, and PPL and PPL Energy Supply cannot predict the outcome of this matter.   The petition filed in Rosebud County has been stayed pending the appeal, although PPL Montana's shareoutcome of any final settlement is not expected to be significant.this matter.
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Clean Water Act 316(b) (PPL, PPL Energy Supply, LKE, LG&E and KU)

The EPA finalized requirements in 2004 for new or modified cooling water intake structures.  These requirements affect where generating plants are built, establish intake design standards and could lead to requirements for cooling towers at new and modified power plants.  In 2009, however, the U.S. Supreme Court ruled that the EPA has discretion to use cost-benefit analysis in determining the best technology available for minimizing adverse environmental impact to aquatic organisms.  The EPA published the proposed 316(b) rule for existing facilities in April 2011.  The industry and PPL reviewed the proposed rule and submitted comments.  The EPA ishas been evaluating comments and meeting with industry groups to discuss options.  Two NODAs have been issued on the rule that indicate the EPA may be willing to amend the rule based on certain industry group comments and the EPA's comment period on the NODAs has ended.  The final rule is expected to be issued in 2013.  The proposed rule contains two requirements to reduce impact to aquatic organisms.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 of achieving the requirements.  The second requirement is to determine and install the best technology available to reduce mortality of aquatic organisms that are pulled through the plant's cooling water system.system (entrainment).  A form of cost-benefit analysis is allowed for this second requirement.  This process involvesrequirement, involving a site-specific evaluation based on nine factors, including impacts to energy delivery reliability and the remaining useful life of the plant.  The final rule is expected to be issued in June 2013.  PPL, PPL Energy Supply, LKE, LG&E and KU cannot reasonably estimate a range of reasonably possible costs, if any, until athe final rule is issued, the required studies have been completed, and each state in which they operate has decided how to implement the rule.

Effluent Limitations Guidelines and Standards (PPL, PPL Energy Supply, LKE, LG&E and KU)

In October 2009,On April 19, 2013, the EPA released its Final Detailed Studyissued 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 handling and metal cleaning wastes, as well as new limits for scrubber wastewater, gasification wastewater and landfill leachate.  The proposal contains several alternative approaches, some of which could significantly impact PPL's coal-fired plants.  PPL will work with industry groups to comment on the Steam Electric Power Generating effluent limitations guidelines and standards.proposed regulation.  The EPAfinal regulation is expected to issuebe issued in May 2014.  At the final regulations in 2014.  PPL, PPL Energy Supply, LKE, LG&E and KU expect the revised guidelines and standards to be more stringent than the current standards especially for sulfur dioxide scrubber wastewater and ash basin discharges, which could result in more stringent discharge permit limits.  In the interim, states may impose more stringent limits on a case-by-case basis under existing authority as permits are renewed.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.

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

In 2006, the EPA significantly decreased to 10 parts per billion (ppb) the drinking water standards related to arsenic.  In Pennsylvania, Montana and Kentucky, this arsenic standard has been incorporated into the states' water quality standards and could result in more stringent limits in NPDES permits for PPL's Pennsylvania, Montana and Kentucky plants.  Subsequently, the EPA developed a draft risk assessment for arsenic that increases the cancer risk exposure by more than 20 times, which would lower the current standard from 10 ppb to 0.1 ppb.  If the lower standard becomes effective, costly treatment would be required to attempt to meet the standard and, at this time, there is no assurance that it could be achieved.  PPL, PPL Energy Supply, LKE, LG&E and KU cannot predict the outcome of the draft risk assessment and what impact, if any, it would have on their plants, but the costs could be significant.

The EPA is reassessing its polychlorinated biphenyls (PCB) regulations under the Toxics Substance Control Act, which currently allow certain PCB articles to remain in use.  In April 2010, the EPA issued an Advanced Notice of Proposed Rulemaking for changes to these regulations.  This rulemaking could lead to a phase-out of all PCB-containing equipment.  The EPA is planning to propose the revised regulations in late 2012 or 2013.  PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and KU2014.  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.

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A PPL Energy Supply subsidiary signed a Consent Order and Agreement (COA) with the PADEP in July 2008 under which it agreed, under certain conditions, to take further actions to minimize the possibility of fish kills at its Brunner Island plant.  Fish are attracted to warm water in the power plant discharge channel, especially during cold weather.  Debris at intake pumps can result in a unit trip or reduction in load, causing a sudden change in water temperature.  A barrier has been constructed to prevent debris from entering the river water intake area at a cost that was not significant.

PPL Energy Supply's subsidiary has also investigated alternatives to exclude fish from the discharge channel and submitted three alternatives toat its Brunner Island plant, but the PADEP.  The subsidiary and the PADEP have now concluded that a barrier method to exclude fish is not workable.  In June 2012, a new COA (the Brunner COA)Consent Order and Agreement (COA) was signed that allows the subsidiary to study a change in a cooling tower operational methodsmethod that may keep fish from entering the channel.  Should this approach fail, the Brunner COA requires a retrofit of impingement control technology at the intakes to the cooling towers.
towers, the cost of which could be significant.
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In March 2012,May 2010, the subsidiary received a draft NPDES permit (renewed) for the Brunner Island plant from the PADEP.  This permit includes new water quality-based limits for the scrubber wastewater plant.  Some of these limits may not be achievable with the existing treatment system.  Several agencies and environmental groups commented on the draft permit, raising issues that must be resolved in order to obtain a final permit for the plant.  PPL Energy Supply cannot predict the outcome of the final resolution of the permit issues at this time, or what impact, if any, they would have on this facility, but the costs could be significant.

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

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

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

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 are unable tocannot 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.

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

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Future cleanup or remediation work at sites currently under review, or at sites not currently identified, may result in significant additional costs for the Registrants.
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Environmental Matters - WPD (PPL)

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

Other

Nuclear Insurance (PPL and PPL Energy Supply)

PPL Susquehanna is a member of certain insurance programs that provide coverage for property damage to members' nuclear generating plants.  FacilitiesEffective April 1, 2013, facilities at the Susquehanna plant are insured against property damage losses up to $2.75$2.50 billion under these programs.  PPL Susquehanna is also a member of an insurance program that provides insurance coverage for the cost of replacement power during prolonged outages of nuclear units caused by certain specified conditions.

Under the property and replacement power insurance programs, PPL Susquehanna could be assessed retroactive premiums in the event of the insurers' adverse loss experience.  At June 30, 2012,Effective April 1, 2013, this maximum assessment was $48$46 million.

In the event of a nuclear incident at the Susquehanna plant, PPL Susquehanna's public liability for claims resulting from such incident would be limited to $12.6 billion under provisions of The Price-Anderson Act Amendments under the Energy Policy Act of 2005.as amended.  PPL Susquehanna is protected against this liability by a combination of commercial insurance and an industry assessment program.

In the event of a nuclear incident at any of the reactors covered by The Price-Anderson Act Amendments under the Energy Policy Act of 2005,as amended, PPL Susquehanna could be assessed up to $235 million per incident, payable at $35 million per year.

Employee Relations(PPL, LKE and KU)

In July 2012, KU and the IBEW Local 2100 ratified a three-year labor agreement containing a 2.5% wage increase through July 2013, a subsequent 2.5% wage increase for July 2013 through July 2014 and a wage reopener for July 2014.  The agreement covers approximately 70 employees.

Guarantees and Other Assurances

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

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

(PPL)

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

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

The table below details guarantees provided at June 30, 2012.March 31, 2013.  The total recorded liability at June 30, 2012March 31, 2013 and December 31, 2011,2012, was $24 million and $14 million for PPL and $20 million and $11 million for LKE.  The probability of expected payment/performance under each of these guarantees is remote except for "WPD guarantee of pension and other obligations of unconsolidated entities" and "Indemnification of lease termination and other divestitures."  For reporting purposes, on a consolidated basis, all guarantees of PPL Energy Supply (other than the letters of credit), PPL Electric, LKE, LG&E and KU also apply to PPL, and all guarantees of LG&E and KU also apply to LKE.

  Exposure at Expiration
  March 31, 2013 (a) Date
PPL      
Indemnifications related to the WPD Midlands acquisition   (b)  
WPD indemnifications for entities in liquidation and sales of assets $ 10 (c) 2018
WPD guarantee of pension and other obligations of unconsolidated entities   85 (d) 2015
       
 
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  Exposure at Expiration
  June 30, 2012 (a) Date
PPL      
Indemnifications related to the WPD Midlands acquisition   (b)  
WPD indemnifications for entities in liquidation and sales of assets $ 290 (c) 2014 - 2018
WPD guarantee of pension and other obligations of unconsolidated entities   89 (d) 2015
Tax indemnification related to unconsolidated WPD affiliates   (e)  
       
PPL Energy Supply (f)      
Letters of credit issued on behalf of affiliates   21 (g) 2012 - 2014
Retrospective premiums under nuclear insurance programs   48 (h)  
Nuclear claims assessment under The Price-Anderson Act Amendments under The Energy Policy Act of 2005   235 (i)  
Indemnifications for sales of assets   262 (j) 2012 - 2025
Indemnification to operators of jointly owned facilities   6 (k)  
Guarantee of a portion of a divested unconsolidated entity's debt   22 (l) 2018
       
PPL Electric (m)      
Guarantee of inventory value   19 (n) 2016
       
LKE (m)      
Indemnification of lease termination and other divestitures   301 (o) 2021 - 2023
       
LG&E and KU (p)      
LG&E and KU guarantee of shortfall related to OVEC   (q)  
  Exposure at Expiration
  March 31, 2013 (a) Date
PPL Energy Supply      
Letters of credit issued on behalf of affiliates   23 (e) 2013 - 2014
Retrospective premiums under nuclear insurance programs   48 (f)  
Nuclear claims assessment under The Price-Anderson Act as amended   235 (g)  
Indemnifications for sales of assets   250 (h) 2025
Indemnification to operators of jointly owned facilities   6 (i)  
Guarantee of a portion of a divested unconsolidated entity's debt   22 (j) 2018
       
PPL Electric      
Guarantee of inventory value   24 (k) 2016
       
LKE      
Indemnification of lease termination and other divestitures   301 (l) 2021 - 2023
       
LG&E and KU      
LG&E and KU guarantee of shortfall related to OVEC   (m)  
 
(a)Represents the estimated maximum potential amount of future payments that could be required to be made under the guarantee.
(b)Prior to PPL's acquisition, WPD Midlands Holdings Limited had agreed to indemnify certain former directors of a Turkish entity, in which WPD Midlands Holdings Limited previously owned an interest, for any liabilities that may arise as a result of an investigation by Turkish tax authorities, and PPL WEM has received a cross-indemnity from E.ON AG with respect to these indemnification obligations.  Additionally, PPL subsidiaries agreed to provide indemnifications to subsidiaries of E.ON AG for certain liabilities relating to properties and assets owned by affiliates of E.ON AG that were transferred to WPD Midlands in connection with the acquisition.  The maximum exposure and expiration of these indemnifications cannot be estimated because the maximum potential liability is not capped and the expiration date is not specified in the transaction documents.
(c)In connection with the liquidation of wholly owned subsidiaries that have been deconsolidated upon turning the entities over to the liquidators, certain affiliates of PPL Global have agreed to indemnify the liquidators, directors and/or the entities themselves for any liabilities or expenses arising during the liquidation process, including liabilities and expenses of the entities placed into liquidation.  In some cases, the indemnifications are limited to a maximum amount that is based on distributions made from the subsidiary to its parent either prior or subsequent to being placed into liquidation.  In other cases, the maximum amount of the indemnifications is not explicitly stated in the agreements.  The indemnifications generally expire two to seven years subsequent to the date of dissolution of the entities.  The exposure noted only includes those cases in which the agreements provide for a specific limit on the amount of the indemnification, and the expiration date was based on an estimate of the dissolution date of the entities.

In connection with their sales of various businesses, WPD and its affiliates have provided the purchasers with indemnifications that are standard for such transactions, including indemnifications for certain pre-existing liabilities and environmental and tax matters.  In addition, in connection with certain of these sales, WPD and its affiliates have agreed to continue their obligations under existing third-party guarantees, either for a set period of time following the transactions or upon the condition that the purchasers make reasonable efforts to terminate the guarantees.  Finally, WPD and its affiliates remain secondarily responsible for lease payments under certain leases that they have assigned to third parties.
(d)As a result of the privatization of the utility industry in the U.K., certain electric associations' roles and responsibilities were discontinued or modified.  As a result, certain obligations, primarily pension-related, associated with these organizations have been guaranteed by the participating members.  Costs are allocated to the members based on predetermined percentages as outlined in specific agreements.  However, if a member becomes insolvent, costs can be reallocated to and are guaranteed by the remaining members.  At June 30, 2012,March 31, 2013, WPD has recorded an estimated discounted liability based on its current allocated percentage of the total expected costs for which the expected payment/performance is probable.  Neither the expiration date nor the maximum amount of potential payments for certain obligations is explicitly stated in the related agreements.  Therefore, they have been estimated based on the types of obligations.
(e)Two WPD unconsolidated affiliates were refinanced during 2005.  Under the terms of the refinancing, WPD indemnified the lender against certain tax and other liabilities.  These indemnifications expired in the second quarter of 2012.
(f)Other than the letters of credit, all guarantees of PPL Energy Supply, on a consolidated basis, also apply to PPL on a consolidated basis for financial reporting purposes.
(g)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.
(h)(f)PPL Susquehanna is contingently obligated to pay this amount related to potential retrospective premiums that could be assessed under its nuclear insurance programs.  See "Nuclear Insurance" above for additional information.
(i)(g)This is the maximum amount PPL Susquehanna could be assessed for each incident at any of the nuclear reactors covered by this Act.  See "Nuclear Insurance" above for additional information.
(j)(h)PPL Energy Supply's maximum exposure with respect to certain indemnifications and the expiration of the indemnifications cannot be estimated because, in the case of certain indemnification provisions, the maximum potential liability is not capped by the transaction documents and the expiration date is based on the applicable statute of limitations.  The exposure and expiration dates noted are only for those cases in which the agreements provide for specific limits.  The indemnification provisions described below are in each case subject to certain customary limitations, including thresholds for allowable claims, caps on aggregate liability, and time limitations for claims arising out of breaches of most representations and warranties.

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

A subsidiary of PPL Energy Supply has agreed to provide indemnification to the purchasers of the Maine hydroelectric facilities for damages arising out of any breach of the representations, warranties and covenants under the respective transaction agreements and for damages arising out of certain other matters, including liabilities of the PPL Energy Supply subsidiary relating to the pre-closing ownership or operation of those hydroelectric facilities.  The indemnification provisions for certainmost representations and warranties expired in the secondfourth quarter of 2011.2012.

Subsidiaries of PPL Energy Supply have agreed to provide indemnification to the purchasers of certain non-core generation facilities sold in March 2011 for damages arising out of any breach of the representations, warranties and covenants under the related transaction agreements and for damages arising out of certain other matters relating to the facilities that were the subject of the transaction, including certain reduced capacity payments (if any) at one of the facilities in the event specified PJM rule changes are proposed and become effective.  The indemnification provisions for most representations and warranties expired in the first quarter of 2012.
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(k)(i)In December 2007, a subsidiary of PPL Energy Supply executed revised owners agreements for two jointly owned facilities, the Keystone and Conemaugh generating plants.  The agreements require that in the event of any default by an owner, the other owners fund contributions for the operation of the generating plants, based upon their ownership percentages.  The non-defaulting owners, who make up the defaulting owner's obligations, are entitled to the generation entitlement of the defaulting owner, based upon their ownership percentage.  The exposure shown reflects the PPL Energy Supply subsidiary's share of the maximum obligation.  The agreements do not have an expiration date.
(l)(j)A PPL Energy Supply subsidiary owned a one-third equity interest in Safe Harbor Water Power Corporation (Safe Harbor) that was sold in March 2011.  Beginning in 2008, PPL Energy Supply guaranteed one-third of any amounts payable with respect to certain senior notes issued by Safe Harbor.  Under the terms of the sale agreement, PPL Energy Supply continues to guarantee the portion of Safe Harbor's debt, but received a cross-indemnity from the purchaser, secured by a lien on the purchaser's stock of Safe Harbor, in the event PPL Energy Supply is required to make a payment under the guarantee.  The exposure noted reflects principal only.
(m)All guarantees of PPL Electric and LKE, on a consolidated basis, also apply to PPL on a consolidated basis for financial reporting purposes.
(n)(k)PPL Electric entered into a contract with a third party logistics firm that provides inventory procurement and fulfillment services.  Under the contract, the logistics firm has title to the inventory purchased for PPL Electric's use.  Upon termination of the contract, PPL Electric has guaranteed to purchase any remaining inventory that has not been used or sold by the logistics firm at the weighted-average cost at which the logistics firm purchased the inventory, thus protecting the logistics firm from reductions in the fair value of the inventory.
(o)(l)LKE provides certain indemnifications, the most significant of which relate to the termination of the WKE lease in July 2009.  These guarantees cover the due and punctual payment, performance and discharge by each party of its respective present and future obligations.  The most comprehensive of these guarantees is the LKE guarantee covering operational, regulatory and environmental commitments and indemnifications made by WKE under the WKE Transaction Termination Agreement.  This guarantee has a term of 12 years ending July 2021, and a cumulative maximum exposure of $200 million.  Certain items such as non-excluded government fines and penalties fall outside the cumulative cap.  LKE has contested the applicability of the indemnification requirement relating to one matter presented by a counterparty under this guarantee.  Another guarantee with a maximum exposure of $100 million covering other indemnifications expires in 2023.  In May 2012, LKELKE'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 July 2012,January 2013, LKE's indemnitee filedcommenced a judicial actionproceeding in the Kentucky Court of Appeals appealing the December 2012 order of the Henderson Circuit Court seeking to vacateconfirming the arbitration decision.award.  LKE believes its indemnification obligations in this matter remain subject to various uncertainties, including the potential for additional legal status of the court's review ofchallenges 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.  ForLKE cannot predict the three and six months ended June 30, 2012, LKE has adjusted its estimated liability for certain of these indemnifications by $9 million ($5 million after-tax or $0.01 per share, basic and diluted, for PPL), 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.  No additional material loss is anticipated by reasonultimate outcomes of such indemnifications.indemnification circumstances, but does not currently expect such outcomes to result in significant losses above the amounts recorded.
(p)All guarantees of LG&E and KU also apply to PPL and LKE on a consolidated basis for financial reporting purposes.
(q)(m)Pursuant to athe OVEC power purchase agreement with OVEC,contract, expiring in June 2040, LG&E and KU are obligated to pay a demand charge which includes, among other charges, debt service and amortization toward principal retirement, decommissioning costs, postretirementpost-retirement and post employment benefits.post-employment benefits costs (other than pensions), and reimbursement of plant operating, maintenance and other expenses.  The demand charge is expected to cover LG&E's and KU's shares of the cost of thesethe listed items over the term of the contract.  However, in the event there is a shortfall in covering these costs, LG&E and KU are obligated to pay their share of the excess.excess debt service, post-retirement and decommissioning costs.   The maximum exposure and the expiration date of these potential obligations are not presently determinable.
 
The Registrants provide other miscellaneous guarantees through contracts entered into in the normal course of business.  These guarantees are primarily in the form of indemnification or warranties related to services or equipment and vary in duration.  The amounts of these guarantees often are not explicitly stated, and the overall maximum amount of the obligation under such guarantees cannot be reasonably estimated.  Historically, no significant payments have been made with respect to these types of guarantees and the probability of payment/performance under these guarantees is remote.

PPL, on behalf of itself and certain of its subsidiaries, maintains insurance that covers liability assumed under contract for bodily injury and property damage.  The coverage requires a maximum $4 million deductible for PPL, PPL Energy Supply and PPL Electric and $2 million for LKE, LG&E and KU, per occurrence and provides maximum aggregate coverage of $200$225 million.  This insurance may be applicable to obligations under certain of these contractual arrangements.

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11.  Related Party Transactions

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

PPL Electric holds competitive solicitations for PLR generation supply.  PPL EnergyPlus has been awarded a portion of the PLR generation supply through these competitive solicitations.  See Note 10 for additional information on the solicitations.  PPL Electric's purchases from PPL EnergyPlus totaled $16 million and $38 million for the three and six months ended June 30, 2012 and $4 million and $10 million during the same periods in 2011.  The sales and purchases between PPL EnergyPlus and PPL Electric are included in the Statements of Income as "Wholesale energy marketing to affiliate" by PPL Energy Supply and as "Energy purchases from affiliate" by PPL Electric.

Under the standard 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 ElectricElectric:  (a) when the aggregate credit exposure with respect tomarket price of electricity capacity and other related products 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 and tangible net worth of PPL Energy Supply, as guarantor, PPL EnergyPlus' credit limit was $35 million at June 30, 2012.March 31, 2013.  In no instance is PPL Electric required to post collateral to suppliers under these supply contracts.

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

At June 30, 2012,March 31, 2013, PPL Energy Supply had a net credit exposure of $38$23 million from PPL Electric from its commitment as a PLR supplier and from the sale of its accounts receivable to PPL Electric.

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 native load.  When LG&E has excess generation capacity after serving its own retail native load and its generation cost is lower than that of KU, KU purchases electricity from LG&E.  When KU has excess generation capacity after serving its own retail native load and its generation cost is lower than that of LG&E, LG&E purchases electricity from KU.  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 equal to the seller's fuel cost.  Savings realized from such intercompany transactions are shared equally between the two companies.  The volume of energy each company has to sell to the other is dependent on its native load needs and its available generation.

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

PPL Services provides corporate functions such as financial, legal, human resources and information technology services.  PPL Services charges the respective PPL subsidiaries for the cost of such services when they can be specifically identified.  The cost of the services that is not directly charged to PPL subsidiaries is allocated to applicable subsidiaries based on an average of the subsidiaries' relative invested capital, operation and maintenance expenses and number of employees.  PPL Services charged the following amounts for the periods ended June 30,March 31, which PPL management believes are reasonable, including amounts applied to accounts that are further distributed between capital and expense:expense.

 Three Months Six Months   Three Months
 2012  2011  2012  2011      2013  2012 
                
PPL Energy Supply $ 53  $ 44  $ 110  $ 94      $ 57  $ 57 
PPL Electric  39   35   81   74       38   42 
LKE  3   4   8   9       4   5 

Intercompany Billings by LKS (LG&E and KU)

LKS provides LG&E and KU with a variety of centralized administrative, management and support services.  The cost of these services is directly charged to the company or, for general costs that cannot be directly attributed, charged based on predetermined allocation factors, including the following measures: number of customers, total assets, revenues, number of employees and/or other statistical information.  LKS charged the amounts in the table below for the periods ended June 30,March 31, which LKE management believes are reasonable, including amounts that are further distributed between capital and expense:

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expense.

 Three Months Six Months   Three Months
 2012  2011  2012  2011      2013  2012 
                
LG&E $40  $50  $81  $83      $39  $41 
KU 35  55  81  104      66  46 

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

(PPL Energy Supply)

A PPL Energy Supply subsidiary periodically holds revolving demand notes from certain affiliates.  At June 30, 2012, there were no balances outstanding.  At December 31, 2011, a note with PPL Energy Funding had an outstanding balance of $198 million with an interest rate of 3.77% that was reflected in "Note receivable from affiliate" on the Balance Sheet.  Interest earned on these revolving facilities is included in "Interest Income from Affiliates" on the Statements of Income.  The interest rates on borrowings are equal to one-month LIBOR plus a spread.  Interest earned on borrowings was insignificant for the three and six months ended June 30, 2012 and 2011.

Intercompany Borrowings (LKE)

LKE maintains a $300 million revolving demand note with a PPL Energy SupplyFunding subsidiary whereby LKE can borrow funds on a short-term basis at market-based rates.  The interest rates on borrowings are equal to one-month LIBOR plus a spread.  At June 30, 2012March 31, 2013 and December 31, 2011, there were no balances outstanding.  Interest expense incurred on the revolving demand note with the PPL Energy Supply subsidiary was not significant for the three and six months ended June 30, 2012, and 2011.

After PPL's acquisition of LKE in November 2010, LKE held a note receivable from 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 June 30, 2012 and December 31, 2011, $12$85 million and $15 million were outstanding and were reflected in "Notes receivable from affiliates" on the Balance Sheets.  The interest rates on loans are based on the PPL affiliate's credit rating and are currently equal to one-month LIBOR plus a spread.  The interest rates on the outstanding borrowings at June 30, 2012 and December 31, 2011 were 2.24% and 2.27%.  Interest income on the note receivable was not significant for the three and six months ended June 30, 2012 and 2011.

(LG&E)

LG&E participates in an intercompany money pool agreement whereby LKE and/or KU make available to LG&E funds up to $500 million at an interest rate based on a market index of commercial paper issues.  At June 30, 2012 and December 31, 2011, LG&E had no payable balance outstanding, but at June 30, 2012, LG&E had a $6 million receivable balance outstanding, which was reflected in "Notes receivable from affiliates" on the Balance Sheet.  The interest rate on the outstanding receivable at June 30, 2012 was 0.48%.  Interest expense incurred on the money pool agreement with LKE and/or KU was not significant for the three and six months ended June 30, 2012 and 2011.  Interest income on the money pool agreement with LKE and/or KU was not significant for the three and six months ended June 30, 2012.  There was no interest income on the money pool agreement with LKE and/or KU for the three and six months ended June 30, 2011.

(KU)

KU participates in an intercompany money pool agreement whereby LKE and/or LG&E make available to KU funds up to $500 million at an interest rate based on a market index of commercial paper issues.  At June 30, 2012, $6$25 million was outstanding and was reflected in "Notes payable with affiliates" on the Balance Sheet.  At December 31, 2011, there was no balance outstanding.  The interest rate on the outstanding borrowingsborrowing at June 30, 2012March 31, 2013 was 0.48%1.7%.  Interest expense incurred on the money pool agreement with LKE and/or LG&Edemand note was not significant for the three and six months ended June 30, 2012March 31, 2013 and 2011.    2012.

Trademark RoyaltiesIntercompany Derivatives (PPL Energy Supply)LKE, LG&E and KU)

APeriodically, 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 subsidiary owns PPL trademarks and billed certain affiliateswith third parties.  See Note 14 for their use under a licensing agreement.  This agreement was terminated in December 2011.  PPL Energy Supply was charged $10 million and $20 million of license fees for the three and six months ended June 30, 2011.  These charges are primarily included in "Other operation and maintenance"additional information on the Statement of Income.
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Intercompany Insurance (PPL Electric)

PPL Power Insurance Ltd. (PPL Power Insurance) is a subsidiary of PPL that provides insurance coverage to PPL and its subsidiaries for property damage, general/public liability and workers' compensation.

Due to damages resulting from several PUC-reportable storms that occurred in May 2011, PPL Electric exceeded its deductible for the 2011 policy year.  Probable recoveries on insurance claims with PPL Power Insurance of $15 million were recorded during the three and six months ended June 30, 2011, of which $9 million was included in "Other operation and maintenance" on the Statement of Income, and the remainder was recorded in PP&E on the Balance Sheet.intercompany derivatives.

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

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

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12.  Other Income (Expense) - net

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

The breakdown of "Other Income (Expense) - net" for the periods ended June 30March 31 was:

   Three Months Six Months       Three Months
   2012  2011  2012  2011        2013  2012 
PPLPPL        PPL        
Other IncomeOther Income        Other Income        
Earnings on securities in NDT funds $ 4  $ 3  $ 12  $ 18 
Interest income  2   2   3   4 
AFUDC  3   2   5   3 Earnings on securities in NDT funds     $ 5  $ 8 
Net hedge gains associated with the 2011 Bridge Facility (a)    62     55 Interest income      1   1 
Equity earnings (losses) from unconsolidated affiliates  (4)    (6)  AFUDC - equity component      3   2 
Miscellaneous - Domestic  3   4   5   7 Miscellaneous - Domestic      2   2 
Miscellaneous - U.K.   2    1    2    1 Miscellaneous - U.K.       1    
Total Other Income   10    74    21    88 Total Other Income       12    13 
Other ExpenseOther Expense        Other Expense        
Economic foreign currency exchange contracts (Note 14)  (25)  (2)  (7)  Economic foreign currency exchange contracts (Note 14)      (119)  18 
Charitable contributions  2   2   6   5 Charitable contributions      4   4 
WPD Midlands acquisition-related costs (Note 8)    26     36 Miscellaneous - Domestic      4   6 
Foreign currency loss on 2011 Bridge Facility (b)    58     58 Miscellaneous - U.K.       1    2 
U.K. stamp duty tax    21     21 Total Other Expense       (110)   30 
Miscellaneous - Domestic  4   1   8   4 
Miscellaneous - U.K.   (1)   2    1    3 
Total Other Expense   (20)   108    8    127 
Other Income (Expense) - netOther Income (Expense) - net $ 30  $ (34) $ 13  $ (39)Other Income (Expense) - net     $ 122  $ (17)
          
PPL Energy Supply        
Other Income        
Earnings on securities in NDT funds $ 4  $ 3  $ 12  $ 18 
Interest income  1   2   1   2 
Miscellaneous   1    1    2    3 
Total Other Income   6    6    15    23 
Other Expense        
Charitable contributions      1   
Miscellaneous   1    2    4    5 
Total Other Expense   1    2    5    5 
Other Income (Expense) - net $ 5  $ 4  $ 10  $ 18 

(a)Represents a gain on foreign currency contracts that hedged the repayment of the 2011 Bridge Facility borrowing.
(b)Represents a foreign currency loss related to the repayment of the 2011 Bridge Facility borrowing.

"Other Income (Expense) - net" for the three and six months ended June 30, 2012 and 2011 for PPL Electric is primarily AFUDC.  "Other Income (Expense) - net" for the three and six months ended June 30, 2012 for LKE and KU is primarily equity losses from an unconsolidated affiliate.  The components of "Other Income (Expense) - net" for the three and six months ended June 30,March 31, 2013 and 2012 for PPL Energy Supply, PPL Electric, LKE, LG&E and 2011 for LG&EKU are not significant.

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13.  Fair Value Measurements and Credit Concentration

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

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price).  A market approach (generally, data from market transactions), an income approach (generally, present value techniques and option-pricing models), and/or a cost approach (generally, replacement cost) are used to measure the fair value of an asset or liability, as appropriate.  These valuation approaches incorporate inputs such as observable, independent market data and/or unobservable data that management believes are predicated on the assumptions market participants would use to price an asset or liability.  These inputs may incorporate, as applicable, certain risks such as nonperformance risk, which includes credit risk.  The fair value of a group of financial assets and liabilities is measured on a net basis.  Transfers between levels are recognized at end-of-reporting-period values.   During the three and six months ended June 30,March 31, 2013 and 2012, there were no transfers between Level 1 and Level 2.   See Note 1 in each Registrant's 2012 Form 10-K for information on the levels in the fair value hierarchy.

Recurring Fair Value Measurements

The assets and liabilities measured at fair value were:

   June 30, 2012 December 31, 2011   March 31, 2013 December 31, 2012
   Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3   Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
PPLPPL                PPL                
AssetsAssets                Assets                
Cash and cash equivalents $ 981  $ 981        $ 1,202  $ 1,202       Cash and cash equivalents $ 853  $ 853        $ 901  $ 901       
Restricted cash and cash equivalents (a)   176    176          209    209       Restricted cash and cash equivalents (a)   186    186          135    135       
Price risk management assets:                Price risk management assets:                
 Energy commodities  3,506   3  $ 3,459  $ 44   3,423   3  $ 3,390  $ 30  Energy commodities  1,676   3  $ 1,651  $ 22   2,068   2  $ 2,037  $ 29 
 Interest rate swaps          3     3    Interest rate swaps  27     27     15     15   
 Foreign currency contracts  19     19     18     18    Foreign currency contracts  96     96           
 Cross-currency swaps   70       60    10    24       20    4  Cross-currency swaps   83       83       14       13    1 
Total price risk management assets   3,595    3    3,538    54    3,468    3    3,431    34 Total price risk management assets   1,882    3    1,857    22    2,097    2    2,065    30 
NDT funds:                
 Cash and cash equivalents  14   14       12   12     
 Equity securities                
 U.S. large-cap  317   219   98     292   202   90   
 U.S. mid/small-cap  127   94   33     117   87   30   
 Debt securities                
 U.S. Treasury  96   96       86   86     
 U.S. government sponsored agency  10     10     10     10   
 Municipality  81     81     83     83   
 Investment-grade corporate  35     35     38     38   
 Other  2     2     2     2   
 Receivables (payables), net   (1)   (4)   3          (3)   3    
Total NDT funds   681    419    262       640    384    256    
Auction rate securities (b)   18       3    15    24          24 
Total assets $ 5,451  $ 1,579  $ 3,803  $ 69  $ 5,543  $ 1,798  $ 3,687  $ 58 
                  
Liabilities                
Price risk management liabilities:                
 Energy commodities $ 2,528  $ 3  $ 2,515  $ 10  $ 2,345  $ 1  $ 2,327  $ 17 
 Interest rate swaps  77     77     63     63   
 Foreign currency contracts  4     4           
 Cross-currency swaps   2       2       2       2    
Total price risk management liabilities $ 2,611  $ 3  $ 2,598  $ 10  $ 2,410  $ 1  $ 2,392  $ 17 

7871

     March 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   8    8          11    11       
  Equity securities                        
   U.S. large-cap   457    342    115       412    308    104    
   U.S. mid/small-cap   68    28    40       60    25    35    
  Debt securities                        
   U.S. Treasury   95    95          95    95       
   U.S. government sponsored agency   9       9       9       9    
   Municipality   83       83       82       82    
   Investment-grade corporate   40       40       40       40    
   Other   3       3       3       3    
  Receivables (payables), net   1    (1)   2          (2)   2    
 Total NDT funds   764    472    292       712    437    275    
 Auction rate securities (b)   19       3    16    19       3    16 
Total assets $ 3,704  $ 1,514  $ 2,152  $ 38  $ 3,864  $ 1,475  $ 2,343  $ 46 
                            
Liabilities                        
 Price risk management liabilities:                        
  Energy commodities $ 1,432  $ 2  $ 1,422  $ 8  $ 1,566  $ 2  $ 1,557  $ 7 
  Interest rate swaps   69       69       80       80    
  Foreign currency contracts   3       3       44       44    
  Cross-currency swaps   1       1       4       4    
 Total price risk management liabilities $ 1,505  $ 2  $ 1,495  $ 8  $ 1,694  $ 2  $ 1,685  $ 7 
                            
PPL Energy Supply                        
Assets                        
 Cash and cash equivalents $ 147  $ 147        $ 413  $ 413       
 Restricted cash and cash equivalents (a)   122    122          63    63       
 Price risk management assets:                        
  Energy commodities   1,676    3  $ 1,651  $ 22    2,068    2  $ 2,037  $ 29 
 Total price risk management assets   1,676    3    1,651    22    2,068    2    2,037    29 
 NDT funds:                        
  Cash and cash equivalents   8    8          11    11       
  Equity securities                        
   U.S. large-cap   457    342    115       412    308    104    
   U.S. mid/small-cap   68    28    40       60    25    35    
  Debt securities                        
   U.S. Treasury   95    95          95    95       
   U.S. government sponsored agency   9       9       9       9    
   Municipality   83       83       82       82    
   Investment-grade corporate   40       40       40       40    
   Other   3       3       3       3    
  Receivables (payables), net   1    (1)   2          (2)   2    
 Total NDT funds   764    472    292       712    437    275    
 Auction rate securities (b)   16       3    13    16       3    13 
Total assets $ 2,725  $ 744  $ 1,946  $ 35  $ 3,272  $ 915  $ 2,315  $ 42 
                            
Liabilities                        
 Price risk management liabilities:                        
  Energy commodities $ 1,432  $ 2  $ 1,422  $ 8  $ 1,566  $ 2  $ 1,557  $ 7 
 Total price risk management liabilities $ 1,432  $ 2  $ 1,422  $ 8  $ 1,566  $ 2  $ 1,557  $ 7 
                            
PPL Electric                        
Assets                        
 Cash and cash equivalents $ 31  $ 31        $ 140  $ 140       
 Restricted cash and cash equivalents (c)   12    12          13    13       
Total assets $ 43  $ 43        $ 153  $ 153       

   June 30, 2012 December 31, 2011
   Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
PPL Energy Supply                
LKELKE                
AssetsAssets                Assets                
Cash and cash equivalents $ 446  $ 446        $ 379  $ 379       
Restricted cash and cash equivalents (a)   110    110          145    145       
Price risk management assets:                
 Energy commodities   3,506    3  $ 3,459  $ 44    3,423    3  $ 3,390  $ 30 
Total price risk management assets   3,506    3    3,459    44    3,423    3    3,390    30 
NDT funds:                
 Cash and cash equivalents  14   14       12   12     
 Equity securities                
 U.S. large-cap  317   219   98     292   202   90   
 U.S. mid/small-cap  127   94   33     117   87   30   
 Debt securities                
 U.S. Treasury  96   96       86   86     
 U.S. government sponsored agency  10     10     10     10   
 Municipality  81     81     83     83   
 Investment-grade corporate  35     35     38     38   Cash and cash equivalents $ 52  $ 52      $ 43  $ 43     
 Other  2     2     2     2   Restricted cash and cash equivalents (d)  27   27       32   32     
 Receivables (payables), net   (1)   (4)   3          (3)   3    Price risk management assets:                
Total NDT funds   681    419    262       640    384    256     Interest rate swaps   24     $ 24       14     $ 14    
Auction rate securities (b)   15       3    12    19          19 Total price risk management assets   24       24       14       14    
Total assetsTotal assets $ 4,758  $ 978  $ 3,724  $ 56  $ 4,606  $ 911  $ 3,646  $ 49 Total assets $ 103  $ 79  $ 24     $ 89  $ 75  $ 14    
                                    
LiabilitiesLiabilities                Liabilities                
Price risk management liabilities:                Price risk management liabilities:                
 Energy commodities $ 2,528  $ 3  $ 2,515  $ 10  $ 2,345  $ 1  $ 2,327  $ 17  Interest rate swaps $ 54     $ 54     $ 58     $ 58    
Total price risk management liabilities $ 2,528  $ 3  $ 2,515  $ 10  $ 2,345  $ 1  $ 2,327  $ 17 
                  
PPL Electric                
Assets                
Cash and cash equivalents $ 45  $ 45      $ 320  $ 320     
Restricted cash and cash equivalents (c)   13    13          13    13       
Total assets $ 58  $ 58        $ 333  $ 333       
Total price risk management liabilitiesTotal price risk management liabilities $ 54     $ 54     $ 58     $ 58    
72

LKE                
   March 31, 2013 December 31, 2012
   Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
LG&ELG&E                
AssetsAssets                Assets                
Cash and cash equivalents $ 29  $ 29      $ 59  $ 59     Cash and cash equivalents $ 34  $ 34      $ 22  $ 22     
Restricted cash and cash equivalents (c)   31    31          29    29       Restricted cash and cash equivalents (d)  27   27       32   32     
Price risk management assets:                
 Interest rate swaps   12     $ 12       7     $ 7    
Total price risk management assetsTotal price risk management assets   12       12       7       7    
Total assetsTotal assets $ 60  $ 60        $ 88  $ 88       Total assets $ 73  $ 61  $ 12     $ 61  $ 54  $ 7    
                                    
LiabilitiesLiabilities                Liabilities                
Price risk management liabilities:                Price risk management liabilities:                
 Interest rate swaps (d) $ 62     $ 62     $ 60     $ 60     Interest rate swaps $ 54     $ 54     $ 58     $ 58    
Total liabilities $ 62     $ 62     $ 60     $ 60    
                  
LG&E                
Assets                
Cash and cash equivalents $ 25  $ 25      $ 25  $ 25     
Restricted cash and cash equivalents (c)   31    31          29    29       
Total assets $ 56  $ 56        $ 54  $ 54       
                  
Liabilities                
Price risk management liabilities:                
 Interest rate swaps (d) $ 62     $ 62     $ 60     $ 60    
Total liabilities $ 62     $ 62     $ 60     $ 60    
Total price risk management liabilitiesTotal price risk management liabilities $ 54     $ 54     $ 58     $ 58    
                                    
KUKU                KU                
AssetsAssets                Assets                
Cash and cash equivalents $ 3  $ 3        $ 31  $ 31       Cash and cash equivalents $ 16  $ 16      $ 21  $ 21     
Price risk management assets:                
 Interest rate swaps   12     $ 12       7     $ 7    
Total price risk management assets   12       12       7       7    
Total assetsTotal assets $ 3  $ 3        $ 31  $ 31       Total assets $ 28  $ 16  $ 12     $ 28  $ 21  $ 7    

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

79


A reconciliation of net assets and liabilities classified as Level 3 for the periods ended June 30, 2012 is as follows:
A reconciliation of net assets and liabilities classified as Level 3 for the three months ended March 31 is as follows:A reconciliation of net assets and liabilities classified as Level 3 for the three months ended March 31 is as follows:
                                    
   Fair Value Measurements Using Significant Unobservable Inputs (Level 3)   Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
   Three Months Six Months   2013  2012 
   Energy Auction Cross-   Energy Auction Cross-     Energy Auction Cross-   Energy Auction Cross-  
   Commodities, Rate Currency   Commodities,  Rate Currency     Commodities, Rate Currency   Commodities,  Rate Currency  
    net Securities Swaps Total  net Securities Swaps Total    net Securities Swaps Total  net Securities Swaps Total
PPLPPL                PPL                
Balance at beginning ofBalance at beginning of                Balance at beginning of                
period $ 19  $ 24  $ 3  $ 46  $ 13  $ 24  $ 4  $ 41 
 Total realized/unrealized                period $ 22  $ 16  $ 1  $ 39  $ 13  $ 24  $ 4  $ 41 
 gains (losses)                 Total realized/unrealized                
 Included in earnings  (2)    (1)  (3)  16     (1)  15  gains (losses)                
 Included in OCI (a)  (1)  (1)  8   6   1   (1)  10   10  Included in earnings  (8)      (8)  18       18 
 Sales    (5)    (5)    (5)    (5) Included in OCI (a)      3   3   2     2   4 
 Settlements  (5)       (5)  (11)      (11) Settlements  (1)       (1)  (6)      (6)
 Transfers into Level 3  14       14   14       14  Transfers into Level 3  1       1         
 Transfers out of Level 3   9    (3)      6    1    (3)   (3)   (5) Transfers out of Level 3         (4)   (4)   (8)      (3)   (11)
Balance at end of periodBalance at end of period $ 34  $ 15  $ 10  $ 59  $ 34  $ 15  $ 10  $59 Balance at end of period $ 14  $ 16  $  $ 30  $ 19  $ 24  $ 3  $46 
                                    
PPL Energy SupplyPPL Energy Supply                PPL Energy Supply                
Balance at beginning ofBalance at beginning of                Balance at beginning of                
period $ 19  $ 19    $ 38  $ 13  $ 19    $ 32 period $ 22  $ 13    $ 35  $ 13  $ 19    $ 32 
 Total realized/unrealized                 Total realized/unrealized                
 gains (losses)                 gains (losses)                
 Included in earnings  (2)      (2)  16       16  Included in earnings  (8)      (8)  18       18 
 Included in OCI (a)  (1)  (1)    (2)  1   (1)     Included in OCI (a)          2       2 
 Sales    (3)    (3)    (3)    (3) Settlements  (1)      (1)  (6)      (6)
 Settlements  (5)      (5)  (11)      (11) Transfers into Level 3  1       1         
 Transfers into Level 3  14       14   14       14  Transfers out of Level 3               (8)         (8)
 Transfers out of Level 3   9    (3)      6    1    (3)      (2)
Balance at end of periodBalance at end of period $ 34  $ 12     $ 46  $ 34  $ 12     $ 46 Balance at end of period $ 14  $ 13     $ 27  $ 19  $ 19     $ 38 

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

A reconciliation of net assets and liabilities classified as Level 3 for the periods ended June 30, 2011 is as follows:
                     
    Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
    Three Months Six Months
    Energy Auction    Energy Auction   
    Commodities, Rate    Commodities,  Rate   
     net Securities Total  net Securities Total
PPL                  
Balance at beginning of period $ 32  $ 25  $ 57  $ (3) $ 25  $ 22 
 Total realized/unrealized gains (losses)                  
  Included in earnings   (5)      (5)   (4)      (4)
  Included in OCI (a)   3       3    4       4 
 Purchases            2       2 
 Sales   (1)      (1)   (4)      (4)
 Settlements   3       3    25       25 
 Transfers out of Level 3   (6)      (6)   6       6 
Balance at end of period $ 26  $ 25  $ 51  $ 26  $ 25  $ 51 
                     
PPL Energy Supply                  
Balance at beginning of period $ 32  $ 20  $ 52  $ (3) $ 20  $ 17 
 Total realized/unrealized gains (losses)                  
  Included in earnings   (5)      (5)   (4)      (4)
  Included in OCI (a)   3       3    4       4 
 Purchases            2       2 
 Sales   (1)      (1)   (4)      (4)
 Settlements   3       3    25       25 
 Transfers out of Level 3   (6)      (6)   6       6 
Balance at end of period $ 26  $ 20  $ 46  $ 26  $ 20  $ 46 

(a)"Energy Commodities, net" are included in "Qualifying derivatives" and "Auction Rate Securities" are included in "Available-for-sale securities" on the Statements of Comprehensive Income.
 
8073

The significant unobservable inputs used in and quantitative information about the fair value measurement of assets and liabilities classified as Level 3 at June 30, 2012 are as follows:

   Quantitative Information about Level 3 Fair Value MeasurementsMarch 31, 2013
   Fair Value, net     Range
   Asset Valuation Unobservable (Weighted
   (Liability) Technique Input(s) Average) (a)
PPL        
Energy commodities    
 Retail natural gas sales contracts (b)  30 16  Discounted cash flow Observable wholesale prices used as proxy for retail delivery points 20%23% - 100% (69%(96%)
 Power sales contracts (c)  (7)(4) Discounted cash flow Basis price between delivery pointsProprietary model used to calculate forward basis prices 24% - 61% (25% 21% (21%)
 
Full-requirement salesFTR purchase contracts (d)  112  Discounted cash flow Customer migrationHistorical settled prices used to model forward prices 13% - 80% (34% 100% (100%)
          
Auction rate securities (e)  1516  Discounted cash flow Modeled from SIFMA Index 54%55% - 80% (65%74% (64%)
          
Cross-currency swaps (f)  10 Discounted cash flowCredit valuation adjustment25% - 37% (32%)
          
PPL Energy Supply        
Energy commodities        
 Retail natural gas sales contracts (b)  30$ 16  Discounted cash flow Observable wholesale prices used as proxy for retail delivery points 20%23% - 100% (69%(96%)
 Power sales contracts (c)  (7)(4) Discounted cash flow Basis price between delivery pointsProprietary model used to calculate forward basis prices 24% - 61% (25% 21% (21%)
 
Full-requirement salesFTR purchase contracts (d)  112  Discounted cash flow Customer migrationHistorical settled prices used to model forward prices 13% - 80% (34% 100% (100%)
          
Auction rate securities (e)  1213  Discounted cash flow Modeled from SIFMA Index 61%58% - 80% (66%74% (65%)

December 31, 2012
Fair Value, netRange
AssetValuationUnobservable(Weighted
(Liability)TechniqueInput(s)Average) (a)
PPL
Energy commodities
Retail natural gas sales contracts (b)$ 24 Discounted cash flowObservable wholesale prices used as proxy for retail delivery points21% - 100% (75%)
Power sales contracts (c) (4)Discounted cash flowProprietary model used to calculate forward basis prices 24% (24%)
FTR purchase contracts (d) 2 Discounted cash flowHistorical settled prices used to model forward prices 100% (100%)
Auction rate securities (e) 16 Discounted cash flowModeled from SIFMA Index54% - 74% (64%)
Cross-currency swaps (f) 1 Discounted cash flowCredit valuation adjustment 22% (22%)
PPL Energy Supply
Energy commodities
Retail natural gas sales contracts (b)$ 24 Discounted cash flowObservable wholesale prices used as proxy for retail delivery points21% - 100% (75%)
Power sales contracts (c) (4)Discounted cash flowProprietary model used to calculate forward basis prices 24% (24%)
FTR purchase contracts (d) 2 Discounted cash flowHistorical settled prices used to model forward prices100% (100%)
Auction rate securities (e) 13 Discounted cash flowModeled from SIFMA Index57% - 74% (65%)

(a)For energy commodities and auction rate securities, the range and weighted average represent the percentage of fair value derived from the unobservable inputs.  For cross-currency swaps, the range and weighted average represent the percentage decrease in fair value due to the unobservable inputs used in the model to calculate the credit valuation adjustment.
(b)RetailAt March 31, 2013, retail natural gas sales contracts extend through 2017.  $142017, and $3 million of the fair value is scheduled to deliver within the next 12 months.  As the forward price of natural gas increases/(decreases), the fair value of the contracts (decreases)/increases.
(c)PowerAt March 31, 2013, power sales contracts extend through 2017.into 2014, and $(4) million of the fair value is scheduled to deliver within the next 12 months.  As the forward price of basis increases/(decreases), the fair value of the contracts (decreases)/increases.
(d)Full-requirement salesAt March 31, 2013, FTR purchase contracts extend through 2013.  $112015, and $1 million of the fair value is scheduled to deliver within the next 12 months.  As customer migrationthe forward implied spread increases/(decreases), the fair value of the contracts decreases/(increases)increases/(decreases).
(e)AuctionAt March 31, 2013, auction rate securities have a weighted average contractual maturity of 2623 years.  The model used to calculate fair value incorporates an assumption that the auctions will continue to fail.  As the modeled forward rates of the SIFMA indexIndex increase/(decrease), the fair value of the securities increases/(decreases).
(f)Cross-currency swaps extend through 2021.  The credit valuation adjustment incorporates projected probabilities of default and estimated recovery rates.  As the credit valuation adjustment increases/(decreases), the fair value of the swaps (decreases)/increases.

74

Net gains and losses on assets and liabilities classified as Level 3 and included in earnings for the periods ended June 30March 31 are reported in the Statements of Income as follows:

   Three Months
                           Cross-Currency
   Energy Commodities, net Swaps
            
   Unregulated Retail Wholesale Energy Net Energy Energy  
   Electric and Gas Marketing Trading Margins Purchases Interest Expense
   2012  2011  2012  2011  2012  2011  2012  2011  2012  2011 
PPL                              
Total gains (losses) included in earnings $ 2  $ 4  $ (6) $ (5) $ 1  $ 2  $ 1  $ (6) $ (1)   
Change in unrealized gains (losses) relating                              
 to positions still held at the reporting date   49    4    (12)   (7)   1       1    (2)      
                                
PPL Energy Supply                              
Total gains (losses) included in earnings $ 2  $ 4  $ (6) $ (5) $ 1  $ 2  $ 1  $ (6)      
Change in unrealized gains (losses) relating                              
 to positions still held at the reporting date   49    4    (12)   (7)   1       1    (2)      
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   Six Months
                           Cross-Currency
   Energy Commodities, net Swaps
               
   Unregulated Retail Wholesale Energy Net Energy Energy  
   Electric and Gas Marketing Trading Margins Purchases Interest Expense
   2012  2011  2012  2011  2012  2011  2012  2011  2012  2011 
PPL                              
Total gains (losses) included in earnings $ 18  $ 5  $ (2) $ (4)    $ (3)    $ (2) $ (1)   
Change in unrealized gains (losses) relating                              
 to positions still held at the reporting date   39    5    (13)   (6) $ 1     $ 1    17       
                                
PPL Energy Supply                              
Total gains (losses) included in earnings $ 18  $ 5  $ (2) $ (4)    $ (3)    $ (2)      
Change in unrealized gains (losses) relating                              
 to positions still held at the reporting date   39    5    (13)   (6) $ 1     $ 1    17       
   Three Months
                          
   Energy Commodities, net
   Unregulated Retail Wholesale Energy Net Energy Energy
   Electric and Gas Marketing Trading Margins Purchases
   2013  2012  2013  2012  2013  2012  2013  2012 
PPL and PPL Energy Supply                        
Total gains (losses) included in earnings $ (7) $ 16  $ (2) $ 4     $ (1) $ 1  $ (1)
Change in unrealized gains (losses) relating to                        
  positions still held at the reporting date   (7)   46 ��  (2)   (18)      (1)   1    (5)

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

Energy commodity contracts for electricity, gas, oil and/or emission allowances are generally valued using the income approach, except for exchange-traded derivative gas and oil contracts, which are valued using the market approach and are classified as Level 1.  When observablethe lowest level inputs that are usedsignificant to measure all or most of the fair value measurement of a contract are observable, the contract is classified as Level 2.  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.  TheseEnergy commodity contracts include forwards, futures, swaps, options and structured deals for electricity, gas, oil, and/or emission allowancestransactions and may be offset with similar positions in exchange-traded markets.  To the extent possible, fair value measurements utilize various inputs that include quoted prices for similar contracts or market-corroborated inputs.  In certain instances, these contracts may be valued using models, including standard option valuation models and standard industry models.  For example, the fair value of a full-requirement sales contract that delivers power to an illiquid delivery point may be measured by valuing the nearest liquid trading point plus the value of the basis between the two points.  The basis input may be from market quotes FTR prices, or historical prices.

When unobservable inputs are significant to the fair value measurement, a contract is classified as Level 3.  The fair value of contracts classified as Level 3 has been calculatedcontracts are valued using PPL proprietary models which include significant unobservable inputs such as delivery at a location where pricing is unobservable, assumptions for customer migration or delivery dates that are beyond the dates for which independent quotes are available.  Forward transactions, including forward transactions classified as Level 3, are analyzed by PPL's Risk Management department, which reports to the Chief Financial Officer (CFO).  Accounting personnel, who also report to the CFO, interpret the analysis quarterly to appropriately classify the forward transactions in the fair value hierarchy.  Valuation techniques are evaluated periodically.  Additionally, Level 2 and Level 3 fair value measurements include adjustments for credit risk based on PPL's own creditworthiness (for net liabilities) and its counterparties' creditworthiness (for net assets).  PPL's credit department assesses all reasonably available market information 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 20122013 and 20112012 were changes in the availability of market information and changes in the significance of the unobservable portioninputs utilized in the valuation of the contract.  As the delivery period of a contract becomes closer, market information may become available.  When this occurs, the model's unobservable inputs are replaced with observable market information.

Price Risk Management Assets/Liabilities - Interest Rate Swaps/Foreign Currency Contracts/Cross-Currency Swaps (PPL, LKE, LG&E and LG&E)KU)

To manage interest rate risk, PPL, LKE, LG&E and LG&EKU 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 and Euro), 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.  TheFor PPL, the primary reason for the transfers out of Level 3 forduring 2013 and 2012 was the change in the significance of the credit valuation adjustment.  Cross-currency swaps classified as Level 3 are valued by PPL's Corporate Finance department, which reports to the CFO.  Accounting personnel,
 
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who also report to the CFO, interpret the analysis quarterly to appropriately classify the contracts in the fair value hierarchy.  Valuation techniques are evaluated periodically.

(PPL and PPL Energy Supply)

NDT Funds

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

·The fair value measurements of equity securities classified as Level 1 are based on quoted prices in active markets and are comprised of securities that are representative of the Wilshire 5000 index, which is invested in approximately 70% large-cap stocks and 30% mid/small-cap stocks.Total Market Index.

·Investments in commingled equity funds are classified as Level 2 and represent securities that track the S&P 500 indexIndex, Dow Jones U.S. Total Stock Market Index and the Wilshire 4500 index.Dow Jones U.S. Completion Total Stock Market Index.  These fair value measurements are based on firm quotes of net asset values per share, which are not obtained from a quoted price in an active market.

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

The debt securities held byin the NDT funds at June 30, 2012March 31, 2013 have a weighted-average coupon of 4.22%4.12% and a weighted-average maturity of 8.38.1 years.

Auction Rate Securities

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

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

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

Financial Instruments Not Recorded at Fair Value (PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and KU)

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

   March 31, 2013 December 31, 2012
   Carrying    Carrying   
   Amount Fair Value Amount Fair Value
PPL            
 Contract adjustment payments (a) $ 81  $ 82  $ 105  $ 106 
 Long-term debt   19,632    21,872    19,476    21,671 
PPL Energy Supply            
 Long-term debt   3,264    3,568    3,272    3,556 
PPL Electric            
 Long-term debt   1,967    2,304    1,967    2,333 
 
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  June 30, 2012 December 31, 2011  March 31, 2013 December 31, 2012
  Carrying   Carrying    Carrying   Carrying  
  Amount Fair Value Amount Fair Value
PPL        
Contract adjustment payments (a) $ 152  $ 154  $ 198  $ 198 
Long-term debt  18,710   20,402   17,993   19,392 
PPL Energy Supply        
Long-term debt  3,279   3,663   3,024   3,397 
PPL Electric        
Long-term debt  1,718   2,020   1,718   2,012   Amount Fair Value Amount Fair Value
LKELKE        LKE        
Long-term debt  4,074   4,333   4,073   4,306 Long-term debt  4,075   4,413   4,075   4,423 
LG&ELG&E        LG&E        
Long-term debt  1,112   1,166   1,112   1,164 Long-term debt  1,112   1,177   1,112   1,178 
KUKU        KU        
Long-term debt  1,842   2,004   1,842   2,000 Long-term debt  1,842   2,052   1,842   2,056 

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

The carrying value of short-term debt (including notes between affiliates), when outstanding, represents or approximates fair value due to the variable interest rates associated with the financial instruments and is classified as Level 2.  The carrying value of held-to-maturity, short-term investments at December 31, 2011 approximated fair value due to the liquid nature and short-term duration of these instruments.

Credit Concentration Associated with Financial Instruments

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

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

(PPL)

At June 30, 2012,March 31, 2013, PPL had credit exposure of $2.9$1.3 billion from energy trading partners, excluding the effects of netting arrangements, reserves and collateral.  As a result of netting arrangements, reserves and collateral, PPL's credit exposure was reduced to $843$544 million.  The top ten counterparties accounted for $429$324 million, or 51%60%, of the netthis exposure and all had investment grade credit ratings from S&P or Moody's.

(PPL Energy Supply)

At June 30, 2012,March 31, 2013, PPL Energy Supply had credit exposure of $2.9$1.3 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 $842$543 million.  The top ten counterparties accounted for $429$324 million, or 51%60%, of the netthis exposure and all had investment grade credit ratings from S&P or Moody's.  See Note 11 for information regarding the related party credit exposure.

(PPL Electric)

At June 30, 2012, PPL Electric had nois exposed to credit exposurerisk under energy supply contracts (including its supply contracts with PPL EnergyPlus).; however, its PUC-approved cost recovery mechanism is anticipated to substantially eliminate this exposure.

(LKE, LG&E and KU)

At June 30, 2012,March 31, 2013, LKE's, LG&E's and KU's credit exposure was not significant.

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14.  Derivative Instruments and Hedging Activities

Risk Management Objectives

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

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

77

Market Risk

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

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

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

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

Commodity price and volumetric risks

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

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

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

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

Interest rate risk

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

85


·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.  Additionally, PPL Energy Supply is exposed to interest rate risk associated with debt securities held by the NDT.

78

Equity securities price risk

·PPL and its subsidiaries are exposed to equity securities price risk associated with equity 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.  Additionally, PPL Energy Supply is exposed to equity securities price risk in the NDT funds.

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

Foreign currency risk

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

Credit Risk

Credit risk is the potential loss that may be incurred due to a counterparty's non-performance, including defaults on payments and energy commodity deliveries.non-performance.

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

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

LKE, LG&E and LG&EKU are exposed to credit risk from "in-the-money" interest rate derivatives with financial institutions.

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

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

Master Netting Arrangements

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

PPL's and PPL Energy Supply's obligation to return counterparty cash collateral under master netting arrangements was $205$49 million and $147$112 million at June 30, 2012March 31, 2013 and December 31, 2011.2012.

PPL Electric, LKE and LG&E had no obligation to return cash collateral under master netting arrangements at June 30, 2012March 31, 2013 and December 31, 2011.2012.

PPL, LKE and LG&E had posted cash collateral under master netting arrangements of $31$27 million and $29$32 million at June 30, 2012March 31, 2013 and December 31, 2011.2012.

PPL Energy Supply, and PPL Electric and KU had not posted any cash collateral under master netting arrangements at June 30, 2012March 31, 2013 and December 31, 2011.2012.
 
8679

 

Commodity Price Risk (Non-trading)

(PPL and PPL Energy Supply)

Commodity Price Risk (Non-trading)

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

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

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

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

Cash Flow Hedges

Certain derivative contracts have qualified for hedge accounting so that the effective portion of a derivative's gain or loss is deferred in AOCI and reclassified into earnings when the forecasted transaction occurs.  Certain cash flow hedge positions were dedesignated during the three months ended March 31, 2013.  The fair value of the hedges at December 31, 2012 remained in AOCI because the original forecasted transaction is still expected to occur.  There were no active cash flow hedges that existed at June 30, 2012 range in maturity through 2016.during the three months ended March 31, 2013.  At June 30, 2012,March 31, 2013, the accumulated net unrecognized after-tax gains (losses) that are expected to be reclassified into earnings during the next 12 months were $260$99 million for PPL and PPL Energy Supply.  Cash flow hedges are discontinued if it is no longer probable that the original forecasted transaction will occur by the end of the originally specified time periods and any amounts previously recorded in AOCI are reclassified into earnings once it is determined that the hedge transaction is probable of not occurring.  For the three and six months ended June 30,March 31, 2013 and 2012, and 2011, such reclassifications were insignificant.

For the three and six months ended June 30,March 31, 2012, hedge ineffectiveness associated with energy derivatives was insignificant.  For the three and six months ended June 30, 2011, hedge ineffectiveness associated with energy derivatives resulted in after-tax gains (losses) of $(10) million and $(14) million.

Certain cash flow hedge positions were dedesignated during the six months ended June 30, 2012.  The fair value of the hedges at December 31, 2011 remained in AOCI because the original forecasted transaction is still expected to occur.  Pre-tax gains (losses) of $123 million, representing the change in fair value of the remaining positions during the six months ended June 30, 2012, were recorded as economic activity in "Wholesale energy marketing - Unrealized" on the Statement of Income.

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.treatment because they were not eligible for hedge accounting or because hedge accounting was not elected.  These derivatives hedge a portion of the economic value of PPL Energy Supply's competitive generation assets and unregulated full-requirement and retail contracts, which are subject to changes in fair value due to market price volatility and volume expectations.  Additionally, economic activity includeswould also include the ineffective portion of qualifying cash flow hedges (see "Cash Flow Hedges" above).  The derivative contracts in this category that existed at June 30, 2012March 31, 2013 range in maturity through 2019.

Examples of economic activity may include hedges on sales of baseload generation; dedesignations as discussed in "Cash Flow Hedges" above;generation, certain purchase contracts used to supply full-requirement sales contracts;contracts, FTRs or basis swaps used to hedge basis risk associated with the sale of competitive generation or supplying unregulated full-requirement sales contracts; spark spreads (sale of electricity with the simultaneous purchase of fuel);contracts, Spark Spread hedging contracts, retail electric and natural gas activities;activities, and fuel oil swaps used to hedge price escalation clauses in coal transportation and other fuel-related contracts.  PPL Energy Supply also uses options, which include the sale of call options and the purchase of put options tied to a particular generating unit.  Since the physical generating capacity is owned, price exposure is limited togenerally capped at the cost ofprice at
80

which the particular generating unit would be dispatched and therefore does not expose PPL Energy Supply to uncovered market price risk.

Unrealized activity associated with monetizing certain full-requirement sales contracts was also included in economic activity during the three and six months ended June 30, 2012 and 2011.
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The net fair value of economic positions at June 30, 2012 and December 31, 2011 was a net asset (liability) of $796 million and $(63) million for PPL Energy Supply.  The unrealized gains (losses) for economic activity for the periods ended June 30March 31 were as follows.

  Three Months Six Months    Three Months
  2012  2011  2012  2011       2013  2012 
PPL Energy Supply        
Operating RevenuesOperating Revenues        Operating Revenues        
Unregulated retail electric and gas $ (12) $ 1  $ (2) $ 5 Unregulated retail electric and gas     $ (8) $ 10 
Wholesale energy marketing  (458)  (44)  394   13 Wholesale energy marketing      (822)  852 
Operating ExpensesOperating Expenses        Operating Expenses        
Fuel  (16)  (11)  (14)  12 Fuel      (1)  2 
Energy purchases  442   109   (149)  127 Energy purchases      634   (591)

The net gains (losses) recorded in "Wholesale energy marketing" resulted primarily from hedges of baseload generation;generation and from certain full-requirement sales contracts for which PPL Energy Supply did not elect NPNS, from hedge ineffectiveness and dedesignations, as discussed in "Cash Flow Hedges" above, and fromNPNS; additionally, 2012 includes amounts related to the monetization of certain full-requirement sales contracts in 2010.  The net gains (losses) recorded in "Energy purchases" resulted primarily from certain purchase contracts to supply the full-requirement sales contracts noted above for which PPL Energy Supply did not elect hedge treatment from hedge ineffectiveness, and from purchase contracts that no longer hedge2012 includes amounts related to the monetization of certain full-requirement sales contracts that were monetized in 2010.

(PPL and PPL Energy Supply)

Commodity Price Risk (Trading)

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

Commodity Volumetric ActivityVolumes

PPL Energy Supply currently employs four primary strategies to maximizeAt March 31, 2013, the value of its wholesale energy portfolio.  As further discussed below, these strategies include the sales of competitive baseload generation, optimization of competitive intermediate and peaking generation, marketing activities, and proprietary trading activities.  The tables within this section present thenet volumes of PPL Energy Supply's derivative activity, excluding those that qualify for NPNS, unless otherwise noted.(sales)/purchase contracts used in support of the various strategies discussed above were as follows.

Sales of Competitive Baseload Generation

PPL Energy Supply has a formal hedging program for its competitive baseload generation fleet, which includes 7,252 MW of nuclear, coal and hydroelectric generating capacity.  The objective of this program is to provide a reasonable level of near-term cash flow and earnings certainty while preserving upside potential of power price increases over the medium term.  PPL Energy Supply sells its expected generation output on a forward basis using both derivative and non-derivative instruments.  Both are included in the following tables.

The following table presents the expected sales, in GWh, from competitive baseload generation and tolling arrangements that are included in the baseload portfolio based on current forecasted assumptions for 2012-2014.

2012 (a) 2013  2014 
     
 25,889   49,602   52,358 
    Volume (a)
Commodity Unit of Measure 2013 (b) 2014  2015  Thereafter
           
Power MWh  (27,422,031)  (22,385,959)  (490,995)  1,415,573 
Capacity MW-Month  (11,655)  (6,630)  (13)  525 
Gas MMBtu  (5,339,243)  (25,106,607)  (4,091,856)  (3,678,883)
Coal Tons  (186,000)  186,000     
FTRs MW-Month  14,224   5,063   1,465   
Oil Barrels  46,118   240,000   300,000   240,000 

(a)Represents expected sales for the balance of the current year.
88


The following table presents the percentage of expected competitive baseload generation sales shown above that has been sold forward under fixed price contracts and the related percentage of fuel that has been purchased or committed at June 30, 2012.

   Derivative Total Power Fuel Purchases (c)
Year Sales (a) Sales (b) Coal Nuclear
          
2012 (d) 94% 97% 108% 100%
2013  90% 94% 106% 100%
2014 (e) 21% 25% 71% 100%

(a)Excludes non-derivative contracts and contracts that qualify for NPNS.  Volumes for option contracts factor in the probability of an option being exercised and may be less than the notional amount of the option.
(b)Amount represents derivative (including contracts that qualify for NPNS) and non-derivative contracts.  Volumes for option contracts factor in the probability of an option being exercised and may be less than the notional amount of the option.  Percentages are based on fixed-price contracts only.
(c)Coal and nuclear contracts receive accrual accounting treatment, as they are not derivative contracts.  Percentages are based on both fixed- and variable-priced contracts.
(d)Represents the balance of the current year.
(e)Volumes for derivative sales contracts that deliver in future periods total 1,737 GWh and 2.0 Bcf.

In addition to the fuel purchases above, PPL Energy Supply attempts to economically hedge the fuel price risk that is within its fuel-related and coal transportation contracts, which are tied to changes in crude oil or diesel prices.  PPL Energy Supply has also entered into contracts to financially hedge the physical sale of oil.  The following table presents the net volumes (in thousands of barrels) of derivative (sales)/purchase contracts and contracts that qualify for NPNS used in support of these strategies at June 30, 2012.

  2012 (a) 2013  2014 
        
 Oil Swaps  68   393   240 

(a)Represents the balance of the current year.

Optimization of Competitive Intermediate and Peaking Generation

In addition to its competitive baseload generation activities, PPL Energy Supply attempts to optimize the overall value of its competitive intermediate and peaking fleet, which includes 3,256 MW of natural gas and oil-fired generation.  The following table presents the net volumes of derivative (sales)/purchase contracts used in support of this strategy at June 30, 2012.

   Units 2012 (a) 2013  2014
          
Net Power Sales (b) GWh  (2,188)  (408)  
Net Fuel Purchases (b)(c) Bcf  25.5   2.6  (0.3)

(a)Represents the balance of the current year.
(b)
Volumes for derivative contracts used in support of these strategies that deliver in future periods are insignificant.         
(c)Included in these volumes are non-options and exercised option contracts that converted to non-option derivative contracts.  Volumes associated with option contracts are insignificant.

Marketing Activities

PPL Energy Supply's marketing portfolio is comprised of full-requirement sales contracts and their related supply contracts, retail natural gas and electricity sales contracts and other marketing activities.  The obligations under the full-requirement sales contracts include supplying a bundled product of energy, capacity, RECs, and other ancillary products.  The full-requirement sales contracts PPL Energy Supply is awarded do not provide for specific levels of load, and actual load could vary significantly from forecasted amounts.  PPL Energy Supply uses a variety of strategies to hedge its full-requirement sales contracts, including purchasing energy at a liquid trading hub or directly at the load delivery zone, purchasing capacity and RECs in the market and supplying the energy, capacity and RECs with its generation.  The following table presents the volume of (sales)/purchase contracts, excluding FTRs, RECs, basis and capacity contracts, used in support of these activities at June 30, 2012.

89



   Units 2012 (a) 2013  2014 
          
Energy sales contracts (b) GWh  (9,905)  (9,387)  (4,306)
Related energy supply contracts (b)        
 Energy purchases GWh  6,904   5,196   1,916 
 Volumetric hedges (c) GWh  212   270   74 
 Generation supply GWh  1,703   3,049   2,234 
Retail natural gas sales contracts Bcf  (8.4)  (8.0)  (2.3)
Retail natural gas purchase contracts Bcf  8.4   8.0   2.3 

(a)Represents the balance of the current year.
(b)Includes NPNS and contracts that are not derivatives, which receive accrual accounting.
(c)PPL Energy Supply uses power and gas options, swaps and futures to hedge the volumetric risk associated with sales contracts since the demand for power varies hourly.  Volumes for option contracts factor in the probability of an option being exercised and may be less than the notional amount of the option.          

Proprietary Trading Activity

At June 30, 2012, PPL Energy Supply's proprietary trading positions, excluding FTR, basis and capacity contract activity that are included in the tables below, were insignificant.

Other Energy-Related Positions

FTRs and Other Basis Positions

PPL Energy Supply buys and sells FTRs and other basis positions to mitigate the basis risk between delivery points related to the sales of its generation, the supply of its full-requirement sales contracts and retail contracts, as well as for proprietary trading purposes.  The following table represents the net volumes of derivative FTR and basis (sales)/purchase contracts at June 30, 2012.

  Units 2012 (a) 2013  2014 
  ��       
FTRs GWh  24,818   19,308   232 
Power Basis Positions (b) GWh  (8,034)  (8,244)  (2,628)
Gas Basis Positions (b) Bcf  11.7   (4.9)  (5.2)

(a)Represents the balance of the current year.
(b)Net volumes that deliver in future periods are (677) GWh and (5.5) Bcf.

Capacity Positions

PPL Energy Supply buys and sells capacity related to the sales of its generation and the supply of its full-requirement sales contracts.  PPL Energy Supply also sells and purchases capacity for proprietary trading purposes.  The following table presents the net volumes of derivative capacity (sales)/purchase contracts at June 30, 2012.

  Units 2012 (a) 2013  2014
          
Capacity (b) MW-months  (6,184)  (7,075)  (2,786)

(a)Represents the balance of the current year.
(b)Net volumes that deliver in future periods are 989 MW-months.        

Interest Rate Risk

(PPL, PPL Energy Supply, LKE, LG&E and LG&E)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.

90


Cash Flow Hedges(PPL and PPL Energy Supply)

(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
81

floating interest rate risk associated with both existing and anticipated debt issuances.  For PPL,At March 31, 2013, outstanding interest rate swap contracts range in maturity through 20232024 for WPD and had a notional amount of $300 million at June 30, 2012.  PPL Energy Supply had no suchthrough 2043 for PPL's domestic interest rate swap contracts outstandingswaps.  These swaps had an aggregate notional value of $1.1 billion at June 30, 2012.

March 31, 2013 of which £295 million (approximately $448 million based on spot rates) was related to WPD.  Also included in this total are forward-starting interest rate swaps entered into by PPL on behalf of LG&E and KU.  Realized gains and losses from these swaps are probable of recovery through regulated rates; as such, the fair value of these derivatives have been reclassified from AOCI to regulatory assets or liabilities.  The gains and losses will be recognized in "Interest Expense" on the Statements of Income over the life of the underlying debt when the hedged transaction occurs.

At March 31, 2013, PPL WEM, holdsheld a notional position in cross-currency interest rate swaps totaling $960 million$1.3 billion that mature through 2021 to hedge the interest payments and principal of its U.S. dollar-denominated senior notes.  Additionally, PPL WW holds a notional positionrange in cross-currency interest rate swaps totaling $302 million that maturematurity through 2028 to hedge the interest payments and principal of itsWPD's U.S. dollar-denominated senior notes.

For the three and six months ended June 30,March 31, 2013 and 2012, hedge ineffectiveness associated with interest rate derivatives was insignificant for PPL and PPL Energy Supply.  For the three and six months ended June 30, 2011, hedge ineffectiveness associated with interest rate derivatives was an after-tax gain (loss) of $(9) million for PPL, 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.  For the three and six months ended June 30, 2011, hedge ineffectiveness associated with interest rate derivatives was insignificant for PPL Energy Supply.insignificant.

Cash flow hedges are discontinued if it is no longer probable that the original forecasted transaction will occur by the end of the originally specified time period and any amounts previously recorded in AOCI are reclassified into earnings once it is determined that the hedged transaction is probable of not occurring.  PPL and PPL Energy Supply had no such reclassifications for the three and six months ended June 30, 2012March 31, 2013 and 2011.2012.

At June 30, 2012,March 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 $(12) million for PPL.$(11) million.  Amounts are reclassified as the hedged interest payments are made.

(LKE, LG&E and KU)

In November 2012, LG&E and KU entered into forward-starting interest rate swaps with PPL that hedge the interest payments on new debt that is expected to be issued in 2013.  These hedging instruments have terms identical to forward-starting swaps entered into by PPL with third parties.  Realized gains and losses from the swaps are probable of recovery through regulated rates; as such, the fair value of these derivatives were reclassified from AOCI to regulatory assets or liabilities.  The gains and losses will be recognized in "Interest Expense" on the Statements of Income over the life of the underlying debt when the hedged transaction occurs.  For the three months ended March 31, 2013, there was no hedge ineffectiveness associated with the interest rate derivatives.  At March 31, 2013, LG&E and KU each held contracts with aggregate notional amounts of $150 million that range in maturity through 2043.

Fair Value Hedges (PPL and PPL Energy Supply)(PPL)

PPL and PPL Energy Supply areis exposed to changes in the fair value of theirits debt portfolios.  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.  At June 30, 2012, PPL held contracts that range in maturity through 2047 and had a notional value of $99 million.  In July 2012, these contracts were canceled without penalties by the counterparties.  PPL Energy Supply did not hold any such contracts at June 30, 2012.March 31, 2013.  PPL and PPL Energy Supply 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 the three and six months ended June 30, 2012March 31, 2013 and 2011.2012.

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 June 30, 2012,March 31, 2013, LG&E held contracts with a notional amount of $179 million that range in maturity through 2033.  The fair values of these contracts were recorded as liabilities of $62$54 million and $60$58 million at June 30, 2012March 31, 2013 and December 31, 20112012 with equal offsetting amounts recorded as regulatory assets.

Foreign Currency Risk (PPL)

PPL is exposed to foreign currency risk, primarily through investments in U.K. affiliates.  PPL has adopted a foreign currency risk management program designed to hedge certain foreign currency exposures, including net investments, firm commitments, recognized assets or liabilities, anticipated transactions and anticipated transactions.net investments.  In addition, PPL enters into financial instruments to protect against foreign currency translation risk of expected earnings.
 
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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 June 30, 2012March 31, 2013 had a notional amount of £96£162 million (approximately $153$261 million based on contracted rates).  The settlement dates of these contracts range from September 2012May 2013 through JuneDecember 2013.  The net fair value of these contracts at June 30, 2012 was insignificantMarch 31, 2013 and at December 31, 20112012 was an asset (liability) of $7$15 million and $(2) million.

Additionally, a PPL Global subsidiary that has a U.S. dollar functional currency entered into a GBP intercompany loan payable with a PPL WEM subsidiary that has a GBP functional currency.  The loan qualifies as a net investment hedge for the PPL Global subsidiary.  As such, the foreign currency gains and losses on the intercompany loan for the PPL Global subsidiary are recorded to the foreign currency translation adjustment component of AOCI.  At June 30, 2012,March 31, 2013, the outstanding balance of the intercompany loan outstanding was £28£46 million (approximately $43$69 million based on spot rates).

For the three and six months ended June 30,March 31, 2013 and 2012, and 2011, PPL recognized insignificant amounts ofafter-tax net investment hedge gains (losses) of $11 million and lossesan insignificant loss in the foreign currency translation adjustment component of AOCI.  At June 30, 2012,March 31, 2013, PPL included $19had $25 million of accumulated net investment hedge gains (losses), after tax,after-tax, in the foreign currency translation adjustment component of AOCI, compared to $19$14 million of gains (losses), after-tax recorded by PPL at December 31, 2011.2012.

Cash Flow Hedges

PPL held no foreign currency derivatives that qualified as cash flow hedges during the three and six months ended June 30, 2012March 31, 2013 and 2011.2012.

Fair Value Hedges

PPL held no foreign currency derivatives that qualified as fair value hedges during the three and six months ended June 30, 2012March 31, 2013 and 2011.2012.

Economic Activity

PPL enters into foreign currency contracts on behalf of a subsidiary to economically hedge GBP-denominated anticipated earnings.  At June 30, 2012,March 31, 2013, the total exposure hedged by PPL was approximately £1£1.2 billion (approximately $1.9 billion based on contracted rates) and the net fair value of these positions was an asset (liability) of $12$78 million.  These contracts had termination dates ranging from July 2012April 2013 through June 2014.May 2015.  Realized and unrealized gains (losses) on these contracts are included in "Other Income (Expense) - net" on the Statements of Income and were $25 million and $7$119 million for the three and six months ended June 30, 2012.March 31, 2013.  At December 31, 2011,2012, the total exposure hedged by PPL was £288 million£1.3 billion (approximately $2.0 billion based on contracted rates) and the net fair value of these positions was an asset (liability) of $11$(42) million.  Realized and unrealized gains (losses) were insignificant$(18) million for the three and six months ended June 30, 2011.

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 April 2011 issuance of common stock and 2011 Equity Units and the issuance of senior notes by PPL WEM, PPL entered into forward contracts to purchase GBP to economically hedge the foreign currency exchange rate risk related to the repayment.  These contracts were settled in April 2011.  Realized and unrealized gains (losses) on these contracts are included in "Other Income (Expense) - net" on the Statement of Income.  PPL recorded $62 million and $55 million of pre-tax, net gains (losses) for the three and six months ended June 30, 2011.March 31, 2012.

Accounting and Reporting

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

All derivative instruments are recorded at fair value on the Balance Sheet as an asset or liability unless they qualify for NPNS.  NPNS contracts for PPL and PPL Energy Supply include full-requirement sales contracts, other physical purchase and sales contracts and certain retail energy and physical capacity contracts, and for PPL Electric include certain full-requirement purchase contracts and other physical purchase contracts.  Changes in the fair value of derivatives not designated as NPNS are recognized currently in earnings unless specific hedge accounting criteria are met and designated as such, except for the change in fair value of LG&E's and KU's interest rate swaps that are recognized as regulatory assets.assets or regulatory liabilities.  See Note 6 for amounts recorded in regulatory assets and regulatory liabilities at June 30, 2012March 31, 2013 and December 31, 2011.2012.

See Notes 1 and 19 in each Registrant's 20112012 Form 10-K for additional information on accounting policies related to derivative instruments.
92


(PPL)

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

       June 30, 2012 December 31, 2011
       Derivatives designated as Derivatives not designated Derivatives designated as Derivatives not designated
       hedging instruments as hedging instruments (a) hedging instruments as hedging instruments (a)
       Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities
Current:                        
 Price Risk Management                        
  Assets/Liabilities (b):                        
   Interest rate swaps    $ 15     $ 5  $ 3  $ 3     $ 5 
   Cross-currency swaps $ 1    2             2       
   Foreign currency                        
    contracts   3     $ 8    3    7     $ 11    
   Commodity contracts   91       2,380    1,570    872    3    1,655    1,557 
     Total current   95    17    2,388    1,578    882    8    1,666    1,562 
Noncurrent:                        
 Price Risk Management                        
  Assets/Liabilities (b):                        
   Interest rate swaps            57             55 
   Cross-currency swaps   69             24          
   Foreign currency                        
    contracts         8    1             
   Commodity contracts   34    1    1,001    957    42    2    854    783 
     Total noncurrent   103    1    1,009    1,015    66    2    854    838 
Total derivatives $ 198  $ 18  $ 3,397  $ 2,593  $ 948  $ 10  $ 2,520  $ 2,400 
83

       March 31, 2013 December 31, 2012
       Derivatives designated as Derivatives not designated Derivatives designated as Derivatives not designated
       hedging instruments as hedging instruments (a) hedging instruments as hedging instruments (a)
       Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities
Current:                        
 Price Risk Management                        
  Assets/Liabilities (b):                        
   Interest rate swaps $ 24  $ 15     $ 5  $ 14  $ 22     $ 5 
   Cross-currency swaps   2    1             3       
   Foreign currency                        
    contracts   15     $ 49          2       23 
   Commodity contracts         1,194    951    59     $ 1,452    1,010 
     Total current   41    16    1,243    956    73    27    1,452    1,038 
Noncurrent:                        
 Price Risk Management                        
  Assets/Liabilities (b):                        
   Interest rate swaps   3          49    1          53 
   Cross-currency swaps   81             14    1       
   Foreign currency                        
    contracts         32    3             19 
   Commodity contracts         482    481    27       530    556 
     Total noncurrent   84       514    533    42    1    530    628 
Total derivatives $ 125  $ 16  $ 1,757  $ 1,489  $ 115  $ 28  $ 1,982  $ 1,666 

(a)$455324 million and $237$300 million of net gains associated with derivatives that were no longer designated as hedging instruments are recorded in AOCI at June 30, 2012March 31, 2013 and December 31, 2011.2012.
(b)Represents the location on the Balance Sheet.Sheets.

The after-tax balances of accumulated net gains (losses) (excluding net investment hedges) in AOCI were $333$114 million and $527$132 million at June 30, 2012March 31, 2013 and December 31, 2011.2012.  The after-tax balances of accumulated net gains (losses) (excluding net investment hedges) in AOCI were $544$471 million and $695$527 million at June 30, 2011March 31, 2012 and December 31, 2010.2011.

The following tables present the pre-tax effect of derivative instruments recognized in income, OCI or regulatory assets and regulatory liabilities for the periodsthree months ended June 30, 2012.March 31.

Derivatives in Hedged Items in Location of Gain Gain (Loss) Recognized Gain (Loss) Recognized Hedged Items in Location of Gain Gain (Loss) Recognized Gain (Loss) Recognized
Fair Value Hedging Fair Value Hedging (Loss) Recognized in Income on Derivative in Income on Related Item Fair Value Hedging (Loss) Recognized in in Income on Derivative in Income on Related Item
Relationships Relationships  in Income Three Months Six Months Three Months Six Months Relationships  Income on Derivative 2013  2012  2013  2012 
                        
Interest rate swaps Fixed rate debt Interest expense $ 1  $ 1  $ 1  $ 2  Fixed rate debt Interest expense       $ 1 

         Three Months Six Months         2013  2012 
           Gain (Loss)   Gain (Loss)           Gain (Loss)   Gain (Loss)
           Recognized   Recognized           Recognized   Recognized
           in Income   in Income           in Income   in Income
         on Derivative Gain (Loss) on Derivative         on Derivative Gain (Loss) on Derivative
       Gain (Loss) (Ineffective Reclassified (Ineffective       Gain (Loss) (Ineffective Reclassified (Ineffective
       Reclassified Portion and from AOCI Portion and     Location of Reclassified Portion and from AOCI Portion and
   Derivative Gain Location of from AOCI Amount into Amount   Derivative Gain Gain (Loss) from AOCI Amount into Amount
   (Loss) Recognized in Gain (Loss) into Income Excluded from Income Excluded from   (Loss) Recognized in Recognized into Income Excluded from Income Excluded from
DerivativeDerivative  OCI (Effective Portion) Recognized  (Effective Effectiveness (Effective EffectivenessDerivative  OCI (Effective Portion) in Income  (Effective Effectiveness (Effective Effectiveness
RelationshipsRelationships Three Months Six Months in Income Portion) Testing) Portion) Testing)Relationships 2013  2012  on Derivative Portion) Testing) Portion) Testing)
Cash Flow Hedges:Cash Flow Hedges:              Cash Flow Hedges:              
Interest rate swaps $ (25) $ (22) Interest expense $ (5)   $ (9)  Interest rate swaps $ 9  $ 3  Interest expense $ (5)   $ (4)  
Cross-currency swaps  34   46  Interest expense      (1)  Cross-currency swaps  73   12  Interest expense      (1)  
        Other income                Other income        
       (expense) - net  47     28          (expense) - net  69     (19)  
Commodity contracts  (14)  99  Wholesale energy        Commodity contracts    113  Wholesale energy        
       marketing  227  $ (5)  499  $ (1)       marketing  67  $ 1   272  $ 4 
       Depreciation      1          Depreciation      1   
         Energy purchases   (45)   1    (85)   (3)         Energy purchases   (16)      (40)   (4)
TotalTotal $ (5) $ 123    $ 224  $ (4) $ 433  $ (4)Total $ 82  $ 128    $ 115  $ 1  $ 209    
                                  
Net Investment Hedges:Net Investment Hedges:              Net Investment Hedges:              
 Foreign currency contracts $ 2  $ (1)           Foreign currency contracts $ 16  $ (3)          
 
9384

 

Derivatives Not Designated as Location of Gain (Loss) Recognized in     Location of Gain (Loss) Recognized in    
Hedging Instruments:  Income on Derivatives Three Months Six Months
Hedging Instruments  Income on Derivative 2013  2012 
            
Foreign currency contracts Other income (expense) - net $ 25  $ 7  Other income (expense) - net $ 119  $ (18)
Interest rate swaps Interest expense  (2)  (4) Interest expense  (2)  (2)
Commodity contracts Unregulated retail electric and gas  1   23  Unregulated retail electric and gas  (7)  22 
 Wholesale energy marketing  33   1,376  Wholesale energy marketing  (699)  1,343 
 Net energy trading margins (a)  13   22  Net energy trading margins (a)  (7)  9 
 Fuel  (12)  (6) Fuel  1   6 
 Energy purchases   (11)   (1,081) Energy purchases   586    (1,070)
 Total $ 47  $ 337  Total $ (9) $ 290 
            
Derivatives Not Designated as Location of Gain (Loss) Recognized as     Location of Gain (Loss) Recognized as    
Hedging Instruments: Regulatory Liabilities/Assets Three Months Six Months
Hedging Instruments Regulatory Liabilities/Assets 2013  2012 
            
Interest rate swaps Regulatory assets - noncurrent $ (9) $ (3) Regulatory assets - noncurrent $ 4  $ 7 
      
Derivatives Designated as Location of Gain (Loss) Recognized as    
Cash Flow Hedges Regulatory Liabilities/Assets 2013  2012 
      
Interest rate swaps Regulatory liabilities - noncurrent $ 10    

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

The following tables present the pre-tax effect of derivative instruments recognized in income or OCI for the periods ended June 30, 2011.

Derivatives in Hedged Items in  Location of Gain Gain (Loss) Recognized Gain (Loss) Recognized
Fair Value Hedging Fair Value Hedging  (Loss) Recognized in Income on Derivative in Income on Related Item
Relationships Relationships  in Income Three Months Six Months Three Months Six Months
                  
Interest rate swaps Fixed rate debt Interest expense $ 1  $ 2  $ 8  $ 18 

              Three Months Six Months
                 Gain (Loss)    Gain (Loss)
                 Recognized    Recognized
                 in Income    in Income
              on Derivative Gain (Loss) on Derivative
           Gain (Loss) (Ineffective Reclassified (Ineffective
           Reclassified Portion and from AOCI Portion and
     Derivative Gain Location of from AOCI Amount into Amount
     (Loss) Recognized in Gain (Loss) into Income Excluded from Income Excluded from
Derivative  OCI (Effective Portion) Recognized  (Effective Effectiveness (Effective Effectiveness
Relationships Three Months Six Months in Income Portion) Testing) Portion) Testing)
Cash Flow Hedges:                    
 Interest rate swaps $ (9) $ 1  Interest expense $ (3) $ (12) $ (6) $ (13)
 Cross-currency swaps   (8)   (33) Interest expense         3    
           Other income            
            (expense) - net   30       17    
 Commodity contracts   (34)   50  Wholesale energy            
            marketing   164    (14)   367    (22)
           Energy purchases   (47)      (117)   1 
Total $ (51) $ 18     $ 144  $ (26) $ 264  $ (34)
                         
Net Investment Hedges:                     
  Foreign currency contracts    $ (1)               

Derivatives Not Designated as Location of Gain (Loss) Recognized in      
 Hedging Instruments:  Income on Derivatives Three Months Six Months
         
Foreign currency contracts Other income (expense) - net $ 64  $ 55 
Interest rate swaps Interest expense   (2)   (4)
Commodity contracts Utility   (3)   (2)
  Unregulated retail electric and gas   4    5 
  Wholesale energy marketing   (71)   (26)
  Net energy trading margins (a)   4    11 
  Fuel   (8)   15 
  Energy purchases   91    36 
  Total $ 79  $ 90 
         
Derivatives Not Designated as Location of Gain (Loss) Recognized as      
 Hedging Instruments: Regulatory Liabilities/Assets Three Months Six Months
         
Interest rate swaps Regulatory assets $ (3) $ (1)

(a)Differs from the Statement of Income due to intra-month transactions that PPL defines as spot activity, which is not accounted for as a derivative.
94

(PPL Energy Supply)

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

     June 30, 2012 December 31, 2011     March 31, 2013 December 31, 2012
     Derivatives designated as Derivatives not designated Derivatives designated as Derivatives not designated     Derivatives designated as Derivatives not designated Derivatives designated as Derivatives not designated
     hedging instruments as hedging instruments (a) hedging instruments hedging instruments (a)     hedging instruments as hedging instruments (a) hedging instruments hedging instruments (a)
     Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities     Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities
Current:Current:                Current:                
Price Risk Management                Price Risk Management                
 Assets/Liabilities (b):                 Assets/Liabilities (b):                
 Commodity contracts $ 91     $ 2,380  $ 1,570  $ 872  $ 3  $ 1,655  $ 1,557  Commodity contracts     $ 1,194  $ 951  $ 59     $ 1,452  $ 1,010 
   Total current   91       2,380    1,570    872    3    1,655    1,557    Total current       1,194    951    59       1,452    1,010 
Noncurrent:Noncurrent:                Noncurrent:                
Price Risk Management                Price Risk Management                
 Assets/Liabilities (b):                 Assets/Liabilities (b):                
 Commodity contracts   34   1    1,001    957    42    2    854    783  Commodity contracts       482    481    27       530    556 
   Total noncurrent   34    1    1,001    957    42    2    854    783    Total noncurrent       482    481    27       530    556 
Total derivativesTotal derivatives $ 125  $ 1  $ 3,381  $ 2,527  $ 914  $ 5  $ 2,509  $ 2,340 Total derivatives     $ 1,676  $ 1,432  $ 86     $ 1,982  $ 1,566 

(a)$455324 million and $237$300 million of net gains associated with derivatives that were no longer designated as hedging instruments are recorded in AOCI at June 30, 2012March 31, 2013 and December 31, 2011.2012.
(b)Represents the location on the balance sheet.Balance Sheets.

The after-tax balances of accumulated net gains (losses) (excluding net investment hedges) in AOCI were $405$181 million and $605$211 million at June 30, 2012March 31, 2013 and December 31, 2011.2012.  The after-tax balances of accumulated net gains (losses) (excluding net investment hedges) in AOCI were $573$522 million and $733$605 million at June 30, 2011March 31, 2012 and December 31, 2010.  At June 30, 2011, AOCI reflects the effect of PPL Energy Supply's January 2011 distribution of its membership interest in PPL Global to its parent, PPL Energy Funding.2011.

The following tables present the pre-tax effect of derivative instruments recognized in income or OCI for the sixthree months ended June 30, 2012.March 31.

         Three Months Six Months         2013  2012 
           Gain (Loss)   Gain (Loss)           Gain (Loss)   Gain (Loss)
           Recognized   Recognized           Recognized   Recognized
           in Income   in Income           in Income   in Income
           on Derivative   on Derivative           on Derivative   on Derivative
       Gain (Loss) (Ineffective Gain (Loss) (Ineffective       Gain (Loss) (Ineffective Gain (Loss) (Ineffective
       Reclassified Portion and Reclassified Portion and     Location of Reclassified Portion and Reclassified Portion and
   Derivative Gain Location of from AOCI Amount from AOCI Amount   Derivative Gain Gains (Losses) from AOCI Amount from AOCI Amount
   (Loss) Recognized in Gains (Losses) into Income Excluded from into Income Excluded from   (Loss) Recognized in Recognized into Income Excluded from into Income Excluded from
DerivativeDerivative OCI (Effective Portion) Recognized (Effective Effectiveness (Effective EffectivenessDerivative OCI (Effective Portion) in Income (Effective Effectiveness (Effective Effectiveness
RelationshipsRelationships Three Months Six Months in Income  Portion)  Testing) Portion) Testing)Relationships 2013  2012  on Derivative  Portion)  Testing) Portion) Testing)
Cash Flow Hedges:              
       Wholesale energy        
 Commodity contracts $ (14) $ 99  marketing $ 227  $ (5) $ 499  $ (1)       Wholesale energy        
       Depreciation  1     1    Commodity contracts    $ 113  marketing $ 67  $ 1  $ 272  $ 4 
         Energy purchases   (45)   1    (85)   (3)         Energy purchases   (16)      (40)   (4)
TotalTotal $ (14) $ 99    $ 183  $ (4) $ 415  $ (4)Total    $ 113    $ 51  $ 1  $ 232    

Derivatives Not Designated as Location of Gain (Loss) Recognized in      
 Hedging Instruments:  Income on Derivatives Three Months Six Months
         
Commodity contracts Unregulated retail electric and gas $ 1  $ 23 
  Wholesale energy marketing   33    1,376 
  Net energy trading margins (a)   13    22 
  Fuel   (12)   (6)
  Energy purchases   (11)   (1,081)
  Total $ 24  $ 334 
85

Derivatives Not Designated as Location of Gain (Loss) Recognized in      
 Hedging Instruments  Income on Derivatives 2013  2012 
         
Commodity contracts Unregulated retail electric and gas $ (7) $ 22 
  Wholesale energy marketing   (699)   1,343 
  Net energy trading margins (a)   (7)   9 
  Fuel   1    6 
  Energy purchases   586    (1,070)
  Total $ (126) $ 310 

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

The following tables present the pre-tax effect of derivative instruments recognized in income or OCI for the periods ended June 30, 2011.

95


Derivatives in Hedged Items in  Location of Gain Gain (Loss) Recognized Gain (Loss) Recognized
Fair Value Hedging Fair Value Hedging  (Loss) Recognized in Income on Derivative in Income on Related Item
Relationships Relationships  in Income Three Months Six Months Three Months Six Months
                  
Interest rate swaps Fixed rate debt Interest expense       $ 1  $ 1 

             Three Months Six Months
                Gain (Loss)    Gain (Loss)
                 Recognized    Recognized
                in Income    in Income
                on Derivative    on Derivative
          Gain (Loss) (Ineffective Gain (Loss) (Ineffective
          Reclassified Portion and Reclassified Portion and
     Derivative Gain Location of from AOCI Amount from AOCI Amount
     (Loss) Recognized in Gains (Losses) into Income Excluded from into Income Excluded from
Derivative OCI (Effective Portion) Recognized (Effective Effectiveness (Effective Effectiveness
Relationships Three Months Six Months in Income  Portion)  Testing) Portion) Testing)
Cash Flow Hedges:                    
          Wholesale energy            
  Commodity contracts $ (34) $ 50   marketing $ 164  $ (14) $ 367  $ (22)
           Energy purchases   (47)      (117)   1 
Total $ (34) $ 50     $ 117  $ (14) $ 250  $ (21)

Derivatives Not Designated as Location of Gain (Loss) Recognized in      
 Hedging Instruments:  Income on Derivatives Three Months Six Months
         
Commodity contracts Unregulated retail electric and gas $ 4  $ 5 
  Wholesale energy marketing   (71)   (26)
  Net energy trading margins (a)   4    11 
  Fuel   (8)   15 
  Energy purchases   91    36 
  Total $ 20  $ 41 

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

(LKE and LG&E)(LKE)

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

     June 30, 2012 December 31, 2011     March 31, 2013 December 31, 2012
     Derivatives designated as Derivatives not designated Derivatives designated as Derivatives not designated     Derivatives designated as Derivatives not designated Derivatives designated as Derivatives not designated
     hedging instruments as hedging instruments hedging instruments as hedging instruments     hedging instruments as hedging instruments hedging instruments as hedging instruments
     Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities     Assets Liabilities Assets Liabilities Assets Liabilities Assets Liabilities
Current:Current:                Current:                
Other Current                Price Risk Management                
 Assets/Liabilities (a):                 Assets/Liabilities (a):                
 Interest rate swaps          $ 5           $ 5  Interest rate swaps $ 24        $ 5  $ 14        $ 5 
   Total current            5             5    Total current   24          5    14          5 
Noncurrent:Noncurrent:                Noncurrent:                
Price Risk Management                Price Risk Management                
 Assets/Liabilities (a):                 Assets/Liabilities (a):                
 Interest rate swaps            57             55  Interest rate swaps            49             53 
   Total noncurrent            57             55    Total noncurrent            49             53 
Total derivativesTotal derivatives          $ 62           $ 60 Total derivatives $ 24        $ 54  $ 14        $ 58 

(a)Represents the location on the Balance Sheet.Sheets.
96


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

Derivatives Not Designated as Location of Gain (Loss) Recognized in      
 Hedging Instruments:  Income on Derivatives Three Months Six Months
         
Interest rate swaps Interest expense $ (2) $ (4)
         
Derivatives Not Designated as Location of Gain (Loss) Recognized as      
 Hedging Instruments: Regulatory Liabilities/Assets Three Months Six Months
         
Interest rate swaps Regulatory assets $ (9) $ (3)

The following tables present the pre-tax effect of derivative instruments recognized in income or regulatory assets and regulatory liabilities for the periodsthree months ended June 30, 2011.March 31.

Derivatives Not Designated as Location of Gain (Loss) Recognized in     Location of Gain (Loss) Recognized in    
Hedging Instruments:  Income on Derivatives Three Months Six Months  Income on Derivatives 2013  2012 
            
Interest rate swaps Interest expense $ (2) $ (4) Interest expense $ (2) $ (2)
Commodity contracts Operating revenues - retail and wholesale (a)   (3)   (2)
 Total $ (5) $ (6)      
            
Derivatives Not Designated as Location of Gain (Loss) Recognized as     Location of Gain (Loss) Recognized as    
Hedging Instruments: Regulatory Liabilities/Assets Three Months Six Months Regulatory Liabilities/Assets 2013  2012 
            
Interest rate swaps Regulatory assets $ (3) $ (1) Regulatory assets - noncurrent $ 4  $ 7 
      
      
Derivatives Designated as Location of Gain (Loss) Recognized as    
Cash Flow Hedges Regulatory Liabilities/Assets 2013  2012 
      
Interest rate swaps Regulatory liabilities - noncurrent $ 10    

(LG&E)

The following table presents the fair value and location of derivative instruments recorded on the Balance Sheets.   
86

       March 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 $ 12        $ 5  $ 7        $ 5 
     Total current   12          5    7          5 
Noncurrent:                        
 Price Risk Management                        
  Assets/Liabilities (a):                        
   Interest rate swaps            49             53 
     Total noncurrent            49             53 
Total derivatives $ 12        $ 54  $ 7        $ 58 

(a)Amounts are included in "Operating Revenues" for LKE.Represents the location on the Balance Sheets.

The following tables present the pre-tax effect of derivative instruments recognized in income or regulatory assets and regulatory liabilities for the three months ended March 31.

Derivatives Not Designated as Location of Gain (Loss) Recognized in      
 Hedging Instruments:  Income on Derivatives 2013  2012 
         
Interest rate swaps Interest expense $ (2) $ (2)
         
         
Derivatives Not Designated as Location of Gain (Loss) Recognized as      
 Hedging Instruments: Regulatory Liabilities/Assets 2013  2012 
         
Interest rate swaps Regulatory assets - noncurrent $ 4  $ 7 
         
         
Derivatives Designated as Location of Gain (Loss) Recognized as    
Cash Flow Hedges Regulatory Liabilities/Assets 2013  2012 
         
Interest rate swaps Regulatory liabilities - noncurrent $ 5    

(KU)

At March 31, 2013 and December 31, 2012, KU had interest rate swaps, which were designated as hedging instruments, of $12 million and $7 million recorded in "Price risk management assets from affiliates" on the Balance Sheets.  KU recognized a $5 million, pre-tax gain on the derivative instruments in "Noncurrent regulatory liabilities" for the three months ended March 31, 2013.

Offsetting Derivative Instruments(PPL, PPL Energy Supply, LKE, LG&E and KU)

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

PPL, PPL Energy Supply, LKE, LG&E and KU have elected not to offset derivative assets and liabilities and not to offset net derivative positions against the right to reclaim cash collateral pledged (an asset) or the obligation to return cash collateral received (a liability) under derivatives agreements.  The table below summarizes the derivative positions presented in the balance sheets where a right of setoff exists under these arrangements and related cash collateral received or pledged.  
87

     Assets Liabilities
        Eligible for Offset       Eligible for Offset   
           Cash          Cash   
        Derivative Collateral       Derivative Collateral   
     Gross Instruments Received Net Gross Instruments Pledged Net
March 31, 2013                        
PPL                        
 Energy Commodities $ 1,676  $ 1,306  $ 48  $ 322  $ 1,432  $ 1,306  $ 15  $ 111 
 Treasury Derivatives   206    16       190    73    16    26    31 
Total $ 1,882  $ 1,322  $ 48  $ 512  $ 1,505  $ 1,322  $ 41  $ 142 
                           
PPL Energy Supply                        
 Energy Commodities $ 1,676  $ 1,306  $ 48  $ 322  $ 1,432  $ 1,306  $ 15  $ 111 

LKE                        
 Treasury Derivatives $ 24        $ 24  $ 54     $ 26  $ 28 
                           
LG&E                        
 Treasury Derivatives $ 12        $ 12  $ 54     $ 26  $ 28 
                           
KU                        
 Treasury Derivatives $ 12        $ 12             

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

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

Credit Risk-Related Contingent Features (PPL, PPL Energy Supply, LKE, LG&E and LG&E)KU)

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

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

At June 30, 2012,March 31, 2013, the effect of a decrease in credit ratings below investment grade on derivative contracts that contain credit risk-related contingent features and were in a net liability position is summarized as follows:

       PPL      
    PPL Energy Supply LKE LG&E
               
Aggregate fair value of derivative instruments in a net liability            
 position with credit contingent provisions $ 211  $ 167  $ 40  $ 40 
Aggregate fair value of collateral posted on these derivative instruments   34    3    31    31 
Aggregate fair value of additional collateral requirements in the event of            
 a credit downgrade below investment grade (a)   186   172    9   
88

       PPL      
    PPL Energy Supply LKE LG&E
               
Aggregate fair value of derivative instruments in a net liability            
 position with credit risk-related contingent features $ 146  $ 110  $ 36  $ 36 
Aggregate fair value of collateral posted on these derivative instruments   27       27    27 
Aggregate fair value of additional collateral requirements in the event of            
 a credit downgrade below investment grade (a)   151   141    10   10 

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

97

15.  15.  Goodwill

(PPL)

The change in the carrying amount of goodwill for the sixthree months ended June 30, 2012March 31, 2013 was primarily due to the effect of foreign currency exchange rates on the U.K. Regulated segment.

16. Asset Retirement Obligations
16. Asset Retirement Obligations
          
16. Asset Retirement Obligations
          
                        
(PPL, PPL Energy Supply, LKE, LG&E and KU)(PPL, PPL Energy Supply, LKE, LG&E and KU)         (PPL, PPL Energy Supply, LKE, LG&E and KU)         
                        
The changes in the carrying amounts of AROs were as follows.The changes in the carrying amounts of AROs were as follows.      The changes in the carrying amounts of AROs were as follows.      
                        
     PPL           PPL      
   PPL Energy Supply LKE LG&E KU   PPL Energy Supply LKE LG&E KU
                        
Balance at December 31, 2011 $ 497  $ 359  $ 118  $ 57  $ 61 
Balance at December 31, 2012Balance at December 31, 2012 $ 552  $ 375  $ 131  $ 62  $ 69 
Accretion expense  17   13   3   1   2 Accretion expense  9   7   2   1   1 
Changes in estimated cash flow or settlement date  2   2       Effect of foreign currency exchange rates  (2)        
Obligations settled   (6)   (5)   (1)   (1)   Obligations settled   (3)   (2)   (1)   (1)   
Balance at June 30, 2012 $ 510  $ 369  $ 120  $ 57  $ 63 
Balance at March 31, 2013Balance at March 31, 2013 $ 556  $ 380  $ 132  $ 62  $ 70 

Substantially all of the ARO balances are classified as noncurrent at June 30, 2012March 31, 2013 and December 31, 2011.2012.

(PPL, LKE, LG&E and KU)

Accretion and depreciation expense recorded by LG&E and KU is offset with a regulatory credit on the income statement, such that there is no net earnings impact.

(PPL and PPL Energy Supply)

The most significant ARO recorded by PPL and PPL Energy Supply relates to the decommissioning of the Susquehanna nuclear plant.  The accrued nuclear decommissioning obligation was $304$322 million and $292$316 million at June 30, 2012March 31, 2013 and December 31, 2011.2012.

Assets in the NDT funds are legally restricted for purposes of settling PPL's and PPL Energy Supply's ARO related to the decommissioning of the PPL Susquehanna nuclear plant.  The aggregate fair value of these assets was $681$764 million and $640$712 million at June 30, 2012March 31, 2013 and December 31, 2011,2012, and is included in "Nuclear plant decommissioning trust funds" on the Balance Sheets.  See Notes 13 and 17 for additional information on these assets.

17.  Available-for-Sale Securities

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

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

(PPL and PPL Energy Supply)

The following table shows the amortized cost, the gross unrealized gains and losses recorded in AOCI, and the fair value of available-for-sale securities.
 
9889

 

     June 30, 2012 December 31, 2011     March 31, 2013 December 31, 2012
       Gross Gross     Gross Gross         Gross Gross     Gross Gross  
     Amortized  Unrealized  Unrealized   Amortized  Unrealized  Unrealized       Amortized  Unrealized  Unrealized   Amortized  Unrealized  Unrealized  
     Cost Gains Losses Fair Value  Cost  Gains Losses Fair Value     Cost Gains Losses Fair Value  Cost  Gains Losses Fair Value
PPLPPL                PPL                
NDT funds:                NDT funds:                
 Cash and cash equivalents $ 14      $ 14  $ 12      $ 12  Cash and cash equivalents $ 8      $ 8  $ 11      $ 11 
 Equity securities:                 Equity securities:                
  U.S. large-cap  178  $ 139     317   173  $ 119     292   U.S. large-cap  225  $ 232     457   222  $ 190     412 
  U.S. mid/small-cap  69   58     127   67   50     117   U.S. mid/small-cap  32   36     68   30   30     60 
 Debt securities:                 Debt securities:                
  U.S. Treasury  86   10     96   76   10     86   U.S. Treasury  86   9     95   86   9     95 
  U.S. government sponsored                  U.S. government sponsored                
   agency  9   1     10   9   1     10    agency  8   1     9   8   1     9 
  Municipality  77   5  $ 1   81   80   4  $ 1   83   Municipality  80   4  $ 1   83   78   5  $ 1   82 
  Investment-grade corporate  32   3     35   35   3     38   Investment-grade corporate  37   3     40   36   4     40 
  Other  2       2   2       2   Other  3       3   3       3 
 Receivables/payables, net   (1)         (1)             Receivables/payables, net   1          1             
 Total NDT funds   466    216    1    681    454    187    1    640  Total NDT funds   480    285    1    764    474    239    1    712 
Auction rate securities   20       2    18    25       1    24 Auction rate securities   20       1    19    20       1    19 
Total $ 486  $ 216  $ 3  $ 699  $ 479  $ 187  $ 2  $ 664 Total $ 500  $ 285  $ 2  $ 783  $ 494  $ 239  $ 2  $ 731 
                                        
PPL Energy SupplyPPL Energy Supply                PPL Energy Supply                
NDT funds:                NDT funds:                
 Cash and cash equivalents $ 14      $ 14  $ 12      $ 12  Cash and cash equivalents $ 8      $ 8  $ 11      $ 11 
 Equity securities:                 Equity securities:                
  U.S. large-cap  178  $ 139     317   173  $ 119     292   U.S. large-cap  225  $ 232     457   222  $ 190     412 
  U.S. mid/small-cap  69   58     127   67   50     117   U.S. mid/small-cap  32   36     68   30   30     60 
 Debt securities:                 Debt securities:                
  U.S. Treasury  86   10     96   76   10     86   U.S. Treasury  86   9     95   86   9     95 
  U.S. government sponsored                  U.S. government sponsored                
   agency  9   1     10   9   1     10    agency  8   1     9   8   1     9 
  Municipality  77   5  $ 1   81   80   4  $ 1   83   Municipality  80   4  $ 1   83   78   5  $ 1   82 
  Investment-grade corporate  32   3     35   35   3     38   Investment-grade corporate  37   3     40   36   4     40 
  Other  2       2   2       2   Other  3       3   3       3 
 Receivables/payables, net   (1)         (1)             Receivables/payables, net   1          1             
 Total NDT funds   466    216    1    681    454    187    1    640  Total NDT funds   480    285    1    764    474    239    1    712 
Auction rate securities   17       2    15    20       1    19 Auction rate securities   17       1    16    17       1    16 
Total $ 483  $ 216  $ 3  $ 696  $ 474  $ 187  $ 2  $ 659 Total $ 497  $ 285  $ 2  $ 780  $ 491  $ 239  $ 2  $ 728 

There were no securities with credit losses at June 30, 2012March 31, 2013 and December 31, 2011.2012.

The following table shows the scheduled maturity dates of debt securities held at June 30, 2012.March 31, 2013.

  Maturity Maturity Maturity Maturity     Maturity Maturity Maturity Maturity   
   Less Than1-55-10in Excess    Less Than1-56-10in Excess 
  1 YearYearsYearsof 10 YearsTotal  1 YearYearsYearsof 10 YearsTotal
PPLPPL          PPL          
Amortized costAmortized cost $ 5  $ 84  $ 61  $ 76  $ 226 Amortized cost $ 13  $ 82  $ 62  $ 77  $ 234 
Fair valueFair value  5   87   67   83   242 Fair value  13   85   68   83   249 
                      
PPL Energy SupplyPPL Energy Supply          PPL Energy Supply          
Amortized costAmortized cost $ 5  $ 84  $ 61  $ 73  $ 223 Amortized cost $ 13  $ 82  $ 62  $ 74  $ 231 
Fair valueFair value  5   87   67   80   239 Fair value  13   85   68   80   246 

The following table shows proceeds from and realized gains and losses on sales of available-for-sale securities for the periods ended June 30.March 31.         
   Three Months Six Months
   2012  2011  2012  2011 
PPL            
Proceeds from sales of NDT securities (a) $ 45  $ 25  $ 79  $ 100 
Other proceeds from sales   5       5    163 
Gross realized gains (b)   8    6    13    23 
Gross realized losses (b)   5    6    6    11 
              
PPL Energy Supply            
Proceeds from sales of NDT securities (a) $ 45  $ 25  $ 79  $ 100 
Other proceeds from sales   3       3    
Gross realized gains (b)   8    6    13    23 
Gross realized losses (b)   5    6    6    11 

         Three Months
       2013  2012 
PPL and PPL Energy Supply            
Proceeds from sales of NDT securities (a)       $ 24  $ 34 
Gross realized gains (b)         4    6 
Gross realized losses (b)         2    1 
99


(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 inon the Statements of Income.
90

18.  Accumulated Other Comprehensive Income (Loss)

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

At December 31, 2010, LG&E held $163 million aggregate principal amountEffective January 1, 2013, PPL and its subsidiaries prospectively adopted accounting guidance issued to improve the reporting of tax-exempt revenue bonds issuedreclassifications out of AOCI, as discussed in Note 2.

The after-tax changes in AOCI by Louisville/Jefferson County, Kentucky on behalf of LG&E that were purchased fromcomponent for the remarketing agent in 2008.  During the sixthree months ended June 30, 2011, LG&E received $163 million for its investments in these bonds when theyMarch 31, 2013 were remarketed to unaffiliated investors.  No realized or unrealizedas follows.

  Foreign Unrealized gains (losses)    Defined benefit plans   
  currency Available-    Equity Prior Actuarial Transition   
  translation for-sale Qualifying investees' service gain asset   
  adjustments securities derivatives AOCI costs (loss) (obligation) Total
PPL                       
December 31, 2012$ (149) $ 112  $ 132  $ 1  $ (14) $ (2,023) $ 1  $ (1,940)
Amounts arising during the period  (245)   23    62                (160)
Reclassifications from AOCI     (1)   (80)      1    34       (46)
Net OCI during the period  (245)   22    (18)      1    34       (206)
March 31, 2013$ (394) $ 134  $ 114  $ 1  $ (13) $ (1,989) $ 1  $ (2,146)
                         
PPL Energy Supply                       
December 31, 2012   $ 112  $ 211     $ (10) $ (265)    $ 48 
Amounts arising during the period     23                   23 
Reclassifications from AOCI     (1)   (30)      1    4       (26)
Net OCI during the period     22    (30)      1    4       (3)
March 31, 2013   $ 134  $ 181     $ (9) $ (261)    $ 45 

The following table presents the gains (losses) were recorded on these securities, asand related income taxes for reclassifications from AOCI for the difference between carrying value and fair value wasthree months ended March 31, 2013.  The defined benefit plan components of AOCI are not significant.  reflected in their entirety in the statement of income during the period; rather, they are included in the computation of net periodic defined benefit costs (credits).  See Note 9 for additional information.

   Affected Line Item on the Statements of Income
        Other            
   Wholesale    Income            
   energy Energy (Expense), Interest Total Income Total
Details about AOCI marketing purchases net Expense Pre-tax Taxes After-tax
PPL                     
Available-for-sale securities       $ 2     $ 2  $ (1) $ 1 
Qualifying derivatives                     
 Interest rate swaps          $ (5)   (5)   2    (3)
 Cross-currency swaps         69       69    (17)   52 
 Energy Commodities $ 67  $ (16)         51    (20)   31 
 Total $ 67  $ (16) $ 69  $ (5)   115    (35)   80 
Defined benefit plans                     
 Prior service costs               (2)   1    (1)
 Net actuarial loss               (47)   13    (34)
 Total             $ (49) $ 14    (35)
                       
Total reclassifications during the period                 $ 46 
                       
PPL Energy Supply                     
Available-for-sale securities       $ 2     $ 2  $ (1) $ 1 
Qualifying derivatives                     
 Energy Commodities $ 67  $ (16)         51    (21)   30 
 Total $ 67  $ (16)         51    (21)   30 
Defined benefit plans                     
 Prior service costs               (2)   1    (1)
 Net actuarial loss               (6)   2    (4)
 Total             $ (8) $ 3    (5)
                       
Total reclassifications during the period                 $ 26 

For the three months ended March 31, 2013, the changes in AOCI and the effect of reclassifications from AOCI on the statement of income for LKE and KU were insignificant.
91

1918..  New Accounting Guidance Pending Adoption

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

Improving Disclosures about Offsetting Balance Sheet ItemsAccounting for Obligations Resulting from Joint and Several Liability Arrangements

Effective January 1, 2013,2014, the Registrants will retrospectively adopt accounting guidance issuedfor 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 enhance disclosures about financial instruments and derivative instruments that either (1) offsetbe in the scope of this guidance, it will be measured as the sum of the amount the reporting entity agreed to pay on the balance sheet or (2) are subjectbasis of its arrangements among its co-obligors and any additional amount the reporting entity expects to an enforceable master netting arrangement or similar agreement, irrespectivepay on behalf of whether they are offset on the balance sheet.its co-obligors.  This guidance also requires additional disclosures for these obligations.

UponThe Registrants are assessing the potential impact of adoption, the enhanced disclosure requirements are not expected to have a significant impact on the Registrants.which could be material.

Testing Indefinite-Lived IntangibleAccounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets for Impairmentwithin a Foreign Entity or of an Investment in a Foreign Entity

Effective January 1, 2013, the Registrants2014, PPL will prospectively adopt accounting guidance that allowsrequires a cumulative translation adjustment to be released into earnings when an entity ceases to electhave a controlling financial interest in a subsidiary or group of assets within a consolidated foreign entity and the option to first make a qualitative evaluation aboutsale or transfer results in the likelihoodcomplete or substantially complete liquidation of an impairmentthe foreign entity.  For the step acquisition of an indefinite-lived intangible asset.  If, based onpreviously held equity method investments that are foreign entities, this assessment, the entity determines that it is more likely than notguidance clarifies that the fair valueamount of accumulated other comprehensive income that is reclassified and included in the indefinite-lived intangible asset exceeds the carrying amount, the fair valuecalculation of a gain or loss shall include any foreign currency translation adjustment related to that asset does not need to be calculated.  If the entity concludes otherwise, a quantitative impairment test must be performed by determining the fair value of the asset and comparing it with the carrying value.  The entity would record an impairment charge, if necessary.previously held investment.

UponThe initial adoption of this guidance is not expected to have a significant impact on PPL; however, the Registrants.impact in future periods could be material.
 
10092

 

PPL CORPORATION AND SUBSIDIARIES

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

The following should be read in conjunction with PPL's Condensed Consolidated Financial Statements and the accompanying Notes and with PPL's 20112012 Form 10-K.  Capitalized terms and abbreviations are defined in the glossary.  Dollars are in millions, except per share data, unless otherwise noted.

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

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

·  "Results of Operations" provides a summary of PPL's earnings, a review of results by reportable segment and a description of key factors by segment expected to impact future earnings.  This section ends with explanations of significant changes in principal line items on PPL's Statements of Income, comparing the three and six months ended June 30, 2012March 31, 2013 with the same periods in 2011.2012.

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

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

Overview

Introduction

PPL is an energy and utility holding company with headquarters in Allentown, Pennsylvania.  Through subsidiaries, PPL generates electricity from power plants in the northeastern, northwestern and southeastern U.S., markets wholesale and retail energy primarily in the northeastern and northwestern portions of the U.S., delivers electricity to customers in Pennsylvania, Kentucky, Virginia, Tennessee and the U.K. and delivers natural gas to customers in Kentucky.

PPL's principal subsidiaries are shown below (* denotes an SEC registrant):
 
      
PPL Corporation*
        
                      
                  PPL Capital Funding   
PPL Global
Engages in the regulated operations of electricity distribution businesses in the U.K.
 
PPL Energy Supply*
PPL Electric*
Engages in the regulated  transmission and distribution of electricity in Pennsylvania
LKE*
  
                         
                        
LKE*
PPL Global
Engages in the regulated distribution of electricity in the U.K.
PPL Electric*
Engages in the regulated transmission and distribution of electricity in Pennsylvania
PPL Energy Supply*
 
   
PPL EnergyPlus
Performs marketing and trading activities
Purchases fuel
  
PPL Generation
Engages in the competitive generation of electricity, primarily in Pennsylvania and Montana
  
LG&E*
Engages in the regulated generation, transmission, distribution and sale of electricity in Kentucky, and distribution and sale of natural gas in Kentucky
  
KU*
Engages in the regulated generation, transmission, distribution and sale of electricity, primarily in Kentucky
PPL EnergyPlus
Performs energy marketing and trading activities
Purchases fuel
PPL Generation
Engages in the competitive generation of electricity, primarily in Pennsylvania and Montana
                     
U.K. Regulated Segment 
Kentucky Regulated
Supply Segment
U.K. Regulated
Segment
 
Pennsylvania Regulated Segment
 Kentucky Regulated
Supply
Segment
  
 
10193

Business Strategy

PPL's overall strategy for its regulated electricity and gas delivery businesses is to achieve stable, long-term growth in itsearnings and rate base.  Rate base is expected to grow as a result of significant capital expenditure programs aimed at maintaining existing assets and improving system reliability at each of the regulated electricity deliverysubsidiaries.  These regulated businesses throughfocus on timely recovery of costs, efficient operations, and strong customer service and constructive regulatory relations, andrelationships.

PPL's strategy for its energy supply business is to achieve disciplined optimization of energy supply margins in its energy supply business while mitigating volatility in both cash flows and earnings.  In pursuing this strategy, PPL acquired LKE in November 2010 and WPD Midlands in April 2011.  These acquisitions have reduced PPL's overall business risk profile and reapportioned the mix of PPL's regulated and competitive businesses by increasing the regulated portion of its business and enhancing rate-regulated growth opportunities as the regulated businesses make investments to improve infrastructure and customer reliability.

The increase in regulated assets is expected to provide earnings stability through regulated returns and the ability to recover costs of capital investments, in contrast to the competitive energy supply business where earnings and cash flows are subject to commodity market volatility.  Results for periods prior to the acquisition of WPD Midlands are not comparable with, or indicative of, results for periods subsequent to the acquisition.  The pro forma impacts of the acquisition of WPD Midlands on income from continuing operations (after income taxes) attributable to PPL for the six months ended June 30 are as follows.

    2011 
        Pro forma  Actual 
                 
Regulated         $ 506 62% $ 387 56%
Competitive           308 38%   308 44%
          $ 814   $ 695  

Note:  Pro forma and actual amounts exclude non-recurring items identified in Note 8 to the Financial Statements.

With the acquisition of WPD Midlands and the related growth of the portion of PPL's overall earnings translated from British pounds sterling, the related foreign currency risk is more substantial.  The U.K. subsidiaries also have currency exposure to the U.S. dollar associated with their 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.

More specifically, PPL's strategy for its competitive energy supply business is to optimize the value from its competitive generation and marketing portfolio.portfolios.  PPL endeavors to do this by matching energy supply with load, or customer demand, under contracts of varying durations with creditworthy counterparties to capture profits while effectively managing exposure to energy and fuel price volatility, counterparty credit risk and operational risk.  PPL is focused on maintaining profitability for its energy supply business during the current and projected period of low commodity prices by controlling its capital and operation and maintenance expenditures.

To manage financing costs and access to credit markets and to fund its capital expenditure program, a key objective of PPL's business strategyfor PPL is to maintain a strong credit profile.  PPL continually focuses on maintaining an appropriate capital structureprofiles and liquidity position.positions.  In addition, PPL has adopted financial and operational risk management programs that, among other things, are designed to monitor and manage its exposure to earnings and cash flow volatility related to changes in energy and fuel prices, interest rates, foreign currency exchange rates, counterparty credit quality and the operating performance of its generating units.

Financial and Operational Developments

Net Income Attributable to PPL CorporationShareowners

Net Income Attributable to PPL Corporation for the three and six months ended June 30, 2012 was $271 million and $812 million compared to $196 million and $597 million for the same periods in 2011 representing a 38% and 36% increase over 2011.  Net Income Attributable to PPL CorporationShareowners for the periods ended June 30March 31 by segment, and reconciled to PPL's consolidated results, was:

  Three Months Six Months    Three Months
  2012  2011  2012  2011       2013  2012 
                  
Kentucky RegulatedKentucky Regulated $ 34  $ 31  $ 76  $ 106 Kentucky Regulated     $ 85  $ 42 
U.K. Regulated (a)U.K. Regulated (a)  196   38   361   93 U.K. Regulated (a)      313   165 
Pennsylvania RegulatedPennsylvania Regulated  29   36   62   88 Pennsylvania Regulated      64   33 
SupplySupply   12   91    313    310 Supply      (46)  301 
Net Income Attributable to PPL Corporation $ 271  $ 196  $ 812  $ 597 
Corporate and Other (a)Corporate and Other (a)       (3)   
Net Income Attributable to PPL ShareownersNet Income Attributable to PPL Shareowners     $ 413  $ 541 
                  
EPS - basicEPS - basic $ 0.46  $ 0.35  $ 1.39  $ 1.14 EPS - basic     $ 0.70  $ 0.93 
EPS - diluted $ 0.46  $ 0.35  $ 1.39  $ 1.14 
EPS - diluted (b)EPS - diluted (b)     $ 0.65  $ 0.93 

102


(a)WPD Midlands was acquiredPrimarily represents costs incurred at the corporate level that have not been allocated or assigned to the segments, which is presented to reconcile segment information to PPL's consolidated results.  For 2012 there were no significant amounts in this category.
(b)See "Equity Units" below for information on April 1, 2011 and its results are recordedthe Equity Units' impact on a one-month lag.  Therefore, the 2012 periods include three and six monthscalculation of WPD Midlands' results while the 2011 periods both include two months of WPD Midlands' results.2013 diluted EPS.

The changes in Net Income Attributable to PPL Corporation from period to period were, in part, attributable to certain items that management considers special.Earnings for the three months ended March 31, 2013 decreased 24% compared with 2012.  See "Results of Operations" below for further discussion of the results of PPL's business segments, details of special items and analysis of the consolidated results of operations.

Economic and Market Conditions

Unregulated gross energy marginsGross Energy Margins associated with PPL Energy Supply's competitive generation and marketing business are impacted by changes in market prices and demand for electricity and natural gas, power plant availability, competition in the markets for retail customers, fuel costs and availability, fuel transportation costs and other costs.  Current depressed wholesale market prices for electricity and natural gas have resulted from general weak economic conditions and other factors, including the impact of expanded domestic shale gas development.  As a result of these factors, PPL Energy Supply has experienced a shift in the dispatching of its competitive generation from coal-fired to combined-cycle gas-fired generation as illustrated in the following table:

   Average Utilization Factors (a)
   2009 - 2011  2012
Pennsylvania coal plants  90%  63%
Montana coal plants  83%  50%
Combined-cycle gas plants  64%  96%

(a)All periods reflect the six months ending June 30.

This reduction in coal-fired generation output has resulted in a surplus of coal inventory at certain of PPL Energy Supply's Pennsylvania coal plants.  To mitigate the risk of exceeding available coal storage, PPL Energy Supply incurred pre-tax charges of $12 million during the six months ended June 30, 2012 to reduce its 2012 contracted coal deliveries.  Because coal purchases may also exceed expected fuel needs for 2013, PPL Energy Supply continues to manage its coal inventory to mitigate the financial impact and physical implications of an oversupply, including, but not limited to, contract modifications to reduce 2013 coal deliveries.

In addition, current economic and commodity market conditions indicate a lower value of unhedged future energy margins (primarily in 2014 and forward years)are expected to continue compared to the hedged energy margins in 2012.  As has been PPL Energy Supply's practice in periods of changing business conditions, PPL Energy Supply continues to review its future business and operational plans, including capital and operation and maintenance expenditures, as well as its hedging strategies.

PPL's businesses are also subject to extensive federal, state and local environmental laws, rules and regulations.  Although
94

PPL Energy Supply's competitive generation assets are well positionedSupply continues to meet these requirements, certain regulated generation assets at LG&E and KUmonitor its Corette plant (which as previously announced will require substantial capital investment.  See Note 15be placed in long-term reserve status, suspending the plant's operation due to the Financial Statements in PPL's 2011 Form 10-K for additional information on these requirements.  These requirements have resulted in LKE's anticipation of retiring six coal-fired units by 2015.  See Notes 6 and 8 to the Financial Statements for additional information regarding the anticipated retirement of these units as well as certain regulatory approvals to build a NGCC facility.

In light of these economic andexpected market conditions as well as current and projected environmental regulatory requirements, PPL considered whether certain of its generating assets werethe costs to comply with the MATS beginning in April 2015) for impairment.  The Corette plant asset group's carrying value at March 31, 2013 was $65 million.  Although the Corette plant was not impaired and determinedat March 31, 2013, it is reasonably possible that noan impairment charges were required at June 30, 2012.  PPL is unable to predict whether future environmental requirements or market conditions will result in impairment charges or additional retirements.

PPL and its subsidiaries may also be impactedcould occur in future periods, by the uncertainty in the worldwide financial and credit markets partially caused by the European sovereign debt crisis.  In addition, PPL may be impacted by reductions in the credit ratings of financial institutions and evolving regulations in the financial sector.  Collectively, these factors could reduce availability or restrict PPL and its subsidiaries' ability to maintain sufficient levels of liquidity, reduce capital market activities, change collateral posting requirements and increase the associated costs to PPL and its subsidiaries.as higher priced sales contracts settle, adversely impacting projected cash flows.

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

Ironwood AcquisitionSusquehanna Turbine Blade Inspection

In April 2012, an indirect, wholly owned subsidiarythe spring of 2013, PPL Energy Supply completedwill begin making modifications to address the acquisitioncauses of turbine blade cracking at the PPL Susquehanna nuclear plant that was first identified in 2011.  The modifications will be made during the Unit 2 refueling outage and an additional planned outage for Unit 1.  Following completion of the equity interestsmodifications, PPL Energy Supply plans to continue monitoring the turbine blades using enhanced diagnostic equipment.

Rate Case Proceedings

Pennsylvania

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

Kentucky

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

RIIO-ED1

In October 2010, Ofgem announced changes to the regulatory framework that will be effective for the U.K. electricity distribution sector, including WPD, beginning April 2015.  The framework, known as RIIO (Revenues = Incentives + Innovation + Outputs), is intended to encourage investment in regulated infrastructure.  The next electricity distribution price control review is referred to as RIIO-ED1.  Key components of the RIIO-ED1 are: an extension of the price review period to eight years, increased emphasis on outputs and incentives, enhanced stakeholder engagement including network customers, a stronger incentive framework to encourage more efficient investment and innovation, and continued use of a single weighted average cost of capital.  Ofgem has also indicated that the depreciation of the RAV, for RAV additions after April 1, 2015, will change from 20 years to 45 years, but that they will consider transition arrangements. WPD published a draft of its 2015 - 2023 business plan on its website in March 2013 in order to solicit feedback from stakeholders on its plan prior to submission to Ofgem in July 2013.   See "Item 1. Business - Background - U.K. Regulated Segment - Revenue and Regulation" in the owner2012 Form 10-K for additional information. At this time, WPD cannot predict the outcome or the future financial impact of this matter.

Legislation - Regulatory Procedures and operatorMechanisms

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 Ironwood Facility.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 Ironwood Facility began operationLTIIP is mandated to be a five- to ten-year plan describing projects eligible for inclusion in 2001the 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, since 2008,on January 15, 2013, PPL Electric filed a petition requesting permission to establish a DSIC.  Several parties have filed responses to PPL Electric's petition.  The case remains pending before the PUC.  PPL Electric does not expect any new rates to be effective before the third quarter of 2013.

 
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PPL EnergyPlus has supplied natural gas for the operation of the Ironwood 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.  See Note 8 to the Financial Statements for additional information.

Bankruptcy of SMGT

In October 2011, SMGT, a Montana cooperative and purchaser of electricity under a long-term supply contract with PPL EnergyPlus expiring in June 2019 (SMGT Contract), filed for protection under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Montana.  At the time of the bankruptcy filing, SMGT was PPL EnergyPlus' largest unsecured credit exposure.

The SMGT Contract provided for fixed volume purchases on a monthly basis at established prices.  Pursuant to a court order and subsequent stipulations entered into between the SMGT bankruptcy trustee and PPL EnergyPlus, since the date of its Chapter 11 filing through January 2012, SMGT continued to purchase electricity from PPL EnergyPlus at the price specified in the SMGT Contract, and made timely payments for such purchases, but at lower volumes than as prescribed in the SMGT Contract.  In January 2012, the trustee notified PPL EnergyPlus that SMGT would not purchase electricity under the SMGT Contract for the month of February.  In March 2012, the U.S. Bankruptcy Court for the District of Montana issued an order approving the request of the SMGT bankruptcy trustee and PPL EnergyPlus to terminate the SMGT Contract.  As a result, the SMGT Contract was terminated effective April 1, 2012, allowing PPL EnergyPlus to resell the electricity previously contracted to SMGT under the SMGT Contract to other customers.

PPL EnergyPlus' receivable under the SMGT Contract totaled approximately $22 million at June 30, 2012, which has been fully reserved.  No assurance can be given as to the collectability of the receivable.

In July 2012, PPL EnergyPlus filed its proof of claim in the SMGT bankruptcy proceeding.  The total claim 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.

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

Tax Litigation

In 1997, the U.K. imposed a Windfall Profits Tax (WPT) on privatized utilities, including WPD.  PPL filed its tax returns for years subsequent to its 1997 and 1998 claim for refund on the basis that the U.K. WPT was creditable.  In September 2010, the U.S. Tax Court (Tax Court) ruled in PPL's favor in a dispute with the IRS, concluding that the U.K. WPT is a creditable tax for U.S. tax purposes.  As a result, and with finalization of other issues, PPL recorded a $42 million tax benefit in 2010.  In January 2011, the IRS appealed the Tax Court's decision to the U.S. Court of Appeals for the Third Circuit (Third Circuit).  In December 2011, the Third Circuit issued its opinion reversing the Tax Court's decision, holding that the U.K. WPT is not a creditable tax.  As a result of the Third Circuit's adverse determination, PPL recorded a $39 million expense in the fourth quarter of 2011.  In February 2012, PPL filed its petition for rehearing of the Third Circuit's opinion.  In March 2012, the Third Circuit denied PPL's petition.  In June 2012, the U.S. Court of Appeals for the Fifth Circuit issued a contrary opinion in an identical case involving another company.  In July 2012, PPL filed a petition for a writ of certiorari seeking U.S. Supreme Court review of the Third Circuit's opinion.

Terminated Bluegrass CTs Acquisition

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


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NGCC Construction

In September 2011, LG&E and KU filed a CPCN with the KPSC requesting approval to build a 640 MW NGCC at the existing Cane Run plant site in Kentucky.  In May 2012, the KPSC issued an order approving the request.  Subject to finalizing contracting agreements and permitting activities, construction is expected to begin in 2012 and be completed during 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, stricter federal EPA regulations with a 2015 compliance date, LG&E and KU anticipate retiring six older coal-fired electric generating units at the Cane Run, Green River and Tyrone plants, which have a combined summer capacity rating of 797 MW.  The Cane Run and Green River coal units are anticipated to remain operational until the NGCC generation and associated transmission project is completed.

Regional Transmission Line Expansion Plan

PPL Electric has experienced delays in obtaining necessary National Park Service (NPS) approvals for the Susquehanna-Roseland transmission line and anticipates a delay of the line's in-service date to 2015.  In March 2012, the NPS announced that the route proposed by PPL Electric and PSE&G, previously approved by the Pennsylvania and New Jersey public utility commissions, is the preferred route for the line under the NPS's National Environmental Policy Act review.  The NPS has stated that it expects to issue its record of decision in October 2012.  An appeal of the New Jersey Board of Public Utilities approval of the line is pending before the New Jersey Superior Court Appellate Division.  PPL Electric cannot predict the ultimate outcome or timing of the NPS approval or any further legal challenges to the project.  PJM has developed a strategy to manage potential reliability problems until the line is built.  PPL Electric cannot predict what additional actions, if any, PJM might take in the event of further delay to its scheduled in-service date for the new line.

At June 30, 2012, PPL Electric's estimated share of the project cost has increased to $560 million from approximately $500 million at December 31, 2011, primarily due to increased material costs.  In July 2012, PPL Electric began pre-construction activities including tree and vegetation removal from the transmission line's right of way and construction of access roads.  See Note 8 in PPL's  2011 Form 10-K for additional information.

FERC Formula Rates

Transmission rates are regulated by the FERC.  PPL Electric's transmission revenues are billed in accordance with a FERC-approved PJM open access transmission tariff that utilizes a formula-based rate recovery mechanism.  The formula rate is calculated, in part, based on financial results as reported in PPL Electric's annual FERC Form No. 1, filed under FERC's Uniform System of Accounts (USOA).  PPL Electric must follow FERC's USOA, which requires subsidiaries to be presented, for FERC reporting purposes, using the equity method of accounting unless a waiver has been issued.  The FERC has granted waivers of this requirement to other utilities when such waiver would more accurately present the integrated operations of the utilities and their subsidiaries.  In March 2012,2013, as part of a routine FERC audit of PPL and its subsidiaries, PPL Electric determined that it never obtained a waiver of the use of the equity method of accounting for PPL Receivables Corporation (PPL Receivables).  PPL Receivables is a wholly owned subsidiary of PPL Electric, formed in 2004 to purchase eligible accounts receivable and unbilled revenue of PPL Electric to collateralize commercial paper issuances to reduce borrowing costs.  In March 2013, PPL Electric filed a request for waiver with FERC that, if approved, would allow it to continue to consolidate the results of PPL Receivables with the results of PPL Electric, as it has done since 2004.  While PPL Electric may ultimately be successful in obtaining a waiver from FERC, seeking recovery, over a 34-year period beginning in June 2012,FERC may require PPL Electric to re-issue one or more of its unrecovered regulatory asset related to the deferred state tax liability that existed at the time of the transition from the flow-through treatment of state income taxes to full normalization.  This change in tax treatment occurred in 2008 as a result of prior FERC initiatives that transferred regulatory jurisdictionForm No. 1 filings in either the audit proceeding or the waiver proceeding.  If re-issuance of certain transmission assets from the PUC to FERC.  A regulatory asset of approximately $50 million related to this transition, classified as taxes recoverable through future rates, is included in "Other Noncurrent Assets - Regulatory assets" on the Balance Sheets at June 30, 2012 and December 31, 2011.  In May 2012, the FERC issued an order approvingForm No. 1 filings were required by FERC, PPL Electric's request effective June 1, 2012.

U.K. Tax Rate Change

In July 2012,revenue requirement calculated under the U.K. Finance Act 2012 (the Act) was enacted.formula rate could be negatively impacted.  The Act reduced the U.K.'s statutory income tax rate from 25% to 24%, effective April 1, 2012impact, if any, is not known at this time but could range between $0 and from 24% to 23%, effective April 1, 2013.  As a result of these changes,$40 million, pre-tax.  PPL expects to record a deferred tax benefit in the range of $65 million to $75 million in the third quarter of 2012.

Ofgem Review of Line Loss Calculation

WPD has a $167 million liability recorded at June 30, 2012 compared with $170 million at December 31, 2011, calculated in accordance with Ofgem's accepted methodology, related to the close-out of line losses for the prior price control period, DPCR4.  Ofgem is currently consulting on the methodology to be used by all network operators to calculate the final line loss incentive/penalty for DPCR4.  In October 2011, Ofgem issued a consultation paper citing two potential changes to the methodology, both of which would result in a reduction of the liability.  In March 2012, Ofgem issued a decision regarding the preferred methodology.  In July 2012, Ofgem issued a consultation paper regarding certain aspects of the preferred methodology as it relates to the DPCR4 line loss incentive/penalty and a proposal to delay the target date for making a final decision until April 2013 together with a proposal to remove the line loss incentive/penalty for DPCR5.  PPLElectric cannot predict the outcome of this matter.the waiver or audit proceedings, which remain pending before the FERC.

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Equity Forward ContractAgreements

In connection with an April 2012 PPL made a registered underwritten public offering of 9.9 million shares of itsPPL common stock.stock, PPL entered into forward sale agreements with two counterparties.  In conjunction with that offering, the underwriters exercised an option to purchase an additional 591 thousand shares of PPL common stock solely to cover over-allotments.

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

In April 2013, PPL settled the subsequentinitial forward sale agreements will occur in July 2013.

PPL will not receive any proceeds or issue anyby the issuance of 8.4 million shares of PPL common stock untiland cash settlement of 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 intends to use anyused the net proceeds that it receives upon settlement to repay short-term debt obligations and for other general corporate purposes.  Settlement of the forward sale agreements covering 591 thousand remaining shares will occur no later than July 2013.  PPL may elect to issue common stock, cash settle or net share settle all or a portion of its rights or obligations under the forward sale agreements.

The forward sale agreements will beare classified as equity transactions.  As a result, no amounts will bewere recorded in the consolidated financial statements until the April 2013 settlement of the initial forward sale agreements.  Prior to those settlements, the only impactHowever, prior to the financial statements will be the inclusion ofApril 2013 settlement, incremental shares were included within the calculation of diluted EPS using the treasury stock method.  See Note 74 to the Financial Statements for additional information.the impact on the calculation of diluted EPS.

RedemptionEquity Units

During 2013, two events will occur related to the components of the 2010 Equity Units.  On July 1, PPL will receive proceeds of $1.150 billion through the issuance of PPL Electric Preference Stockcommon stock to settle the 2010 Purchase Contracts, and in the second quarter of 2013, PPL Capital Funding expects to remarket the 4.625% Junior Subordinated Notes due 2018.  During the first quarter of 2013, financing plans were finalized to remarket the debt component of the Equity Units.

In June 2012,The If-Converted Method of calculating diluted EPS was applied to the Equity Units beginning in the first quarter of 2013 resulting in $15 million of interest charges (after-tax) being added back to net income available to PPL Electric redeemed all 2.5common shareowners and 72 million shares of its 6.25% Series Preference Stock, par value $100 per share.  The price paidPPL common stock being treated as outstanding.  See Note 4 to the Financial Statements for the redemption wasimpact on the par value, without premium ($250 million in the aggregate).  At December 31, 2011, the preference stock was reflected in "Noncontrolling Interests" on PPL's Balance Sheet.calculation of diluted EPS.

Results of Operations

The following discussion provides a review of results by reportable segment and a description of key factors by segment expected to impact future earnings.  This section ends with "Statement of Income Analysis," which includes explanations of Kentucky Gross Margins, Pennsylvania Gross Delivery Margins and Unregulated Gross Energy Margins and significant changes in principal line items on PPL's Statements of Income, comparing the three and six months ended June 30, 2012March 31, 2013 with the same periods in 2011.2012.

On April 1, 2011, PPL, through its subsidiary PPL WEM, completed its acquisition of WPD Midlands.  As PPL consolidates WPD Midlands on a one-month lag, consistent with its accounting policy on consolidation of foreign subsidiaries, two months of WPD Midlands' results of operations are included in PPL's results for the 2011 periods.  When discussing PPL's results of operations for 2012 compared with 2011, the results of WPD Midlands (which includes PPL WEM for this purpose) are isolated for purposes of comparability.  WPD Midlands' results are included within the U.K. Regulated segment (formerly the International Regulated segment, renamed in 2012).  See Note 8 to the Financial Statements for additional information regarding the acquisition.
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The results for interim periods can be disproportionately influenced by numerous factors and developments and by seasonal variations.  As such, the results of operations for interim periods do not necessarily indicate results or trends for the year or future periods.

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

Pennsylvania Regulated Segment
Supply
Segment Results
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Business Strategy

PPL's strategy for its regulated electricity and gas delivery businesses is to achieve stable, long-term growth in earnings and rate base.  Rate base is expected to grow as a result of significant capital expenditure programs aimed at maintaining existing assets and improving system reliability at each of the regulated subsidiaries.  These regulated businesses focus on timely recovery of costs, efficient operations, strong customer service and constructive regulatory relationships.

PPL's strategy for its energy supply business is to achieve disciplined optimization of energy supply margins while mitigating volatility in both cash flows and earnings.  More specifically, PPL's strategy is to optimize the value from its competitive generation and marketing portfolios.  PPL endeavors to do this by matching energy supply with load, or customer demand, under contracts of varying durations with creditworthy counterparties to capture profits while effectively managing exposure to energy and fuel price volatility, counterparty credit risk and operational risk.  PPL is focused on maintaining profitability for its energy supply business during the current and projected period of low commodity prices by controlling its capital and operation and maintenance expenditures.

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

Financial and Operational Developments

Net Income Attributable to PPL Shareowners

Net Income Attributable to PPL Shareowners for the periods ended March 31 by segment, and reconciled to PPL's consolidated results, was:

     Three Months
       2013  2012 
              
Kentucky Regulated       $ 85  $ 42 
U.K. Regulated         313    165 
Pennsylvania Regulated         64    33 
Supply         (46)   301 
Corporate and Other (a)         (3)   
Net Income Attributable to PPL Shareowners       $ 413  $ 541 
              
EPS - basic       $ 0.70  $ 0.93 
EPS - diluted (b)       $ 0.65  $ 0.93 

Kentucky Regulated Segment

The Kentucky Regulated
(a)Primarily represents costs incurred at the corporate level that have not been allocated or assigned to the segments, which is presented to reconcile segment consists primarily of LKE's results from the operation of regulated electricity generation, transmission and distribution assets, primarilyinformation to PPL's consolidated results.  For 2012 there were no significant amounts in Kentucky, as well as in Virginia and Tennessee.  This segment also includes LKE's results from the regulated distribution and sale of natural gas in Kentucky.
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Net Income Attributable to PPL Corporation for the periods ended June 30 includes the following results:

   Three Months Six Months
   2012  2011  % Change 2012  2011  % Change
                 
Utility revenues $ 658  $ 638   3  $ 1,363  $ 1,404   (3)
Fuel   215    206   4    428    421   2 
Energy purchases   34    40   (15)   108    147   (27)
Other operation and maintenance   197    198   (1)   403    379   6 
Depreciation   86    84   2    172    165   4 
Taxes, other than income   12    9   33    23    18   28 
 Total operating expenses   544    537   1    1,134    1,130   
Other Income (Expense) - net   (7)    n/a   (10)   (1)  900 
Interest Expense (a)   54    54      109    108   1 
Income Taxes   13    16   (19)   28    59   (53)
Income (Loss) from Discontinued Operations   (6)    n/a   (6)    n/a
Net Income Attributable to PPL Corporation $ 34  $ 31   10  $ 76  $ 106   (28)

(a)Includes allocated interest expense of $17 million and $34 million for the three and six months ended June 30, 2012 and $17 million and $35 million for the three and six months ended June 30, 2011 related to the 2010 Equity Units and interest rate swaps.this category.

The changes in
(b)See "Equity Units" below for information on the componentsEquity Units' impact on the calculation of the Kentucky Regulated segment's results between these periods were due to the following factors, which reflect reclassifications for items included in gross margins and certain items that management considers special.  See additional detail of these special items in the table below.

  Three Months Six Months
       
Kentucky gross margins $ 12  $ (16)
Other operation and maintenance   4    (17)
Depreciation   (1)   (5)
Taxes, other than income   (3)   (5)
Other Income (Expense) - net   (7)   (9)
Other      (2)
Income Taxes   3    25 
Special items, after-tax   (5)   (1)
Total $ 3  $ (30)

·See "Statement of Income Analysis - Margins - Changes in Non-GAAP Financial Measures" for an explanation of Kentucky Gross Margins.2013 diluted EPS.

·Higher other operation and maintenance for the six-month period, primarily due to $11 million of higher steam maintenance costs resulting from an increased scope of scheduled plant outages.  Also, a $6 million credit was recorded in 2011 to establish a regulatory asset related to 2009 storm costs.
Earnings for the three months ended March 31, 2013 decreased 24% compared with 2012.  See "Results of Operations" below for further discussion of PPL's business segments, details of special items and analysis of the consolidated results of operations.

·Lower other income (expense) - net for the three and six-month periods, primarily due to equity losses from an unconsolidated affiliate.
Economic and Market Conditions

·Lower income taxes for the six-month period, primarily due to the change in pre-tax income.

The following after-tax amounts, which management considers special items, also impacted the Kentucky Regulated segment's results during the periods ended June 30.

   Income Statement Three Months Six Months
   Line Item 2012  2011  2012  2011 
                
Special items gains (losses), net of tax (expense) benefit:             
LKE acquisition-related adjustments:             
 Net operating loss carryforward and other tax related adjustmentsIncome Taxes and Other O&M       $ 4    
Other:             
 LKE discontinued operations, net of tax of $4, $0, $4, $0 (a)Disc. Operations $ (5)      (5)   
Total  $ (5)    $ (1)   
Unregulated Gross Energy Margins associated with PPL Energy Supply's competitive generation and marketing business are impacted by changes in market prices and demand for electricity and natural gas, power plant availability, competition in the markets for retail customers, fuel costs and availability, fuel transportation costs and other costs.  Current depressed wholesale market prices for electricity and natural gas have resulted from general weak economic conditions and other factors, including the impact of expanded domestic shale gas development.  As a result of these factors, lower future energy margins are expected to continue compared to the energy margins in 2012.  As has been PPL Energy Supply's practice in periods of changing business conditions, PPL Energy Supply continues to review its future business and operational plans, including capital and operation and maintenance expenditures, as well as its hedging strategies.
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PPL Energy Supply continues to monitor its Corette plant (which as previously announced will be placed in long-term reserve status, suspending the plant's operation due to expected market conditions and the costs to comply with the MATS beginning in April 2015) for impairment.  The Corette plant asset group's carrying value at March 31, 2013 was $65 million.  Although the Corette plant was not impaired at March 31, 2013, it is reasonably possible that an impairment could occur in future periods, as higher priced sales contracts settle, adversely impacting projected cash flows.

(a)Represents an adjustment to an indemnification liability.
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Outlook

Excluding special items, PPL projects lower segment earnings in 2012 compared with 2011, primarily driven by higher operation and maintenance expenses, which are expected to be partially offset by higher margins.

In June 2012, LG&E and KU filed requests with the KPSC for increases in annual base electric rates of approximately $62 million at LG&E and approximately $82 million at KU and an increase in annual base gas rates of approximately $17 million at LG&E.  The proposed base rate increases would result in electric rate increases of 6.9% at LG&E and 6.5% at KU and a gas rate increase of 7.0% at LG&E and would be effective in January 2013.  LG&E's and KU's applications include requests for authorized returns-on-equity at LG&E and KU of 11% each.  A hearing on these matters is expected to be scheduled during the fourth quarter of 2012.  LG&E and KU cannot predict the outcome of these proceedings.

Earnings in 2012 are subject to various risks and uncertainties.  See "Forward-Looking Information," the rest of this Item 2 and Notes 6 and 10 to the Financial Statements in this Form 10-Q and "Item 1. Business" and "Item 1A. Risk Factors" in PPL's 2011 Form 10-K for a discussion of the risks, uncertainties and factors that may impact future earnings.

U.K. Regulated Segment

The U.K. Regulated segment consists primarily of the electric distribution operations of WPD in the U.K.

Net Income Attributable to PPL Corporation for the periods ended June 30 includes the following results:

   Three Months Six Months
   2012  2011  % Change 2012  2011  % Change
                  
Utility revenues $ 209  $ 203   3  $ 437  $ 419   4 
Energy-related businesses   8    10   (20)   18    19   (5)
 Total operating revenues   217    213   2    455    438   4 
Other operation and maintenance   52    49   6    107    91   18 
Depreciation   33    32   3    64    62   3 
Taxes, other than income   12    13   (8)   26    26   
Energy-related businesses   6    4   50    11    8   38 
 Total operating expenses   103    98   5    208    187   11 
Other Income (Expense) - net   31    5   520    10    3   233 
Interest Expense (a)   46    58   (21)   93    98   (5)
Income Taxes   21    8   163    40    28   43 
WPD Midlands, net of tax (b)   118    65   82    241    65   271 
WPD Midlands acquisition-related                
 adjustments, net of tax      (81)  (100)   (4)   (100)  (96)
Net Income Attributable to PPL Corporation $ 196  $ 38   416  $ 361  $ 93   288 
PPL cannot predict the future impact that economic and market conditions and regulatory requirements may have on its financial condition or results of operations.

(a)Includes allocated interest expense of $11 million and $23 million for the three and six months ended June 30, 2012 and $14 million for both the three and six months ended June 30, 2011, related primarily to the 2011 Equity Units.
(b)2012 represents the operations of WPD Midlands for the three and six months ended June 30, 2012 and 2011 represents the operations of WPD Midlands for the period from the April 1, 2011 acquisition date through June 30, 2011, recorded on a one month lag.  These amounts exclude acquisition-related adjustments.  WPD Midlands' revenue from external customers was $340 million and $664 million for the three and six months ended June 30, 2012 and $207 million in the same periods of 2011.

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

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   Three Months Six Months
        
PPL WW      
 Utility revenues $ 12  $ 26 
 Other operation and maintenance   (9)   (19)
 Interest expense   8    11 
 Other   1    (2)
 Income taxes   6    4 
WPD Midlands, after-tax   56    184 
U.S.      
 Interest expense   3    (13)
 Other   (1)   
 Income taxes   (11)   (14)
Foreign currency exchange rates, after-tax (a)   (3)   (7)
Special items, after-tax   96    98 
Total $ 158  $ 268 
Susquehanna Turbine Blade Inspection

(a)Includes the effect of realized gains/(losses) on earnings hedges.
PPL WW
·Higher utility revenues for the three-month period due to the April 1, 2011 and 2012 price increases which resulted in $19 million of higher utility revenues, partially offset by $4 million of lower regulatory recovery due to a 2012 charge to income for the over-recovery of revenues from customers, compared to a credit to income in 2011.
In the spring of 2013, PPL Energy Supply will begin making modifications to address the causes of turbine blade cracking at the PPL Susquehanna nuclear plant that was first identified in 2011.  The modifications will be made during the Unit 2 refueling outage and an additional planned outage for Unit 1.  Following completion of the modifications, PPL Energy Supply plans to continue monitoring the turbine blades using enhanced diagnostic equipment.

Higher utility revenues for the six-month period due to the April 1, 2011 and 2012 price increases which resulted in $55 million of higher utility revenues, partially offset by $15 million of lower volumes due primarily to a downturn in the economy and weather and $11 million of lower regulatory recovery due to a 2012 charge to income for the over-recovery of revenues from customers, compared to a credit to income in 2011.
Rate Case Proceedings

·Higher other operation and maintenance expense for the three-month period due to $5 million of higher pension expense resulting from an increase in amortization of actuarial losses and $4 million of higher network maintenance expense.
Pennsylvania

Higher other operation and maintenance expense for the six-month period due to $10 million of higher pension expense resulting from an increase in amortization of actuarial losses and $6 million of higher network maintenance expense.
In December 2012, the PUC approved a total distribution revenue increase of about $71 million, using a 10.4% return on equity.  The approved rates became effective January 1, 2013.

·Lower interest expense for the three and six-month periods primarily due to lower interest expense on index-linked notes.
Kentucky

·Lower income taxes for the three and six-month periods due to $7 million and $5 million of favorable adjustments related to uncertain tax positions.

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

·Higher interest expense for the six-month period primarily due to $13 million of higher interest expense associated with the 2011 Equity Units issued to finance the WPD Midlands acquisition.
RIIO-ED1

·Higher income taxes for the three and six-month periods due to a $7 million and $14 million of tax benefits recorded in 2011 as a result of U.K. pension plan contributions.

The following after-tax amounts, which management considers special items, also impacted the U.K. Regulated segment's results during the periods ended June 30.

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   Income Statement Three Months Six Months
   Line Item 2012  2011  2012  2011 
                
Special items gains (losses), net of tax (expense) benefit:             
Foreign currency-related economic hedges, net of tax of ($8), ($1), ($1), $0 (a)Other Income-net $ 16  $ 1  $ 2    
WPD Midlands acquisition-related adjustments:             
 2011 Bridge Facility costs, net of tax of $0, $11, $0, $13 (b)Interest Expense      (25)    $ (30)
 Foreign currency loss on 2011 Bridge Facility, net of tax of $0, $19, $0, $19 (c)Other Income-net      (39)      (39)
 Net hedge gains, net of tax of $0, ($20), $0, ($17) (c)Other Income-net      43       39 
 Hedge ineffectiveness, net of tax of $0, $3, $0, $3 (d)Interest Expense      (9)      (9)
 U.K. stamp duty tax, net of tax of $0, $0, $0, $0 (e)Other Income-net      (21)      (21)
 Separation benefits, net of tax of $0, $2, $2, $2Other O&M   (4)   (4)   (8)   (4)
 Other acquisition-related adjustments, net of tax of ($1), $10, ($1), $10(f)   4    (26)   4    (36)
Total  $ 16  $ (80) $ (2) $ (100)
In October 2010, Ofgem announced changes to the regulatory framework that will be effective for the U.K. electricity distribution sector, including WPD, beginning April 2015.  The framework, known as RIIO (Revenues = Incentives + Innovation + Outputs), is intended to encourage investment in regulated infrastructure.  The next electricity distribution price control review is referred to as RIIO-ED1.  Key components of the RIIO-ED1 are: an extension of the price review period to eight years, increased emphasis on outputs and incentives, enhanced stakeholder engagement including network customers, a stronger incentive framework to encourage more efficient investment and innovation, and continued use of a single weighted average cost of capital.  Ofgem has also indicated that the depreciation of the RAV, for RAV additions after April 1, 2015, will change from 20 years to 45 years, but that they will consider transition arrangements. WPD published a draft of its 2015 - 2023 business plan on its website in March 2013 in order to solicit feedback from stakeholders on its plan prior to submission to Ofgem in July 2013.   See "Item 1. Business - Background - U.K. Regulated Segment - Revenue and Regulation" in the 2012 Form 10-K for additional information. At this time, WPD cannot predict the outcome or the future financial impact of this matter.

(a)Represents unrealized gains (losses) on contracts that economically hedge anticipated earnings denominated in GBP.
Legislation - Regulatory Procedures and Mechanisms
(b)Represents fees incurred in connection with establishing the 2011 Bridge Facility.

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

The PUC approved the LTIIP on January 10, 2013 and, on January 15, 2013, PPL Electric filed a petition requesting permission to establish a DSIC.  Several parties have filed responses to PPL Electric's petition.  The case remains pending before the PUC.  PPL Electric does not expect any new rates to be effective before the third quarter of 2013.
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FERC Formula Rates

Transmission rates are regulated by the FERC.  PPL Electric's transmission revenues are billed in accordance with a FERC-approved PJM open access transmission tariff that utilizes a formula-based rate recovery mechanism.  The formula rate is calculated, in part, based on financial results as reported in PPL Electric's annual FERC Form No. 1, filed under FERC's Uniform System of Accounts (USOA).  PPL Electric must follow FERC's USOA, which requires subsidiaries to be presented, for FERC reporting purposes, using the equity method of accounting unless a waiver has been issued.  The FERC has granted waivers of this requirement to other utilities when such waiver would more accurately present the integrated operations of the utilities and their subsidiaries.  In March 2013, as part of a routine FERC audit of PPL and its subsidiaries, PPL Electric determined that it never obtained a waiver of the use of the equity method of accounting for PPL Receivables Corporation (PPL Receivables).  PPL Receivables is a wholly owned subsidiary of PPL Electric, formed in 2004 to purchase eligible accounts receivable and unbilled revenue of PPL Electric to collateralize commercial paper issuances to reduce borrowing costs.  In March 2013, PPL Electric filed a request for waiver with FERC that, if approved, would allow it to continue to consolidate the results of PPL Receivables with the results of PPL Electric, as it has done since 2004.  While PPL Electric may ultimately be successful in obtaining a waiver from FERC, FERC may require PPL Electric to re-issue one or more of its prior FERC Form No. 1 filings in either the audit proceeding or the waiver proceeding.  If re-issuance of FERC Form No. 1 filings were required by FERC, PPL Electric's revenue requirement calculated under the formula rate could be negatively impacted.  The impact, if any, is not known at this time but could range between $0 and $40 million, pre-tax.  PPL Electric cannot predict the outcome of the waiver or audit proceedings, which remain pending before the FERC.

Equity Forward Agreements

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 the issuance of 8.4 million shares of PPL common stock and cash settlement of 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.  Settlement of the forward sale agreements covering 591 thousand remaining shares will occur no later than July 2013.  PPL may elect to issue common stock, cash settle or net share settle all or a portion of its rights or obligations under the forward sale agreements.

The forward sale agreements are classified as equity transactions.  As a result, no amounts were recorded in the consolidated financial statements until the April 2013 settlement of the initial forward sale agreements.  However, prior to the April 2013 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, two events will occur related to the components of the 2010 Equity Units.  On July 1, PPL will receive proceeds of $1.150 billion through the issuance of PPL common stock to settle the 2010 Purchase Contracts, and in the second quarter of 2013, PPL Capital Funding expects to remarket the 4.625% Junior Subordinated Notes due 2018.  During the first quarter of 2013, financing plans were finalized to remarket the debt component of the Equity Units.

The If-Converted Method of calculating diluted EPS was applied to the Equity Units beginning in the first quarter of 2013 resulting in $15 million of interest charges (after-tax) being added back to net income available to PPL common shareowners and 72 million shares of PPL common stock being treated as outstanding.  See Note 4 to the Financial Statements for the impact on the calculation of diluted EPS.

Results of Operations

The following discussion provides a review of results by reportable segment and a description of key factors by segment expected to impact future earnings.  This section ends with "Statement of Income Analysis," which includes explanations of Kentucky Gross Margins, Pennsylvania Gross Delivery Margins and Unregulated Gross Energy Margins and significant changes in principal line items on PPL's Statements of Income, comparing the three months ended March 31, 2013 with 2012.
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The results for interim periods can be disproportionately influenced by numerous factors and developments and by seasonal variations.  As such, the results of operations for interim periods do not necessarily indicate results or trends for the year or future periods.

Tables analyzing changes in amounts between periods within "Segment Results" and "Statement of Income Analysis" are presented on a constant U.K. foreign currency exchange rate basis, where applicable, in order to isolate the impact of the change in the exchange rate on the item being explained.  Results computed on a constant U.K. foreign currency exchange rate basis are calculated by translating current year results at the prior year weighted-average U.K. foreign currency loss on the repayment of the 2011 Bridge Facility, including a pre-tax foreign currency loss of $15 million associated with proceeds received on the U.S. dollar-denominated senior notes issued by PPL WEM in April 2011 that were used to repay a portion of PPL WEM's borrowing under the 2011 Bridge Facility.  The foreign currency risk was economically hedged with forward contracts to purchase GBP, which resulted in pre-tax gains of $63 million and $56 million for the three and six-month periods.  See Note 14 to the Financial Statements for additional information.
(d)Represents a combination of ineffectiveness associated with closed out interest rate swaps and a charge recorded as a result of certain interest rate swaps failing hedge effectiveness testing.  See Note 14 to the Financial Statements for additional information.
(e)Tax on the transfer of ownership of property in the U.K. which is not tax deductible for income tax purposes.
(f)2011 primarily represents advisory, accounting and legal fees which are reflected in "Other Income (Expense) - net" on the Statements of Income.

Outlook

Excluding special items, PPL projects higher segment earnings in 2012 compared with 2011, primarily driven by four additional months of earnings from the Midlands businesses and higher electricity delivery revenue. Partially offsetting these positive earnings drivers are higher income taxes, higher operation and maintenance expense, higher depreciation, higher financing costs and a less favorable currency exchange rate.

Earnings in 2012 are subject to various risks and uncertainties.  See "Forward-Looking Information," the rest of this Item 2, and Notes 6 and 10 to the Financial Statements in this Form 10-Q and "Item 1. Business" and "Item 1A. Risk Factors" in PPL's 2011 Form 10-K for a discussion of the risks, uncertainties and factors that may impact future earnings.

Pennsylvania Regulated Segment

Supply
The Pennsylvania Regulated segment includes the regulated electric delivery operations of PPL Electric.Segment
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Business Strategy

PPL's strategy for its regulated electricity and gas delivery businesses is to achieve stable, long-term growth in earnings and rate base.  Rate base is expected to grow as a result of significant capital expenditure programs aimed at maintaining existing assets and improving system reliability at each of the regulated subsidiaries.  These regulated businesses focus on timely recovery of costs, efficient operations, strong customer service and constructive regulatory relationships.

PPL's strategy for its energy supply business is to achieve disciplined optimization of energy supply margins while mitigating volatility in both cash flows and earnings.  More specifically, PPL's strategy is to optimize the value from its competitive generation and marketing portfolios.  PPL endeavors to do this by matching energy supply with load, or customer demand, under contracts of varying durations with creditworthy counterparties to capture profits while effectively managing exposure to energy and fuel price volatility, counterparty credit risk and operational risk.  PPL is focused on maintaining profitability for its energy supply business during the current and projected period of low commodity prices by controlling its capital and operation and maintenance expenditures.

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

Financial and Operational Developments

Net Income Attributable to PPL Shareowners

Net Income Attributable to PPL Shareowners for the periods ended March 31 by segment, and reconciled to PPL's consolidated results, was:

     Three Months
       2013  2012 
              
Kentucky Regulated       $ 85  $ 42 
U.K. Regulated         313    165 
Pennsylvania Regulated         64    33 
Supply         (46)   301 
Corporate and Other (a)         (3)   
Net Income Attributable to PPL Shareowners       $ 413  $ 541 
              
EPS - basic       $ 0.70  $ 0.93 
EPS - diluted (b)       $ 0.65  $ 0.93 

Net Income Attributable to PPL Corporation for the periods ended June 30 includes the following results:
                  
   Three Months Six Months
   2012  2011  % Change 2012  2011  % Change
Operating revenues                
 External $ 403  $ 436   (8) $ 860  $ 990   (13)
 Intersegment   1    4   (75)   2    8   (75)
 Total operating revenues   404    440   (8)   862    998   (14)
Energy purchases                
 External   120    169   (29)   273    420   (35)
 Intersegment   17    4   325    38    10   280 
Other operation and maintenance   143    126   13    283    256   11 
Depreciation   39    37   5    78    70   11 
Taxes, other than income   22    22      48    57   (16)
 Total operating expenses   341    358   (5)   720    813   (11)
Other Income (Expense) - net   1    1      3    1   200 
Interest Expense   24    24      48    48   
Income Taxes   11    19   (42)   31    42   (26)
Net Income   29    40   (28)   66    96   (31)
Net Income Attributable to Noncontrolling Interests      4   (100)   4    8   (50)
Net Income Attributable to PPL Corporation $ 29  $ 36   (19) $ 62  $ 88   (30)

The changes in
(a)Primarily represents costs incurred at the components of the Pennsylvania Regulated segment's results between these periods were duecorporate level that have not been allocated or assigned to the following factors,segments, which reflect reclassificationsis presented to reconcile segment information to PPL's consolidated results.  For 2012 there were no significant amounts in this category.
(b)See "Equity Units" below for items included in gross delivery margins.


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  Three Months Six Months
       
Pennsylvania gross delivery margins $ 3  $ (10)
Other operation and maintenance   (19)   (25)
Depreciation   (2)   (8)
Other   (1)   2 
Income Taxes   8    11 
Noncontrolling Interests   4    4 
Total $ (7) $ (26)

·See "Statement of Income Analysis - Margins - Changes in Non-GAAP Financial Measures" for an explanation of Pennsylvania Gross Delivery Margins.information on the Equity Units' impact on the calculation of 2013 diluted EPS.

·HigherEarnings for the three months ended March 31, 2013 decreased 24% compared with 2012.  See "Results of Operations" below for further discussion of PPL's business segments, details of special items and analysis of the consolidated results of operations.

Economic and Market Conditions

Unregulated Gross Energy Margins associated with PPL Energy Supply's competitive generation and marketing business are impacted by changes in market prices and demand for electricity and natural gas, power plant availability, competition in the markets for retail customers, fuel costs and availability, fuel transportation costs and other operation and maintenance expense for the three-month period, primarily due to $6 million of higher payroll and benefit related costs, $6 million of higher vegetation management costs and $3 million of higher corporate service costs.  Current depressed wholesale market prices for electricity and natural gas have resulted from general weak economic conditions and other factors, including the impact of expanded domestic shale gas development.  As a result of these factors, lower future energy margins are expected to continue compared to the energy margins in 2012.  As has been PPL Energy Supply's practice in periods of changing business conditions, PPL Energy Supply continues to review its future business and operational plans, including capital and operation and maintenance expenditures, as well as its hedging strategies.
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PPL Energy Supply continues to monitor its Corette plant (which as previously announced will be placed in long-term reserve status, suspending the plant's operation due to expected market conditions and the costs to comply with the MATS beginning in April 2015) for impairment.  The Corette plant asset group's carrying value at March 31, 2013 was $65 million.  Although the Corette plant was not impaired at March 31, 2013, it is reasonably possible that an impairment could occur in future periods, as higher priced sales contracts settle, adversely impacting projected cash flows.

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

Susquehanna Turbine Blade Inspection

In the spring of 2013, PPL Energy Supply will begin making modifications to address the causes of turbine blade cracking at the PPL Susquehanna nuclear plant that was first identified in 2011.  The modifications will be made during the Unit 2 refueling outage and an additional planned outage for Unit 1.  Following completion of the modifications, PPL Energy Supply plans to continue monitoring the turbine blades using enhanced diagnostic equipment.

Rate Case Proceedings

Pennsylvania

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

Kentucky

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

RIIO-ED1

In October 2010, Ofgem announced changes to the regulatory framework that will be effective for the U.K. electricity distribution sector, including WPD, beginning April 2015.  The framework, known as RIIO (Revenues = Incentives + Innovation + Outputs), is intended to encourage investment in regulated infrastructure.  The next electricity distribution price control review is referred to as RIIO-ED1.  Key components of the RIIO-ED1 are: an extension of the price review period to eight years, increased emphasis on outputs and incentives, enhanced stakeholder engagement including network customers, a stronger incentive framework to encourage more efficient investment and innovation, and continued use of a single weighted average cost of capital.  Ofgem has also indicated that the depreciation of the RAV, for RAV additions after April 1, 2015, will change from 20 years to 45 years, but that they will consider transition arrangements. WPD published a draft of its 2015 - 2023 business plan on its website in March 2013 in order to solicit feedback from stakeholders on its plan prior to submission to Ofgem in July 2013.   See "Item 1. Business - Background - U.K. Regulated Segment - Revenue and Regulation" in the 2012 Form 10-K for additional information. At this time, WPD cannot predict the outcome or the future financial impact of this matter.

Legislation - Regulatory Procedures and Mechanisms

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

The PUC approved the LTIIP on January 10, 2013 and, on January 15, 2013, PPL Electric filed a petition requesting permission to establish a DSIC.  Several parties have filed responses to PPL Electric's petition.  The case remains pending before the PUC.  PPL Electric does not expect any new rates to be effective before the third quarter of 2013.
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FERC Formula Rates

Transmission rates are regulated by the FERC.  PPL Electric's transmission revenues are billed in accordance with a FERC-approved PJM open access transmission tariff that utilizes a formula-based rate recovery mechanism.  The formula rate is calculated, in part, based on financial results as reported in PPL Electric's annual FERC Form No. 1, filed under FERC's Uniform System of Accounts (USOA).  PPL Electric must follow FERC's USOA, which requires subsidiaries to be presented, for FERC reporting purposes, using the equity method of accounting unless a waiver has been issued.  The FERC has granted waivers of this requirement to other utilities when such waiver would more accurately present the integrated operations of the utilities and their subsidiaries.  In March 2013, as part of a routine FERC audit of PPL and its subsidiaries, PPL Electric determined that it never obtained a waiver of the use of the equity method of accounting for PPL Receivables Corporation (PPL Receivables).  PPL Receivables is a wholly owned subsidiary of PPL Electric, formed in 2004 to purchase eligible accounts receivable and unbilled revenue of PPL Electric to collateralize commercial paper issuances to reduce borrowing costs.  In March 2013, PPL Electric filed a request for waiver with FERC that, if approved, would allow it to continue to consolidate the results of PPL Receivables with the results of PPL Electric, as it has done since 2004.  While PPL Electric may ultimately be successful in obtaining a waiver from FERC, FERC may require PPL Electric to re-issue one or more of its prior FERC Form No. 1 filings in either the audit proceeding or the waiver proceeding.  If re-issuance of FERC Form No. 1 filings were required by FERC, PPL Electric's revenue requirement calculated under the formula rate could be negatively impacted.  The impact, if any, is not known at this time but could range between $0 and $40 million, pre-tax.  PPL Electric cannot predict the outcome of the waiver or audit proceedings, which remain pending before the FERC.

Equity Forward Agreements

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 the issuance of 8.4 million shares of PPL common stock and cash settlement of 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.  Settlement of the forward sale agreements covering 591 thousand remaining shares will occur no later than July 2013.  PPL may elect to issue common stock, cash settle or net share settle all or a portion of its rights or obligations under the forward sale agreements.

The forward sale agreements are classified as equity transactions.  As a result, no amounts were recorded in the consolidated financial statements until the April 2013 settlement of the initial forward sale agreements.  However, prior to the April 2013 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, two events will occur related to the components of the 2010 Equity Units.  On July 1, PPL will receive proceeds of $1.150 billion through the issuance of PPL common stock to settle the 2010 Purchase Contracts, and in the second quarter of 2013, PPL Capital Funding expects to remarket the 4.625% Junior Subordinated Notes due 2018.  During the first quarter of 2013, financing plans were finalized to remarket the debt component of the Equity Units.

The If-Converted Method of calculating diluted EPS was applied to the Equity Units beginning in the first quarter of 2013 resulting in $15 million of interest charges (after-tax) being added back to net income available to PPL common shareowners and 72 million shares of PPL common stock being treated as outstanding.  See Note 4 to the Financial Statements for the impact on the calculation of diluted EPS.

Results of Operations

The following discussion provides a review of results by reportable segment and a description of key factors by segment expected to impact future earnings.  This section ends with "Statement of Income Analysis," which includes explanations of Kentucky Gross Margins, Pennsylvania Gross Delivery Margins and Unregulated Gross Energy Margins and significant changes in principal line items on PPL's Statements of Income, comparing the three months ended March 31, 2013 with 2012.
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The results for interim periods can be disproportionately influenced by numerous factors and developments and by seasonal variations.  As such, the results of operations for interim periods do not necessarily indicate results or trends for the year or future periods.

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

Segment Results

Kentucky Regulated Segment

The Kentucky Regulated segment consists primarily of LKE's regulated electricity generation, transmission and distribution operations.  This segment also includes LKE's regulated distribution and sale of natural gas.  In addition, the Kentucky Regulated segment is allocated certain financing costs.

Net Income Attributable to PPL Shareowners for the periods ended March 31 includes the following results:

   Three Months
   2013  2012  % Change
         
Utility revenues $ 800  $ 705   13 
Fuel   231    213   8 
Energy purchases   86    74   16 
Other operation and maintenance   197    206   (4)
Depreciation   82    86   (5)
Taxes, other than income   12    11   9 
 Total operating expenses   608    590   3 
Other Income (Expense) - net   (2)   (3)  (33)
Interest Expense   55    55   
Income Taxes   50    15   233 
Net Income Attributable to PPL Shareowners $ 85  $ 42   102 

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

Three Months
Kentucky Gross Margins$ 75 
Other operation and maintenance 10 
Depreciation (9)
Taxes, other than income (1)
Income Taxes (29)
Special items, after-tax (3)
Total$ 43 

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

·Lower other operation and maintenance primarily due to $14 million of lower costs due to the timing and scope of scheduled coal plant maintenance outages, partially offset by $4 million of adjustments to regulatory assets and liabilities.

·Higher depreciation due to environmental costs related to the elimination of the 2005 and 2006 ECR plans now being included in base rates, which added $13 million to depreciation that is excluded from Margins, partially offset by lower depreciation of $5 million due to revised rates that were effective January 1, 2013.  Both of these events are the result of the 2012 Kentucky rate case proceedings.

·Higher income taxes primarily due to higher pre-tax income.

Higher other operation and maintenance expense for the six-month period, primarily due to $8 million of higher payroll and benefit related costs, $8 million of higher vegetation management costs and $5 million of higher corporate service costs.
The following after-tax gains (losses), which management considers special items, also impacted the Kentucky Regulated segment's results during the periods ended March 31.
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   Income Statement Three Months
   Line Item 2013  2012 
          
LKE acquisition-related adjustments:       
 Income Taxes and Other Operation      
 Net operating loss carryforward and other tax-related adjustmentsand Maintenance    $
Other:       
 EEI adjustments, net of tax of $0, $0Other Income (Expense)-net $ 1    
Total  $ 1  $ 4 

·Higher depreciation expense for the six-month period, primarily due to the impact of PP&E additions related to the ongoing efforts to ensure the reliability of the delivery system, and replace aging infrastructure.
2013 Outlook

·Lower income taxes for the three and six-month periods, primarily due to the change in pre-tax income, which reduced income taxes by $7 million and $16 million.
Excluding special items, PPL projects higher segment earnings in 2013 compared with 2012, primarily driven by electric and gas base rate increases, returns on additional environmental capital investments, and load growth, partially offset by higher operation and maintenance expense.

·  Lower noncontrolling interests for the three and six-month periods due to the preference stock redemption in June 2012.

Outlook

PPL projects lower segment earningsEarnings in future periods are subject to various risks and uncertainties.  See "Forward-Looking Information," the rest of this Item 2, and Notes 6 and 10 to the Financial Statements in this Form 10-Q and "Item 1. Business" and "Item 1A. Risk Factors" in PPL's 2012 compared with 2011, primarily driven by higher operation and maintenance expense, higher depreciation and lower distribution revenue, which are expected to be partially offset by higher transmission revenue, lower financing costs, and lower income taxes.

In March 2012, PPL Electric filed a request with the PUC to increase distribution rates by approximately $105 million.  The proposed distribution revenue rate increase would result in a 2.9% increase over PPL Electric's total rates at the time of filing and be effective January 1, 2013.  PPL Electric's application includes a request for an authorized return-on-equity of 11.25%.  Hearings on this matter are scheduled during August 2012 and a decision is expected in the fourth quarter of 2012.  PPL Electric cannot predict the outcome of this proceeding.

Earnings in 2012 are subject to various risks and uncertainties.  See "Forward-Looking Information," the rest of this Item 2 and Notes 6 and 10 to the Financial Statements in this Form 10-Q and "Item 1. Business" and "Item 1A.  Risk Factors" in PPL's 2011 Form 10-K for a discussion of the risks, uncertainties and factors that may impact future earnings.

U.K. Regulated Segment

The U.K. Regulated segment consists of WPD's regulated electricity distribution operations and PPL Global.  In addition, the U.K. Regulated segment includes certain U.S. income taxes and certain administrative costs, as well as allocated financing costs.
Net Income Attributable to PPL Shareowners for the periods ended March 31 includes the following results:

   Three Months
   2013  2012  % Change
          
Utility revenues $ 638  $ 552   16 
Energy-related businesses   10    10   
 Total operating revenues   648    562   15 
Other operation and maintenance   117    113   4 
Depreciation   74    67   10 
Taxes, other than income   37    36   3 
Energy-related businesses   7    5   40 
 Total operating expenses   235    221   6 
Other Income (Expense) - net   120    (20)  700 
Interest Expense   107    103   4 
Income Taxes   113    53   113 
Net Income Attributable to PPL Shareowners $ 313  $ 165   90 

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

Three Months
U.K.
Utility revenues$ 75 
Other operation and maintenance (6)
Interest expense (3)
Other (3)
Income taxes (10)
U.S.
Income taxes 1 
Foreign currency exchange rates, after-tax (a) 1 
Special items, after-tax 93 
Total$ 148 

(a)Includes the effect of realized gains (losses) on foreign currency economic hedges.
98

U.K.

·Higher utility revenues due to the April 1, 2012 price increases that resulted in $57 million of higher utility revenues, $8 million of additional third-party engineering work, $5 million of higher volumes due primarily to weather and a $5 million reduction of regulatory over-recovery in 2013.

·Higher other operation and maintenance due to $8 million of additional third-party engineering work and $7 million of higher network maintenance expense, primarily tree trimming, partially offset by $4 million of lower employee-related expenses.

·Higher income taxes due to higher pre-tax income, which increased income taxes by $16 million, partially offset by $6 million of lower income taxes due to lower tax rates.

The following after-tax gains (losses), which management considers special items, also impacted the U.K. Regulated segment's results during the periods ended March 31.

   Income Statement Three Months
   Line Item 2013  2012 
          
Foreign currency-related economic hedges, net of tax of ($42), $7 (a)Other Income (Expense)-net $ 78  $ (14)
WPD Midlands acquisition-related adjustments:       
 Separation benefits, net of tax of $1, $2Other Operation and Maintenance   (1)   (4)
 Other acquisition-related adjustments, net of tax of $0, $0Other Operation and Maintenance   (2)   
Total  $ 75  $ (18)

(a)Represents unrealized gains (losses) on contracts that economically hedge anticipated earnings denominated in GBP.

2013 Outlook

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

Earnings in future periods are subject to various risks and uncertainties.  See "Forward-Looking Information," the rest of this Item 2, and Notes 5, 6 and 10 to the Financial Statements in this Form 10-Q and "Item 1. Business" and "Item 1A. Risk Factors" in PPL's 2012 Form 10-K for a discussion of the risks, uncertainties and factors that may impact future earnings.

Pennsylvania Regulated Segment

The Pennsylvania Regulated segment includes PPL Electric's regulated electricity transmission and distribution operations.  In addition, the Pennsylvania Regulated segment is allocated certain financing costs.

Net Income Attributable to PPL Shareowners for the periods ended March 31 includes the following results:
          
   Three Months
   2013  2012  % Change
Utility revenues        
 External $ 512  $ 457   12 
 Intersegment   1    1   
 Total utility revenues   513    458   12 
Energy purchases        
 External   172    153   12 
 Intersegment   14    21   (33)
Other operation and maintenance   133    140   (5)
Depreciation   43    39   10 
Taxes, other than income   30    26   15 
 Total operating expenses   392    379   3 
Other Income (Expense) - net   1    2   (50)
Interest Expense   25    24   4 
Income Taxes   33    20   65 
Net Income   64    37   73 
Net Income Attributable to Noncontrolling Interests      4   (100)
Net Income Attributable to PPL Shareowners $ 64  $ 33   94 
99

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

Three Months
Pennsylvania Gross Delivery Margins$ 40 
Other operation and maintenance 7 
Depreciation (4)
Other (3)
Income Taxes (13)
Noncontrolling Interests 4 
Total$ 31 

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

·Lower other operation and maintenance primarily due to lower corporate service costs.

·     Higher depreciation due to PP&E additions.

·Higher income taxes primarily due to the impact of higher pre-tax income.

·Lower noncontrolling interests due to PPL Electric's June 2012 redemption of all 2.5 million shares of its preference stock.

2013 Outlook

Excluding special items, PPL projects higher segment earnings in 2013 compared with 2012, primarily driven by higher distribution revenues from a distribution base rate increase and higher transmission margins, partially offset by higher depreciation.

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

Supply Segment

The Supply segment primarily consists of thePPL Energy Supply's energy marketing and trading activities, as well as theits competitive generation and development operations of PPL Energy Supply.operations.  In addition, the Supply segment is allocated certain financing costs.

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Net Income Attributable to PPL Corporation for the periods ended June 30 includes the following results:
Net Income Attributable to PPL Shareowners for the periods ended March 31 includes the following results:Net Income Attributable to PPL Shareowners for the periods ended March 31 includes the following results:
                    
  Three Months Six Months  Three Months
  2012  2011  % Change 2012  2011  % Change  2013  2012  % Change
Energy revenuesEnergy revenues            Energy revenues      
External (a) $ 816  $ 879   (7) $ 3,106  $ 2,132   46 External (a) $ 381  $ 2,290   (83)
Intersegment  17   4   325   38   10   280 Intersegment  14   21   (33)
Energy-related businessesEnergy-related businesses   115    116   (1)   213    228   (7)Energy-related businesses   113    98   15 
Total operating revenues   948    999   (5)   3,357    2,370   42 Total operating revenues   508    2,409   (79)
Fuel (a)Fuel (a) 196  208  (6) 407  468  (13)Fuel (a)  298   211   41 
Energy purchasesEnergy purchases            Energy purchases      
External (a)  191   116   65   1,438   411   250 External (a)  (200)  1,247   (116)
Intersegment     n/a  1   1   Intersegment  1   1   
Other operation and maintenanceOther operation and maintenance  287   283   1   535   516   4 Other operation and maintenance  235   248   (5)
DepreciationDepreciation  76   64   19   148   128   16 Depreciation  78   72   8 
Taxes, other than incomeTaxes, other than income  17   15   13   35   31   13 Taxes, other than income  17   18   (6)
Energy-related businessesEnergy-related businesses   113    116   (3)   210    225   (7)Energy-related businesses   110    97   13 
Total operating expenses   880    802   10    2,774    1,780   56 Total operating expenses   539    1,894   (72)
Other Income (Expense) - netOther Income (Expense) - net  4   4     9   19   (53)Other Income (Expense) - net  4   5   (20)
Other-Than-Temporary Impairments  1    n/a  1   1   
Interest ExpenseInterest Expense  53   51   4   101   100   1 Interest Expense  60   48   25 
Income TaxesIncome Taxes  6   58   (90)  177   200   (12)Income Taxes   (41)   171   (124)
Income (Loss) from Discontinued Operations      (1)  (100)      2   (100)
Net Income Attributable to PPL Corporation $ 12  $ 91   (87) $ 313  $ 310   1 
Net Income (Loss) Attributable to PPL ShareownersNet Income (Loss) Attributable to PPL Shareowners $ (46) $ 301   (115)

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

100

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

  Three Months Six Months
       
Unregulated gross energy margins    $ (87)
Other operation and maintenance $ (8)   (19)
Depreciation   (12)   (20)
Other Income (Expense) - net   (2)   (12)
Other   (4)   (6)
Income Taxes   8    73 
Discontinued operations, after-tax      3 
Special items, after-tax   (61)   71 
Total $ (79) $ 3 
Three Months
Unregulated Gross Energy Margins$ (107)
Other operation and maintenance 6 
Depreciation (6)
Interest expense (12)
Other 2 
Income Taxes 33 
Special items, after-tax (263)
Total$ (347)

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

·HigherLower other operation and maintenance expense for the three and six-month periods in partprimarily due to $11 million and $17$15 million of higherlower costs at PPL Susquehanna, including refueling outageeastern fossil and hydroelectric plants largely due to outages in 2012, partially offset by $3 million of additional costs payroll-related costs and timing of projects.due to the Ironwood Acquisition.

·Higher depreciation expense for the three and six-month periodsprimarily due to the impact of PP&E additions.Ironwood Acquisition.

·Lower other income (expense) - net for the six-month periodHigher interest expense primarily due to lower earnings on securitiesfinancings associated with PPL Ironwood, acquired in April 2012, which increased interest expense by $4 million, and $4 million due to the NDT funds.allocation of interest from a June 2012 PPL Capital Funding debt issuance.

·Lower income taxes for the three and six-month periods primarily due to lower pre-tax income in 2013, which reduced income taxes by $5$47 million, and $46 million.  The six-month period was also lower due topartially offset by an $11 million deferred tax benefit from a state tax rate adjustmentchange recorded in 2012 and $11 million of Pennsylvania net operating loss valuation allowance adjustments which negatively impacted 2011, driven primarily by the impact of bonus depreciation.2012.

The following after-tax amounts,gains (losses), which management considers special items, also impacted the Supply segment's results during the periods ended June 30.March 31.

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  Income Statement Three Months Six Months  Income Statement Three Months
  Line Item 2012  2011  2012  2011   Line Item 2013  2012 
                   
Special items gains (losses), net of tax (expense) benefit:         
Adjusted energy-related economic activity, net, net of tax of $23, $2, ($79), ($10)(a) $ (32) $ (3) $ 118  $ 14 
Adjusted energy-related economic activity, net, net of tax of $79, ($102)Adjusted energy-related economic activity, net, net of tax of $79, ($102)(a) $ (117) $ 150 
Impairments:Impairments:         Impairments:      
Emission allowances, net of tax of $0, $0, $0, $1Other O&M        (1)
Renewable energy credits, net of tax of $0, $0, $0, $2Other O&M        (2)
Adjustments - nuclear decommissioning trust investments, net of tax of ($1), $0, ($2), ($1)Other Income-net      1   1 
LKE acquisition-related adjustments:         
Sale of certain non-core generation facilities, net of tax of $0, $1, $0, $0Disc. Operations    (2)    (3)Adjustments - nuclear decommissioning trust investments, net of tax of $0, ($1)Other Income (Expense)-net     1 
Other:Other:         Other:      
Montana hydroelectric litigation, net of tax of $0, $0, $0, $1Interest Expense    (1)    (1)Counterparty bankruptcy, net of tax of $0, $5 (b)Other Operation and Maintenance     (6)
Litigation settlement - spent nuclear fuel storage, net of tax of $0, ($21), $0, ($21) (b)Fuel    29     29 Ash basin leak remediation adjustment, net of tax of $0, ($1)Other Operation and Maintenance      1 
Counterparty bankruptcy, net of tax of $0, $0, $5, $0 (c)Other O&M      (6)  
Wholesale supply cost reimbursement, net of tax of $0, $0, $0, $0(d)  1     1   
Ash basin leak remediation adjustment, net of tax of $0, $0, ($1), $0Other O&M      1   
Coal contract modification payments, net of tax of $5, $0, $5, $0 (e)Fuel   (7)      (7)   
TotalTotal  $ (38) $ 23  $ 108  $ 37 Total  $ (117) $ 146 

(a)See "Reconciliation of Economic Activity" below.
(b)In May 2011, PPL Susquehanna entered into a settlement agreement with the U.S. Government relating to PPL Susquehanna's lawsuit, seeking damages for the Department of Energy's failure to accept spent nuclear fuel from the PPL Susquehanna plant.  PPL Susquehanna recorded credits to fuel expense to recognize recovery, under the settlement agreement, of certain costs to store spent nuclear fuel at the Susquehanna plant.  This special item represents amounts recorded in 2011 to cover the costs incurred from 1998 through September 2009.
(c)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.
(d)Recorded in "Wholesale energy marketing - Realized" on the Statement of Income.
(e)As a result of lower electricity and natural gas prices, coal unit runtimes have decreased.  Contract modification payments were incurred to reduce the contracted coal quantities scheduled for delivery.

Reconciliation of Economic Activity

The following table reconciles unrealized pre-tax gains (losses) for the periods ended June 30,March 31, from the table within "Commodity Price Risk (Non-trading) - Economic Activity" in Note 14 to the Financial Statements to the special item identified as "Adjusted energy-related economic activity, net."

    Three Months Six Months
    2012  2011  2012  2011 
Operating Revenues            
  Unregulated retail electric and gas $ (12) $ 1  $ (2) $ 5 
  Wholesale energy marketing   (458)   (44)   394    13 
Operating Expenses            
  Fuel   (16)   (11)   (14)   12 
  Energy Purchases   442    109    (149)   127 
Energy-related economic activity (a)   (44)   55    229    157 
Option premiums (b)   1    6    1    11 
Adjusted energy-related economic activity   (43)   61    230    168 
Less:  Economic activity realized, associated with the monetization of            
 certain full-requirement sales contracts in 2010   12    66    33    144 
Adjusted energy-related economic activity, net, pre-tax $ (55) $ (5) $ 197  $ 24 
               
Adjusted energy-related economic activity, net, after-tax $ (32) $ (3) $ 118  $ 14 
101

    Three Months
    2013  2012 
Operating Revenues      
  Unregulated retail electric and gas $ (8) $ 10 
  Wholesale energy marketing   (822)   852 
Operating Expenses      
  Fuel   (1)   2 
  Energy Purchases   634    (591)
Energy-related economic activity (a)   (197)   273 
Option premiums   1    
Adjusted energy-related economic activity   (196)   273 
Less:  Economic activity realized, associated with the monetization of certain      
 full-requirement sales contracts in 2010      21 
Adjusted energy-related economic activity, net, pre-tax $ (196) $ 252 
         
Adjusted energy-related economic activity, net, after-tax $ (117) $ 150 

(a)See Note 14 to the Financial Statements for additional information.
(b)Adjustment for the net deferral and amortization of option premiums over the delivery period of the item that was hedged or upon realization.  Option premiums are recorded in "Wholesale energy marketing - Realized" and "Energy purchases - Realized" on the Statements of Income.

2013 Outlook

Excluding special items, PPL projects lower segment earnings in 20122013 compared with 2011,2012, primarily driven by lower energy margins as a result of lower energy and capacity prices, higher fuel costs, higher operation and maintenance expense, higher depreciation, and higher depreciation.  See "Overview"financing costs, partially offset by higher capacity prices and higher nuclear generation output despite scheduled outages for both Susquehanna units to implement a discussion on economic and market conditions.long-term solution to turbine blade issues.

Earnings in 2012future periods are subject to various risks and uncertainties.  See "Forward-Looking Information," the rest of this Item 2, and Note 10 to the Financial Statements in this Form 10-Q and "Item 1. Business" and "Item 1A1A. Risk Factors" in PPL's 20112012 Form 10-K for a discussion of the risks, uncertainties and factors that may impact future earnings.

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Statement of Income Analysis --

Margins

Non-GAAP Financial Measures

The following discussion includes financial information prepared in accordance with GAAP, as well as three non-GAAP financial measures:  "Kentucky Gross Margins," "Pennsylvania Gross Delivery Margins" and "Unregulated Gross Energy Margins."  These measures are not intended to replace "Operating Income," which is determined in accordance with GAAP, as an indicator of overall operating performance.  Other companies may use different measures to analyze and to report on the results of their operations.  PPL believes that these measures provide additional criteria to make investment decisions.  These performance measures are used, in conjunction with other information, internally by senior management and the Board of Directors to manage the Kentucky Regulated, Pennsylvania Regulated and Supply segment operations, analyze each respective segment's actual results compared with budget and, in certain cases, to measure certain corporate financial goals used in determining variable compensation.

PPL's three non-GAAP financial measures include:

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

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

102

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

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Reconciliation of Non-GAAP Financial Measures

The following tables reconcile "Operating Income" totable reconciles PPL's three non-GAAP financial measures to "Operating Income" for the periods ended June 30.March 31.

   2012 Three Months 2011 Three Months   2013 Three Months 2012 Three Months
      Unregulated         Unregulated           Unregulated         Unregulated     
   Kentucky PA Gross Gross      Kentucky PA Gross Gross        Kentucky PA Gross Gross      Kentucky PA Gross Gross     
   Gross Delivery Energy    Operating Gross Delivery Energy    Operating   Gross Delivery Energy    Operating Gross Delivery Energy    Operating
   Margins Margins Margins Other (a) Income (b) Margins Margins Margins Other (a) Income (b)   Margins Margins Margins Other (a) Income (b) Margins Margins Margins Other (a) Income (b)
                                                
Operating RevenuesOperating Revenues                      Operating Revenues                      
Utility $ 658  $ 403    $ 544 (c) $ 1,605  $ 639  $ 436    $ 409 (c) $ 1,484 Utility $ 800  $ 512    $ 638 (c) $ 1,950  $ 705  $ 457    $ 552 (c) $ 1,714 
PLR intersegment utility                      PLR intersegment utility                      
 revenue (expense) (d)    (17) $ 17          (4) $ 4       revenue (expense) (d)    (14) $ 14          (21) $ 21      
Unregulated retail                      Unregulated retail                      
 electric and gas      192   (13)   179       180   1    181  electric and gas      246   (9)(f)  237       214   9 (f)  223 
Wholesale energy marketing                      Wholesale energy marketing                      
 Realized      1,075   8 (f)  1,083       716   16 (f)  732  Realized      977   (1)   976       1,204   4 (e)  1,208 
 Unrealized economic                       Unrealized economic                      
 activity        (458)(g)  (458)        (44)(g)  (44) activity        (822)(f)  (822)        852 (f)  852 
Net energy trading margins      10      10       10      10 Net energy trading margins      (11)     (11)      8      8 
Energy-related businesses            130     130             126     126 Energy-related businesses            127     127             107     107 
 Total Operating Revenues   658    386    1,294    211     2,549    639    432    910    508     2,489  Total Operating Revenues   800    498    1,226    (67)    2,457    705    436    1,447    1,524     4,112 
                                                
Operating ExpensesOperating Expenses                      Operating Expenses                      
Fuel  215     170   26 (e)  411   206     250   (42)(e)  414 Fuel  231     299   (1)(f)  529   213     214   (3)(f)  424 
Energy purchases                      Energy purchases                      
 Realized  34   120   617   16 (f)  787   40   169   150   75 (f)  434  Realized  86   172   436   (3)   691   74   153   636   20 (e)  883 
 Unrealized economic                       Unrealized economic                      
 activity        (442)(g)  (442)        (109)(g)  (109) activity        (634)(f)  (634)        591 (f)  591 
Other operation and                      Other operation and                      
 maintenance  24   26   7   682    739   21   29   9   664    723  maintenance  25   22   5   624    676   22   22   4   658    706 
Depreciation  13       258    271   12       225    237 Depreciation        284    284   13       251    264 
Taxes, other than income    20   7   60    87     20   7   48    75 Taxes, other than income    28   8   60    96     25   8   58    91 
Energy-related businesses        124    124         120    120 Energy-related businesses        122    122         102    102 
Intercompany eliminations      (1)      1           (4)   1    3     Intercompany eliminations      (1)   1              (1)   1        
 Total Operating Expenses   286    165    801    725     1,977    279    214    417    984     1,894  Total Operating Expenses   342    221    749    452     1,764    322    199    863    1,677     3,061 
TotalTotal $ 372  $ 221  $ 493  $ (514)  $ 572  $ 360  $ 218  $ 493  $ (476)  $ 595 Total $ 458  $ 277  $ 477  $ (519)  $ 693  $ 383  $ 237  $ 584  $ (153)  $ 1,051 

      2012 Six Months 2011 Six Months
          Unregulated          Unregulated      
      Kentucky PA Gross Gross       Kentucky PA Gross Gross      
      Gross Delivery Energy    Operating Gross Delivery Energy     Operating
      Margins Margins Margins Other (a) Income (b) Margins Margins Margins Other (a) Income (b)
                           
Operating Revenues                                
 Utility $ 1,363  $ 860     $ 1,096 (c) $ 3,319  $ 1,404  $ 990     $ 626 (c) $ 3,020 
 PLR intersegment utility                                
  revenue (expense) (d)      (38) $ 38              (10) $ 10        
 Unregulated retail                                
  electric and gas         406    (4)    402          323    5     328 
 Wholesale energy marketing                                
   Realized         2,279    12 (f)   2,291          1,738    32 (f)   1,770 
   Unrealized economic                                
    activity            394 (g)   394             13 (g)   13 
 Net energy trading margins         18        18          21        21 
 Energy-related businesses            237     237             247     247 
   Total Operating Revenues   1,363    822    2,741    1,735     6,661    1,404    980    2,092    923     5,399 
                                     
Operating Expenses                                
 Fuel   428       385    22 (e)   835    421       534    (66)(e)   889 
 Energy purchases                                
   Realized   108    273    1,251    38 (f)   1,670    147    420    377    161 (f)   1,105 
   Unrealized economic                                
    activity            149 (g)   149             (127)(g)   (127)
 Other operation and                                
  maintenance   46    49    11    1,339     1,445    41    47    13    1,205     1,306 
 Depreciation   26          509     535    24          421     445 
 Taxes, other than income      44    16    118     178       53    14    81     148 
 Energy-related businesses            226     226             233     233 
 Intercompany eliminations      (2)   1    1           (8)   2    6     
   Total Operating Expenses   608    364    1,664    2,402     5,038    633    512    940    1,914     3,999 
 Discontinued operations                         12    (12)(h)   
Total $ 755  $ 458  $ 1,077  $ (667)  $ 1,623  $ 771  $ 468  $ 1,164  $(1,003)  $ 1,400 

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(a)Represents amounts that are excluded from Margins.
(b)As reported on the StatementStatements of Income.
(c)Primarily represents WPD's utility revenue.
(d)Primarily related to PLR supply sold by PPL EnergyPlus to PPL Electric.
(e)Includes economic activity related to fuel as described in "Commodity Price Risk (Non-trading) - Economic Activity" within Note 14 to the Financial Statements.  The three and six months ended June 30, 2012, includes a pre-tax loss of $12 million related to coal contract modification payments.  The three and six months ended June 30, 2011 includes a pre-tax credit of $50 million for the spent nuclear fuel litigation settlement.
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(f)(e)Represents energy-related economic activity as described in "Commodity Price Risk (Non-trading) - Economic Activity" within Note 14 to the Financial Statements.  For the three and six months ended June 30,March 31, 2012, "Wholesale energy marketing - Realized" and "Energy purchases - Realized" includeincludes a net pre-tax lossesloss of $12 million and $33 related to the monetization of certain full-requirement sales contracts and net pre-tax gains of $1 million and $1 million related to the amortization of option premiums.  The three and six months ended June 30, 2011 include net pre-tax losses of $66 million and $144$21 million related to the monetization of certain full-requirement sales contracts and net pre-tax gains of $6 million and $11 million related to the amortization of option premiums.contracts.
(g)(f)Represents energy-related economic activity, which is subject to fluctuations in value due to market price volatility, as described in "Commodity Price Risk (Non-trading) - Economic Activity" within Note 14 to the Financial Statements.
(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 PPL's three non-GAAP financial measures for the periods ended June 30March 31 as well as the change between periods.  The factors that gave rise to the changes are described below the table.

  Three Months Six Months  Three Months
  2012  2011  Change 2012  2011  Change  2013  2012  Change
                    
Kentucky Gross MarginsKentucky Gross Margins $ 372  $ 360  $ 12  $ 755  $ 771  $ (16)Kentucky Gross Margins $ 458  $ 383  $ 75 
             
PA Gross Delivery Margins by ComponentPA Gross Delivery Margins by Component            PA Gross Delivery Margins by Component      
Distribution $ 170  $ 173  $ (3) $ 359  $ 381  $ (22)Distribution $ 224  $ 189  $ 35 
Transmission   51    45    6    99    87    12 Transmission   53    48    5 
TotalTotal $ 221  $ 218  $ 3  $ 458  $ 468  $ (10)Total $ 277  $ 237  $ 40 
                    
Unregulated Gross Energy Margins by RegionUnregulated Gross Energy Margins by Region            Unregulated Gross Energy Margins by Region      
Non-tradingNon-trading            Non-trading      
Eastern U.S. $ 407  $ 395  $ 12  $ 896  $ 972  $ (76)Eastern U.S. $ 430  $ 489  $ (59)
Western U.S.  76   88   (12)  163   171   (8)Western U.S.  58   87   (29)
Net energy tradingNet energy trading   10    10       18    21    (3)Net energy trading   (11)   8    (19)
TotalTotal $ 493  $ 493  $  $ 1,077  $ 1,164  $ (87)Total $ 477  $ 584  $ (107)

Kentucky Gross Margins

Margins increased for the three-month period ended June 30, 2012, compared with 2011, due to $12 million of higher retail margins, as volumes were impacted by increases in production levels at some of LKE's larger industrial customers and warmer weather during the three months ended June 30, 2012.  Total cooling degree daysMarch 31, 2013 compared with 2012 due to higher base rates of $31 million, higher volumes of $19 million, environmental costs added to base rates of $18 million and increased 9% compared to the same period in 2011.environmental investments of $7 million.

Margins decreased forThe increase in base rates was the six-month period ended June 30, 2012,result of new KPSC rates going into effect on January 1, 2013.  The increase in volumes was attributable to colder weather in 2013 compared with 2011, primarily due to $13 million of lower retail margins, as volumes were impacted by unseasonably mild weather during the first four months of 2012, and $3 million of lower wholesale margins, as volumes were impacted by lower market prices.2012.  Total heating degree days decreased 24% comparedincreased 41%.  The environmental costs added to base rates was due to the same periodelimination of the 2005 and 2006 ECR plans as a result of the 2012 Kentucky rate case.  This elimination results in 2011.depreciation and other operation and maintenance expenses associated with the 2005 and 2006 ECR plans being excluded from Margins in 2013.

Pennsylvania Gross Delivery Margins

Distribution

Margins decreasedincreased for the three and six month periodsmonths ended June 30, 2012,March 31, 2013 compared with 2011,2012 primarily due primarily to a $13 million favorable effect of mild weather in 2012 and a $19 million favorable effect of price, largely comprised of higher base rates, effective January 1, 2013 as a result of the effects2012 rate case and higher volumes of weather.$3 million.

Transmission

Margins increased for the three and six month periodsmonths ended June 30, 2012,March 31, 2013 compared with 2011,2012 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.
The change in non-trading margins for the period ended March 31, 2013 compared with 2012 was due to:
 
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Unregulated Gross Energy Margins

Eastern U.S.      
       
The changes in non-trading margins for the periods ended June 30, 2012 compared with 2011 were due to:
       
  Three Months Six Months
       
Baseload energy and capacity prices (a) $ (51) $ (137)
Intermediate and peaking energy and capacity (b)   (5)   (26)
Full-requirement sales contracts   (9)   (14)
Impact of non-core generation facilities sold in the first quarter of 2011      (12)
Ironwood Acquisition which eliminates tolling expense (c)   13    13 
Net coal and hydroelectric unit availability (d)   9    19 
Nuclear generation volume (e)   57    82 
Other   (2)   (1)
  $ 12  $ (76)

(a)EnergyThree Months
Baseload energy prices$ (125)
Coal prices (10)
Nuclear fuel prices (6)
Full-requirement sales contracts 5 
Intermediate and peaking capacity prices were lower in both periods 5 
Baseload capacity prices 6 
Intermediate and peaking Spark Spreads 14 
Ironwood acquisition which eliminated tolling expense 15 
Net economic availability of 2012.coal and hydroelectric plants 32 
(b)OtherCapacity prices were lower in both periods of 2012. 5 
(c)TotalSee Note 8 to the Financial Statements for additional information.
(d)Coal unit availability was higher in both periods allowing the capture of additional margins.
(e)For the three and six month periods, volumes were higher due to a shorter outage period for blade inspections and an uprate in the third quarter of 2011.  For the six month period, volumes were also higher due to an unplanned outage in March 2011.$ (59)

Western U.S.

Non-trading margins for the three and six months ended June 30, 2012,March 31, 2013 compared with the same periods in 20112012 were lower primarily due to $14$43 million related to the bankruptcy of SMGT.lower wholesale prices, partially offset by $12 million of higher wholesale volumes.

Utility Revenues  
          
The increase (decrease) in utility revenues for the periods ended June 30, 2012 compared with 2011 was due to:  
          
     Three Months Six Months
Domestic:      
 PPL Electric (a) $ (33) $ (130)
 LKE (b)   20    (41)
 Total Domestic   (13)   (171)
          
U.K.:      
 PPL WW      
  Price (c)   19    55 
  Volume (d)   (2)   (15)
  Recovery of allowed revenues (e)   (4)   (11)
  Foreign currency exchange rates   (5)   (8)
  Other   (2)   (3)
  Total PPL WW   6    18 
 WPD Midlands (f)   128    452 
 Total U.K.   134    470 
Total $ 121  $ 299 
Net Energy Trading Margins

Net energy trading margins for the three months ended March 31, 2013 compared with 2012 decreased as a result of lower margins of $16 million on gas positions due to higher prices.

Utility Revenues
The increase (decrease) in utility revenues for the period ended March 31, 2013 compared with 2012 was due to:
Three Months
Domestic:
PPL Electric (a)$ 55 
LKE (b) 95 
Total Domestic 150 
U.K.:
Price (c) 57 
Volume 5 
Recovery of allowed revenues 5 
Foreign currency exchange rates 10 
Other (d) 9 
Total U.K. 86 
Total$ 236 

(a)See "Pennsylvania Gross Delivery Margins" for further information.
(b)See "Kentucky Gross Margins" for further information.
(c)The increase for the three and six-month periods is primarily dueDue to price increases effective April 1, 2012 and 2011.2012.
(d)The decrease for the six-month periodThis increase is primarily due to the downturn$8 million of third-party engineering work, which is offset by expenses in the economy"Other operation and weather.maintenance".

(e)Other Operation and Maintenance
The decreaseincrease (decrease) in other operation and maintenance for the three and six-month periods is primarily due to a 2012 charge to income for the over-recovery of revenues from customers, compared to a credit to income in 2011.
(f)Periods are not comparable.  The periodsperiod ended June 30, 2012 include three and six months of WPD Midlands' results,March 31, 2013 compared with two months for the same periods in 2011.2012 was due to:
Three Months
Domestic:
Uncollectible accounts (a)$ (16)
LKE coal plant outages (b) (14)
Costs at eastern fossil and hydroelectric plants (c) (11)
Pension and postretirement costs
Other
U.K.:
Third-party engineering work (d)
Network maintenance expense (e)
Employee related expenses (4)
Severance compensation (4)
Other (2)
Total$ (30)

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Other Operation and Maintenance     
        
The increase (decrease) in other operation and maintenance expense for the periods ended June 30, 2012 compared with 2011 were due to:
        
        
   Three Months Six Months
Domestic:     
 Uncollectible accounts (a)$ 4  $18 
 LKE steam maintenance plant costs (b)    11 
 LKE storm costs (c)    
 PPL Susquehanna nuclear plant costs (d)  11   17 
 Vegetation management  6   
 Stock based compensation    
 Other    
U.K.:     
        
 PPL WW (e)  7   17 
 WPD Midlands (f)  (12)  45 
Total$ 16  $ 139 

(a)In October 2011,The decrease is primarily due to SMGT filedfiling for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code.  The increase for the six-month period reflects anCode in 2011.  $11 million increaseof damages billed to a reserve on unpaid amounts.SMGT were fully reserved in 2012.
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(b)IncreaseThe decrease is primarily due to steam maintenance costs, resulting from an increasedthe timing and scope of scheduled outages.
(c)A creditThe decrease is primarily due to establish a regulatory asset was recordedBrunner Island Unit 3 outage costs of $15 million in 2012 compared with no major outage costs in 2013, partially offset by $3 million of additional costs due to the first quarter of 2011 related to 2009 storm costs.Ironwood Acquisition.
(d)Primarily due to refueling outage costs, payroll costs and timingThese expenses are offset by revenues reflected in "Utility" on the Statements of projects.Income.
(e)Increase for the three and six-month periods includes $5 million and $10 million of higher pension expense resulting from the amortization of actuarial losses and $4 million and $6 million of higher network maintenance expense.
(f)Periods are not comparable.  The periods ended June 30, 2012 include three and six months of WPD Midlands' results, compared with two months for the same periods in 2011.  The decrease for the three-month period wasincrease is primarily due to the impact of acquisition-related adjustments.higher tree trimming expense.

Depreciation  
        
The increase (decrease) in depreciation expense for the periods ended June 30, 2012 compared with 2011 was due to:
        
   Three Months Six Months
        
Additions to PP&E $ 13  $ 33 
WPD Midlands (a)   17    53 
Ironwood Acquisition   4    4 
Total $ 34  $ 90 

(a)DepreciationPeriods are not comparable.  
The periodsincrease (decrease) in depreciation for the period ended June 30, 2012 include three and six months of WPD Midlands' results,March 31, 2013 compared with two months for the same periods in 2011.2012 was due to:

Taxes, Other Than Income      
        
The increase (decrease) in taxes, other than income for the periods ended June 30, 2012 compared with 2011 was due to:
        
   Three Months Six Months
        
Pennsylvania gross receipts tax (a) $ (5) $ (12)
Domestic property tax   5    5 
WPD Midlands (b)   8    30 
Other   4    7 
Total $ 12  $ 30 

(a)The decrease for the three and six month periods was primarily due
Three Months
Additions to a decrease in taxable electric revenue.  This tax is included in "Unregulated Gross Energy Margins" and "Pennsylvania Gross Delivery Margins".PP&E$ 21 
(b)LKE lower depreciation rates effective January 1, 2013Periods are not comparable.  The periods ended June 30, 2012 include three and six months of WPD Midlands' results, compared with two months for the same periods in 2011. (5)
Ironwood Acquisition 6 
Other (2)
Total$ 20 

Other Income (Expense) - net

The $64$139 million increase in other income (expense) - net for the three months ended June 30, 2012March 31, 2013 compared with 20112012 was primarily due to:

·$47 million of other WPD Midlands acquisition-related adjustments in 2011;
·a $23 million increase in gains fromto $119 million of realized and unrealized gains on economic foreign currency exchange contracts; and

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·a $58 million foreign currency loss related to the repayment of the 2011 Bridge Facility borrowing offset by a $62 million gain on foreign currency contracts that hedged the repayment of such borrowings, both in 2011.

The $52 million increase in other income (expense) - net for the six months ended June 30, 2012 compared with 2011 was primarily due to:

·$57 million of other WPD Midlands acquisition-related adjustments in 2011;
·a $7 million increase in gains from economic foreign currency exchange contracts; and
·a $58 million foreign currency loss related to the repayment of the 2011 Bridge Facility borrowing partially offset by a $55 million gain on foreign currency contracts that hedged the repayment of such borrowings, both in 2011.
losses in 2012 of $18 million.

See Note 12 to the Financial Statements for further details.

Interest Expense  
       
The increase (decrease) in interest expense for the periods ended June 30, 2012 compared with 2011 was due to:
    
  Three Months Six Months
       
2011 Bridge Facility costs related to financing the acquisition of WPD Midlands $ (36) $ (43)
2011 Equity Units (a)     13 
Interest rates (excluding 2011 Equity Units) (b)   (15)   (26)
Debt balances (excluding 2011 Equity Units) (c)   13    17 
WPD Midlands (d)   12    68 
Inflation adjustment on U.K. Index-linked Senior Unsecured Notes   (5)   (8)
Hedging activity and ineffectiveness   10    19 
Ironwood Acquisition (Note 8)   4    4 
Other   (12)   (16)
Total $ (28) $ 28 
Interest Expense
The increase (decrease) in interest expense for the period ended March 31, 2013 compared with 2012 was due to:
Three Months
Long-term debt interest expense (a)$ 14 
Ironwood Acquisition (b) 4 
Other 3 
Total$ 21 

(a)Interest relatedThe increase was primarily due to PPL Capital Funding's June 2012 issuance of $400 million, 4.2% Senior Notes due 2022 and October 2012 issuance of $400 million, 3.5% Senior Notes due 2022.  Also, contributing to the increase was higher accretion expense on WPD index linked bonds and interest on WPD (East Midlands') April 2012 issuance in April 2011 to support the WPD Midlands acquisition.of £100 million, 5.25% Senior Notes due 2023.
(b)Short-term weighted average rates were 0.69% and 0.73% for the three and six months ended June 30, 2012, compared with 1.82% and 2.02% for the same periods in 2011.  Long-term weighted average rates of 4.69% at June 30, 2012, compared with 4.94% at June 30, 2011.
(c)Short-term debt balances were $420 million and $83 million higher for the three and six months ended June 30, 2012, comparedThe increase was due to financings associated with the same periods in 2011.  The long-term debt balance (excluding $255 million of long-term debt balance from the April 2012 Ironwood Acquisition) was $520 million higher at June 30, 2012, compared with the same period in 2011.
(d)Periods are not comparable.  The periods ended June 30, 2012 include three and six months of WPD Midlands' results, compared with two months for the same periods in 2011.Acquisition.  

Income Taxes  
        
The increase (decrease) in income taxes for the periods ended June 30, 2012 compared with 2011 was due to:
        
    
   Three Months Six Months
        
Lower pre-tax book income $ (30) $ (23)
State valuation allowance adjustments (a)      (11)
Federal and state tax reserve adjustments   (2)   (2)
Federal and state tax return adjustments   (1)   2 
U.S. income tax on foreign earnings net of foreign tax credit (b)   10    18 
Foreign tax reserve adjustments (c)   (8)   (5)
Net operating loss carryforward adjustments (d)   (3)   (9)
Depreciation not normalized (a)      2 
WPD Midlands (e)   27    61 
State deferred tax rate change (f)      (11)
Other   (1)   6 
Total $ (8) $ 28 
Income Taxes
The increase (decrease) in income taxes for the period ended March 31, 2013 compared with 2012 was due to:
Three Months
Lower pre-tax book income$ (119)
Foreign tax reserve adjustments (3)
Net operating loss carryforward adjustments (a) 6 
State deferred tax rate change (b) 11 
Other (3)
Total$ (108)

(a)In February 2011, the Pennsylvania Department of Revenue issued interpretive guidance on the treatment of bonus depreciation for Pennsylvania income tax purposes.  In accordance with Corporation Tax Bulletin 2011-01, Pennsylvania 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, PPL recorded state deferred income tax expense during the six months ended June 30, 2011 related to valuation allowances.

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 in service before January 1, 2012.  The placed in service deadline is extended to January 1, 2013 for property that exceeds $1 million, has a production period longer than one year and has a tax life of at least 10 years.
(b)During the three and six months ended June 30, 2011, PPL recorded a $7 million and $14 million federal income tax benefit related to U.K. pension contributions.

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(c)During the three and six months ended June 30, 2012, PPL recorded a tax benefit following resolution of a U.K. tax issue related to interest expense.
(d)During the three and six months ended June 30,March 31, 2012, PPL recorded adjustments to deferred taxes related to net operating loss carryforwards of LKE based on income tax return adjustments.
(e)Periods are not comparable.  The periods ended June 30, 2012 include three and six months of WPD Midlands' results compared with two months for the same periods in 2011.
(f)(b)During the sixthree months ended June 30,March 31, 2012, PPL recorded an adjustmentadjustments related to state deferred tax liabilities.

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

Noncontrolling Interests
Financial Condition
Liquidity and Capital Resources
PPL had the following at:

"Net Income Attributable to Noncontrolling Interests" decreased by $4 million for the three and six months ended June 30, 2012 compared with 2011.  The decrease is due to PPL Electric's June 2012 redemption of all 2.5 million shares of its preference stock.  The price paid was the par value, without premium ($250 million in the aggregate).
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Financial Condition
       
Liquidity and Capital Resources
       
PPL had the following at:
       
  June 30, 2012 December 31, 2011
       
Cash and cash equivalents $ 981  $ 1,202 
Short-term investments      16 
  $ 981  $ 1,218 
Short-term debt $ 889  $ 578 
  March 31, 2013 December 31, 2012
       
Cash and cash equivalents $ 853  $ 901 
Short-term debt $ 1,061  $ 652 

At June 30, 2012, $357March 31, 2013, $335 million of cash and cash equivalents were denominated in GBP.  If these amounts would be remitted as dividends, PPL may be subject to additional U.S. taxes, net of allowable foreign tax credits.  Historically, dividends paid by foreign subsidiaries have been distributions of the current year's earnings.  See Note 5 to the Financial Statements in PPL's 20112012 Form 10-K for additional information on undistributed earnings of WPD.

The $221$48 million decrease in PPL's cash and cash equivalents position was primarily the net result of:

·capital expenditures of $1.3 billion;$828 million;
·the payment of $413$210 million of common stock dividends;
·the redemption of preference stock of a subsidiary of $250 million;$52 million net increase in restricted cash and cash equivalents; and
·the Ironwood Acquisition for $84$24 million net of cash acquired;contract adjustment payments; partially offset by
·proceeds of $432 million from the issuance of long-term debt, net of costs;
·net increase in short-term debt of $416 million; and
·net cash provided by operating activities of $947 million;
·proceeds of $575 million from the issuance of long-term debt; and
·a net increase in short-term debt of $311$244 million.

PPL's cash provided by operating activities increaseddecreased by $133$484 million for the sixthree months ended June 30, 2012March 31, 2013 compared with 2011.2012.  The increasedecrease was the net effect of:primarily due to:

·an increase of $211 million in net income (primarily from the U.K. Regulated segment); and
·a decrease of $57$336 million in defined benefit plan funding; partially offset by
·an increase in cash used by components of working capital (primarily due to changes in accounts receivable of $117 million.$219 million resulting from higher base rates and favorable effects of weather and counterparty collateral of $129 million); and
·a $221 million increase in defined benefit plans funding; partially offset by
·a $72 million increase in net income, when adjusted for non-cash components.

Capital expenditures increased by $146 million for the three months ended March 31, 2013 compared with 2012, primarily due to the Susquehanna-Roseland transmission project and environmental projects at Mill Creek and Ghent, and construction of Cane Run Unit 7.

Credit Facilities

PPL maintains credit facilities to provide liquidity and to backstop commercial paper issuances.  At June 30, 2012,March 31, 2013, PPL's total committed borrowing capacity under its credit facilities and the use of this borrowing capacity were:

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         Letters of   
         Credit Issued   
         and   
   Committed   Commercial Unused
   Capacity Borrowed Paper Backstop Capacity
          
PPL Energy Supply Credit Facilities $ 3,200     $ 790  $ 2,410 
PPL Electric Credit Facilities (a)   450       196    254 
LG&E Credit Facility   400          400 
KU Credit Facilities   598       198    400 
 Total Domestic Credit Facilities (b) $ 4,648     $ 1,184  $ 3,464 
              
PPL WW Credit Facility (c) £ 150  £ 110   n/a £ 40 
WPD (South West) Credit Facility (d)   245      n/a   245 
WPD (East Midlands) Credit Facility   300          300 
WPD (West Midlands) Credit Facility   300          300 
 Total WPD Credit Facilities (e) £ 995  £ 110     £ 885 
         Letters of   
         Credit Issued   
         and   
   Committed   Commercial Unused
   Capacity Borrowed Paper Backup Capacity
          
PPL Energy Supply Credit Facilities (a) $ 3,200     $ 764  $ 2,436 
PPL Electric Credit Facilities (b)   400       126    274 
LG&E Syndicated Credit Facility   500       70    430 
KU Credit Facilities (c)   598       313    285 
 Total Domestic Credit Facilities (d) $ 4,698     $ 1,273  $ 3,425 
              
PPL WW Syndicated Credit Facility (e) £ 210  £ 109   n/a £ 101 
WPD (South West) Syndicated Credit Facility   245      n/a   245 
WPD (East Midlands) Syndicated Credit Facility (f)   300    65       235 
WPD (West Midlands) Syndicated Credit Facility   300          300 
 Total WPD Credit Facilities (g) £ 1,055  £ 174     £ 881 

(a)In February 2013, PPL Energy Supply extended a letter of credit facility expiration date from March 2013 and, effective April 2012, PPL Electric increased2013, the capacity of its syndicated credit facility from $200 millionwas reduced to $300$150 million.

(b)Committed capacity includes a $150$100 million credit facility related to an asset-backed commercial paper program through which PPL Electric obtains financing by selling and contributing its eligible accounts receivable and unbilled revenue to a special purpose, wholly owned subsidiary on an ongoing basis.  The subsidiary pledges these assets to secure loans of up to an aggregate of $150$100 million from a commercial paper conduit sponsored by a financial institution.  At June 30, 2012,March 31, 2013, based on accounts receivable and unbilled revenue pledged, the amount available for borrowing under the facility was limited to $87 million.  In July 2012, PPL Electric and the subsidiary extended this agreement to September 2012 and reduced the capacity to $100 million.
(b)(c)In May 2013, KU extended its $198 million letter of credit facility to May 2016.
(d)The commitments under PPL's domestic credit facilities are provided by a diverse bank group, with no one bank and its affiliates providing an aggregate commitment of more than 9% of the total committed capacity.
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(c)(e)In December 2012, the PPL WW syndicated credit facility that was set to expire in January 2013 was replaced and the capacity was increased from £150 million.  The borrowing outstandingamount borrowed at June 30, 2012March 31, 2013 was a USD-denominated borrowing of $174$171 million, which equated to £110£109 million at the time of borrowing and bore interest at approximately 1.458%1.9034%.
(d)(f)In January 2012, WPD (South West) entered intoThe amount borrowed at March 31, 2013 was a new £245GBP-denominated borrowing of £65 million, syndicated credit facilitywhich equated to replace its previous £210$99 million syndicated credit facility.  Under the new facility, WPD (South West) has the ability to make cash borrowings but cannot request the lenders to issue letters of credit.  WPD (South West) pays customary commitment fees under this facility, and borrowings bearbore interest at LIBOR-based rates plus a margin.  The facility contains financial covenants that require WPD (South West) to maintain an interest coverage ratio of not less than 3.0 times consolidated earnings before income taxes, depreciation and amortization and total net debt not in excess of 85% of its RAV, in each case calculated in accordance with the credit facility.1.30%.
(e)(g)At June 30, 2012,March 31, 2013, the U.S. dollarUSD equivalent of unused capacity under WPD's committed credit facilities was approximately $1.4$1.3 billion.  The commitments under WPD's credit facilities are provided by a diverse bank group with no one bank providing more than 16%13% of the total committed capacity.

See Note 7 to the Financial Statements for further discussion of PPL's credit facilities.

Commercial Paper

In February 2012, LG&E and KU each establishedPPL Energy Supply maintains a commercial paper program for up to $250 million to provide an additional financing source to fund their short-term liquidity needs.  Commercial paper issuances are supported by LG&E's and KU's Syndicated Credit Facilities.  LG&E and KU had no commercial paper outstanding at June 30, 2012.

In April 2012, PPL Energy Supply increased the capacity of its commercial paper program from $500 million to $750 million to provide an additional financing source to fund its short-term liquidity needs, if and when necessary.  Commercial paper issuances are supported by PPL Energy Supply's Syndicated Credit Facility.  At June 30,March 31, 2013 and December 31, 2012, PPL Energy Supply had $520$481 million and $356 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheet,Sheets, at a weighted-average interest raterates of approximately 0.48%0.38% and 0.50%.

In May 2012, PPL Electric increased the capacity of itsmaintains a commercial paper program from $200 millionfor up to $300 million to provide an additional financing source to fund its short-term liquidity needs, if and when necessary.  Commercial paper issuances are supported by PPL Electric's Syndicated Credit Facility.  At June 30, 2012,March 31, 2013, PPL Electric had $195$125 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheet, at a weighted-average interest rate of approximately 0.49%0.39%.  PPL Electric had no commercial paper outstanding at December 31, 2012.

In April 2013, LG&E and KU each increased the capacity of their commercial paper programs from $250 million to $350 million to provide an additional financing source to fund their short-term liquidity needs, if and when necessary.  Commercial paper issuances are supported by LG&E's and KU's Syndicated Credit Facilities.  At March 31, 2013 and December 31, 2012, LG&E had $70 million and $55 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheets, at weighted-average interest rates of 0.36% and 0.42%.  At March 31, 2013 and December 31, 2012, KU had $115 million and $70 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheets, at weighted-average interest rates of 0.36% and 0.42%.

Long-term Debt and Equity Securities

See "Overview" above for information regarding equity forward agreements and the 2010 Equity Units.

In April 2012,March 2013, PPL made a registered underwritten public offering of 9.9Capital Funding issued $450 million shares of its common stock.  In conjunction with that offering, the underwriters exercised an option5.90% Junior Subordinated Notes due 2073.  PPL Capital Funding received proceeds of $436 million, net of underwriting fees, which will be loaned to purchase an additional 591 thousand sharesor invested in affiliates of PPL common stock solelyCapital Funding and used to cover over-allotments.
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In connection with the registered public offering, PPL entered into forward sale agreements with two counterparties covering the 9.9 million shares of PPL's common stock.  Settlement of these initial forward sale agreements will occur no later than April 2013.  As a result of the underwriters' exercise of the overallotment option, PPL entered into additional forward sale agreements covering the additional 591 thousand shares of common stock.  Settlement of the subsequent forward sale agreements will occur in July 2013.  Upon any physical settlement of any forward sale agreement, PPL will issuefund their capital expenditures and deliver to the forward counterparties shares of its common stock in exchange for cash proceeds per share equal to the forward sale price.  The forward sale price will be calculated based on an initial forward price of $27.02 per share reduced during the period the contracts are outstanding as specified in the forward sale agreements.  PPL may, in certain circumstances, elect cash settlement or net share settlement for all or a portion of its rights or obligations under the forward sale agreements.

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

The forward sale agreements will be classified as equity transactions.  As a result, no amounts will be recordedIn addition, PPL has reduced the estimate of its plans to issue new shares of common stock in 2013 by $100 million from the consolidated financial statements until the settlement of the forward sale agreements.  Prior to those settlements, the only impact to the financial statements will be the inclusion of incremental shares within the calculation of diluted EPS using the treasury stock method.$350 million reported in its 2012 Form 10-K.

In April 2012, an indirect, wholly owned subsidiary of PPL Energy Supply completed the Ironwood Acquisition.  See Note 8 for information on the transaction and the debt of PPL Ironwood, LLC assumed through consolidation as part of the acquisition.

In April 2012, WPD (East Midlands) issued £100 million aggregate principal amount of 5.25% Senior Notes due 2023.  WPD (East Midlands) received proceeds of approximately £111 million, which equated to $178 million at the time of issuance, net of underwriting fees.  The net proceeds were used for general corporate purposes.

In June 2012, LKE completed an exchange of all its outstanding 4.375% Senior Notes due 2021 issued in September 2011 in a transaction not registered under the Securities Act of 1933, for similar securities that were issued in a transaction registered with the SEC.  See Note 7 in PPL's and LKE's 2011 Form 10-K for additional information.

In June 2012, PPL Capital Funding issued $400 million of 4.20% Senior Notes due 2022.  The notes may be redeemed at PPL Capital Funding's option any time prior to maturity at make-whole redemption prices.  PPL Capital Funding received proceeds of $396 million, net of a discount and underwriting fees, that will be used for general corporate purposes.

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

In July 2012, PPL Capital Funding gave notice of its election to redeem at par on August 14, 2012, together with interest accrued to the redemption date, the entire $99 million outstanding principal amount of its 6.85% Senior Notes due 2047.

See Note 7 in PPL's 2011 Form 10-K for information on the 2011 Bridge Facility, 2011 Equity Units and the April 2011 issuance of common stock.

Common Stock Dividends

In May 2012,February 2013, PPL declared its quarterly common stock dividend, payable July 2, 2012,April 1, 2013, at 36.036.75 cents per share (equivalent to $1.44$1.47 per annum).  Future dividends, declared at the discretion of the Board of Directors, will be dependent upon future earnings, cash flows, financial and legal requirements and other factors.

Rating Agency Actions

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

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

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independently of each other and any other rating that may be assigned to the securities.
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A downgrade in PPL's or its subsidiaries' credit ratings could result in higher borrowing costs and reduced access to capital markets.

As a result of the passage of the Dodd-Frank Act, PPL is limiting its credit rating disclosure to a description of the actions taken by the rating agencies with respect to PPL's ratings, but without stating what ratings have been assigned to PPL or its subsidiaries, or their securities.  The ratings assigned by the rating agencies to  PPL and its subsidiaries and their respective securities may be found, without charge, on eachhave no credit rating triggers that would result in the reduction of access to capital markets or the respective rating agencies' websites, which ratings together with all other information contained on such rating agency websites is, hereby, explicitly not incorporated by reference in this report.acceleration of maturity dates of outstanding debt.

The rating agencies took the following actions related to PPL and its subsidiaries:

In January 2012, S&P affirmed its rating and revised its outlook for PPL Montana's Pass Through Certificates due 2020.subsidiaries during 2013:

In February 2012, Fitch assigned ratings2013, Moody's upgraded its rating, from B2 to Ba1, and revised the two newly established commercial paper programsoutlook from under review to stable for LG&E and KU.PPL Ironwood.

In March 2012, Moody's affirmed the following ratings:
·the long-term ratings of the First Mortgage Bonds for LG&E and KU;
·the issuer ratings for LG&E and KU; and
·the bank loan ratings for LG&E and KU.

Also in March 2012,2013, S&P, Moody's and S&P each assigned short-term ratings to the two newly established commercial paper programs for LG&E and KU.

In March and May 2012, Moody's, S&P and Fitch affirmed the long-term ratings for LG&E's 2003 Series A and 2007 Series B pollution control bonds.

Following the announcement of the then-pending acquisition of AES Ironwood, L.L.C. in February 2012, the rating agencies took the following actions:
·In March 2012, Moody's placed AES Ironwood, L.L.C.'s senior secured bonds under review for possible ratings upgrade.
·In April 2012, S&P affirmed the rating of AES Ironwood, L.L.C.'s senior secured bonds.

In May 2012, Fitch downgraded its rating and revised its outlook for PPL Montana's Pass Through Certificates due 2020.

In June 2012, Fitch assigned a ratingratings of BB+, Ba1 and outlookBB+ to PPL Capital Funding's Senior Notes.$450 million 5.90% Junior Subordinated Notes due 2073.  Fitch also assigned a stable outlook to these notes.

In April 2013, Fitch affirmed the BBB- rating and stable outlook at PPL Montana.

Ratings Triggers

PPL and PPL Energy Supply have various derivative and non-derivative contracts, including contracts for the sale and purchase of electricity and fuel, commodity transportation and storage, tolling agreements and interest rate and foreign currency instruments, which contain provisions that require PPL and PPL Energy Supply to post additional collateral or permit the counterparty to terminate the contract, if PPL's or PPL Energy Supply's credit rating were to fall below investment grade.  See Note 14 to the Financial Statements for a discussion of "Credit Risk-Related Contingent Features," including a discussion of the potential additional collateral that would have been required for derivative contracts in a net liability position at June 30, 2012.  At June 30, 2012, if PPL's and its subsidiaries' credit ratings had been below investment grade, PPL would have been required to prepay or post an additional $531 million of collateral to counterparties for both derivative and non-derivative commodity and commodity-related contracts used in its generation, marketing and trading operations and interest rate and foreign currency contracts.

Capital Expenditures

Capital expenditure plans are revised periodically to reflect changes in operational, market and regulatory conditions.  PPL has lowered its projected capital spending for 2012 by approximately $325 million from the previously disclosed $3.8 billion projection included in PPL's 2011 Form 10-K.  The lower projected capital spending is due mainly to the terminated Bluegrass CT acquisition discussed in Notes 6 and 8 to the Financial Statements and the status of environmental projects.March 31, 2013.

For additional information on PPL's liquidity and capital resources, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," in PPL's 20112012 Form 10-K.

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Risk Management

Market Risk

See Notes 13 and 14 to the Financial Statements for information about PPL's risk management objectives, valuation techniques and accounting designations.

The forward-looking information presented below provides estimates of what may occur in the future, assuming certain adverse market conditions and model assumptions.  Actual future results may differ materially from those presented.  These disclosures are not precise indicators of expected future losses, but only indicators of possible losses under normal market conditions at a given confidence level.

Commodity Price Risk (Non-trading)

PPL segregates its non-trading activities into two categories:  hedge activity and economic activity.  Transactions that are accounted for as hedge activity qualify for hedge accounting treatment.  The economic activity category includes transactions that address a specific risk, but were not eligible for hedge accounting or for which hedge accounting was not elected.  This activity includes the changes in fair value of positions used to hedge a portion of the economic value of PPL's competitive generation assets and full-requirement sales contracts 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.  The fair value of economic positions at June 30, 2012 and December 31, 2011 was a net asset/(liability) of $796 million and $(63) million.  The change in fair value is largely attributable to the dedesignation of cash flow hedges that are now classified as economic hedges.  See Note 14 to the Financial Statements for additional information.

To hedge the impact of market price volatility on PPL's energy-related assets, liabilities and other contractual arrangements, PPL both sells and purchases physical energy at the wholesale level under FERC market-based tariffs throughout the U.S. and enters into financial exchange-traded and over-the-counter contracts.  PPL's non-trading commodity derivative contracts mature at various timesrange in maturity through 2019.

The following table sets forth the changechanges in the net fair value of PPL's non-trading commodity derivative contracts for the periods ended June 30.March 31.  See Notes 13 and 14 to the Financial Statements for additional information.

  Gains (Losses)
  Three Months Six Months
  2012  2011  2012  2011 
             
Fair value of contracts outstanding at the beginning of the period $ 1,215  $ 997  $ 1,082  $ 947 
Contracts realized or otherwise settled during the period   (261)   (85)   (540)   (128)
Fair value of new contracts entered into during the period (a)   13    31    12    15 
Other changes in fair value   (6)   (49)   407    60 
Fair value of contracts outstanding at the end of the period $ 961  $ 894  $ 961  $ 894 
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        Gains (Losses)
    Three Months
      2013  2012 
             
Fair value of contracts outstanding at the beginning of the period       $ 473  $ 1,082 
Contracts realized or otherwise settled during the period         (137)   (279)
Fair value of new contracts entered into during the period (a)         9    (1)
Other changes in fair value         (116)   413 
Fair value of contracts outstanding at the end of the period       $ 229  $ 1,215 

(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 PPL's non-trading commodity derivative contracts at June 30, 2012,March 31, 2013, based on the level of observability of the information used to determine the fair value.

  Net Asset (Liability)  Net Asset (Liability)
  Maturity     Maturity    Maturity     Maturity  
  Less Than Maturity Maturity in Excess Total Fair  Less Than Maturity Maturity in Excess Total Fair
  1 Year 1-3 Years 4-5 Years of 5 Years Value  1 Year 1-3 Years 4-5 Years of 5 Years Value
Source of Fair ValueSource of Fair Value          Source of Fair Value          
Prices based on significant other observable inputs $ 703  $ 237  $ (21) $ 8  $ 927 
Prices based on significant unobservable inputs   21    9    4       34 
Prices based on significant observable inputs (Level 2)Prices based on significant observable inputs (Level 2) $ 238  $ (21) $ (8) $ 6  $ 215 
Prices based on significant unobservable inputs (Level 3)Prices based on significant unobservable inputs (Level 3)   (1)   12    3       14 
Fair value of contracts outstanding at the end of the periodFair value of contracts outstanding at the end of the period $ 724  $ 246  $ (17) $ 8  $ 961 Fair value of contracts outstanding at the end of the period $ 237  $ (9) $ (5) $ 6  $ 229 

PPL sells electricity, capacity and related services and buys fuel on a forward basis to hedge the value of energy from its generation assets.  If PPL were unable to deliver firm capacity and energy or to accept the delivery of fuel under its agreements, under certain circumstances it could be required to pay liquidating damages.  These damages would be based on the difference between the market price and the contract price of the commodity.  Depending on price changes in the wholesale energy markets, such damages could be significant.  Extreme weather conditions, unplanned power plant outages, transmission disruptions, nonperformance by counterparties (or their own counterparties) with which it has energy contracts

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and other factors could affect PPL's ability to meet its obligations, or cause significant increases in the market price of replacement energy.  Although PPL attempts to mitigate these risks, there can be no assurance that it will be able to fully meet its firm obligations, that it will not be required to pay damages for failure to perform, or that it will not experience counterparty nonperformance in the future.  In connection with its bankruptcy proceedings, a significant counterparty, SMGT, had been purchasing lower volumes of electricity than prescribed in the contract and effective April 1, 2012 the contract was terminated.  At this time, PPL Energy Supply cannot predict the prices or other terms on which it will be able to market to third parties the power that SMGT will not purchase from PPL EnergyPlus due to the termination of this contract.  See Note 10 to the Financial Statements for additional information.

Commodity Price Risk (Trading)

PPL's trading commodity derivative contracts mature at various timesrange in maturity through 2017.  The following table sets forth changes in the net fair value of PPL's trading commodity derivative contracts for the periods ended June 30.March 31.  See Notes 13 and 14 to the Financial Statements for additional information.

 Gains (Losses)     Gains (Losses)
 Three Months Six Months   Three Months
 2012  2011  2012  2011      2013  2012 
                
Fair value of contracts outstanding at the beginning of the period $ 2  $ 7  $ (4) $ 4      $ 29  $ (4)
Contracts realized or otherwise settled during the period  (1)  1   (1)  3       (2)  
Fair value of new contracts entered into during the period (a)  (1)  5   5   8        (12)   6 
Other changes in fair value   17    2    17    
Fair value of contracts outstanding at the end of the period $ 17  $ 15  $ 17  $ 15      $ 15  $ 2 

(a)Represents the fair value of contracts at the end of the quarter of their inception.

Unrealized gains of approximately $1 million will be reversed over the next three months as the transactions are realized.

The following table segregates the net fair value of trading commodity derivative contracts at June 30, 2012,March 31, 2013, based on the level of observability of the information used to determine the fair value.

 Net Asset (Liability) Net Asset (Liability)
 Maturity     Maturity   Maturity     Maturity  
 Less Than Maturity Maturity in Excess Total Fair Less Than Maturity Maturity in Excess Total Fair
 1 Year 1-3 Years 4-5 Years of 5 Years Value 1 Year 1-3 Years 4-5 Years of 5 Years Value
Source of Fair Value                    
Prices based on significant other observable inputs $ 8  $ 8  $ 1     $ 17 
Prices quoted in active markets for identical instruments (Level 1) $ 1        $ 1 
Prices based on significant observable inputs (Level 2)   5  $ 9          14 
Fair value of contracts outstanding at the end of the period $ 8  $ 8  $ 1     $ 17  $ 6  $ 9        $ 15 

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VaR Models

A VaR model is utilized to measure commodity price risk in domesticunregulated gross energy margins for the non-trading and trading portfolios.  VaR is a statistical model that attempts to estimate the value of potential loss over a given holding period under normal market conditions at a given confidence level.  VaR is calculated using a Monte Carlo simulation technique based on a five-day holding period at a 95% confidence level.  Given the company's conservativedisciplined hedging program, the non-trading VaR exposure is expected to be limited in the short-term.  The VaR for portfolios using end-of-month results for the periodperiods was as follows.

   Trading VaR Non-Trading VaR
   Six Months Twelve Months Six Months Twelve Months
   Ended Ended Ended Ended
   June 30, December 31, June 30, December 31,
   2012  2011  2012  2011 
95% Confidence Level, Five-Day Holding Period            
 Period End $ 5  $ $11  $ 6 
 Average for the Period   2        5 
 High   5     11    7 
 Low   1        4 
   Trading VaR Non-Trading VaR
   Three Months Three Months
   Ended Ended
   March 31, March 31,
   2013  2013 
95% Confidence Level, Five-Day Holding Period      
 Period End $ 6  $
 Average for the Period   5   
 High   6   
 Low   3   

The trading portfolio includes all speculativeproprietary trading positions, regardless of the delivery period.  All positions not considered speculativeproprietary 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

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absence of reliable spot and forward markets.  The fair value of the non-trading and trading FTR positions was insignificant at June 30, 2012.March 31, 2013.

Interest Rate Risk

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

At June 30, 2012,March 31, 2013, PPL's potential annual exposure to increased interest expense, based on a 10% increase in interest rates, was not significant.

PPL is also exposed to changes in the fair value of its domestic and international debt portfolios.  PPL estimated that a 10% decrease in interest rates at June 30, 2012March 31, 2013 would increase the fair value of its debt portfolio by $601$563 million.

At June 30, 2012,March 31, 2013, PPL had the following interest rate hedges outstanding:

       Effect of a
     Fair Value, 10% Adverse
    Exposure Net - Asset Movement
   Hedged (Liability) (a) in Rates (b)
Cash flow hedges         
 Interest rate swaps (c) $ 300  $ (15) $ (6)
 Cross-currency swaps (d)   1,262    68    (177)
Fair value hedges         
 Interest rate swaps (e)   99    1    
Economic hedges         
 Interest rate swaps (f)   179    (62)   (3)
         Effect of a
      Fair Value, 10% Adverse
    Exposure Net - Asset Movement
   Hedged (Liability) (a)  in Rates (b)
Cash flow hedges         
 Interest rate swaps (c) $ 1,148  $ 12  $ (35)
 Cross-currency swaps (d)   1,262    82    (171)
Economic activity         
 Interest rate swaps (e)   179    (55)   (3)

(a)Includes accrued interest, if applicable.
(b)Effects of adverse movements decrease assets or increase liabilities, as applicable, which could result in an asset becoming a liability.  Sensitivities represent a 10% adverse movement in interest rates, except for cross-currency swaps which also includes foreign currency exchange rates.
(c)PPL utilizes various risk management instruments to reduce its exposure to the expected future cash flow variability of its debt instruments.  These risks include exposure to adverse interest rate movements for outstanding variable rate debt and for future anticipated financing.  While PPL is exposed to changes in the fair value of these instruments, any changes in the fair value of such cash flow hedges are recorded in equity.equity or as regulatory assets or liabilities, if recoverable through regulated rates.  The changes in fair value of these instruments are then reclassified into earnings in the same period during which the item being hedged affects earnings.  Sensitivities represent a 10% adverse movement in interest rates.  The positions outstanding at June 30, 2012March 31, 2013 mature through 2023.2043.
(d)PPL WEM, through PPL, and PPL WW useutilizes cross-currency swaps to hedge the interest payments and principal of theirWPD's U.S. dollar-denominated senior notes.  While PPL is exposed to changes in the fair value of these instruments, any change in the fair value of these instruments is recorded in equity and reclassified into earnings in the same period during which the item being hedged affects earnings.  Sensitivities represent a 10% adverse movement in both interest rates and foreign currency exchange rates.  The positions outstanding at June 30, 2012March 31, 2013 mature through 2028.
(e)PPL utilizes various risk management instruments to adjust the mix of fixed and floating interest rates in its debt portfolio.  The change in fair value of these instruments, as well as the offsetting change in the value of the hedged exposure of the debt, is reflected in earnings.  Sensitivities represent a 10% adverse movement in interest rates.  In July 2012, these contracts were canceled without penalties by the counterparties.
(f)PPL utilizes various risk management instruments to reduce its exposure to the expected future cash flow variability of its debt instruments.  These risks include exposure to adverse interest rate movements for outstanding variable rate debt and for future anticipated financing.  While PPL is exposed to changes in the fair value of these instruments, any realized changes in the fair value of such economic hedgespositions are recoverable through regulated rates and any subsequent changes in fair value of these derivatives are included in regulatory assets or liabilities.  Sensitivities represent a 10% adverse movement in interest rates.  The positions outstanding at June 30, 2012March 31, 2013 mature through 2033.
 
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Foreign Currency Risk

PPL is exposed to foreign currency risk, primarily through investments in U.K. affiliates.  In addition, PPL's domestic operations may make purchases of equipment in currencies other than U.S. dollars.

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.

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At June 30, 2012, PPL had the following foreign currency hedges outstanding:
outstanding March 31, 2013:
      Effect of a      Effect of a
      10%      10%
      Adverse      Adverse
      Movement      Movement
      in Foreign      in Foreign
    Fair Value, Currency    Fair Value, Currency
  Exposure Net - Asset Exchange  Exposure Net - Asset Exchange
  Hedged (Liability) Rates (a)  Hedged (Liability) Rates (a)
              
Net investment hedges (b)Net investment hedges (b) £ 96  $ 3  $ (15)Net investment hedges (b) £ 162  $ 15  $ (25)
Economic hedges (c)  1,022   12   (153)
Economic activity (c)Economic activity (c)  1,175   78   (167)

(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 at June 30, 2012March 31, 2013 mature through 2013.  Excludes the amount of an intercompany loan classified as a net investment hedge.  See Note 14 to the Financial Statements for additional information.
(c)To economically hedge the translation of expected income denominated in GBP to U.S. dollars, PPL enters into a combination of average rate forwards and average rate options to sell GBP.  The positionsforwards and options outstanding at June 30, 2012March 31, 2013 mature through 2014.2015.

NDT Funds - Securities Price Risk

In connection with certain NRC requirements, PPL Susquehanna maintains trust funds to fund certain costs of decommissioning the PPL Susquehanna nuclear plant (Susquehanna).  At June 30, 2012,March 31, 2013, these funds were invested primarily in domestic equity securities and fixed-rate, fixed-income securities and are reflected at fair value on the Balance Sheet.  The mix of securities is designed to provide returns sufficient to fund Susquehanna's decommissioning and to compensate for inflationary increases in decommissioning costs.  However, the equity securities included in the trusts are exposed to price fluctuation in equity markets, and the values of fixed-rate, fixed-income securities are primarily exposed to changes in interest rates.  PPL actively monitors the investment performance and periodically reviews asset allocation in accordance with its NDTnuclear decommissioning trust policy statement.  At June 30, 2012,March 31, 2013, a hypothetical 10% increase in interest rates and a 10% decrease in equity prices would have resulted in an estimated $47$55 million reduction in the fair value of the trust assets.  See Notes 13 and 17 to the Financial Statements for additional information regarding the NDT funds.

Credit Risk

See Notes 13 and 14 to the Financial Statements in this Form 10-Q and "Risk Management - Energy Marketing & Trading and Other - Credit Risk" in PPL's 20112012 Form 10-K for additional information.

Foreign Currency Translation

The value of the British pound sterling fluctuates in relation to the U.S. dollar.  Changes in thesethis exchange ratesrate resulted in a foreign currency translation loss of $104$256 million for the sixthree months ended June 30, 2012,March 31, 2013, which primarily reflected a $196$696 million reductiondecrease to PP&E and goodwill offset by a reductiondecrease of $92$440 million to net liabilities.  Changes in thesethis exchange ratesrate resulted in a foreign currency translation gain of $162$76 million for the sixthree months ended June 30, 2011,March 31, 2012, which primarily reflected a $336$188 million increase to PP&E and goodwill offset by an increase of $174$112 million to net liabilities.  The impact of foreign currency translation is recorded in AOCI.

Related Party Transactions

PPL is not aware of any material ownership interests or operating responsibility by senior management of PPL, PPL Energy Supply, PPL Electric, LKE, LG&E or KU in outside partnerships, including leasing transactions with variable interest entities or other entities doing business with PPL.  See Note 11 to the Financial Statements for additional information on related party transactions.

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Acquisitions, Development and Divestitures

See Note 8PPL from time to the Financial Statementstime evaluates opportunities for information on the April 2012 Ironwood Acquisitionpotential acquisitions, divestitures and LG&E's and KU's June 2012 termination of the asset purchase agreement for the Bluegrass CTs.

See Note 10 to the Financial Statements in PPL's 2011 Form 10-K and Note 8 to the Financial Statements for information on PPL's April 2011 acquisition of WPD Midlands.


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development projects.  Development projects are continuously reexamined based on market conditions and other factors to determine whether to proceed with the projects, sell, cancel or expand them, execute tolling agreements or pursue other options.  See Note 8 to the Financial Statements for additional information on the more significant activities.

Environmental Matters

Extensive federal, state and local environmental laws and regulations are applicable to PPL's air emissions, water discharges and the management of hazardous and solid waste, amongas well as other areas; and theaspects of PPL's business.  The cost of compliance or alleged non-compliance cannot be predicted with certainty but could be material.  In addition, costs may increase significantly if the requirements or scope of environmental laws or regulations, or similar rules, are expanded or changed by the relevant regulatory agencies.  Costs may take the form of increased capital expenditures or operating and maintenance expenses;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 ofcosts for their products or their demand for PPL's services.

Physical effects associated with climate change could include the impact of changes in weather patterns, such as storm frequency and intensity, and the resultant potential damage to PPL's generation assets, electricity transmission and distribution systems, as well as impacts on customers.  In addition, changed weather patterns could potentially reduce annual rainfall in areas where PPL has hydro generating facilities or where river water is used to cool its fossil and nuclear powered generators.  PPL cannot currently predict whether its businesses will experience these potential climate change-related risks or estimate the potential cost of their related consequences.

The following is a discussion of the more significant environmental matters.

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) under existing solid waste regulations.  A final rulemaking is currently expected before the end of 2015.  However, the timing of the final regulations could be accelerated by certain litigation that could require the EPA to issue its regulations sooner.  Regulations could impact handling, disposal and/or beneficial use of CCRs.  The financial impact could be material if CCRs are regulated as hazardous waste, and significant if regulated as non-hazardous, in accordance with the proposed rule.

Effluent Limitation Guidelines
On April 19, 2013, the EPA issued 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 handling and metal cleaning wastes, as well as new limits for scrubber wastewater, gasification wastewater and landfill leachate.  The proposal contains several alternative approaches, some of which could significantly impact PPL's coal-fired plants.  PPL will work with industry groups to comment on the proposed regulation.  The final regulation is expected in May 2014.  At the present time, PPL is unable to predict the outcome of this matter or estimate a range of reasonably possible costs, but the costs could be significant.

316(b) Cooling Water Intake Structure Rule
In April 2011, the EPA published a draft regulation under Section 316(b) of the Clean Water Act, which regulates cooling water intakes for power plants.  The draft rule has two provisions: one requires installation of Best Technology Available (BTA) to reduce mortality of aquatic organisms that are pulled into the plant cooling water system (entrainment), and the second imposes standards for reduction of mortality of aquatic organisms trapped on water intake screens (impingement).  A final rule is expected in June 2013.  The proposed regulation would apply to nearly all PPL-owned steam electric plants in Pennsylvania, Kentucky, and Montana, potentially even including those equipped with closed-cycle cooling systems.  PPL's compliance costs could be significant, especially if the final rule requires closed-cycle systems at plants that do not currently have them or conversions of once-through systems to closed-cycle.
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GHG Regulations
In 2013, the EPA is expected to finalize limits on GHG emissions from new power plants and to begin working on a proposal for such emissions from existing power plants.  The EPA's proposal on GHG emissions from new power plants would effectively preclude construction of any coal-fired plants and could even be difficult for new gas-fired plants to meet.  With respect to existing power plants, the impact could be significant, depending on the structure and stringency of the final rule.  PPL, along with others in the industry, filed comments on the EPA's proposal related to GHG emissions from new plants.

MATS
The EPA finalized MATS requiring fossil-fuel fired plants to reduce emissions of mercury and other hazardous air pollutants by April 16, 2015.  The rule is being challenged by industry groups and states.  The EPA has subsequently proposed changes to the rule with respect to new sources to address the concern that the rule effectively precludes construction of any new coal-fired plants.  PPL is generally well-positioned to comply with MATS, primarily due to recent investments in environmental controls and approved ECR plans to install additional controls at some of its Kentucky plants.  Additionally, PPL is evaluating chemical additive systems for mercury control at Brunner Island, and modifications to existing controls at Colstrip for improved particulate matter reductions.  In September 2012, PPL announced its intention to place its Corette plant in long-term reserve status beginning in April 2015 due to expected market conditions and costs to comply with MATS.  The anticipated retirements of certain coal-fired electric generating units are in response to this and other environmental regulations.

CSAPR and CAIR
In 2011, the EPA finalized its CSAPR regulating emissions of nitrous oxide and sulfur dioxide through new allowance trading programs which were to be implemented in two phases (2012 and 2014).  Like its predecessor, the CAIR, CSAPR targeted sources in the eastern United States.  In December 2011, the U.S. Court of Appeals for the District of Columbia Circuit (the Court) stayed implementation of CSAPR, leaving CAIR in place.  Subsequently, in August 2012, the Court vacated and remanded CSAPR back to the EPA for further rulemaking, again leaving CAIR in place.  PPL plants in Pennsylvania and Kentucky will continue to comply with CAIR through optimization of existing controls, balanced with emission allowance purchases.  The Court's August decision leaves plants in CSAPR-affected states potentially exposed to more stringent emission reductions due to regional haze implementation (it was previously determined that CSAPR or CAIR participation satisfies regional haze requirements), and/or petitions to the EPA by downwind states under Section 126 of the Clean Air Act requesting the EPA to require plants that allegedly contribute to downwind non-attainment to take action to reduce emissions.

Regional Haze - Montana
The EPA signed its final Federal Implementation Plan of the Regional Haze Rules for Montana in September 2012, with tighter emissions limits for Colstrip Units 1 & 2 based on the installation of new controls (no limits or additional controls were specified for Colstrip Units 3 & 4), and tighter emission limits for Corette (which are not based on additional controls).  The cost of the potential additional controls for Colstrip Units 1 & 2, if required, could be significant.  PPL expects to meet the tighter permit limits at Corette without any significant changes to operations, although other requirements have led to the planned suspension of operations at Corette beginning in April 2015 (see "MATS" discussion above).

See Note 10 to the Financial Statements in this Form 10-Q and "Item 1. Business - Environmental Matters" in PPL's 20112012 Form 10-K for a discussion of environmental matters.

New Accounting Guidance

See Notes 2 and 1819 to the Financial Statements for a discussion of new accounting guidance adopted and pending adoption.

Application of Critical Accounting Policies

Financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies.  The following accounting policies are particularly important to the financial condition or results of operations, and require estimates or other judgments of matters inherently uncertain: price risk management, defined benefits, asset impairment (excluding investments), loss accruals, AROs, income taxes, and regulatory assets and liabilities and business combinations - purchase price allocation.liabilities.  See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in PPL's 20112012 Form 10-K for a discussion of each critical accounting policy.
 
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PPL ENERGY SUPPLY, LLC AND SUBSIDIARIES

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

The following should be read in conjunction with PPL Energy Supply's Condensed Consolidated Financial Statements and the accompanying Notes and with PPL Energy Supply's 20112012 Form 10-K.  Capitalized terms and abbreviations are defined in the glossary.  Dollars are in millions, unless otherwise noted.

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

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

·  "Results of Operations" provides a summary of PPL Energy Supply's earnings and a description of key factors expected to impact future earnings.  This section ends with explanations of significant changes in principal line items on PPL Energy Supply's Statements of Income, comparing the three and six months ended June 30, 2012March 31, 2013 with the same periods in 2011.2012.

·  "Financial Condition - Liquidity and Capital Resources" provides an analysis of PPL Energy Supply's liquidity position and credit profile.  This section also includes a discussion of rating agency actions.

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

Overview

Introduction

PPL Energy Supply is an energy company with headquarters in Allentown, Pennsylvania.  Through its subsidiaries, PPL Energy Supply is primarily engaged in the competitive generation and marketing of electricity in two key markets - the northeastern and northwestern U.S.

Business Strategy

PPL Energy Supply's overall strategy is to achieve disciplined optimization of energy supply margins while mitigating volatility in both cash flows and earnings.  More specifically, PPL Energy Supply's strategy is to optimize the value from its competitive generation and marketing portfolio.portfolios.  PPL Energy Supply endeavors to do this by matching energy supply with load, or customer demand, under contracts of varying durations with creditworthy counterparties to capture profits while effectively managing exposure to energy and fuel price volatility, counterparty credit risk and operational risk.  PPL Energy Supply is focused on maintaining profitability during the current and projected period of low commodity prices by controlling its capital and operation and maintenance expenditures.

To manage financing costs and access to credit markets, a key objective offor PPL Energy Supply's businessSupply is to maintain a strong credit profile.  PPL Energy Supply continually focuses on maintaining an appropriate capital structureprofile and liquidity position.  In addition, PPL Energy Supply has financial and operational risk management programs that, among other things, are designed to monitor and manage its exposure to earnings and cash flow volatility related to changes in energy and fuel prices, interest rates, counterparty credit quality and the operating performance of its generating units.

Financial and Operational Developments

Net Income Attributable to PPL Energy Supply

Net Income(Loss) Attributable to PPL Energy Supply Member

Net Income (Loss) Attributable to PPL Energy Supply Member for the three and six months ended June 30, 2012March 31, 2013 was $19 million and $328$(38) million compared to $89$309 million and $303 million for the same periods in 20112012, representing a 79% decrease and an 8% increase over the same periods in 2011.112% decrease.

See "Results of Operations" below for details of special itemsfurther discussion and analysis of the consolidated results of operations.
 
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Economic and Market Conditions

Unregulated gross energy marginsGross Energy Margins associated with PPL Energy Supply's competitive generation and marketing business are impacted by changes in market prices and demand for electricity and natural gas, power plant availability, competition in the markets for retail customers, fuel costs and availability, fuel transportation costs and other costs.  Current depressed wholesale market prices for electricity and natural gas have resulted from general weak economic conditions and other factors, including the impact of expanded domestic shale gas development.  As a result of these factors, PPL Energy Supply has experienced a shift in the dispatching of its competitive generation from coal-fired to combined-cycle gas-fired generation as illustrated in the following table:

   Average Utilization Factors (a)
   2009 - 2011  YTD 2012
Pennsylvania coal plants  90%  63%
Montana coal plants  83%  50%
Combined-cycle gas plants  64%  96%

(a)All periods reflect the six months ending June 30.

This reduction in coal-fired generation output has resulted in a surplus of coal inventory at certain of PPL Energy Supply's Pennsylvania coal plants.  To mitigate the risk of exceeding available coal storage, PPL Energy Supply incurred pre-tax charges of $12 million during the six months ended June 30, 2012 to reduce its 2012 contracted coal deliveries.  Because coal purchases may also exceed expected fuel needs for 2013, PPL Energy Supply continues to manage its coal inventory to mitigate the financial impact and physical implications of an oversupply, including, but not limited to, contract modifications to reduce 2013 coal deliveries.

In addition, current economic and commodity market conditions indicated a lower value of unhedged future energy margins (primarily in 2014 and forward years)are expected to continue compared to the hedged energy margins in 2012.  As has been PPL Energy Supply's practice in periods of changing business conditions, PPL Energy Supply continues to review its future business and operational plans, including capital and operation and maintenance expenditures, as well as its hedging strategies.

PPL Energy Supply's businesses are also subjectSupply continues to extensive federal, state and local environmental laws, rules and regulations.  PPL Energy Supply's competitive generation assets are well positionedmonitor its Corette plant (which as previously announced will be placed in long-term reserve status, suspending the plant's operation due to meet these requirements.  See Note 15 to the Financial Statements in PPL Energy Supply's Form 2011 10-K for additional information on these requirements.

In light of these economic andexpected market conditions as well as current and projected environmental regulatory requirements, PPL Energy Supply considered whether certain of its generating assets werethe costs to comply with the MATS beginning in April 2015) for impairment.  The Corette plant asset group's carrying value at March 31, 2013 was $65 million.  Although the Corette plant was not impaired and determinedat March 31, 2013, it is reasonably possible that noan impairment charges were required at June 30, 2012.  PPL Energy Supply is unable to predict whether future environmental requirements or market conditions will result in impairment charges or retirements.

PPL Energy Supply and its subsidiaries may also be impactedcould occur in future periods, by the uncertainty in the worldwide financial and credit markets partially caused by the European sovereign debt crisis.  In addition, PPL Energy Supply may be impacted by reductions in the credit ratings of financial institutions and evolving regulations in the financial sector.  Collectively, these factors could reduce availability or restrict PPL Energy Supply and its subsidiaries' ability to maintain sufficient levels of liquidity, reduce capital market activities, change collateral posting requirements and increase the associated costs to PPL Energy Supply and its subsidiaries.as higher priced sales contracts settle, adversely impacting projected cash flows.

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

Ironwood AcquisitionSusquehanna Turbine Blade Inspection

In April 2012, an indirect, wholly owned subsidiarythe spring of 2013, PPL Energy Supply completedwill begin making modifications to address the acquisitioncauses of turbine blade cracking at the Susquehanna nuclear plant that was first identified in 2011.  The modifications will be made during the Unit 2 refueling outage and an additional planned outage for Unit 1.  Following completion of the equity interests in the owner and operator of the Ironwood Facility.  The Ironwood Facility began operation in 2001 and, since 2008, PPL EnergyPlus has supplied natural gas for the operation of the Ironwood Facility and received the facility's full electricity output and capacity value pursuant to a tolling agreement that expires in 2021.  The acquisition providesmodifications, PPL Energy Supply through its subsidiaries, operational control of additional combined-cycle gas generation in PJM.  See Note 8plans to continue monitoring the Financial Statements for additional information.
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Bankruptcy of SMGT

In October 2011, SMGT, a Montana cooperative and purchaser of electricity under a long-term supply contract with PPL EnergyPlus expiring in June 2019 (SMGT Contract), filed for protection under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Montana.  At the time of the bankruptcy filing, SMGT was PPL EnergyPlus' largest unsecured credit exposure.

The SMGT Contract provided for fixed volume purchases on a monthly basis at established prices.  Pursuant to a court order and subsequent stipulations entered into between the SMGT bankruptcy trustee and PPL EnergyPlus, since the date of its Chapter 11 filing through January 2012, SMGT continued to purchase electricity from PPL EnergyPlus at the price specified in the SMGT Contract, and made timely payments for such purchases, but at lower volumes than as prescribed in the SMGT Contract.  In January 2012, the trustee notified PPL EnergyPlus that SMGT would not purchase electricity under the SMGT Contract for the month of February.  In March 2012, the U.S. Bankruptcy Court for the District of Montana issued an order approving the request of the SMGT bankruptcy trustee and PPL EnergyPlus to terminate the SMGT Contract.  As a result, the SMGT Contract was terminated effective April 1, 2012, allowing PPL EnergyPlus to resell the electricity previously contracted to SMGT under the SMGT Contract to other customers.

PPL EnergyPlus' receivable under the SMGT Contract totaled approximately $22 million at June 30, 2012, which has been fully reserved.  No assurance can be given as to the collectability of the receivable.

In July 2012, PPL EnergyPlus filed its proof of claim in the SMGT bankruptcy proceeding.  The total claim 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.

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

Results of Operations

The following discussion provides a summary of PPL Energy Supply's earnings and a description of key factors that are expected to impact future earnings.  This section ends with "Statement of Income Analysis," which includes explanations of significant changes in Unregulated Gross Energy Margins by region and principal line items on PPL Energy Supply's Statements of Income, comparing the three and six months ended June 30, 2012March 31, 2013 with the same periods in 2011.2012.

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

Earnings
              
Net Income Attributable to PPL Energy Supply for the periods ended June 30 was:
              
   Three Months Six Months
   2012  2011  2012  2011 
              
Net Income Attributable to PPL Energy Supply $ 19  $ 89  $ 328  $ 303 
Earnings
              
Net Income (Loss) Attributable to PPL Energy Supply Member for the periods ended March 31 was:
              
         Three Months
         2013  2012 
              
Net Income (Loss) Attributable to PPL Energy Supply Member       $ (38) $ 309 

The changes in the components of Net Income (Loss) Attributable to PPL Energy Supply Member between these periods were due to the following factors, which reflect reclassifications for items included in unregulated gross energy marginsUnregulated Gross Energy Margins and certain items that management considers special.  See additional detail of these special items in the tables below.

  Three Months Six Months
       
Unregulated gross energy margins    $ (87)
Other operation and maintenance $ (10)   (16)
Depreciation   (9)   (14)
Other Income (Expense) - net   (1)   (10)
Interest Expense   7    16 
Other   (2)   (3)
Income Taxes   6    65 
Discontinued operations, after-tax      3 
Special items, after-tax   (61)   71 
Total $ (70) $ 25 
Three Months
Unregulated Gross Energy Margins$ (107)
Other operation and maintenance 13 
Depreciation (14)
Interest Expense (9)
Income Taxes 33 
Special items, after-tax (263)
Total$ (347)

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

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·HigherLower other operation and maintenance expense for the three-month period primarily due to $11$15 million of higherlower costs at PPL Susquehanna, including refueling outage costs, payroll-related costseastern fossil and timing of projects, and $7 million from higher system-related costs and timing of projects,hydroelectric plants largely due to outages in 2012, partially offset by $8$3 million of trademark royalties with an affiliate in 2011 for which the agreement was terminated December 31, 2011.

Higher other operation and maintenance expense for the six-month period primarilyadditional costs due to $17 million of higher costs at PPL Susquehanna, including refueling outage costs, payroll-related costs and timing of projects, and $14 million from higher system-related costs and timing of projects, partially offset by $17 million of trademark royalties with an affiliate in 2011 for which the agreement was terminated December 31, 2011.Ironwood Acquisition.

·Higher depreciation expense for the three and six-month periodsprimarily due to the impact of PP&E additions.Ironwood Acquisition.

·Lower other income (expense) - net for the six-month periodHigher interest expense primarily due to lower earnings on securitiesfinancings associated with PPL Ironwood, acquired in the NDT funds.

·LowerApril 2012, which increased interest expense for the three and six-month period, reflecting a $5by $4 million and $10$3 million impact ofdue to lower interest rates, as a result of the redemption of 7.00% Senior Unsecured Notes in July 2011.capitalized interest.

·Lower income taxes for the six-month period primarily due to lower pre-tax income in 2013, which reduced income taxes by $48 million.  The six-month period was also lower due to$47 million, partially offset by an $11 million deferred tax benefit from a state tax rate adjustmentchange recorded in 2012 and $6 million of Pennsylvania net operating loss valuation allowance adjustments recorded in 2011, driven primarily by the impact of bonus depreciation.2012.


The following after-tax amounts,gains (losses), which management considers special items, also impacted the results during the periods ended June 30.March 31.

  Income Statement Three Months Six Months  Income Statement Three Months
  Line Item 2012  2011  2012  2011   Line Item 2013  2012 
                   
Special items gains (losses), net of tax (expense) benefit:         
Adjusted energy-related economic activity, net, net of tax of $23, $2, ($79), ($10)(a) $ (32) $ (3) $ 118  $ 14 
Adjusted energy-related economic activity, net, net of tax of $79, ($102)Adjusted energy-related economic activity, net, net of tax of $79, ($102)(a) $ (117) $ 150 
Impairments:Impairments:         Impairments:      
Emission allowances, net of tax of $0, $0, $0, $1Other O&M        (1)
Renewable energy credits, net of tax of $0, $0, $0, $2Other O&M        (2)
Adjustments - nuclear decommissioning trust investments, net of tax of ($1), $0, ($2), ($1)Other Income-net      1   1 
LKE acquisition-related adjustments:         
Sale of certain non-core generation facilities, net of tax of $0, $1, $0, $0Disc. Operations    (2)    (3)Adjustments - nuclear decommissioning trust investments, net of tax of $0, ($1)Other Income (Expense)-net     1 
Other:Other:         Other:      
Montana hydroelectric litigation, net of tax of $0, $0, $0, $1Interest Expense    (1)    (1)Counterparty bankruptcy, net of tax of $0, $5 (b)Other Operation and Maintenance     (6)
Litigation settlement - spent nuclear fuel storage, net of tax of $0, ($21), $0, ($21) (b)Fuel    29     29 Ash basin leak remediation adjustment, net of tax of $0, ($1)Other Operation and Maintenance      1 
Counterparty bankruptcy, net of tax of $0, $0, $5, $0 (c)Other O&M      (6)  
Wholesale supply cost reimbursement, net of tax of $0, $0, $0, $0(d)  1     1   
Ash basin leak remediation adjustment, net of tax of $0, $0, ($1), $0Other O&M      1   
Coal contract modification payments, net of tax of $5, $0, $5, $0 (e)Fuel  (7)    (7)  
TotalTotal  $ (38) $ 23  $ 108  $ 37 Total  $ (117) $ 146 

(a)See "Reconciliation of Economic Activity" below.
(b)In May 2011, PPL Susquehanna entered into a settlement agreement with the U.S. Government relating to PPL Susquehanna's lawsuit, seeking damages for the Department of Energy's failure to accept spent nuclear fuel from the PPL Susquehanna plant.  PPL Susquehanna recorded credits to fuel expense to recognize recovery, under the settlement agreement, of certain costs to store spent nuclear fuel at the Susquehanna plant.  This special item represents amounts recorded in 2011 to cover the costs incurred from 1998 through September 2009.
(c)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.
(d)Recorded in "Wholesale energy marketing - Realized" on the Statement of Income.
(e)As a result of lower electricity and  natural gas prices, coal unit runtimes have decreased.  Contract modification payments were incurred to reduce the contracted coal quantities scheduled for delivery.


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Reconciliation of Economic Activity

The following table reconciles unrealized pre-tax gains (losses) for the periods ended June 30,March 31, from the table within "Commodity Price Risk (Non-trading) - Economic Activity" in Note 14 to the Financial Statements to the special item identified as "Adjusted energy-related economic activity, net."

   Three Months Six Months   Three Months
   2012  2011  2012  2011    2013  2012 
Operating RevenuesOperating Revenues        Operating Revenues    
 Unregulated retail electric and gas $ (12) $ 1  $ (2) $ 5  Unregulated retail electric and gas $ (8) $ 10 
 Wholesale energy marketing  (458)  (44)  394   13  Wholesale energy marketing  (822)  852 
Operating ExpensesOperating Expenses        Operating Expenses    
 Fuel  (16)  (11)  (14)  12  Fuel  (1)  2 
 Energy Purchases   442    109    (149)   127  Energy Purchases   634    (591)
Energy-related economic activity (a)Energy-related economic activity (a)  (44)  55   229   157 Energy-related economic activity (a)  (197)  273 
Option premiums (b)Option premiums (b)   1    6    1    11 Option premiums (b)   1    
Adjusted energy-related economic activityAdjusted energy-related economic activity  (43)  61   230   168 Adjusted energy-related economic activity  (196)  273 
Less: Economic activity realized, associated with the monetization of        
Less: Economic activity realized, associated with the monetization of certainLess: Economic activity realized, associated with the monetization of certain    
certain full-requirement sales contracts in 2010   12    66    33    144 full-requirement sales contracts in 2010      21 
Adjusted energy-related economic activity, net, pre-taxAdjusted energy-related economic activity, net, pre-tax $ (55) $ (5) $ 197  $ 24 Adjusted energy-related economic activity, net, pre-tax $ (196) $ 252 
                
Adjusted energy-related economic activity, net, after-taxAdjusted energy-related economic activity, net, after-tax $ (32) $ (3) $ 118  $ 14 Adjusted energy-related economic activity, net, after-tax $ (117) $ 150 

(a)See Note 14 to the Financial Statements for additional information.
(b)Adjustment for the net deferral and amortization of option premiums over the delivery period of the item that was hedged or upon realization.  Option premiums are recorded in "Wholesale energy marketing - Realized" and "Energy purchases - Realized" on the Statements of Income.

2013 Outlook

Excluding special items, PPL Energy Supply projects lower earnings in 20122013 compared with 2011,2012, primarily driven by lower energy margins as a result of lower energy and capacity prices, higher fuel costs, higher operation and maintenance expense, higher depreciation, and higher depreciation.  See "Overview"financing costs, partially offset by higher capacity prices and higher nuclear generation output despite scheduled outages for both Susquehanna units to implement a discussion on economic and market conditions.long-term solution to turbine blade issues.

Earnings in 2012future periods are subject to various risks and uncertainties.  See "Forward-Looking Information," the rest of this Item 2, and Note 10 to the Financial Statements in this Form 10-Q and "Item 1. Business" and "Item 1A. Risk Factors" in PPL Energy Supply's 20112012 Form 10-K for a discussion of the risks, uncertainties and factors that may impact future earnings.

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Statement of Income Analysis --

UnregulatedPennsylvania Gross EnergyDelivery Margins

Non-GAAP Financial MeasureDistribution

The following discussion includes financial information preparedMargins increased for the three months ended March 31, 2013 compared with 2012 primarily due to a $13 million favorable effect of mild weather in accordance with GAAP, as well2012 and a $19 million favorable effect of price, largely comprised of higher base rates, effective January 1, 2013 as a non-GAAP financial measure, "Unregulated Gross Energy Margins."  "Unregulated Gross Energy Margins" is a single financial performance measureresult of PPL Energy Supply's competitive energy non-tradingthe 2012 rate case and trading activities.  In calculating this measure, PPL Energy Supply's energy revenues, which include operating revenues associatedhigher volumes of $3 million.

Transmission

Margins increased for the three months ended March 31, 2013 compared with certain PPL Energy Supply businesses that are classified as discontinued operations, are offset by the cost of fuel, energy purchases, certain other operation and maintenance expenses,2012 primarily ancillary charges, gross receipts tax, which is recorded in "Taxes, other than income," and operating expenses associated with certain PPL Energy Supply businesses that are classified as discontinued operations.  This performance measure is relevant to PPL Energy Supply due to increased investment in plant and the volatility inrecovery of additional costs through 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 swings in unrealized gains and losses.  Such factors could result in gains or losses being recorded in either "Wholesale energy marketing" or "Energy purchases" on the Statements of Income.  This performance measure includes PLR revenues from energy sales to PPL Electric by PPL EnergyPlus, which are recorded in "Wholesale energy marketing to affiliate" revenue.  PPL Energy Supply excludes from "Unregulated Gross Energy Margins" energy-related economic activity, which includes the changes in fair value of positions used to economically hedge a portion of the economic value of PPL Energy Supply's competitive generation assets, full-requirement sales contracts and retail activities.  This economic value is subject to changes in fair value due to market price volatility of the input and output commodities (e.g., fuel and power) prior to the delivery period that was hedged.  Also included in this energy-related economic activity is the ineffective portion of qualifying cash flow hedges, the monetization of certain full-requirement sales contracts and premium amortization associated with options.  This economic activity is deferred, with the exception of the full-requirement sales contracts that were monetized, and included inFERC formula-based rates.

Unregulated Gross Energy Margins
Eastern U.S.
The change in non-trading margins for the period ended March 31, 2013 compared with 2012 was due to:
 
133104

 
"Unregulated Gross Energy Margins" over the delivery period that was hedged or upon realization.  This measure is not intended to replace "Operating Income," which is determined in accordance with GAAP, as an indicator of overall operating performance.  Other companies may use different measures to analyze and to report on the results of their operations.  PPL Energy Supply believes that "Unregulated Gross Energy Margins" provides another criterion to make investment decisions.  This performance measure is used, in conjunction with other information, internally by senior management and PPL's Board of Directors to manage PPL Energy Supply's operations, analyze actual results compared with budget and measure certain corporate financial goals used in determining variable compensation.

Reconciliation of Non-GAAP Financial Measures

The following table reconciles "Operating Income" to "Unregulated Gross Energy Margins" as defined by PPL Energy Supply for the periods ended June 30.

     2012 Three Months 2011 Three Months
     Unregulated       Unregulated      
     Gross Energy    Operating Gross Energy     Operating
     Margins Other (a) Income (b) Margins Other (a) Income (b)
                  
Operating Revenues                   
 Wholesale energy marketing                   
    Realized$ 1,075  $ 8 (c) $ 1,083  $ 716  $ 16 (c) $ 732 
    Unrealized economic activity     (458)(d)   (458)      (44)(d)   (44)
 Wholesale energy marketing                   
  to affiliate  17        17    4        4 
 Unregulated retail electric and gas  192    (12)    180    180    1     181 
 Net energy trading margins  10        10    10        10 
 Energy-related businesses     112     112       114     114 
   Total Operating Revenues  1,294    (350)    944    910    87     997 
                        
Operating Expenses                   
 Fuel  170    26 (e)   196    250    (42)(e)   208 
 Energy purchases                   
    Realized  617    18 (c)   635    150    76 (c)   226 
    Unrealized economic activity     (442)(d)   (442)      (109)(d)   (109)
 Energy purchases from affiliate            1        1 
 Other operation and maintenance  7    287     294    9    279     288 
 Depreciation     69     69       60     60 
 Taxes, other than income  7    10     17    7    9     16 
 Energy-related businesses     109     109       112     112 
   Total Operating Expenses  801    77     878    417    385     802 
Total$ 493  $ (427)  $ 66  $ 493  $ (298)  $ 195 

      2012 Six Months 2011 Six Months
      Unregulated       Unregulated      
      Gross Energy    Operating Gross Energy     Operating
      Margins Other (a) Income (b) Margins Other (a) Income (b)
                   
Operating Revenues                    
 Wholesale energy marketing                    
    Realized $ 2,279  $ 12 (c) $ 2,291  $ 1,738  $ 32 (c) $ 1,770 
    Unrealized economic activity      394 (d)   394       13 (d)   13 
 Wholesale energy marketing                    
  to affiliate   38        38    10        10 
 Unregulated retail electric and gas   406    (2)    404    323    5     328 
 Net energy trading margins   18        18    21        21 
 Energy-related businesses      208     208       224     224 
   Total Operating Revenues   2,741    612     3,353    2,092    274     2,366 
                         
Operating Expenses                    
 Fuel   385    22 (e)   407    534    (66)(e)   468 
 Energy purchases                    
    Realized   1,251    43 (c)   1,294    377    163 (c)   540 
    Unrealized economic activity      149 (d)   149       (127)(d)   (127)
 Energy purchases from affiliate   1        1    2        2 
 Other operation and maintenance   11    538     549    13    520     533 
 Depreciation      133     133       119     119 
 Taxes, other than income   16    19     35    14    18     32 
 Energy-related businesses      201     201       220     220 
   Total Operating Expenses   1,664    1,105     2,769    940    847     1,787 
 Discontinued Operations             12    (12)(f)   
Total $ 1,077  $ (493)  $ 584  $ 1,164  $ (585)  $ 579 

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(a)Represents amounts excluded from Margins.Three Months
(b)As reported on the Statements of Income.
(c)Baseload energy pricesRepresents energy-related economic activity as described in "Commodity Price Risk (Non-trading) - Economic Activity" within Note 14 to the Financial Statements.  For the three and six months ended June 30, 2012, "Wholesale energy marketing - Realized" and "Energy purchases - Realized" include net pre-tax losses of $12 million and $33 related to the monetization of certain full-requirement$ (125)
Coal prices (10)
Nuclear fuel prices (6)
Full-requirement sales contracts 5 
Intermediate and net pre-tax gainspeaking capacity prices 5 
Baseload capacity prices 6 
Intermediate and peaking Spark Spreads 14 
Ironwood acquisition which eliminated tolling expense 15 
Net economic availability of $1 millioncoal and $1 million related to the amortization of option premiums.  The three and six months ended June 30, 2011 include net pre-tax losses of $66 million and $144 million related to the monetization of certain full-requirement sales contracts and net pre-tax gains of $6 million and $11 million related to the amortization of option premiums.hydroelectric plants 32 
(d)OtherRepresents energy-related economic activity, which is subject to fluctuations in value due to market price volatility, as described in "Commodity Price Risk (Non-trading) - Economic Activity" within Note 14 to the Financial Statements. 5 
(e)TotalIncludes economic activity related to fuel as described in "Commodity Price Risk (Non-trading) - Economic Activity" within Note 14 to the Financial Statements.  The three and six months ended June 30, 2012, includes a pre-tax loss of $12 million related to coal contract modification payments.  The three and six months ended June 30, 2011 includes a pre-tax credit of $50 million for the spent nuclear fuel litigation settlement.
(f)Represents the net of certain revenues and expenses associated with certain businesses that are classified as discontinued operations.  These revenues and expenses are not reflected in "Operating Income" on the Statements of Income.

Changes in Non-GAAP Financial Measures

Unregulated Gross Energy Margins are generated through PPL Energy Supply's competitive non-trading and trading activities.  PPL Energy Supply's non-trading energy business is managed on a geographic basis that is aligned with its generation fleet.  The following table shows PPL Energy Supply's non-GAAP financial measure, Unregulated Gross Energy Margins, for the periods ended June 30, as well as the change between periods.  The factors that gave rise to the changes are described below the table.

   Three Months Six Months
   2012  2011  Change 2012  2011  Change
                    
Non-trading                  
 Eastern U.S. $ 407  $ 395  $ 12  $ 896  $ 972  $ (76)
 Western U.S.   76    88    (12)   163    171    (8)
Net energy trading   10    10       18    21    (3)
Total $ 493  $ 493  $  $ 1,077  $ 1,164  $ (87)

Eastern U.S.      
       
The changes in non-trading margins for the periods ended June 30, 2012 compared with 2011 were due to:
       
  Three Months Six Months
       
Baseload energy and capacity prices (a) $ (51) $ (137)
Intermediate and peaking energy and capacity (b)   (5)   (26)
Full-requirement sales contracts   (9)   (14)
Impact of non-core generation facilities sold in the first quarter of 2011      (12)
Ironwood Acquisition which eliminates tolling expense (c)   13    13 
Net coal and hydroelectric unit availability (d)   9    19 
Nuclear generation volume (e)   57    82 
Other   (2)   (1)
  $ 12  $ (76)

(a)Energy prices and capacity prices were lower in both periods of 2012.
(b)Capacity prices were lower in both periods of 2012.
(c)See Note 8 to the Financial Statements for additional information.
(d)$Coal unit availability was higher in both periods allowing the capture of additional margins.
(e)For the three and six month periods, volumes were higher due to a shorter outage period for blade inspections and an uprate in the third quarter of 2011.  For the six month period, volumes were also higher due to an unplanned outage in March 2011. (59)

Western U.S.

Non-trading margins for the three and six months ended June 30, 2012,March 31, 2013 compared with the same periods in 20112012 were lower primarily due to $14$43 million related to the bankruptcy of SMGT.
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lower wholesale prices, partially offset by $12 million of higher wholesale volumes.

Other Operation and Maintenance     
       
The increase (decrease) in other operation and maintenance expense for the periods ended June 30, 2012 compared with 2011 was due to:
   
  Three Months Six Months
       
Susquehanna nuclear plant costs (a)$ 11  $ 17 
Uncollectible accounts (b)     11 
Costs at Western fossil and hydroelectric plants  (3)   (5)
Trademark royalties (c)  (8)   (17)
Corporate service costs (d)  7    14 
Other  (1)   (4)
Total$ 6  $ 16 
Net Energy Trading Margins

Net energy trading margins for the three months ended March 31, 2013 compared with 2012 decreased as a result of lower margins of $16 million on gas positions due to higher prices.

Utility Revenues
The increase (decrease) in utility revenues for the period ended March 31, 2013 compared with 2012 was due to:
Three Months
Domestic:
PPL Electric (a)$ 55 
LKE (b) 95 
Total Domestic 150 
U.K.:
Price (c) 57 
Volume 5 
Recovery of allowed revenues 5 
Foreign currency exchange rates 10 
Other (d) 9 
Total U.K. 86 
Total$ 236 

(a)Primarily due to refueling outage costs, payroll-related costs and timing of projects.See "Pennsylvania Gross Delivery Margins" for further information.
(b)In October 2011,See "Kentucky Gross Margins" for further information.
(c)Due to price increases effective April 1, 2012.
(d)This increase is primarily due to $8 million of third-party engineering work, which is offset by expenses in "Other operation and maintenance".

Other Operation and Maintenance
The increase (decrease) in other operation and maintenance for the period ended March 31, 2013 compared with 2012 was due to:
Three Months
Domestic:
Uncollectible accounts (a)$ (16)
LKE coal plant outages (b) (14)
Costs at eastern fossil and hydroelectric plants (c) (11)
Pension and postretirement costs
Other
U.K.:
Third-party engineering work (d)
Network maintenance expense (e)
Employee related expenses (4)
Severance compensation (4)
Other (2)
Total$ (30)

(a)The decrease is primarily due to SMGT filedfiling for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code.  The increase for the six-month period reflects anCode in 2011.  $11 million increaseof damages billed to a reserve on unpaid amounts.SMGT were fully reserved in 2012.
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(b)The decrease is primarily due to the timing and scope of scheduled outages.
(c)In 2011, PPL Energy Supply was charged trademark royaltiesThe decrease is primarily due to Brunner Island Unit 3 outage costs of $15 million in 2012 compared with no major outage costs in 2013, partially offset by an affiliate.  The agreement was terminated December 31, 2011.$3 million of additional costs due to the Ironwood Acquisition.
(d)PrimarilyThese expenses are offset by revenues reflected in "Utility" on the Statements of Income.
(e)The increase is primarily due to systems-related costs and timing of projects.higher tree trimming expense.

Depreciation      
       
The increase (decrease) in depreciation expense for the periods ended June 30, 2012 compared with 2011 was due to:
       
  Three Months Six Months
       
Additions to PP&E $ 5  $ 10 
Ironwood Acquisition   4    4 
Total $ 9  $ 14 
Depreciation
The increase (decrease) in depreciation for the period ended March 31, 2013 compared with 2012 was due to:
Three Months
Additions to PP&E$ 21 
LKE lower depreciation rates effective January 1, 2013 (5)
Ironwood Acquisition 6 
Other (2)
Total$ 20 

Other Income (Expense) - net

The $8$139 million decreaseincrease in other income (expense) - net for the sixthree months ended June 30, 2012March 31, 2013 compared with 20112012 was primarily due to a $6$119 million decreaseof realized and unrealized gains on economic foreign currency contracts compared with losses in earnings on securities in the NDT funds.2012 of $18 million.

See Note 12 to the Financial Statements for further details.

Interest Expense      
        
The increase (decrease) in interest expense for the periods ended June 30, 2012 compared with 2011 was due to:
        
       
        
  Three Months Six Months
        
Interest rates (a) $ (5) $ (10)
Debt balances   (2)   (5)
Ironwood Acquisition (Note 8)   4    4 
Other   (5)   (7)
Total $ (8) $ (18)
Interest Expense
The increase (decrease) in interest expense for the period ended March 31, 2013 compared with 2012 was due to:
Three Months
Long-term debt interest expense (a)$ 14 
Ironwood Acquisition (b) 4 
Other 3 
Total$ 21 

(a)Long-term weighted average ratesThe increase was primarily due to PPL Capital Funding's June 2012 issuance of 5.88% at June 30,$400 million, 4.2% Senior Notes due 2022 and October 2012 comparedissuance of $400 million, 3.5% Senior Notes due 2022.  Also, contributing to the increase was higher accretion expense on WPD index linked bonds and interest on WPD (East Midlands') April 2012 issuance of £100 million, 5.25% Senior Notes due 2023.
(b)The increase was due to financings associated with 6.24% at June 30, 2011.the Ironwood Acquisition.  

Income Taxes      
       
The increase (decrease) in income taxes for the periods ended June 30, 2012 compared with 2011 was due to:
       
    
  Three Months Six Months
       
Higher (lower) pre-tax book income $ (50) $ 2 
State valuation allowance adjustments (a)      (6)
State deferred tax rate change (b)      (11)
Total $ (50) $ (15)

Income Taxes
The increase (decrease) in income taxes for the period ended March 31, 2013 compared with 2012 was due to:
Three Months
Lower pre-tax book income$ (119)
Foreign tax reserve adjustments (3)
Net operating loss carryforward adjustments (a) 6 
State deferred tax rate change (b) 11 
Other (3)
Total$ (108)
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(a)In February 2011,During the Pennsylvania Departmentthree months ended March 31, 2012, PPL recorded adjustments to deferred taxes related to net operating loss carryforwards of Revenue issued interpretive guidanceLKE based on the treatment of bonus depreciation for Pennsylvania income tax purposes.  In accordance with Corporation Tax Bulletin 2011-01, Pennsylvania allows 100% bonus depreciation for qualifying assets in the same year bonus depreciation is allowed for Federal tax purposes.  Due to the decrease in projected taxable income related to bonus depreciation, PPL Energy Supply recorded state deferred income tax expense during the six months ended June 30, 2011 related to valuation allowances.return adjustments.
(b)During the sixthree months ended June 30,March 31, 2012, PPL Energy Supply recorded an adjustmentadjustments related to state deferred tax liabilities.

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

Financial Condition
       
Liquidity and Capital Resources
       
PPL Energy Supply had the following at:
       
  June 30, 2012 December 31, 2011
       
Cash and cash equivalents $ 446  $ 379 
Short-term debt $ 520  $ 400 
Financial Condition
Liquidity and Capital Resources
PPL had the following at:
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  March 31, 2013 December 31, 2012
       
Cash and cash equivalents $ 853  $ 901 
Short-term debt $ 1,061  $ 652 

At March 31, 2013, $335 million of cash and cash equivalents were denominated in GBP.  If these amounts would be remitted as dividends, PPL may be subject to additional U.S. taxes, net of allowable foreign tax credits.  Historically, dividends paid by foreign subsidiaries have been distributions of the current year's earnings.  See Note 5 to the Financial Statements in PPL's 2012 Form 10-K for additional information on undistributed earnings of WPD.

The $67$48 million increasedecrease in PPL Energy Supply'sPPL's cash and cash equivalents position was primarily the net result of:

·      contributions from Member of $472 million;
·capital expenditures of $828 million;
·the payment of $210 million of common stock dividends;
·a $52 million net increase in restricted cash and cash equivalents; and
·$24 million of contract adjustment payments; partially offset by
·proceeds of $432 million from the issuance of long-term debt, net of costs;
·net increase in short-term debt of $416 million; and
·net cash provided by operating activities of $308 million;$244 million.

PPL's cash provided by operating activities decreased by $484 million for the three months ended March 31, 2013 compared with 2012.  The decrease was primarily due to:

·a $336 million increase in cash used by components of working capital (primarily due to changes in accounts receivable of $219 million resulting from higher base rates and favorable effects of weather and counterparty collateral of $129 million); and
·a net decrease$221 million increase in note receivable from affiliate of $198 million;defined benefit plans funding; partially offset by
·a net$72 million increase in short-term debt of $120 million;
·distributions to Member of $657 million;
·capital expenditures of $316 million; and
·the Ironwood Acquisitionnet income, when adjusted for $84 million, net of cash acquired.non-cash components.

PPL Energy Supply's cash provided by operating activitiesCapital expenditures increased by $120$146 million for the sixthree months ended June 30, 2012,March 31, 2013 compared with 2011.  This was2012, primarily due to a $68 million decrease in defined benefit plan fundingthe Susquehanna-Roseland transmission project and a $104 million increase in cash from componentsenvironmental projects at Mill Creek and Ghent, and construction of working capital (primarily due to changes in counterparty collateral, partially offset by changes in accounts receivable, unbilled revenue and accrued taxes).Cane Run Unit 7.

Credit Facilities

PPL Energy Supply maintains credit facilities to provide liquidity and to backstop commercial paper issuances.  At June 30, 2012, PPL Energy Supply'sMarch 31, 2013, PPL's total committed borrowing capacity under its credit facilities and the use of this borrowing capacity were:

         Letters of   
         Credit Issued   
       and  
   Committed   Commercial Unused
   Capacity Borrowed Paper Backstop Capacity
              
Syndicated Credit Facility $ 3,000     $ 662  $ 2,338 
Letter of Credit Facility   200   n/a   128    72 
Total PPL Energy Supply Credit Facilities (a) $ 3,200     $ 790  $ 2,410 
         Letters of   
         Credit Issued   
         and   
   Committed   Commercial Unused
   Capacity Borrowed Paper Backup Capacity
          
PPL Energy Supply Credit Facilities (a) $ 3,200     $ 764  $ 2,436 
PPL Electric Credit Facilities (b)   400       126    274 
LG&E Syndicated Credit Facility   500       70    430 
KU Credit Facilities (c)   598       313    285 
 Total Domestic Credit Facilities (d) $ 4,698     $ 1,273  $ 3,425 
              
PPL WW Syndicated Credit Facility (e) £ 210  £ 109   n/a £ 101 
WPD (South West) Syndicated Credit Facility   245      n/a   245 
WPD (East Midlands) Syndicated Credit Facility (f)   300    65       235 
WPD (West Midlands) Syndicated Credit Facility   300          300 
 Total WPD Credit Facilities (g) £ 1,055  £ 174     £ 881 

(a)In February 2013, PPL Energy Supply extended a letter of credit facility expiration date from March 2013 and, effective April 2013, the capacity was reduced to $150 million.
(b)Committed capacity includes a $100 million credit facility related to an asset-backed commercial paper program through which PPL Electric obtains financing by selling and contributing its eligible accounts receivable and unbilled revenue to a special purpose, wholly owned subsidiary on an ongoing basis.  The subsidiary pledges these assets to secure loans of up to an aggregate of $100 million from a commercial paper conduit sponsored by a financial institution.  At March 31, 2013, based on accounts receivable and unbilled revenue pledged, the amount available for borrowing under the facility was $100 million.
(c)In May 2013, KU extended its $198 million letter of credit facility to May 2016.
(d)The commitments under PPL Energy Supply'sPPL's domestic credit facilities are provided by a diverse bank group, with no one bank and its affiliates providing an aggregate commitment of more than 11%9% of the total committed capacity.
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(e)In December 2012, the PPL WW syndicated credit facility that was set to expire in January 2013 was replaced and the capacity was increased from £150 million.  The amount borrowed at March 31, 2013 was a USD-denominated borrowing of $171 million, which equated to £109 million at the time of borrowing and bore interest at 1.9034%.
(f)The amount borrowed at March 31, 2013 was a GBP-denominated borrowing of £65 million, which equated to $99 million and bore interest at 1.30%.
(g)At March 31, 2013, the USD equivalent of unused capacity under WPD's committed credit facilities was $1.3 billion.  The commitments under WPD's credit facilities are provided by a diverse bank group with no one bank providing more than 13% of the total committed capacity.

See Note 7 to the Financial Statements for further discussion of PPL Energy Supply'sPPL's credit facilities.

Commercial Paper

In April 2012, PPL Energy Supply increased the capacity of itsmaintains a commercial paper program from $500 millionfor up to $750 million to provide an additional financing source to fund its short-term liquidity needs, if and when necessary.  Commercial paper issuances are supported by PPL Energy Supply's Syndicated Credit Facility.  At June 30,March 31, 2013 and December 31, 2012, PPL Energy Supply had $520$481 million and $356 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheets, at weighted-average interest rates of 0.38% and 0.50%.

PPL Electric maintains a commercial paper program for up to $300 million to provide an additional financing source to fund its short-term liquidity needs, if and when necessary.  Commercial paper issuances are supported by PPL Electric's Syndicated Credit Facility.  At March 31, 2013, PPL Electric had $125 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheet, at a weighted-average interest rate of approximately 0.48%0.39%.
137

Long-term Debt Securities  PPL Electric had no commercial paper outstanding at December 31, 2012.

In April 2013, LG&E and KU each increased the capacity of their commercial paper programs from $250 million to $350 million to provide an additional financing source to fund their short-term liquidity needs, if and when necessary.  Commercial paper issuances are supported by LG&E's and KU's Syndicated Credit Facilities.  At March 31, 2013 and December 31, 2012, an indirect, wholly owned subsidiaryLG&E had $70 million and $55 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheets, at weighted-average interest rates of 0.36% and 0.42%.  At March 31, 2013 and December 31, 2012, KU had $115 million and $70 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheets, at weighted-average interest rates of 0.36% and 0.42%.

Long-term Debt and Equity Securities

See "Overview" above for information regarding equity forward agreements and the 2010 Equity Units.

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

In addition, PPL has reduced the Ironwood Acquisition.  See Note 8estimate of its plans to issue new shares of common stock in 2013 by $100 million from the Financial Statements for information on$350 million reported in its 2012 Form 10-K.

Common Stock Dividends

In February 2013, PPL declared its quarterly common stock dividend, payable April 1, 2013, at 36.75 cents per share (equivalent to $1.47 per annum).  Future dividends, declared at the transaction and the debt of PPL Ironwood, LLC assumed through consolidation as partdiscretion of the acquisition.Board of Directors, will be dependent upon future earnings, cash flows, financial and legal requirements and other factors.

Rating Agency Actions

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

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

As a result of the passage of the Dodd-Frank Act,  PPL Energy Supply is limiting its credit rating disclosure to a description of the actions taken by the rating agencies with respect to PPL Energy Supply's ratings, but without stating what ratings have been assigned to PPL Energy Supply or its subsidiaries, or their securities.  The ratings assigned by the rating agencies to PPL Energy Supply and its subsidiaries and their respective securities may be found, without charge, on eachhave no credit rating triggers that would result in the reduction of access to capital markets or the respective rating agencies' websites, which ratings together with all other information contained on such rating agency websites is, hereby, explicitly not incorporated by reference in this report.acceleration of maturity dates of outstanding debt.

The rating agencies took the following actions related to PPL Energy Supply and its subsidiaries.subsidiaries during 2013:

In January 2012, S&P affirmedFebruary 2013, Moody's upgraded its rating, from B2 to Ba1, and revised itsthe outlook from under review to stable for PPL Montana's Pass Through Certificates due 2020.Ironwood.

Following the announcementIn March 2013, S&P, Moody's and Fitch assigned ratings of the then-pending acquisition of AES Ironwood, L.L.C. in February 2012, the rating agencies took the following actions:BB+, Ba1 and BB+ to PPL Capital Funding's $450 million 5.90% Junior Subordinated Notes due 2073.  Fitch also assigned a stable outlook to these notes.

·In March 2012, Moody's placed AES Ironwood, L.L.C.'s senior secured bonds under review for possible ratings upgrade.

·In April 2012, S&P affirmed the rating of AES Ironwood, L.L.C.'s senior secured bonds.

In May 2012, Fitch downgraded its rating and revised its outlook for PPL Montana's Pass Through Certificates due 2020.
In April 2013, Fitch affirmed the BBB- rating and stable outlook at PPL Montana.

Ratings Triggers

PPL and PPL Energy Supply hashave various derivative and non-derivative contracts, including contracts for the sale and purchase of electricity and fuel, commodity transportation and storage, tolling agreements and interest rate and foreign currency instruments, which contain provisions that require PPL and PPL Energy Supply to post additional collateral or permit the counterparty to terminate the contract, if PPL's or PPL Energy Supply's credit rating were to fall below investment grade.  See Note 14 to the Financial Statements for a discussion of "Credit Risk-Related Contingent Features," including a discussion of the potential additional collateral that would have been required for derivative contracts in a net liability position at June 30, 2012.  At June 30, 2012, if PPL Energy Supply's credit rating had been below investment grade, PPL Energy Supply would have been required to prepay or post an additional $427 million of collateral to counterparties for both derivative and non-derivative commodity and commodity-related contracts used in its generation, marketing and trading operations and interest rate contracts.March 31, 2013.

For additional information on PPL Energy Supply'sPPL's liquidity and capital resources, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," in PPL Energy Supply's 2011PPL's 2012 Form 10-K.
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Risk Management

Market Risk

See Notes 13 and 14 to the Financial Statements for information about PPL Energy Supply'sPPL's risk management objectives, valuation techniques and accounting designations.

The forward-looking information presented below provides estimates of what may occur in the future, assuming certain adverse market conditions and model assumptions.  Actual future results may differ materially from those presented.  These disclosures are not precise indicators of expected future losses, but only indicators of possible losses under normal market conditions at a given confidence level.

Commodity Price Risk (Non-trading)

PPL Energy Supply segregates its non-trading activities into two categories:  hedge activity and economic activity.  Transactions that are accounted for as hedge activity qualify for hedge accounting treatment.  The economic activity category includes transactions that address a specific risk, but were not eligible for hedge accounting or for which hedge accounting was not elected.  This activity includes the changes in fair value of positions used to hedge a portion of the economic value of PPL Energy Supply'sPPL's competitive generation assets and full-requirement sales contracts 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.  The fair value of economic positions at June 30, 2012 and December 31, 2011 was a net asset/(liability) of $796 million and $(63) million.  The change in fair value is largely attributable to the dedesignation of cash flow hedges that are now classified as economic hedges.  See Note 14 to the Financial Statements for additional information.

To hedge the impact of market price volatility on PPL Energy Supply'sPPL's energy-related assets, liabilities and other contractual arrangements, PPL Energy Supply both sells and purchases physical energy at the wholesale level under FERC market-based tariffs throughout the U.S. and enters into financial exchange-traded and over-the-counter contracts.  PPL Energy Supply'sPPL's non-trading commodity derivative contracts range in maturity through 2019.

The following table sets forth the changes in the net fair value of PPL Energy Supply's non-trading commodity derivative contracts for the periods ended June 30.March 31.  See Notes 13 and 14 to the Financial Statements for additional information.

  Gains (Losses)
  Three Months Six Months
  2012  2011  2012  2011 
             
Fair value of contracts outstanding at the beginning of the period $ 1,215  $ 998  $ 1,082  $ 958 
Contracts realized or otherwise settled during the period   (261)   (83)   (540)   (135)
Fair value of new contracts entered into during the period (a)   13    32    12    15 
Other changes in fair value   (6)   (51)   407    58 
Fair value of contracts outstanding at the end of the period $ 961  $ 896  $ 961  $ 896 
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        Gains (Losses)
    Three Months
      2013  2012 
             
Fair value of contracts outstanding at the beginning of the period       $ 473  $ 1,082 
Contracts realized or otherwise settled during the period         (137)   (279)
Fair value of new contracts entered into during the period (a)         9    (1)
Other changes in fair value         (116)   413 
Fair value of contracts outstanding at the end of the period       $ 229  $ 1,215 

(a)Represents the fair value of contracts at the end of the quarter of their inception.

The following table segregates the net fair value of non-trading commodity derivative contracts at June 30, 2012,March 31, 2013, based on the level of observability of the information used to determine the fair value.

  Net Asset (Liability)  Net Asset (Liability)
  Maturity     Maturity    Maturity     Maturity  
  Less Than Maturity Maturity in Excess Total Fair  Less Than Maturity Maturity in Excess Total Fair
  1 Year 1-3 Years 4-5 Years of 5 Years Value  1 Year 1-3 Years 4-5 Years of 5 Years Value
Source of Fair ValueSource of Fair Value          Source of Fair Value          
Prices based on significant other observable inputs $ 703  $ 237  $ (21) $ 8  $ 927 
Prices based on significant unobservable inputs   21    9    4       34 
Prices based on significant observable inputs (Level 2)Prices based on significant observable inputs (Level 2) $ 238  $ (21) $ (8) $ 6  $ 215 
Prices based on significant unobservable inputs (Level 3)Prices based on significant unobservable inputs (Level 3)   (1)   12    3       14 
Fair value of contracts outstanding at the end of the periodFair value of contracts outstanding at the end of the period $ 724  $ 246  $ (17) $ 8  $ 961 Fair value of contracts outstanding at the end of the period $ 237  $ (9) $ (5) $ 6  $ 229 

PPL Energy Supply sells electricity, capacity and related services and buys fuel on a forward basis to hedge the value of energy from its generation assets.  If PPL Energy Supply were unable to deliver firm capacity and energy or to accept the delivery of fuel under its agreements, under certain circumstances it could be required to pay liquidating damages.  These damages couldwould be based on the difference between the market price and the contract price of the commodity.  Depending on price changes in the wholesale energy markets, such damages could be significant.  Extreme weather conditions, unplanned power plant outages, transmission disruptions, nonperformance by counterparties (or their own counterparties) with which it
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has energy contracts and other factors could affect PPL Energy Supply'sPPL's ability to meet its obligations, or cause significant increases in the market price of replacement energy.  Although PPL Energy Supply attempts to mitigate these risks, there can be no assurance that it will be able to fully meet its firm obligations, that it will not be required to pay damages for failure to perform, or that it will not experience counterparty nonperformance in the future.  In connection with its bankruptcy proceedings, a significant counterparty, SMGT, had been purchasing lower volumes of electricity than prescribed in the contract and effective April 1, 2012 the contract was terminated.  PPL Energy Supply cannot predict the prices or other terms on which it will be able to market to third parties the power that SMGT will not purchase from PPL EnergyPlus due to the termination of this contract.  See Note 10 to the Financial Statements for additional information.

Commodity Price Risk (Trading)

PPL Energy Supply'sPPL's trading commodity derivative contracts range in maturity through 2017.  The following table sets forth changes in the net fair value of PPL Energy Supply's trading commodity derivative contracts for the periods ended June 30.March 31.  See Notes 13 and 14 to the Financial Statements for additional information.

 Gains (Losses)     Gains (Losses)
 Three Months Six Months   Three Months
 2012  2011  2012  2011      2013  2012 
                
Fair value of contracts outstanding at the beginning of the period $ 2  $ 7  $ (4) $ 4      $ 29  $ (4)
Contracts realized or otherwise settled during the period  (1)  1   (1)  3       (2)  
Fair value of new contracts entered into during the period (a)  (1)  5   5   8        (12)   6 
Other changes in fair value   17    2    17    
Fair value of contracts outstanding at the end of the period $ 17  $ 15  $ 17  $ 15      $ 15  $ 2 

(a)Represents the fair value of contracts at the end of the quarter of their inception.

Unrealized gains of approximately $1 million will be reversed over the next three months as the transactions are realized.

The following table segregates the net fair value of trading commodity derivative contracts at June 30, 2012,March 31, 2013, based on the level of observability of the information used to determine the fair value.

 Net Asset (Liability) Net Asset (Liability)
 Maturity     Maturity   Maturity     Maturity  
 Less Than Maturity Maturity in Excess Total Fair Less Than Maturity Maturity in Excess Total Fair
 1 Year 1-3 Years 4-5 Years of 5 Years Value 1 Year 1-3 Years 4-5 Years of 5 Years Value
Source of Fair Value                    
Prices based on significant other observable inputs $ 8  $ 8  $ 1     $ 17 
Prices quoted in active markets for identical instruments (Level 1) $ 1        $ 1 
Prices based on significant observable inputs (Level 2)   5  $ 9          14 
Fair value of contracts outstanding at the end of the period $ 8  $ 8  $ 1     $ 17  $ 6  $ 9        $ 15 

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VaR Models

A VaR model is utilized to measure commodity price risk in domesticunregulated gross energy margins for the non-trading and trading portfolios.  VaR is a statistical model that attempts to estimate the value of potential loss over a given holding period under normal market conditions at a given confidence level.  VaR is calculated using a Monte Carlo simulation technique based on a five-day holding period at a 95% confidence level.  Given the company's conservativedisciplined hedging program, the non-trading VaR exposure is expected to be limited in the short-term.  The VaR for portfolios using end-of-month results for the periodperiods was as follows.

   Trading VaR Non-Trading VaR
   Six Months Twelve Months Six Months Twelve Months
   Ended Ended Ended Ended
   June 30, December 31, June 30, December 31,
   2012  2011  2012  2011 
95% Confidence Level, Five-Day Holding Period            
 Period End $ 5  $ $11  $ 6 
 Average for the Period   2        5 
 High   5     11    7 
 Low   1        4 
   Trading VaR Non-Trading VaR
   Three Months Three Months
   Ended Ended
   March 31, March 31,
   2013  2013 
95% Confidence Level, Five-Day Holding Period      
 Period End $ 6  $
 Average for the Period   5   
 High   6   
 Low   3   

The trading portfolio includes all speculativeproprietary trading positions, regardless of the delivery period.  All positions not considered speculativeproprietary 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
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absence of reliable spot and forward markets.  The fair value of the non-trading and trading FTR positions was insignificant at June 30, 2012.March 31, 2013.

Interest Rate Risk

PPL Energy Supply and its subsidiaries issue debt to finance their operations, which exposes them to interest rate risk.  PPL and PPL Energy Supply utilizeutilizes various financial derivative instruments to adjust the mix of fixed and floating interest rates in PPL Energy Supply'sits debt portfolio, adjust the duration of its debt portfolio and lock in benchmark interest rates in anticipation of future financing, when appropriate.  Risk limits under the risk management program are designed to balance risk exposure to volatility in interest expense and changes in the fair value of PPL Energy Supply'sPPL's debt portfolio due to changes in the absolute level of interest rates.  PPL Energy Supply had no interest rate hedges outstanding at June 30, 2012.

At June 30, 2012, PPL Energy Supply'sMarch 31, 2013, PPL's potential annual exposure to increased interest expense, based on a 10% increase in interest rates, was not significant.

PPL Energy Supply is also exposed to changes in the fair value of its domestic and international debt portfolio.portfolios.  PPL Energy Supply estimated that a 10% decrease in interest rates at June 30, 2012March 31, 2013 would increase the fair value of its debt portfolio by $56$563 million.

At March 31, 2013, PPL had the following interest rate hedges outstanding:

         Effect of a
      Fair Value, 10% Adverse
    Exposure Net - Asset Movement
   Hedged (Liability) (a)  in Rates (b)
Cash flow hedges         
 Interest rate swaps (c) $ 1,148  $ 12  $ (35)
 Cross-currency swaps (d)   1,262    82    (171)
Economic activity         
 Interest rate swaps (e)   179    (55)   (3)

(a)Includes accrued interest, if applicable.
(b)Effects of adverse movements decrease assets or increase liabilities, as applicable, which could result in an asset becoming a liability.  Sensitivities represent a 10% adverse movement in interest rates, except for cross-currency swaps which also includes foreign currency exchange rates.
(c)PPL utilizes various risk management instruments to reduce its exposure to the expected future cash flow variability of its debt instruments.  These risks include exposure to adverse interest rate movements for outstanding variable rate debt and for future anticipated financing.  While PPL is exposed to changes in the fair value of these instruments, any changes in the fair value of such cash flow hedges are recorded in equity or as regulatory assets or liabilities, if recoverable through regulated rates.  The changes in fair value of these instruments are then reclassified into earnings in the same period during which the item being hedged affects earnings.  The positions outstanding at March 31, 2013 mature through 2043.
(d)PPL utilizes cross-currency swaps to hedge the interest payments and principal of WPD's U.S. dollar-denominated senior notes.  While PPL is exposed to changes in the fair value of these instruments, any change in the fair value of these instruments is recorded in equity and reclassified into earnings in the same period during which the item being hedged affects earnings.  The positions outstanding at March 31, 2013 mature through 2028.
(e)PPL utilizes various risk management instruments to reduce its exposure to the expected future cash flow variability of its debt instruments.  These risks include exposure to adverse interest rate movements for outstanding variable rate debt and for future anticipated financing.  While PPL is exposed to changes in the fair value of these instruments, any realized changes in the fair value of such economic positions are recoverable through regulated rates and any subsequent changes in fair value of these derivatives are included in regulatory assets or liabilities.  The positions outstanding at March 31, 2013 mature through 2033.
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Foreign Currency Risk

PPL is exposed to foreign currency risk, primarily through investments in U.K. affiliates.  In addition, PPL's domestic operations may make purchases of equipment in currencies other than U.S. dollars.

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

PPL had the following foreign currency hedges outstanding March 31, 2013:
       Effect of a
       10%
       Adverse
       Movement
       in Foreign
     Fair Value, Currency
   Exposure Net - Asset Exchange
   Hedged (Liability) Rates (a)
           
Net investment hedges (b) £ 162  $ 15  $ (25)
Economic activity (c)   1,175    78    (167)

(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 at March 31, 2013 mature through 2013.  Excludes the amount of an intercompany loan classified as a net investment hedge.  See Note 14 to the Financial Statements for additional information.
(c)To economically hedge the translation of expected income denominated in GBP to U.S. dollars, PPL enters into a combination of average rate forwards and average rate options to sell GBP.  The forwards and options outstanding at March 31, 2013 mature through 2015.

NDT Funds - Securities Price Risk

In connection with certain NRC requirements, PPL Susquehanna maintains trust funds to fund certain costs of decommissioning the PPL Susquehanna nuclear plant (Susquehanna).  At June 30, 2012,March 31, 2013, these funds were invested primarily in domestic equity securities and fixed-rate, fixed-income securities and are reflected at fair value on the Balance Sheet.  The mix of securities is designed to provide returns sufficient to fund Susquehanna's decommissioning and to compensate for inflationary increases in decommissioning costs.  However, the equity securities included in the trusts are exposed to price fluctuation in equity markets, and the values of fixed-rate, fixed-income securities are primarily exposed to changes in interest rates.  PPL actively monitors the investment performance and periodically reviews asset allocation in accordance with its NDTnuclear decommissioning trust policy statement.  At June 30, 2012,March 31, 2013, a hypothetical 10% increase in interest rates and a 10% decrease in equity prices would have resulted in an estimated $47$55 million reduction in the fair value of the trust assets.  See Notes 13 and 17 to the Financial Statements for additional information regarding the NDT funds.

Credit Risk

See Notes 11, 13 and 14 to the Financial Statements in this Form 10-Q and "Risk Management - Energy Marketing & Trading and Other - Credit Risk" in PPL Energy Supply's 2011PPL's 2012 Form 10-K for additional information.

Foreign Currency Translation

The value of the British pound sterling fluctuates in relation to the U.S. dollar.  Changes in this exchange rate resulted in a foreign currency translation loss of $256 million for the three months ended March 31, 2013, which primarily reflected a $696 million decrease to PP&E and goodwill offset by a decrease of $440 million to net liabilities.  Changes in this exchange rate resulted in a foreign currency translation gain of $76 million for the three months ended March 31, 2012, which primarily reflected a $188 million increase to PP&E and goodwill offset by an increase of $112 million to net liabilities.  The impact of foreign currency translation is recorded in AOCI.

Related Party Transactions

PPL Energy Supply is not aware of any material ownership interests or operating responsibility by senior management of PPL, PPL Energy Supply, PPL Electric, LKE, LG&E or KU in outside partnerships, including leasing transactions with variable interest entities or other entities doing business with PPL Energy Supply.  See Note 11 to the Financial Statements for additional information on related party transactions.PPL.

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Acquisitions, Development and Divestitures

PPL from time to time evaluates opportunities for potential acquisitions, divestitures and development projects.  Development projects are continuously reexamined based on market conditions and other factors to determine whether to proceed with the projects, sell, cancel or expand them, execute tolling agreements or pursue other options.  See Note 8 to the Financial Statements for information on the more significant activities, including the April 2012 Ironwood Acquisition.activities.

Environmental Matters

Extensive federal, state and local environmental laws and regulations are applicable to PPL Energy Supply'sPPL's air emissions, water discharges and the management of hazardous and solid waste, amongas well as other areas; and the costsaspects of PPL's business.  The cost of compliance or alleged non-compliance cannot be predicted with certainty but could be material.  In addition, costcosts may increase significantly if the requirements or scope of environmental laws or regulations, or similar rules, are expanded or changed by the relevant regulatory agencies.  Costs may take the form of increased capital expenditures or operating and maintenance expenses;expenses, monetary fines, penalties or other restrictions.  Many of these environmental law considerations are also applicable to the operations of key suppliers, or customers, such as coal producers and industrial power users, and may impact the costs offor their products or their demand for PPL's services.

Physical effects associated with climate change could include the impact of changes in weather patterns, such as storm frequency and intensity, and the resultant potential damage to PPL's generation assets, electricity transmission and distribution systems, as well as impacts on customers.  In addition, changed weather patterns could potentially reduce annual rainfall in areas where PPL Energy Supply's services.  has hydro generating facilities or where river water is used to cool its fossil and nuclear powered generators.  PPL cannot currently predict whether its businesses will experience these potential climate change-related risks or estimate the potential cost of their related consequences.

The following is a discussion of the more significant environmental matters.

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) under existing solid waste regulations.  A final rulemaking is currently expected before the end of 2015.  However, the timing of the final regulations could be accelerated by certain litigation that could require the EPA to issue its regulations sooner.  Regulations could impact handling, disposal and/or beneficial use of CCRs.  The financial impact could be material if CCRs are regulated as hazardous waste, and significant if regulated as non-hazardous, in accordance with the proposed rule.

Effluent Limitation Guidelines
On April 19, 2013, the EPA issued 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 handling and metal cleaning wastes, as well as new limits for scrubber wastewater, gasification wastewater and landfill leachate.  The proposal contains several alternative approaches, some of which could significantly impact PPL's coal-fired plants.  PPL will work with industry groups to comment on the proposed regulation.  The final regulation is expected in May 2014.  At the present time, PPL is unable to predict the outcome of this matter or estimate a range of reasonably possible costs, but the costs could be significant.

316(b) Cooling Water Intake Structure Rule
In April 2011, the EPA published a draft regulation under Section 316(b) of the Clean Water Act, which regulates cooling water intakes for power plants.  The draft rule has two provisions: one requires installation of Best Technology Available (BTA) to reduce mortality of aquatic organisms that are pulled into the plant cooling water system (entrainment), and the second imposes standards for reduction of mortality of aquatic organisms trapped on water intake screens (impingement).  A final rule is expected in June 2013.  The proposed regulation would apply to nearly all PPL-owned steam electric plants in Pennsylvania, Kentucky, and Montana, potentially even including those equipped with closed-cycle cooling systems.  PPL's compliance costs could be significant, especially if the final rule requires closed-cycle systems at plants that do not currently have them or conversions of once-through systems to closed-cycle.
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GHG Regulations
In 2013, the EPA is expected to finalize limits on GHG emissions from new power plants and to begin working on a proposal for such emissions from existing power plants.  The EPA's proposal on GHG emissions from new power plants would effectively preclude construction of any coal-fired plants and could even be difficult for new gas-fired plants to meet.  With respect to existing power plants, the impact could be significant, depending on the structure and stringency of the final rule.  PPL, along with others in the industry, filed comments on the EPA's proposal related to GHG emissions from new plants.

MATS
The EPA finalized MATS requiring fossil-fuel fired plants to reduce emissions of mercury and other hazardous air pollutants by April 16, 2015.  The rule is being challenged by industry groups and states.  The EPA has subsequently proposed changes to the rule with respect to new sources to address the concern that the rule effectively precludes construction of any new coal-fired plants.  PPL is generally well-positioned to comply with MATS, primarily due to recent investments in environmental controls and approved ECR plans to install additional controls at some of its Kentucky plants.  Additionally, PPL is evaluating chemical additive systems for mercury control at Brunner Island, and modifications to existing controls at Colstrip for improved particulate matter reductions.  In September 2012, PPL announced its intention to place its Corette plant in long-term reserve status beginning in April 2015 due to expected market conditions and costs to comply with MATS.  The anticipated retirements of certain coal-fired electric generating units are in response to this and other environmental regulations.

CSAPR and CAIR
In 2011, the EPA finalized its CSAPR regulating emissions of nitrous oxide and sulfur dioxide through new allowance trading programs which were to be implemented in two phases (2012 and 2014).  Like its predecessor, the CAIR, CSAPR targeted sources in the eastern United States.  In December 2011, the U.S. Court of Appeals for the District of Columbia Circuit (the Court) stayed implementation of CSAPR, leaving CAIR in place.  Subsequently, in August 2012, the Court vacated and remanded CSAPR back to the EPA for further rulemaking, again leaving CAIR in place.  PPL plants in Pennsylvania and Kentucky will continue to comply with CAIR through optimization of existing controls, balanced with emission allowance purchases.  The Court's August decision leaves plants in CSAPR-affected states potentially exposed to more stringent emission reductions due to regional haze implementation (it was previously determined that CSAPR or CAIR participation satisfies regional haze requirements), and/or petitions to the EPA by downwind states under Section 126 of the Clean Air Act requesting the EPA to require plants that allegedly contribute to downwind non-attainment to take action to reduce emissions.

Regional Haze - Montana
The EPA signed its final Federal Implementation Plan of the Regional Haze Rules for Montana in September 2012, with tighter emissions limits for Colstrip Units 1 & 2 based on the installation of new controls (no limits or additional controls were specified for Colstrip Units 3 & 4), and tighter emission limits for Corette (which are not based on additional controls).  The cost of the potential additional controls for Colstrip Units 1 & 2, if required, could be significant.  PPL expects to meet the tighter permit limits at Corette without any significant changes to operations, although other requirements have led to the planned suspension of operations at Corette beginning in April 2015 (see "MATS" discussion above).

See Note 10 to the Financial Statements in this Form 10-Q and "Item 1. Business - Environmental Matters" in PPL Energy Supply's 2011PPL's 2012 Form 10-K for a discussion of environmental matters.

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New Accounting Guidance

See Notes 2 and 1819 to the Financial Statements for a discussion of new accounting guidance adopted and pending adoption.

Application of Critical Accounting Policies

Financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies.  The following accounting policies are particularly important to the financial condition or results of operations, and require estimates or other judgments of matters inherently uncertain: price risk management, defined benefits, asset impairment (excluding investments), loss accruals, AROs, income taxes, and income taxes.regulatory assets and liabilities.  See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in PPL Energy Supply's 2011PPL's 2012 Form 10-K for a discussion of each critical accounting policy.

 
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PPL ELECTRIC UTILITIES CORPORATIONENERGY SUPPLY, LLC AND SUBSIDIARIES

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


The following should be read in conjunction with PPL Electric'sEnergy Supply's Condensed Consolidated Financial Statements and the accompanying Notes and with PPL Electric's 2011Energy Supply's 2012 Form 10-K.  Capitalized terms and abbreviations are defined in the glossary.  Dollars are in millions, unless otherwise noted.

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

·  "Overview" provides a description of PPL ElectricEnergy Supply and its business strategy, a summary of Net Income AvailableAttributable to PPL CorporationEnergy Supply Member and a discussion of certain events related to PPL Electric'sEnergy Supply's results of operations and financial condition.

·  "Results of Operations" provides a summary of PPL Electric'sEnergy Supply's earnings and a description of key factors expected to impact future earnings.  This section ends with explanations of significant changes in principal line items on PPL Electric'sEnergy Supply's Statements of Income, comparing the three and six months ended June 30, 2012March 31, 2013 with the same periods in 2011.2012.

·  "Financial Condition - Liquidity and Capital Resources" provides an analysis of PPL Electric'sEnergy Supply's liquidity position and credit profile.  This section also includes a discussion of rating agency actions.

·  "Financial Condition - Risk Management" provides an explanation of PPL Electric'sEnergy Supply's risk management programs relating to market and credit risk.

Overview

Introduction

PPL ElectricEnergy Supply is an electricity delivery service provider in eastern and central Pennsylvaniaenergy company with headquarters in Allentown, Pennsylvania.  Through its subsidiaries, PPL ElectricEnergy Supply is subject to regulation as a public utility byprimarily engaged in the PUC,competitive generation and certainmarketing of its transmission activities are subject to the jurisdiction of FERC under the Federal Power Act.  PPL Electric delivers electricity in its Pennsylvania service areatwo key markets - the northeastern and provides electricity supply to retail customers in that area as a PLR under the Customer Choice Act.northwestern U.S.

Business Strategy

PPL Electric'sEnergy Supply's strategy and principal challenge is to ownachieve disciplined optimization of energy supply margins while mitigating volatility in both cash flows and operateearnings.  More specifically, PPL Energy Supply's strategy is to optimize the value from its electricity delivery business atcompetitive generation and marketing portfolios.  PPL Energy Supply endeavors to do this by matching energy supply with load, or customer demand, under contracts of varying durations with creditworthy counterparties to capture profits while effectively managing exposure to energy and fuel price volatility, counterparty credit risk and operational risk.  PPL Energy Supply is focused on maintaining profitability during the most efficient cost while maintaining high quality customer servicecurrent and reliability.  PPL Electric anticipates that it will have significantprojected period of low commodity prices by controlling its capital expenditure requirements in the future.  In order toand operation and maintenance expenditures.

To manage financing costs and access to credit markets, a key objective for PPL Electric's businessEnergy Supply is to maintain a strong credit profile.  PPL Electric continually focuses on maintaining an appropriate capital structureprofile and liquidity position.  In addition, PPL Energy Supply has financial and operational risk management programs that, among other things, are designed to monitor and manage exposure to earnings and cash flow volatility related to changes in energy and fuel prices, interest rates, counterparty credit quality and the operating performance of its generating units.

Timely recovery of costs to maintain and enhance the reliability of its delivery system including the replacement of aging distribution assets is required in order to maintain strong cash flows and a strong credit profile.  Traditionally, such cost recovery would be pursued through periodic base rate case proceedings with the PUC.  As such costs continue to increase, more frequent rate case proceedings may be required or an alternative rate making process would need to be implemented in order to achieve more timely recovery.  See "Regulatory Matters - Pennsylvania Activities - Legislation - Regulatory Procedures and Mechanisms" in Note 6 to the Financial Statements for information on Pennsylvania's new alternative rate-making mechanism.

Transmission costs are recovered through a FERC Formula Rate mechanism, which is updated annually for costs incurred and assets placed in service.  Accordingly, increased costs including those related to the replacement of aging transmission assets and the PJM-approved Regional Transmission Line Expansion Plan are recovered on a timely basis.


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Financial and Operational Developments

Net Income Available(Loss) Attributable to PPL CorporationEnergy Supply Member

Net Income Available(Loss) Attributable to PPL CorporationEnergy Supply Member for the three and six months ended June 30, 2012March 31, 2013 was $29 million and $62$(38) million compared to $36$309 million and $88 million for the same periods in 20112012, representing a 19% and 30% decrease from the same periods in 2011.112% decrease.

See "Results of Operations" below for afurther discussion and analysis of PPL Electric's earnings.the consolidated results of operations.
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Economic and Market Conditions

Redemption of Preference Stock

In June 2012,Unregulated Gross Energy Margins associated with PPL Electric redeemed all 2.5 million shares of its 6.25% Series Preference Stock, par value $100 per share.  The price paidEnergy Supply's competitive generation and marketing business are impacted by changes in market prices and demand for the redemption was the par value, without premium ($250 millionelectricity and natural gas, power plant availability, competition in the aggregate).  At December 31, 2011,markets for retail customers, fuel costs and availability, fuel transportation costs and other costs.  Current depressed wholesale market prices for electricity and natural gas have resulted from general weak economic conditions and other factors, including the preference stock was reflected onimpact of expanded domestic shale gas development.  As a result of these factors, lower future energy margins are expected to continue compared to the energy margins in 2012.  As has been PPL Electric's Balance SheetsEnergy Supply's practice in "Preference stock."

Regional Transmission Line Expansion Planperiods of changing business conditions, PPL Energy Supply continues to review its future business and operational plans, including capital and operation and maintenance expenditures, as well as its hedging strategies.

PPL Electric has experienced delaysEnergy Supply continues to monitor its Corette plant (which as previously announced will be placed in obtaining necessary National Park Service (NPS) approvalslong-term reserve status, suspending the plant's operation due to expected market conditions and the costs to comply with the MATS beginning in April 2015) for impairment.  The Corette plant asset group's carrying value at March 31, 2013 was $65 million.  Although the Susquehanna-Roseland transmission line and anticipates a delay of the line's in-service date to 2015.  InCorette plant was not impaired at March 2012, the NPS announced31, 2013, it is reasonably possible that the route proposed by an impairment could occur in future periods, as higher priced sales contracts settle, adversely impacting projected cash flows.

PPL Electric and PSE&G, previously approved by the Pennsylvania and New Jersey public utility commissions, is the preferred route for the line under the NPS's National Environmental Policy Act review.  The NPS has stated that it expects to issue its record of decision in October 2012.  An appeal of the New Jersey Board of Public Utilities approval of the line is pending before the New Jersey Superior Court Appellate Division.  PPL ElectricEnergy Supply cannot predict the ultimate outcomefuture impact that economic and market conditions and regulatory requirements may have on its financial condition or timingresults of the NPS approval or any further legal challenges to the project.  PJM has developed a strategy to manage potential reliability problems until the line is built.  PPL Electric cannot predict what additional actions, if any, PJM might take in the event of a further delay to its scheduled in-service date for the new line.operations.

At June 30, 2012, PPL Electric's estimated share of the project cost has increased to $560 million from approximately $500 million at December 31, 2011, mainly due to increased material costs.  In July 2012, PPL Electric began pre-construction activities including tree and vegetation removal from the transmission line's right of way and construction of access roads.  See Note 8 in PPL Electric's 2011 Form 10-K for additional information.

FERC Formula RatesSusquehanna Turbine Blade Inspection

In March 2012,the spring of 2013, PPL Electric filed a request withEnergy Supply will begin making modifications to address the FERC seeking recovery, over a 34-year period beginning in June 2012,causes of its unrecovered regulatory asset related to the deferred state tax liability that existedturbine blade cracking at the timeSusquehanna nuclear plant that was first identified in 2011.  The modifications will be made during the Unit 2 refueling outage and an additional planned outage for Unit 1.  Following completion of the transition frommodifications, PPL Energy Supply plans to continue monitoring the flow-through treatment of state income taxes to full normalization.  This change in tax treatment occurred in 2008 as a result of prior FERC initiatives that transferred regulatory jurisdiction of certain transmission assets from the PUC to FERC.  A regulatory asset of approximately $50 million related to this transition, classified as taxes recoverable through future rates, is included in "Other Noncurrent Assets - Regulatory assets" on the Balance Sheets at June 30, 2012 and December 31, 2011.  In May 2012, the FERC issued an order approving PPL Electric's request effective June 1, 2012.turbine blades using enhanced diagnostic equipment.

Results of Operations

The following discussion provides a summary of PPL Electric'sEnergy Supply's earnings and a description of key factors that management expects mayare expected to impact future earnings.  This section ends with "Statement of Income Analysis," which includes explanations of significant changes in Unregulated Gross Energy Margins by region and principal line items on PPL Electric'sEnergy Supply's Statements of Income, comparing the three and six months ended June 30, 2012March 31, 2013 with the same periods in 2011.2012.

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

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Earnings            
              
Net Income Available to PPL Corporation for the periods ended June 30 was:
              
   Three Months Six Months
   2012  2011  2012  2011 
              
Net Income Available to PPL Corporation $ 29  $ 36  $ 62  $ 88 
Earnings
              
Net Income (Loss) Attributable to PPL Energy Supply Member for the periods ended March 31 was:
              
         Three Months
         2013  2012 
              
Net Income (Loss) Attributable to PPL Energy Supply Member       $ (38) $ 309 

The changes in the components of Net Income Available(Loss) Attributable to PPL CorporationEnergy Supply Member between these periods were due to the following factors, which reflect reclassifications for items included in gross delivery margins.Unregulated Gross Energy Margins and certain items that management considers special.  See additional detail of these special items in the tables below.

  Three Months Six Months
       
Pennsylvania gross delivery margins $ 3  $ (10)
Other operation and maintenance   (19)   (25)
Depreciation   (2)   (8)
Other   (1)   2 
Income Taxes   8    11 
Distributions on preference stock   4    4 
Total $ (7) $ (26)
Three Months
Unregulated Gross Energy Margins$ (107)
Other operation and maintenance 13 
Depreciation (14)
Interest Expense (9)
Income Taxes 33 
Special items, after-tax (263)
Total$ (347)

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

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·HigherLower other operation and maintenance expense for the three-month period, primarily due to $6$15 million of higher payrolllower costs at eastern fossil and benefit related costs, $6 million of higher vegetation management costs andhydroelectric plants largely due to outages in 2012, partially offset by $3 million of higher corporate service costs.

Higher other operation and maintenance expense for the six-month period, primarilyadditional costs due to $8 million of higher payroll and benefit related costs, $8 million of higher vegetation management costs and $5 million of higher corporate service costs.the Ironwood Acquisition.

·Higher depreciation expense for the six-month period, primarily due to the impact of PP&E additions relatedIronwood Acquisition.

·Higher interest expense primarily due to the ongoing effortsfinancings associated with PPL Ironwood, acquired in April 2012, which increased interest expense by $4 million and $3 million due to ensure the reliability of the delivery system, and replace aging infrastructure.lower capitalized interest.

·Lower income taxes for the three and six-month periods, primarily due to the changelower pre-tax income in pre-tax income,2013, which reduced income taxes by $7$47 million, and $16 million.

·  Lower distributions on preference stock for the three and six-month periods due to the preference stock redemptionpartially offset by an $11 million benefit from a state tax rate change recorded in June 2012.

The following after-tax gains (losses), which management considers special items, also impacted the results during the periods ended March 31.

   Income Statement Three Months
   Line Item 2013  2012 
          
Adjusted energy-related economic activity, net, net of tax of $79, ($102)(a) $ (117) $ 150 
Impairments:       
 Adjustments - nuclear decommissioning trust investments, net of tax of $0, ($1)Other Income (Expense)-net      1 
Other:       
 Counterparty bankruptcy, net of tax of $0, $5 (b)Other Operation and Maintenance      (6)
 Ash basin leak remediation adjustment, net of tax of $0, ($1)Other Operation and Maintenance      1 
Total  $ (117) $ 146 

(a)See "Reconciliation of Economic Activity" below.
(b)In October 2011, a wholesale customer, SMGT, filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy code.  In 2012, PPL EnergyPlus recorded an additional allowance for unpaid amounts under the long-term power contract.  In March 2012, the U.S. Bankruptcy Court for the District of Montana approved the request to terminate the contract, effective April 1, 2012.

Reconciliation of Economic Activity

The following table reconciles unrealized pre-tax gains (losses) for the periods ended March 31, from the table within "Commodity Price Risk (Non-trading) - Economic Activity" in Note 14 to the Financial Statements to the special item identified as "Adjusted energy-related economic activity, net."

    Three Months
    2013  2012 
Operating Revenues      
  Unregulated retail electric and gas $ (8) $ 10 
  Wholesale energy marketing   (822)   852 
Operating Expenses      
  Fuel   (1)   2 
  Energy Purchases   634    (591)
Energy-related economic activity (a)   (197)   273 
Option premiums   1    
Adjusted energy-related economic activity   (196)   273 
Less:  Economic activity realized, associated with the monetization of certain      
 full-requirement sales contracts in 2010      21 
Adjusted energy-related economic activity, net, pre-tax $ (196) $ 252 
         
Adjusted energy-related economic activity, net, after-tax $ (117) $ 150 

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

2013 Outlook

Excluding special items, PPL ElectricEnergy Supply projects lower earnings in 20122013 compared with 2011,2012, primarily driven by lower energy prices, higher fuel costs, higher operation and maintenance expense, higher depreciation, and lower distribution revenue, which are expected to behigher financing costs, partially offset by higher transmission revenue, lower financing costs,capacity prices and lower income taxes.

In March 2012, PPL Electric filedhigher nuclear generation output despite scheduled outages for both Susquehanna units to implement a request with the PUClong-term solution to increase distribution rates by approximately $105 million.  The proposed distribution revenue rate increase would result in a 2.9% increase over PPL Electric's total rates at the time of filing and be effective January 1, 2013.  PPL Electric's application includes a request for an authorized return-on-equity of 11.25%.  Hearings on this matter are scheduled during August 2012 and a decision is expected in the fourth quarter of 2012.  PPL Electric cannot predict the outcome of this proceeding.turbine blade issues.

Earnings in 2012future periods are subject to various risks and uncertainties.  See "Forward-Looking Information," the rest of this Item 2, and Notes 6 andNote 10 to the Financial Statements in this Form 10-Q and "Item 1. Business" and "Item 1A. Risk Factors" in PPL Electric's 2011Energy Supply's 2012 Form 10-K for a discussion of the risks, uncertainties and factors that may impact future earnings.


 
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Statement of Income Analysis --

Pennsylvania Gross Delivery Margins

Distribution

Margins increased for the three months ended March 31, 2013 compared with 2012 primarily due to a $13 million favorable effect of mild weather in 2012 and a $19 million favorable effect of price, largely comprised of higher base rates, effective January 1, 2013 as a result of the 2012 rate case and higher volumes of $3 million.

Transmission

Margins increased for the three months ended March 31, 2013 compared with 2012 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.
The change in non-trading margins for the period ended March 31, 2013 compared with 2012 was due to:
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Three Months
Baseload energy prices$ (125)
Coal prices (10)
Nuclear fuel prices (6)
Full-requirement sales contracts 5 
Intermediate and peaking capacity prices 5 
Baseload capacity prices 6 
Intermediate and peaking Spark Spreads 14 
Ironwood acquisition which eliminated tolling expense 15 
Net economic availability of coal and hydroelectric plants 32 
Other 5 
Total$ (59)

Western U.S.

Non-trading margins for the three months ended March 31, 2013 compared with 2012 were lower due to $43 million of lower wholesale prices, partially offset by $12 million of higher wholesale volumes.

Net Energy Trading Margins

Net energy trading margins for the three months ended March 31, 2013 compared with 2012 decreased as a result of lower margins of $16 million on gas positions due to higher prices.

Utility Revenues
The increase (decrease) in utility revenues for the period ended March 31, 2013 compared with 2012 was due to:
Three Months
Domestic:
PPL Electric (a)$ 55 
LKE (b) 95 
Total Domestic 150 
U.K.:
Price (c) 57 
Volume 5 
Recovery of allowed revenues 5 
Foreign currency exchange rates 10 
Other (d) 9 
Total U.K. 86 
Total$ 236 

(a)See "Pennsylvania Gross Delivery Margins" for further information.
(b)See "Kentucky Gross Margins" for further information.
(c)Due to price increases effective April 1, 2012.
(d)This increase is primarily due to $8 million of third-party engineering work, which is offset by expenses in "Other operation and maintenance".

Other Operation and Maintenance
The increase (decrease) in other operation and maintenance for the period ended March 31, 2013 compared with 2012 was due to:
Three Months
Domestic:
Uncollectible accounts (a)$ (16)
LKE coal plant outages (b) (14)
Costs at eastern fossil and hydroelectric plants (c) (11)
Pension and postretirement costs
Other
U.K.:
Third-party engineering work (d)
Network maintenance expense (e)
Employee related expenses (4)
Severance compensation (4)
Other (2)
Total$ (30)

(a)The decrease is primarily due to SMGT filing for protection under Chapter 11 of the U.S. Bankruptcy Code in 2011.  $11 million of damages billed to SMGT were fully reserved in 2012.
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(b)The decrease is primarily due to the timing and scope of scheduled outages.
(c)The decrease is primarily due to Brunner Island Unit 3 outage costs of $15 million in 2012 compared with no major outage costs in 2013, partially offset by $3 million of additional costs due to the Ironwood Acquisition.
(d)These expenses are offset by revenues reflected in "Utility" on the Statements of Income.
(e)The increase is primarily due to higher tree trimming expense.

Depreciation
The increase (decrease) in depreciation for the period ended March 31, 2013 compared with 2012 was due to:
Three Months
Additions to PP&E$ 21 
LKE lower depreciation rates effective January 1, 2013 (5)
Ironwood Acquisition 6 
Other (2)
Total$ 20 

Other Income (Expense) - net

The $139 million increase in other income (expense) - net for the three months ended March 31, 2013 compared with 2012 was primarily due to $119 million of realized and unrealized gains on economic foreign currency contracts compared with losses in 2012 of $18 million.

See Note 12 to the Financial Statements for further details.

Interest Expense
The increase (decrease) in interest expense for the period ended March 31, 2013 compared with 2012 was due to:
Three Months
Long-term debt interest expense (a)$ 14 
Ironwood Acquisition (b) 4 
Other 3 
Total$ 21 

(a)The increase was primarily due to PPL Capital Funding's June 2012 issuance of $400 million, 4.2% Senior Notes due 2022 and October 2012 issuance of $400 million, 3.5% Senior Notes due 2022.  Also, contributing to the increase was higher accretion expense on WPD index linked bonds and interest on WPD (East Midlands') April 2012 issuance of £100 million, 5.25% Senior Notes due 2023.
(b)The increase was due to financings associated with the Ironwood Acquisition.  

Income Taxes
The increase (decrease) in income taxes for the period ended March 31, 2013 compared with 2012 was due to:
Three Months
Lower pre-tax book income$ (119)
Foreign tax reserve adjustments (3)
Net operating loss carryforward adjustments (a) 6 
State deferred tax rate change (b) 11 
Other (3)
Total$ (108)

(a)During the three months ended March 31, 2012, PPL recorded adjustments to deferred taxes related to net operating loss carryforwards of LKE based on income tax return adjustments.
(b)During the three months ended March 31, 2012, PPL recorded adjustments related to state deferred tax liabilities.

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

Financial Condition
Liquidity and Capital Resources
PPL had the following at:
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  March 31, 2013 December 31, 2012
       
Cash and cash equivalents $ 853  $ 901 
Short-term debt $ 1,061  $ 652 

At March 31, 2013, $335 million of cash and cash equivalents were denominated in GBP.  If these amounts would be remitted as dividends, PPL may be subject to additional U.S. taxes, net of allowable foreign tax credits.  Historically, dividends paid by foreign subsidiaries have been distributions of the current year's earnings.  See Note 5 to the Financial Statements in PPL's 2012 Form 10-K for additional information on undistributed earnings of WPD.

The $48 million decrease in PPL's cash and cash equivalents position was primarily the net result of:

·capital expenditures of $828 million;
·the payment of $210 million of common stock dividends;
·a $52 million net increase in restricted cash and cash equivalents; and
·$24 million of contract adjustment payments; partially offset by
·proceeds of $432 million from the issuance of long-term debt, net of costs;
·net increase in short-term debt of $416 million; and
·net cash provided by operating activities of $244 million.

PPL's cash provided by operating activities decreased by $484 million for the three months ended March 31, 2013 compared with 2012.  The decrease was primarily due to:

·a $336 million increase in cash used by components of working capital (primarily due to changes in accounts receivable of $219 million resulting from higher base rates and favorable effects of weather and counterparty collateral of $129 million); and
·a $221 million increase in defined benefit plans funding; partially offset by
·a $72 million increase in net income, when adjusted for non-cash components.

Capital expenditures increased by $146 million for the three months ended March 31, 2013 compared with 2012, primarily due to the Susquehanna-Roseland transmission project and environmental projects at Mill Creek and Ghent, and construction of Cane Run Unit 7.

Credit Facilities

PPL maintains credit facilities to provide liquidity and to backstop commercial paper issuances.  At March 31, 2013, PPL's total committed borrowing capacity under its credit facilities and the use of this borrowing capacity were:

         Letters of   
         Credit Issued   
         and   
   Committed   Commercial Unused
   Capacity Borrowed Paper Backup Capacity
          
PPL Energy Supply Credit Facilities (a) $ 3,200     $ 764  $ 2,436 
PPL Electric Credit Facilities (b)   400       126    274 
LG&E Syndicated Credit Facility   500       70    430 
KU Credit Facilities (c)   598       313    285 
 Total Domestic Credit Facilities (d) $ 4,698     $ 1,273  $ 3,425 
              
PPL WW Syndicated Credit Facility (e) £ 210  £ 109   n/a £ 101 
WPD (South West) Syndicated Credit Facility   245      n/a   245 
WPD (East Midlands) Syndicated Credit Facility (f)   300    65       235 
WPD (West Midlands) Syndicated Credit Facility   300          300 
 Total WPD Credit Facilities (g) £ 1,055  £ 174     £ 881 

(a)In February 2013, PPL Energy Supply extended a letter of credit facility expiration date from March 2013 and, effective April 2013, the capacity was reduced to $150 million.
(b)Committed capacity includes a $100 million credit facility related to an asset-backed commercial paper program through which PPL Electric obtains financing by selling and contributing its eligible accounts receivable and unbilled revenue to a special purpose, wholly owned subsidiary on an ongoing basis.  The subsidiary pledges these assets to secure loans of up to an aggregate of $100 million from a commercial paper conduit sponsored by a financial institution.  At March 31, 2013, based on accounts receivable and unbilled revenue pledged, the amount available for borrowing under the facility was $100 million.
(c)In May 2013, KU extended its $198 million letter of credit facility to May 2016.
(d)The commitments under PPL's domestic credit facilities are provided by a diverse bank group, with no one bank and its affiliates providing an aggregate commitment of more than 9% of the total committed capacity.
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(e)In December 2012, the PPL WW syndicated credit facility that was set to expire in January 2013 was replaced and the capacity was increased from £150 million.  The amount borrowed at March 31, 2013 was a USD-denominated borrowing of $171 million, which equated to £109 million at the time of borrowing and bore interest at 1.9034%.
(f)The amount borrowed at March 31, 2013 was a GBP-denominated borrowing of £65 million, which equated to $99 million and bore interest at 1.30%.
(g)At March 31, 2013, the USD equivalent of unused capacity under WPD's committed credit facilities was $1.3 billion.  The commitments under WPD's credit facilities are provided by a diverse bank group with no one bank providing more than 13% of the total committed capacity.

See Note 7 to the Financial Statements for further discussion of PPL's credit facilities.

Commercial Paper

PPL Energy Supply maintains a commercial paper program for up to $750 million to provide an additional financing source to fund its short-term liquidity needs, if and when necessary.  Commercial paper issuances are supported by PPL Energy Supply's Syndicated Credit Facility.  At March 31, 2013 and December 31, 2012, PPL Energy Supply had $481 million and $356 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheets, at weighted-average interest rates of 0.38% and 0.50%.

PPL Electric maintains a commercial paper program for up to $300 million to provide an additional financing source to fund its short-term liquidity needs, if and when necessary.  Commercial paper issuances are supported by PPL Electric's Syndicated Credit Facility.  At March 31, 2013, PPL Electric had $125 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheet, at a weighted-average interest rate of 0.39%.  PPL Electric had no commercial paper outstanding at December 31, 2012.

In April 2013, LG&E and KU each increased the capacity of their commercial paper programs from $250 million to $350 million to provide an additional financing source to fund their short-term liquidity needs, if and when necessary.  Commercial paper issuances are supported by LG&E's and KU's Syndicated Credit Facilities.  At March 31, 2013 and December 31, 2012, LG&E had $70 million and $55 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheets, at weighted-average interest rates of 0.36% and 0.42%.  At March 31, 2013 and December 31, 2012, KU had $115 million and $70 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheets, at weighted-average interest rates of 0.36% and 0.42%.

Long-term Debt and Equity Securities

See "Overview" above for information regarding equity forward agreements and the 2010 Equity Units.

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

In addition, PPL has reduced the estimate of its plans to issue new shares of common stock in 2013 by $100 million from the $350 million reported in its 2012 Form 10-K.

Common Stock Dividends

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

Rating Agency Actions

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

A credit rating reflects an assessment by the rating agency of the creditworthiness associated with an issuer and particular securities that it issues.  The credit ratings of PPL and its subsidiaries are based on information provided by PPL and other sources.  The ratings of Moody's, S&P and Fitch are not a recommendation to buy, sell or hold any securities of PPL or its subsidiaries.  Such ratings may be subject to revisions or withdrawal by the agencies at any time and should be evaluated independently of each other and any other rating that may be assigned to the securities.
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A downgrade in PPL's or its subsidiaries' credit ratings could result in higher borrowing costs and reduced access to capital markets.  PPL and its subsidiaries have no credit rating triggers that would result in the reduction of access to capital markets or the acceleration of maturity dates of outstanding debt.

The rating agencies took the following actions related to PPL and its subsidiaries during 2013:

In February 2013, Moody's upgraded its rating, from B2 to Ba1, and revised the outlook from under review to stable for PPL Ironwood.

In March 2013, S&P, Moody's and Fitch assigned ratings of BB+, Ba1 and BB+ to PPL Capital Funding's $450 million 5.90% Junior Subordinated Notes due 2073.  Fitch also assigned a stable outlook to these notes.

In April 2013, Fitch affirmed the BBB- rating and stable outlook at PPL Montana.

Ratings Triggers

PPL and PPL Energy Supply have various contracts, including contracts for the sale and purchase of electricity and fuel, commodity transportation and storage, tolling agreements and interest rate and foreign currency instruments, which contain provisions that require PPL and PPL Energy Supply to post additional collateral or permit the counterparty to terminate the contract, if PPL's or PPL Energy Supply's credit rating were to fall below investment grade.  See Note 14 to the Financial Statements for a discussion of "Credit Risk-Related Contingent Features," including a discussion of the potential additional collateral that would have been required for derivative contracts in a net liability position at March 31, 2013.

For additional information on PPL's liquidity and capital resources, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," in PPL's 2012 Form 10-K.

Risk Management

Market Risk

See Notes 13 and 14 to the Financial Statements for information about PPL's risk management objectives, valuation techniques and accounting designations.

The forward-looking information presented below provides estimates of what may occur in the future, assuming certain adverse market conditions and model assumptions.  Actual future results may differ materially from those presented.  These disclosures are not precise indicators of expected future losses, but only indicators of possible losses under normal market conditions at a given confidence level.

Commodity Price Risk (Non-trading)

PPL segregates its non-trading activities into two categories:  hedge activity and economic activity.  Transactions that are accounted for as hedge activity qualify for hedge accounting treatment.  The economic activity category includes transactions that address a specific risk, but were not eligible for hedge accounting or for which hedge accounting was not elected.  This activity includes the changes in fair value of positions used to hedge a portion of the economic value of PPL's competitive generation assets 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 14 to the Financial Statements for additional information.

To hedge the impact of market price volatility on PPL's energy-related assets, liabilities and other contractual arrangements, PPL both sells and purchases physical energy at the wholesale level under FERC market-based tariffs throughout the U.S. and enters into financial exchange-traded and over-the-counter contracts.  PPL's non-trading commodity derivative contracts range in maturity through 2019.

The following table sets forth the changes in the net fair value of non-trading commodity derivative contracts for the periods ended March 31.  See Notes 13 and 14 to the Financial Statements for additional information.
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        Gains (Losses)
    Three Months
      2013  2012 
             
Fair value of contracts outstanding at the beginning of the period       $ 473  $ 1,082 
Contracts realized or otherwise settled during the period         (137)   (279)
Fair value of new contracts entered into during the period (a)         9    (1)
Other changes in fair value         (116)   413 
Fair value of contracts outstanding at the end of the period       $ 229  $ 1,215 

(a)Represents the fair value of contracts at the end of the quarter of their inception.

The following table segregates the net fair value of non-trading commodity derivative contracts at March 31, 2013, based on the observability of the information used to determine the fair value.

   Net Asset (Liability)
   Maturity       Maturity   
   Less Than Maturity Maturity in Excess Total Fair
   1 Year 1-3 Years 4-5 Years of 5 Years Value
Source of Fair Value               
Prices based on significant observable inputs (Level 2) $ 238  $ (21) $ (8) $ 6  $ 215 
Prices based on significant unobservable inputs (Level 3)   (1)   12    3       14 
Fair value of contracts outstanding at the end of the period $ 237  $ (9) $ (5) $ 6  $ 229 

PPL sells electricity, capacity and related services and buys fuel on a forward basis to hedge the value of energy from its generation assets.  If PPL were unable to deliver firm capacity and energy or to accept the delivery of fuel under its agreements, under certain circumstances it could be required to pay liquidating damages.  These damages would be based on the difference between the market price and the contract price of the commodity.  Depending on price changes in the wholesale energy markets, such damages could be significant.  Extreme weather conditions, unplanned power plant outages, transmission disruptions, nonperformance by counterparties (or their counterparties) with which it has energy contracts and other factors could affect PPL's ability to meet its obligations, or cause significant increases in the market price of replacement energy.  Although PPL attempts to mitigate these risks, there can be no assurance that it will be able to fully meet its firm obligations, that it will not be required to pay damages for failure to perform, or that it will not experience counterparty nonperformance in the future.

Commodity Price Risk (Trading)

PPL's trading commodity derivative contracts range in maturity through 2017.  The following table sets forth changes in the net fair value of trading commodity derivative contracts for the periods ended March 31.  See Notes 13 and 14 to the Financial Statements for additional information.

        Gains (Losses)
    Three Months
      2013  2012 
             
Fair value of contracts outstanding at the beginning of the period       $ 29  $ (4)
Contracts realized or otherwise settled during the period         (2)   
Fair value of new contracts entered into during the period (a)         (12)   6 
Fair value of contracts outstanding at the end of the period       $ 15  $ 2 

(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 March 31, 2013, based on the observability of the information used to determine the fair value.

  Net Asset (Liability)
  Maturity      Maturity  
  Less Than Maturity Maturity in Excess Total Fair
  1 Year 1-3 Years 4-5 Years of 5 Years Value
Source of Fair Value               
Prices quoted in active markets for identical instruments (Level 1) $ 1           $ 1 
Prices based on significant observable inputs (Level 2)   5  $ 9          14 
Fair value of contracts outstanding at the end of the period $ 6  $ 9        $ 15 
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VaR Models

A VaR model is utilized to measure commodity price risk in unregulated gross energy margins for the non-trading and trading portfolios.  VaR is a statistical model that attempts to estimate the value of potential loss over a given holding period under normal market conditions at a given confidence level.  VaR is calculated using a Monte Carlo simulation technique based on a five-day holding period at a 95% confidence level.  Given the company's disciplined hedging program, the non-trading VaR exposure is expected to be limited in the short-term.  The VaR for portfolios using end-of-month results for the periods was as follows.

   Trading VaR Non-Trading VaR
   Three Months Three Months
   Ended Ended
   March 31, March 31,
   2013  2013 
95% Confidence Level, Five-Day Holding Period      
 Period End $ 6  $
 Average for the Period   5   
 High   6   
 Low   3   

The trading portfolio includes all proprietary trading positions, regardless of the delivery period.  All positions not considered proprietary trading are considered non-trading.  The non-trading portfolio includes the entire portfolio, including generation, with delivery periods through the next 12 months.  Both the trading and non-trading VaR computations exclude FTRs due to the absence of reliable spot and forward markets.  The fair value of the non-trading and trading FTR positions was insignificant at March 31, 2013.

Interest Rate Risk

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

At March 31, 2013, PPL's potential annual exposure to increased interest expense, based on a 10% increase in interest rates, was not significant.

PPL is also exposed to changes in the fair value of its domestic and international debt portfolios.  PPL estimated that a 10% decrease in interest rates at March 31, 2013 would increase the fair value of its debt portfolio by $563 million.

At March 31, 2013, PPL had the following interest rate hedges outstanding:

         Effect of a
      Fair Value, 10% Adverse
    Exposure Net - Asset Movement
   Hedged (Liability) (a)  in Rates (b)
Cash flow hedges         
 Interest rate swaps (c) $ 1,148  $ 12  $ (35)
 Cross-currency swaps (d)   1,262    82    (171)
Economic activity         
 Interest rate swaps (e)   179    (55)   (3)

(a)Includes accrued interest, if applicable.
(b)Effects of adverse movements decrease assets or increase liabilities, as applicable, which could result in an asset becoming a liability.  Sensitivities represent a 10% adverse movement in interest rates, except for cross-currency swaps which also includes foreign currency exchange rates.
(c)PPL utilizes various risk management instruments to reduce its exposure to the expected future cash flow variability of its debt instruments.  These risks include exposure to adverse interest rate movements for outstanding variable rate debt and for future anticipated financing.  While PPL is exposed to changes in the fair value of these instruments, any changes in the fair value of such cash flow hedges are recorded in equity or as regulatory assets or liabilities, if recoverable through regulated rates.  The changes in fair value of these instruments are then reclassified into earnings in the same period during which the item being hedged affects earnings.  The positions outstanding at March 31, 2013 mature through 2043.
(d)PPL utilizes cross-currency swaps to hedge the interest payments and principal of WPD's U.S. dollar-denominated senior notes.  While PPL is exposed to changes in the fair value of these instruments, any change in the fair value of these instruments is recorded in equity and reclassified into earnings in the same period during which the item being hedged affects earnings.  The positions outstanding at March 31, 2013 mature through 2028.
(e)PPL utilizes various risk management instruments to reduce its exposure to the expected future cash flow variability of its debt instruments.  These risks include exposure to adverse interest rate movements for outstanding variable rate debt and for future anticipated financing.  While PPL is exposed to changes in the fair value of these instruments, any realized changes in the fair value of such economic positions are recoverable through regulated rates and any subsequent changes in fair value of these derivatives are included in regulatory assets or liabilities.  The positions outstanding at March 31, 2013 mature through 2033.
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Foreign Currency Risk

PPL is exposed to foreign currency risk, primarily through investments in U.K. affiliates.  In addition, PPL's domestic operations may make purchases of equipment in currencies other than U.S. dollars.

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

PPL had the following foreign currency hedges outstanding March 31, 2013:
       Effect of a
       10%
       Adverse
       Movement
       in Foreign
     Fair Value, Currency
   Exposure Net - Asset Exchange
   Hedged (Liability) Rates (a)
           
Net investment hedges (b) £ 162  $ 15  $ (25)
Economic activity (c)   1,175    78    (167)

(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 at March 31, 2013 mature through 2013.  Excludes the amount of an intercompany loan classified as a net investment hedge.  See Note 14 to the Financial Statements for additional information.
(c)To economically hedge the translation of expected income denominated in GBP to U.S. dollars, PPL enters into a combination of average rate forwards and average rate options to sell GBP.  The forwards and options outstanding at March 31, 2013 mature through 2015.

NDT Funds - Securities Price Risk

In connection with certain NRC requirements, PPL Susquehanna maintains trust funds to fund certain costs of decommissioning the PPL Susquehanna nuclear plant (Susquehanna).  At March 31, 2013, these funds were invested primarily in domestic equity securities and fixed-rate, fixed-income securities and are reflected at fair value on the Balance Sheet.  The mix of securities is designed to provide returns sufficient to fund Susquehanna's decommissioning and to compensate for inflationary increases in decommissioning costs.  However, the equity securities included in the trusts are exposed to price fluctuation in equity markets, and the values of fixed-rate, fixed-income securities are primarily exposed to changes in interest rates.  PPL actively monitors the investment performance and periodically reviews asset allocation in accordance with its nuclear decommissioning trust policy statement.  At March 31, 2013, a hypothetical 10% increase in interest rates and a 10% decrease in equity prices would have resulted in an estimated $55 million reduction in the fair value of the trust assets.  See Notes 13 and 17 to the Financial Statements for additional information regarding the NDT funds.

Credit Risk

See Notes 13 and 14 to the Financial Statements in this Form 10-Q and "Risk Management - Energy Marketing & Trading and Other - Credit Risk" in PPL's 2012 Form 10-K for additional information.

Foreign Currency Translation

The value of the British pound sterling fluctuates in relation to the U.S. dollar.  Changes in this exchange rate resulted in a foreign currency translation loss of $256 million for the three months ended March 31, 2013, which primarily reflected a $696 million decrease to PP&E and goodwill offset by a decrease of $440 million to net liabilities.  Changes in this exchange rate resulted in a foreign currency translation gain of $76 million for the three months ended March 31, 2012, which primarily reflected a $188 million increase to PP&E and goodwill offset by an increase of $112 million to net liabilities.  The impact of foreign currency translation is recorded in AOCI.

Related Party Transactions

PPL is not aware of any material ownership interests or operating responsibility by senior management of PPL, PPL Energy Supply, PPL Electric, LKE, LG&E or KU in outside partnerships, including leasing transactions with variable interest entities or other entities doing business with PPL.
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Acquisitions, Development and Divestitures

PPL from time to time evaluates opportunities for potential acquisitions, divestitures and development projects.  Development projects are reexamined based on market conditions and other factors to determine whether to proceed with the projects, sell, cancel or expand them, execute tolling agreements or pursue other options.  See Note 8 to the Financial Statements for information on the more significant activities.

Environmental Matters

Extensive federal, state and local environmental laws and regulations are applicable to PPL's air emissions, water discharges and the management of hazardous and solid waste, as well as other aspects of PPL's business.  The cost of compliance or alleged non-compliance cannot be predicted with certainty but could be material.  In addition, costs may increase significantly if the requirements or scope of environmental laws or regulations, or similar rules, are expanded or changed by the relevant agencies.  Costs may take the form of increased capital expenditures or operating and maintenance expenses, monetary fines, penalties or other restrictions.  Many of these environmental law considerations are also applicable to the operations of key suppliers, or customers, such as coal producers and industrial power users, and may impact the costs for their products or their demand for PPL's services.

Physical effects associated with climate change could include the impact of changes in weather patterns, such as storm frequency and intensity, and the resultant potential damage to PPL's generation assets, electricity transmission and distribution systems, as well as impacts on customers.  In addition, changed weather patterns could potentially reduce annual rainfall in areas where PPL has hydro generating facilities or where river water is used to cool its fossil and nuclear powered generators.  PPL cannot currently predict whether its businesses will experience these potential climate change-related risks or estimate the potential cost of their related consequences.

The following is a discussion of the more significant environmental matters.

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) under existing solid waste regulations.  A final rulemaking is currently expected before the end of 2015.  However, the timing of the final regulations could be accelerated by certain litigation that could require the EPA to issue its regulations sooner.  Regulations could impact handling, disposal and/or beneficial use of CCRs.  The financial impact could be material if CCRs are regulated as hazardous waste, and significant if regulated as non-hazardous, in accordance with the proposed rule.

Effluent Limitation Guidelines
On April 19, 2013, the EPA issued 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 handling and metal cleaning wastes, as well as new limits for scrubber wastewater, gasification wastewater and landfill leachate.  The proposal contains several alternative approaches, some of which could significantly impact PPL's coal-fired plants.  PPL will work with industry groups to comment on the proposed regulation.  The final regulation is expected in May 2014.  At the present time, PPL is unable to predict the outcome of this matter or estimate a range of reasonably possible costs, but the costs could be significant.

316(b) Cooling Water Intake Structure Rule
In April 2011, the EPA published a draft regulation under Section 316(b) of the Clean Water Act, which regulates cooling water intakes for power plants.  The draft rule has two provisions: one requires installation of Best Technology Available (BTA) to reduce mortality of aquatic organisms that are pulled into the plant cooling water system (entrainment), and the second imposes standards for reduction of mortality of aquatic organisms trapped on water intake screens (impingement).  A final rule is expected in June 2013.  The proposed regulation would apply to nearly all PPL-owned steam electric plants in Pennsylvania, Kentucky, and Montana, potentially even including those equipped with closed-cycle cooling systems.  PPL's compliance costs could be significant, especially if the final rule requires closed-cycle systems at plants that do not currently have them or conversions of once-through systems to closed-cycle.
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GHG Regulations
In 2013, the EPA is expected to finalize limits on GHG emissions from new power plants and to begin working on a proposal for such emissions from existing power plants.  The EPA's proposal on GHG emissions from new power plants would effectively preclude construction of any coal-fired plants and could even be difficult for new gas-fired plants to meet.  With respect to existing power plants, the impact could be significant, depending on the structure and stringency of the final rule.  PPL, along with others in the industry, filed comments on the EPA's proposal related to GHG emissions from new plants.

MATS
The EPA finalized MATS requiring fossil-fuel fired plants to reduce emissions of mercury and other hazardous air pollutants by April 16, 2015.  The rule is being challenged by industry groups and states.  The EPA has subsequently proposed changes to the rule with respect to new sources to address the concern that the rule effectively precludes construction of any new coal-fired plants.  PPL is generally well-positioned to comply with MATS, primarily due to recent investments in environmental controls and approved ECR plans to install additional controls at some of its Kentucky plants.  Additionally, PPL is evaluating chemical additive systems for mercury control at Brunner Island, and modifications to existing controls at Colstrip for improved particulate matter reductions.  In September 2012, PPL announced its intention to place its Corette plant in long-term reserve status beginning in April 2015 due to expected market conditions and costs to comply with MATS.  The anticipated retirements of certain coal-fired electric generating units are in response to this and other environmental regulations.

CSAPR and CAIR
In 2011, the EPA finalized its CSAPR regulating emissions of nitrous oxide and sulfur dioxide through new allowance trading programs which were to be implemented in two phases (2012 and 2014).  Like its predecessor, the CAIR, CSAPR targeted sources in the eastern United States.  In December 2011, the U.S. Court of Appeals for the District of Columbia Circuit (the Court) stayed implementation of CSAPR, leaving CAIR in place.  Subsequently, in August 2012, the Court vacated and remanded CSAPR back to the EPA for further rulemaking, again leaving CAIR in place.  PPL plants in Pennsylvania and Kentucky will continue to comply with CAIR through optimization of existing controls, balanced with emission allowance purchases.  The Court's August decision leaves plants in CSAPR-affected states potentially exposed to more stringent emission reductions due to regional haze implementation (it was previously determined that CSAPR or CAIR participation satisfies regional haze requirements), and/or petitions to the EPA by downwind states under Section 126 of the Clean Air Act requesting the EPA to require plants that allegedly contribute to downwind non-attainment to take action to reduce emissions.

Regional Haze - Montana
The EPA signed its final Federal Implementation Plan of the Regional Haze Rules for Montana in September 2012, with tighter emissions limits for Colstrip Units 1 & 2 based on the installation of new controls (no limits or additional controls were specified for Colstrip Units 3 & 4), and tighter emission limits for Corette (which are not based on additional controls).  The cost of the potential additional controls for Colstrip Units 1 & 2, if required, could be significant.  PPL expects to meet the tighter permit limits at Corette without any significant changes to operations, although other requirements have led to the planned suspension of operations at Corette beginning in April 2015 (see "MATS" discussion above).

See Note 10 to the Financial Statements in this Form 10-Q and "Item 1. Business - Environmental Matters" in PPL's 2012 Form 10-K for a discussion of environmental matters.

New Accounting Guidance

See Notes 2 and 19 to the Financial Statements for a discussion of new accounting guidance adopted and pending adoption.

Application of Critical Accounting Policies

Financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies.  The following accounting policies are particularly important to the financial condition or results of operations, and require estimates or other judgments of matters inherently uncertain: price risk management, defined benefits, asset impairment (excluding investments), loss accruals, AROs, income taxes, and regulatory assets and liabilities.  See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in PPL's 2012 Form 10-K for a discussion of each critical accounting policy.
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PPL ENERGY SUPPLY, LLC AND SUBSIDIARIES

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

The following should be read in conjunction with PPL Energy Supply's Condensed Consolidated Financial Statements and the accompanying Notes and with PPL Energy Supply's 2012 Form 10-K.  Capitalized terms and abbreviations are defined in the glossary.  Dollars are in millions, unless otherwise noted.

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

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

·  "Results of Operations" provides a summary of PPL Energy Supply's earnings and a description of key factors expected to impact future earnings.  This section ends with explanations of significant changes in principal line items on PPL Energy Supply's Statements of Income, comparing the three months ended March 31, 2013 with 2012.

·  "Financial Condition - Liquidity and Capital Resources" provides an analysis of PPL Energy Supply's liquidity position and credit profile.  This section also includes a discussion of rating agency actions.

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

Overview

Introduction

PPL Energy Supply is an energy company with headquarters in Allentown, Pennsylvania.  Through its subsidiaries, PPL Energy Supply is primarily engaged in the competitive generation and marketing of electricity in two key markets - the northeastern and northwestern U.S.

Business Strategy

PPL Energy Supply's strategy is to achieve disciplined optimization of energy supply margins while mitigating volatility in both cash flows and earnings.  More specifically, PPL Energy Supply's strategy is to optimize the value from its competitive generation and marketing portfolios.  PPL Energy Supply endeavors to do this by matching energy supply with load, or customer demand, under contracts of varying durations with creditworthy counterparties to capture profits while effectively managing exposure to energy and fuel price volatility, counterparty credit risk and operational risk.  PPL Energy Supply is focused on maintaining profitability during the current and projected period of low commodity prices by controlling its capital and operation and maintenance expenditures.

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

Financial and Operational Developments

Net Income (Loss) Attributable to PPL Energy Supply Member

Net Income (Loss) Attributable to PPL Energy Supply Member for the three months ended March 31, 2013 was $(38) million compared to $309 million in 2012, representing a 112% decrease.

See "Results of Operations" below for further discussion and analysis of the consolidated results of operations.
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Economic and Market Conditions

Unregulated Gross Energy Margins associated with PPL Energy Supply's competitive generation and marketing business are impacted by changes in market prices and demand for electricity and natural gas, power plant availability, competition in the markets for retail customers, fuel costs and availability, fuel transportation costs and other costs.  Current depressed wholesale market prices for electricity and natural gas have resulted from general weak economic conditions and other factors, including the impact of expanded domestic shale gas development.  As a result of these factors, lower future energy margins are expected to continue compared to the energy margins in 2012.  As has been PPL Energy Supply's practice in periods of changing business conditions, PPL Energy Supply continues to review its future business and operational plans, including capital and operation and maintenance expenditures, as well as its hedging strategies.

PPL Energy Supply continues to monitor its Corette plant (which as previously announced will be placed in long-term reserve status, suspending the plant's operation due to expected market conditions and the costs to comply with the MATS beginning in April 2015) for impairment.  The Corette plant asset group's carrying value at March 31, 2013 was $65 million.  Although the Corette plant was not impaired at March 31, 2013, it is reasonably possible that an impairment could occur in future periods, as higher priced sales contracts settle, adversely impacting projected cash flows.

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

Susquehanna Turbine Blade Inspection

In the spring of 2013, PPL Energy Supply will begin making modifications to address the causes of turbine blade cracking at the Susquehanna nuclear plant that was first identified in 2011.  The modifications will be made during the Unit 2 refueling outage and an additional planned outage for Unit 1.  Following completion of the modifications, PPL Energy Supply plans to continue monitoring the turbine blades using enhanced diagnostic equipment.

Results of Operations

The following discussion provides a summary of PPL Energy Supply's earnings and a description of key factors that are expected to impact future earnings.  This section ends with "Statement of Income Analysis," which includes explanations of significant changes in Unregulated Gross Energy Margins by region and principal line items on PPL Energy Supply's Statements of Income, comparing the three months ended March 31, 2013 with 2012.

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

Earnings
              
Net Income (Loss) Attributable to PPL Energy Supply Member for the periods ended March 31 was:
              
         Three Months
         2013  2012 
              
Net Income (Loss) Attributable to PPL Energy Supply Member       $ (38) $ 309 

The changes in the components of Net Income (Loss) Attributable to PPL Energy Supply Member between these periods were due to the following factors, which reflect reclassifications for items included in Unregulated Gross Energy Margins and certain items that management considers special.  See additional detail of these special items in the tables below.

Three Months
Unregulated Gross Energy Margins$ (107)
Other operation and maintenance 13 
Depreciation (14)
Interest Expense (9)
Income Taxes 33 
Special items, after-tax (263)
Total$ (347)

·See "Statement of Income Analysis - Unregulated Gross Energy Margins - Changes in Non-GAAP Financial Measures" for an explanation of Unregulated Gross Energy Margins.
116

·Lower other operation and maintenance primarily due to $15 million of lower costs at eastern fossil and hydroelectric plants largely due to outages in 2012, partially offset by $3 million of additional costs due to the Ironwood Acquisition.

·Higher depreciation primarily due to the Ironwood Acquisition.

·Higher interest expense primarily due to financings associated with PPL Ironwood, acquired in April 2012, which increased interest expense by $4 million and $3 million due to lower capitalized interest.

·Lower income taxes due to lower pre-tax income in 2013, which reduced income taxes by $47 million, partially offset by an $11 million benefit from a state tax rate change recorded in 2012.

The following after-tax gains (losses), which management considers special items, also impacted the results during the periods ended March 31.

   Income Statement Three Months
   Line Item 2013  2012 
          
Adjusted energy-related economic activity, net, net of tax of $79, ($102)(a) $ (117) $ 150 
Impairments:       
 Adjustments - nuclear decommissioning trust investments, net of tax of $0, ($1)Other Income (Expense)-net      1 
Other:       
 Counterparty bankruptcy, net of tax of $0, $5 (b)Other Operation and Maintenance      (6)
 Ash basin leak remediation adjustment, net of tax of $0, ($1)Other Operation and Maintenance      1 
Total  $ (117) $ 146 

(a)See "Reconciliation of Economic Activity" below.
(b)In October 2011, a wholesale customer, SMGT, filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy code.  In 2012, PPL EnergyPlus recorded an additional allowance for unpaid amounts under the long-term power contract.  In March 2012, the U.S. Bankruptcy Court for the District of Montana approved the request to terminate the contract, effective April 1, 2012.

Reconciliation of Economic Activity

The following table reconciles unrealized pre-tax gains (losses) for the periods ended March 31, from the table within "Commodity Price Risk (Non-trading) - Economic Activity" in Note 14 to the Financial Statements to the special item identified as "Adjusted energy-related economic activity, net."

    Three Months
    2013  2012 
Operating Revenues      
  Unregulated retail electric and gas $ (8) $ 10 
  Wholesale energy marketing   (822)   852 
Operating Expenses      
  Fuel   (1)   2 
  Energy Purchases   634    (591)
Energy-related economic activity (a)   (197)   273 
Option premiums   1    
Adjusted energy-related economic activity   (196)   273 
Less:  Economic activity realized, associated with the monetization of certain      
 full-requirement sales contracts in 2010      21 
Adjusted energy-related economic activity, net, pre-tax $ (196) $ 252 
         
Adjusted energy-related economic activity, net, after-tax $ (117) $ 150 

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

2013 Outlook

Excluding special items, PPL Energy Supply projects lower earnings in 2013 compared with 2012, primarily driven by lower energy prices, higher fuel costs, higher operation and maintenance expense, higher depreciation, and higher financing costs, partially offset by higher capacity prices and higher nuclear generation output despite scheduled outages for both Susquehanna units to implement a long-term solution to turbine blade issues.

Earnings in future periods are subject to various risks and uncertainties.  See "Forward-Looking Information," the rest of this Item 2, and Note 10 to the Financial Statements in this Form 10-Q and "Item 1. Business" and "Item 1A. Risk Factors" in PPL Energy Supply's 2012 Form 10-K for a discussion of the risks, uncertainties and factors that may impact future earnings.
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Statement of Income Analysis --

Unregulated Gross Energy Margins

Non-GAAP Financial Measure

The following discussion includes financial information prepared in accordance with GAAP, as well as a non-GAAP financial measure, "Unregulated Gross Energy Margins."  "Unregulated Gross Energy Margins" is a single financial performance measure of PPL Energy Supply's competitive energy non-trading and trading activities.  In calculating this measure, PPL Energy Supply's energy revenues are offset by the cost of fuel, energy purchases, certain other operation and maintenance expenses, primarily ancillary charges, and gross receipts tax, which is recorded in "Taxes, other than income".  This performance measure is relevant to PPL Energy Supply due to the volatility in the individual revenue and expense lines on the Statements of Income that comprise "Unregulated Gross Energy Margins."  This volatility stems from a number of factors, including the required netting of certain transactions with ISOs and significant fluctuations in unrealized gains and losses.  Such factors could result in gains or losses being recorded in either "Wholesale energy marketing" or "Energy purchases" on the Statements of Income.  This performance measure includes PLR revenues from energy sales to PPL Electric by PPL EnergyPlus, which are recorded in "Wholesale energy marketing to affiliate" revenue.  PPL Energy Supply excludes from "Unregulated Gross Energy Margins" adjusted energy-related economic activity, which includes the changes in fair value of positions used to economically hedge a portion of the economic value of PPL Energy Supply's competitive generation assets, full-requirement sales contracts and retail activities.  This economic value is subject to changes in fair value due to market price volatility of the input and output commodities (e.g., fuel and power) prior to the delivery period that was hedged.  Also included in adjusted energy-related economic activity is the premium amortization associated with options and for 2012 the ineffective portion of qualifying cash flow hedges and economic activity realized associated with the monetization of certain full-requirement sales contracts in 2010.  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.  This measure is not intended to replace "Operating Income," which is determined in accordance with GAAP, as an indicator of overall operating performance.  Other companies may use different measures to analyze and to report on the results of their operations.  PPL Energy Supply believes that "Unregulated Gross Energy Margins" provides another criterion to make investment decisions.  This performance measure is used, in conjunction with other information, internally by senior management to manage PPL Energy Supply's operations, analyze actual results compared with budget and measure certain corporate financial goals used in determining variable compensation.

Reconciliation of Non-GAAP Financial Measures

The following table reconciles "Unregulated Gross Energy Margins" as defined by PPL Energy Supply to "Operating Income" for the periods ended March 31.

      2013 Three Months 2012 Three Months
      Unregulated       Unregulated      
      Gross Energy    Operating Gross Energy     Operating
      Margins Other (a) Income (b) Margins Other (a) Income (b)
                   
Operating Revenues                    
 Wholesale energy marketing                    
    Realized $ 977  $ (1)  $ 976  $ 1,204  $ 4 (c) $ 1,208 
    Unrealized economic activity      (822)(d)   (822)      852 (d)   852 
 Wholesale energy marketing                    
  to affiliate   14        14    21        21 
 Unregulated retail electric and gas   246    (8)(d)   238    214    10 (d)   224 
 Net energy trading margins   (11)       (11)   8        8 
 Energy-related businesses      113     113       96     96 
   Total Operating Revenues   1,226    (718)    508    1,447    962     2,409 
                         
Operating Expenses                    
 Fuel   299    (1)(d)   298    214    (3)(d)   211 
 Energy purchases                    
    Realized   436    (2)    434    636    23 (c)   659 
    Unrealized economic activity      (634)(d)   (634)      591 (d)   591 
 Energy purchases from affiliate   1        1    1        1 
 Other operation and maintenance   5    230     235    4    251     255 
 Depreciation      78     78       64     64 
 Taxes, other than income   8    9     17    8    10     18 
 Energy-related businesses      110     110       92     92 
   Total Operating Expenses   749    (210)    539    863    1,028     1,891 
Total $ 477  $ (508)  $ (31) $ 584  $ (66)  $ 518 
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(a)Represents amounts excluded from Margins.
(b)As reported on the Statements of Income.
(c)Represents energy-related economic activity as described in "Commodity Price Risk (Non-trading) - Economic Activity" within Note 14 to the Financial Statements.  For the three months ended March 31, 2012, "Wholesale energy marketing - Realized" and "Energy purchases - Realized" includes a net pre-tax loss of $21 million related to the monetization of certain full-requirement sales contracts.
(d)Represents energy-related economic activity, which is subject to fluctuations in value due to market price volatility, as described in "Commodity Price Risk (Non-trading) - Economic Activity" within Note 14 to the Financial Statements.

Changes in Non-GAAP Financial Measures

Unregulated Gross Energy Margins are generated through PPL Energy Supply's competitive non-trading and trading activities.  PPL Energy Supply's non-trading energy business is managed on a geographic basis that is aligned with its generation fleet.  The following table shows PPL Energy Supply's non-GAAP financial measure, Unregulated Gross Energy Margins, for the periods ended March 31, as well as the change between periods.  The factors that gave rise to the changes are described below the table.

     Three Months
         2013  2012  Change
                    
Non-trading                  
 Eastern U.S.          $ 430  $ 489  $ (59)
 Western U.S.            58    87    (29)
Net energy trading            (11)   8    (19)
Total          $ 477  $ 584  $ (107)

Unregulated Gross Energy Margins
Eastern U.S.
The change in non-trading margins for the period ended March 31, 2013 compared with 2012 was due to:
Three Months
Baseload energy prices$ (125)
Coal prices (10)
Nuclear fuel prices (6)
Full-requirement sales contracts 5 
Intermediate and peaking capacity prices 5 
Baseload capacity prices 6 
Intermediate and peaking Spark Spreads 14 
Ironwood acquisition which eliminated tolling expense 15 
Net economic availability of coal and hydroelectric plants 32 
Other 5 
Total$ (59)

Western U.S.

Non-trading margins for the three months ended March 31, 2013 compared with 2012 were lower due to $43 million of lower wholesale prices, partially offset by $12 million of higher wholesale volumes.

Net Energy Trading Margins

Net energy trading margins for the three months ended March 31, 2013 compared with 2012 decreased as a result of lower margins of $16 million on gas positions due to higher prices.

Other Operation and Maintenance
The increase (decrease) in other operation and maintenance for the period ended March 31, 2013 compared with 2012 was due to:
Three Months
Uncollectible accounts (a)$ (11)
Costs at eastern fossil and hydroelectric plants (b) (11)
Other 2 
Total$ (20)
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(a)The decrease is primarily due to SMGT filing for protection under Chapter 11 of the U.S. Bankruptcy Code in 2011.  $11 million of damages billed to SMGT were fully reserved in 2012.
(b)The decrease is primarily due to Brunner Island Unit 3 outage costs of $15 million in 2012 compared with no major outage costs in 2013, partially offset by $3 million of additional costs due to the Ironwood Acquisition.

Depreciation

Depreciation increased by $14 million for the three months ended March 31, 2013 compared with 2012, primarily due to $10 million related to PP&E additions and $6 million attributable to the Ironwood Acquisition.

Interest Expense
The increase (decrease) in interest expense for the period ended March 31, 2013 compared with 2012 was due to:
Three Months
Ironwood Acquisition (a)$ 4 
Capitalized interest 3 
Other 2 
Total$ 9 

(a)The increase was due to financings associated with the Ironwood Acquisition.

Income Taxes
The increase (decrease) in income taxes for the period ended March 31, 2013 compared with 2012 was due to:
Three Months
Lower pre-tax book income$ (225)
State deferred tax rate change (a) 11 
Other 2 
Total$ (212)

(a)During the three months ended March 31, 2012, PPL Energy Supply recorded adjustments related to state deferred tax liabilities.

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

Financial Condition
       
Liquidity and Capital Resources
       
PPL Energy Supply had the following at:
       
  March 31, 2013 December 31, 2012
       
Cash and cash equivalents $ 147  $ 413 
Short-term debt $ 481  $ 356 

The $266 million decrease in PPL Energy Supply's cash and cash equivalents position was primarily the net result of:

·distributions to member of $313 million;
·capital expenditures of $124 million;
·a net increase in restricted cash and cash equivalents of $59 million;
·net cash provided by operating activities of $125 million; and
·a net increase in short-term debt of $125 million.

PPL Energy Supply's cash provided by operating activities decreased by $129 million for the three months ended March 31, 2013, compared with 2012.  This was primarily due to a $45 million increase in cash used by working capital components, a decrease in net income when adjusted for non-cash components of $31 million and a $36 million increase in defined benefit plans funding.
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Credit Facilities

PPL Energy Supply maintains credit facilities to provide liquidity and to backstop commercial paper issuances.  At March 31, 2013, PPL Energy Supply's total committed borrowing capacity under its credit facilities and the use of this borrowing capacity were:

         Letters of   
         Credit Issued   
       and  
   Committed   Commercial Unused
   Capacity Borrowed Paper Backup Capacity
              
Syndicated Credit Facility $ 3,000     $ 641  $ 2,359 
Letter of Credit Facility (a)   200   n/a   123    77 
Total PPL Energy Supply Credit Facilities (b) $ 3,200     $ 764  $ 2,436 

(a)In February 2013, PPL Energy Supply extended the expiration date from March 2013 and, effective April 2013, the capacity was reduced to $150 million.
(b)The commitments under PPL Energy Supply's credit facilities are provided by a diverse bank group, with no one bank and its affiliates providing an aggregate commitment of more than 11% of the total committed capacity.

See Note 7 to the Financial Statements for further discussion of PPL Energy Supply's credit facilities.

Commercial Paper

PPL Energy Supply maintains a commercial paper program up to $750 million to provide an additional financing source to fund its short-term liquidity needs, if and when necessary.  Commercial paper issuances are supported by PPL Energy Supply's Syndicated Credit Facility.  At March 31, 2013 and December 31, 2012, PPL Energy Supply had $481 million and $356 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheets, at weighted-average interest rates of 0.38% and 0.50%.

Rating Agency Actions

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

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

A downgrade in PPL Energy Supply's or its subsidiaries' credit ratings could result in higher borrowing costs and reduced access to capital markets.  PPL Energy Supply and its subsidiaries have no credit rating triggers that would result in the reduction of access to capital markets or the acceleration of maturity dates of outstanding debt.

The rating agencies took the following actions related to PPL Energy Supply and its subsidiaries in 2013:

In February 2013, Moody's upgraded its rating, from B2 to Ba1, and revised the outlook from under review to stable for PPL Ironwood.

In April 2013, Fitch affirmed the BBB- rating and stable outlook at PPL Montana.

Ratings Triggers

PPL Energy Supply has various contracts, including contracts for the sale and purchase of electricity and fuel, commodity transportation and storage, tolling agreements and interest rate instruments, which contain provisions that require PPL Energy Supply to post additional collateral or permit the counterparty to terminate the contract if PPL Energy Supply's credit rating were to fall below investment grade.  See Note 14 to the Financial Statements for a discussion of "Credit Risk-Related Contingent Features," including a discussion of the potential additional collateral that would have been required for derivative contracts in a net liability position at March 31, 2013.
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For additional information on PPL Energy Supply's liquidity and capital resources, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," in PPL Energy Supply's 2012 Form 10-K.

Risk Management

Market Risk

See Notes 13 and 14 to the Financial Statements for information about PPL Energy Supply's risk management objectives, valuation techniques and accounting designations.

The forward-looking information presented below provides estimates of what may occur in the future, assuming certain adverse market conditions and model assumptions.  Actual future results may differ materially from those presented.  These disclosures are not precise indicators of expected future losses, but only indicators of possible losses under normal market conditions at a given confidence level.

Commodity Price Risk (Non-trading)

PPL Energy Supply segregates its non-trading activities into two categories:  hedge activity and economic activity.  Transactions that are accounted for as hedge activity qualify for hedge accounting treatment.  The economic activity category includes transactions that address a specific risk, but were not eligible for hedge accounting or for which hedge accounting was not elected.  This activity includes the changes in fair value of positions used to hedge a portion of the economic value of PPL Energy Supply's 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 14 to the Financial Statements for additional information.

To hedge the impact of market price volatility on PPL Energy Supply's energy-related assets, liabilities and other contractual arrangements, PPL Energy Supply both sells and purchases physical energy at the wholesale level under FERC market-based tariffs throughout the U.S. and enters into financial exchange-traded and over-the-counter contracts.  PPL Energy Supply's non-trading commodity derivative contracts range in maturity through 2019.

The following table sets forth the changes in the net fair value of non-trading commodity derivative contracts for the period ended March 31.  See Notes 13 and 14 to the Financial Statements for additional information.

        Gains (Losses)
    Three Months
      2013  2012 
             
Fair value of contracts outstanding at the beginning of the period       $ 473  $ 1,082 
Contracts realized or otherwise settled during the period         (137)   (279)
Fair value of new contracts entered into during the period (a)         9    (1)
Other changes in fair value         (116)   413 
Fair value of contracts outstanding at the end of the period       $ 229  $ 1,215 

(a)Represents the fair value of contracts at the end of the quarter of their inception.

The following table segregates the net fair value of non-trading commodity derivative contracts at March 31, 2013, based on the observability of the information used to determine the fair value.

   Net Asset (Liability)
   Maturity       Maturity   
   Less Than Maturity Maturity in Excess Total Fair
   1 Year 1-3 Years 4-5 Years of 5 Years Value
Source of Fair Value               
Prices based on significant observable inputs (Level 2) $ 238  $ (21) $ (8) $ 6  $ 215 
Prices based on significant unobservable inputs (Level 3)   (1)   12    3       14 
Fair value of contracts outstanding at the end of the period $ 237  $ (9) $ (5) $ 6  $ 229 
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PPL Energy Supply sells electricity, capacity and related services and buys fuel on a forward basis to hedge the value of energy from its generation assets.  If PPL Energy Supply were unable to deliver firm capacity and energy or to accept the delivery of fuel under its agreements, under certain circumstances it could be required to pay liquidating damages.  These damages would be based on the difference between the market price and the contract price of the commodity.  Depending on price changes in the wholesale energy markets, such damages could be significant.  Extreme weather conditions, unplanned power plant outages, transmission disruptions, nonperformance by counterparties (or their counterparties) with which it has energy contracts and other factors could affect PPL Energy Supply's ability to meet its obligations, or cause significant increases in the market price of replacement energy.  Although PPL Energy Supply attempts to mitigate these risks, there can be no assurance that it will be able to fully meet its firm obligations, that it will not be required to pay damages for failure to perform, or that it will not experience counterparty nonperformance in the future.

Commodity Price Risk (Trading)

PPL Energy Supply's trading commodity derivative contracts range in maturity through 2017.  The following table sets forth changes in the net fair value of trading commodity derivative contracts for the period ended March 31.  See Notes 13 and 14 to the Financial Statements for additional information.

    Three Months
      2013  2012 
             
Fair value of contracts outstanding at the beginning of the period       $ 29  $ (4)
Contracts realized or otherwise settled during the period         (2)   
Fair value of new contracts entered into during the period (a)         (12)   6 
Fair value of contracts outstanding at the end of the period       $ 15  $ 2 

(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 March 31, 2013, based on the observability of the information used to determine the fair value.

  Net Asset (Liability)
  Maturity      Maturity  
  Less Than Maturity Maturity in Excess Total Fair
  1 Year 1-3 Years 4-5 Years of 5 Years Value
Source of Fair Value               
Prices quoted in active markets for identical instruments (Level 1) $ 1           $ 1 
Prices based on significant observable inputs (Level 2)   5  $ 9          14 
Fair value of contracts outstanding at the end of the period $ 6  $ 9        $ 15 

VaR Models

A VaR model is utilized to measure commodity price risk in unregulated gross energy margins for the non-trading and trading portfolios.  VaR is a statistical model that attempts to estimate the value of potential loss over a given holding period under normal market conditions at a given confidence level.  VaR is calculated using a Monte Carlo simulation technique based on a five-day holding period at a 95% confidence level.  Given the company's disciplined hedging program, the non-trading VaR exposure is expected to be limited in the short-term.  The VaR for portfolios using end-of-month results for the periods was as follows.

   Trading VaR Non-Trading VaR
   Three Months Three Months
   Ended Ended
   March 31, March 31,
   2013  2013 
95% Confidence Level, Five-Day Holding Period      
 Period End $ 6  $
 Average for the Period   5   
 High   6   
 Low   3   

The trading portfolio includes all proprietary trading positions, regardless of the delivery period.  All positions not considered proprietary trading are considered non-trading.  The non-trading portfolio includes the entire portfolio, including generation, with delivery periods through the next 12 months.  Both the trading and non-trading VaR computations exclude FTRs due to the absence of reliable spot and forward markets.  The fair value of the non-trading and trading FTR positions was insignificant at March 31, 2013.
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Interest Rate Risk

PPL Energy Supply and its subsidiaries issue debt to finance their operations, which exposes them to interest rate risk.  PPL and PPL Energy Supply utilize various financial derivative instruments to adjust the mix of fixed and floating interest rates in PPL Energy Supply's debt portfolio, adjust the duration of its debt portfolio and lock in benchmark interest rates in anticipation of future financing, when appropriate.  Risk limits under the risk management program are designed to balance risk exposure to volatility in interest expense and changes in the fair value of PPL Energy Supply's debt portfolio due to changes in the absolute level of interest rates.  PPL Energy Supply had no interest rate hedges outstanding at March 31, 2013.

At March 31, 2013, PPL Energy Supply's potential annual exposure to increased interest expense, based on a 10% increase in interest rates, was not significant.

PPL Energy Supply is also exposed to changes in the fair value of its debt portfolio.  PPL Energy Supply estimated that a 10% decrease in interest rates at March 31, 2013 would increase the fair value of its debt portfolio by $47 million.

NDT Funds - Securities Price Risk

In connection with certain NRC requirements, PPL Susquehanna maintains trust funds to fund certain costs of decommissioning the PPL Susquehanna nuclear plant (Susquehanna).  At March 31, 2013, these funds were invested primarily in domestic equity securities and fixed-rate, fixed-income securities and are reflected at fair value on the Balance Sheet.  The mix of securities is designed to provide returns sufficient to fund Susquehanna's decommissioning and to compensate for inflationary increases in decommissioning costs.  However, the equity securities included in the trusts are exposed to price fluctuation in equity markets, and the values of fixed-rate, fixed-income securities are primarily exposed to changes in interest rates.  PPL actively monitors the investment performance and periodically reviews asset allocation in accordance with its nuclear decommissioning trust policy statement.  At March 31, 2013, a hypothetical 10% increase in interest rates and a 10% decrease in equity prices would have resulted in an estimated $55 million reduction in the fair value of the trust assets.  See Notes 13 and 17 to the Financial Statements for additional information regarding the NDT funds.

Credit Risk

See Notes 11, 13 and 14 to the Financial Statements in this Form 10-Q and "Risk Management - Energy Marketing & Trading and Other - Credit Risk" in PPL Energy Supply's 2012 Form 10-K for additional information.

Related Party Transactions

PPL Energy Supply is not aware of any material ownership interests or operating responsibility by senior management of PPL Energy Supply in outside partnerships, including leasing transactions with variable interest entities or other entities doing business with PPL Energy Supply.  See Note 11 to the Financial Statements for additional information on related party transactions.

Acquisitions, Development and Divestitures

PPL Energy Supply from time to time evaluates opportunities for potential acquisitions, divestitures and development projects.  Development projects are reexamined based on market conditions and other factors to determine whether to proceed with the projects, sell, cancel or expand them, execute tolling agreements or pursue other options.  See Note 8 to the Financial Statements for information on the more significant activities.

Environmental Matters

Extensive federal, state and local environmental laws and regulations are applicable to PPL Energy Supply's air emissions, water discharges and the management of hazardous and solid waste, as well as other aspects of PPL Energy Supply's business. The cost of compliance or alleged non-compliance cannot be predicted with certainty but could be material.  In addition, costs may increase significantly if the requirements or scope of environmental laws or regulations, or similar rules, are expanded or changed by the relevant agencies.  Costs may take the form of increased capital expenditures or operating and maintenance expenses, monetary fines, penalties or other restrictions.  Many of these environmental law considerations are also applicable to the operations of key suppliers, or customers, such as coal producers and industrial power users, and may impact the costs of their products or their demand for PPL Energy Supply's services.
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Physical effects associated with climate change could include the impact of changes in weather patterns, such as storm frequency and intensity, and the resultant potential damage to PPL Energy Supply's generation assets as well as impacts on customers.  In addition, changed weather patterns could potentially reduce annual rainfall in areas where PPL Energy Supply has hydro generating facilities or where river water is used to cool its fossil and nuclear powered generators.  PPL Energy Supply cannot currently predict whether its businesses will experience these potential climate change-related risks or estimate the potential cost of their related consequences.

The following is a discussion of the more significant environmental matters.

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) under existing solid waste regulations.  A final rulemaking is currently expected before the end of 2015.  However, the timing of the final regulations could be accelerated by certain litigation that could require the EPA to issue its regulations sooner.  Regulations could impact handling, disposal and/or beneficial use of CCRs.  The financial impact could be material if CCRs are regulated as hazardous waste, and significant if regulated as non-hazardous, in accordance with the proposed rule.

Effluent Limitation Guidelines
On April 19, 2013, the EPA issued 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 handling and metal cleaning wastes, as well as new limits for scrubber wastewater, gasification wastewater and landfill leachate.  The proposal contains several alternative approaches, some of which could significantly impact PPL Energy Supply's coal-fired plants.  PPL Energy Supply will work with industry groups to comment on the proposed regulation.  A final regulation is expected in May 2014.  At the present time, PPL Energy Supply is unable to predict the outcome of this matter or estimate a range of reasonably possible costs, but the costs could be significant.

316(b) Cooling Water Intake Structures Rule
In April 2011, the EPA published a draft regulation under Section 316(b) of the Clean Water Act, which regulates cooling water intakes for power plants.  The draft rule has two provisions: one requires installation of Best Technology Available (BTA) to reduce mortality of aquatic organisms that are pulled into the plants cooling water system (entrainment), and the second imposes standards for reduction of mortality of aquatic organisms trapped on water intake screens (impingement).  A final rule is expected in June 2013.  The proposed regulation would apply to nearly all PPL Energy Supply-owned steam electric plants in Pennsylvania and Montana, potentially even including those equipped with closed-cycle cooling systems.  PPL Energy Supply's compliance costs could be significant, especially if the final rule requires closed-cycle systems at plants that do not currently have them or conversions of once-through systems to closed-cycle.

GHG Regulations
In 2013, the EPA is expected to finalize limits on GHG emissions from new power plants and to begin working on a proposal for such emissions from existing power plants.  The EPA's proposal on GHG emissions from new power plants would effectively preclude construction on any coal-fired plants and could even be difficult for new gas-fired plants to meet.  With respect to existing power plants, the impact could be significant, depending on the structure and stringency of the final rule.  PPL Energy Supply, along with others in the industry, filed comments on the EPA's proposal related to GHG emissions from new plants.

MATS
The EPA finalized MATS requiring fossil-fuel fired plants to reduce emissions of mercury and other hazardous air pollutants by April 16, 2015.  The rule is being challenged by industry groups and states.  The EPA has subsequently proposed changes to the rule with respect to new sources to address the concern that the rule effectively precludes construction of any new coal-fired plants.  PPL Energy Supply is generally well-positioned to comply with MATS due to its recent investment in, and installation of, environmental controls such as wet flue gas desulfurization systems.  PPL Energy Supply is evaluating chemical additive systems for mercury control at Brunner Island, and modifications to existing controls at Colstrip for improved particulate matter reductions.  In September 2012, PPL Energy Supply announced its intention to place its Corette plant in long-term reserve status beginning in April 2015 due to expected market conditions and costs to comply with MATS.

CSAPR and CAIR
In 2011, the EPA finalized its CSAPR regulating emissions of nitrous oxide and sulfur dioxide through new allowance trading programs which were to be implemented in two phases (2012 and 2014).  Like its predecessor, the CAIR, CSAPR targeted sources in the eastern United States.  In December 2011, the U.S. Court of Appeals for the District of Columbia. Circuit (the Court) stayed implementation of CSAPR, leaving CAIR in place.  Subsequently, in August 2012, the Court vacated and remanded CSAPR back to the EPA for further rulemaking, again leaving CAIR in place.  PPL Energy Supply
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plants in Pennsylvania will continue to comply with CAIR through optimization of existing controls, balanced with emission allowance purchases.  The Court's August decision leaves plants in CSAPR-affected states potentially exposed to more stringent emission reductions due to regional haze implementation (it was previously determined that CSAPR or CAIR participation satisfies regional haze requirements), and/or petitions to the EPA by downwind states under Section 126 of the Clean Air Act requesting the EPA to require plants that allegedly contribute to downwind non-attainment to take action to reduce emissions.

Regional Haze - Montana
The EPA signed its final Federal Implementation Plan of the Regional Haze Rules for Montana in September 2012, with tighter emissions limits for Colstrip Units 1 & 2 based on the installation of new controls (no limits or additional controls were specified for Colstrip Units 3 & 4), and tighter emission limits for Corette (which are not based on additional controls).  The cost of the potential additional controls for Colstrip Units 1 & 2, if required, could be significant.  PPL Energy Supply expects to meet the tighter permit limits at Corette without any significant changes to operations, although other requirements have led to the planned suspension of operations at Corette beginning in April 2015 (see "MATS" discussion above).

See Note 10 to the Financial Statements in this Form 10-Q and "Item 1. Business - Environmental Matters" in PPL Energy Supply's 2012 Form 10-K for a discussion of environmental matters.

New Accounting Guidance

See Notes 2 and 19 to the Financial Statements for a discussion of new accounting guidance adopted and pending adoption.

Application of Critical Accounting Policies

Financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies.  The following accounting policies are particularly important to the financial condition or results of operations, and require estimates or other judgments of matters inherently uncertain: price risk management, defined benefits, asset impairment (excluding investments), loss accruals, AROs and income taxes.  See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in PPL Energy Supply's 2012 Form 10-K for a discussion of each critical accounting policy.
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PPL ELECTRIC UTILITIES CORPORATION AND SUBSIDIARIES

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


The following should be read in conjunction with PPL Electric's Condensed Consolidated Financial Statements and the accompanying Notes and with PPL Electric's 2012 Form 10-K.  Capitalized terms and abbreviations are defined in the glossary.  Dollars are in millions, unless otherwise noted.

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

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

·  "Results of Operations" provides a summary of PPL Electric's earnings and a description of key factors expected to impact future earnings.  This section ends with explanations of significant changes in principal line items on PPL Electric's Statements of Income, comparing the three months ended March 31, 2013 with 2012.

·  "Financial Condition - Liquidity and Capital Resources" provides an analysis of PPL Electric's liquidity position and credit profile.  This section also includes a discussion of rating agency actions.

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

Overview

Introduction

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

Business Strategy

PPL Electric's strategy for its regulated electricity delivery business is to provide safe, reliable service to its customers and achieve stable, long-term growth in earnings and rate base.  Rate base is expected to grow as a result of significant capital expenditure programs aimed at maintaining existing assets and improving system reliability.  PPL Electric is focused on timely recovery of costs, efficient operations, strong customer service and constructive regulatory relationships.

To manage financing costs and access to credit markets and to fund its capital expenditure program, a key objective for PPL Electric is to maintain a strong credit profile and strong liquidity position.

Timely recovery of costs to maintain and enhance the reliability of its delivery system, including the replacement of aging distribution assets, is required in order to maintain strong cash flows and a strong credit profile.  Traditionally, such cost recovery would be pursued through periodic base rate case proceedings with the PUC.  As such costs continue to increase, more frequent rate case proceedings may be required or an alternative rate making process would need to be implemented in order to achieve more timely recovery.  See "Legislation - Regulatory Procedures and Mechanisms" below for information on Pennsylvania's new alternative rate-making mechanism.

Transmission costs are recovered through a FERC Formula Rate mechanism, which is updated annually for costs incurred and assets placed in service.  Accordingly, increased costs, including those related to the replacement of aging transmission assets and the PJM-approved Regional Transmission Line Expansion Plan, are recovered on a timely basis.
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Financial and Operational Developments

Net Income Available to PPL

Net Income Available to PPL for the three months ended March 31, 2013 was $64 million compared to $33 million in 2012, representing a 94% increase.

See "Results of Operations" below for further discussion and analysis of PPL Electric's earnings.

Rate Case Proceeding

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

Legislation - Regulatory Procedures and Mechanisms

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

The PUC approved the LTIIP on January 10, 2013 and, on January 15, 2013, PPL Electric filed a petition requesting permission to establish a DSIC.  Several parties have filed responses to PPL Electric's petition.  The case remains pending before the PUC.  PPL Electric does not expect any new rates to be effective before the third quarter of 2013.

FERC Formula Rates

Transmission rates are regulated by the FERC.  PPL Electric's transmission revenues are billed in accordance with a FERC-approved PJM open access transmission tariff that utilizes a formula-based rate recovery mechanism.  The formula rate is calculated, in part, based on financial results as reported in PPL Electric's annual FERC Form No. 1, filed under FERC's Uniform System of Accounts (USOA).  PPL Electric must follow FERC's USOA, which requires subsidiaries to be presented, for FERC reporting purposes, using the equity method of accounting unless a waiver has been issued.  The FERC has granted waivers of this requirement to other utilities when such waiver would more accurately present the integrated operations of the utilities and their subsidiaries.  In March 2013, as part of a routine FERC audit of PPL and its subsidiaries, PPL Electric determined that it never obtained a waiver of the use of the equity method of accounting for PPL Receivables Corporation (PPL Receivables).  PPL Receivables is a wholly owned subsidiary of PPL Electric, formed in 2004 to purchase eligible accounts receivable and unbilled revenue of PPL Electric to collateralize commercial paper issuances to reduce borrowing costs.  In March 2013, PPL Electric filed a request for waiver with FERC that, if approved, would allow it to continue to consolidate the results of PPL Receivables with the results of PPL Electric, as it has done since 2004.  While PPL Electric may ultimately be successful in obtaining a waiver from FERC, FERC may require PPL Electric to re-issue one or more of its prior FERC Form No. 1 filings in either the audit proceeding or the waiver proceeding.  If re-issuance of FERC Form No. 1 filings were required by FERC, PPL Electric's revenue requirement calculated under the formula rate could be negatively impacted.  The impact, if any, is not known at this time but could range between $0 and $40 million, pre-tax.  PPL Electric cannot predict the outcome of the waiver or audit proceedings, which remain pending before the FERC.
Results of Operations

The following discussion provides a summary of PPL Electric's earnings and a description of key factors that are expected to impact future earnings.  This section ends with "Statement of Income Analysis," which includes explanations of significant changes in Pennsylvania Gross Delivery Margins by component and principal line items on PPL Electric's Statements of Income, comparing the three months ended March 31, 2013 with 2012.

The results for interim periods can be disproportionately influenced by numerous factors and developments and by seasonal variations.  As such, the results of operations for interim periods do not necessarily indicate results or trends for the year or future periods.
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Earnings            
              
Net Income Available to PPL for the periods ended March 31 was:
              
     Three Months
       2013  2012 
              
Net Income Available to PPL       $ 64  $ 33 

The changes in the components of Net Income Available to PPL between these periods were due to the following factors which reflect reclassifications for items included in Pennsylvania Gross Delivery Margins.

Three Months
Pennsylvania Gross Delivery Margins$ 40 
Other operation and maintenance 7 
Depreciation (4)
Other (3)
Income Taxes (13)
Distributions on Preference Stock 4 
Total$ 31 

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

·Lower other operation and maintenance primarily due to lower corporate service costs.

·     Higher depreciation due to PP&E additions.

·Higher income taxes primarily due to the impact of higher pre-tax income.

·Lower distributions on preference stock due to the June 2012 redemption of all 2.5 million shares of preference stock.

2013 Outlook

Excluding special items, PPL Electric projects higher earnings in 2013 compared with 2012, primarily driven by higher distribution revenues from a distribution base rate increase and higher transmission margins, partially offset by higher depreciation.

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

Statement of Income Analysis --

Pennsylvania Gross Delivery Margins

Non-GAAP Financial Measure

The following discussion includes financial information prepared in accordance with GAAP, as well as a non-GAAP financial measure, "Pennsylvania Gross Delivery Margins."  "Pennsylvania Gross Delivery Margins" is a single financial performance measure of PPL Electric's Pennsylvania regulated electric delivery operations, which includes transmission and distribution activities.  In calculating this measure, utility revenues and expenses associated with approved recovery mechanisms, including energy provided as a PLR, are offset with minimal impact on earnings.  Costs associated with these mechanisms are recorded in "Energy purchases," "Energy purchases from affiliate," "Other operation and maintenance" expense,maintenance," which is primarily Act 129 costs, and "Taxes, other than income" which is primarily gross receipts tax.  As a result, this measure represents the net revenues from PPL Electric's Pennsylvania regulated electric delivery operations.  This measure is not intended to replace "Operating Income," which is determined in accordance with GAAP, as an indicator of overall operating performance.  Other companies may use different measures to analyze and to report on the results of their operations.  PPL Electric believes that "Pennsylvania Gross Delivery Margins" provides another criterion to make investment decisions.  This performance measure is used, in conjunction with other information, internally by senior management and PPL's Board of Directors to manage PPL Electric's operations and analyze actual results to budget.

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Reconciliation of Non-GAAP Financial Measures

The following tables reconcile "Operating Income" totable reconciles "Pennsylvania Gross Delivery Margins" as defined by PPL Electric to "Operating Income" for the periods ended June 30.March 31.

     2012 Three Months 2011 Three Months
     PA Gross      PA Gross     
     Delivery   Operating Delivery    Operating
     Margins Other (a) Income (b) Margins Other (a) Income (b)
                
Operating Revenues                 
 Retail electric$ 403     $ 403  $ 436     $ 436 
 Electric revenue from affiliate  1       1    4       4 
   Total Operating Revenues  404       404    440       440 
                      
Operating Expenses                 
 Energy purchases  120       120    169       169 
 Energy purchases from affiliate  17       17    4       4 
 Other operation and maintenance  26  $ 117    143    29  $ 97    126 
 Depreciation     39    39       37    37 
 Taxes, other than income  20    2    22    20    2    22 
   Total Operating Expenses  183    158    341    222    136    358 
Total$ 221  $ (158) $ 63  $ 218  $ (136) $ 82 

   2012 Six Months 2011 Six Months   2013 Three Months 2012 Three Months
   PA Gross     PA Gross       PA Gross     PA Gross    
   Delivery   Operating Delivery   Operating   Delivery   Operating Delivery   Operating
   Margins Other (a) Income (b) Margins Other (a) Income (b)   Margins Other (a) Income (b) Margins Other (a) Income (b)
                            
Operating RevenuesOperating Revenues            Operating Revenues            
Retail electric $ 860    $ 860  $ 990    $ 990 Retail electric $ 512    $ 512  $ 457    $ 457 
Electric revenue from affiliate   2       2    8       8 Electric revenue from affiliate   1       1    1       1 
 Total Operating Revenues   862       862    998       998  Total Operating Revenues   513       513    458       458 
                            
Operating ExpensesOperating Expenses            Operating Expenses            
Energy purchases  273     273   420     420 Energy purchases  172     172   153     153 
Energy purchases from affiliate  38     38   10     10 Energy purchases from affiliate  14     14   21     21 
Other operation and maintenance  49  $ 234   283   47  $ 209   256 Other operation and maintenance  22  $ 111   133   22  $ 118   140 
Depreciation    78   78     70   70 Depreciation    43   43     39   39 
Taxes, other than income   44    4    48    53    4    57 Taxes, other than income   28    2    30    25    1    26 
 Total Operating Expenses   404    316    720    530    283    813  Total Operating Expenses   236    156    392    221    158    379 
TotalTotal $ 458  $ (316) $ 142  $ 468  $ (283) $ 185 Total $ 277  $ (156) $ 121  $ 237  $ (158) $ 79 

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


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Changes in Non-GAAP Financial Measures

The following table shows PPL Electric's non-GAAP financial measure, "Pennsylvania Gross Delivery Margins" for the periods ended June 30,March 31, as well as the change between periods.  The factors that gave rise to the change are described below the table.
   Three Months Six Months
   2012  2011  Change 2012  2011  Change
                    
PA Gross Delivery Margins by Component                  
 Distribution $ 170  $ 173  $ (3) $ 359  $ 381  $ (22)
 Transmission   51    45    6    99    87    12 
 Total $ 221  $ 218  $ 3  $ 458  $ 468  $ (10)
            Three Months
            2013  2012  Change
PA Gross Delivery Margins by Component                  
 Distribution          $ 224  $ 189  $ 35 
 Transmission            53    48    5 
 Total          $ 277  $ 237  $ 40 

Distribution

Margins decreasedincreased for the three and six month periodsmonths ended June 30, 2012,March 31, 2013 compared with 2011,2012 primarily due primarily to a $13 million favorable effect of mild weather in 2012 and a $19 million favorable effect of price, largely comprised of higher base rates, effective January 1, 2013 as a result of the effects2012 rate case and higher volumes of weather.$3 million.

Transmission

Margins increased for the three and six month periodsmonths ended June 30, 2012,March 31, 2013 compared with 2011,2012 primarily due to increased investment in plant and the recovery of additional costs through the FERC formula-based rates.

Other Operation and Maintenance     
       
The increase (decrease) in other operation and maintenance expense for the periods ended June 30, 2012 compared with 2011 was due to:
   
  Three Months Six Months
       
      
Payroll-related costs$ 4  $ 7 
Vegetation management  6    8 
PUC-reportable storm costs, net of insurance recovery  (2)   (7)
Uncollectible accounts  2    4 
Allocation of certain corporate support group costs  2    5 
Other  5    10 
Total$ 17  $ 27 
Other Operation and Maintenance
The increase (decrease) in other operation and maintenance for the period ended March 31, 2013 compared with 2012 was due to:
Three Months
Uncollectible accounts$ (2)
Corporate service costs (a) (5)
Total$ (7)

(a)The decrease is partially due to $2 million of storm insurance policy premiums for coverage that was in place in 2012 but was not renewed in 2013.
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Depreciation

Depreciation increased by $8$4 million for the sixthree months ended June 30, 2012March 31, 2013 compared with 2011,2012, primarily due to PP&E additions relatedas part of ongoing investments to PPL Electric's ongoing efforts to ensure the reliability of its deliveryenhance system and replace aging infrastructure.reliability.

Taxes, Other Than Income

Taxes, other than income increased by $4 million for the sixthree months ended June 30, 2012March 31, 2013 compared with 2011 decreased by $9 million,2012, primarily due to lowerhigher Pennsylvania gross receipts tax expense due to a decrease in taxable electrichigher retail electricity revenue.  This tax is included in "Pennsylvania Gross Delivery Margins."

Financing Costs      
       
The increase (decrease) in financing costs for the periods ended June 30, 2012 compared with 2011 was due to:
       
  Three Months Six Months
       
Long-term debt balances $ 4  $ 7 
Interest rates   (5)   (9)
Distributions on preference stock (a)   (4)   (4)
Amortization of debt issuance costs   1    2 
Total $ (4) $ (4)
Financing Costs

(a)      DecreasesFinancing costs, which consist of "Interest Expense" and "Distributions on Preference Stock," decreased by $3 million for both periods arethe three months ended March 31, 2013, compared with 2012.  The decrease was primarily due to the June 2012 redemption of all 2.5 million shares of preference stock.

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Income Taxes      
       
The increase (decrease) in income taxes for the periods ended June 30, 2012 compared with 2011 was due to:
       
    
  Three Months Six Months
       
Lower pre-tax book income $ (7) $ (16)
Federal and state tax reserve adjustments      1 
Federal and state tax return adjustments (a)      2 
Depreciation not normalized (a)   (1)   1 
Other      1 
Total $ (8) $ (11)

(a)Income TaxesIn February 2011, the Pennsylvania Department of Revenue issued interpretive guidance on the treatment of bonus depreciation for Pennsylvania��
The increase (decrease) in income tax purposes.  In accordance with Corporation Tax Bulletin 2011-01, Pennsylvania 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 benefittaxes 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.period ended March 31, 2013 compared with 2012 was due to:
Three Months
Higher pre-tax book income$ 16 
Depreciation not normalized (2)
Other (1)
Total$ 13 

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

Financial Condition
        
Liquidity and Capital Resources
        
PPL Electric had the following at:
        
 June 30, 2012 December 31, 2011 March 31, 2013 December 31, 2012
        
Cash and cash equivalents $ 45  $ 320  $ 31  $ 140 
Short-term debt $ 195  $  $ 125    

The $275$109 million decrease in PPL Electric's cash and cash equivalents position was primarily the net result of:

·capital expenditures of $256$189 million;
·redemptionnet cash used in operating activities of preference stock of $250$77 million;
·the payment of $56$25 million of common stock dividends to parent; partially offset by
·thea net increase in short-term debt of $195$125 million; and
·net cash provided by operating activitiescontributions from parent of $101$60 million.

PPL Electric's cash provided byused in operating activities increased by $38$67 million for the sixthree months ended June 30, 2012,March 31, 2013 compared with 2011, primarily due to2012.  The increase was a $48 million decrease in defined benefit plan funding.net effect of:

·a $77 million increase in cash used by components of working capital (primarily due to a $76 million change in accounts receivable resulting from higher base rates and favorable effects of weather); and
·a $34 million increase in defined benefit plan funding; partially offset by
·a $27 million increase in net income.
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Credit Facilities

PPL Electric maintains credit facilities to provide liquidity and to backstop commercial paper issuances.  At June 30, 2012,March 31, 2013, PPL Electric's total committed borrowing capacity under its credit facilities and the use of this borrowing capacity were:

      Letters of        Letters of  
      Credit Issued        Credit Issued  
      and        and  
  Committed   Commercial Unused  Committed   Commercial Unused
  Capacity Borrowed Paper Backstop Capacity  Capacity Borrowed Paper Backup Capacity
                  
Syndicated Credit Facility (a)Syndicated Credit Facility (a) $ 300    $ 196  $ 104 Syndicated Credit Facility (a) $ 300    $ 126  $ 174 
Asset-backed Credit Facility (b)Asset-backed Credit Facility (b)   150      n/a   150 Asset-backed Credit Facility (b)   100      n/a   100 
Total PPL Electric Credit FacilitiesTotal PPL Electric Credit Facilities $ 450     $ 196  $ 254 Total PPL Electric Credit Facilities $ 400     $ 126  $ 274 

(a)The commitments under this credit facility are provided by a diverse bank group, with no one bank and its affiliates providing an aggregate commitment of more than 7%5% of the total committed capacity.
(b)PPL Electric obtains financing by selling and contributing its eligible accounts receivable and unbilled revenue to a special purpose, wholly owned subsidiary on an ongoing basis.  The subsidiary pledges these assets to secure loans of up to an aggregate of $150$100 million from a commercial paper conduit sponsored by a financial institution.  At June 30, 2012,March 31, 2013, based on accounts receivable and unbilled revenue pledged, the amount available for borrowing under thisthe facility was limited to $87 million.  In July 2012, PPL Electric and the subsidiary extended this agreement from July 2012 to September 2012 and reduced the capacity to $100 million.

148

See Note 7 to the Financial Statements for further discussion of PPL Electric's credit facilities.

Commercial Paper

In May 2012, PPL Electric increased the capacity of itsmaintains a commercial paper program from $200 millionfor up to $300 million to provide an additional financing source to fund its short-term liquidity needs, if and when necessary.  Commercial paper issuances are supported by PPL Electric's Syndicated Credit Facility.  At June 30, 2012,March 31, 2013, PPL Electric had $195$125 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheet, at a weighted-average interest rate of approximately 0.49%0.39%.

Equity Securities

In June 2012,  PPL Electric redeemed all 2.5 million shares of its 6.25% Series Preference Stock, par value $100 per share.  The price paid for the redemption was the par value, without premium ($250 million in the aggregate).  Athad no commercial paper outstanding at December 31, 2011, the preference stock was reflected in "Preference stock" on PPL Electric's Balance Sheet.2012.

Rating Agency Actions

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

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

A downgrade in PPL Electric's credit ratings could result in higher borrowing costs and reduced access to capital markets.

As a result of the passage of the Dodd-Frank Act,  PPL Electric is limiting itsdoes not have credit rating disclosuretriggers that would result in the reduction of access to a descriptioncapital markets or the acceleration of the actions taken by the rating agencies with respect to PPL Electric's ratings, but without stating what ratings have been assigned to PPL Electric or its securities.  The ratings assigned by the rating agencies to PPL Electric and its respective securities may be found, without charge, on eachmaturity dates of the respective rating agencies' websites, which ratings together with all other information contained on such rating agency websites is, hereby, explicitly not incorporated by reference in this report.outstanding debt.

The rating agencies did not take any actions related to PPL Electric in 2012.2013.

For additional information on PPL Electric's liquidity and capital resources, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," in PPL Electric's 20112012 Form 10-K.

Risk Management

Market Risk and Credit Risk

PPL Electric issues debt to finance its operations, which exposes it to interest rate risk.  At March 31, 2013, PPL Electric had noElectric's potential annual exposure to increased interest expense, based on a 10% increase in interest rates, at June 30, 2012.was not significant.

PPL Electric is also exposed to changes in the fair value of its debt portfolio.  PPL Electric estimated that a 10% decrease in interest rates at June 30, 2012March 31, 2013 would increase the fair value of its debt portfolio by $77$71 million.

See Notes 13 and 14 to the Financial Statements in this Form 10-Q and "Risk Management" in PPL Electric's 20112012 Form 10-K for additional information on market and credit risk.

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Related Party Transactions

PPL Electric is not aware of any material ownership interests or operating responsibility by senior management of PPL Electric in outside partnerships, including leasing transactions with variable interest entities or other entities doing business with PPL Electric.  See Note 11 to the Financial Statements for additional information on related party transactions.
149


Environmental Matters

Physical effects associated with climate change could include the impact of changes in weather patterns, such as storm frequency and intensity, and the resultant potential damage to PPL Electric's electricity transmission and distribution systems, as well as impacts on customers.  PPL Electric cannot currently predict whether its businesses will experience these potential climate change-related risks or estimate the potential cost of their related consequences.

See Note 10 to the Financial Statements in this Form 10-Q and "Item 1. Business - Environmental Matters" in PPL Electric's 20112012 Form 10-K for a discussion of environmental matters.

New Accounting Guidance

See Notes 2 and 1819 to the Financial Statements for a discussion of new accounting guidance adopted and pending adoption.

Application of Critical Accounting Policies

Financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies.  The following accounting policies are particularly important to the financial condition or results of operations, and require estimates or other judgments of matters inherently uncertain: defined benefits, loss accruals, income taxes, regulatory assets and liabilities, and revenue recognition - unbilled revenue.  See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in PPL Electric's 20112012 Form 10-K for a discussion of each critical accounting policy.

 
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LG&E AND KU ENERGY LLC AND SUBSIDIARIES

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


The following should be read in conjunction with LKE's Condensed Consolidated Financial Statements and the accompanying Notes and with LKE's 20112012 Form 10-K.  Capitalized terms and abbreviations are defined in the glossary.  Dollars are in millions, unless otherwise noted.

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

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

·"Results of Operations" provides a summary of LKE's earnings and a description of key factors expected to impact future earnings.  This section ends with explanations of significant changes in principal line items on LKE's Statements of Income, comparing the three and six months ended June 30, 2012March 31, 2013 with the same periods in 2011.2012.

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

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

Overview

Introduction

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

Business Strategy

LKE's overall strategy is to provide reliable, safe, and competitively priced energy to its customers.customers and reasonable returns on regulated investments to its member.

A key objective for LKE is to maintain a strong credit profile through managing financing costs and access to credit markets.  LKE continually focuses on maintaining an appropriate capital structure and liquidity position.

Financial and Operational Developments

Net Income
 
Net Income for the three and six months ended June 30, 2012March 31, 2013 was $44 million and $97$96 million compared to $41$53 million and $128 million for the same periods in 20112012 representing a 7%an 81% increase and a 24% decrease over the same periods in 2011.2012. 

See "Results of Operations" for a discussion and analysis of LKE's earnings.

Terminated Bluegrass CTs AcquisitionRate Case Proceedings

In September 2011,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 entered intoand an asset purchase agreement with Bluegrass Generationincrease in annual base gas rates of $15 million for the purchase of the Bluegrass CTs, aggregating approximately 495 MW, plus limited associated contractual arrangements required for operation of the units, for a purchase price of $110 million, pending receipt of applicable regulatory approvals.  In May 2012, the KPSC issued an order approving the request to purchase the Bluegrass CTs.  Also in May 2012, the FERC issued an order conditionally authorizing the acquisition of the Bluegrass CTs, subject to approval by the FERC of satisfactory mitigation measures to address market-power concerns.  After a review of potentially available mitigation options, LG&E and KU determined that the options were not commercially justifiable.  In June 2012, LG&E and KU terminated the asset purchase agreement for the Bluegrass CTs in accordance with its terms and made applicable filings withusing a 10.25% return on equity.  The approved rates became effective January 1, 2013.

 
151134

 

the KPSC and FERC.  LG&E and KU are currently assessing the impact of the Bluegrass contract termination and potential future generation capacity options.

NGCC Construction

In September 2011, LG&E and KU filed a CPCN with the KPSC requesting approval to build a 640 MW NGCC at the existing Cane Run plant site in Kentucky.  In May 2012, the KPSC issued an order approving the request.  Subject to finalizing contracting agreements and permitting activities, construction is expected to begin in 2012 and be completed during 2015.  The project, which includes building a natural gas supply pipeline and related transmission projects, has an estimated cost of approximately $600 million ($130 million for LG&E and $470 million for KU).

In conjunction with this construction and to meet new, stricter federal EPA regulations with a 2015 compliance date, LG&E and KU anticipate retiring six older coal-fired electric generating units at the Cane Run, Green River and Tyrone plants, which have a combined summer capacity rating of 797 MW.  The Cane Run and Green River coal units are anticipated to remain operational until the NGCC generation and associated transmission project is completed.

Registered Debt Exchange Offer by LKE

In June 2012, LKE completed an exchange of all its outstanding 4.375% Senior Notes due 2021 issued in September 2011 in a transaction not registered under the Securities Act of 1933, for similar securities that were issued in a transaction registered with the SEC.  See Note 7 in LKE's 2011 Form 10-K for additional information.

Commercial Paper

In February 2012, LG&E and KU each established a commercial paper program for up to $250 million to provide an additional financing source to fund their short-term liquidity needs.  Commercial paper issuances will be supported by LG&E's and KU's Syndicated Credit Facilities.  LG&E and KU had no commercial paper outstanding at June 30, 2012.

Results of Operations

The following discussion provides a summary of LKE's earnings and a description of key factors that management expects mayexpected to impact future earnings.  This section ends with "Statement of Income Analysis," which includes explanations of significant changes in Margins and principal line items on LKE's Statements of Income, comparing the three and six months ended June 30, 2012March 31, 2013 with the same periods in 2011.2012.

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

Earnings
                  
Net Income for the periods ended June 30 was:        
Net Income for the period ended March 31 was:Net Income for the period ended March 31 was:        
                  
  Three Months Six Months    Three Months
  2012  2011  2012  2011       2013  2012 
                  
Net IncomeNet Income $ 44  $ 41  $ 97  $ 128 Net Income     $ 96  $ 53 

The changes in the components of Net Income between these periods were due to the following factors, which reflect reclassifications for items included in marginsMargins and certain items that management considers special.  See additional detail of these special items in the table below.

  Three Months Six Months
       
Margins $ 12  $ (16)
Other operation and maintenance   4    (17)
Depreciation   (1)   (5)
Taxes, other than income   (3)   (5)
Other   (1)   (4)
Other Income (Expense) - net   (7)   (9)
Income Taxes   4    26 
Special items   (5)   (1)
Total $ 3  $ (31)
Three Months
Margins$ 75 
Other operation and maintenance 10 
Depreciation (9)
Taxes, other than income (1)
Interest Expense 1 
Income Taxes (30)
Special items, after-tax (3)
Total$ 43 


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

·Higher other operation and maintenance for the six-month period, primarily due to $11 million of higher steam maintenance costs resulting from an increased scope of scheduled plant outages.  Also, a $6 million credit was recorded in 2011 to establish a regulatory asset related to 2009 storm costs.Margins.

·Lower other income (expense) - net for the threeoperation and six-month periodsmaintenance primarily due to equity losses from an unconsolidated affiliate.$14 million of lower costs due to the timing and scope of scheduled coal plant maintenance outages, partially offset by $4 million of adjustments to regulatory assets and liabilities.

·LowerHigher depreciation due to environmental costs related to the elimination of the 2005 and 2006 ECR plans now being included in base rates, which added $13 million to depreciation that is excluded from Margins, partially offset by lower depreciation of $5 million due to revised rates that were effective January 1, 2013.  Both of these events are the result of the 2012 Kentucky rate case proceedings.

·Higher income taxes for the six-month period, primarily due to the change inhigher pre-tax income.

The following after-tax amounts,gains (losses), which management considers special items, also impacted earnings during the periods ended June 30:March 31.

  Income Statement Three Months Six Months
  Line Item 2012  2011  2012  2011 
               
Special items gains (losses), net of tax (expense) benefit:             
Acquisition-related adjustments:             
 Net operating loss carryforward and other tax related adjustmentsIncome Taxes and Other O&M       $ 4    
Other:             
 Discontinued Operations, net of tax of $4, $0, $4, $0 (a)Discontinued Operations $ (5)      (5)   
Total  $ (5)    $ (1)   
  Income Statement  Three Months
  Line Item  2013  2012 
          
EEI adjustmentsOther Income (Expense) - net  $ 1    
Net operating loss carryforward and other tax-related adjustmentsIncome Taxes and Other O&M     $ 4 
Total   $ 1  $ 4 

(a)Represents an adjustment to an indemnification liability.

2013 Outlook

Excluding special items, LKE projects lowerhigher earnings in 20122013 compared with 2011, as margin increases are not expected to offset operating expense increases, including depreciation.  Actual results will be dependent on the effects of the economy2012, primarily driven by electric and the impact of weather on retail sales among other variables.

In June 2012, LG&E and KU filed requests with the KPSC for increases in annual base electric rates of approximately $62 million at LG&E and approximately $82 million at KU and an increase in annual base gas rates of approximately $17 million at LG&E.  The proposed base rate increases, would result in electric rate increases of 6.9% at LG&Ereturns on additional environmental capital investments and 6.5% at KUload growth, partially offset by higher operation and a gas rate increase of 7.0% at LG&E and would be effective in January 2013.  LG&E's and KU's applications include requests for authorized returns-on-equity at LG&E and KU of 11% each. A hearing on these matters is expected to be scheduled during the fourth quarter of 2012.  LG&E and KU cannot predict the outcome of these proceedings.maintenance expense.

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Earnings in 2012future periods are subject to various risks and uncertainties.  See "Forward-Looking Information," the rest of this Item 2, Notes 6 and 10 to the Financial Statements in this Form 10-Q and "Item 1. Business" and "Item 1A. Risk Factors" in LKE's 20112012 Form 10-K for a discussion of the risks, uncertainties and factors that may impact future earnings.

Statement of Income Analysis --

Margins

Non-GAAP Financial Measure

The following discussion includes financial information prepared in accordance with GAAP, as well as a non-GAAP financial measure, "Margins." Margins is not intended to replace "Operating Income," which is determined in accordance with GAAP as an indicator of overall operating performance.  Other companies may use different measures to analyze and to report on the results of their operations.  Margins is a single financial performance measure of LKE's operations.electricity generation, transmission and distribution operations as well as its distribution and sale of natural gas.  In calculating this measure, fuel and energy purchases are deducted from revenues.  In addition, utility revenues and expenses associated with approved cost recovery tracking mechanisms are offset.  These mechanisms allow for recovery of certain expenses, returns on capital investments associated with environmental regulations and performance incentives.  Certain costs associated with these mechanisms, primarily ECR, DSM and DSM,GLT, are recorded as "Other operation and maintenance" and "Depreciation."  As a result, this measure represents the net revenues from LKE's operations.  This performance measure is used, in conjunction with other information, internally by senior management to manage LKE's operations and analyze actual results compared towith budget.


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Reconciliation of Non-GAAP Financial Measures

The following tables reconciletable reconciles "Margins" to "Operating Income" to "Margins" as defined by LKE for the periods ended June 30.March 31.

      2012 Three Months  2011 Three Months
          Operating       Operating
      Margins Other (a) Income (b)  Margins Other (a) Income (b)
                  
Operating Revenues $ 658     $ 658   $ 639  $ (1) $ 638 
Operating Expenses                   
 Fuel   215       215     206       206 
 Energy purchases   34       34     40       40 
 Other operation and maintenance   24  $ 173    197     21    177    198 
 Depreciation   13    73    86     12    72    84 
 Taxes, other than income      12    12        9    9 
   Total Operating Expenses   286    258    544     279    258    537 
Total $ 372  $ (258) $ 114   $ 360  $ (259) $ 101 

   2012 Six Months 2011 Six Months   2013 Three Months 2012 Three Months
       Operating     Operating       Operating     Operating
   Margins Other (a) Income (b) Margins Other (a) Income (b)   Margins Other (a) Income (b) Margins Other (a) Income (b)
                            
Operating RevenuesOperating Revenues $ 1,363    $ 1,363  $ 1,404    $ 1,404 Operating Revenues $ 800    $ 800  $ 705    $ 705 
Operating ExpensesOperating Expenses            Operating Expenses            
Fuel  428     428   421     421 Fuel  231     231   213     213 
Energy purchases  108     108   147     147 Energy purchases  86     86   74     74 
Other operation and maintenance  46  $ 357   403   41  $ 338   379 Other operation and maintenance  25  $ 172   197   22  $ 184   206 
Depreciation  26   146   172   24   141   165 Depreciation    82   82   13   73   86 
Taxes, other than income      23    23       18    18 Taxes, other than income      12    12       11    11 
 Total Operating Expenses   608    526    1,134    633    497    1,130  Total Operating Expenses   342    266    608    322    268    590 
TotalTotal $ 755  $ (526) $ 229  $ 771  $ (497) $ 274 Total $ 458  $ (266) $ 192  $ 383  $ (268) $ 115 

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

Changes in Non-GAAP Financial Measures

Margins increased by $12$75 million for the three-month period due to higher retail margins, as volumes were impacted by increases in production levels at some of LKE's larger industrial customers and warmer weather during the three months ended June 30, 2012.  Total cooling degree daysMarch 31, 2013 compared with 2012 due to higher base rates of $31 million, higher volumes of $19 million, environmental costs added to base rates of $18 million and increased 9% compared to the same period in 2011.environmental investments of $7 million.

Margins decreased by $16 million forThe increase in base rates was the six-month period primarily dueresult of new KPSC rates going into effect on January 1, 2013.  The increase in volumes was attributable to $13 million of lower retail margins, as volumes were impacted by unseasonably mildcolder weather during the first four months of 2012, and $3 million of lower wholesale margins, as volumes were impacted by lower market prices.in 2013 compared with 2012.  Total heating degree days decreased 24% comparedincreased 41%.  The environmental costs added to base rates was due to the same periodelimination of the 2005 and 2006 ECR plans as a result of the 2012 Kentucky rate case.  This elimination results in 2011.depreciation and other operation and maintenance expenses associated with the 2005 and 2006 ECR plans being excluded from Margins in 2013.

Other Operation and Maintenance     
       
The increase (decrease) in other operation and maintenance expense for the periods ended June 30, 2012, compared with 2011, was due to:
   
 Three Months Six Months
       
Steam maintenance (a)   $ 11 
Distribution maintenance (b)$ (1)   8 
DSM  2    3 
Other  (2)   2 
Total$ (1) $ 24 
Other Operation and Maintenance
The increase (decrease) in other operation and maintenance expense for the period ended March 31, 2013 compared with 2012 was due to:

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Three Months
Coal plant outages (a)$ (14)
Bad debt expense (3)
Adjustments to regulatory assets and liabilities 4 
Other 4 
Total$ (9)

(a)Steam maintenance costs increased $11 million duringDecrease is primarily due to the six months ended June 30, 2011, primarily resulting from an increasedtiming and scope of scheduled outages.

(b)DepreciationA $6 million credit
The increase (decrease) in depreciation for the period ended March 31, 2013 compared with 2012 was due to:
Three Months
Lower depreciation rates effective January 1, 2013$ (5)
Additions to establish a regulatory asset was recorded in the first quarter of 2011 related to 2009 storm costs.PP&E 2 
Other (1)
Total$ (4)

DepreciationIncome Taxes

DepreciationIncome taxes increased by $2 million and $7$36 million for the three and six months ended June 30, 2012March 31, 2013 compared with 2011,2012 primarily due to PP&E additions.


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Other Income (Expense) - net

The increase (decrease) in other income (expense) - net for the periods ended June 30, 2012, compared with 2011, was due to:

  Three Months Six Months
       
Equity losses from an unconsolidated affiliate$ (4) $ (6)
Other  (3)   (3)
Total$ (7) $ (9)

Income Taxes  
        
The increase (decrease) in income taxes for the periods ended June 30, 2012, compared with 2011, was due to:
        
    
   Three Months Six Months
        
Higher (lower) pre-tax book income $ 2  $ (22)
Net operating loss carryforward adjustments (a)   (3)   (9)
Other   (3)   (1)
Total $ (4) $ (32)

(a)During the three and six months ended June 30, 2012, LKE recorded adjustments to deferred taxes related to net operating loss carryforwards based on income tax return adjustments.
higher pre-tax income.

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

Income (Loss) from Discontinued Operations (net of income taxes)
Financial Condition
       
Liquidity and Capital Resources
       
LKE had the following at:
       
  March 31, 2013 December 31, 2012
       
Cash and cash equivalents $ 52  $ 43 
       
Short-term debt (a) $ 185  $ 125 
       
Notes payable with affiliates $ 85  $ 25 

Loss from discontinued operations increased by $6 million for the three and six months ended June 30, 2012, compared with 2011.  The increase was primarily related to an adjustment to the estimated liability for indemnifications.

Financial Condition
       
Liquidity and Capital Resources
       
LKE had the following at:
       
  June 30, 2012 December 31, 2011
       
Cash and cash equivalents $ 29  $ 59 
(a)Represents borrowings under LG&E's and KU's commercial paper programs.  See Note 7 to the Financial Statements for additional information.

The $30$9 million decreaseincrease in LKE's cash and cash equivalents position was primarily the net result of:

·capital expenditurescash provided by operating activities of $324 million$85 million;
·an increase in short term debt of $60 million;
·an increase in notes payable with affiliates of $60 million; and
·the paymentcapital contributions from member of $60 million of distributions to PPL, partially$75 million; offset by
·cash provided by operating activitiescapital expenditures of $354$271 million.

LKE's cash provided by operating activities decreased by $53$147 million for the sixthree months ended June 30, 2012,March 31, 2013, compared with 2011,2012, primarily due to:as a result of:

·an increase in cash outflows from other operating activities of $110 million driven by a decrease$96 million increase in discretionary defined benefit plan contributions; and
·a decline in working capital cash flow changes of $98 million driven primarily by changes in accounts receivable and unbilled revenues due to higher sales volumes, higher rates and extended payment terms, offset by lower inventory levels in 2013 compared with 2012 driven by increased generation; offset by
·an increase in net income of $31 million due to unseasonably mild weather during the first four months of 2012 and higher operation and maintenance expenses, adjusted for non-cash effectsitems of $74$61 million (deferred income taxes and investment tax credits of $90$13 million, and defined benefit plans - expense of $5$7 million partiallyand other non-cash items of $2 million, offset by depreciation of $7 million and other noncash items of $14$4 million) and.
·a decrease in coal consumption resulting from lower coal-fired generation due to the mild winter weather and an increase in combustion turbine generation that led to an increase of $34 million in coal inventory, along with an increase in price per ton of coal in comparison to 2011; partially offset by
·a decrease in cash outflows of $95 million due to a reduction in discretionary defined benefit plan contributions.

LKE's cash used in investing activities increased by $273 million for the six months ended June 30, 2012, compared with 2011, primarily due to proceeds from the sale of other investments of $163 million in 2011 and an increase in capital
 
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Capital expenditures of $144increased by $97 million as a result of increased environmental spending, primarily related to landfills, and infrastructure improvements at generation, distribution and transmission facilities.

LKE's cash used in financing activities decreased by $251 million forduring the sixthree months ended June 30, 2012,March 31, 2013 compared with 2011,2012 primarily due to a repayment on a revolving lineenvironmental air projects at Mill Creek and Ghent, and construction of credit of $163 million in 2011 and lower distributions to PPL of $86 million in 2012.Cane Run Unit 7.

Credit Facilities

At June 30, 2012,March 31, 2013, LKE's total committed borrowing capacity under its credit facilities and the use of this borrowing capacity were:
   Committed   Letters of Unused
   Capacity Borrowed Credit Issued Capacity
          
LKE Credit Facility with a subsidiary of PPL Energy Supply $ 300        $ 300 
LG&E Credit Facility   400          400 
KU Credit Facilities   598     $ 198    400 
 Total Credit Facilities (a) $ 1,298     $ 198  $ 1,100 
         Letters of   
         Credit Issued   
        and   
   Committed   Commercial Unused
   Capacity Borrowed Paper Backup Capacity
          
LKE Credit Facility with a subsidiary of PPL Energy Funding Corporation $ 300  $ 85     $ 215 
LG&E Credit Facility (a)   500     $ 70    430 
KU Credit Facilities (a) (b)   598       313    285 
 Total Credit Facilities (c) $ 1,398  $ 85  $ 383  $ 930 

(a)Each company pays customary fees under their respective syndicated credit facilities, as well as KU's letter of credit facility, and borrowings generally bear interest at LIBOR-based rates plus an applicable margin.
(b)In May 2013, KU extended its $198 million letter of credit facility to May 2016.
(c)The $1.098 billion of commitments under LKE'sLG&E's and KU's domestic credit facilities are provided by a diverse bank group, with no one bank and its affiliates providing an aggregate commitment of more than 10%11% of the total committed capacity; however, the PPL affiliate providesprovided a commitment of approximately 23%21% of the total facilities listed above. The syndicated credit facilities, as well as KU's letter of credit facility, each contain a financial covenant requiring debt to total capitalization not to exceed 70% for LG&E or KU, as calculated in accordance with the facility, and other customary covenants.

See Note 7 to the Financial Statements for further discussion of LKE's credit facilities and long-term debt securities.facilities.

LKE's long-term debt securities activity through June 30, 2012 was:
         
    Debt
    Issuances Retirement
         
Non-cash Exchanges (a)      
 LKE Senior Unsecured Notes $ 250  $ (250)
Long-term Debt Securities

(a)In June 2012, LKE completed an exchange of all of its outstanding 4.375% Senior Notes due 2021 issued in September 2011 in a transaction not registered under the Securities Act of 1933, for similar securities that were issued in a transaction registered with the SEC.
LG&E and KU currently plan to issue, subject to market conditions, up to $350 million for LG&E and $300 million for KU, of first mortgage bond indebtedness in 2013, the proceeds of which will be used to fund capital expenditures and for other general corporate purposes.

See Note 7 to the Financial Statements for additional information about long-term debt securities.

Rating Agency Actions

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

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

As a result of the passage of the Dodd-Frank Act and the attendant uncertainties relating to the extent to which issuers of non-asset backed securities may disclose credit ratings without being required to obtain rating agency consent to the inclusion of such disclosure, or incorporation by reference of such disclosure, in a registrant's registration statement or section 10(a) prospectus, LKE is limiting its credit rating disclosure to a description of the actions taken by the rating agencies with respect to LKE's ratings, but without stating what ratings have been assigned to LKE or its subsidiaries, or their securities.  The ratings assigned by the rating agencies to LKE and its subsidiaries affect its liquidity, access to capital markets and their respective securities may be found, without charge, on eachcost of the respective rating agencies' websites, which ratings together with all other information contained on such rating agency websites is, hereby, explicitly not incorporated by reference in this report.borrowing under its credit facilities.

The rating agencies took the followingdid not take any actions related to LKE and its subsidiaries:

In February 2012, Fitch assigned ratings tosubsidiaries during the two newly established commercial paper programs for LG&E and KU.


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In March 2012, Moody's affirmed the following ratings:
·the long-term ratings of the First Mortgage Bonds for LG&E and KU;
·the issuer ratings for LG&E and KU; and
·the bank loan ratings for LG&E and KU.

Also in March 2012, Moody's and S&P each assigned short-term ratings to the two newly established commercial paper programs for LG&E and KU.

In March and May 2012, Moody's, S&P and Fitch affirmed the long-term ratings for LG&E's 2003 Series A and 2007 Series B pollution control bonds.first quarter of 2013.

Ratings Triggers

LKE and its subsidiaries have various derivative and non-derivative contracts, including contracts for the sale and purchase of electricity, fuel, commodity transportation and storage and interest rate instruments, which contain provisions requiring LKE and its subsidiaries to post additional collateral, or permitting the counterparty to terminate the contract, if LKE's or its subsidiaries' credit ratings were to fall below investment grade.  See Note 14 to the Financial Statements for a discussion of "Credit Risk-Related Contingent Features," including a discussion of the potential additional collateral that would have been required for derivative contracts in a net liability position at June 30, 2012.  At June 30, 2012, if LKE and its subsidiaries' credit ratings had been below investment grade, the maximum amount that LKE would have been required to post as additional collateral to counterparties was $100 million for both derivative and non-derivative commodity and commodity-related contracts used in its generation and marketing operations, gas supply and interest rate contracts.March 31, 2013.

Capital Expenditures
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LKE has lowered its projected capital spending for 2012 by approximately $325 million from the previously disclosed $1.2 billion projection included in LKE's 2011 Form 10-K.  The lower projected capital spending is due mainly to the terminated Bluegrass CTs acquisition discussed in Notes 6 and 8 to the Financial Statements and the status of environmental projects.

Risk Management

Market Risk

See Notes 13 and 14 to the Financial Statements for information about LKE'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)

LG&E's and KU's rates are set by regulatory commissions and the fuel costs incurred are directly recoverable from customers.  As a result, LG&E and KU are subject to commodity price risk for only a small portion of on-going business operations.  LKE conducts energy trading and risk management activitiessells excess economic generation to maximize the value of the physical assets at times when the assets are not required to serve LG&E's andor KU's customers.  See Note 14 to the Financial Statements for additional disclosures.

Interest Rate Risk

LKE and its subsidiaries issue debt to finance their operations, which exposes them to interest rate risk.  LKE utilizes various financial derivative instruments to adjust the mix of fixed and floating interest rates in its debt portfolio when appropriate.  Risk limits under LKE's risk management program are designed to balance risk, exposure to volatility in interest expense and changes in the fair value of LKE's debt portfolio due to changes in the absolute level of interest rates.

At June 30, 2012,March 31, 2013, LKE's potential annual exposure to increased interest expense, based on a 10% increase in interest rates, was not significant.


157


LKE is also exposed to changes in the fair value of its debt portfolio.  LKE estimated that a 10% decrease in interest rates at June 30, 2012,March 31, 2013, would increase the fair value of its debt portfolio by $120$111 million.

At June 30, 2012, LKE had the following interest rate hedges outstanding:
           
       Effect of a
     Fair Value, 10% Adverse
    Exposure Net - Asset Movement
   Hedged (Liability) (a) in Rates
Economic hedges         
 Interest rate swaps  (b) $ 179  $ (63) $ (3)
At March 31, 2013, LKE had the following interest rate hedges outstanding:
           
       Effect of a
        10% Adverse
      Fair Value, Movement
    Exposure Net - Asset in Interest
   Hedged (Liability) (a) Rates
Economic activity         
 Interest rate swaps  (b) $ 179  $ (55) $ (3)
Cash flow hedges         
 Interest rate swaps (b)   300    24    (17)

(a)Includes accrued interest.
(b)LKE utilizes various risk management instruments to reduce its exposure to the expected future cash flow variability of its debt instruments.  These risks include exposure to adverse interest rate movements for outstanding variable rate debt and for future anticipated financing.  While LKE is exposed to changes in the fair value of these instruments, any realized changes in the fair value of such economic positions and cash flow hedges are recoverable through regulated rates and any subsequent changes in fair value of these derivatives are included in regulatory assets or liabilities.  Sensitivities represent a 10% adverse movement in interest rates.  The positions outstanding at June 30, 2012March 31, 2013 mature through 2033.2043.

Credit Risk

See Notes 13 and 14 to the Financial Statements in this Form 10-Q and "Risk Management - Energy Marketing & Trading and Other - Credit Risk" in PPL's and LKE's 20112012 Form 10-K for additional information.

Related Party Transactions

LKE is not aware of any material ownership interest or operating responsibility by senior management of LKE, LG&E or KU in outside partnerships, including leasing transactions with variable interest entities, or other entities doing business with LKE.  See Note 11 to the Financial Statements for additional information on related party transactions.

139

Environmental Matters

Protection of the environment is a major priority for LKE and a significant element of its business activities.  Extensive federal, state and local environmental laws and regulations are applicable to LKE'sLG&E's and KU's air emissions, water discharges and the management of hazardous and solid waste, amongas well as other areas, and the costsaspects of LKE's business.  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 from prior versions by the relevant agencies.  Costs may take the form of increased capital expenditures or operating and maintenance expenses;expenses, monetary fines, penalties or forfeitures; or other restrictions.  Many of these environmental law considerations are also applicable to the operations of key suppliers, or customers, such as coal producers and industrial power users, etc. and may impact the costscost for their products or their demand for LKE'sLG&E's and KU's services.

Physical effects associated with climate change could include the impact of changes in weather patterns, such as storm frequency and intensity, and the resultant potential damage to LG&E's and KU's generation assets, electricity transmission and distribution systems, as well as impacts on customers.  In addition, changed weather patterns could potentially reduce annual rainfall in areas where LG&E and KU have hydro generating facilities or where river water is used to cool its fossil-powered generators.  LKE cannot currently predict whether its businesses will experience these potential climate change-related risks or estimate the potential costs of their related consequences.

The following is a discussion of the more significant environmental matters.

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) under existing solid waste regulations.  A final rulemaking is currently expected before the end of 2015.  However, the timing of the final regulations could be accelerated by certain litigation that could require the EPA to issue its regulations sooner.  Regulations could impact handling, disposal and/or beneficial use of CCRs.  The financial impact could be material if CCRs are regulated as hazardous waste, and significant if regulated as non-hazardous, in accordance with the proposed rule.

Effluent Limitation Guidelines
On April 19, 2013, the EPA issued 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 handling and metal cleaning wastes as well as new limits for scrubber wastewater, gasification wastewater and landfill leachate.  The proposal contains several alternative approaches, some of which could significantly impact LG&E's and KU's coal-fired plants.  LG&E and KU will comment on the proposed regulation.  The final regulation is expected in May 2014.  At the present time, LKE is unable to predict the outcome of this matter or estimate a range of reasonably possible costs, but the costs could be significant.

316(b) Cooling Water Intake Structure Rule
In April 2011, the EPA published a draft regulation under Section 316(b) of the Clean Water Act, which regulates cooling water intakes for power plants.  The draft rule has two provisions: one requires installation of Best Technology Available (BTA) to reduce mortality of aquatic organisms that are pulled into the plant cooling water system (entrainment), and the second imposes standards for reduction of mortality of aquatic organisms trapped on water intake screens (impingement).  A final rule is expected in June 2013.  The proposed regulation would apply to nearly all LG&E and KU-owned steam electric plants in Kentucky, potentially even including those equipped with closed-cycle cooling systems.

GHG Regulations
In 2013, the EPA is expected to finalize limits on GHG emissions from new power plants and to begin working on a proposal for such emissions from existing power plants.  The EPA's proposal on GHG emissions from new power plants would effectively preclude construction of any coal-fired plants and could even be difficult for new gas-fired plants to meet.  With respect to existing power plants, the impact could be very significant, depending on the structure and stringency of the final rule.  On behalf of LG&E and KU, PPL, along with others in the industry, filed comments on the EPA's proposal related to GHG emissions from new plants.
140

MATS
The EPA finalized MATS requiring fossil-fuel fired plants to reduce emissions of mercury and other hazardous air pollutants by April 16, 2015.  The rule is being challenged by industry groups and states.  The EPA has subsequently proposed changes to the rule with respect to new sources to address the concern that the rule effectively precludes construction of any new coal-fired plants.  LG&E and KU are generally well-positioned to comply with MATS, primarily due to recent investments in environmental controls and approved ECR plans to install additional controls at some of their Kentucky plants.  LG&E and KU are evaluating, among other measures, chemical additive systems for mercury control at Trimble County and Brown plants.  The anticipated retirements of certain coal-fired electric generating units is in response to this and other environmental regulations.

CSAPR and CAIR
In 2011, the EPA finalized its CSAPR regulating emissions of nitrous oxide and sulfur dioxide through new allowance trading programs which were to be implemented in two phases (2012 and 2014).  Like its predecessor, the CAIR, CSAPR targeted sources in the eastern United States.  In December 2011, the U.S. Court of Appeals for the District of Columbia Circuit (the Court) stayed implementation of CSAPR, leaving CAIR in place.  Subsequently, in August 2012, the Court vacated and remanded CSAPR back to the EPA for further rulemaking, again leaving CAIR in place.  LG&E and KU plants in Kentucky will continue to comply with CAIR through optimization of existing controls, balanced with emission allowance purchases.  The Court's August decision leaves plants in CSAPR-affected states potentially exposed to more stringent emission reductions due to regional haze implementation (it was previously determined that CSAPR or CAIR participation satisfies regional haze requirements), and/or petitions to the EPA by downwind states under Section 126 of the Clean Air Act requesting the EPA to require plants that allegedly contribute to downwind non-attainment to take action to reduce emissions.

National Ambient Air Quality Standards
During 2010 and 2012, the EPA issued new ambient air standards for sulfur dioxide and particulates, respectively.  In 2013, the EPA preliminarily designated Jefferson County, Kentucky, as a partial non-attainment area for sulfur dioxide.  Final designations of non-attainment areas may occur in 2013 and 2014, respectively.  Existing environmental plans for LG&E's and KU's Kentucky plants, including announced retirements of certain plants and ECR-approved new or upgraded scrubbers or baghouses at other plants, may aid in achievement of eventual ambient air requirements.   However, depending upon the specifics of final non-attainment designations and consequent compliance plans, additional controls may be required, the financial impact of which could be significant.

See Note 10 to the Financial Statements in this Form 10-Q report and "Item 1. Business - Environmental Matters" in LKE's 20112012 Form 10-K and Note 10 to the Financial Statements for a discussion of environmental matters.

New Accounting Guidance

See Notes 2 and 1819 to the Financial Statements for a discussion of new accounting guidance adopted and pending adoption.

Application of Critical Accounting Policies

Financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies.  The following accounting policies are particularly important to the financial condition or results of operations and require estimates or other judgments of matters inherently uncertain: revenue recognition - unbilled revenue, price risk management, defined benefits, asset impairment (excluding investments), loss accruals, AROs, income taxes, and regulatory assets and liabilities.  See "Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations" in LKE's 20112012 Form 10-K for a discussion of each critical accounting policy.

 
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LOUISVILLE GAS AND ELECTRIC COMPANY

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


The following should be read in conjunction with LG&E's Condensed Financial Statements and the accompanying Notes and with LG&E's 20112012 Form 10-K.  Capitalized terms and abbreviations are defined in the glossary.  Dollars are in millions, unless otherwise noted.

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

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

 ·"Results of Operations" provides a summary of LG&E's earnings and a description of key factors expected to impact future earnings.  This section ends with explanations of significant changes in principal line items on LG&E's Statements of Income, comparing the three and six months ended three and six months ended June 30, 2012March 31, 2013 with the same periods in 2011.2012.

 ·"Financial Condition - Liquidity and Capital Resources" provides an analysis of LG&E's liquidity position and credit profile.  This section also includes a discussion of rating agency actions.

 ·"Financial Condition - Risk Management" provides an explanation of LG&E's risk management programs relating to market and credit risk.

Overview

Introduction

LG&E, headquartered in Louisville, Kentucky, is a regulated utility engaged in the generation, transmission, distribution and sale of electricityelectric energy and the distribution and sale of natural gas in Kentucky.  LG&E and its affiliate, KU, are wholly owned subsidiaries of LKE.  LKE is an intermediary holding company in PPL's group of companies.

Business Strategy

LG&E's overall strategy is to provide reliable, safe, and competitively priced energy to its customers.customers and reasonable returns on regulated investments to its shareowner.

A key objective for LG&E is to maintain a strong credit profile through managing financing costs and access to credit markets.  LG&E continually focuses on maintaining an appropriate capital structure and liquidity position.

Financial and Operational Developments

Net Income
 
Net Income for the three and six months ended June 30, 2012March 31, 2013 was $26 million and $51$44 million compared to $20$25 million and $59 million for the same periods in 20112012 representing a 30%76% increase and a 14% decrease over the same periods in 2011.2012. 

See "Results of Operations" for a discussion and analysis of LG&E's earnings.

Terminated Bluegrass CTs AcquisitionRate Case Proceedings

In September 2011, LG&E and KU entered into an asset purchase agreement with Bluegrass Generation for the purchase of the Bluegrass CTs, aggregating approximately 495 MW, plus limited associated contractual arrangements required for operation of the units, for a purchase price of $110 million, pending receipt of applicable regulatory approvals.  In MayDecember 2012, the KPSC issuedapproved a rate case settlement agreement providing for increases in annual base electricity rates of $34 million and an order approving the request to purchase the Bluegrass CTs.  Alsoincrease in May 2012, the FERC issued an order conditionally authorizing the acquisitionannual base gas rates of the Bluegrass CTs, subject to approval by the FERC of satisfactory mitigation measures to address market-power concerns.  After$15 million using a review of potentially available mitigation options, LG&E and KU determined that the options were not commercially justifiable.  In June 2012, LG&E and KU terminated the asset purchase agreement for the Bluegrass CTs in accordance with its terms and made applicable filings with10.25% return on equity.  The approved rates became effective January 1, 2013.

 
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the KPSC and FERC.  LG&E and KU are currently assessing the impact of the Bluegrass contract termination and potential future generation capacity options.

NGCC Construction

In September 2011, LG&E and KU filed a CPCN with the KPSC requesting approval to build a 640 MW NGCC at the existing Cane Run plant site in Kentucky.  In May 2012, the KPSC issued an order approving the request.  Subject to finalizing contracting agreements and permitting activities, construction is expected to begin in 2012 and be completed during 2015.  The project, which includes building a natural gas supply pipeline and related transmission projects, has an estimated cost of approximately $600 million ($130 million for LG&E and up to $470 million for KU).

In conjunction with this construction and to meet new, stricter federal EPA regulations with a 2015 compliance date, LG&E and KU anticipate retiring six older coal-fired electric generating units at the Cane Run, Green River and Tyrone plants, which have a combined summer capacity rating of 797 MW.  The Cane Run and Green River coal units are anticipated to remain operational until the NGCC generation and associated transmission project is completed.

Commercial Paper

In February 2012, LG&E established a commercial paper program for up to $250 million to provide an additional financing source to fund its short-term liquidity needs.  Commercial paper issuances will be supported by LG&E's Syndicated Credit Facility.  LG&E had no commercial paper outstanding at June 30, 2012.

Results of Operations

The following discussion provides a summary of LG&E's earnings and a description of key factors that management expects mayexpected to impact future earnings.  This section ends with "Statement of Income Analysis," which includes explanations of significant changes in Margins and principal line items on LG&E's Statements of Income, comparing the three and six months ended June 30, 2012March 31, 2013 with the same periods in 2011.2012.

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

Earnings
                  
Net Income for the periods ended June 30 was:
Net Income for the periods ended March 31 was:Net Income for the periods ended March 31 was:
                  
  Three Months Six Months    Three Months
  2012  2011  2012  2011       2013  2012 
                  
Net IncomeNet Income $ 26  $ 20  $ 51  $ 59 Net Income     $ 44  $ 25 

The changes in the components of Net Income between these periods were due to the following factors, which reflect reclassificationreclassifications for items included in margins.Margins.

  Three Months Six Months
       
Margin $ 8  $ (3)
Other operation and maintenance   2    (7)
Depreciation   (1)   (3)
Taxes, other than income   (1)   (2)
Other Income (Expense) - net   (2)   
Interest Expense   2    2 
Income Taxes   (2)   5 
Total $ 6  $ (8)
Three Months
Margins$ 22 
Other operation and maintenance 8 
Depreciation 1 
Taxes, other than income (1)
Other Income (Expense) - net (2)
Interest Expense 1 
Income Taxes (10)
Total$ 19 

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

·Lower other operation and maintenance primarily due to the timing and scope of scheduled coal plant maintenance outages.

·Higher other operation and maintenance for the six-month period,income taxes primarily due to $7 million of higher steam maintenance costs primarily resulting from an increased scope of scheduled plant outages.pre-tax income.


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2013 Outlook

LG&E projects lowerhigher earnings in 20122013 compared with 2011, as margin2012, primarily driven by electric and gas base rate increases, are not expected toreturns on additional environmental capital investments and retail load growth, partially offset operating expense increases, including depreciation.  Actual results will be dependent on the effects of the economyby higher operation and the impact of weather on retail sales among other variables.

In June 2012, LG&E filed a request with the KPSC for an increase in annual base electric rates of approximately $62 million and an increase in annual base gas rates of approximately $17 million.  The proposed request would result in a 6.9% increase in the base electric rates and a 7.0% increase in the base gas rates, and would be effective in January 2013.  LG&E's application includes a request for authorized return-on-equity of 11%.  A hearing on these matters is expected to be scheduled during the fourth quarter of 2012.  LG&E cannot predict the outcome of this proceeding.maintenance expense.

Earnings in 2012future periods are subject to various risks and uncertainties.  See "Forward-Looking Information," the rest of this Item 2, Notes 6 and 10 to the Financial Statements in this Form 10-Q and "Item 1. Business" and "Item 1A. Risk Factors" in LG&E's 20112012 Form 10-K for a discussion of the risks, uncertainties and factors that may impact future earnings.

Statement of Income Analysis --

Margins

Non-GAAP Financial Measure

The following discussion includes financial information prepared in accordance with GAAP, as well as a non-GAAP financial measure, "Margins."  Margins is not intended to replace "Operating Income," which is determined in accordance with GAAP as an indicator of overall operating performance.  Other companies may use different measures to analyze and to report on the results of their operations.  Margins is a single financial performance measure of LG&E's operations.electricity generation, transmission and distribution operations as well as its distribution and sale of natural gas.  In calculating this measure, fuel
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and energy purchases are deducted from revenues.  In addition, utility revenues and expenses associated with approved cost recovery tracking mechanisms are offset.  These mechanisms allow for recovery of certain expenses, returns on capital investments associated with environmental regulations and performance incentives.  Certain costs associated with these mechanisms, primarily ECR, DSM and DSM,GLT, are recorded as "Other operation and maintenance" and "Depreciation"."Depreciation."  As a result, this measure represents the net revenues from LG&E's operations.  This performance measure is used, in conjunction with other information, internally by senior management to manage operations and analyze actual results compared towith budget.

Reconciliation of Non-GAAP Financial Measures

The following tables reconciletable reconciles "Margins" to "Operating Income" to "Margins" as defined by LG&E for the periods ended June 30.March 31.

      2012 Three Months  2011 Three Months
          Operating       Operating
      Margins Other (a) Income (b)  Margins Other (a) Income (b)
                  
Operating Revenues $ 304     $ 304   $ 297     $ 297 
Operating Expenses                   
 Fuel   92       92     82       82 
 Energy purchases   25       25     39       39 
 Other operation and maintenance   11  $ 81    92     8  $ 83    91 
 Depreciation   1    37    38     1    36    37 
 Taxes, other than income      6    6        5    5 
   Total Operating Expenses   129    124    253     130    124    254 
Total $ 175  $ (124) $ 51   $ 167  $ (124) $ 43 

      2012 Six Months  2011 Six Months
          Operating       Operating
      Margins Other (a) Income (b)  Margins Other (a) Income (b)
                  
                    
Operating Revenues $ 657     $ 657   $ 695     $ 695 
Operating Expenses                   
 Fuel   181       181     167       167 
 Energy purchases   98       98     149       149 
 Other operation and maintenance   21  $ 169    190     19  $ 162    181 
 Depreciation   1    75    76     1    72    73 
 Taxes, other than income      11    11        9    9 
   Total Operating Expenses   301    255   556     336   243   579 
Total $ 356  $ (255) $ 101   $ 359  $ (243) $ 116 

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      2013 Three Months  2012 Three Months
          Operating       Operating
      Margins Other (a) Income (b)  Margins Other (a) Income (b)
                  
Operating Revenues $ 390     $ 390   $ 353     $ 353 
Operating Expenses                   
 Fuel   96       96     89       89 
 Energy purchases   81       81     73       73 
 Other operation and maintenance   11  $ 80    91     10  $ 88    98 
 Depreciation      36    36     1    37    38 
 Taxes, other than income      6    6        5    5 
   Total Operating Expenses   188    122    310     173   130   303 
Total $ 202  $ (122) $ 80   $ 180  $ (130) $ 50 

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

Changes in Non-GAAP Financial Measures

Margins increased by $8$22 million and decreased by $3 million during the three and six months ended June 30, 2012, compared with the same periods in 2011.  The positive impact during the three-month period primarily resulted from $8 million of higher retail margins, as volumes were impacted by increases in production levels at some of LG&E's larger industrial customers and warmer weather duringfor the three months ended June 30,March 31, 2013 compared with 2012 due to higher base rates of $13 million, higher volumes of $6 million, increased environmental investments of $2 million and environmental costs added to base rates of $1 million.

The increase in base rates was the result of new KPSC rates going into effect on January 1, 2013.  The increase in volumes was attributable to colder weather in 2013 compared with 2012.  Total coolingheating degree days increased by 14% compared48%.  The environmental costs added to base rates was due to the same periodelimination of the 2005 and 2006 ECR plans as a result of the 2012 Kentucky rate case.  This elimination results in 2011.  The negative impact duringdepreciation and other operation and maintenance expenses associated with the six-month period primarily resulted2005 and 2006 ECR plans being excluded from $3 million of lower wholesale margins, as volumes were impacted by lower market prices.Margins in 2013.

Other Operation and Maintenance     
       
The increase (decrease) in other operation and maintenance expense for the periods ended June 30, 2012, compared with 2011, was due to:
   
  Three Months Six Months
       
Steam maintenance (a)$ (2) $ 7 
Other  3    2 
Total$ 1  $ 9 
Other Operation and Maintenance
The increase (decrease) in other operation and maintenance expense for the period ended March 31, 2013 compared with 2012 was due to:
Three Months
Coal plant outages (a)$ (8)
Other 1 
Total$ (7)

(a)Higher steam maintenance costs of $7 million for the six-month periodDecrease is due to an increasedthe timing and scope of scheduled outages.

Income Taxes  
        
The increase (decrease) in income taxes for the periods ended June 30, 2012, compared with 2011, was due to:
        
    
   Three Months Six Months
        
Higher (lower) pre-tax book income $ 3  $ (5)
Other   (1)   
Total $ 2  $ (5)
Income Taxes

Income taxes increased by $10 million for the three months ended March 31, 2013 compared with 2012 primarily due to higher pre-tax income.

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

Financial Condition
       
Liquidity and Capital Resources
       
LG&E had the following at:
       
  June 30, 2012 December 31, 2011
       
Cash and cash equivalents $ 25  $ 25 
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Financial Condition
       
Liquidity and Capital Resources
       
LG&E had the following at:
       
  March 31, 2013 December 31, 2012
       
Cash and cash equivalents $ 34  $ 22 
       
Short-term debt (a) $ 70  $ 55 

(a)Represents borrowings under LG&E's commercial paper program.  See Note 7 to the Financial Statements for additional information.

The $12 million increase in LG&E's cash and cash equivalents position was primarily the net result of:

·cash provided by operating activities of $160 million,$85 million;
·capital contributions from parent of $25 million; and
·an increase in short term debt of $15 million; partially offset by
·capital expenditures of $120$98 million; and
·the payment of $31 million of common stock dividends; and
·notes receivable from affiliatesdividends to parent of $6$19 million.

LG&E's cash provided by operating activities decreased by $17 million for the sixthree months ended June 30, 2012,March 31, 2013, compared with 2011,2012, primarily due to:

·a netan increase in cash outflows related to working capital, excluding fuel, materials and supplies,from other operating activities of $37$18 million due to the timing of cash receipts and payments, including an $8driven by a $19 million increase in accounts payable invoices paid on behalf of KUdiscretionary defined benefit plan contributions; and an $8 million increase in tax settlements with LKE;
·a decreasedecline in coal consumption resulting from lower coal-fired generationworking capital cash flow changes of $12 million driven primarily by changes in accounts receivable and unbilled revenues due to the mild winter weatherhigher sales volume, higher rates and an increaseextended payment terms, partially offset by lower fuel levels in combustion turbine2013 compared with 2012 driven by increased generation that led to an increase of $30 millionand a higher federal income tax accrual in coal inventory, along with an increase in price per ton of coal in comparison to 2011; and2013; offset by

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·a decreasean increase in net income of $8 million due to unseasonably mild weather during the first four months of 2012, lower off-system sales and higher operation and maintenance expenses, adjusted for non-cash effectsitems of $4$13 million (defined(amortization of $3 million and defined benefit plans - expense of $2 million and other noncash items of $6 million, partially offset by depreciation of $3 million and deferred income taxes and investment tax credits of $1$5 million, other non-cash items of $4 million and depreciation of $2 million); partially offset by
·a decrease in cash outflows of $42 million due to a reduction in discretionary defined benefit plan contributions and
·a decrease in cash outflows related to accrued taxes of $15 million primarily due to the timing of property tax payments..

LG&E's cash used in investing activitiesCapital expenditures increased by $208$38 million forduring the sixthree months ended June 30, 2012,March 31, 2013 compared with 2011,2012 primarily due to proceeds from the saleenvironmental air projects at Mill Creek, and construction of other investments of $163 million in 2011 and an increase in capital expenditures of $41 million as a result of increased environmental spending, primarily related to landfills, and infrastructure improvements at generation, distribution, transmission and gas storage facilities.

LG&E's cash used in financing activities decreased by $186 million for the six months ended June 30, 2012, compared with 2011, primarily due to a repayment on a revolving line of credit of $163 million and a net decrease in notes payable with affiliates of $12 million in 2011, along with lower common stock dividends paid to LKE of $11 million in 2012.Cane Run Unit 7.

Credit Facilities

At June 30, 2012,March 31, 2013, LG&E's committed borrowing capacity under its credit facilities and the use of this borrowing capacity were:
   Committed   Letters of Unused
   Capacity Borrowed Credit Issued Capacity
          
Syndicated Credit Facility (a) $ 400        $ 400 
         Letters of   
         Credit Issued   
        and   
   Committed   Commercial Unused
   Capacity Borrowed Paper Backup Capacity
          
Syndicated Credit Facility (a) (b) $ 500     $ 70  $ 430 

(a)The commitments under LG&E's Syndicated Credit Facility are provided by a diverse bank group, with no one bank and its affiliates providing an aggregate commitment of more than 6% of the total committed capacity available to LG&E.
(b)LG&E pays customary fees under its syndicated credit facility, and borrowings generally bear interest at LIBOR-based rates plus an applicable margin.

LG&E participates in an intercompany money pool agreement whereby LKE and/or KU make available to LG&E funds up to $500 million at an interest rate based on a market index of commercial paper issues.  At June 30, 2012March 31, 2013 and December 31, 2011,2012, there was no balance outstanding.

See Note 7 to the Financial Statements for further discussion of LG&E's credit facilities.
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Long-term Debt Securities

LG&E currently plans to issue, subject to market conditions, up to $350 million of first mortgage bond indebtedness in 2013, the proceeds of which will be used to fund capital expenditures and for other general corporate purposes.

See Note 7 to the Financial Statements for additional information about long-term debt securities.

Rating Agency Actions

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

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

As a resultmarkets and cost of the passage of the Dodd-Frank Act and the attendant uncertainties relating to the extent to which issuers of non-asset backed securities may disclose credit ratings without being required to obtain rating agency consent to the inclusion of such disclosure, or incorporation by reference of such disclosure, in a registrant's registration statement or section 10(a) prospectus, LG&E is limitingborrowing under its credit rating disclosure to a description of the actions taken by the rating agencies with respect to LG&E's ratings, but without stating what ratings have been assigned to LG&E's securities.  The ratings assigned by the rating agencies to LG&E and its securities may be found, without charge, on each of the respective rating agencies' websites, which ratings together with all other information contained on such rating agency websites is, hereby, explicitly not incorporated by reference in this report.facilities.

The rating agencies took the followingdid not take any actions related to LG&E:

In February 2012, Fitch assigned ratings to LG&E's newly established commercial paper program.

In March 2012, Moody's affirmed&E during the following ratings:
·the long-term ratings of the First Mortgage Bonds for LG&E;

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·the issuer ratings for LG&E; and
·the bank loan ratings for LG&E.

Also in March 2012, Moody's and S&P each assigned short-term ratings to LG&E's newly established commercial paper programs.

In March and May 2012, Moody's, S&P and Fitch affirmed the long-term ratings for LG&E's 2003 Series A and 2007 Series B pollution control bonds.first quarter of 2013.

Ratings Triggers

LG&E has various derivative and non-derivative contracts, including contracts for the sale and purchase of electricity, fuel, commodity transportation and storage and interest rate instruments, which contain provisions requiring LG&E to post additional collateral, or permitting the counterparty to terminate the contract, if LG&E's credit rating were to fall below investment grade.  See Note 14 to the Financial Statements for a discussion of "Credit Risk-Related Contingent Features," including a discussion of the potential additional collateral that would have been required for derivative contracts in a net liability position at June 30, 2012.  At June 30, 2012, if LG&E's credit ratings had been below investment grade, the maximum amount that LG&E would have been required to post as additional collateral to counterparties was $79 million for both derivative and non-derivative commodity and commodity-related contracts used in its generation and marketing operations, gas supply and interest rate contracts.

Capital Expenditures

LG&E has lowered its projected capital spending for 2012 by approximately $215 million from the previously disclosed $554 million projection included in LG&E's 2011 Form 10-K.  The lower projected capital spending is due mainly to the terminated Bluegrass CTs acquisition discussed in Notes 6 and 8 to the Financial Statements and the status of environmental projects.March 31, 2013.

Risk Management

Market Risk

See Notes 13 and 14 to the Financial Statements for information about LG&E'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)

LG&E's rates are set by a regulatory commissioncommissions and the fuel costs incurred are directly recoverable from customers.  As a result, LG&E is subject to commodity price risk for only a small portion of on-going business operations.  LG&E conducts energy trading and risk management activitiessells excess economic generation to maximize the value of the physical assets at times when the assets are not required to serve LG&E's or KU's customers.  See Note 14 to the Financial Statements for additional disclosures.

Interest Rate Risk

LG&E issues debt to finance its operations, which exposes it to interest rate risk.  LG&E utilizes various financial derivative instruments to adjust the mix of fixed and floating interest rates in its debt portfolio when appropriate.  Risk limits under LG&E's risk management program are designed to balance risk, exposure to volatility in interest expense and changes in the fair value of LG&E's debt portfolio due to changes in the absolute level of interest rates.

At June 30, 2012,March 31, 2013, LG&E's potential annual exposure to increased interest expense, based on a 10% increase in interest rates, was not significant.

LG&E is also exposed to changes in the fair value of its debt portfolio.  LG&E estimated that a 10% decrease in interest rates at June 30, 2012,March 31, 2013, would increase the fair value of its debt portfolio by $28$27 million.

 
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At June 30, 2012, LG&E had the following interest rate hedges outstanding:
           
       Effect of a
     Fair Value, 10% Adverse
    Exposure Net - Asset Movement
   Hedged (Liability) (a) in Rates
Economic hedges         
 Interest rate swaps  (b) $ 179  $ (63) $ (3)
At March 31, 2013, LG&E had the following interest rate hedges outstanding:
           
       Effect of a
        10% Adverse
      Fair Value, Movement
    Exposure Net - Asset in Interest
   Hedged (Liability) (a) Rates
Economic activity         
 Interest rate swaps  (b) $ 179  $ (55) $ (3)
Cash flow hedges         
 Interest rate swaps (b)   150    12    (8)

(a)Includes accrued interest.
(b)LG&E utilizes various risk management instruments to reduce its exposure to the expected future cash flow variability of its debt instruments.  These risks include exposure to adverse interest rate movements for outstanding variable rate debt and for future anticipated financing.  While LG&E is exposed to changes in the fair value of these instruments, any realized changes in the fair value of such economic positions and cash flow hedges are recoverable through regulated rates and any subsequent changes in fair value of these derivatives are included in regulatory assets or liabilities.  Sensitivities represent a 10% adverse movement in interest rates.  The positions outstanding at June 30, 2012March 31, 2013 mature through 2033.2043.

Credit Risk

See Notes 13 and 14 to the Financial Statements in this Form 10-Q and "Risk Management - Energy Marketing & Trading and Other - Credit Risk" in PPL's and LG&E's 20112012 Form 10-K for additional information.

Related Party Transactions

LG&E is not aware of any material ownership interest or operating responsibility by senior management of LG&E in outside partnerships, including leasing transactions with variable interest entities, or other entities doing business with LG&E.  See Note 11 to the Financial Statements for additional information on related party transactions.

Environmental Matters

Protection of the environment is a major priority for LG&E and a significant element of its business activities.  Extensive federal, state and local environmental laws and regulations are applicable to LG&E's air emissions, water discharges and the management of hazardous and solid waste, amongas well as other areas, and the costsaspects of LG&E's business.  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 from prior versions by the relevant agencies.  Costs may take the form of increased capital expenditures or operating and maintenance expenses;expenses, monetary fines, penalties or forfeitures; or other restrictions.  Many of these environmental law considerations are also applicable to the operations of key suppliers, or customers, such as coal producers and industrial power users, etc. and may impact the costscost for their products or their demand for LG&E's services.

Physical effects associated with climate change could include the impact of changes in weather patterns, such as storm frequency and intensity, and the resultant potential damage to LG&E's generation assets, electricity transmission and distribution systems, as well as impacts on customers.  In addition, changed weather patterns could potentially reduce annual rainfall in areas where LG&E has hydro generating facilities or where river water is used to cool its fossil-powered generators.  LG&E cannot currently predict whether its businesses will experience these potential climate change-related risks or estimate the potential costs of their related consequences.

The following is a discussion of the more significant environmental matters.

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) under existing solid waste regulations.  A final rulemaking is currently expected before the end of 2015.  However, the timing of the final regulations could be accelerated by certain litigation that could require the EPA to issue its regulations sooner.  Regulations could impact handling, disposal and/or beneficial use of CCRs.  The financial impact could be material if CCRs are regulated as hazardous waste, and significant if regulated as non-hazardous, in accordance with the proposed rule.
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Effluent Limitation Guidelines
On April 19, 2013, the EPA issued 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 handling and metal cleaning wastes as well as new limits for scrubber wastewater, gasification wastewater and landfill leachate.  The proposal contains several alternative approaches, some of which could significantly impact LG&E's coal-fired plants.  LG&E will comment on the proposed regulation.  The final regulation is expected in May 2014.  At the present time, LG&E is unable to predict the outcome of this matter or estimate a range of reasonably possible costs, but the costs could be significant.

316(b) Cooling Water Intake Structure Rule
In April 2011, the EPA published a draft regulation under Section 316(b) of the Clean Water Act, which regulates cooling water intakes for power plants.  The draft rule has two provisions: one requires installation of Best Technology Available (BTA) to reduce mortality of aquatic organisms that are pulled into the plant cooling water system (entrainment), and the second imposes standards for reduction of mortality of aquatic organisms trapped on water intake screens (impingement).  A final rule is expected in June 2013.  The proposed regulation would apply to nearly all LG&E-owned steam electric plants in Kentucky, potentially even including those equipped with closed-cycle cooling systems.

GHG Regulations
In 2013, the EPA is expected to finalize limits on GHG emissions from new power plants and to begin working on a proposal for such emissions from existing power plants.  The EPA's proposal on GHG emissions from new power plants would effectively preclude construction of any coal-fired plants and could even be difficult for new gas-fired plants to meet.  With respect to existing power plants, the impact could be very significant, depending on the structure and stringency of the final rule.  On behalf of LG&E, PPL, along with others in the industry, filed comments on the EPA's proposal related to GHG emissions from new plants.

MATS
The EPA finalized MATS requiring fossil-fuel fired plants to reduce emissions of mercury and other hazardous air pollutants by April 16, 2015.  The rule is being challenged by industry groups and states.  The EPA has subsequently proposed changes to the rule with respect to new sources to address the concern that the rule effectively precludes construction of any new coal-fired plants.  LG&E is generally well-positioned to comply with MATS, primarily due to recent investments in environmental controls and approved ECR plans to install additional controls at some of its Kentucky plants.  LG&E is evaluating, among other measures, chemical additive systems for mercury control at Trimble County plant.  The anticipated retirements of certain coal-fired electric generating units is in response to this and other environmental regulations.

CSAPR and CAIR
In 2011, the EPA finalized its CSAPR regulating emissions of nitrous oxide and sulfur dioxide through new allowance trading programs which were to be implemented in two phases (2012 and 2014).  Like its predecessor, the CAIR, CSAPR targeted sources in the eastern United States.  In December 2011, the U.S. Court of Appeals for the District of Columbia Circuit (the Court) stayed implementation of CSAPR, leaving CAIR in place.  Subsequently, in August 2012, the Court vacated and remanded CSAPR back to the EPA for further rulemaking, again leaving CAIR in place.  LG&E plants in Kentucky will continue to comply with CAIR through optimization of existing controls, balanced with emission allowance purchases.  The Court's August decision leaves plants in CSAPR-affected states potentially exposed to more stringent emission reductions due to regional haze implementation (it was previously determined that CSAPR or CAIR participation satisfies regional haze requirements), and/or petitions to the EPA by downwind states under Section 126 of the Clean Air Act requesting the EPA to require plants that allegedly contribute to downwind non-attainment to take action to reduce emissions.

National Ambient Air Quality Standards
During 2010 and 2012, the EPA issued new ambient air standards for sulfur dioxide and particulates, respectively.  In 2013, the EPA preliminarily designated Jefferson County, Kentucky, as a partial non-attainment area for sulfur dioxide.  Final designations of non-attainment areas may occur in 2013 and 2014, respectively.  Existing environmental plans for LG&E's 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.

See Note 10 to the Financial Statements in this Form 10-Q report and "Item 1. Business - Environmental Matters" in LG&E's 20112012 Form 10-K and Note 10 to the Financial Statements for a discussion of environmental matters.

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New Accounting Guidance

See Notes 2 and 1819 to the Financial Statements for a discussion of new accounting guidance adopted and pending adoption.

Application of Critical Accounting Policies

Financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies.  The following accounting policies are particularly important to the financial condition or results of operations and require estimates or other judgments of matters inherently uncertain: revenue recognition - unbilled revenue, price risk management, defined benefits, asset impairment (excluding investments), loss accruals, AROs, income taxes, and regulatory assets and liabilities.  See "Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations" in LG&E's 20112012 Form 10-K for a discussion of each critical accounting policy.

 
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KENTUCKY UTILITIES COMPANY

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


The following should be read in conjunction with KU's Condensed Financial Statements and the accompanying Notes and with KU's 20112012 Form 10-K.  Capitalized terms and abbreviations are defined in the glossary.  Dollars are in millions, unless otherwise noted.

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

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

·"Results of Operations" provides a summary of KU's earnings and a description of key factors expected to impact future earnings.  This section ends with explanations of significant changes in principal line items on KU's Statements of Income, comparing the three and six months ended June 30, 2012March 31, 2013 with the same periods in 2011.2012.

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

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

Overview

Introduction

KU, headquartered in Lexington, Kentucky, is a regulated utility engaged in the generation, transmission, distribution and sale of electricity,electric energy in Kentucky, Virginia and Tennessee.  KU and its affiliate, LG&E, are wholly owned subsidiaries of LKE.  LKE is an intermediary holding company in PPL's group of companies.

Business Strategy

KU's overall strategy is to provide reliable, safe, and competitively priced energy to its customers.customers and reasonable returns on regulated investments to its shareowner.

A key objective for KU is to maintain a strong credit profile through managing financing costs and access to credit markets.  KU continually focuses on maintaining an appropriate capital structure and liquidity position.

Financial and Operational Developments

Net Income
 
Net Income for the three and six months ended June 30, 2012March 31, 2013 was $30 million and $68$64 million compared to $30$38 million and $88 million for the same periods in 20112012 representing a 23% decrease for the six-month period.68% increase over 2012. 

See "Results of Operations" for a discussion and analysis of KU's earnings.

Terminated Bluegrass CTs AcquisitionRate Case Proceedings

In September 2011, KU and LG&E entered into an asset purchase agreement with Bluegrass Generation for the purchase of the Bluegrass CTs, aggregating approximately 495 MW, plus limited associated contractual arrangements required for operation of the units, for a purchase price of $110 million, pending receipt of applicable regulatory approvals.  In MayDecember 2012, the KPSC issued an order approving the request to purchase the Bluegrass CTs.  Alsoapproved a rate case settlement agreement providing for increases in May 2012, the FERC issued an order conditionally authorizing the acquisitionannual base electricity rates of the Bluegrass CTs, subject to approval by the FERC of satisfactory mitigation measures to address market-power concerns.  After$51 million using a review of potentially available mitigation options, KU and LG&E determined that the options were not commercially justifiable.  In June 2012, KU and LG&E terminated the asset purchase agreement for the Bluegrass CTs in accordance with its terms and made applicable filings with the KPSC and FERC.  KU and LG&E are currently assessing the impact of the Bluegrass contract termination and potential future generation capacity options.

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NGCC Construction

In September 2011, KU and LG&E filed a CPCN with the KPSC requesting approval to build a 640 MW NGCC at the existing Cane Run plant site in Kentucky.  In May 2012, the KPSC issued an order approving the request.  Subject to finalizing contracting agreements and permitting activities, construction is expected to begin in 2012 and be completed during 2015.10.25% return on equity.  The project, which includes building a natural gas supply pipeline and related transmission projects, has an estimated cost of approximately $600 million ($470 million for KU and up to $130 million for LG&E).

In conjunction with this construction and to meet new, stricter federal EPA regulations with a 2015 compliance date, KU and LG&E anticipate retiring six older coal-fired electric generating units at the Cane Run, Green River and Tyrone plants, which have a combined summer capacity rating of 797 MW.  The Cane Run and Green River coal units are anticipated to remain operational until the NGCC generation and associated transmission project is completed.

Commercial Paper

In February 2012, KU established a commercial paper program for up to $250 million to provide an additional financing source to fund its short-term liquidity needs.  Commercial paper issuances will be supported by KU's Syndicated Credit Facility.  KU had no commercial paper outstanding at June 30, 2012.approved rates became effective January 1, 2013.

Results of Operations


The following discussion provides a summary of KU's earnings and a description of key factors that management expects mayexpected to impact future earnings.  This section ends with "Statement of Income Analysis," which includes explanations of significant changes in Margins and principal line items on KU's Statements of Income, comparing the three and six months ended June 30, 2012March 31, 2013 with the same periods in 2011.2012.

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

Earnings
                  
Net Income for the periods ended June 30 was:
Net Income for the periods ended March 31 was:Net Income for the periods ended March 31 was:
                  
  Three Months Six Months    Three Months
  2012  2011  2012  2011       2013  2012 
                  
Net IncomeNet Income $ 30  $ 30  $ 68  $ 88 Net Income     $ 64  $ 38 

The changes in the components of Net Income between these periods were due to the following factors, which reflect reclassifications for items included in margins.Margins.

  Three Months Six Months
       
Margin $ 5  $ (12)
Other operation and maintenance   2    (6)
Depreciation   (1)   (3)
Taxes, other than income   (2)   (3)
Other   1    1 
Other Income (Expense) - net   (5)   (7)
Income Taxes      10 
Total $  $ (20)
Three Months
Margins$ 53 
Depreciation (10)
Other Income (Expense) - net (1)
Income Taxes (17)
Special item - EEI adjustments, after-tax�� 1 
Total$ 26 

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

·Higher other operation and maintenance for the six-month period primarilydepreciation due to a $6 million credit recorded in 2011 to establish a regulatory assetenvironmental costs related to 2009 storm costs.the elimination of the 2005 and 2006 ECR plans now being included in base rates, which added $12 million to depreciation that is excluded from Margins, partially offset by lower depreciation of $3 million due to revised rates that were effective January 1, 2013.  Both of these events are the result of the 2012 Kentucky rate case proceedings.

·Higher other income (expense) - net for the three and six-month periodstaxes primarily due to equity losses from an unconsolidated affiliate.

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·Lower income taxes for the six-month period primarily due to the change inhigher pre-tax income.

2013 Outlook

Excluding special items, KU projects lowerhigher earnings in 20122013 compared with 2011, as margin2012, primarily driven by electric base rate increases, are not expected toreturns on additional environmental capital investments and load growth, partially offset operating expense increases, including depreciation.  Actual results will be dependent on the effects of the economyby higher operation and the impact of weather on retail sales among other variables.

In June 2012, KU filed a request with the KPSC for an increase in annual base electric rates of approximately $82 million.  The proposed base electric rate increase would result in a 6.5% increase over KU's present rate and would be effective in January 2013.  KU's application includes a request for authorized return-on-equity of 11%.  A hearing on these matters is expected to be scheduled during the fourth quarter of 2012.  KU cannot predict the outcome of this proceeding.maintenance expense.

Earnings in 2012future periods are subject to various risks and uncertainties.  See "Forward-Looking Information," the rest of this Item 2, Notes 6 and 10 to the Financial Statements in this Form 10-Q and "Item 1. Business" and "Item 1A. Risk Factors" in KU's 20112012 Form 10-K for a discussion of the risks, uncertainties and factors that may impact future earnings.

Statement of Income Analysis --

Margins

Non-GAAP Financial Measure

The following discussion includes financial information prepared in accordance with GAAP, as well as a non-GAAP financial measure, "Margins." Margins is not intended to replace "Operating Income," which is determined in accordance with GAAP as an indicator of overall operating performance.  Other companies may use different measures to analyze and to report on the results of their operations.  Margins is a single financial performance measure of KU's electricity generation, transmission and distribution operations.  In calculating this measure, fuel and energy purchases are deducted from revenues.  In addition, utility revenues and expenses associated with approved cost recovery tracking mechanisms are offset.  These mechanisms allow for recovery of certain expenses, returns on capital investments associated with environmental regulations and performance incentives.  Certain costs associated with these mechanisms, primarily ECR and DSM, are recorded as "Other operation and maintenance" and "Depreciation"."Depreciation."  As a result, this measure represents the net revenues from KU's operations.  This performance measure is used, in conjunction with other information, internally by senior management to manage operations and analyze actual results compared towith budget.

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Reconciliation of Non-GAAP Financial Measures

The following tables reconciletable reconciles "Margins" to "Operating Income" to "Margins" as defined by KU for the periods ended June 30.March 31.

      2012 Three Months  2011 Three Months
          Operating       Operating
      Margins Other (a) Income (b)  Margins Other (a) Income (b)
                  
Operating Revenues $ 374     $ 374   $ 366  $ (1) $ 365 
Operating Expenses                   
 Fuel   123       123     124       124 
 Energy purchases   29       29     25       25 
 Other operation and maintenance   12  $ 86    98     12    88    100 
 Depreciation   12    36    48     12    35    47 
 Taxes, other than income      6    6        4    4 
   Total Operating Expenses   176    128    304     173    127    300 
Total $ 198  $ (128) $ 70   $ 193  $ (128) $ 65 


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   2012 Six Months 2011 Six Months   2013 Three Months 2012 Three Months
       Operating      Operating       Operating     Operating
   Margins Other (a) Income (b)  Margins Other (a) Income (b)   Margins Other (a) Income (b) Margins Other (a) Income (b)
                             
Operating RevenuesOperating Revenues $ 754    $ 754   $ 771    $ 771 Operating Revenues $ 432    $ 432  $ 380    $ 380 
Operating ExpensesOperating Expenses              Operating Expenses            
Fuel  247     247     254     254 Fuel  135     135   124     124 
Energy purchases  58     58     60     60 Energy purchases  27     27   29     29 
Other operation and maintenance  25  $ 168   193     22  $ 162   184 Other operation and maintenance  14  $ 83   97   12  $ 83   95 
Depreciation  24   72   96     23   69   92 Depreciation    46   46   12   36   48 
Taxes, other than income      12    12        9    9 Taxes, other than income      6    6       6    6 
 Total Operating Expenses   354    252    606     359    240    599  Total Operating Expenses   176    135    311    177    125    302 
TotalTotal $ 400  $ (252) $ 148   $ 412  $ (240) $ 172 Total $ 256  $ (135) $ 121  $ 203  $ (125) $ 78 

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

Changes in Non-GAAP Financial Measures

Margins increased by $5$53 million and decreased by $12 million during the three and six months ended June 30, 2012, compared with the same periods in 2011.  The positive impact during the three-month period primarily resulted from $4 million of higher retail margins, as volumes were impacted by increases in production levels at some of KU's larger industrial customers and warmer weather duringfor the three months ended June 30, 2012.  Total cooling degree daysMarch 31, 2013 compared with 2012, due to higher base rates of $18 million, environmental costs added to base rates of $16 million, higher volumes of $13 million and increased 2%environmental investments of $5 million.

The increase in base rates was the result of new KPSC rates going into effect on January 1, 2013.  The increase in volumes was attributable to colder weather in 2013 compared to the same period in 2011.  The negative impact during the six-month period primarily resulted from $12 million of lower retail margins, as volumes were impacted by unseasonably mild weather during the first four months ofwith 2012.  Total heating degree days decreased 21% comparedincreased 35%.  The environmental costs added to base rates was due to the same periodelimination of the 2005 and 2006 ECR plans as a result of the 2012 Kentucky rate case.  This elimination results in 2011.depreciation and other operation and maintenance expenses associated with the 2005 and 2006 ECR plans being excluded from Margins in 2013.

Other Operation and Maintenance     
       
The increase (decrease) in other operation and maintenance expense for the periods ended June 30, 2012, compared with 2011, was due to:
   
  Three Months Six Months
       
Distribution maintenance (a)   $ 7 
Other$ (2)   2 
Total$ (2) $ 9 
Other Operation and Maintenance
The increase (decrease) in other operation and maintenance expense for the period ended March 31, 2013 compared with 2012 was due to:
Three Months
Coal plant outages (a)$ (5)
Adjustments to regulatory assets and liabilities 4 
Other 3 
Total$ 2 

(a)Higher distribution maintenance primarilyDecrease is due to a $6 million credit to establish a regulatory asset that was recorded in the first quartertiming and scope of 2011 related to 2009 storm costs.scheduled outages.

Other Income (Expense) - net

The increase (decrease) in Other Income (Expense) for the periods ended June 30, 2012, compared with 2011, was due to:

  Three Months Six Months
       
Equity losses from an unconsolidated affiliate$ (4) $ (6)
Other  (1)   (1)
Total$ (5) $ (7)

Income Taxes

Income taxes decreasedincreased by $10$17 million for the sixthree months ended June 30, 2012,March 31, 2013 compared with 2011,2012 primarily due to the change inhigher pre-tax income.

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

Financial Condition
        
Liquidity and Capital Resources
        
KU had the following at:
 June 30, 2012 December 31, 2011    
     March 31, 2013 December 31, 2012
    
Cash and cash equivalents $ 3  $ 31  $ 16  $ 21 
    
Short-term debt (a) $ 115  $ 70 

 
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(a)Represents borrowings made under KU's commercial paper program.  See Note 7 to the Financial Statements for additional information.
The $28$5 million decrease in KU's cash and cash equivalents position was the net result of:

·capital expenditures of $203 million$172 million; and
·the payment of $48 million of common stock dividends to parent of $13 million; partially offset by
·cash provided by operating activities of $217 million$85 million;
·capital contributions from parent of $50 million; and
·notes payable with affiliatesan increase in short term debt of $6$45 million.

KU's cash provided by operating activities increaseddecreased by $32$67 million for the sixthree months ended June 30, 2012,March 31, 2013, compared with 2011,2012, primarily due to:

·an increase in cash outflows from other operating activities of $61 million driven by a $43 million increase in discretionary defined benefit plan contributions; and
·a decline in working capital cash flow changes of $49 million driven primarily by changes in accounts receivable and unbilled revenues due to higher sales volumes, higher rates and extended payment terms and a lower federal income tax accrual in 2013 as a result of federal settlement payment, offset by an increase in cash from accounts payable primarily due to timing of fuel purchase commitments and payments; offset by
·an increase in net income adjusted for non-cash items of $43 million (deferred income taxes and investment tax credits of $10 million, amortization of $4 million, other non-cash items of $3 million and defined benefit plans - expense of $2 million offset by depreciation of $2 million)

Capital expenditures increased by $59 million during the three months ended March 31, 2013 compared with 2012 primarily due to a decrease in cash outflowsenvironmental air projects at Ghent and construction of $27 million due to a reduction in discretionary defined benefit plan contributions.

KU's cash used in investing activities increased by $102 million for the six months ended June 30, 2012, compared with 2011, due to an increase in capital expenditures of $102 million as a result of increased environmental spending, primarily related to landfills, and infrastructure improvements at generation, distribution and transmission facilities.

KU's cash used in financing activities decreased by $38 million for the six months ended June 30, 2012, compared with 2011, primarily due to lower common stock dividends paid to LKE of $20 million in 2012 and a higher notes payable with affiliates.Cane Run Unit 7.

Credit Facilities

At June 30, 2012,March 31, 2013, KU's committed borrowing capacity under its credit facilities and the use of this borrowing capacity were:
   Committed   Letters of Unused
   Capacity Borrowed Credit Issued Capacity
          
Syndicated Credit Facility $ 400        $ 400 
Letter of Credit Facility   198     $ 198    
 Total Credit Facilities (a) $ 598     $ 198  $ 400 
         Letters of   
         Credit Issued   
        and   
   Committed   Commercial Unused
   Capacity Borrowed Paper Backup Capacity
          
Syndicated Credit Facility (a) $ 400     $ 115  $ 285 
Letter of Credit Facility (a) (b)   198       198    
 Total Credit Facilities (c) $ 598     $ 313  $ 285 

(a)KU pays customary fees under its syndicated credit facility as well as its letter of credit facility, and borrowings generally bear interest at LIBOR-based rates plus an applicable margin.
(b)In May 2013, KU extended its $198 million letter of credit facility to May 2016.
(c)The commitments under KU's credit facilities are provided by a diverse bank group, with no one bank and its affiliates providing an aggregate commitment of more than 19% of the total committed capacity available to KU.

KU participates in an intercompany money pool agreement whereby LKE and/or LG&E make available to KU funds up to $500 million at an interest rate based on a market index of commercial paper issues.  At June 30, 2012, KU owed $6 millionMarch 31, 2013 and at December 31, 2011,2012, there was no balance outstanding.

See NotesNote 7 and 11 to the Financial Statements for further discussion of KU's credit facilities.

Long-term Debt Securities

KU currently plans to issue, subject to market conditions, up to $300 million of first mortgage bond indebtedness in 2013, the proceeds of which will be used to fund capital expenditures and for other general corporate purposes.

See Note 7 to the Financial Statements for additional information about long-term debt securities.
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Rating Agency Actions

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

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

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


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The rating agencies took the followingdid not take any actions related to KU:

In February 2012, Fitch assigned ratings to KU's newly established commercial paper program.

In March 2012, Moody's affirmedKU during the following ratings:
·the long-term ratings of the First Mortgage Bonds for KU;
·the issuer ratings for KU; and
·the bank loan ratings for KU.

Also in March 2012, Moody's and S&P each assigned short-term ratings to KU's newly established commercial paper programs.first quarter of 2013.

Ratings Triggers

KU has various derivative and non-derivative contracts, including contracts for the sale and purchase of electricity, fuel, and commodity transportation and storage, which contain provisions requiring KU to post additional collateral, or permitting the counterparty to terminate the contract, if KU's credit rating were to fall below investment grade.  See Note 14 to the Financial Statements for a discussion of "Credit Risk-Related Contingent Features," including a discussion of the potential additional collateral that would have been required for derivative contracts in a net liability position at June 30, 2012.  At June 30, 2012, if KU's credit ratings had been below investment grade, the maximum amount that KU would have been required to post as additional collateral to counterparties was $21 million for both derivative and non-derivative commodity and commodity-related contracts used in its generation and marketing operations.

Capital Expenditures

KU has lowered its projected capital spending for 2012 by approximately $110 million from the previously disclosed $656 million projection included in KU's 2011 Form 10-K.  The lower projected capital spending is due mainly to the terminated Bluegrass CTs acquisition discussed in Notes 6 and 8 to the Financial Statements and the status of environmental projects.March 31, 2013.

Risk Management

Market Risk

See Notes 13 and 14 to the Financial Statements for information about KU'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)

KU's rates are set by regulatory commissions and the fuel costs incurred are directly recoverable from customers.  As a result, KU is subject to commodity price risk for only a small portion of on-going business operations.  KU conducts energy trading and risk management activitiessells excess economic generation to maximize the value of the physical assets at times when the assets are not required to serve KU'sLG&E's or LG&E'sKU's customers.  See Note 14 to the Financial Statements for additional disclosures.

Interest Rate Risk

KU issues debt to finance its operations, which exposes it to interest rate risk. KU utilizes various financial derivative instruments to adjust the mix of fixed and floating interest rates in its debt portfolio when appropriate. Risk limits under KU's risk management program are designed to balance risk, exposure to volatility in interest expense and changes in the fair value of KU's debt portfolio due to changes in the absolute level of interest rates.

At June 30, 2012,March 31, 2013, KU's potential annual exposure to increased interest expense, based on a 10% increase in interest rates, was not significant.

KU is also exposed to changes in the fair value of its debt portfolio.  KU estimated that a 10% decrease in interest rates at June 30, 2012,March 31, 2013, would increase the fair value of its debt portfolio by $71$68 million.

At March 31, 2013, KU had the following interest rate hedges outstanding:
           
       Effect of a
        10% Adverse
      Fair Value, Movement
    Exposure Net - Asset in Interest
   Hedged (Liability)  Rates
Cash flow hedges         
 Interest rate swaps (a) $ 150  $ 12  $ (8)
 
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(a)KU utilizes various risk management instruments to reduce its exposure to the expected future cash flow variability of its debt instruments.  These risks include exposure to adverse interest rate movements for outstanding variable rate debt and for future anticipated financing.  While KU is exposed to changes in the fair value of these instruments, any realized changes in the fair value of such cash flow hedges are recoverable through regulated rates and any subsequent changes in fair value of these derivatives are included in regulatory assets or liabilities.  The positions outstanding at March 31, 2013 mature through 2043.

Credit Risk

See Notes 13 and 14 to the Financial Statements in this Form 10-Q and "Risk Management - Energy Marketing & Trading and Other - Credit Risk" in PPL's and KU's 20112012 Form 10-K for additional information.

Related Party Transactions

KU is not aware of any material ownership interest or operating responsibility by senior management of KU in outside partnerships, including leasing transactions with variable interest entities, or other entities doing business with KU.  See Note 11 to the Financial Statements for additional information on related party transactions.

Environmental Matters

Protection of the environment is a major priority for KU and a significant element of its business activities.  Extensive federal, state and local environmental laws and regulations are applicable to KU's air emissions, water discharges and the management of hazardous and solid waste, amongas well as other areas, and the costsaspects of KU's business.  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 from prior versions by the relevant agencies.  Costs may take the form of increased capital expenditures or operating and maintenance expenses;expenses, monetary fines, penalties or forfeitures; or other restrictions.  Many of these environmental law considerations are also applicable to the operations of key suppliers, or customers, such as coal producers and industrial power users, etc. and may impact the costscost for their products or their demand for KU's services.

Physical effects associated with climate change could include the impact of changes in weather patterns, such as storm frequency and intensity, and the resultant potential damage to KU's generation assets, electricity transmission and distribution systems, as well as impacts on customers.  In addition, changed weather patterns could potentially reduce annual rainfall in areas where KU has hydro generating facilities or where river water is used to cool its fossil-powered generators.  KU cannot currently predict whether its businesses will experience these potential climate change-related risks or estimate the potential costs of their related consequences.

The following is a discussion of the more significant environmental matters.

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) under existing solid waste regulations.  A final rulemaking is currently expected before the end of 2015.  However, the timing of the final regulations could be accelerated by certain litigation that could require the EPA to issue its regulations sooner.  Regulations could impact handling, disposal and/or beneficial use of CCRs.  The financial impact could be material if CCRs are regulated as hazardous waste, and significant if regulated as non-hazardous, in accordance with the proposed rule.

Effluent Limitation Guidelines
On April 19, 2013, the EPA issued 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 handling and metal cleaning wastes as well as new limits for scrubber wastewater, gasification wastewater and landfill leachate.  The proposal contains several alternative approaches, some of which could significantly impact KU's coal-fired plants.  KU will comment on the proposed regulation.  The final regulation is expected in May 2014.  At the present time, KU is unable to predict the outcome of this matter or estimate a range of reasonably possible costs, but the costs could be significant.

316(b) Cooling Water Intake Structure Rule
In April 2011, the EPA published a draft regulation under Section 316(b) of the Clean Water Act, which regulates cooling water intakes for power plants.  The draft rule has two provisions: one requires installation of Best Technology Available (BTA) to reduce mortality of aquatic organisms that are pulled into the plant cooling water system (entrainment), and the second imposes standards for reduction of mortality of aquatic organisms trapped on water intake screens (impingement).  A final rule is expected in June 2013.  The proposed regulation would apply to nearly all KU-owned steam electric plants in Kentucky, potentially even including those equipped with closed-cycle cooling systems.
155

GHG Regulations
In 2013, the EPA is expected to finalize limits on GHG emissions from new power plants and to begin working on a proposal for such emissions from existing power plants.  The EPA's proposal on GHG emissions from new power plants would effectively preclude construction of any coal-fired plants and could even be difficult for new gas-fired plants to meet.  With respect to existing power plants, the impact could be very significant, depending on the structure and stringency of the final rule.  On behalf of KU, PPL, along with others in the industry, filed comments on the EPA's proposal related to GHG emissions from new plants.

MATS
The EPA finalized MATS requiring fossil-fuel fired plants to reduce emissions of mercury and other hazardous air pollutants by April 16, 2015.  The rule is being challenged by industry groups and states.  The EPA has subsequently proposed changes to the rule with respect to new sources to address the concern that the rule effectively precludes construction of any new coal-fired plants.  KU is generally well-positioned to comply with MATS, primarily due to recent investments in environmental controls and approved ECR plans to install additional controls at some of its Kentucky plants.  KU is evaluating, among other measures, chemical additive systems for mercury control at Trimble County and Brown plants.  The anticipated retirements of certain coal-fired electric generating units is in response to this and other environmental regulations.

CSAPR and CAIR
In 2011, the EPA finalized its CSAPR regulating emissions of nitrous oxide and sulfur dioxide through new allowance trading programs which were to be implemented in two phases (2012 and 2014).  Like its predecessor, the CAIR, CSAPR targeted sources in the eastern United States.  In December 2011, the U.S. Court of Appeals for the District of Columbia Circuit (the Court) stayed implementation of CSAPR, leaving CAIR in place.  Subsequently, in August 2012, the Court vacated and remanded CSAPR back to the EPA for further rulemaking, again leaving CAIR in place.  KU plants in Kentucky will continue to comply with CAIR through optimization of existing controls, balanced with emission allowance purchases.  The Court's August decision leaves plants in CSAPR-affected states potentially exposed to more stringent emission reductions due to regional haze implementation (it was previously determined that CSAPR or CAIR participation satisfies regional haze requirements), and/or petitions to the EPA by downwind states under Section 126 of the Clean Air Act requesting the EPA to require plants that allegedly contribute to downwind non-attainment to take action to reduce emissions.

National Ambient Air Quality Standards
During 2010 and 2012, the EPA issued new ambient air standards for sulfur dioxide and particulates, respectively.  In 2013, the EPA preliminarily designated Jefferson County, Kentucky, as a partial non-attainment area for sulfur dioxide.  Final designations of non-attainment areas may occur in 2013 and 2014, respectively.  Existing environmental plans for 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.

See Note 10 to the Financial Statements in this Form 10-Q report and "Item 1. Business - Environmental Matters" in KU's 20112012 Form 10-K and Note 10 to the Financial Statements for a discussion of environmental matters.


New Accounting Guidance

See Notes 2 and 1819 to the Financial Statements for a discussion of new accounting guidance adopted and pending adoption.

Application of Critical Accounting Policies

Financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies.  The following accounting policies are particularly important to the financial condition or results of operations and require estimates or other judgments of matters inherently uncertain: revenue recognition - unbilled revenue, price risk management, defined benefits, asset impairment (excluding investments), loss accruals, AROs, income taxes, and regulatory assets and liabilities.  See "Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations" in KU's 20112012 Form 10-K for a discussion of each critical accounting policy.

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

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Reference is made to "Risk Management" in each Registrant's "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations."

Item 4.  Controls and Procedures

(a)           Evaluation of disclosure controls and procedures.

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

The registrants' principal executive officers and principal financial officers, based on their evaluation of the registrants' disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934) have concluded that, as of June 30, 2012,March 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 quarterly report has been prepared.  The aforementioned principal officers have concluded that the disclosure controls and procedures are also effective to ensure that information required to be disclosed in reports filed under the Exchange Act is accumulated and communicated to management, including the principal executive and principal financial officers, to allow for timely decisions regarding required disclosure.

(b)           Change in internal controls over financial reporting.

PPL Corporation,

The registrant's principal executive officer and principal financial officer have concluded that there were no changes in the registrant's internal control over financial reporting during the registrant's second fiscal quarter that have materially affected, or are reasonably likely to materially affect, the registrant's internal control over financial reporting.
As reported in the 2011 Form 10-K, PPL's principal executive officer and principal financial officer concluded that a systems migration related to the WPD Midlands acquisition created a material change to its internal control over financial reporting.  Specifically, on December 1, 2011, the use of legacy information technology systems at WPD Midlands was discontinued and the related data, processes and internal controls were migrated to the systems, processes and controls currently in place at PPL WW.

Risks related to the system migration were partially mitigated by PPL's expanded internal control over financial reporting that were implemented subsequent to the acquisition and PPL's existing policy of consolidating foreign subsidiaries on a one-month lag, which provided management additional time for review and analysis of WPD Midlands' results and their incorporation into PPL's consolidated financial statements.

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

The registrants' principal executive officers and principal financial officers have concluded that there were no changes in the registrants' internal control over financial reporting during the registrants' secondfirst fiscal quarter that have materially affected, or are reasonably likely to materially affect, the registrants' internal control over financial reporting.

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PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

For additional information regarding various pending administrative and judicial proceedings involving regulatory, environmental and other matters, which information is incorporated by reference into this Part II, see:

 · "Item 3. Legal Proceedings" in each Registrant's 20112012 Form 10-K; and
 · Notes 5, 6 and 10 to the Financial Statements.

Item 1A.  Risk Factors

There have been no material changes in the Registrant's risk factors from those disclosed in "Item 1A. Risk Factors" of the 20112012 Form 10-K.


Item 4.  Mine Safety Disclosures

Not applicable.

 
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Item 6. Exhibits

The following Exhibits indicated by an asterisk preceding the Exhibit number are filed herewith.  The balance of the Exhibits have heretofore been filed with the Commission and pursuant to Rule 12(b)-32 are incorporated herein by reference.  Exhibits indicated by a [_] are filed or listed pursuant to Item 601(b)(10)(iii) of Regulation S-K.

-
Amendment No. 7 to PPL Employee Stock Ownership Plan, dated May 30, 2012
-Amendment No. 8 to PPL Employee Stock Ownership Plan, dated July 17, 2012
4(c)-
Supplemental Indenture No. 8,4, dated as of June 14, 2012,March 15, 2013, among PPL Capital Funding, Inc., PPL Corporation and The Bank of New York Mellon (as successor to JPMorgan Chase Bank, N. A. (formerly known as The Chase Manhattan Bank))Bank of New York), as Trustee (Exhibit 4(b) to PPL Corporation Form 8-K Report (File No. 1-11459) dated June 14, 2012)
[_]10(a)-PPL Corporation 2012 Stock Incentive Plan (Annex A to Proxy Statement of PPL Corporation, dated April 3, 2012)March 15, 2013)
-Uncommitted Line
Amendment No. 1, dated as of May 1, 2013, to $198,309,583.05 Amended and Restated Letter of Credit Letter Agreement dated as of July 1,August 16, 2012 between PPL Energy Supply, LLC,among Kentucky Utilities Company, the Borrower,Lenders from time to time party thereto, and Banco Bilbao Vizcaya Argentaria, S.A., the BankNew York Branch, as Administrative Agent and Sumitomo Mitsui Banking Corporation, New York Branch as Issuing Lender
-Reimbursement
Amendment No. 2, dated as of May 1, 2013, to $198,309,583.05 Amended and Restated Letter of Credit Agreement dated as of July 1,August 16, 2012 between PPL Energy Supply, LLCamong Kentucky Utilities Company, the Lenders from time to time party thereto, Sumitomo Mitsui Banking Corporation, New York Branch, as successor Administrative Agent and Banco Bilbao Vizcaya Argentaria, S.A.Sumitomo Mitsui Banking Corporation, New York Branch as Issuing Lender
-PPL Corporation Executive Severance Plan, effective as of July 26, 2012
*10(e)-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
-
PPL Corporation and Subsidiaries Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
-
PPL Energy Supply, LLC and Subsidiaries Computation of Ratio of Earnings to Fixed Charges
-
PPL Electric Utilities Corporation and Subsidiaries Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
-
LG&E and KU Energy LLC and Subsidiaries Computation of Ratio of Earnings to Fixed Charges
-
Louisville Gas and Electric Company Computation of Ratio of Earnings to Fixed Charges
-
Kentucky Utilities Company Computation of Ratio of Earnings to Fixed Charges
Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, for the quarterly period ended June 30, 2012,March 31, 2013, filed by the following officers for the following companies:
-
PPL Corporation's principal executive officer
-
PPL Corporation's principal financial officer
-
PPL Energy Supply, LLC's principal executive officer
-
PPL Energy Supply, LLC's principal financial officer
-
PPL Electric Utilities Corporation's principal executive officer
-
PPL Electric Utilities Corporation's principal financial officer
-
LG&E and KU Energy LLC's principal executive officer
-
LG&E and KU Energy LLC's principal financial officer
-
Louisville Gas and Electric Company's principal executive officer
-
Louisville Gas and Electric Company's principal financial officer
-
Kentucky Utilities Company's principal executive officer
-
Kentucky Utilities Company's principal financial officer

 
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Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, for the quarterly period ended June 30, 2012,March 31, 2013, furnished by the following officers for the following companies:
-
PPL Corporation's principal executive officer and principal financial officer
-
PPL Energy Supply, LLC's principal executive officer and principal financial officer
-
PPL Electric Utilities Corporation's principal executive officer and principal financial officer
-
LG&E and KU Energy LLC's principal executive officer and principal financial officer
-
Louisville Gas and Electric Company's principal executive officer and principal financial officer
-
Kentucky Utilities Company's principal executive officer and principal financial officer
   
*32(a)101.INS
-
PPL Corporation's principal executive officer
-PPL Corporation's principal financial officer
-PPL Energy Supply, LLC's principal executive officer
-PPL Energy Supply, LLC's principal financial officer
-PPL Electric Utilities Corporation's principal executive officer
-PPL Electric Utilities Corporation's principal financial officer
-LG&E and KU Energy LLC's principal executive officer
-LG&E and KU Energy LLC's principal financial officer
-Louisville Gas and Electric Company's principal executive officer
-Louisville Gas and Electric Company's principal financial officer
-Kentucky Utilities Company's principal executive officer
-Kentucky Utilities Company's principal financial officer
101.INS-XBRL Instance Document for PPL Corporation, PPL Energy Supply, LLC, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company
101.SCH
-
XBRL Taxonomy Extension Schema for PPL Corporation, PPL Energy Supply, LLC, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company
101.CAL
-
XBRL Taxonomy Extension Calculation Linkbase for PPL Corporation, PPL Energy Supply, LLC, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company
101.DEF
-
XBRL Taxonomy Extension Definition Linkbase for PPL Corporation, PPL Energy Supply, LLC, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company
101.LAB
-
XBRL Taxonomy Extension Label Linkbase for PPL Corporation, PPL Energy Supply, LLC, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company
101.PRE
-
XBRL Taxonomy Extension Presentation Linkbase for PPL Corporation, PPL Energy Supply, LLC, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company

 
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized.  The signature for each undersigned company shall be deemed to relate only to matters having reference to such company or its subsidiaries.

 PPL Corporation
 (Registrant) 
   
 PPL Energy Supply, LLC
 (Registrant) 
   
   
   
Date:  August 8, 2012May 3, 2013/s/  Vincent Sorgi 
 Vincent Sorgi 
 Vice President and Controller 
 (Principal Accounting Officer) 
   
   
   
 PPL Electric Utilities Corporation
 (Registrant) 
   
   
   
Date:  August 8, 2012May 3, 2013/s/  Vincent Sorgi 
 Vincent Sorgi 
 Vice President and 
 Chief Accounting Officer 
 (Principal Financial and Accounting Officer) 


 LG&E and KU Energy LLC
 (Registrant) 
   
 Louisville Gas and Electric Company
 (Registrant) 
   
 Kentucky Utilities Company
 (Registrant) 
   
   
   
Date:  August 8, 2012May 3, 2013/s/  Kent W. Blake 
 
Kent W. Blake
Chief Financial Officer
 
 (Principal Financial Officer and Principal Accounting Officer) 
 
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