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, 20122013
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, 580,736,054631,700,409 shares outstanding at July 31, 2012.2013.
   
 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, 2012.2013.
   
 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, 2012.2013.
   
 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, 2012.2013.

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, 20122013


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) 
  
  
  
  
  
  
  
  
  55
  57
  71
  72
  73
  81
  93
  93
  93
  95
97
 Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations 
   98
   124
   138
   145
   155
   163
 172
 172
PART II.  OTHER INFORMATION 
 173
 173
173
 173
 174
176
177
 
183
 
195


 
 

 

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 transmitsengaged in the regulated transmission and distributesdistribution of electricity in its Pennsylvania service area and that 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, through its subsidiaries, owns and operates a businessWPD, PPL's regulated electricity distribution businesses in the U.K., WPD, that is focused on the regulated distribution of electricity.  In January 2011,

PPL Energy Supply,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.

i



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

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.

 
ii

 

AEPS - Alternative Energy Portfolio Standard.

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

AOCI - accumulated other comprehensive income or loss.

ARO - asset retirement obligation.

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

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

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 2011between two pricing locations (source 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.sink).

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 - A method applicable for calculating diluted EPS when a company has convertible debt outstanding.  The method is applied as follows: 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.

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.

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.

v



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.

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 PUCLG&E, KU 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.;WPD;
·the impact of any state, federal or foreign investigations applicable to the Registrants and their subsidiaries and the energy industry;
·the effect of any business or industry restructuring;
·development of new projects, markets and technologies;
·performance of new ventures; and
·business dispositions or acquisitions and our ability to successfully operate 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   Three Months Ended Six Months Ended
   June 30, June 30,   June 30, June 30,
   2012  2011   2012   2011    2013  2012  2013  2012 
Operating RevenuesOperating Revenues        Operating Revenues        
Utility
 $ 1,605  $ 1,484  $ 3,319  $ 3,020 
Utility
 $ 1,655  $ 1,605  $ 3,605  $ 3,319 
Unregulated retail electric and gas
  179   181   402   328 
Unregulated retail electric and gas
  257   179   494   402 
Wholesale energy marketing        Wholesale energy marketing        
 
Realized
  1,083   732   2,291   1,770  
Realized
  811   1,083   1,787   2,291 
 
Unrealized economic activity (Note 14)
  (458)  (44)  394   13  
Unrealized economic activity (Note 14)
  590   (458)  (232)  394 
Net energy trading margins
  10   10   18   21 
Net energy trading margins
    10   (11)  18 
Energy-related businesses
   130    126    237    247 
Energy-related businesses
   137    130    264    237 
Total Operating Revenues
   2,549    2,489    6,661    5,399 
Total Operating Revenues
   3,450    2,549    5,907    6,661 
                 
Operating ExpensesOperating Expenses        Operating Expenses        
Operation        Operation        
 
Fuel
  411   414   835   889  
Fuel
  441   411   970   835 
 Energy purchases         Energy purchases        
 
Realized
  787   434   1,670   1,105  
Realized
  572   787   1,263   1,670 
 
Unrealized economic activity (Note 14)
  (442)  (109)  149   (127) 
Unrealized economic activity (Note 14)
  479   (442)  (155)  149 
 
Other operation and maintenance
  739   723   1,445   1,306  
Other operation and maintenance
  698   739   1,374   1,445 
Depreciation
  271   237   535   445 
Depreciation
  286   271   570   535 
Taxes, other than income
  87   75   178   148 
Taxes, other than income
  86   87   182   178 
Energy-related businesses
   124    120    226    233 
Energy-related businesses
   130    124    252    226 
Total Operating Expenses
   1,977    1,894    5,038    3,999 
Total Operating Expenses
   2,692    1,977    4,456    5,038 
                    
Operating Income
Operating Income
  572   595   1,623   1,400 
Operating Income
  758   572   1,451   1,623 
                    
Other Income (Expense) - net
Other Income (Expense) - net
  30   (34)  13   (39)
Other Income (Expense) - net
  13   30   135   13 
                 
Other-Than-Temporary Impairments
Other-Than-Temporary Impairments
  1     1   1 
Other-Than-Temporary Impairments
    1     1 
                    
Interest Expense
Interest Expense
   236    264    466    438 
Interest Expense
   258    236    509    466 
                    
Income from Continuing Operations Before Income Taxes
Income from Continuing Operations Before Income Taxes
  365   297   1,169   922 
Income from Continuing Operations Before Income Taxes
  513   365   1,077   1,169 
                    
Income Taxes
Income Taxes
   88    96    347    319 
Income Taxes
   109    88    260    347 
                    
Income from Continuing Operations After Income Taxes
Income from Continuing Operations After Income Taxes
  277   201   822   603 
Income from Continuing Operations After Income Taxes
  404   277   817   822 
                    
Income (Loss) from Discontinued Operations (net of income taxes)
Income (Loss) from Discontinued Operations (net of income taxes)
   (6)   (1)   (6)   2 
Income (Loss) from Discontinued Operations (net of income taxes)
   1    (6)   1    (6)
                    
Net Income
Net Income
  271   200   816   605 
Net Income
  405   271   818   816 
                    
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 
Net Income Attributable to PPL Shareowners
Net Income Attributable to PPL Shareowners
 $ 405  $ 271  $ 818  $ 812 
                    
Amounts Attributable to PPL Corporation:        
Amounts Attributable to PPL Shareowners:Amounts Attributable to PPL Shareowners:        
Income from Continuing Operations After Income Taxes
 $ 277  $ 197  $ 818  $ 595 
Income from Continuing Operations After Income Taxes
 $ 404  $ 277  $ 817  $ 818 
Income (Loss) from Discontinued Operations (net of income taxes)
   (6)   (1)   (6)   2 
Income (Loss) from Discontinued Operations (net of income taxes)
   1    (6)   1    (6)
Net Income
 $ 271  $ 196  $ 812  $ 597 
Net Income
 $ 405  $ 271  $ 818  $ 812 
                    
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  Income from Continuing Operations After Income Taxes Available to PPL  
 Corporation Common Shareowners:         Common Shareowners:        
 
Basic
 $ 0.47  $ 0.35  $1.40  $1.13  
Basic
 $0.68  $0.47  $ 1.39  $1.40 
 
Diluted
 $ 0.47  $ 0.35  $1.40  $1.13  
Diluted
 $0.63  $0.47  $ 1.28  $1.40 
Net Income Available to PPL Corporation Common Shareowners:        Net Income Available to PPL Common Shareowners:        
 
Basic
 $ 0.46  $ 0.35  $1.39  $1.14  
Basic
 $0.68  $0.46  $1.39  $1.39 
 
Diluted
 $ 0.46  $ 0.35  $1.39  $1.14  
Diluted
 $0.63  $0.46  $1.28  $1.39 
                    
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  $0.36  $0.735  $0.72 
                    
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
  589,834   579,881   586,683  579,462 
 
Diluted
  580,593   562,019  580,062  523,184  
Diluted
  664,615   580,593   661,263  580,062 
                    
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 Six Months Ended
   June 30, June 30,   June 30, June 30,
   2012  2011  2012  2011    2013  2012  2013  2012 
                      
Net income
Net income
 $ 271  $ 200  $ 816  $ 605 
Net income
 $ 405  $ 271  $ 818  $ 816 
                      
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)         Amounts arising during the period - gains (losses), net of tax (expense)         
benefit:         benefit:         
 
Foreign currency translation adjustments, net of tax of ($2), $0, $0, $1
  (179)  93    (103)  160  
Foreign currency translation adjustments, net of tax of ($1), ($2), ($7), $0
  (7)  (179)   (252)  (103)
 
Available-for-sale securities, net of tax of $8, ($1), ($20), ($13)
  (7)  1    15   13  
Available-for-sale securities, net of tax of ($2), $8, ($27), ($18)
  2   (7)   25   17 
 
Qualifying derivatives, net of tax of $7, $21, ($55), ($11)
  2   (30)   68   7  
Qualifying derivatives, net of tax of ($23), $7, ($43), ($43)
  24   2    86   80 
 Equity investees' other comprehensive income (loss), net of         Equity investees' other comprehensive income (loss), net of        
 
tax of $0, $0, $2, $0
  1      (3)  (1) 
tax of $0, $0, $0, $2
    1      (3)
 Defined benefit plans:          Defined benefit plans:         
 
Net actuarial gain (loss), net of tax of $28, $0, $28, $0
  (85)    (85)   
Net actuarial gain (loss), net of tax of $0, $28, $0, $28
    (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)
Reclassifications from AOCI - (gains) losses, net of tax expenseReclassifications from AOCI - (gains) losses, net of tax expense         
 
Qualifying derivatives, net of tax of $84, $55, $171, $106
  (140)  (89)   (262)  (158)(benefit):         
 Equity investees' other comprehensive (income) loss, net of          
Available-for-sale securities, net of tax of $0, $1, $1, $1
  (1)  (1)   (2)  (6)
 
tax of $0, $0, $0, $0
    1      3  
Qualifying derivatives, net of tax of $22, $84, $57, $159
  (36)  (140)   (116)  (274)
 Defined benefit plans:          Defined benefit plans:         
  
Prior service costs, net of tax of ($2), ($1), ($3), ($3)
  2   2   5   5   
Prior service costs, net of tax of ($1), ($2), ($2), ($3)
  2   2   3   5 
  
Net actuarial loss, net of tax of ($7), ($6), ($11), ($10)
   17    12    37    23   
Net actuarial loss, net of tax of ($12), ($7), ($25), ($11)
   34    17    68    37 
Total other comprehensive income (loss) attributable to PPLTotal other comprehensive income (loss) attributable to PPL        Total other comprehensive income (loss) attributable to PPL        
Corporation
   (390)   (11)   (332)   44 
Shareowners
   18    (390)   (188)   (332)
                      
Comprehensive income (loss)
Comprehensive income (loss)
  (119)  189   484   649 
Comprehensive income (loss)
  423   (119)  630   484 
 
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
 $ 423  $ (119) $ 630  $ 480 
                      
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,   Six Months Ended June 30,
   2012  2011    2013  2012 
Cash Flows from Operating ActivitiesCash Flows from Operating Activities    Cash Flows from Operating Activities    
Net income
 $ 816  $ 605 
Net income
 $ 818  $ 816 
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
  570   535 
 
Amortization
  88   126  
Amortization
  113   88 
 
Defined benefit plans - expense
  84   71  
Defined benefit plans - expense
  91   84 
 
Deferred income taxes and investment tax credits
  364   337  
Deferred income taxes and investment tax credits
  291   364 
 
Unrealized (gains) losses on derivatives, and other hedging activities
  (209)  (165) 
Unrealized (gains) losses on derivatives, and other hedging activities
  (11)  (209)
 
Other
  25   67  
Other
  50   25 
Change in current assets and current liabilities    Change in current assets and current liabilities    
 
Accounts receivable
  21   (36) 
Accounts receivable
  (189)  21 
 
Accounts payable
  (126)  (60) 
Accounts payable
  (75)  (126)
 
Unbilled revenues
  72   194  
Unbilled revenues
  144   72 
 
Prepayments
  (97)  111  
Prepayments
  (64)  (97)
 
Counterparty collateral
  57   (258) 
Counterparty collateral
  (61)  57 
 
Taxes
  29   (63) 
Taxes
  128   29 
 
Accrued interest
  (87)  (9) 
Uncertain tax positions
  (98)  (4)
 
Other
  (71)  36  
Accrued interest
  (119)  (87)
Other operating activities     
Other
  (113)  (67)
 
Defined benefit plans - funding
  (493)  (550)Other operating activities    
 
Other assets
  (16)  (42) 
Defined benefit plans - funding
  (468)  (493)
 
Other liabilities
   (45)   4  
Other assets
  (64)  (16)
 
Net cash provided by operating activities
   947    814  
Other liabilities
   4    (45)
 
Net cash provided by operating activities
   947    947 
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
  (1,797)  (1,309)
Purchases of nuclear plant decommissioning trust investments
  (85)  (107)
Ironwood Acquisition, net of cash acquired
    (84)
Proceeds from the sale of nuclear plant decommissioning trust investments
  79   100 
Purchases of nuclear plant decommissioning trust investments
  (66)  (85)
Proceeds from the sale of other investments
  21   163 
Proceeds from the sale of nuclear plant decommissioning trust investments
  59   79 
Net (increase) decrease in restricted cash and cash equivalents
  54   (22)
Net (increase) decrease in restricted cash and cash equivalents
  (17)  54 
Other investing activities
   (29)   (48)
Other investing activities
   (13)   (8)
 
Net cash provided by (used in) investing activities
   (1,353)   (6,299) 
Net cash provided by (used in) investing activities
   (1,834)   (1,353)
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   575 
Issuance of common stock
  35   2,266 
Repurchase of common stock
  (28)  
Payment of common stock dividends
  (413)  (340)
Issuance of common stock
  259   35 
Redemption of preference stock of a subsidiary
  (250)  
Payment of common stock dividends
  (426)  (413)
Net increase (decrease) in short-term debt
  311   (321)
Redemption of preference stock of a subsidiary
    (250)
Other financing activities
   (67)   (108)
Debt issuance and credit facility costs
  (33)  (9)
  
Net cash provided by (used in) financing activities
   191    5,847 
Contract adjustment payments
  (48)  (48)
Net increase (decrease) in short-term debt
  563   311 
Other financing activities
   (27)   (10)
  
Net cash provided by (used in) financing activities
   710    191 
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
   (13)   (6)
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
   (190)  (221)
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
 $ 711  $ 981 
            
      
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,   June 30, 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
 $ 711  $ 901 
Restricted cash and cash equivalents
  101   152 
Restricted cash and cash equivalents
  84   54 
Accounts receivable (less reserve:  2012, $64; 2011, $54)    Accounts receivable (less reserve:  2013, $66; 2012, $64)    
 
Customer
  750   736  
Customer
  879   745 
 
Other
  63   91  
Other
  129   79 
Unbilled revenues
  754   830 
Unbilled revenues
  701   857 
Fuel, materials and supplies
  719   654 
Fuel, materials and supplies
  642   673 
Prepayments
  252   160 
Prepayments
  198   166 
Price risk management assets
  2,483   2,548 
Price risk management assets
  1,334   1,525 
Regulatory assets
  17   9 
Regulatory assets
  34   19 
Other current assets
   31    28 
Other current assets
   63    49 
Total Current Assets
   6,151    6,426 
Total Current Assets
   4,775    5,068 
            
InvestmentsInvestments    Investments    
Nuclear plant decommissioning trust funds
  681   640 
Nuclear plant decommissioning trust funds
  771   712 
Other investments
   68    78 
Other investments
   47    47 
Total Investments
   749    718 
Total Investments
   818    759 
            
Property, Plant and EquipmentProperty, Plant and Equipment    Property, Plant and Equipment    
Regulated utility plant
  23,584   22,994 
Regulated utility plant
  25,620   25,196 
Less:  accumulated depreciation - regulated utility plant
   3,813    3,534 
Less:  accumulated depreciation - regulated utility plant
   4,424    4,164 
 
Regulated utility plant, net
   19,771    19,460  
Regulated utility plant, net
   21,196    21,032 
Non-regulated property, plant and equipment    Non-regulated property, plant and equipment    
 
Generation
  11,182   10,514  
Generation
  11,594   11,295 
 
Nuclear fuel
  524   457  
Nuclear fuel
  590   524 
 
Other
  674   637  
Other
  758   726 
Less:  accumulated depreciation - non-regulated property, plant and equipment
   5,762    5,676 
Less:  accumulated depreciation - non-regulated property, plant and equipment
   6,063    5,942 
 
Non-regulated property, plant and equipment, net
  6,618   5,932  
Non-regulated property, plant and equipment, net
  6,879   6,603 
Construction work in progress
   1,880    1,874 
Construction work in progress
   2,525    2,397 
Property, Plant and Equipment, net (a)
   28,269    27,266 
Property, Plant and Equipment, net (a)
   30,600    30,032 
      
Other Noncurrent AssetsOther Noncurrent Assets    Other Noncurrent Assets    
Regulatory assets
  1,335   1,349 
Regulatory assets
  1,443   1,483 
Goodwill
  4,036   4,114 
Goodwill
  3,991   4,158 
Other intangibles (a)
  909   1,065 
Other intangibles
  907   925 
Price risk management assets
  1,112   920 
Price risk management assets
  599   572 
Other noncurrent assets
   947    790 
Other noncurrent assets
   613    637 
Total Other Noncurrent Assets
   8,339    8,238 
Total Other Noncurrent Assets
   7,553    7,775 
         
Total Assets
Total Assets
 $ 43,508  $ 42,648 
Total Assets
 $ 43,746  $ 43,634 

(a)BothAt June 30, 20122013 and December 31, 2011 include2012, includes $416 million and $428 million of PP&E, consisting primarily of "Generation," including leasehold improvements and $10 million and $11 million of "Other intangibles" from the consolidation of a VIE that is the owner/lessor of the Lower Mt. Bethel plant.

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,   June 30, 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
 $ 1,206  $ 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
   1,114   1,252 
Taxes
   94   65 
Taxes
   144   90 
Interest
   201   287 
Interest
   197   325 
Dividends
   210   207 
Dividends
   218   210 
Price risk management liabilities
   1,595   1,570 
Price risk management liabilities
   887   1,065 
Regulatory liabilities
   58   73 
Regulatory liabilities
   54   61 
Other current liabilities
   1,222    1,261 
Other current liabilities
   971    1,219 
Total Current Liabilities
   5,318    5,255 
Total Current Liabilities
   5,542    5,625 
              
Long-term Debt
Long-term Debt
   18,698    17,993 
Long-term Debt
   18,875    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
   3,704   3,387 
Investment tax credits
   305   285 
Investment tax credits
   350   328 
Price risk management liabilities
   1,016   840 
Price risk management liabilities
   514   629 
Accrued pension obligations
   1,093   1,313 
Accrued pension obligations
   1,551   2,076 
Asset retirement obligations
   497   484 
Asset retirement obligations
   545   536 
Regulatory liabilities
   1,003   1,010 
Regulatory liabilities
   1,052   1,010 
Other deferred credits and noncurrent liabilities
   960    1,046 
Other deferred credits and noncurrent liabilities
   659    820 
Total Deferred Credits and Other Noncurrent Liabilities
   8,512    8,304 
Total Deferred Credits and Other Noncurrent Liabilities
   8,375    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
   7,195   6,936 
 
Earnings reinvested
   5,190   4,797  
Earnings reinvested
   5,863   5,478 
 
Accumulated other comprehensive loss
   (1,120)   (788) 
Accumulated other comprehensive loss
   (2,128)   (1,940)
 
Total PPL Corporation Shareowners' Common Equity
   10,962   10,828  
Total PPL Shareowners' Common Equity
   10,936   10,480 
Noncontrolling Interests
   18    268 
Noncontrolling Interests
   18    18 
Total Equity
   10,980    11,096 
Total Equity
   10,954    10,498 
              
Total Liabilities and Equity
Total Liabilities and Equity
 $ 43,508  $ 42,648 
Total Liabilities and Equity
 $ 43,746  $ 43,634 

(a)780,000 shares authorized; 580,213591,622 and 578,405581,944 shares issued and outstanding at June 30, 20122013 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
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
PPL Corporation and Subsidiaries(Unaudited)(Millions of Dollars)
   PPL Corporation Shareowners       PPL Shareowners    
   Common               Common            
    stock       Accumulated        stock       Accumulated    
   shares   Additional   other Non-     shares   Additional   other Non-  
   outstanding Common paid-in Earnings comprehensive controlling     outstanding Common paid-in Earnings comprehensive controlling  
   (a)  stock  capital  reinvested  loss  interests  Total   (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 
March 31, 2013 (b)
March 31, 2013 (b)
  583,214  $ 6  $ 6,988  $ 5,676  $ (2,146) $ 18  $ 10,542 
Common stock issued (c)
Common stock issued (c)
  9,338     245         245 
Common stock repurchased (d)
Common stock repurchased (d)
  (930)    (28)        (28)
Cash settlement of equity forwardCash settlement of equity forward              
agreements (d)
      (13)        (13)
Stock-based compensation (e)
Stock-based compensation (e)
      3         3 
Net income
Net income
        271       271 
Net income
        405       405 
Dividends, dividend equivalents,Dividends, dividend equivalents,              Dividends, dividend equivalents,              
redemptions and distributions (f)
        (218)      (218)
Other comprehensiveOther comprehensive              
income (loss)
              18       18 
June 30, 2013 (b)
June 30, 2013 (b)
  591,622  $ 6  $ 7,195  $ 5,863  $ (2,128) $ 18  $ 10,954 
                
December 31, 2012 (b)
December 31, 2012 (b)
  581,944  $ 6  $ 6,936  $ 5,478  $ (1,940) $ 18  $ 10,498 
Common stock issued (c)
Common stock issued (c)
  10,608     282         282 
Common stock repurchased (d)
Common stock repurchased (d)
  (930)    (28)        (28)
Cash settlement of equity forwardCash settlement of equity forward              
agreements (d)
      (13)        (13)
Stock-based compensation (e)
Stock-based compensation (e)
      18         18 
Net income
Net income
        818       818 
Dividends, dividend equivalents,Dividends, dividend equivalents,              
redemptions and distributions (f)
        (433)      (433)
Other comprehensiveOther comprehensive              
income (loss)
              (188)      (188)
June 30, 2013 (b)
June 30, 2013 (b)
  591,622  $ 6  $ 7,195  $ 5,863  $ (2,128) $ 18  $ 10,954 
                
March 31, 2012
March 31, 2012
  579,520  $ 6  $ 6,862  $ 5,129  $ (730) $ 268  $ 11,535 
Common stock issued (c)
Common stock issued (c)
  693     18         18 
Stock-based compensation (e)
Stock-based compensation (e)
      6         6 
Net income
Net income
        271       271 
Dividends, dividend equivalentsDividends, dividend equivalents              
redemptions and distributions (e)
        (210)    (250)  (460)
redemptions and distributions (f)
        (210)    (250)  (460)
Other comprehensiveOther comprehensive              Other comprehensive              
income (loss)
              (390)      (390)
income (loss)
              (390)      (390)
June 30, 2012
June 30, 2012
  580,213  $ 6  $ 6,886  $ 5,190  $ (1,120) $ 18  $ 10,980 
June 30, 2012
  580,213  $ 6  $ 6,886  $ 5,190  $ (1,120) $ 18  $ 10,980 
                                
December 31, 2011
December 31, 2011
  578,405  $ 6  $ 6,813  $ 4,797  $ (788) $ 268  $ 11,096 
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 
Common stock issued (c)
Common stock issued (c)
  1,808     50         50 
Stock-based compensation (e)
Stock-based compensation (e)
      23         23 
Net income
Net income
        196     4   200 
Net income
        812     4   816 
Dividends, dividend equivalentsDividends, dividend equivalents              Dividends, dividend equivalents              
and distributions (e)
        (202)    (4)  (206)
redemptions and distributions (f)
        (419)    (254)  (673)
Other comprehensiveOther comprehensive              Other comprehensive              
income (loss)
              (11)      (11)
income (loss)
              (332)      (332)
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 
June 30, 2012
June 30, 2012
  580,213  $ 6  $ 6,886  $ 5,190  $ (1,120) $ 18  $ 10,980 

(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 20112013 periods include the April issuance of 92 million shares of common stock.  See Note 7 for additional information.
(c)(d)See Note 7 for additional information.
(e)The three and six months ended June 30, 2013 include $8 million and $36 million and the three and six months ended June 30, 2012 include $6 million and $35 million and the three and six months ended June 30, 2011 include $5 million and $22 million of stock-based compensation expense related to new and existing unvested equity awards.  The three and six months ended June 30, 2013 include $(5) million and $(18) million and the six months ended June 30, 2012 and 2011 includeincludes $(12) million and $(21) 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)(f)"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.which was classified as noncontrolling interest.

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

 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
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   Three Months Ended Six Months Ended
   June 30, June 30,   June 30, June 30,
   2012  2011  2012  2011    2013  2012  2013  2012 
Operating RevenuesOperating Revenues        Operating Revenues        
Wholesale energy marketing        Wholesale energy marketing        
 
Realized
 $ 1,083  $ 732  $ 2,291  $ 1,770  
Realized
 $ 811  $ 1,083  $ 1,787  $ 2,291 
 
Unrealized economic activity (Note 14)
  (458)  (44)  394   13  
Unrealized economic activity (Note 14)
  590   (458)  (232)  394 
Wholesale energy marketing to affiliate
  17   4   38   10 
Wholesale energy marketing to affiliate
  12   17   26   38 
Unregulated retail electric and gas
  180   181   404   328 
Unregulated retail electric and gas
  257   180   495   404 
Net energy trading margins
  10   10   18   21 
Net energy trading margins
    10   (11)  18 
Energy-related businesses
   112    114    208    224 
Energy-related businesses
   122    112    235    208 
Total Operating Revenues
   944    997    3,353    2,366 
Total Operating Revenues
   1,792    944    2,300    3,353 
                    
Operating ExpensesOperating Expenses        Operating Expenses        
Operation        Operation        
 
Fuel
  196   208   407   468  
Fuel
  224   196   522   407 
 Energy purchases         Energy purchases        
 
Realized
  635   226   1,294   540  
Realized
  418   635   852   1,294 
 
Unrealized economic activity (Note 14)
  (442)  (109)  149   (127) 
Unrealized economic activity (Note 14)
  479   (442)  (155)  149 
 
Energy purchases from affiliate
    1   1   2  
Energy purchases from affiliate
  1     2   1 
 
Other operation and maintenance
  294   288   549   533  
Other operation and maintenance
  270   294   505   549 
Depreciation
  69   60   133   119 
Depreciation
  79   69   157   133 
Taxes, other than income
  17   16   35   32 
Taxes, other than income
  16   17   33   35 
Energy-related businesses
   109    112    201    220 
Energy-related businesses
   118    109    228    201 
Total Operating Expenses
   878    802    2,769    1,787 
Total Operating Expenses
   1,605    878    2,144    2,769 
                    
Operating Income
Operating Income
  66   195   584   579 
Operating Income
  187   66   156   584 
                    
Other Income (Expense) - net
Other Income (Expense) - net
  5   4   10   18 
Other Income (Expense) - net
  12   6   16   11 
                    
Other-Than-Temporary Impairments
Other-Than-Temporary Impairments
  1     1   1 
Other-Than-Temporary Impairments
    1     1 
                    
Interest Income from Affiliates
  1   1   1   4 
          
Interest Expense
Interest Expense
   43    51    80    98 
Interest Expense
   46    43    92    80 
                    
Income from Continuing Operations Before Income Taxes
  28   149   514   502 
Income Before Income Taxes
Income Before Income Taxes
  153   28   80   514 
                    
Income Taxes
Income Taxes
   9    59    186    201 
Income Taxes
   67    9    32    186 
                    
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 Attributable to PPL Energy Supply Member
Net Income Attributable to PPL Energy Supply Member
 $ 86  $ 19  $ 48  $ 328 
                    
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 Six Months Ended
   June 30, June 30,   June 30, June 30,
   2012  2011  2012  2011    2013  2012  2013  2012 
                        
Net income
Net income
 $ 19  $ 89  $ 328  $ 303 
Net income
 $ 86  $ 19  $ 48  $ 328 
                        
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)          Amounts arising during the period - gains (losses), net of tax (expense)          
benefit:          benefit:          
 
Available-for-sale securities, net of tax of $8, ($1), ($20), ($13)
   (7)  1    15   13  
Available-for-sale securities, net of tax of ($2), $8, ($27), ($18)
   2   (7)   25   17 
 
Qualifying derivatives, net of tax of $5, $13, ($52), ($21)
   (9)  (21)   47   29  
Qualifying derivatives, net of tax of $0, $5, $0, ($40)
     (9)     59 
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)
Reclassifications from AOCI - (gains) losses, net of tax expenseReclassifications from AOCI - (gains) losses, net of tax expense          
 
Qualifying derivatives, net of tax of $75, $49, $168, $103
   (108)  (68)   (247)  (147)(benefit):          
 Equity investee's other comprehensive (income) loss, net of           
Available-for-sale securities, net of tax of $0, $1, $1, $1
   (1)  (1)   (2)  (6)
 
tax of $0, $0, $0, $0
    1      3  
Qualifying derivatives, net of tax of $23, $75, $44, $156
   (37)  (108)   (67)  (259)
 Defined benefit plans:           Defined benefit plans:          
  
Prior service costs, net of tax of $0, ($1), ($1), ($2)
   2   1    3   2   
Prior service costs, net of tax of $0, $0, ($1), ($1)
   1   2    2   3 
  
Net actuarial loss, net of tax of ($2), ($1), $0, ($1)
   1    1    6    2   
Net actuarial loss, net of tax of ($3), ($2), ($5), $0
   4    1    8    6 
Total other comprehensive income (loss) attributable toTotal other comprehensive income (loss) attributable to          Total other comprehensive income (loss) attributable to          
PPL Energy Supply
   (122)   (86)   (180)   (106)
PPL Energy Supply Member
   (31)   (122)   (34)   (180)
                        
Comprehensive income (loss) attributable to PPL EnergyComprehensive income (loss) attributable to PPL Energy          
            
Supply Member
 $ 55  $ (103) $ 14  $ 148 
Comprehensive income (loss) attributable to PPL Energy Supply
 $ (103) $ 3  $ 148  $ 197 
                    
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,   Six Months Ended June 30,
   2012  2011    2013  2012 
Cash Flows from Operating ActivitiesCash Flows from Operating Activities    Cash Flows from Operating Activities    
Net income
 $ 328  $ 303 
Net income
 $ 48  $ 328 
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
  133   120  
Depreciation
  157   133 
 
Amortization
  57   50  
Amortization
  71   57 
 
Defined benefit plans - expense
  22   17  
Defined benefit plans - expense
  26   22 
 
Deferred income taxes and investment tax credits
  165   186  
Deferred income taxes and investment tax credits
  98   165 
 
Unrealized (gains) losses on derivatives, and other hedging activities
  (216)  (163) 
Unrealized (gains) losses on derivatives, and other hedging activities
  91   (216)
 
Other
  28   29  
Other
  24   28 
Change in current assets and current liabilities    Change in current assets and current liabilities    
 
Accounts receivable
  (2)  57  
Accounts receivable
  6   (2)
 
Accounts payable
  (57)  (104) 
Accounts payable
  (81)  (57)
 
Unbilled revenues
  61   126  
Unbilled revenues
  96   61 
 
Fuel, materials and supplies
  (74)  (26) 
Fuel, materials and supplies
  5   (74)
 
Taxes
  (58)  31  
Prepayments
  (67)  (30)
 
Counterparty collateral
  57   (258) 
Counterparty collateral
  (61)  57 
 
Other
  (40)  (43) 
Other
  (22)  (68)
Other operating activities    Other operating activities    
 
Defined benefit plans - funding
  (69)  (137) 
Defined benefit plans - funding
  (106)  (69)
 
Other assets
  (19)  (25) 
Other assets
  (38)  (19)
 
Other liabilities
   (8)   25  
Other liabilities
   (20)   (8)
 
Net cash provided by operating activities
   308    188  
Net cash provided by operating activities
   227    308 
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
  (241)  (316)
Proceeds from the sale of certain non-core generation facilities
    381 
Ironwood Acquisition, net of cash acquired
    (84)
Ironwood Acquisition, net of cash acquired
  (84)  
Expenditures for intangible assets
  (23)  (25)
Purchases of nuclear plant decommissioning trust investments
  (85)  (107)
Purchases of nuclear plant decommissioning trust investments
  (66)  (85)
Proceeds from the sale of nuclear plant decommissioning trust investments
  79   100 
Proceeds from the sale of nuclear plant decommissioning trust investments
  59   79 
Net (increase) decrease in notes receivable from affiliates
  198   (37)
Net (increase) decrease in notes receivable from affiliates
  (4)  198 
Net (increase) decrease in restricted cash and cash equivalents
  57   (14)
Net (increase) decrease in restricted cash and cash equivalents
  (24)  57 
Other investing activities
   (22)   (35)
Other investing activities
   17    3 
 
Net cash provided by (used in) investing activities
   (173)   (36) 
Net cash provided by (used in) investing activities
   (282)   (173)
Cash Flows from Financing ActivitiesCash Flows from Financing Activities    Cash Flows from Financing Activities    
Contributions from member
  472   168 
Retirement of long-term debt
  (9)  (3)
Distributions to member
  (657)  (134)
Contributions from member
  105   472 
Cash included in net assets of subsidiary distributed to member
    (325)
Distributions to member
  (408)  (657)
Net increase (decrease) in short-term debt
  120   (100)
Net increase (decrease) in short-term debt
  219   120 
Other financing activities
   (3)    
Net cash provided by (used in) financing activities
   (93)   (68)
 
Net cash provided by (used in) financing activities
   (68)   (391)
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
  (148)  67 
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
 $ 265  $ 446 
            
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,   June 30, December 31,
   2012  2011    2013  2012 
AssetsAssets    Assets    
            
Current AssetsCurrent Assets    Current Assets    
Cash and cash equivalents
 $ 446  $ 379 
Cash and cash equivalents
 $ 265  $ 413 
Restricted cash and cash equivalents
  93   145 
Restricted cash and cash equivalents
  70   46 
Accounts receivable (less reserve:  2012, $23; 2011, $15)    Accounts receivable (less reserve:  2013, $20; 2012, $23)    
 
Customer
  181   169  
Customer
  200   183 
 
Other
  22   31  
Other
  95   31 
Accounts receivable from affiliates
  89   89 
Accounts receivable from affiliates
  53   125 
Unbilled revenues
  341   402 
Unbilled revenues
  273   369 
Note receivable from affiliate
    198 
Notes receivable from affiliates
  4   
Fuel, materials and supplies
  372   298 
Fuel, materials and supplies
  322   327 
Prepayments
  44   14 
Prepayments
  63   15 
Price risk management assets
  2,471   2,527 
Price risk management assets
  1,146   1,511 
Other current assets
   12    11 
Other current assets
   22    10 
Total Current Assets
   4,071    4,263 
Total Current Assets
   2,513    3,030 
          
InvestmentsInvestments    Investments    
Nuclear plant decommissioning trust funds
  681   640 
Nuclear plant decommissioning trust funds
  771   712 
Other investments
   42    40 
Other investments
   41    41 
Total Investments
   723    680 
Total Investments
   812    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
  11,604   11,305 
 
Nuclear fuel
  524   457  
Nuclear fuel
  590   524 
 
Other
  253   245  
Other
  297   294 
Less:  accumulated depreciation - non-regulated property, plant and equipment
   5,649    5,573 
Less:  accumulated depreciation - non-regulated property, plant and equipment
   5,921    5,817 
 
Non-regulated property, plant and equipment, net
  6,319   5,646  
Non-regulated property, plant and equipment, net
  6,570   6,306 
Construction work in progress
   810    840 
Construction work in progress
   704    987 
Property, Plant and Equipment, net (a)
   7,129    6,486 
Property, Plant and Equipment, net (a)
   7,274    7,293 
          
Other Noncurrent AssetsOther Noncurrent Assets    Other Noncurrent Assets    
Goodwill
  86   86 
Goodwill
  86   86 
Other intangibles (a)
  244   386 
Other intangibles
  259   252 
Price risk management assets
  1,035   896 
Price risk management assets
  508   557 
Other noncurrent assets
   387    382 
Other noncurrent assets
   369    404 
Total Other Noncurrent Assets
   1,752    1,750 
Total Other Noncurrent Assets
   1,222    1,299 
          
Total Assets
Total Assets
 $ 13,675  $ 13,179 
Total Assets
 $ 11,821  $ 12,375 

(a)BothAt June 30, 20122013 and December 31, 2011 include2012, includes $416 million and $428 million of PP&E, consisting primarily of "Generation," including leasehold improvements and $10 million and $11 million of "Other intangibles" from the consolidation of a VIE that is the owner/lessor of the Lower Mt. Bethel plant.

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

 
CONDENSED CONSOLIDATED BALANCE SHEETS
PPL Energy Supply, LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
     June 30, December 31,
     2013  2012 
Liabilities and Equity      
          
Current Liabilities      
 
Short-term debt
 $ 575  $ 356 
 
Long-term debt due within one year
   741    751 
 
Accounts payable
   374    438 
 
Accounts payable to affiliates
      31 
 
Taxes
   13    62 
 
Interest
   31    31 
 
Price risk management liabilities
   879    1,010 
 
Deferred income taxes
   72    158 
 
Other current liabilities
   249    319 
 
Total Current Liabilities
   2,934    3,156 
          
Long-term Debt
   2,522    2,521 
       
Deferred Credits and Other Noncurrent Liabilities      
 
Deferred income taxes
   1,368    1,232 
 
Investment tax credits
   211    186 
 
Price risk management liabilities
   472    556 
 
Accrued pension obligations
   198    293 
 
Asset retirement obligations
   374    365 
 
Other deferred credits and noncurrent liabilities
   183    218 
 
Total Deferred Credits and Other Noncurrent Liabilities
   2,806    2,850 
          
Commitments and Contingent Liabilities (Note 10)      
       
Equity      
 
Member's equity
   3,541    3,830 
 
Noncontrolling interests
   18    18 
 
Total Equity
   3,559    3,848 
          
Total Liabilities and Equity
 $ 11,821  $ 12,375 
          
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

CONDENSED CONSOLIDATED BALANCE SHEETS
PPL Energy Supply, LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
     June 30, December 31,
     2012  2011 
Liabilities and Equity      
          
Current Liabilities      
 
Short-term debt
 $ 520  $ 400 
 
Long-term debt due within one year
   12    
 
Accounts payable
   428    472 
 
Accounts payable to affiliates
   5    14 
 
Taxes
   32    90 
 
Interest
   31    30 
 
Price risk management liabilities
   1,570    1,560 
 
Counterparty collateral
   205    148 
 
Deferred income taxes
   296    315 
 
Other current liabilities
   209    196 
 
Total Current Liabilities
   3,308    3,225 
          
Long-term Debt
   3,267    3,024 
       
Deferred Credits and Other Noncurrent Liabilities      
 
Deferred income taxes
   1,286    1,223 
 
Investment tax credits
   159    136 
 
Price risk management liabilities
   958    785 
 
Accrued pension obligations
   156    214 
 
Asset retirement obligations
   359    349 
 
Other deferred credits and noncurrent liabilities
   182    186 
 
Total Deferred Credits and Other Noncurrent Liabilities
   3,100    2,893 
          
Commitments and Contingent Liabilities (Note 10)      
       
Equity      
 
Member's equity
   3,982    4,019 
 
Noncontrolling interests
   18    18 
 
Total Equity
   4,000    4,037 
          
Total Liabilities and Equity
 $ 13,675  $ 13,179 
          
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.
 
13

 

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
PPL Energy Supply, LLC and Subsidiaries
(Unaudited)      (Unaudited)
(Millions of Dollars)
            
   Non-     Non-  
 Member's controlling   Member's controlling  
 equity interests Total equity interests Total
      
March 31, 2013 (a)
 $ 3,476  $ 18  $ 3,494 
Net income
  86     86 
Other comprehensive income (loss)
  (31)    (31)
Contributions from member
  105     105 
Distributions
   (95)      (95)
June 30, 2013 (a)
 $ 3,541  $ 18  $ 3,559 
      
December 31, 2012 (a)
 $ 3,830  $ 18  $ 3,848 
Net income
  48     48 
Other comprehensive income (loss)
  (34)    (34)
Contributions from member
  105     105 
Distributions
   (408)      (408)
June 30, 2013 (a)
 $ 3,541  $ 18  $ 3,559 
            
March 31, 2012
 $ 3,713  $ 18  $ 3,731  $ 3,713  $ 18  $ 3,731 
Net income
  19     19   19     19 
Other comprehensive income (loss)
  (122)    (122)  (122)    (122)
Contributions from member
  472     472   472     472 
Distributions
   (100)      (100)   (100)      (100)
June 30, 2012
 $ 3,982  $ 18  $ 4,000  $ 3,982  $ 18  $ 4,000 
            
December 31, 2011
 $ 4,019  $ 18  $ 4,037  $ 4,019  $ 18  $ 4,037 
Net income
  328     328   328     328 
Other comprehensive income (loss)
  (180)    (180)  (180)    (180)
Contributions from member
  472     472   472     472 
Distributions
   (657)      (657)   (657)      (657)
June 30, 2012
 $ 3,982  $ 18  $ 4,000  $ 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 

(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.

 
14

 


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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   Three Months Ended Six Months Ended
   June 30, June 30,   June 30, June 30,
   2012  2011  2012  2011    2013  2012  2013  2012 
Operating RevenuesOperating Revenues        Operating Revenues        
Retail electric
 $ 403  $ 436  $ 860  $ 990 
Retail electric
 $ 413  $ 403  $ 925  $ 860 
Electric revenue from affiliate
   1 ��  4    2    8 
Electric revenue from affiliate
   1    1    2    2 
Total Operating Revenues
   404    440    862    998 
Total Operating Revenues
   414    404    927    862 
                   
Operating ExpensesOperating Expenses        Operating Expenses        
Operation        Operation        
 
Energy purchases
  120   169   273   420  
Energy purchases
  120   120   292   273 
 
Energy purchases from affiliate
  17   4   38   10  
Energy purchases from affiliate
  12   17   26   38 
 
Other operation and maintenance
  143   126   283   256  
Other operation and maintenance
  124   143   257   283 
Depreciation
  39   37   78   70 
Depreciation
  44   39   87   78 
Taxes, other than income
   22    22    48    57 
Taxes, other than income
   22    22    52    48 
Total Operating Expenses
   341    358    720    813 
Total Operating Expenses
   322    341    714    720 
                    
Operating Income
Operating Income
  63   82   142   185 
Operating Income
  92   63   213   142 
                    
Other Income (Expense) - net
Other Income (Expense) - net
  1   1   3   1 
Other Income (Expense) - net
  2   1   3   3 
                    
Interest Expense
Interest Expense
   24    24    48    48 
Interest Expense
   25    24    50    48 
                    
Income Before Income Taxes
Income Before Income Taxes
  40   59   97   138 
Income Before Income Taxes
  69   40   166   97 
                    
Income Taxes
Income Taxes
   11    19    31    42 
Income Taxes
   24    11    57    31 
                    
Net Income (a)
Net Income (a)
  29   40   66   96 
Net Income (a)
  45   29   109   66 
                    
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
 $ 45  $ 29  $ 109  $ 62 

(a)Net income approximates comprehensive income.

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

 
16

 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)
          
     Six Months Ended
     June 30,
     2013  2012 
Cash Flows from Operating Activities      
 
Net income
 $ 109  $ 66 
 Adjustments to reconcile net income to net cash provided by operating activities      
  
Depreciation
   87    78 
  
Amortization
   10    9 
  
Defined benefit plans - expense
   10    11 
  
Deferred income taxes and investment tax credits
   81    59 
  
Other
   3    5 
 Change in current assets and current liabilities      
  
Accounts receivable
   (56)   19 
  
Accounts payable
   (45)   (37)
  
Unbilled revenues
   36    11 
  
Prepayments
   (18)   (18)
  
Taxes
   18    
  
Other
   (38)   (23)
 Other operating activities      
  
Defined benefit plans - funding
   (88)   (54)
  
Other assets
      2 
  
Other liabilities
   6    (27)
   
Net cash provided by operating activities
   115    101 
          
Cash Flows from Investing Activities      
 
Expenditures for property, plant and equipment
   (451)   (256)
 
Other investing activities
   (4)   (1)
   
Net cash provided by (used in) investing activities
   (455)   (257)
          
Cash Flows from Financing Activities      
 
Contributions from parent
   205    
 
Redemption of preference stock
      (250)
 
Payment of common stock dividends to parent
   (66)   (56)
 
Net increase (decrease) in short-term debt
   85    195 
 
Other financing activities
      (8)
   
Net cash provided by (used in) financing activities
   224    (119)
          
Net Increase (Decrease) in Cash and Cash Equivalents
   (116)   (275)
Cash and Cash Equivalents at Beginning of Period
   140    320 
Cash and Cash Equivalents at End of Period
 $ 24  $ 45 
          
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
PPL Electric Utilities Corporation and Subsidiaries
(Unaudited)
(Millions of Dollars)
          
     Six Months Ended
     June 30,
     2012  2011 
Cash Flows from Operating Activities      
 
Net income
 $ 66  $ 96 
 Adjustments to reconcile net income to net cash provided by (used in) operating activities      
  
Depreciation
   78    70 
  
Amortization
   9    
  
Defined benefit plans - expense
   11    9 
  
Deferred income taxes and investment tax credits
   59    (19)
  
Other
   5    2 
 Change in current assets and current liabilities      
  
Accounts receivable
   19    (48)
  
Accounts payable
   (37)   (75)
  
Unbilled revenues
   11    47 
  
Prepayments
   (18)   38 
  
Regulatory assets and liabilities
   (12)   63 
  
Taxes
      10 
  
Other
   (11)   (16)
 Other operating activities      
  
Defined benefit plans - funding
   (54)   (102)
  
Other assets
   2    (7)
  
Other liabilities
   (27)   (5)
   
Net cash provided by (used in) operating activities
   101    63 
          
Cash Flows from Investing Activities      
 
Expenditures for property, plant and equipment
   (256)   (244)
 
Other investing activities
   (1)   4 
   
Net cash provided by (used in) investing activities
   (257)   (240)
          
Cash Flows from Financing Activities      
 
Redemption of preference stock
   (250)   
 
Payment of common stock dividends to parent
   (56)   (52)
 
Net increase (decrease) in note payable to affiliate
      37 
 
Net increase (decrease) in short-term debt
   195    
 Distributions on preference stock   (8)   (8)
   
Net cash provided by (used in) financing activities
   (119)   (23)
          
Net Increase (Decrease) in Cash and Cash Equivalents
   (275)   (200)
Cash and Cash Equivalents at Beginning of Period
   320    204 
Cash and Cash Equivalents at End of Period
 $ 45  $ 4 
          
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,   June 30, December 31,
   2012  2011    2013  2012 
AssetsAssets    Assets    
            
Current AssetsCurrent Assets    Current Assets    
Cash and cash equivalents
 $ 24  $ 140 
Cash and cash equivalents
 $ 45  $ 320 Accounts receivable (less reserve: 2013, $19; 2012, $18)    
Accounts receivable (less reserve: 2012, $18; 2011, $17)     
Customer
  316   249 
 
Customer
  261   271  
Other
  4   5 
 
Other
  6   9 
Accounts receivable from affiliates
  3   29 
Accounts receivable from affiliates
  30   35 
Unbilled revenues
  74   110 
Unbilled revenues
  87   98 
Materials and supplies
  39   39 
Materials and supplies
  38   42 
Prepayments
  94   76 
Prepayments
  96   78 
Deferred income taxes
  45   45 
Other current assets
   29    30 
Other current assets
   18    4 
Total Current Assets
   592    883 
Total Current Assets
   617    697 
            
Property, Plant and EquipmentProperty, Plant and Equipment    Property, Plant and Equipment    
Regulated utility plant
  6,024   5,830 
Regulated utility plant
  6,627   6,286 
Less: accumulated depreciation - regulated utility plant
   2,269    2,217 
Less: accumulated depreciation - regulated utility plant
   2,383    2,316 
 
Regulated utility plant, net
  3,755   3,613  
Regulated utility plant, net
  4,244   3,970 
Other, net
  2   2 
Other, net
  2   2 
Construction work in progress
   262    242 
Construction work in progress
   444    370 
Property, Plant and Equipment, net
   4,019    3,857 
Property, Plant and Equipment, net
   4,690    4,342 
            
Other Noncurrent AssetsOther Noncurrent Assets    Other Noncurrent Assets    
Regulatory assets
  734   729 
Regulatory assets
  862   853 
Intangibles
  161   155 
Intangibles
  181   171 
Other noncurrent assets
   80    81 
Other noncurrent assets
   35    55 
Total Other Noncurrent Assets
   975    965 
Total Other Noncurrent Assets
   1,078    1,079 
            
Total Assets
Total Assets
 $ 5,586  $ 5,705 
Total Assets
 $ 6,385  $ 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,   June 30, 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
 $ 85   
Accounts payable
  154  $ 171 
Long term debt due within one year
  10   
Accounts payable to affiliates
  49   64 
Accounts payable
  242  $ 259 
Interest
  23   24 
Accounts payable to affiliates
  43   63 
Regulatory liabilities
  42   53 
Taxes
  20   12 
Customer deposits and prepayments
  29   39 
Interest
  26   26 
Vacation
  23   22 
Regulatory liabilities
  48   52 
Other current liabilities
   39    47 
Other current liabilities
   89    93 
Total Current Liabilities
   554    420 
Total Current Liabilities
   563    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
  1,307   1,233 
Investment tax credits
  4   5 
Investment tax credits
  3   3 
Accrued pension obligations
  139   186 
Accrued pension obligations
  154   237 
Regulatory liabilities
  9   7 
Regulatory liabilities
  13   8 
Other deferred credits and noncurrent liabilities
   113    129 
Other deferred credits and noncurrent liabilities
   78    103 
Total Deferred Credits and Other Noncurrent Liabilities
   1,433    1,442 
Total Deferred Credits and Other Noncurrent Liabilities
   1,555    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
  1,340   1,135 
Earnings reinvested
   538    532 
Earnings reinvested
   606    563 
Total Equity
   1,881    2,125 
Total Equity
   2,310    2,062 
            
Total Liabilities and Equity
Total Liabilities and Equity
 $ 5,586  $ 5,705 
Total Liabilities and Equity
 $ 6,385  $ 6,118 

(a)170,000 shares authorized; 66,368 shares issued and outstanding at June 30, 20122013 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, 2013
March 31, 2013
  66,368     $ 364  $ 1,195  $ 602  $ 2,161 
Net income
Net income
          45   45 
Capital contributions from PPL
Capital contributions from PPL
        145     145 
Cash dividends declared on common stock
Cash dividends declared on common stock
              (41)   (41)
June 30, 2013
June 30, 2013
  66,368     $ 364  $ 1,340  $ 606  $ 2,310 
              
December 31, 2012
December 31, 2012
  66,368    $ 364  $ 1,135  $ 563  $ 2,062 
Net income
Net income
          109   109 
Capital contributions from PPL
Capital contributions from PPL
        205     205 
Cash dividends declared on common stock
Cash dividends declared on common stock
              (66)   (66)
June 30, 2013
June 30, 2013
  66,368     $ 364  $ 1,340  $ 606  $ 2,310 
                            
March 31, 2012
March 31, 2012
  66,368  $ 250  $ 364  $ 979  $ 530  $ 2,123 
March 31, 2012
  66,368  $ 250  $ 364  $ 979  $ 530  $ 2,123 
Net income
Net income
          29   29 
Net income
          29   29 
Redemption of preference stock (b)
Redemption of preference stock (b)
    (250)        (250)
Redemption of preference stock (b)
    (250)        (250)
Cash dividends declared on common stock
Cash dividends declared on common stock
              (21)   (21)
Cash dividends declared on common stock
              (21)   (21)
June 30, 2012
June 30, 2012
  66,368  $  $ 364  $ 979  $ 538  $ 1,881 
June 30, 2012
  66,368  $  $ 364  $ 979  $ 538  $ 1,881 
                            
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
          66   66 
Redemption of preference stock (b)
Redemption of preference stock (b)
    (250)        (250)
Redemption of preference stock (b)
    (250)        (250)
Cash dividends declared on preference stockCash dividends declared on preference stock          (4)  (4)
Cash 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
              (56)   (56)
June 30, 2012
June 30, 2012
  66,368  $  $ 364  $ 979  $ 538  $ 1,881 
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 

(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.

 
20

 


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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   Three Months Ended Six Months Ended
   June 30, June 30,   June 30, June 30,
   2012  2011   2012   2011    2013  2012   2013   2012 
                 
Operating Revenues
Operating Revenues
 $ 658  $ 638  $ 1,363  $ 1,404 
Operating Revenues
 $ 682  $ 658  $ 1,482  $ 1,363 
                 
Operating ExpensesOperating Expenses        Operating Expenses        
Operation        Operation        
 
Fuel
  215   206   428   421  
Fuel
  216   215   447   428 
 
Energy purchases
  34   40   108   147  
Energy purchases
  37   34   123   108 
 
Other operation and maintenance
  197   198   403   379  
Other operation and maintenance
  197   197   394   403 
Depreciation
  86   84   172   165 
Depreciation
  83   86   165   172 
Taxes, other than income
   12    9    23    18 
Taxes, other than income
   12    12    24    23 
Total Operating Expenses
   544    537    1,134    1,130 
Total Operating Expenses
   545    544    1,153    1,134 
                    
Operating Income
Operating Income
  114   101   229   274 
Operating Income
  137   114   329   229 
                    
Other Income (Expense) - net
Other Income (Expense) - net
  (7)    (10)  (1)
Other Income (Expense) - net
    (7)  (2)  (10)
                 
Interest Expense
Interest Expense
   37    36    75    72 
Interest Expense
  36   37   73   75 
                    
Interest Expense with Affiliate
Interest Expense with Affiliate
   1       1    
          
Income from Continuing Operations Before Income Taxes
Income from Continuing Operations Before Income Taxes
  70   65   144   201 
Income from Continuing Operations Before Income Taxes
  100   70   253   144 
                    
Income Taxes
Income Taxes
   20    24    41    73 
Income Taxes
   37    20    94    41 
                    
Income from Continuing Operations After Income Taxes
Income from Continuing Operations After Income Taxes
  50   41   103   128 
Income from Continuing Operations After Income Taxes
  63   50   159   103 
                    
Income (Loss) from Discontinued Operations (net of income taxes)
Income (Loss) from Discontinued Operations (net of income taxes)
   (6)      (6)   
Income (Loss) from Discontinued Operations (net of income taxes)
   1    (6)   1    (6)
                    
Net Income (a)
Net Income (a)
 $ 44  $ 41  $ 97  $ 128 
Net Income (a)
 $ 64  $ 44  $ 160  $ 97 
          
(a) Net income approximates comprehensive income.
          
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

(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,  Six Months Ended June 30,
   2012  2011    2013  2012 
Cash Flows from Operating ActivitiesCash Flows from Operating Activities    Cash Flows from Operating Activities    
Net income
 $ 97  $ 128 
Adjustments to reconcile net income to net cash provided by operating activities    
Net income
 $ 160  $ 97 
 
Depreciation
  172   165 Adjustments to reconcile net income to net cash provided by operating activities    
 
Amortization
  14   13  
Depreciation
  165   172 
 
Defined benefit plans - expense
  20   25  
Amortization
  14   14 
 
Deferred income taxes and investment tax credits
  56   146  
Defined benefit plans - expense
  27   20 
 
Other
  (2)  (15) 
Deferred income taxes and investment tax credits
  95   56 
Change in current assets and current liabilities     
Other
  (6)  (2)
 
Accounts receivable
  (11)  17 Change in current assets and current liabilities    
 
Accounts payable
  17   (20) 
Accounts receivable
  (62)  (11)
 
Unbilled revenues
  1   38  
Accounts payable
  36   17 
 
Fuel, materials and supplies
  1   42  
Unbilled revenues
  (2)  1 
 
Income tax receivable
  2   40  
Fuel, materials and supplies
  25   1 
 
Taxes
  33   (6) 
Taxes
    33 
 
Other
  (8)  (18) 
Other
  2   (6)
Other operating activities    Other operating activities    
 
Defined benefit plans - funding
  (62)  (157) 
Defined benefit plans - funding
  (156)  (62)
 
Other assets
    (1) 
Other assets
  (3)  
 
Other liabilities
   24    10  
Other liabilities
   2    24 
 
Net cash provided by operating activities
   354    407  
Net cash provided by operating activities
   297    354 
Cash Flows from Investing ActivitiesCash Flows from Investing Activities     Cash Flows from Investing Activities     
Expenditures for property, plant and equipment
  (324)  (180)
Expenditures for property, plant and equipment
  (579)  (324)
Proceeds from the sale of other investments
    163 
Net (increase) decrease in notes receivable from affiliates
    3 
Net (increase) decrease in notes receivable from affiliates
  3   (29)
Net (increase) decrease in restricted cash and cash equivalents
  10   (2)
Net (increase) decrease in restricted cash and cash equivalents
   (2)   (4)
Other investing activities
   1    
 
Net cash provided by (used in) investing activities
   (323)   (50) 
Net cash provided by (used in) investing activities
   (568)   (323)
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
  47   
Debt issuance and credit facility costs
  (1)  (3)
Net increase (decrease) in short-term debt
  127   
Distributions to member
   (60)   (146)
Debt issuance and credit facility costs
    (1)
  
Net cash provided by (used in) financing activities
   (61)    (312)
Distributions to member
  (69)  (60)
Contributions from member
   146    
  
Net cash provided by (used in) financing activities
   251     (61)
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
   (20)  (30)
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
 $ 23  $ 29 
            
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,   June 30, December 31,
   2012  2011    2013  2012 
AssetsAssets    Assets    
            
Current AssetsCurrent Assets    Current Assets    
Cash and cash equivalents
 $ 29  $ 59 
Cash and cash equivalents
 $ 23  $ 43 
Accounts receivable (less reserve: 2012, $19; 2011, $17)    Accounts receivable (less reserve: 2013, $22; 2012, $19)    
 
Customer
  145   129  
Customer
  202   133 
 
Other
  13   20  
Other
  21   20 
Unbilled revenues
  145   146 
Unbilled revenues
  158   156 
Fuel, materials and supplies
  281   283 
Accounts receivable from affiliates
    1 
Prepayments
  28   22 
Fuel, materials and supplies
  251   276 
Notes receivable from affiliates
  12   15 
Prepayments
  24   28 
Income taxes receivable
  1   3 
Price risk management assets from affiliates
  72   14 
Deferred income taxes
  104   17 
Deferred income taxes
  11   13 
Regulatory assets
  17   9 
Regulatory assets
  29   19 
Other current assets
   4    3 
Other current assets
   6    4 
Total Current Assets
   779    706 
Total Current Assets
   797    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
  8,232   8,073 
Less: accumulated depreciation - regulated utility plant
   397    277 
Less: accumulated depreciation - regulated utility plant
   647    519 
 
Regulated utility plant, net
  7,361   7,242  
Regulated utility plant, net
  7,585   7,554 
Other, net
  2   2 
Other, net
  3   3 
Construction work in progress
   574    557 
Construction work in progress
   1,113    750 
Property, Plant and Equipment, net
   7,937    7,801 
Property, Plant and Equipment, net
   8,701    8,307 
            
Other Noncurrent AssetsOther Noncurrent Assets    Other Noncurrent Assets    
Regulatory assets
  601   620 
Regulatory assets
  581   630 
Goodwill
  996   996 
Goodwill
  996   996 
Other intangibles
  290   314 
Other intangibles
  245   271 
Other noncurrent assets
   113    108 
Other noncurrent assets
   98    108 
Total Other Noncurrent Assets
   2,000    2,038 
Total Other Noncurrent Assets
   1,920    2,005 
            
Total Assets
Total Assets
 $ 10,737  $ 10,576 
Total Assets
 $ 11,418  $ 11,019 
            
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

 
24

 

CONDENSED CONSOLIDATED BALANCE SHEETS
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
     June 30, December 31,
     2013  2012 
Liabilities and Equity      
          
Current Liabilities      
 
Short-term debt
 $ 252  $ 125 
 
Notes payable with affiliates
   72    25 
 
Accounts payable
   301    283 
 
Accounts payable to affiliates
   1    1 
 
Customer deposits
   49    48 
 
Taxes
   26    26 
 
Price risk management liabilities
   4    5 
 
Regulatory liabilities
   6    9 
 
Interest
   21    21 
 
Other current liabilities
   104    100 
 
Total Current Liabilities
   836    643 
          
Long-term Debt
   4,075    4,075 
       
Deferred Credits and Other Noncurrent Liabilities      
 
Deferred income taxes
   637    541 
 
Investment tax credits
   137    138 
 
Accrued pension obligations
   266    414 
 
Asset retirement obligations
   127    125 
 
Regulatory liabilities
   1,039    1,002 
 
Price risk management liabilities
   39    53 
 
Other deferred credits and noncurrent liabilities
   240    242 
 
Total Deferred Credits and Other Noncurrent Liabilities
   2,485    2,515 
          
Commitments and Contingent Liabilities (Notes 6 and 10)      
          
Member's equity
   4,022    3,786 
          
Total Liabilities and Equity
 $ 11,418  $ 11,019 
          
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

CONDENSED CONSOLIDATED BALANCE SHEETS
LG&E and KU Energy LLC and Subsidiaries
(Unaudited)
(Millions of Dollars)
     June 30, December 31,
     2012  2011 
Liabilities and Equity      
          
Current Liabilities      
 
Accounts payable
 $ 214  $ 224 
 
Accounts payable to affiliates
   2    2 
 
Customer deposits
   47    45 
 
Taxes
   58    25 
 
Regulatory liabilities
   16    20 
��
Interest
   22    23 
 
Salaries and benefits
   51    59 
 
Other current liabilities
   45    35 
 
Total Current Liabilities
   455    433 
          
Long-term Debt
   4,074    4,073 
       
Deferred Credits and Other Noncurrent Liabilities      
 
Deferred income taxes
   563    413 
 
Investment tax credits
   141    144 
 
Accrued pension obligations
   313    359 
 
Asset retirement obligations
   118    116 
 
Regulatory liabilities
   994    1,003 
 
Price risk management liabilities
   57    55 
 
Other deferred credits and noncurrent liabilities
   248    239 
 
Total Deferred Credits and Other Noncurrent Liabilities
   2,434    2,329 
          
Commitments and Contingent Liabilities (Notes 6 and 10)      
          
Member's equity
   3,774    3,741 
          
Total Liabilities and Equity
 $ 10,737  $ 10,576 
          
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
    
March 31, 2013
$ 3,952 
Net income
 64 
Contributions from member
 71 
Distributions to member
 (65)
June 30, 2013
$ 4,022 
December 31, 2012
 $ 3,786 
Net income
 160 
Contributions from member
 146 
Distributions to member
 (69)
Other comprehensive income (loss)
 (1)
June 30, 2013
$ 4,022 
March 31, 2012
$3,765 
Net income
   44 
Distributions to member
   (35)
June 30, 2012
 $ 3,774 
    
December 31, 2011
 $3,741 
Net income
   97 
Distributions to member
   (60)
Other comprehensive income (loss)
   (4)
June 30, 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
$ 3,991 

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   Three Months Ended Six Months Ended
   June 30, June 30,   June 30, June 30,
   2012  2011   2012   2011    2013  2012  2013  2012 
Operating RevenuesOperating Revenues        Operating Revenues        
Retail and wholesale
 $ 286  $ 280  $ 615  $ 651 
Retail and wholesale
 $ 302  $ 286  $ 671  $ 615 
Electric revenue from affiliate
   18    17    42    44 
Electric revenue from affiliate
   14    18    35    42 
Total Operating Revenues
   304    297    657    695 
Total Operating Revenues
   316    304    706    657 
                    
Operating ExpensesOperating Expenses        Operating Expenses        
Operation        Operation        
 
Fuel
  92   82   181   167  
Fuel
  88   92   184   181 
 
Energy purchases
  23   32   92   131  
Energy purchases
  31   23   111   92 
 
Energy purchases from affiliate
  2   7   6   18  
Energy purchases from affiliate
  3   2   4   6 
 
Other operation and maintenance
  92   91   190   181  
Other operation and maintenance
  94   92   185   190 
Depreciation
  38   37   76   73 
Depreciation
  37   38   73   76 
Taxes, other than income
   6    5    11    9 
Taxes, other than income
   6    6    12    11 
Total Operating Expenses
   253    254    556    579 
Total Operating Expenses
   259    253    569    556 
                    
Operating Income
Operating Income
  51   43   101   116 
Operating Income
  57   51   137   101 
                    
Other Income (Expense) - net
Other Income (Expense) - net
  (1)  1     
Other Income (Expense) - net
  (1)  (1)  (2)  
                    
Interest Expense
Interest Expense
   10    12    21    23 
Interest Expense
   10    10    20    21 
                    
Income Before Income Taxes
Income Before Income Taxes
  40   32   80   93 
Income Before Income Taxes
  46   40   115   80 
                    
Income Taxes
Income Taxes
   14    12    29    34 
Income Taxes
   17    14    42    29 
                    
Net Income (a)
Net Income (a)
 $ 26  $ 20  $ 51  $ 59 
Net Income (a)
 $ 29  $ 26  $ 73  $ 51 
          
(a) Net income approximates comprehensive income.
          
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

(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,  Six Months Ended June 30,
   2012  2011    2013  2012 
Cash Flows from Operating ActivitiesCash Flows from Operating Activities    Cash Flows from Operating Activities    
Net income
 $ 51  $ 59 
Net income
 $ 73  $ 51 
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
  73   76 
 
Amortization
  6   6  
Amortization
  6   6 
 
Defined benefit plans - expense
  9   11  
Defined benefit plans - expense
  9   9 
 
Deferred income taxes and investment tax credits
  28   27  
Deferred income taxes and investment tax credits
  21   28 
 
Other
  (6)   
Other
    (6)
Change in current assets and current liabilities    Change in current assets and current liabilities    
 
Accounts receivable
  (11)  24  
Accounts receivable
  (9)  (7)
 
Accounts payable
  11   (11) 
Accounts payable
  13   11 
 
Accounts payable to affiliates
  (10)  (7) 
Accounts payable to affiliates
  (2)  (10)
 
Unbilled revenues
  6   27  
Unbilled revenues
  2   6 
 
Fuel, materials and supplies
  6   41  
Fuel, materials and supplies
  25   6 
 
Other
  19   (9) 
Taxes
  12   15 
Other operating activities     
Other
  6   
 
Defined benefit plans - funding
  (25)  (67)Other operating activities    
 
Other assets
  (1)   
Defined benefit plans - funding
  (44)  (25)
 
Other liabilities
   1    3  
Other assets
  (1)  (1)
 
Net cash provided by operating activities
   160    177  
Other liabilities
   2    1 
 
Net cash provided by operating activities
   186    160 
Cash Flows from Investing ActivitiesCash Flows from Investing Activities     Cash Flows from Investing Activities     
Expenditures for property, plant and equipment
  (120)  (79)
Proceeds from the sale of other investments
    163 
Expenditures for property, plant and equipment
  (236)  (120)
Net (increase) decrease in notes receivable from affiliates
  (6)  
Net (increase) decrease in notes receivable from affiliates
    (6)
Net (increase) decrease in restricted cash and cash equivalents
   (2)   (4)
Net (increase) decrease in restricted cash and cash equivalents
   10    (2)
 
Net cash provided by (used in) investing activities
   (128)   80  
Net cash provided by (used in) investing activities
   (226)   (128)
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
  25   
Net increase (decrease) in short-term debt
    (163)
Debt issuance and credit facility costs
    (1)
Debt issuance and credit facility costs
  (1)  (1)
Payment of common stock dividends to parent
  (48)  (31)
Payment of common stock dividends to parent
   (31)   (42)
Contributions from parent
   54    
  
Net cash provided by (used in) financing activities
   (32)    (218)  
Net cash provided by (used in) financing activities
   31     (32)
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
   (9)  
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
 $ 13  $ 25 
            
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,   June 30, 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
 $ 13  $ 22 
 
Other
  6   9 Accounts receivable (less reserve: 2013, $2; 2012, $1)    
Unbilled revenues
  59   65  
Customer
  84   59 
Accounts receivable from affiliates
  21   11  
Other
  9   16 
Fuel, materials and supplies
  136   142 
Unbilled revenues
  70   72 
Prepayments
  10   7 
Accounts receivable from affiliates
  8   14 
Notes receivable from affiliates
  6   
Fuel, materials and supplies
  117   142 
Income taxes receivable
    4 
Prepayments
  7   7 
Deferred income taxes
  2   2 
Price risk management from affiliates
  36   7 
Regulatory assets
  13   9 
Regulatory assets
  21   19 
Other current assets
   1    
Other current assets
   1    1 
Total Current Assets
   343    334 
Total Current Assets
   366    359 
            
Property, Plant and EquipmentProperty, Plant and Equipment    Property, Plant and Equipment    
Regulated utility plant
  3,077   2,956 
Regulated utility plant
  3,279   3,187 
Less: accumulated depreciation - regulated utility plant
   168    116 
Less: accumulated depreciation - regulated utility plant
   282    220 
 
Regulated utility plant, net
  2,909   2,840  
Regulated utility plant, net
  2,997   2,967 
Construction work in progress
   182    215 
Construction work in progress
   407    259 
Property, Plant and Equipment, net
   3,091    3,055 
Property, Plant and Equipment, net
   3,404    3,226 
            
Other Noncurrent AssetsOther Noncurrent Assets    Other Noncurrent Assets    
Regulatory assets
  391   403 
Regulatory assets
  369   400 
Goodwill
  389   389 
Goodwill
  389   389 
Other intangibles
  155   166 
Other intangibles
  132   144 
Other noncurrent assets
   42    40 
Other noncurrent assets
   34    44 
Total Other Noncurrent Assets
   977    998 
Total Other Noncurrent Assets
   924    977 
            
Total Assets
Total Assets
 $ 4,411  $ 4,387 
Total Assets
 $ 4,694  $ 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,   June 30, December 31,
   2012  2011    2013  2012 
Liabilities and EquityLiabilities and Equity    Liabilities and Equity    
            
Current LiabilitiesCurrent Liabilities    Current Liabilities    
Short-term debt
 $ 80  $ 55 
Accounts payable
 $ 93  $ 94 
Accounts payable
  146   117 
Accounts payable to affiliates
  16   26 
Accounts payable to affiliates
  21   23 
Customer deposits
  23   22 
Customer deposits
  24   23 
Taxes
  28   13 
Taxes
  14   2 
Regulatory liabilities
  7   10 
Price risk management liabilities
  4   5 
Interest
  6   6 
Regulatory liabilities
  5   4 
Salaries and benefits
  13   14 
Interest
  5   5 
Other current liabilities
   20    14 
Other current liabilities
   40    34 
Total Current Liabilities
   206    199 
Total Current Liabilities
   339    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
  567   544 
Investment tax credits
  41   43 
Investment tax credits
  39   40 
Accrued pension obligations
  71   95 
Accrued pension obligations
  57   102 
Asset retirement obligations
  55   55 
Asset retirement obligations
  57   56 
Regulatory liabilities
  472   478 
Regulatory liabilities
  488   471 
Price risk management liabilities
  57   55 
Price risk management liabilities
  39   53 
Other deferred credits and noncurrent liabilities
   109    113 
Other deferred credits and noncurrent liabilities
   107    106 
Total Deferred Credits and Other Noncurrent Liabilities
   1,311    1,314 
Total Deferred Credits and Other Noncurrent Liabilities
   1,354    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
  1,332   1,278 
Earnings reinvested
   80    60 
Earnings reinvested
   133    108 
Total Equity
   1,782    1,762 
Total Equity
   1,889    1,810 
            
Total Liabilities and Equity
Total Liabilities and Equity
 $ 4,411  $ 4,387 
Total Liabilities and Equity
 $ 4,694  $ 4,562 

(a)75,000 shares authorized; 21,294 shares issued and outstanding at June 30, 20122013 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
                 
March 31, 2013
  21,294  $424  $1,303  $133  $1,860 
Net income
           29    29 
Capital contributions from LKE
        29       29 
Cash dividends declared on common stock
           (29)   (29)
June 30, 2013
 21,294  $ 424  $ 1,332  $ 133  $ 1,889 
                 
December 31, 2012
 21,294  $424  $1,278  $108  $ 1,810 
Net income
           73    73 
Capital contributions from LKE
        54       54 
Cash dividends declared on common stock
           (48)   (48)
June 30, 2013
 21,294  $ 424  $ 1,332  $ 133  $ 1,889 
                 
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 

(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   Three Months Ended Six Months Ended
   June 30, June 30,   June 30, June 30,
   2012  2011   2012   2011    2013  2012  2013  2012 
Operating RevenuesOperating Revenues        Operating Revenues        
Retail and wholesale
 $ 372  $ 358  $ 748  $ 753 
Retail and wholesale
 $ 380  $ 372  $ 811  $ 748 
Electric revenue from affiliate
   2    7    6    18 
Electric revenue from affiliate
   3    2    4    6 
Total Operating Revenues
   374    365    754    771 
Total Operating Revenues
   383    374    815    754 
                    
Operating ExpensesOperating Expenses        Operating Expenses        
Operation        Operation        
 
Fuel
  123   124   247   254  
Fuel
  128   123   263   247 
 
Energy purchases
  11   8   16   16  
Energy purchases
  6   11   12   16 
 
Energy purchases from affiliate
  18   17   42   44  
Energy purchases from affiliate
  14   18   35   42 
 
Other operation and maintenance
  98   100   193   184  
Other operation and maintenance
  98   98   195   193 
Depreciation
  48   47   96   92 
Depreciation
  46   48   92   96 
Taxes, other than income
   6    4    12    9 
Taxes, other than income
   6    6    12    12 
Total Operating Expenses
   304    300    606    599 
Total Operating Expenses
   298    304    609    606 
                    
Operating Income
Operating Income
  70   65   148   172 
Operating Income
  85   70   206   148 
                    
Other Income (Expense) - net
Other Income (Expense) - net
  (5)    (6)  1 
Other Income (Expense) - net
  2   (5)  1   (6)
                    
Interest Expense
Interest Expense
   17    17    34    35 
Interest Expense
   17    17    34    34 
                    
Income Before Income Taxes
Income Before Income Taxes
  48   48   108   138 
Income Before Income Taxes
  70   48   173   108 
                    
Income Taxes
Income Taxes
   18    18    40    50 
Income Taxes
   26    18    65    40 
                    
Net Income (a)
Net Income (a)
 $ 30  $ 30  $ 68  $ 88 
Net Income (a)
 $ 44  $ 30  $ 108  $ 68 
          
(a) Net income approximates comprehensive income.
          
The accompanying Notes to Condensed Financial Statements are an integral part of the financial statements.

(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,  Six Months Ended June 30,
   2012  2011    2013  2012 
Cash Flows from Operating ActivitiesCash Flows from Operating Activities    Cash Flows from Operating Activities    
Net income
 $ 68  $ 88 
Net income
 $ 108  $ 68 
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
  96   92  
Depreciation
  92   96 
 
Amortization
  7   6  
Amortization
  7   7 
 
Defined benefit plans - expense
  5   7  
Defined benefit plans - expense
  12   5 
 
Deferred income taxes and investment tax credits
  53   49  
Deferred income taxes and investment tax credits
  72   53 
 
Other
    (10) 
Other
  (2)  
Change in current assets and current liabilities    Change in current assets and current liabilities    
 
Accounts receivable
  (24)  15  
Accounts receivable
  (39)  (20)
 
Accounts payable
  12   2  
Accounts payable
  33   12 
 
Accounts payable to affiliates
  1   (19) 
Accounts payable to affiliates
  (7)  1 
 
Unbilled revenues
  (5)  11  
Unbilled revenues
  (4)  (5)
 
Fuel, materials and supplies
  (3)  1  
Fuel, materials and supplies
    (3)
 
Other
  15   (15) 
Taxes
  (10)  12 
Other operating activities     
Other
  5   (1)
 
Defined benefit plans - funding
  (18)  (45)Other operating activities    
 
Other assets
    (1) 
Defined benefit plans - funding
  (61)  (18)
 
Other liabilities
   10    4  
Other assets
  (3)  
 
Net cash provided by operating activities
   217    185  
Other liabilities
   (13)   10 
 
Net cash provided by operating activities
   190    217 
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
  (341)  (203)
 
Net cash provided by (used in) investing activities
   (203)   (101)
Other investing activities
   1    
 
Net cash provided by (used in) investing activities
   (340)   (203)
Cash Flows from Financing ActivitiesCash Flows from Financing Activities     Cash Flows from Financing Activities     
Net increase (decrease) in notes payable with affiliates
     6 
Net increase (decrease) in notes payable with affiliates
   6   (10)
Net increase (decrease) in short-term debt
  102   
Debt issuance and credit facility costs
    (2)
Payment of common stock dividends to parent
  (55)  (48)
Payment of common stock dividends to parent
   (48)   (68)
Contributions from parent
   92    
  
Net cash provided by (used in) financing activities
   (42)    (80)  
Net cash provided by (used in) financing activities
   139     (42)
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
   (11)   (28)
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
 $ 10  $ 3 
            
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,   June 30, December 31,
   2012  2011    2013  2012 
AssetsAssets    Assets    
            
Current AssetsCurrent Assets    Current Assets    
Cash and cash equivalents
 $ 3  $ 31 
Cash and cash equivalents
 $ 10  $ 21 
Accounts receivable (less reserve: 2012, $2; 2011, $2)    Accounts receivable (less reserve: 2013, $5; 2012, $2)    
 
Customer
  81   69  
Customer
  118   74 
 
Other
  7   9  
Other
  11   13 
Unbilled revenues
  86   81 
Unbilled revenues
  88   84 
Accounts receivable from affiliates
  15   
Accounts receivable from affiliates
  9   7 
Fuel, materials and supplies
  145   141 
Fuel, materials and supplies
  134   134 
Prepayments
  11   7 
Prepayments
  7   10 
Income taxes receivable
  1   5 
Price risk management assets from affiliates
  36   7 
Deferred income taxes
  5   5 
Deferred income taxes
  2   3 
Regulatory assets
  4   
Regulatory assets
  8   
Other current assets
   5    3 
Other current assets
   5    3 
Total Current Assets
   363    351 
Total Current Assets
   428    356 
            
Investments
   20    31 
Property, Plant and EquipmentProperty, Plant and Equipment    
      
Regulated utility plant
  4,953   4,886 
Property, Plant and Equipment    
Regulated utility plant
  4,681   4,563 
Less: accumulated depreciation - regulated utility plant
   365    299 
Less: accumulated depreciation - regulated utility plant
   229    161  
Regulated utility plant, net
  4,588   4,587 
 
Regulated utility plant, net
  4,452   4,402 
Other, net
  1   1 
Construction work in progress
   390    340 
Construction work in progress
   704    490 
Property, Plant and Equipment, net
   4,842    4,742 
Property, Plant and Equipment, net
   5,293    5,078 
            
Other Noncurrent AssetsOther Noncurrent Assets    Other Noncurrent Assets    
Regulatory assets
  210   217 
Regulatory assets
  212   230 
Goodwill
  607   607 
Goodwill
  607   607 
Other intangibles
  135   148 
Other intangibles
  113   127 
Other noncurrent assets
   60    60 
Other noncurrent assets
   57    57 
Total Other Noncurrent Assets
   1,012    1,032 
Total Other Noncurrent Assets
   989    1,021 
            
Total Assets
Total Assets
 $ 6,237  $ 6,156 
Total Assets
 $ 6,710  $ 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,   June 30, 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
 $ 172  $ 70 
Accounts payable to affiliates
  35   33 
Accounts payable
  146   147 
Customer deposits
  24   23 
Accounts payable to affiliates
  26   33 
Taxes
  23   11 
Customer deposits
  25   25 
Regulatory liabilities
  9   10 
Taxes
  16   26 
Interest
  10   11 
Regulatory liabilities
  1   5 
Salaries and benefits
  13   15 
Interest
  10   10 
Other current liabilities
   20    13 
Other current liabilities
   37    33 
Total Current Liabilities
   251    228 
Total Current Liabilities
   433    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
  657   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
  551   531 
Other deferred credits and noncurrent liabilities
   90    87 
Other deferred credits and noncurrent liabilities
   86    92 
Total Deferred Credits and Other Noncurrent Liabilities
   1,383    1,341 
Total Deferred Credits and Other Noncurrent Liabilities
   1,507    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
  2,440   2,348 
Accumulated other comprehensive income (loss)
  (4)  
Accumulated other comprehensive income (loss)
  1   1 
Earnings reinvested
   109    89 
Earnings reinvested
   179    126 
Total Equity
   2,761    2,745 
Total Equity
   2,928    2,783 
            
Total Liabilities and Equity
Total Liabilities and Equity
 $ 6,237  $ 6,156 
Total Liabilities and Equity
 $ 6,710  $ 6,455 

(a)80,000 shares authorized; 37,818 shares issued and outstanding at June 30, 20122013 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, 2013
  37,818  $308  $2,398  $177  $ 1  $ 2,884 
Net income
        44     44 
Capital contributions from LKE
      42       42 
Cash dividends declared on common stock
           (42)      (42)
June 30, 2013
 37,818  $ 308  $ 2,440  $ 179  $ 1  $ 2,928 
            
December 31, 2012
 37,818  $308  $2,348  $126  $ 1  $2,783 
Net income
        108     108 
Capital contributions from LKE
      92       92 
Cash dividends declared on common stock
           (55)      (55)
June 30, 2013
 37,818  $ 308  $ 2,440  $ 179  $ 1  $ 2,928 
            
March 31, 2012
  37,818  $308  $2,348  $103  $ (4) $ 2,755  37,818  $308  $2,348  $103  $ (4) $2,755 
Net income
        30     30         30     30 
Cash dividends declared on common stock
           (24)      (24)           (24)      (24)
June 30, 2012
 37,818  $ 308  $ 2,348  $ 109  $ (4) $ 2,761  37,818  $ 308  $ 2,348  $ 109  $ (4) $ 2,761 
                        
December 31, 2011
 37,818  $308  $2,348  $89    $2,745  37,818  $308  $2,348  $89    $2,745 
Net income
        68     68         68     68 
Cash dividends declared on common stock
        (48)    (48)        (48)    (48)
Other comprehensive income (loss)
            $ (4)   (4)            $ (4)   (4)
June 30, 2012
 37,818  $ 308  $ 2,348  $ 109  $ (4) $ 2,761  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 

(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.  When appropriate, PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and KU are named specifically at each discussion heading or therein for their related activities and disclosures.

The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the U.S.GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include all of the information and footnotes required by accounting principles generally accepted in the U.S.GAAP 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.GAAP are reflected in the condensed financial statements.  All adjustments are of a normal recurring nature, except as otherwise disclosed.  Each Registrant's Balance Sheet at December 31, 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, 2012,2013, 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, 20122013 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.

2.  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.  During the three and six months ended June 30, 2013, PPL Electric receives a nominal fee for administering its program.purchased $220 million and $479 million of accounts receivable from unaffiliated third parties and $70 million and $147 million from PPL EnergyPlus.  During the three and six months ended June 30, 2012, PPL Electric purchased $184 million and $422 million of accounts receivable from unaffiliated third parties and $74 million and $156 million from its affiliate, PPL EnergyPlus.  During the three and six months ended June 30, 2011, PPL Electric purchased $198 million and $452 million of accounts receivable from unaffiliated third parties and $59 million and $120 million from its affiliate, PPL EnergyPlus.

Depreciation (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 since the rate case.
 
39


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.

39


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.

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.

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 includes financing and certain other costs incurred at the corporate level that have not been allocated or assigned to the segments, as well as certain unallocated assets, which are 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 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 resultscompanies, as appropriate.  The financing costs associated primarily with PPL Capital Funding's new securities issuances, with certain exceptions including the remarketing of the U.K. Regulateddebt component of the Equity Units, have not been directly assigned or allocated to any segment are not comparable between 2012 and 2011.generally have been reflected in Corporate and Other in 2013.

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

      Three Months Six Months
  2012  2011  2012  2011 
Income Statement Data            
Revenues from external customers            
 Kentucky Regulated $ 658  $ 638  $ 1,363  $ 1,404 
 U.K. Regulated   557    420    1,119    645 
 Pennsylvania Regulated   403    436    860    990 
 Supply (a)   931    995    3,319    2,360 
Total $ 2,549  $ 2,489  $ 6,661  $ 5,399 
                 
Intersegment electric revenues            
 Pennsylvania Regulated $ 1  $ 4  $ 2  $ 8 
 Supply   17    4    38    10 
                 
Net Income Attributable to PPL            
 Kentucky Regulated $ 34  $ 31  $ 76  $ 106 
 U.K. Regulated   196    38    361    93 
 Pennsylvania Regulated   29    36    62    88 
 Supply (a)   12    91    313    310 
Total $ 271  $ 196  $ 812  $ 597 
 
40

 
      Three Months Six Months
  2013  2012  2013  2012 
Income Statement Data            
Revenues from external customers            
 Kentucky Regulated $ 682  $ 658  $ 1,482  $ 1,363 
 U.K. Regulated   572    557    1,220    1,119 
 Pennsylvania Regulated   413    403    925    860 
 Supply (a)   1,780    931    2,274    3,319 
 Corporate and Other   3       6    
Total $ 3,450  $ 2,549  $ 5,907  $ 6,661 
                 
Intersegment electric revenues            
 Pennsylvania Regulated $ 1  $ 1  $ 2  $ 2 
 Supply   12    17    26    38 
                 
Net Income Attributable to PPL Shareowners            
 Kentucky Regulated $ 49  $ 34  $ 134  $ 76 
 U.K. Regulated (a)   245    196    558    361 
 Pennsylvania Regulated   45    29    109    62 
 Supply (a)   77    12    31    313 
 Corporate and Other   (11)      (14)   
Total $ 405  $ 271  $ 818  $ 812 

  June 30, December 31,  June 30, December 31,
  2012  2011   2013  2012 
Balance Sheet DataBalance Sheet Data    Balance Sheet Data    
AssetsAssets    Assets    
Kentucky Regulated $ 10,288  $ 10,229 Kentucky Regulated $ 11,084  $ 10,670 
U.K. Regulated  13,445   13,364 U.K. Regulated  13,792   14,073 
Pennsylvania Regulated  5,532   5,610 Pennsylvania Regulated  6,385   6,023 
Supply   14,243    13,445 Supply  12,155   12,868 
Corporate and Other (b)   330    
Total assetsTotal assets $ 43,508  $ 42,648 Total assets $ 43,746  $ 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, thesemethod or the If-Converted Method, as applicable.  The If-Converted Method was applied to the Equity Units beginning in the first quarter of 2013.  Incremental non-participating securities included stock options and performance units granted under incentive compensation plans andthat have a dilutive impact are detailed in the Purchase Contracts associated with Equity Units.  In 2012, these securities also included the PPL common stock forward sale agreements.  table below.

See Note 7 for additional information on the forward sale agreements.

TheApril and May 2013 settlements of forward sale agreements were dilutive underand 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 indicated in the forward sale agreements.

The Purchase Contracts will be dilutive under the treasury stock method if the average VWAPJuly 2013 issuance of PPL common stock for a certain period exceeds approximately $30.99 and $28.80, forto settle 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 provisions in the event of early settlement upon a Fundamental Change.

Reconciliations of the amounts of income and shares of PPL common stock (in thousands) for the periods ended June 30 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 Six Months
    2013  2012  2013  2012 
Income (Numerator)Income (Numerator)        
Income from continuing operations after income taxes attributable to PPLIncome from continuing operations after income taxes attributable to PPL        
shareowners $ 404  $ 277  $ 817  $ 818 
Less amounts allocated to participating securitiesLess amounts allocated to participating securities   2    2    4    5 
Income from continuing operations after income taxes available to PPLIncome from continuing operations after income taxes available to PPL        
common shareowners - Basic  402   275   813   813 
Plus interest charges (net of tax) related to Equity UnitsPlus interest charges (net of tax) related to Equity Units   15       30    
Income from continuing operations after income taxes available to PPLIncome from continuing operations after income taxes available to PPL        
common shareowners - Diluted $ 417  $ 275  $ 843  $ 813 
           
Income (loss) from discontinued operations (net of income taxes) availableIncome (loss) from discontinued operations (net of income taxes) available        
to PPL common shareowners - Basic and Diluted $ 1  $ (6) $ 1  $ (6)
           
Net income attributable to PPL shareownersNet income attributable to PPL shareowners $ 405  $ 271  $ 818  $ 812 
Less amounts allocated to participating securitiesLess amounts allocated to participating securities   2    2    4    5 
Net income available to PPL common shareowners - BasicNet income available to PPL common shareowners - Basic  403   269   814   807 
Plus interest charges (net of tax) related to Equity UnitsPlus interest charges (net of tax) related to Equity Units   15       30    
Net income available to PPL common shareowners - DilutedNet income available to PPL common shareowners - Diluted $ 418  $ 269  $ 844  $ 807 
           
Shares of Common Stock (Denominator)Shares of Common Stock (Denominator)        
Weighted-average shares - Basic EPSWeighted-average shares - Basic EPS  589,834   579,881   586,683   579,462 
Add incremental non-participating securities:Add incremental non-participating securities:        
 Share-based payment awards  1,133   444   971   465 
 Equity Units  73,388     72,689   
 Forward sale agreements   260    268    920    135 
Weighted-average shares - Diluted EPSWeighted-average shares - Diluted EPS   664,615    580,593    661,263    580,062 
    2012  2011  2012  2011            
Basic EPSBasic EPS        Basic EPS        
Available to PPL common shareowners:Available to PPL common shareowners:        Available to PPL common shareowners:        
 Income from continuing operations after income taxes $ 0.47  $ 0.35  $ 1.40  $ 1.13  Income from continuing operations after income taxes $ 0.68  $ 0.47  $ 1.39  $ 1.40 
 Income (loss) from discontinued operations (net of income taxes)   (0.01)      (0.01)   0.01  Income (loss) from discontinued operations (net of income taxes)      (0.01)      (0.01)
 Net Income $ 0.46  $ 0.35  $ 1.39  $ 1.14  Net Income $ 0.68  $ 0.46  $ 1.39  $ 1.39 
                      
Diluted EPSDiluted EPS        Diluted EPS        
Available to PPL common shareowners:Available to PPL common shareowners:        Available to PPL common shareowners:        
 Income from continuing operations after income taxes $ 0.47  $ 0.35  $ 1.40  $ 1.13  Income from continuing operations after income taxes $ 0.63  $ 0.47  $ 1.28  $ 1.40 
 Income (loss) from discontinued operations (net of income taxes)   (0.01)      (0.01)   0.01  Income (loss) from discontinued operations (net of income taxes)      (0.01)      (0.01)
 Net Income $ 0.46  $ 0.35  $ 1.39  $ 1.14  Net Income $ 0.63  $ 0.46  $ 1.28  $ 1.39 

For the periods ended June 30, 2012, 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 Six Months
   2013  2012  2013  2012 
                
Stock-based compensation plans (a)Stock-based compensation plans (a)  76   353 Stock-based compensation plans (a)  938   76   1,384   353 
ESOPESOP    280 ESOP      275   280 
DRIPDRIP  617   1,175 DRIP    617   549   1,175 

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

See Note 7 for information on the repurchase of shares of PPL common stock that substantially offset the issuances for the three months ended June 30, 2013.

For the periods ended June 30, 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 Three Months Six Months
(Shares in thousands) 2012  2011  2012  2011  2013  2012  2013  2012 
                
Stock options  6,250   5,045   5,966   5,829   2,192   6,250   5,486   5,966 
Performance units  34   1   115   4  �� 5   34   108   115 
Restricted stock units      58   

5.  Income Taxes

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

(PPL)
                
     Three Months Six Months
     2012  2011  2012  2011 
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 
Increase (decrease) due to:            
 State income taxes, net of federal income tax benefit   7    14    32    39 
 State valuation allowance adjustments (a)            11 
 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 (c)   (1)   (11)   1    (17)
 Federal and state tax reserve adjustments   (4)   (2)   (5)   (3)
 Foreign tax reserve adjustments (d)   (8)      (5)   
 Federal income tax credits   (3)   (2)   (7)   (7)
 Amortization of investment tax credit   (3)   (1)   (5)   (4)
 Depreciation not normalized (a)   (2)   (2)   (4)   (6)
 State deferred tax rate change (e)         (11)   
 Net operating loss carryforward adjustments (f)   (3)      (9)   
 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 

(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.

 
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Additionally, the 100% Pennsylvania bonus depreciation deduction created a current state income tax benefit for the flow-through impact of Pennsylvania regulated state tax depreciation.  The federal provision for 100% bonus depreciation generally applies to property placed into service before January 1, 2012.  The placed in service deadline is extended to January 1, 2013 for property that exceeds $1 million, has a production period longer than one year and has a tax life of at least ten years.
(PPL)
                 
      Three Months Six Months
      2013  2012  2013  2012 
             
Federal income tax on Income from Continuing Operations Before            
 Income Taxes at statutory tax rate - 35% $ 180  $ 128  $ 377  $ 409 
Increase (decrease) due to:            
  State income taxes, net of federal income tax benefit   14    7    17    32 
  Impact of lower U.K. income tax rates (a)   (25)   (24)   (63)   (45)
  U.S. income tax on foreign earnings - net of foreign tax credit (b)   (7)   (1)   (5)   1 
  Federal and state tax reserve adjustments (c)   (39)   (4)   (40)   (5)
  Foreign tax reserve adjustments (d)      (8)      (5)
  Foreign income tax return adjustments   (4)      (4)   
  Federal income tax credits   (2)   (3)   (5)   (7)
  Amortization of investment tax credit   (2)   (3)   (5)   (5)
  Depreciation not normalized   (1)   (2)   (4)   (4)
  State deferred tax rate change (e)            (11)
  Net operating loss carryforward adjustments (f)      (3)      (9)
  Other   (5)   1    (8)   (4)
   Total increase (decrease)   (71)   (40)   (117)   (62)
Total income taxes from continuing operations $ 109  $ 88  $ 260  $ 347 

(b)(a)The U.K. Finance Act of 2011,2012, enacted in July 2011,2012, reduced the U.K. statutory income tax rate from 27%25% to 26%24% retroactive to April 1, 20112012 and from 26%24% to 25%23% effective April 1, 2012.2013.

The U.K. Finance Act of 2010,2011, enacted in July 2010,2011, reduced the U.K. statutory income tax rate from 28%27% to 27%26% retroactive to April 1, 2011 and from 26% to 25% effective April 1, 2011.2012.
(c)(b)During the three and six months ended June 30, 2011,2013, PPL recorded a $7 million and $14 million federalincrease to income tax expense primarily attributable to a revision in the expected taxable amount of cash repatriation in 2013 and recorded a tax benefit relatedof $19 million associated with a ruling obtained from the IRS impacting the recalculation of 2010 U.K. earnings and profits that will be reflected on an amended 2010 U.S. tax return.
(c)In 1997, the U.K. imposed a Windfall Profits Tax (WPT) on privatized utilities, including WPD.  PPL filed its tax returns for years subsequent to its 1997 and 1998 claims for refund on the basis that the U.K. pension contributions.WPT was creditable.  In September 2010, the U.S. Tax Court (Tax Court) ruled in PPL's favor in a dispute with the IRS, concluding that the U.K. WPT is a creditable tax for U.S. tax purposes.  In January 2011, the IRS appealed the Tax Court's decision to the U.S. Court of Appeals for the Third Circuit (Third Circuit).  In December 2011, the Third Circuit issued its opinion reversing the Tax Court's decision, holding that the U.K. WPT is not a creditable tax.  As a result of the Third Circuit's adverse determination, PPL recorded a $39 million expense in the fourth quarter of 2011.  In June 2012, the U.S. Court of Appeals for the Fifth Circuit issued a contrary opinion in an identical case involving another company.  In July 2012, PPL filed a petition for a writ of certiorari seeking U.S. Supreme Court review of the Third Circuit's opinion.  The Supreme Court granted PPL's petition and oral argument was held in February 2013.  On May 20, 2013, the Supreme Court reversed the Third Circuit's opinion and ruled that the WPT is a creditable tax.  As a result of the Supreme Court ruling, PPL recorded a tax benefit of $44 million during the three and six months ended June 30, 2013, of which $19 million relates to interest.
(d)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 the tax deductibility of interest expense.
(e)During the six months ended June 30, 2012, PPL recorded an adjustmentadjustments related to state deferred tax liabilities.
(f)During the three and six months ended June 30, 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 2012,2013, the U.K. Finance Act of 20122013 (the Act) was enacted.  The Act reduced the U.K.'s statutory income tax rate from 25%23% to 24%21%, effective April 1, 20122014 and from 24%21% to 23%20%, effective April 1, 2013.2015.  As a result of these changes, PPL expects to record a deferred tax benefit in the range of $65$90 million to $75$100 million in the third quarter of 2012.     2013.

(PPL Energy Supply)(PPL Energy Supply)        (PPL Energy Supply)        
                     
    Three Months Six Months   Three Months Six Months
    2012  2011  2012  2011    2013  2012  2013  2012 
Reconciliation of Income Tax Expense        
Federal income tax on Income from Continuing Operations Before        
Federal income tax on Income Before Income Taxes at statutoryFederal income tax on Income Before Income Taxes at statutory        
 Income Taxes at statutory tax rate - 35% $ 10  $ 52  $ 180  $ 176 tax rate - 35% $ 54  $ 10  $ 28  $ 180 
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  9   1   3   24 
State valuation allowance adjustments (a)        6  Federal and state tax reserve adjustments (a)  7     6   
Federal income tax credits  (2)  (1)  (6)  (6) Federal income tax credits    (2)  (3)  (6)
State deferred tax rate change (b)      (11)   State deferred tax rate change (b)        (11)
Other      (2)   (1)   (2) Other   (3)      (2)   (1)
  Total increase (decrease)   (1)   7    6    25  Total increase (decrease)   13    (1)   4    6 
Total income taxes from continuing operations $ 9  $ 59  $ 186  $ 201 
Total income taxesTotal income taxes $ 67  $ 9  $ 32  $ 186 

(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 thethree and six months ended June 30, 20112013, PPL Energy Supply reversed a $3 million tax benefit related to valuation allowances.a 2008 change in method of accounting for certain expenditures for tax purposes and recorded $4 million in federal tax reserves related to differences in over (under) payment interest rates applied to audit claims as a result of the U.S. Supreme Court decision related to Windfall Profits Tax.
(b)During the six months ended June 30, 2012, PPL Energy Supply recorded an adjustmentadjustments related to state deferred tax liabilities.

(PPL Electric)            
                
     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% $ 14  $ 21  $ 34  $ 48 
Increase (decrease) due to:            
 State income taxes, net of federal income tax benefit   3    3    5    7 
 Federal and state tax reserve adjustments   (2)   (2)   (3)   (4)
 Federal and state income tax return adjustments (a)            (2)
 Depreciation not normalized (a)   (3)   (2)   (4)   (5)
 Other   (1)   (1)   (1)   (2)
   Total increase (decrease)   (3)   (2)   (3)   (6)
Total income taxes $ 11  $ 19  $ 31  $ 42 

(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.

 
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(LKE)            
                
     Three Months Six Months
     2012  2011  2012  2011 
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 
Increase (decrease) due to:            
 State income taxes, net of federal income tax benefit      2    2    7 
 Amortization of investment tax credit   (1)   (1)   (3)   (3)
 Net operating loss carryforward adjustments (a)   (3)      (9)   
 Other   (1)      1    (1)
   Total increase (decrease)   (5)   1    (9)   3 
Total income taxes from continuing operations $ 20  $ 24  $ 41  $ 73 


(PPL Electric)            
                 
      Three Months Six Months
      2013  2012  2013  2012 
             
Federal income tax on Income Before Income Taxes at statutory            
 tax rate - 35% $ 24  $ 14  $ 58  $ 34 
Increase (decrease) due to:            
  State income taxes, net of federal income tax benefit   3    3    8    5 
  Federal and state tax reserve adjustments   (2)   (2)   (4)   (3)
  Depreciation not normalized   (1)   (3)   (4)   (4)
  Other      (1)   (1)   (1)
   Total increase (decrease)      (3)   (1)   (3)
Total income taxes $ 24  $ 11  $ 57  $ 31 

(LKE)            
                 
      Three Months Six Months
      2013  2012  2013  2012 
             
Federal income tax on Income from Continuing Operations Before            
 Income Taxes at statutory tax rate - 35% $ 35  $ 25  $ 89  $ 50 
Increase (decrease) due to:            
  State income taxes, net of federal income tax benefit   3       8    2 
  Net operating loss carryforward adjustments (a)      (3)      (9)
  Other   (1)   (2)   (3)   (2)
   Total increase (decrease)   2    (5)   5    (9)
Total income taxes from continuing operations $ 37  $ 20  $ 94  $ 41 

(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.  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 Six Months
    2012  2011  2012  2011    2013  2012  2013  2012 
Reconciliation of Income Tax Expense        
Federal income tax on Income Before Income Taxes at statutory                 
Federal income tax on Income Before Income Taxes at statutoryFederal income tax on Income Before Income Taxes at statutory        
  tax rate - 35% $ 14  $ 11  $ 28  $ 33  tax rate - 35% $ 16  $ 14  $ 40  $ 28 
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  1   1   4   3 
Other   (1)      (2)   (2) Other      (1)   (2)   (2)
  Total increase (decrease)      1    1    1  Total increase (decrease)   1       2    1 
Total income taxesTotal income taxes $ 14  $ 12  $ 29  $ 34 Total income taxes $ 17  $ 14  $ 42  $ 29 

(KU)(KU)        (KU)        
                     
    Three Months Six Months   Three Months Six Months
    2012  2011  2012  2011    2013  2012  2013  2012 
Reconciliation of Income Tax Expense        
Federal income tax on Income Before Income Taxes at statutory                 
Federal income tax on Income Before Income Taxes at statutoryFederal income tax on Income Before Income Taxes at statutory        
 tax rate - 35% $ 17  $ 17  $ 38  $ 48 tax rate - 35% $ 25  $ 17  $ 61  $ 38 
Increase (decrease) due to:Increase (decrease) due to:        Increase (decrease) due to:        
State income taxes, net of federal income tax benefit  2   2   4   4  State income taxes, net of federal income tax benefit  2   2   6   4 
Other   (1)   (1)   (2)   (2) Other   (1)   (1)   (2)   (2)
  Total increase (decrease)   1    1    2    2  Total increase (decrease)   1    1    4    2 
Total income taxesTotal income taxes $ 18  $ 18  $ 40  $ 50 Total income taxes $ 26  $ 18  $ 65  $ 40 

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

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

   Three Months Six Months
   2012  2011  2012  2011 
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)   
 Additions based on tax positions related to the current year           
 Reductions based on tax positions related to the current year  (2)  (1)  (2)  (2)
 Lapse of applicable statutes of limitations  (2)  (3)  (4)  (5)
 Effects of foreign currency translation          
 End of period $113  $250  $113  $250 
              
PPL Energy Supply            
 Beginning of period $31  $28  $28  $183 
 Additions based on tax positions of prior years           
 Reductions based on tax positions of prior years        (1)   
 Derecognize unrecognized tax benefits (a)           (155)
 End of period $31  $28  $31  $28 

 
44

 

   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.
   Three Months Six Months
   2013  2012  2013  2012 
PPL            
 Beginning of period $90  $121  $92  $145 
 Additions based on tax positions of prior years           
 Reductions based on tax positions of prior years  (25)  (4)  (26)  (31)
 Additions based on tax positions related to the current year         
 Reductions based on tax positions related to the current year     (2)     (2)
 Settlements  (30)     (30)   
 Lapse of applicable statutes of limitations  (2)  (2)  (4)  (4)
 End of period $36  $113  $36  $113 
              
PPL Energy Supply            
 Beginning of period $30  $31  $30  $28 
 Additions based on tax positions of prior years           
 Reductions based on tax positions of prior years  (15)     (15)  (1)
 End of period $15  $31  $15  $31 
              
PPL Electric            
 Beginning of period $24  $46  $26  $73 
 Reductions based on tax positions of prior years  (10)  (1)  (10)  (27)
 Additions based on tax positions related to the current year           
 Lapse of applicable statutes of limitations  (2)  (2)  (4)  (4)
 End of period $12  $43  $12  $43 

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, 20122013 and 2011.2012.

At June 30, 2012,2013, 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 $ 16  $ 35 
PPL Energy SupplyPPL Energy Supply  1   31 PPL Energy Supply    15 
PPL ElectricPPL Electric  22   38 PPL Electric  16   11 

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

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

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

       
  2013  2012 
       
PPL $23  $36 
PPL Energy Supply  14   14 
PPL Electric    

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

       
  2012  2011 
       
PPL $36  $185 
PPL Energy Supply  14   12 
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 madefor its Montana operations for the Montana generation operations for 2009.

2009 tax year.  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.  The IRS may assert, and ultimately conclude, that PPL's deduction
45

for generation-related expenditures should be disallowed in whole or in part.  PPL believes that it has established an adequate reservereserves 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 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 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.

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  PPL PPL Electric
  June 30, December 31, June 30, December 31,  June 30, December 31, June 30, December 31,
  2012  2011  2012  2011   2013  2012  2013  2012 
                  
Current Regulatory Assets:Current Regulatory Assets:        Current Regulatory Assets:        
Transmission formula rate $ 5    $ 5   
ECR  7       
Gas supply clause  14  $ 11     
Gas supply clause $ 7  $ 6     Fuel adjustment clause  3   6     
Fuel adjustment clause   10    3       Other   5    2       
Total current regulatory assetsTotal current regulatory assets $ 17  $ 9       Total current regulatory assets $ 34  $ 19  $ 5    
                  
Noncurrent Regulatory Assets:Noncurrent Regulatory Assets:        Noncurrent Regulatory Assets:        
Defined benefit plans $ 595  $ 615  $ 270  $ 276 Defined benefit plans $ 700  $ 730  $ 351  $ 362 
Taxes recoverable through future rates  297   289   297   289 Taxes recoverable through future rates  298   293   298   293 
Storm costs  148   154   32   31 Storm costs  157   168   56   59 
Unamortized loss on debt  103   110   71   77 Unamortized loss on debt  90   96   60   65 
Interest rate swaps  71   69     Interest rate swaps  51   67     
Accumulated cost of removal of utility plant  62   53   62   53 Accumulated cost of removal of utility plant  92   71   92   71 
Coal contracts (a)  7   11     AROs  34   26     
AROs  23   18     Other   21    32    5    3 
Other   29    30    2    3 
Total noncurrent regulatory assetsTotal noncurrent regulatory assets $ 1,335  $ 1,349  $ 734  $ 729 Total noncurrent regulatory assets $ 1,443  $ 1,483  $ 862  $ 853 

Current Regulatory Liabilities:Current Regulatory Liabilities:        Current Regulatory Liabilities:        
Generation supply charge $ 21  $ 42  $ 21  $ 42 
ECR  9   7     Generation supply charge $ 24  $ 27  $ 24  $ 27 
Gas supply clause  5   6     ECR    4     
Transmission service charge  4   2   4   2 Gas supply clause    4     
Transmission formula rate  7     7   Transmission service charge  11   6   11   6 
Universal service rider  7     7   Universal service rider  11   17   11   17 
Other   5    16    3    9 Other   8    3    2    2 
Total current regulatory liabilitiesTotal current regulatory liabilities $ 58  $ 73  $ 42  $ 53 Total current regulatory liabilities $ 54  $ 61  $ 48  $ 52 
                  
Noncurrent Regulatory Liabilities:Noncurrent Regulatory Liabilities:        Noncurrent Regulatory Liabilities:        
Accumulated cost of removal of utility plant $ 666  $ 651     Accumulated cost of removal of utility plant $ 689  $ 679     
Coal contracts (a)  161   180     Coal contracts (a)  119   141     
Power purchase agreement - OVEC (a)  112   116     Power purchase agreement - OVEC (a)  104   108     
Net deferred tax assets  37   39     Net deferred tax assets  32   34     
Act 129 compliance rider  9   7  $ 9  $ 7 Act 129 compliance rider  13   8  $ 13  $ 8 
Defined benefit plans  10   9     Defined benefit plans  18   17     
Other   8    8       Interest rate swaps  72   14     
Other   5    9       
Total noncurrent regulatory liabilitiesTotal noncurrent regulatory liabilities $ 1,003  $ 1,010  $ 9  $ 7 Total noncurrent regulatory liabilities $ 1,052  $ 1,010  $ 13  $ 8 

 
46

 

  LKE LG&E KU  LKE LG&E KU
  June 30, December 31, June 30, December 31, June 30, December 31,  June 30, December 31, June 30, December 31, June 30, December 31,
  2012  2011  2012  2011  2012  2011   2013  2012  2013  2012  2013  2012 
                          
Current Regulatory Assets:Current Regulatory Assets:            Current Regulatory Assets:            
ECR $ 7    $ 2    $ 5   
Gas supply clause  14  $ 11   14  $ 11     
Gas supply clause $ 7  $ 6  $ 7  $ 6     Fuel adjustment clause  3   6   3   6     
Fuel adjustment clause   10    3    6    3  $ 4    Other   5    2    2    2    3    
Total current regulatory assetsTotal current regulatory assets $ 17  $ 9  $ 13  $ 9  $ 4    Total current regulatory assets $ 29  $ 19  $ 21  $ 19  $ 8    
                          
Noncurrent Regulatory Assets:Noncurrent Regulatory Assets:            Noncurrent Regulatory Assets:            
Defined benefit plans $ 325  $ 339  $ 215  $ 225  $ 110  $ 114 Defined benefit plans $ 349  $ 368  $ 219  $ 232  $ 130  $ 136 
Storm costs  116   123   63   66   53   57 Storm costs  101   109   55   59   46   50 
Unamortized loss on debt  32   33   21   21   11   12 Unamortized loss on debt  30   31   19   20   11   11 
Interest rate swaps  71   69   71   69     Interest rate swaps  51   67   51   67     
Coal contracts (a)  7   11   3   5   4   6 AROs  34   26   19   15   15   11 
AROs  23   18   12   11   11   7 Other   16    29    6    7    10    22 
Other   27    27    6    6    21    21 
Total noncurrent regulatory assetsTotal noncurrent regulatory assets $ 601  $ 620  $ 391  $ 403  $ 210  $ 217 Total noncurrent regulatory assets $ 581  $ 630  $ 369  $ 400  $ 212  $ 230 

Current Regulatory Liabilities:Current Regulatory Liabilities:            Current Regulatory Liabilities:            
 ECR   $ 4        $ 4 
 ECR $ 9  $ 7      $ 9  $ 7  Gas supply clause    4    $ 4     
 Gas supply clause  5   6  $ 5  $ 6      Gas line tracker $ 4    $ 4       
 Other   2    7    2    4       3  Other   2    1    1     $ 1    1 
Total current regulatory liabilitiesTotal current regulatory liabilities $ 16  $ 20  $ 7  $ 10  $ 9  $ 10 Total current regulatory liabilities $ 6  $ 9  $ 5  $ 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 $ 689  $ 679  $ 300  $ 297  $ 389  $ 382 
Coal contracts (a)  161   180   70   78   91   102 Coal contracts (a)  119   141   52   61   67   80 
Power purchase agreement - OVEC (a)  112   116   78   80   34   36 Power purchase agreement - OVEC (a)  104   108   72   75   32   33 
Net deferred tax assets  37   39   30   31   7   8 Net deferred tax assets  32   34   26   28   6   6 
Defined benefit plans  10   9       10   9 Defined benefit plans  18   17       18   17 
Other   8    8    3    3    5    5 Interest rate swaps  72   14   36   7   36   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 $ 1,039  $ 1,002  $ 488  $ 471  $ 551  $ 531 

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

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)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 (SDER) within 90 days following the order.  PPL Electric filed a requestits proposed SDER with the PUC on March 28, 2013, including requested recovery of the 2012 qualifying storm costs related to increase distribution rates by approximately $105 million.  TheHurricane Sandy, which the PUC previously approved 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 beSDER become effective January 1, 2013.  PPL Electric's application includes a request2013 for an authorized return on equity of 11.25%.   Hearings on this matter are scheduled during Auguststorm costs incurred in 2013, with those costs and the 2012 and a decision is expectedHurricane Sandy costs included in rates effective January 1, 2014.  Several parties filed comments opposing the fourth quarter of 2012.SDER.  PPL Electric cannot predictand several other parties filed reply comments in May 2013.  This matter remains pending before the outcome of this proceeding.PUC.

 
4847

 

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 exposedsubject to significant penalties.

Under Act 129, EDCs must file an energy efficiency and conservation plan (EE&C Plan) with the PUC and contract with conservation service providers to implement all or a portion of the EE&C Plan.  Act 129 requires EDCs to cause reduced overall electricity consumption of 1.0% by May 2011 and 3.0% by May 2013 and reduced peak demand of 4.5% for the 100 hours of highest demand by May 2013 (which will be measured during the June 2012 through September 2012 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 Phase 1 EE&C Plan.  To date,Plan ending May 31, 2013.

Act 129 requires EDCs to reduce overall electricity consumption by 1.0% by May 2011 and, by May 2013, reduce overall electricity consumption by 3.0% and reduce peak demand by 4.5%.  Although PPL Electric believes it has met the May 2011 requirement, subjectthe PUC is not expected to formally determine compliance for any EDC before the PUC's verification.first quarter of 2014.  The peak demand reduction must occur for the 100 hours of highest demand, which is determined by actual demand reduction during the June 2012 through September 2012 period.  PPL Electric will determine if it met the May 2013 peak demand reduction and energy reduction targets after it completes the final program evaluation in the fourth quarter of 2013.

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 15, 2012 and, in March 2013, the PUC approved PPL Electric's Phase II EE&C Plan with minor modifications.  PPL Electric filed a Revised Phase II EE&C Plan on May 13, 2013 pursuant to the PUC's March Order.  On July 11, 2013, the PUC issued an Order approving PPL Electric's Revised Phase II EE&C Plan.  PPL Electric began its Phase II Plan implementation on June 1, 2012.2013.

Act 129 also requires the Default Service ProviderProviders (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.  TheA DSP will beis able to recover the costs associated with aits competitive procurement plan.

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

The PUC has directed all EDCs to file default service procurement plans for the period June 1, 2013 through May 31, 2015.  PPL Electric filed its plan in May 2012.  In that plan, PPL Electric 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 establish collaborative processes to address several retail competition issues.  In February 2013, PPL Electric filed a revised Default Service Supply Master Agreement and a revised Request for Proposals Process and Rules which the PUC approved.  PPL Electric filed revised retail competition initiatives and a revised plan consistent with the PUC's January order.  In an order entered on May 23, 2013, the PUC approved PPL Electric's most recent filing with minor changes and PPL Electric began implementing its revised plan on June 1, 2013.  See Note 10 for additional information.

Smart Meter Rider

Act 129 also requires installation of smart meters for new construction, upon the request of consumers and at their cost, or on a depreciation schedule not exceeding 15 years.  Under Act 129, EDCs are able to recover the costs of providing smart metering technology.  All of PPL Electric's metered customers currently have advanced meters installed at their service locations capable of many of the functions required under Act 129. PPL Electric continues to conduct pilot projects to evaluate additional applications of its current advanced metering technology pursuant to the requirements of Act 129.  PPL Electric recovers the cost of its pilot projects through a cost recovery mechanism, the Smart Meter Rider (SMR).  In August 2012, PPL Electric filed with the PUC an annual report describing the actions it was taking under its Smart Meter Plan during 2012 and its planned actions for 2013.  PPL Electric also submitted revised SMR charges which became effective January 1,

48


2013.  In August 2013, PPL Electric will file its annual Smart Meter report and revised SMR charges to become effective January 1, 2014.  PPL Electric will submit its final Smart Meter Plan by June 30, 2014.

PUC Investigation of Retail Electricity Market

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

Distribution System Improvement Charge

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

In September 2012, PPL Electric filed its LTIIP describing projects eligible for inclusion in the DSIC.  The PUC approved the LTIIP on January 10, 2013 and, on January 15, 2013, PPL Electric filed a petition requesting permission to establish a DSIC.  Several parties filed responses to PPL Electric's petition.  In an order entered on May 23, 2013, the PUC approved PPL Electric's proposed DSIC with an initial rate effective July 1, 2013, subject to refund after hearings.  The PUC also assigned four specific issues to the Office of Administrative Law Judge for hearingshearing and preparation of a recommended decision.  A prehearing conference has been held and a litigation schedule set with evidentiary hearings scheduled for the end of October 2013.  The PUC is expected to rule oncase remains pending before the plan in 2013.PUC.

Federal Matters

Federal MattersFERC Formula Rates ((PPL and PPL Electric)

PPL Electric must follow the FERC's Uniform System of Accounts (USOA), which requires subsidiaries to be presented, for FERC Formula Ratesreporting purposes, using the equity method of accounting unless a waiver has been granted.  The FERC has granted waivers of this requirement to other utilities when alternative accounting would more accurately present the integrated operations of a utility and its 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 equity method accounting requirement 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 and reduce borrowing costs.  In March 2013, PPL Electric filed a request for waiver with the 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.  Although PPL Electric may ultimately be successful in obtaining the waiver, the FERC may require PPL Electric to re-issue one or more of its prior FERC Form No. 1 filings.  If re-issuance of FERC Form No. 1 filings were required by the 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.

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.

In May 2010,  The formula rate is calculated, in part, based on financial results as reported in PPL Electric's annual FERC Form No. 1, filed under the FERC's USOA.  PPL Electric has initiated itsseparate formula rate Annual Updates for each of the years 2010-2013.  The 2010, Annual Update.  In November 2010,2011, and 2012 updates were subsequently challenged by a group of municipal customers, taking transmission service inwhich challenges PPL Electric's transmission zone filed a preliminary challenge to the update and, in December 2010, filed a formal challenge.Electric has opposed.  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 September 2012, the FERC issued an order setting for evidentiary

In May 2011, PPL Electric initiated its formula rate 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, PPL Electric filed a response to that formal challenge.
 
49

 

hearings and settlement judge procedures a number of issues raised in the 2010 and 2011 formal challenges.  Settlement conferences were held in late 2012 and early 2013.  In MayFebruary 2013, the FERC set for evidentiary hearings and settlement judge procedures a number of issues in the 2012 formal challenge and consolidated that challenge with the 2010 and 2011 challenges.  PPL Electric initiated its formula rate 2012 Annual Updatefiled a request for rehearing of the February Order which currently isremains pending before the FERC.  PPL Electric and the group of municipal customers have exchanged confidential settlement proposals and PPL Electric anticipates that there will be additional settlement conferences held in the 180-day review2013.  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. Activities (PPL)(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 issuedstated that their expectation was to issue a consultation paper citing two potential changes todecision in the methodology, bothsecond half of which would result in a reduction of the liability.  In March 2012,2013.  On July 12, 2013, Ofgem issued a decision regardingpaper on the preferred methodology.  In July 2012, Ofgem issued a consultation paper regarding certain aspects of the preferred methodology as it relatesprocess to the DPCR4 line loss incentive/penalty and a proposal to delay the target datefollow for making a final decision until April 2013 together with a proposal to removeclosing out the line loss incentive/penalty for DPCR5.penalty.  Based on one element of the decision paper, WPD has concluded that certain data, which had previously served to reduce the liability calculation, could not be included.  Additional information in the decision paper has increased the level of uncertainty regarding the ultimate settlement of this liability.  WPD currently estimates the potential loss exposure to be in the range of $97 million to $251 million.  As a result, during the three and six months ended June 30, 2013, WPD recorded a $24 million increase to the liability with a reduction to "Utility" revenue on the Statement of Income, increasing the liability to $97 million at June 30, 2013 compared with $94 million at December 31, 2012.  Other changes to this line loss liability included reductions of $16 million resulting from the refund being included in tariffs starting in April 2013 and foreign exchange movement during the six months ended June 30, 2013.  PPL cannot predict the outcome of this matter.

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
                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                    
 WPD Credit Facilities                    
  PPL WW Syndicated                    
   Credit Facility (b) Jan. 2013 £ 150  £ 110   n/a £ 40  £ 111   n/a
  WPD (South West)                    
   Syndicated Credit Facility (c) Jan. 2017   245      n/a   245      n/a
  WPD (East Midlands)                    
   Syndicated Credit Facility Apr. 2016   300          300     £ 70 
  WPD (West Midlands)                    
   Syndicated Credit Facility Apr. 2016   300          300       71 
  Uncommitted Credit Facilities     84     £ 4    80       3 
   Total WPD Credit Facilities (d)   £ 1,079  £ 110  £ 4  £ 965  £ 111  £ 144 
                           
PPL Energy Supply (e)                    
 Syndicated Credit Facility Oct. 2016 $ 3,000     $ 662  $ 2,338     $ 541 
 Letter of Credit Facility Mar. 2013   200   n/a   128    72   n/a   89 
   Total PPL Energy Supply                    
    Credit Facilities   $ 3,200     $ 790  $ 2,410     $ 630 
                           
       June 30, 2013 December 31, 2012
                Letters of      Letters of
                Credit Issued       Credit Issued
                and       and
                Commercial       Commercial
       Expiration    Borrowed Paper Unused Borrowed Paper
        Date Capacity (a) Backup Capacity (a) Backup
PPL                 ��  
 WPD Credit Facilities                    
  PPL WW Syndicated                    
   Credit Facility (b) (c) Dec. 2016 £ 210  £ 112   n/a £ 98  £ 106   n/a
  WPD (South West)                    
   Syndicated Credit Facility Jan. 2017   245      n/a   245      n/a
  WPD (East Midlands)                    
   Syndicated Credit Facility (c) Apr. 2016   300    47       253       
  WPD (West Midlands)                    
   Syndicated Credit Facility (c) Apr. 2016   300    34       266       
  Uncommitted Credit Facilities     84     £ 5    79     £ 4 
   Total WPD Credit Facilities (d)   £ 1,139  £ 193  £ 5  £ 941  £ 106  £ 4 

 
50

 
       June 30, 2013 December 31, 2012
                Letters of      Letters of
                Credit Issued       Credit Issued
                and       and
                Commercial       Commercial
       Expiration    Borrowed Paper Unused Borrowed Paper
        Date Capacity (a) Backup Capacity (a) Backup
PPL Energy Supply                    
 Syndicated Credit Facility Nov. 2017 $ 3,000     $ 637  $ 2,363     $ 499 
 Letter of Credit Facility (e) Mar. 2014   150   n/a   148    2   n/a   132 
 Uncommitted Credit Facilities     200   n/a   80    120   n/a   40 
   Total PPL Energy Supply Credit Facilities $ 3,350     $ 865  $ 2,485     $ 671 
                           
PPL Electric                    
 Syndicated Credit Facility Oct. 2017 $ 300     $ 86  $ 214     $ 1 
 Asset-backed Credit Facility (f) Sept. 2013   100      n/a   100      n/a
   Total PPL Electric Credit Facilities   $ 400     $ 86  $ 314     $ 1 
                           
LG&E                    
 Syndicated Credit Facility Nov. 2017 $ 500     $ 80  $ 420     $ 55 
                           
KU                    
 Syndicated Credit Facility Nov. 2017 $ 400     $ 172  $ 228     $ 70 
 Letter of Credit Facility (g) May 2016   198       198          198 
   Total KU Credit Facilities   $ 598     $ 370  $ 228     $ 268 
       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 June 30, 2013 and December 31, 2012 were USD-denominated borrowings of $171 million, which equated to £112 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 plus1.90% and 0.85%.  WPD (East Midlands) amount borrowed at June 30, 2013 was a margin.  The credit facility contains financial covenants that requireGBP-denominated borrowing of £47 million, which equated to $71 million and bore interest at 1.30%.  WPD (South West)(West Midlands) amount borrowed at June 30, 2013 was a GBP-denominated borrowing of £34 million, which equated to maintain an$52 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, 2012,2013, the U.S. dollarUSD equivalent of unused capacity under WPD's credit facilities was approximately $1.5$1.4 billion.

(e)All credit facilities atIn February 2013, PPL Energy Supply PPL Electric, LG&Eextended the expiration date from March 2013 and, KU also apply to PPL on a consolidated basis for financial reporting purposes.

(f)Ineffective April 2012, PPL Electric increased2013, the capacity of its syndicated credit facilitywas reduced from $200 million.

(g)(f)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, 2012 and December 31, 2011, $237 million and $251 million of accounts receivable and $87 million and $98 million of unbilled revenue were pledged by the subsidiary under the credit agreement related to PPL Electric's and the subsidiary's participation in the asset-backed commercial paper program.  Based on the accounts receivable and unbilled revenue pledged at June 30, 2012, the amount available for borrowing under the facility was limited to $87At June 30, 2013 and December 31, 2012, $272 million and $238 million of accounts receivable and $74 million and $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, 2013, the amount available for borrowing under the facility was $100 million.  PPL Electric's sale to its subsidiary of the accounts receivable and unbilled revenue is an absolute sale of assets, and PPL Electric does not retain an interest in these assets.  However, for financial reporting purposes, the subsidiary's financial results are consolidated in PPL Electric's financial statements.  PPL Electric performs certain record-keeping and cash collection functions with respect to the assets in return for a servicing fee from the subsidiary.

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

(h)
Allletter of credit facilities at LG&E and KU also apply to LKE on a consolidated basis for financial reporting purposes. 
facility from April 2014.

(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, 2012,2013, 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, 2012.2013.

51

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, 2013 and December 31, 2012, PPL Energy Supply had $520$575 million and

51


$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 million0.29% 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, 2012,2013, PPL Electric had $195$85 million of
commercial paper outstanding, included in "Short-term debt" on the Balance Sheet, at a weighted-average interest rate of approximately 0.49%0.34%.  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 June 30, 2013 and December 31, 2012, LG&E had $80 million and KU had no$55 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheets, at weighted-average interest rates of 0.32% and 0.42%.  At June 30, 2012.2013 and December 31, 2012, KU had $172 million and $70 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheets, at weighted-average interest rates of 0.33% 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 physical settlement of any forward sale agreement, PPL will issue and deliver to the forward counterpartiesby issuing 8.4 million shares of itsPPL common stock in exchange forand cash settling the remaining 1.5 million shares.  PPL received 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 may, in certain circumstances, elect cash settlement or net share settlement for all or a portion of its rights or obligations underused 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.  In May 2013, PPL cash settled the forward sale agreements covering the 591 thousand remaining shares for $4 million.

The forward sale agreements will bewere 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.  PriorHowever, prior to those settlements, the only impact to the financial statements will be the inclusion ofsettlement, 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)March 2013, PPL Capital Funding issued £100$450 million aggregate principal amount of 5.25%5.90% Junior Subordinated Notes due 2073.  PPL Capital Funding received proceeds of $436 million, net of underwriting fees, which was loaned to or invested in affiliates of PPL Capital Funding and used to fund their capital expenditures and for other general corporate purposes.

In May 2013, PPL Capital Funding remarketed $1.150 billion of 4.625% Junior Subordinated Notes due 2018 that were originally issued in June 2010 as a component of PPL's 2010 Equity Units.  In connection with the remarketing, PPL Capital Funding issued $300 million of 2.04% Junior Subordinated Notes due 2016 and $850 million of 2.77% Junior Subordinated Notes due 2018, which were simultaneously exchanged into three tranches of Senior Notes.  As a result of the exchange, the new Senior Notes include $250 million of 1.90% Senior Notes due 2023.  WPD (East Midlands) received proceeds2018, $600 million of approximately £1113.40% Senior Notes due 2023 and $300 million of 4.70% Senior Notes due 2043.  The transaction was accounted for as a debt extinguishment, resulting in a $10 million loss on extinguishment of the Junior Subordinated Notes, which equatedwas recorded to $178 million at"Interest Expense" on the timeStatement of issuance, netIncome.  The transaction was considered non-cash activity that was excluded from the 2013 Statement of underwriting fees.  The net proceeds were used for general corporate purposes.Cash Flows.

 
52

 

In June 2013, PPL repurchased 930,000 shares of common stock for $28 million to substantially offset second quarter issuances of common stock under stock-based compensation plans.  See Note 4 for further information.

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

See Note 7 in PPL's 2012 PPL Capital Funding issued $400Form 10-K for information on the 2011 Equity Units (with respect to which the related $978 million of 4.20%Notes are expected to be remarketed in the first quarter of 2014).

(PPL and PPL Energy Supply)

In February 2013, PPL Energy Supply completed an offer to exchange up to all, but not less than a majority, of PPL Ironwood's 8.857% Senior Secured Bonds due 2025, (Ironwood Bonds), for newly issued PPL Energy Supply Senior Notes, Series 4.60% due 2022.  The notes may2021.  A total of $167 million aggregate principal amount of outstanding Ironwood Bonds was exchanged for $212 million aggregate principal amount of Senior Notes, Series 4.60% due 2021.  This transaction was accounted for as a modification of the existing debt; therefore, the amount of debt on the Balance Sheet remained at $167 million and will be redeemed at accreted to $212 million over the life of the new Senior Notes.  No gain or loss was recorded and the exchange was considered non-cash activity that was excluded from the 2013 Statement of Cash Flows.

(PPL Capital Funding's option any time prior to maturity at make-whole redemption prices.and PPL Capital FundingElectric)

In July 2013, PPL Electric issued $350 million of 4.75% First Mortgage Bonds due 2043.  PPL Electric received proceeds of $396$345 million, net of a discount and underwriting fees, thatwhich will be used for capital expenditures, to fund pension obligations and for 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 2011 Form 10-K for information on the 2011 Bridge Facility, 2011 Equity Units and the April 2011 issuance of common stock.
(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 information on the transaction and the debt 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.

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 2012,2013, PPL declared its quarterly common stock dividend, payable July 2, 2012,1, 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.

53

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

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

    PPL Energy             
    Supply  PPL Electric LKE LG&E KU
                   
Dividends/distributions paid to parent/member $ 657   $ 56  $ 60  $ 31  $ 48 
Capital contributions received from parent/member   472              
 
(PPL, LKE, LG&E and KU)
53

 
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.


    PPL Energy             
    Supply  PPL Electric LKE LG&E KU
                   
Dividends/distributions paid to parent/member $ 408   $ 66  $ 69  $ 48  $ 55 
Capital contributions received from parent/member   105     205    146    54    92 

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.
54

(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 

55

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 PPL's Susquehanna nuclear generating plant.  PPL Bell Bend does not expect to complete the Susquehanna plant.COLA review process with the NRC prior to 2016.  PPL Bell Bend has made no decision to proceed with construction of Bell Bend and expects that such decision will not be made for several years given the anticipated lengthy NRC license approval process.  Additionally, PPL Bell Bend 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 2012 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, 20122013 and December 31, 2011, $1422012, $165 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 Rainbow hydroelectric redevelopment project in Great Falls, Montana was placed in service.

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 U.S. District Court for the District of Columbia by various environmental groups, including the Sierra Club, challenging the ROD and seeking to prohibit its implementation, 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.

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

Construction activities have begun on portions of the 101-mile route in Pennsylvania.  The line is pendingexpected to be completed before the New Jersey Superior Court Appellate Division.peak summer demand period of 2015.  At June 30, 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.

Northeast/Pocono

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

In December 2012, PPL Electric submitted an application to the PUC requesting permission to site and construct the project.  A number of parties have protested the application, which has been assigned to an Administrative Law Judge.  Evidentiary hearings were held in July 2013.  A final PUC order is expected in the first quarter of 2014.  PPL Electric expects the project to be completed in 2017.  At June 30, 2012,2013, PPL Electric'sElectric increased the estimated sharecosts of the project cost has increased to $560$335 million from approximately $500its original estimate of $200 million at December 31, 2011, mainly2012.  The increased cost is primarily related to higher material and labor costs and additional scope due to increased material costs.  In July 2012, PPL Electric began pre-construction activities including tree and vegetation removal fromrevised construction standards.  Of the transmission line's right of way and construction of access roads.total estimated cost, $308 million qualifies for the CWIP treatment.   

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:

   Pension Benefits   Pension Benefits
   Three Months Six Months   Three Months Six Months
   U.S. U.K. U.S. U.K.   U.S. U.K. U.S. U.K.
   2012  2011  2012  2011  2012  2011  2012  2011    2013  2012  2013  2012  2013  2012  2013  2012 
PPLPPL                PPL                
Service costService cost $ 26  $ 23  $ 14  $ 12  $ 52  $ 47  $ 27  $ 17 Service cost $ 32  $ 26  $ 16  $ 14  $ 63  $ 52  $ 34  $ 27 
Interest costInterest cost  54   54   85   73   110   109   169   112 Interest cost  53   54   78   85   107   110   159   169 
Expected return on plan assetsExpected return on plan assets  (64)  (61)  (114)  (88)  (130)  (123)  (225)  (140)Expected return on plan assets  (73)  (64)  (113)  (114)  (147)  (130)  (231)  (225)
Amortization of:Amortization of:                Amortization of:                
 Prior service cost  6   6   1   1   12   12   2   2  Prior service cost  5   6     1   11   12     2 
 Actuarial (gain) loss   11    8    20    15    21    14    40    29  Actuarial (gain) loss   20    11    37    20    40    21    75    40 
Net periodic defined benefitNet periodic defined benefit                Net periodic defined benefit                
costs (credits) prior to                costs (credits) $ 37  $ 33  $ 18  $ 6  $ 74  $ 65  $ 37  $ 13 
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     
Net periodic defined benefit                
costs (credits) $ 1  $ 2      $ 3  $ 3     
 
5755


   Pension Benefits       Pension Benefits
   Three Months   Six Months     Three Months Six Months
   2012  2011      2012  2011        2013  2012  2013  2012 
PPL Energy SupplyPPL Energy Supply        
Service costService cost $ 2  $ 2  $ 4  $ 3 
Interest costInterest cost  2   2   4    4 
Expected return on plan assetsExpected return on plan assets  (2)  (3)  (5)  (5)
Amortization of:Amortization of:        
 Actuarial (gain) loss         1    1 
Net periodic defined benefit costs (credits)Net periodic defined benefit costs (credits) $ 2  $ 1  $ 4  $ 3 
                            
LKELKE                LKE        
Service costService cost $ 5  $ 6      $ 11  $ 12     Service cost $ 6  $ 5  $ 13  $ 11 
Interest costInterest cost  15   17       32   34     Interest cost  15   15   31   32 
Expected return on plan assetsExpected return on plan assets  (17)  (16)      (35)  (32)    Expected return on plan assets  (20)  (17)  (41)  (35)
Amortization of:Amortization of:                Amortization of:        
Prior service cost  1   1       2   2      Prior service cost  1   1   2   2 
Actuarial (gain) loss   6    6        11    11      Actuarial (gain) loss   9    6    17    11 
Net periodic defined benefit                
 costs (credits) $ 10  $ 14      $ 21  $ 27     
Net periodic defined benefit costs (credits)Net periodic defined benefit costs (credits) $ 11  $ 10  $ 22  $ 21 
                            
LG&ELG&E                LG&E        
Service costService cost $ 1  $ 1      $ 1  $ 1     Service cost   $ 1  $ 1  $ 1 
Interest costInterest cost  3   3       7   7     Interest cost $ 4   3   7   7 
Expected return on plan assetsExpected return on plan assets  (4)  (5)      (9)  (9)    Expected return on plan assets  (5)  (4)  (10)  (9)
Amortization of:Amortization of:                Amortization of:        
Prior service cost    1       1   1      Prior service cost      1   1 
Actuarial (gain) loss   2    3        5    6      Actuarial (gain) loss   4    2    7    5 
Net periodic defined benefit                
 costs (credits) $ 2  $ 3      $ 5  $ 6     
Net periodic defined benefit costs (credits)Net periodic defined benefit costs (credits) $ 3  $ 2  $ 6  $ 5 

  Other Postretirement Benefits  Other Postretirement Benefits
  Three Months Six Months  Three Months Six Months
  2012  2011  2012  2011   2013  2012  2013  2012 
                  
PPLPPL        PPL        
Service costService cost $ 3  $ 3  $ 6  $ 6 Service cost $ 3  $ 3  $ 7  $ 6 
Interest costInterest cost  8   8   16   16 Interest cost  7   8   14   16 
Expected return on plan assetsExpected return on plan assets  (5)  (5)  (11)  (11)Expected return on plan assets  (6)  (5)  (12)  (11)
Amortization of:Amortization of:        Amortization of:        
Transition obligation    1   1   1 Transition obligation        1 
Actuarial (gain) loss   1    1    2    3 Actuarial (gain) loss   2    1    3    2 
Net periodic defined benefit costs (credits)Net periodic defined benefit costs (credits) $ 7  $ 8  $ 14  $ 15 Net periodic defined benefit costs (credits) $ 6  $ 7  $ 12  $ 14 
                  
LKELKE        LKE        
Service costService cost $ 1  $ 1  $ 2  $ 2 Service cost $ 1  $ 1  $ 2  $ 2 
Interest costInterest cost  2   2   4   5 Interest cost  2   2   4   4 
Expected return on plan assetsExpected return on plan assets  (1)  (1)  (2)  (2)Expected return on plan assets  (1)  (1)  (2)  (2)
Amortization of:Amortization of:        Amortization of:        
Transition obligation  1   1   1   1 Transition obligation    1     1 
Prior service cost  1     2   1 Prior service cost    1   1   2 
Actuarial (gain) loss   (1)      (1)   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) $ 2  $ 3  $ 5  $ 6 

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

In addition to the specific defined benefit plans they sponsor, PPL Energy Supply subsidiaries are also allocated costs of defined benefit plans sponsored by PPL Services and LG&E is allocated costs of defined benefit plans sponsored by LKE based on their participation in those plans, which management believes are reasonable.  PPL Electric and KU do not directlyindependently 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, 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 Three Months Six Months
 2012  2011  2012  2011  2013  2012  2013  2012 
                
PPL Energy Supply $ 9  $ 8  $ 19  $ 15  $ 12  $ 9  $ 23  $ 19 
PPL Electric  7   6   15   12   9   7   18   15 
LG&E  3   4   6   8   3   3   6   6 
KU  5   5   9   11   5   5   9   9 

 
5856

 
Expected Cash Flows - U.K. Pension Plans

(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.  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
59

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 accrued 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

57


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.  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 assert the same.  Trial in this matter as to liability has been scheduled for October 2014.  Trial as to remedies, if there is a finding of liability, is scheduled for August 2015.

On July 27, 2013, the Sierra Club and MEIC filed an additional Notice, andidentifying additional expansion projects that are alleged not to be in compliance with the Clean Air Act.  PPL Montana cannot at this time predict the ultimate outcome of this matter.  matter at this time.

Regulatory Issues

(PPL, PPL Energy Supply, 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

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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 of this matter was completed in June 2013 and is continuing.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.

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 of this matter was completed in March 2013 and a decision is expected in the litigationthird 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 June 30, 2013, by the City of Seattle, for approximately $50 million.  In April 2013, the FERC issued an order on reconsideration allowing the parties to seek refunds for the period January 2000 through December 2000.  As a result, the City of Seattle may be able to seek refunds from PPL Montana for such period.  Hearings have been scheduled to begin in August 2013.
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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.

Electric - Reliability Standards(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.  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 2005 - 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 (GMDs).  The FERC proposed to direct the NERC to submit for approval Reliability Standards that address the impact of GMDs on the reliable operation of the bulk-power system.  In May 2013, the FERC issued its Final Rule, Order No. 779, which directs the NERC to submit GMD Reliability Standards to the FERC for approval in two stages.  In the first stage, the NERC must submit one or more Reliability Standards by January 22, 2014 that require owners and operators of the bulk-power system to develop and implement operational procedures to mitigate the effects of GMDs on the bulk-power system.  In the second stage, the NERC must submit one or more Reliability Standards by January 22, 2015 that require owners and operators of bulk-power system facilities to assess yet to be determined "benchmark GMD events" and develop and implement plans to protect the bulk-power system from such GMD events.  The Registrants are unable to predict the specific requirements that will be contained in the Reliability Standards that the NERC has been directed to submit or the amount of any expenditures that may be required as a result of the approval of any such Reliability Standards.


Environmental Matters - Domestic

(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 operatingoperation of certain facilities or performance of certain operations to comply with statutes, regulations and other requirements of regulatory bodies or courts.  In addition, legal challenges to new environmental permits or rules add to the uncertainty of estimating the future cost impact of these permits and rules.

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

(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 in July 2008 by the U.S. Court of Appeals for the District of Columbia Circuit (the(Circuit Court) in July 2008..  CAIR subsequently was effectively reinstated by the Circuit Court in December 2008, pending finalization of the Transport Rule.CSAPR.  Like CAIR, CSAPR targeted sources in the eastern U.S. and the proposed Transport Rule, the CSAPR only applies 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 ozone 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 Circuit 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 revisionsCircuit Court 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 oninterim.  On June 24, 2013, the validityU.S. Supreme Court granted the EPA's petition for review of the rule is expected in 2012.Circuit Court's August 2012 decision.

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 ofcan meet the CAIR and the Kentucky companies' significant number ofsulfur dioxide emission requirements by utilizing sulfur dioxide allowances those units will be dispatched with lower operating cost, but slightly higher sulfur dioxide(including banked allowances and optimizing existing controls).  To meet nitrogen oxide emissions.  However, a key component of standards, under
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the Court's final decision, even ifCAIR, the CSAPR is upheld,Kentucky companies will be whether the ruling delays the implementation of the CSAPR by one year for both Phases I and II, need to buy allowances and/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.make operational changes.  LG&E and KU havedo not currently anticipate that the ability to recover emission allowance expense through the ECR mechanism; however, actual recovery is subject to the outcomecosts of future review proceedings by the KPSC.meeting these reinstated CAIR requirements or standards will be significant.

PPL Energy Supply's Pennsylvania fossil-fueled generating plants can meet both the CAIR and the stayed CSAPR sulfur dioxide emission requirements with the existing scrubbers that were placed in service in 2008 and 2009.  To meet the CAIR 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 CSAPR 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 July 25, 2013, the EPA designated as non-attainment areas states are required to develop planspart of Yellowstone County in Montana (Billings area), primarily the Corette plant and its immediate vicinity, and part of Jefferson County in Kentucky.  These designations will become final 60 days after publication in the Federal Register.  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, or the CSAPRMATS, or the Regional Haze requirements (as discussed below), such as upgraded or new sulfur dioxide scrubbers at some of theircertain 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.  The short-term impact on the Corette plant from the EPA's final designation of part of Yellowstone County in Montana as non-attainment as noted above is not expected to be significant as PPL Energy Supply previously announced its intent to place the plant in long-term reserve status beginning in April 2015 (see "MATS" below).  The longer-term impact will depend on what the MDEQ proposes in its State Implementation Plan to bring the area into attainment, which plan is due within 18 months from the date of the EPA's designation (as well as the status of plant operations at that time).

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

Mercury and Other Hazardous Air PollutantsMATS

In May 2011, the EPA published a proposed regulation providing forrequiring stringent reductions of mercury and other hazardous air pollutants.pollutants from power plants.  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

At the need to install pollution control equipment to meettime the provisions of theMATs 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 expected need 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.  With the publication of the final MATS rule,regulations.  LG&E and KU are currently assessingcontinuing to assess 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 these plants may require installation of chemical additive systems may be necessary at certain coal-fired plants, the capital cost of which is not expected to be significant.  PPL Energy Supply continues to analyze the potential impact on operating costs.  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 June 30, 2013 was $68 million.  Although the Corette plant asset group was not determined to be impaired at June 30, 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
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flows.  PPL Energy Supply, LG&E and KU are continuing to conduct in-depth reviews of the MATS.MATS, including the potential implications to scrubber wastewater discharges.  See the discussion of effluent limitations guidelines and standards below.  Upon reconsideration of the MATS rule, in March 2013 the EPA revised certain emission limits and related requirements for new power plants.  The revised limits are somewhat less onerous than the original proposal, and thereby pose less of an impediment to the construction of new coal-fired power plants.

Regional Haze and Visibility

In January 2012, the EPA proposed limited approval of the PennsylvaniaThe EPA's regional haze programs were developed under the Clean Air Act to eliminate man-made visibility degradation by 2064.  Under the programs, states are required to take action via state 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 commissioned between 1962 and 1977.

The primary power plant emissions affecting visibility are not warranted.  The limited approval does not address deficienciessulfur dioxide, nitrogen oxide and particulates.  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 or CAIR.  More specifically, before CAIR was temporarily invalidated in 2008, the EPA finalizedhad determined, and the Circuit Court had affirmed, that a state could accept region-wide reductions under the CAIR trading program to satisfy BART requirements.  After CAIR was temporarily invalidated, the EPA adopted a final rule providing that 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 addressesCircuit Court's August 2012 decision to vacate and remand CSAPR and to implement CAIR in its place on an interim basis leaves power plants located in the eastern U.S., including PPL's plants in Pennsylvania SIP deficiency arisingand Kentucky, exposed to reductions in sulfur dioxide and nitrogen oxides as required by BART, unless the Circuit Court's decision, now pending before the U.S. Supreme Court, is overturned.

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 ruleKentucky Division of Air Quality's regional haze state implementation plan that was submitted to the EPA.  LG&E is currently installing sorbent injection technology to comply with these reductions, the costs of which are not expected to be challenged by environmental groups.significant.

In Montana, the EPA Region 8 is developingdeveloped the regional haze plan as the Montana Department of Environmental Quality declined to develop a BART SIP at this time.  PPL submitted tostate implementation plan.  In September 2012, the EPA issued its analyses offinal Federal Implementation Plan (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 "MATS" above).  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 to the EPA which requires the Mill Creek plant to reduce its sulfuric acid mist emissions from Units 3been consolidated, 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.litigation is on-going.

New Source Review (NSR)

The EPA has continued its NSR enforcement efforts targeting coal-fired generating plants.  The EPA has asserted that modification of these plants has increased their emissions and, consequently, that they are subject to stringent NSR requirements under the Clean Air Act.  In April 2009, PPL received EPA information requests for its Montour and Brunner Island plants.  The requests are similar to those that PPL received several years ago 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 thea 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.

In March 2009, KU received aan EPA notice alleging that KU violated certain provisions of the Clean Air Act's rules governing NSR and prevention of significant deterioration by installing sulfur dioxide scrubbers and SCR controls at its Ghent plant without assessing potential increased sulfuric acid mist emissions.  KU contends that the workprojects in question aswere pollution control projects, wasand therefore exempt from the requirements cited by the EPA.  In December 2009, the EPA

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issued an information request on this matter.  KU has exchangedIn September 2012, the parties reached a tentative settlement proposals and other information withaddressing 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 encompassGhent NSR matter that seeks to resolve a September 2007 notice of violation alleging opacity violations at the plant.  Depending onA proposed consent decree was filed 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 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 accruedfor information on a lawsuit filed by KU.environmental groups in March 2013 against PPL Montana and other owners of Colstrip.

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

States and environmental groups also have initiated enforcement actions and litigation alleging violations of the NSR regulations by coal-fired generating plants, and PPL, PPL Energy Supply, LKE, LG&E and KU are unable to predict whether such actions will be brought against any of their plants.  See "Legal Matters" above for information on a notice of intent to sue received in July 2012 by PPL Montana and the other owners of Colstrip.

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 in January 2010 were incorporated into a final revised permit issued by the KDAQ in January 2010.KDAQ.  In March 2010, the environmental groups petitioned the EPA to object to the revised state permit.  Until the EPA issues a final ruling 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, PPL Electric, 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 toapplied beginning 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 requiresnow require adherence to the BACT permit limits for GHGs.  TheseThe rules were challenged, and in June 2012 the U.S.Circuit Court of Appeals for the D.C. Circuit upheld the EPA's regulations.  In December 2012, the Circuit Court denied petitions for rehearing pertaining to its June 2012 opinion, and the U.S. Supreme Court has been petitioned by industry groups and sources to hear the case.

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 achievemeet these limitations and, as a result, the EPA's proposal would effectively preclude new construction of coal-fired generation.  Compliance could even be difficult for certain new coal-fired generationgas-fired plants.  In December 2012, the Circuit Court dismissed consolidated challenges to the NSPS holding that the proposed rule is not a final agency action.

In June 2013, President Obama released his Climate Action Plan which reiterates the goal of reducing greenhouse gas emissions in the future.U.S. "in the range of" 17% below 2005 levels by 2020 through such actions as regulating power plant emissions, promoting increased use of renewables and clean energy technology, and establishing tighter energy efficiency standards.  Also, by Presidential Memorandum the EPA was directed to issue a new proposal for new power plants by September 20, 2013, with a final rule in a timely fashion thereafter, and to issue proposed standards for existing plants by June 1, 2014 with a final rule to be issued by June 1, 2015.  The EPA was further directed to require that states develop implementation plans for existing plants by June 2016.  Regulation of existing plants could have a significant industry-wide impact depending on the structure and stringency of the final rule and the state implementation plans.  The Administration's

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recent increase in its estimate of the "social cost of carbon" (which is used to calculate benefits associated with proposed regulations) from $23.80 to $38 per metric ton in 2015 may also lead to more costly regulatory requirements.  Additionally, the Climate Action Plan requirements related to preparing the U.S. for the impacts of climate change could affect PPL and others in the industry as transmission system modifications to improve the ability to withstand major storms may be needed in order to meet those requirements.

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.  PPL and PPL Energy Supply cannot predict at this time whether this legislation will be enacted.

Eleven western states and certain Canadian provinces established the Western Climate Initiative (WCI) in 2003.  The WCI established a goal of reducing carbon dioxide emissions 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, 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, although the decided cases to date have not sustained claims brought on the basis of these theories of liability, the law remains unsettled on these claims.  In September 2009, the U.S. Court of Appeals for the Second Circuit in the case of AEP v. Connecticut reversed a federal district court's decision and ruled that several states and public interest groups, as well as the City of New York, could sue five electric utility companies under federal common law for allegedly causing a public nuisance as a result of their emissions of GHGs.  In June 2011, the U.S. Supreme Court overturned the lower courtSecond Circuit and held that such federal common law claims were displaced by the Clean Air Act and regulatory actions of the EPA.  In addition, in Comer v. Murphy Oil (Comer case), the U.S. Court of Appeals for the Fifth Circuit (Fifth Circuit) declined to overturn a district court ruling that plaintiffs did not have standing to pursue state common law claims against companies that emit GHGs.  The complaint in the Comer case named the previous indirect parent of LKE as a defendant based upon emissions from the Kentucky plants.  In January 2011, the Supreme Court denied a petition to reverse the 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 district 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's claims were displaced by the Clean Air Act, and other grounds.  In April 2012, plaintiffs filed a notice of appeal inclaims.  Plaintiffs appealed to the U.S. Court of Appeals for the Fifth Circuit.Circuit and in May 2013 the Fifth Circuit affirmed the district court's dismissal of the case.  Additional litigation in federal and state courts over thesesuch issues is continuing.  PPL, LKE and KU cannot predict the outcome of this litigationthese lawsuits or estimate a range of reasonably possible losses, if any.

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).  Atenacted this time, neither theyear.  In Pennsylvania, bills were recently introduced calling for an increase in AEPS Tier 1 obligations and to create a $25 million permanent funding program for solar generation.  A bill adding new hydropower to Montana's renewable energy debate nor the CES discussion is expected to gain momentum at the federal or state levels (beyond what is otherwise already required in Pennsylvania and Montana) in the near term.portfolio standard was enacted with an effective date of October 1, 2013.

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

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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 regulateRegulating CCRs as a hazardous waste under Subtitle C of the RCRA.  This approachRCRA 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 secondEPA's proposed approach wouldto regulate CCRs as a solidnon-hazardous waste under Subtitle D of the RCRA.  This approachRCRA 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,EPA's proposed non-hazardous waste regulations, as these plants are using surface impoundments for management and disposal of CCRs.

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

The EPA is continuing to evaluate the unprecedented number of comments it received on its June 2010 proposed regulations.  In October 2011, the EPA issued a Notice of Data Availability (NODA) that requestsrequesting comments on selected documents that the EPAit received during the comment period for the proposed regulations.  In addition,regulations, and on July 29, 2013, the EPA released a pre-publication version of a second NODA seeking comment on additional information related to its proposal.  On July 25, 2013, the U.S. House of Representatives in October 2011 approved a bill to modify Subtitle Dpassed House Bill H.R. 2218, the Coal Residuals and Reuse Management Act of the RCRA to provide for the proper management and disposal of CCRs and to preclude2013, which would preempt the EPA from regulating CCRs under Subtitle C of the RCRA.  The bill has been introducedRCRA and sets rules governing state programs; however, prospects remain uncertain for similar legislation to pass in the Senate, and the prospect for passage of this legislation is uncertain.Senate.

In January 2012, aA coalition of environmental groups and two CCR recycling companies have filed a 60-day notice of intent to suelawsuits against 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, aThe two CCR recycling company also issued a 60-day notice of intent to sue the EPA over its timeliness in issuing CCR regulations, but that company requestedcompanies are asserting that the EPA takeshould regulate CCRs as a Subtitle D approachnon-hazardous waste 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 on

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 and significant if regulated as non-hazardous.

Trimble County Landfill Permit (PPL, LKE, LG&E and KU)

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

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

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being deposited onto adjacent roadways and fields, and into a nearby creek and the Delaware River.  PPL Energy Supply determined that the release was caused by a failure in the disposal basin's discharge structure.  PPL Energy Supply 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 Energy Supply and the PADEP have settled this matter.  The settlement also required PPL Energy Supply to submit a report on the completed studies of possible natural resource damages.  PPL Energy Supply 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 (NRD) 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 Energy Supply filed separate responses with the court.  In March 2012, the court dismissed the interveners' case, butand the interveners have appealed the dismissal to the Pennsylvania Supreme Court.  TheIn June 2013 the Supreme Court dismissed the appeal.  Following this ruling, PPL Energy Supply is proceeding to finalize the NRD settlement agreement forwith the Natural Resources Damage Claim has not yet been submitted for public comments, which is the next phase in the process of finalizing the claim.PADEP and other NRD trustees.

Through June 30, 2012,2013, 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 assessmentNRD settlement or the associated costs, the outcome of any new 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 assessment or 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, andwhich affirmed the district court's decision is expected in the second half of 2012.  Therefore,order enforcing the settlement ordered byin December 2012 and denied plaintiff's motion for rehearing in February 2013.  The parties are still in negotiations regarding the district court is not final.  PPL and PPL Energy Supply cannot predict the outcome of the appeal, althoughfinal settlement documents.  PPL Montana's share of any finalthe settlement is not expected to be significant.

In August 2012, PPL Montana entered into an Administrative Order on Consent (AOC) with the MDEQ which establishes a comprehensive process to investigate and remediate groundwater seepage impacts related to the wastewater facilities at the Colstrip power plant.  The AOC requires that within five years, PPL Montana provide financial assurance to the MDEQ for the costs associated with closure and future monitoring of the waste-water treatment facilities.  PPL Montana cannot predict at this time if the actions required under the AOC will create the need to adjust the existing ARO related to these facilities.

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

In late October 2012, Earthjustice filed a second complaint against the MDEQ and PPL Montana in state district court in Lewis and Clark County on behalf of the Sierra Club, the MEIC and the NWF.  This complaint alleges that the defendants have failed to take action under the MFSA and the Montana Water Quality Act to effectively monitor and correct issues of

 
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coal ash disposal and wastewater ponds at the Colstrip plant.  The complaint seeks a declaration that the operations of the impoundments violate the statutes referred to above, requests a writ of mandamus directing the MDEQ to enforce the same and seeks recovery of attorneys' fees and costs.  In May 2013, the court granted MDEQ's and PPL Montana's motion to dismiss.  It is unknown at this time whether the complainants will appeal this decision.

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 rule 316(b) for existing facilities in April 2011.  The industry and PPL reviewedEPA has been evaluating the comments it received to the proposed rule and submitted comments.  The EPA is 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 achievingto achieve the requirements.standards.  The second requirement is to determine and install the best technology available to reduce mortality of aquatic organisms that are pulled through thea 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 November 2013.  Until the final rule is issued, PPL, PPL Energy Supply, LKE, LG&E and KU cannot reasonably estimate a range of reasonably possible costs, if any, untilthat would be required to comply with such a final rule is issued, the required studies have been completed, and each state in which they operate has decided how to implement the rule.regulation.

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

In October 2009,June 2013, the EPA released its Final Detailed Studypublished proposed regulations to revise discharge limitations for steam electric generation wastewater permits.  The proposed limitations are based on the EPA review of available treatment technologies and their capacity for reducing pollutants and include new requirements for fly ash and bottom ash transport water and metal cleaning waste waters, as well as new limits for scrubber wastewater and landfill leachate.  The EPA's proposed ELG regulations contain requirements that would affect the Steam Electric Power Generating effluent limitations guidelinesinspection and standards.operation of CCR facilities, if finalized.  The EPA has indicated that it will coordinate these regulations with the regulation of CCRs discussed above.  The proposal contains alternative approaches, some of which could significantly impact PPL's coal-fired plants.  PPL is working with industry groups to comment on the proposed regulation.  The final 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 ToxicsToxic Substance Control Act, which currently allow certain PCB articles to remain in use.  In April 2010, the EPA issued an Advanced Notice of Proposed Rulemaking for changes to these regulations.  This rulemaking could lead to a phase-out of all 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.

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-basedtechnology-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.

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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"U.S." subject to regulation under the Clean Water Act.  This change has the potential to affect generation and delivery operations, with the most significant effect being the potential elimination of the existing regulatory exemption for plant waste water treatment systems.  The costs that may be imposed on the Registrants as a result of any eventual expansion of this interpretation cannot reliably be estimated at this time.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.

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.

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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, 2012.2013.  The total recorded liability at June 30, 20122013 and December 31, 2011,2012, was $24$23 million and $14$24 million for PPL and $20 million and $11 millionfor both periods for LKE.  The probability of expected payment/performance under each of these guarantees is remote except for "WPD guarantee of pension and other obligations of unconsolidated entities" and "Indemnification of lease termination and other divestitures."  For reporting purposes, on a consolidated basis, all guarantees of PPL Energy Supply (other than the letters of credit), PPL Electric, LKE, LG&E and KU also apply to PPL, and all guarantees of LG&E and KU also apply to LKE.

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 Exposure at Expiration Exposure at Expiration
 June 30, 2012 (a) Date June 30, 2013 (a) Date
PPL          
Indemnifications related to the WPD Midlands acquisition  (b)    (b)  
WPD indemnifications for entities in liquidation and sales of assets $ 290 (c) 2014 - 2018 $ 10 (c) 2018
WPD guarantee of pension and other obligations of unconsolidated entities  89 (d) 2015  87 (d) 2015
Tax indemnification related to unconsolidated WPD affiliates  (e)  
          
PPL Energy Supply (f)     
PPL Energy Supply     
Letters of credit issued on behalf of affiliates  21 (g) 2012 - 2014  23 (e) 2013 - 2014
Retrospective premiums under nuclear insurance programs  48 (h)    46 (f)  
Nuclear claims assessment under The Price-Anderson Act Amendments under The Energy Policy Act of 2005  235 (i)  
Nuclear claims assessment under The Price-Anderson Act as amended  235 (g)  
Indemnifications for sales of assets  262 (j) 2012 - 2025  250 (h) 2025
Indemnification to operators of jointly owned facilities  6 (k)    6 (i)  
Guarantee of a portion of a divested unconsolidated entity's debt  22 (l) 2018  22 (j) 2018
          
PPL Electric (m)     
PPL Electric     
Guarantee of inventory value  19 (n) 2016  29 (k) 2017
          
LKE (m)     
LKE     
Indemnification of lease termination and other divestitures  301 (o) 2021 - 2023  301 (l) 2021 - 2023
          
LG&E and KU (p)     
LG&E and KU     
LG&E and KU guarantee of shortfall related to OVEC  (q)    (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.

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(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, 2012,2013, 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.
(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 contractcontracts with a third party logistics firm that provides inventory procurement and fulfillment services.  Under the contract,contracts, the logistics firm has title to the inventory purchased for PPL Electric's use.  Upon termination of the contract,contracts, PPL Electric has guaranteed to purchase any remaining inventory that has not been used or sold by the logistics firm at the weighted-average cost at which the logistics firm purchased the inventory, 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 thepotential 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.  For 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 reason of such indemnifications.
(p)All guarantees of LG&E and KU also apply to PPL and LKE on a consolidated basis for financial reporting purposes.

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related to historical obligations for other divested subsidiaries and affiliates.  The indemnifications vary by entity and the maximum exposures range from being capped at the sale price to no specified maximum; however, LKE is not aware of formal claims under such indemnities made by any party at this time.  LKE could be required to perform on these indemnifications in the event of covered losses or liabilities being claimed by an indemnified party.  In the second quarter of 2012, LKE adjusted its estimated liability for certain of these indemnifications by $9 million ($5 million after-tax), which is reflected in "Income (Loss) from Discontinued Operations (net of income taxes)" on the Statement of Income.  The adjustment was recorded in the Kentucky Regulated segment for PPL.  LKE cannot predict the ultimate outcomes of such indemnification circumstances, but does not currently expect such outcomes to result in significant losses above the amounts recorded.
(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 Default Service Supply Master Agreement for the solicitation process, PPL Electric requires all suppliers to post collateral once credit exposures exceed defined credit limits.  PPL EnergyPlus is required to post collateral with PPL 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, 2012.2013.  In no instance is PPL Electric required to post collateral to suppliers under these supply contracts.

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

At June 30, 2012,2013, PPL Energy Supply had a net credit exposure of $38$26 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, which PPL management believes are reasonable, including amounts applied to accounts that are further distributed between capital and expense:

 Three Months Six Months Three Months Six Months
 2012  2011  2012  2011  2013  2012  2013  2012 
                
PPL Energy Supply $ 53  $ 44  $ 110  $ 94  $ 52  $ 53  $ 109  $ 110 
PPL Electric  39   35   81   74   34   39   72   81 
LKE  3   4   8   9   4   3   8   8 

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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, which LKE management believes are reasonable, including amounts that are further distributed between capital and expense:

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  Three Months Six Months
  2013  2012  2013  2012 
             
LG&E $67  $40  $106  $81 
KU  44   35   110   81 

  Three Months Six Months
  2012  2011  2012  2011 
             
LG&E $40  $50  $81  $83 
KU  35   55   81   104 
In addition, LG&E and KU provide services to each other and to LKS.  Billings between LG&E and KU relate to labor and overheads associated with union and hourly employees performing work for the other company, charges related to jointly-owned generating units and other miscellaneous charges.  Tax settlements between LKE and LG&E and LKE and KU are reimbursed through LKS.

Intercompany Borrowings

(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.

(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, 20122013 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$72 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, 20122013 was 0.48%1.69%.  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, 20122013 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.intercompany derivatives.

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Intercompany Insurance (PPL Electric)

In May 2013, PPL Electric received $18.25 million from the settlement of its 2012 storm insurance claims with PPL Power Insurance Ltd. (PPL Power Insurance) is, a subsidiary of PPL that provides certain insurance coverage to PPL and its subsidiaries for property damage, general/public liability and workers' compensation.subsidiaries.

Due to damages resulting from several PUC-reportable storms that occurred in May 2011,Effective January 1, 2013, PPL Electric exceeded its deductible for the 2011 policy year.  Probable recoveries onno longer has storm insurance claimscoverage with PPL Power Insurance of $15 million were recorded duringInsurance.  See Note 6 for discussion regarding the three and six months ended June 30, 2011, of which $9 million was included in "Other operation and maintenance" onproposed Storm Damage Expense Rider filed with the Statement of Income, and the remainder was recorded in PP&E on the Balance Sheet.PUC by PPL Electric.

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.

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 30 was:

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

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(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.
    Three Months Six Months
    2013  2012  2013  2012 
PPL            
Other Income            
 Earnings on securities in NDT funds $ 5  $ 4  $ 10  $ 12 
 Interest income      2    1    3 
 AFUDC - equity component   2    3    5    5 
 Earnings (losses) from equity method investments      (4)      (6)
 Miscellaneous - Domestic   7    3    9    5 
 Miscellaneous - U.K.      2    1    2 
 Total Other Income   14    10    26    21 
Other Expense            
 Economic foreign currency exchange contracts (Note 14)   (4)   (25)   (123)   (7)
 Charitable contributions   4    2    8    6 
 Miscellaneous - Domestic   1    4    5    8 
 Miscellaneous - U.K.      (1)   1    1 
 Total Other Expense   1    (20)   (109)   8 
Other Income (Expense) - net $ 13  $ 30  $ 135  $ 13 
               
PPL Energy Supply            
Other Income            
 Earnings on securities in NDT funds $ 5  $ 4  $ 10  $ 12 
 Interest income   2    1    2    1 
 Miscellaneous   6    2    7    3 
 Total Other Income   13    7    19    16 
Other Expense            
 Charitable contributions   1       2    1 
 Miscellaneous      1    1    4 
 Total Other Expense   1    1    3    5 
Other Income (Expense) - net $ 12  $ 6  $ 16  $ 11 

"Other Income (Expense) - net" for the three and six months ended June 30, 20122013 and 20112012 for PPL Electric is primarily the equity component of AFUDC.  The components of "Other Income (Expense) - net" for the three and six months ended June 30, 2013 for LKE, LG&E and KU are not significant.  "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.equity method investment.  The components of "Other Income (Expense) - net" for the three and six months ended June 30, 2012 and 2011 for LG&E 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, 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
     Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
PPL                        
Assets                        
 Cash and cash equivalents $ 981  $ 981        $ 1,202  $ 1,202       
 Restricted cash and cash equivalents (a)   176    176          209    209       
 Price risk management assets:                        
  Energy commodities   3,506    3  $ 3,459  $ 44    3,423    3  $ 3,390  $ 30 
  Interest rate swaps               3       3    
  Foreign currency contracts   19       19       18       18    
  Cross-currency swaps   70       60    10    24       20    4 
 Total price risk management assets   3,595    3    3,538    54    3,468    3    3,431    34 
 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 

 
7873

 

   June 30, 2013 December 31, 2012
   Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
PPLPPL                
AssetsAssets                
Cash and cash equivalents $ 711  $ 711        $ 901  $ 901       
Restricted cash and cash equivalents (a)   151    151          135    135       
Price risk management assets:                
 Energy commodities  1,654   1  $ 1,600  $ 53   2,068   2  $ 2,037  $ 29 
 Interest rate swaps  132     132     15     15   
 Foreign currency contracts  85     85           
 Cross-currency swaps   62       59    3    14       13    1 
Total price risk management assets   1,933    1    1,876    56    2,097    2    2,065    30 
NDT funds:                
 Cash and cash equivalents  12   12       11   11     
 Equity securities                
 U.S. large-cap  468   349   119     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  6     6     9     9   
 Municipality  77     77     82     82   
 Investment-grade corporate  39     39     40     40   
 Other  3     3     3     3   
 Receivables (payables), net   3       3          (2)   2    
Total NDT funds   771    484    287       712    437    275    
Auction rate securities (b)   19          19    19       3    16 
Total assetsTotal assets $ 3,585  $ 1,347  $ 2,163  $ 75  $ 3,864  $ 1,475  $ 2,343  $ 46 
                  
LiabilitiesLiabilities                
Price risk management liabilities:                
 Energy commodities $ 1,351  $ 1  $ 1,337  $ 13  $ 1,566  $ 2  $ 1,557  $ 7 
 Interest rate swaps  46     46     80     80   
 Foreign currency contracts  3     3     44     44   
 Cross-currency swaps   1       1       4       4    
   June 30, 2012 December 31, 2011Total price risk management liabilities $ 1,401  $ 1  $ 1,387  $ 13  $ 1,694  $ 2  $ 1,685  $ 7 
   Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3                  
PPL Energy SupplyPPL Energy Supply                PPL Energy Supply                
AssetsAssets                Assets                
Cash and cash equivalents $ 446  $ 446        $ 379  $ 379       Cash and cash equivalents $ 265  $ 265        $ 413  $ 413       
Restricted cash and cash equivalents (a)   110    110          145    145       Restricted cash and cash equivalents (a)   87    87          63    63       
Price risk management assets:                Price risk management assets:                
 Energy commodities   3,506    3  $ 3,459  $ 44    3,423    3  $ 3,390  $ 30  Energy commodities   1,654    1  $ 1,600  $ 53    2,068    2  $ 2,037  $ 29 
Total price risk management assets   3,506    3    3,459    44    3,423    3    3,390    30 Total price risk management assets   1,654    1    1,600    53    2,068    2    2,037    29 
NDT funds:                NDT funds:                
 Cash and cash equivalents  14   14       12   12      Cash and cash equivalents  12   12       11   11     
 Equity securities                 Equity securities                
 U.S. large-cap  317   219   98     292   202   90    U.S. large-cap  468   349   119     412   308   104   
 U.S. mid/small-cap  127   94   33     117   87   30    U.S. mid/small-cap  68   28   40     60   25   35   
 Debt securities                 Debt securities                
 U.S. Treasury  96   96       86   86      U.S. Treasury  95   95       95   95     
 U.S. government sponsored agency  10     10     10     10    U.S. government sponsored agency  6     6     9     9   
 Municipality  81     81     83     83    Municipality  77     77     82     82   
 Investment-grade corporate  35     35     38     38    Investment-grade corporate  39     39     40     40   
 Other  2     2     2     2    Other  3     3     3     3   
 Receivables (payables), net   (1)   (4)   3          (3)   3     Receivables (payables), net   3       3          (2)   2    
Total NDT funds   681    419    262       640    384    256    Total NDT funds   771    484    287       712    437    275    
Auction rate securities (b)   15       3    12    19          19 Auction rate securities (b)   16          16    16       3    13 
Total assetsTotal assets $ 4,758  $ 978  $ 3,724  $ 56  $ 4,606  $ 911  $ 3,646  $ 49 Total assets $ 2,793  $ 837  $ 1,887  $ 69  $ 3,272  $ 915  $ 2,315  $ 42 
                                    
LiabilitiesLiabilities                Liabilities                
Price risk management liabilities:                Price risk management liabilities:                
 Energy commodities $ 2,528  $ 3  $ 2,515  $ 10  $ 2,345  $ 1  $ 2,327  $ 17  Energy commodities $ 1,351  $ 1  $ 1,337  $ 13  $ 1,566  $ 2  $ 1,557  $ 7 
Total price risk management liabilities $ 2,528  $ 3  $ 2,515  $ 10  $ 2,345  $ 1  $ 2,327  $ 17 Total price risk management liabilities $ 1,351  $ 1  $ 1,337  $ 13  $ 1,566  $ 2  $ 1,557  $ 7 
                                    
PPL ElectricPPL Electric                PPL Electric                
AssetsAssets                Assets                
Cash and cash equivalents $ 45  $ 45      $ 320  $ 320     Cash and cash equivalents $ 24  $ 24      $ 140  $ 140     
Restricted cash and cash equivalents (c)   13    13          13    13       Restricted cash and cash equivalents (c)   12    12          13    13       
Total assetsTotal assets $ 58  $ 58        $ 333  $ 333       Total assets $ 36  $ 36        $ 153  $ 153       

LKE                        
Assets                        
 Cash and cash equivalents $ 29  $ 29        $ 59  $ 59       
 Restricted cash and cash equivalents (c)   31    31          29    29       
Total assets $ 60  $ 60        $ 88  $ 88       
                            
Liabilities                        
 Price risk management liabilities:                        
  Interest rate swaps (d) $ 62     $ 62     $ 60     $ 60    
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    
                            
KU                        
Assets                        
 Cash and cash equivalents $ 3  $ 3        $ 31  $ 31       
Total assets $ 3  $ 3        $ 31  $ 31       
74


     June 30, 2013 December 31, 2012
     Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
LKE                        
Assets                        
 Cash and cash equivalents $ 23  $ 23        $ 43  $ 43       
 Restricted cash and cash equivalents (d)   22    22          32    32       
 Price risk management assets:                        
   Interest rate swaps   72     $ 72       14     $ 14    
 Total price risk management assets   72       72       14       14    
Total assets $ 117  $ 45  $ 72     $ 89  $ 75  $ 14    
                            
Liabilities                        
 Price risk management liabilities:                        
  Interest rate swaps $ 43     $ 43     $ 58     $ 58    
Total price risk management liabilities $ 43     $ 43     $ 58     $ 58    
                            
LG&E                        
Assets                        
 Cash and cash equivalents $ 13  $ 13        $ 22  $ 22       
 Restricted cash and cash equivalents (d)   22    22          32    32       
 Price risk management assets:                        
   Interest rate swaps   36     $ 36       7     $ 7    
 Total price risk management assets   36       36       7       7    
Total assets $ 71  $ 35  $ 36     $ 61  $ 54  $ 7    
                            
Liabilities                        
 Price risk management liabilities:                        
  Interest rate swaps $ 43     $ 43     $ 58     $ 58    
Total price risk management liabilities $ 43     $ 43     $ 58     $ 58    
                            
KU                        
Assets                        
 Cash and cash equivalents $ 10  $ 10        $ 21  $ 21       
 Price risk management assets:                        
   Interest rate swaps   36     $ 36       7     $ 7    
 Total price risk management assets   36       36       7       7    
Total assets $ 46  $ 10  $ 36     $ 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.

A reconciliation of net assets and liabilities classified as Level 3 for the periods ended June 30, 2013 is as follows:
                             
      Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
      Three Months Six Months
      Energy Auction Cross-    Energy Auction Cross-   
      Commodities, Rate Currency    Commodities,  Rate Currency   
       net Securities Swaps Total  net Securities Swaps Total
PPL                        
Balance at beginning of                        
 period $ 14  $ 16     $ 30  $ 22  $ 16  $ 1  $ 39 
  Total realized/unrealized                        
   gains (losses)                        
    Included in earnings   14          14    6          6 
    Included in OCI (a)                     3    3 
  Sales   (2)         (2)   (2)         (2)
  Settlements   4          4    3          3 
  Transfers into Level 3   6    3  $ 3    12    7    3    3    13 
  Transfers out of Level 3   4          4    4       (4)   
Balance at end of period $ 40  $ 19  $ 3  $ 62  $ 40  $ 19  $ 3  $62 

 
7975

 

      Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
      Three Months Six Months
      Energy Auction Cross-    Energy Auction Cross-   
      Commodities, Rate Currency    Commodities,  Rate Currency   
       net Securities Swaps Total  net Securities Swaps Total
PPL Energy Supply                        
Balance at beginning of                        
 period $ 14  $ 13     $ 27  $ 22  $ 13     $ 35 
  Total realized/unrealized                        
   gains (losses)                        
    Included in earnings   14          14    6          6 
  Sales   (2)         (2)   (2)         (2)
  Settlements   4          4    3          3 
  Transfers into Level 3   6    3       9    7    3       10 
  Transfers out of Level 3   4          4    4          4 
Balance at end of period $ 40  $ 16     $ 56  $ 40  $ 16     $ 56 

(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, 2012 is as follows:
                             
      Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
      Three Months Six Months
      Energy Auction Cross-    Energy Auction Cross-   
      Commodities, Rate Currency    Commodities,  Rate Currency   
       net Securities Swaps Total  net Securities Swaps Total
PPL                        
Balance at beginning of                        
 period $ 19  $ 24  $ 3  $ 46  $ 13  $ 24  $ 4  $ 41 
  Total realized/unrealized                        
   gains (losses)                        
    Included in earnings   (2)      (1)   (3)   16       (1)   15 
    Included in OCI (a)   (1)   (1)   8    6    1    (1)   10    10 
  Sales      (5)      (5)      (5)      (5)
  Settlements   (5)         (5)   (11)         (11)
  Transfers into Level 3   14          14    14          14 
  Transfers out of Level 3   9    (3)      6    1    (3)   (3)   (5)
Balance at end of period $ 34  $ 15  $ 10  $ 59  $ 34  $ 15  $ 10  $ 59 
                             
PPL Energy Supply                        
Balance at beginning of                        
 period $ 19  $ 19     $ 38  $ 13  $ 19     $ 32 
  Total realized/unrealized                        
   gains (losses)                        
    Included in earnings   (2)         (2)   16          16 
    Included in OCI (a)   (1)   (1)      (2)   1    (1)      
  Sales      (3)      (3)      (3)      (3)
  Settlements   (5)         (5)   (11)         (11)
  Transfers into Level 3   14          14    14          14 
  Transfers out of Level 3   9    (3)      6    1    (3)      (2)
Balance at end of period $ 34  $ 12     $ 46  $ 34  $ 12     $ 46 

(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.
80

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:

76

   Quantitative Information about Level 3 Fair Value MeasurementsJune 30, 2013
   Fair Value, net     Range
   Asset Valuation Unobservable (Weighted
   (Liability) Technique Input(s) Average) (a)
PPL        
Energy commodities    
 Retail natural gas sales contracts (b)  30$ 36  Discounted cash flow Observable wholesale prices used as proxy for retail delivery points 20%17% - 100% (69%(82%)
 Power sales contracts (c)  (7) (5) Discounted cash flow Basis price between delivery pointsProprietary model used to calculate forward basis prices 24%11% - 61% (25%100% (39%)
 Heat rate call option (d)   
Full-requirement sales contracts (d) 119  Discounted cash flow Customer migrationProprietary model used to calculate forward prices 13% - 80% (34% 18% (18%)
          
Auction rate securities (e)  15 19  Discounted cash flow Modeled from SIFMA Index 54%11% - 80% (65%78% (63%)
          
Cross-currency swaps (f)  10 3  Discounted cash flow Credit valuation adjustment 25% - 37% (32% 11% (11%)
          
PPL Energy Supply        
Energy commodities        
 Retail natural gas sales contracts (b)  30$ 36  Discounted cash flow Observable wholesale prices used as proxy for retail delivery points 20%17% - 100% (69%(82%)
 Power sales contracts (c)  (7) (5) Discounted cash flow Basis price between delivery pointsProprietary model used to calculate forward basis prices 24%11% - 61% (25%100% (39%)
 Heat rate call option (d)   
Full-requirement sales contracts (d) 119  Discounted cash flow Customer migrationProprietary model used to calculate forward prices 13% - 80% (34%18% (18%)
          
Auction rate securities (e)  12 16  Discounted cash flow Modeled from SIFMA Index 61%11% - 80% (66%78% (62%)

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 (g) 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 (g) 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 June 30, 2013, retail natural gas sales contracts extend through 2017.  $142018, and $16 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 June 30, 2013, power sales contracts extend through 2017.  $(4)into 2018, and $(5) 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 sales contracts extendAt June 30, 2013, the heat rate call option extends through 2013.  $112014, and $6 million of the fair value is scheduled to deliver within the next 12 months.  As customer migrationthe market implied heat rate increases/(decreases), the fair value of the contracts decreases/(increases)increases/(decreases).
(e)AuctionAt June 30, 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-currencyAt June 30, 2013, cross-currency swaps extend throughinto 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.

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(g)As the forward implied spread increases/(decreases), the fair value of the contracts increases/(decreases).

Net gains and losses on assets and liabilities classified as Level 3 and included in earnings for the periods ended June 30 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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   Three Months
                           Cross-Currency
   Energy Commodities, net Swaps
            
   Unregulated Retail Wholesale Energy Net Energy Energy  
   Electric and Gas Marketing Trading Margins Purchases Interest Expense
   2013  2012  2013  2012  2013  2012  2013  2012  2013  2012 
PPL                        
Total gains (losses) included in earnings $ 22  $ 2  $ (5) $ (6) $ (2) $ 1  $ (1) $ 1     $ (1)
Change in unrealized gains (losses) relating                              
 to positions still held at the reporting date   22    49       (12)   (7)   1    1    1       
                                
PPL Energy Supply                              
Total gains (losses) included in earnings $ 22  $ 2  $ (5) $ (6) $ (2) $ 1  $ (1) $ 1       
Change in unrealized gains (losses) relating                              
 to positions still held at the reporting date   22    49       (12)   (7)   1    1    1       

  Six Months  Six Months
                  Cross-Currency                  Cross-Currency
  Energy Commodities, net Swaps  Energy Commodities, net Swaps
                          
  Unregulated Retail Wholesale Energy Net Energy Energy    Unregulated Retail Wholesale Energy Net Energy Energy  
  Electric and Gas Marketing Trading Margins Purchases Interest Expense  Electric and Gas Marketing Trading Margins Purchases Interest Expense
  2012  2011  2012  2011  2012  2011  2012  2011  2012  2011   2013  2012  2013  2012  2013  2012  2013  2012  2013  2012 
PPLPPL                    PPL                  
Total gains (losses) included in earningsTotal gains (losses) included in earnings $ 18  $ 5  $ (2) $ (4)   $ (3)   $ (2) $ (1)  Total gains (losses) included in earnings $ 15  $ 18  $ (7) $ (2) $ (2)         $ (1)
Change in unrealized gains (losses) relatingChange in unrealized gains (losses) relating                    Change in unrealized gains (losses) relating                    
to positions still held at the reporting date  39   5   (13)  (6) $ 1    $ 1   17     to positions still held at the reporting date  17   39   (2)  (13)  (7) $ 1  $ 2  $ 1     
                                          
PPL Energy SupplyPPL Energy Supply                    PPL Energy Supply                    
Total gains (losses) included in earningsTotal gains (losses) included in earnings $ 18  $ 5  $ (2) $ (4)   $ (3)   $ (2)    Total gains (losses) included in earnings $ 15  $ 18  $ (7) $ (2) $ (2)          
Change in unrealized gains (losses) relatingChange in unrealized gains (losses) relating                    Change in unrealized gains (losses) relating                    
to positions still held at the reporting date  39   5   (13)  (6) $ 1    $ 1   17     to positions still held at the reporting date  17   39   (2)  (13)  (7) $ 1  $ 2  $ 1     
                     

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

Energy commodity contracts for electricity, gas, oil and/or emission allowances are generally valued using the income approach, except for exchange-traded derivative gas and oil contracts, which are valued using the market approach and are classified as Level 1.  When 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.

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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, 20122013 have a weighted-average coupon of 4.22%3.99% and a weighted-average maturity of 8.37.8 years.

Auction Rate Securities

Auction rate securities include Federal Family Education Loan Program guaranteed student loan revenue bonds, as well as various municipal bond issues.  The 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 transfertransfers in and out of Level 3 in 2013 and 2012 was the change in the significance of the present value of future interest payments as maturity dates approach.discount rates and SIFMA Index.

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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.
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  June 30, 2012 December 31, 2011  June 30, 2013 December 31, 2012
  Carrying   Carrying    Carrying   Carrying  
  Amount Fair Value Amount Fair Value  Amount Fair Value Amount Fair Value
PPLPPL        PPL        
Contract adjustment payments (a) $ 152  $ 154  $ 198  $ 198 Contract adjustment payments (a) $ 56  $ 57  $ 105  $ 106 
Long-term debt  18,710   20,402   17,993   19,392 Long-term debt  19,626   21,413   19,476   21,671 
PPL Energy SupplyPPL Energy Supply        PPL Energy Supply        
Long-term debt  3,279   3,663   3,024   3,397 Long-term debt  3,263   3,462   3,272   3,556 
PPL ElectricPPL Electric        PPL Electric        
Long-term debt  1,718   2,020   1,718   2,012 Long-term debt  1,967   2,168   1,967   2,333 
LKELKE        LKE        
Long-term debt  4,074   4,333   4,073   4,306 Long-term debt  4,075   4,231   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   1,136   1,112   1,178 
KUKU        KU        
Long-term debt  1,842   2,004   1,842   2,000 Long-term debt  1,842   1,938   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, 2012,2013, 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$669 million.  The top ten counterparties accounted for $429$339 million, or 51%, of the netthis exposure and all had investment grade credit ratings from S&P or Moody's.

(PPL Energy Supply)

At June 30, 2012,2013, 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$667 million.  The top ten counterparties accounted for $429$339 million, or 51%, 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.

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(LKE, LG&E and KU)

At June 30, 2012,2013, 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.

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.

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Interest rate risk

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

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

Equity securities price risk

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

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

Foreign currency risk

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

Credit Risk

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

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$31 million and $147$112 million at June 30, 20122013 and December 31, 2011.2012.

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PPL Electric, LKE and LG&E had no obligation to return cash collateral under master netting arrangements at June 30, 20122013 and December 31, 2011.2012.

PPL, LKE and LG&E had posted cash collateral under master netting arrangements of $31$22 million and $29$32 million at June 30, 20122013 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, 20122013 and December 31, 2011.
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Commodity Price Risk (Non-trading)2012.

(PPL and PPL Energy Supply)

Commodity Price Risk (Non-trading)

Commodity price risk, including basis and volumetric risk, is among PPL's and PPL Energy Supply's most significant risks due to the level of investment that PPL and PPL Energy Supply maintain in their competitive generation assets, as well as the extent of their marketing 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.  TheCertain cash flow hedge positions were dedesignated during the six months ended June 30, 2013 and 2012 and the unamortized portion remained in AOCI because the original forecasted transaction is still expected to occur.  There were no active cash flow hedges that existed at June 30, 2012 range in maturity through 2016.2013.  At June 30, 2012,2013, the accumulated net unrecognized after-tax gains (losses) that are expected to be reclassified into earnings during the next 12 months were $260$71 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, 20122013 and 2011,2012, such reclassifications were insignificant.

For the three and six months ended June 30, 2013 and 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

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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, 20122013 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 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 30 were as follows.

   Three Months Six Months
   2012  2011  2012  2011 
PPL Energy Supply            
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 

The net gains (losses) recorded in "Wholesale energy marketing" resulted primarily from hedges of baseload generation; 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 from 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 hedge the 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.  PPL Energy Supply'sThe proprietary trading activity isportfolio shown in "Net energy trading margins" on the Statements of Income.

Commodity Volumetric Activity

PPL Energy Supply currently employs four primary strategies to maximize 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 the volumesIncome is not a significant part of PPL Energy Supply's derivative activity, excluding those that qualify for NPNS, unless otherwise noted.business.

Sales of Competitive Baseload GenerationCommodity Volumes

PPL Energy Supply has a formal hedging program for its competitive baseload generation fleet, which includes 7,252 MWAt June 30, 2013, the net volumes of nuclear, coal and hydroelectric generating capacity.  The objectivederivative (sales)/purchase contracts used in support 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.various strategies discussed above were as follows.

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  (20,132,552)  (28,846,530)  (4,693,573)  1,575,123 
Capacity MW-Month  (10,339)  (9,075)  (1,453)  490 
Gas MMBtu  27,768,152   (2,395,839)  (4,919,285)  (8,210,551)
FTRs MW-Month  8,807   8,519   1,465   
Oil Barrels  (148,614)  300,000   392,331   378,315 

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

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   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.

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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 floating interest rate risk associated with both existing and anticipated debt issuances.  For PPL,At June 30, 2013, outstanding interest rate swap contracts range in maturity through 20232024 for WPD and through 2044 for PPL's domestic interest rate swaps.  These swaps had aan aggregate notional amountvalue of $300 million$1.9 billion at June 30, 2012.  PPL Energy Supply had no such2013 of which £300 million (approximately $455 million based on spot rates) was related to WPD.  Also included in this total are forward-starting interest rate swap contracts outstanding at June 30, 2012.

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.

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At June 30, 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, 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, 20122013 and 2011.2012.

At June 30, 2012,2013, 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.million.  Amounts are reclassified as the hedged interest payments are made.

Fair Value Hedges(PPLLKE, LG&E and PPL Energy Supply)KU)

In November 2012 and April 2013, LG&E and KU entered into forward-starting interest rate swaps with PPL that hedge the interest payments on new debt that is expected to be issued in 2013.  These hedging instruments have terms identical to forward-starting swaps entered into by PPL with third parties.  Realized gains and PPL Energy Supplylosses from the swaps are exposed to changes inprobable of recovery through regulated rates; as such, the fair value of their debt portfolios.  To manage this risk, financial contracts maythese derivatives were reclassified from AOCI to regulatory assets or liabilities.  The gains and losses will be entered into to hedge fluctuationsrecognized in "Interest Expense" on the fair valueStatements 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 byIncome over the counterparties.  PPL Energy Supply did not hold any such contracts at June 30, 2012.  PPL and PPL Energy Supply did not recognize gains or losses resulting from the ineffective portion of fair value hedges or from a portionlife of the hedging instrument being excluded fromunderlying debt when the assessment of hedge effectiveness or from hedges of debt issuances that no longer qualified as fair value hedges forhedged transaction occurs.  For the three and six months ended June 30, 20122013, there was no hedge ineffectiveness associated with the interest rate derivatives.  At June 30, 2013, LG&E and 2011.KU each held contracts with aggregate notional amounts of $250 million that range in maturity through 2043.

Economic Activity (PPL, LKE and LG&E)

LG&E enters into interest rate swap contracts that economically hedge interest payments on variable rate debt.  Because realized gains and losses from the swaps, including a terminated swap contract, are recoverable through regulated rates, any subsequent changes in fair value of these derivatives are included in regulatory assets or liabilities until they are realized as interest expense.  Realized gains and losses are recognized in "Interest Expense" on the Statements of Income when the hedged transaction occurs.  At June 30, 2012,2013, 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 million and $60 million at June 30, 2012 and December 31, 2011 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, 20122013 had a notional amount of £96£166 million (approximately $153$263 million based on contracted rates).  The settlement dates of these contracts range from September 2012November 2013 through June 2013.  The net fair value of these contracts at June 30, 2012 was insignificant and at December 31, 2011 was an asset (liability) of $7 million.2014.

Additionally, a PPL Global subsidiary that has a U.S. dollar functional currency entered into a GBP intercompany loanloans payable with a PPL WEM subsidiarysubsidiaries that has ahave GBP functional currency.  The loan qualifiesloans qualify as a net investment hedge for the PPL Global subsidiary.  As such, the foreign currency gains and losses on the intercompany loanloans for the PPL Global subsidiary are recorded to the foreign currency translation adjustment component of AOCI.OCI.  At June 30, 2012,2013, the outstanding balances of the intercompany loan outstanding was £28loans were £94 million (approximately $43$142 million based on spot rates).

For the three and six months ended June 30, 2012 and 2011,2013, PPL recognized insignificant amounts ofafter-tax net investment hedge gains (losses) on the intercompany loans of $2 million and losses$6 million in the foreign currency translation adjustment component of AOCI.  OCI.  Such amounts for the three and six months ended June 30, 2012 were not significant.

At June 30, 2012,2013, PPL included $19had $29 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
85


PPL held no foreign currency derivatives that qualified as cash flow hedges during the three and six months ended June 30, 2012 and 2011.

Fair Value Hedges

PPL held no foreign currency derivatives that qualified as fair value hedges during the three and six months ended June 30, 2012 and 2011.

Economic Activity

PPL enters into foreign currency contracts on behalf of a subsidiary to economically hedge GBP-denominated anticipated earnings.  At June 30, 2012,2013, the total exposure hedged by PPL was approximately £1£1.2 billion and the net fair value of these positions was an asset (liability) of $12 million.(approximately $1.9 billion based on contracted rates).  These contracts had termination dates ranging from July 20122013 through June 2014.  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 million for the three and six months ended June 30, 2012.  At December 31, 2011, the total exposure hedged by PPL was £288 million and the net fair value of these positions was an asset (liability) of $11 million.  Realized and unrealized gains (losses) were insignificant for the three and six months ended June 30, 2011.2015.  

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.

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 certain full-requirement sales contracts, other physical purchase and sales contracts and certain retail energy and physical capacity contracts, and for PPL Electric include certain full-requirement purchase contracts and other physical purchase contracts.  Changes in the fair value of derivatives not designated as NPNS are recognized currently in earnings unless specific hedge accounting criteria are met and designated as such, except for the change in fair value of LG&E's and KU's interest rate swaps that are recognized as regulatory assets.assets or regulatory liabilities.  See Note 6 for amounts recorded in regulatory assets and regulatory liabilities at June 30, 20122013 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.
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(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     June 30, 2013 December 31, 2012
     Derivatives designated as Derivatives not designated Derivatives designated as Derivatives not designated     Derivatives designated as Derivatives not designated Derivatives designated as Derivatives not designated
     hedging instruments as hedging instruments (a) hedging instruments as hedging instruments (a)     hedging instruments as hedging instruments (a) hedging instruments as 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):                
 Interest rate swaps   $ 15    $ 5  $ 3  $ 3    $ 5  Interest rate swaps (c) $ 130  $ 3    $ 4  $ 14  $ 22    $ 5 
 Cross-currency swaps $ 1   2         2      Cross-currency swaps  1   1         3     
 Foreign currency                 Foreign currency                
  contracts  3    $ 8   3   7    $ 11     contracts  11    $ 46       2     23 
 Commodity contracts   91       2,380    1,570    872    3    1,655    1,557  Commodity contracts         1,146    879    59     $ 1,452    1,010 
   Total current   95    17    2,388    1,578    882    8    1,666    1,562    Total current   142    4    1,192    883    73    27    1,452    1,038 
Noncurrent:Noncurrent:                Noncurrent:                
Price Risk Management                Price Risk Management                
 Assets/Liabilities (b):                 Assets/Liabilities (b):                
 Interest rate swaps        57         55  Interest rate swaps (c)  2       39   1       53 
 Cross-currency swaps  69         24        Cross-currency swaps  61         14   1     
 Foreign currency                 Foreign currency                
  contracts      8   1           contracts      28   3         19 
 Commodity contracts   34    1    1,001    957    42    2    854    783  Commodity contracts         508    472    27       530    556 
   Total noncurrent   103    1    1,009    1,015    66    2    854    838    Total noncurrent   63       536    514    42    1    530    628 
Total derivativesTotal derivatives $ 198  $ 18  $ 3,397  $ 2,593  $ 948  $ 10  $ 2,520  $ 2,400 Total derivatives $ 205  $ 4  $ 1,728  $ 1,397  $ 115  $ 28  $ 1,982  $ 1,666 

(a)$455264 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, 20122013 and December 31, 2011.2012.
(b)Represents the location on the Balance Sheet.Sheets.
(c)Excludes accrued interest, if applicable.

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The after-tax balances of accumulated net gains (losses) (excluding net investment hedges) in AOCI were $102 million and $132 million at June 30, 2013 and December 31, 2012.  The after-tax balances of accumulated net gains (losses) (excluding net investment hedges) in AOCI were $333 million and $527 million at June 30, 2012 and December 31, 2011.  The after-tax balances of accumulated net gains (losses) (excluding net investment hedges) in AOCI were $544 million and $695 million at June 30, 2011 and December 31, 2010.

The following tables present the pre-tax effect of derivative instruments recognized in income, OCI or regulatory assets and regulatory liabilities for the periods ended June 30, 2012.2013.

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  $ 1  $ 2 
              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
        Location of Reclassified Portion and from AOCI Portion and
     Derivative Gain Gain (Loss) from AOCI Amount into Amount
     (Loss) Recognized in Recognized into Income Excluded from Income Excluded from
Derivative  OCI (Effective Portion)  in Income (Effective Effectiveness (Effective Effectiveness
Relationships Three Months Six Months on Derivative Portion) Testing) Portion) Testing)
Cash Flow Hedges:                    
 Interest rate swaps $ 68  $ 77  Interest expense $ (4)    $ (9)   
 Cross-currency swaps   (21)   52  Interest expense   1       1    
           Other income            
            (expense) - net   1       70    
 Commodity contracts       Wholesale energy            
            marketing   73       140  $ 1 
           Depreciation   1       1    
           Energy purchases   (14)      (30)   
Total $ 47  $ 129     $ 58     $ 173  $ 1 
                         
Net Investment Hedges:                     
  Foreign currency contracts $ 1  $ 17                

              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 $ (25) $ (22) Interest expense $ (5)    $ (9)   
 Cross-currency swaps   34    46  Interest expense         (1)   
           Other income            
            (expense) - net   47       28    
 Commodity contracts   (14)   99  Wholesale energy            
            marketing   227  $ (5)   499  $ (1)
           Depreciation         1    
           Energy purchases   (45)   1    (85)   (3)
Total $ (5) $ 123     $ 224  $ (4) $ 433  $ (4)
                         
Net Investment Hedges:                     
  Foreign currency contracts $ 2  $ (1)               
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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 Three Months Six Months
            
Foreign currency contracts Other income (expense) - net $ 25  $ 7  Other income (expense) - net $ 4  $ 123 
Interest rate swaps Interest expense  (2)  (4) Interest expense  (2)  (4)
Commodity contracts Unregulated retail electric and gas  1   23  Unregulated retail electric and gas  22   15 
 Wholesale energy marketing  33   1,376  Wholesale energy marketing  739   40 
 Net energy trading margins (a)  13   22  Net energy trading margins (a)  1   (6)
 Fuel  (12)  (6) Fuel  (3)  (2)
 Energy purchases   (11)   (1,081) Energy purchases   (599)   (13)
 Total $ 47  $ 337  Total $ 162  $ 153 
            
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 Three Months Six Months
            
Interest rate swaps Regulatory assets - noncurrent $ (9) $ (3) Regulatory assets - noncurrent $ 11  $ 15 
      
Derivatives Designated as Location of Gain (Loss) Recognized as    
Hedging Instruments Regulatory Liabilities/Assets Three Months Six Months
      
Interest rate swaps Regulatory liabilities - noncurrent $ 48  $ 58 

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

The following tables present the pre-tax effect of derivative instruments recognized in income, OCI, or OCIregulatory assets and regulatory liabilities for the periods ended June 30, 2011.2012.

Derivatives in Hedged Items in  Location of Gain Gain (Loss) Recognized Gain (Loss) Recognized
Fair Value Hedging Fair Value Hedging  (Loss) Recognized in Income on Derivative in Income on Related Item
Relationships Relationships  in Income Three Months Six Months Three Months Six Months
                  
Interest rate swaps Fixed rate debt Interest expense $ 1  $ 2  $ 8  $ 18 
87

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

              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)
              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
        Location of Reclassified Portion and from AOCI Portion and
     Derivative Gain Gain (Loss) from AOCI Amount into Amount
     (Loss) Recognized in Recognized into Income Excluded from Income Excluded from
Derivative  OCI (Effective Portion)  in Income (Effective Effectiveness (Effective Effectiveness
Relationships Three Months Six Months on Derivative Portion) Testing) Portion) Testing)
Cash Flow Hedges:                    
 Interest rate swaps $ (25) $ (22) Interest expense $ (5)    $ (9)   
 Cross-currency swaps   34    46  Interest expense         (1)   
           Other income            
            (expense) - net   47       28    
 Commodity contracts   (14)   99  Wholesale energy            
            marketing   227  $ (5)   499  $ (1)
           Depreciation         1    
           Energy purchases   (45)   1    (85)   (3)
Total $ (5) $ 123     $ 224  $ (4) $ 433  $ (4)
                         
Net Investment Hedges:                     
  Foreign currency contracts $ 2  $ (1)               

Derivatives Not Designated as Location of Gain (Loss) Recognized in      
 Hedging Instruments  Income on Derivative Three Months Six Months
         
Foreign currency contracts Other income (expense) - net $ 25  $ 7 
Interest rate swaps Interest expense   (2)   (4)
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 $ 47  $ 337 
         
Derivatives Not Designated as Location of Gain (Loss) Recognized as      
 Hedging Instruments Regulatory Liabilities/Assets Three Months Six Months
         
Interest rate swaps Regulatory assets - noncurrent $ (9) $ (3)

(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     June 30, 2013 December 31, 2012
     Derivatives designated as Derivatives not designated Derivatives designated as Derivatives not designated     Derivatives not designated Derivatives designated as Derivatives not designated
     hedging instruments as hedging instruments (a) hedging instruments hedging instruments (a)     as hedging instruments (a) hedging instruments as hedging instruments (a)
     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 $ 1,146  $ 879  $ 59     $ 1,452  $ 1,010 
   Total current   91       2,380    1,570    872    3    1,655    1,557    Total current   1,146    879    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   508    472    27       530    556 
   Total noncurrent   34    1    1,001    957    42    2    854    783    Total noncurrent   508    472    27       530    556 
Total derivativesTotal derivatives $ 125  $ 1  $ 3,381  $ 2,527  $ 914  $ 5  $ 2,509  $ 2,340 Total derivatives $ 1,654  $ 1,351  $ 86     $ 1,982  $ 1,566 

(a)$455264 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, 20122013 and December 31, 2011.2012.
(b)Represents the location on the balance sheet.Balance Sheets.

88


The after-tax balances of accumulated net gains (losses) (excludingin AOCI were $144 million and $211 million at June 30, 2013 and December 31, 2012.  The after-tax balances of accumulated net investment hedges)gains (losses) in AOCI were $405 million and $605 million at June 30, 2012 and December 31, 2011.  The after-tax balances of accumulated net gains (losses) (excluding net investment hedges) in AOCI were $573 million and $733 million at June 30, 2011 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.

The following tables present the pre-tax effect of derivative instruments recognized in income or OCI for the six monthsperiods ended June 30, 2012.2013.

         Three Months Six Months         Three Months Six Months
           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 Three Months Six Months on Derivative  Portion)  Testing) Portion) Testing)
Cash Flow Hedges:Cash Flow Hedges:              Cash Flow Hedges:              
       Wholesale energy        Commodity contracts      Wholesale energy        
 Commodity contracts $ (14) $ 99  marketing $ 227  $ (5) $ 499  $ (1)        marketing $ 73    $ 140  $ 1 
       Depreciation  1     1          Depreciation  1     1   
         Energy purchases   (45)   1    (85)   (3)         Energy purchases   (14)      (30)   
TotalTotal $ (14) $ 99    $ 183  $ (4) $ 415  $ (4)Total         $ 60     $ 111  $ 1 
                 

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 Instrument  Income on Derivative Three Months Six Months
            
Commodity contracts Unregulated retail electric and gas $ 1  $ 23  Unregulated retail electric and gas $ 22  $ 15 
 Wholesale energy marketing  33   1,376  Wholesale energy marketing  739   40 
 Net energy trading margins (a)  13   22  Net energy trading margins (a)  1   (6)
 Fuel  (12)  (6) Fuel  (3)  (2)
 Energy purchases   (11)   (1,081) Energy purchases   (599)   (13)
 Total $ 24  $ 334  Total $ 160  $ 34 

(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, 2011.2012.

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

Derivatives Not Designated as Location of Gain (Loss) Recognized in      
 Hedging Instruments  Income on Derivative 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 


 
9589

 

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

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 
(LKE)

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

       June 30, 2013 December 31, 2012
       Assets Liabilities  Assets Liabilities 
Current:              
 Price Risk Management              
  Assets/Liabilities (a):              
   Interest rate swaps $ 72      $ 14     

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

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

Derivative Instruments Location of Gain (Loss) Three Months Six Months
         
Interest rate swaps Regulatory liabilities - noncurrent $ 48  $ 58 

(LG&E)

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

       June 30, 2013 December 31, 2012
       Assets Liabilities  Assets Liabilities 
Current:              
 Price Risk Management              
  Assets/Liabilities (a):              
   Interest rate swaps $ 36      $ 7     

(a)Represents the location on the Balance Sheets.

The following tables present the pre-tax effect of derivative instruments designated as cash flow hedges that are recognized in regulatory liabilities for the periods ended June 30, 2013.
Derivative Instruments Location of Gain (Loss) Three Months Six Months
         
Interest rate swaps Regulatory liabilities - noncurrent $ 24  $ 29 

(KU)

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

       June 30, 2013 December 31, 2012
       Assets Liabilities  Assets Liabilities 
Current:              
 Price Risk Management              
  Assets/Liabilities (a):              
   Interest rate swaps $ 36      $ 7     

(a)Represents the location on the Balance Sheets.

The following tables present the pre-tax effect of derivative instruments designated as cash flow hedges that are recognized in regulatory liabilities for the periods ended June 30, 2013.
90


Derivative Instruments Location of Gain (Loss) Three Months Six Months
         
Interest rate swaps Regulatory liabilities - noncurrent $ 24  $ 29 

(LKE and LG&E)

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

     June 30, 2012 December 31, 2011
     Derivatives designated as Derivatives not designated Derivatives designated as Derivatives not designated
     hedging instruments as hedging instruments hedging instruments as hedging instruments     June 30, 2013 December 31, 2012 
     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    $ 4     $ 5  
   Total current            5             5    Total current      4       5  
Noncurrent:Noncurrent:                Noncurrent:         
Price Risk Management                Price Risk Management         
 Assets/Liabilities (a):                 Assets/Liabilities (a):         
 Interest rate swaps            57             55  Interest rate swaps    39     53  
   Total noncurrent            57             55    Total noncurrent      39       53  
Total derivativesTotal derivatives          $ 62           $ 60 Total derivatives    $ 43     $ 58  

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

96


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

  Location of Gain (Loss) Recognized in    
Derivative Instruments Income on Derivatives Three Months Six Months
         
Interest rate swaps Interest expense $ (2) $ (4)
         
  Location of Gain (Loss) Recognized in    
Derivative Instruments Regulatory Assets Three Months Six Months
         
Interest rate swaps Regulatory assets - noncurrent $ 11  $ 15 

The following tables present the pre-tax effect of derivatives not designated as hedging instruments recognized in income or regulatory assets for the periods ended 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)
  Location of Gain (Loss) Recognized in    
Derivative Instruments Income on Derivatives Three Months Six Months
         
Interest rate swaps Interest expense $ (2) $ (4)
         
  Location of Gain (Loss) Recognized in    
Derivative Instruments Regulatory Assets Three Months Six Months
         
Interest rate swaps Regulatory assets - noncurrent $ (9) $ (3)

The following tables present the pre-tax effect of derivative instruments recognized in income or regulatory assets for the periods ended June 30, 2011.Offsetting Derivative Instruments(PPL, PPL Energy Supply, LKE, LG&E and KU)

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)
Commodity contracts Operating revenues - retail and wholesale (a)   (3)   (2)
  Total $ (5) $ (6)
         
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)
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.

(a)Amounts are included in "Operating Revenues" for LKE.
91


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

     Assets Liabilities
        Eligible for Offset       Eligible for Offset   
           Cash          Cash   
        Derivative Collateral       Derivative Collateral   
     Gross Instruments Received Net Gross Instruments Pledged Net
June 30, 2013                        
PPL                        
 Energy Commodities $ 1,654  $ 1,221  $ 29  $ 404  $ 1,351  $ 1,221  $ 12  $ 118 
 Treasury Derivatives   279    4       275    50    4    22    24 
Total $ 1,933  $ 1,225  $ 29  $ 679  $ 1,401  $ 1,225  $ 34  $ 142 
                           
PPL Energy Supply                        
 Energy Commodities $ 1,654  $ 1,221  $ 29  $ 404  $ 1,351  $ 1,221  $ 12  $ 118 

LKE                        
 Treasury Derivatives $ 72        $ 72  $ 43     $ 22  $ 21 
                           
LG&E                        
 Treasury Derivatives $ 36        $ 36  $ 43     $ 22  $ 21 
                           
KU                        
 Treasury Derivatives $ 36        $ 36             

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.

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At June 30, 2012,2013, 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    
   PPL Energy Supply LKE LG&E   PPL Energy Supply LKE LG&E
                    
Aggregate fair value of derivative instruments in a net liabilityAggregate fair value of derivative instruments in a net liability        Aggregate fair value of derivative instruments in a net liability        
position with credit contingent provisions $ 211  $ 167  $ 40  $ 40 position with credit risk-related contingent features $ 148  $ 118  $ 30  $ 30 
Aggregate fair value of collateral posted on these derivative instrumentsAggregate fair value of collateral posted on these derivative instruments  34   3   31   31 Aggregate fair value of collateral posted on these derivative instruments  22     22   22 
Aggregate fair value of additional collateral requirements in the event ofAggregate fair value of additional collateral requirements in the event of        Aggregate fair value of additional collateral requirements in the event of        
a credit downgrade below investment grade (a)  186  172   9  a credit downgrade below investment grade (a)  144  136   8  

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

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15.  Goodwill

(PPL)

The change in the carrying amount of goodwill for the six months ended June 30, 20122013 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  18   14   3   1   2 
Changes in estimated cash flow or settlement date  2   2       Changes in estimated cash flow or settlement date    (1)  1   1   
Obligations settled   (6)   (5)   (1)   (1)   Effect of foreign currency exchange rates  (3)        
Balance at June 30, 2012 $ 510  $ 369  $ 120  $ 57  $ 63 
Obligations settled   (6)   (3)   (3)   (3)   
Balance at June 30, 2013Balance at June 30, 2013 $ 561  $ 385  $ 132  $ 61  $ 71 

Substantially all of the ARO balances are classified as noncurrent at June 30, 20122013 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$329 million and $292$316 million at June 30, 20122013 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$771 million and $640$712 million at June 30, 20122013 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)
93


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.
98


     June 30, 2012 December 31, 2011     June 30, 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 $ 12      $ 12  $ 11      $ 11 
 Equity securities:                 Equity securities:                
  U.S. large-cap  178  $ 139     317   173  $ 119     292   U.S. large-cap  227  $ 241     468   222  $ 190     412 
  U.S. mid/small-cap  69   58     127   67   50     117   U.S. mid/small-cap  31   37     68   30   30     60 
 Debt securities:                 Debt securities:                
  U.S. Treasury  86   10     96   76   10     86   U.S. Treasury  89   6     95   86   9     95 
  U.S. government sponsored                  U.S. government sponsored                
   agency  9   1     10   9   1     10    agency  5   1     6   8   1     9 
  Municipality  77   5  $ 1   81   80   4  $ 1   83   Municipality  77   2  $ 2   77   78   5  $ 1   82 
  Investment-grade corporate  32   3     35   35   3     38   Investment-grade corporate  37   2     39   36   4     40 
  Other  2       2   2       2   Other  3       3   3       3 
 Receivables/payables, net   (1)         (1)             Receivables/payables, net   3          3             
 Total NDT funds   466    216    1    681    454    187    1    640  Total NDT funds   484    289    2    771    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 $ 504  $ 289  $ 3  $ 790  $ 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 $ 12      $ 12  $ 11      $ 11 
 Equity securities:                 Equity securities:                
  U.S. large-cap  178  $ 139     317   173  $ 119     292   U.S. large-cap  227  $ 241     468   222  $ 190     412 
  U.S. mid/small-cap  69   58     127   67   50     117   U.S. mid/small-cap  31   37     68   30   30     60 
 Debt securities:                 Debt securities:                
  U.S. Treasury  86   10     96   76   10     86   U.S. Treasury  89   6     95   86   9     95 
  U.S. government sponsored                  U.S. government sponsored                
   agency  9   1     10   9   1     10    agency  5   1     6   8   1     9 
  Municipality  77   5  $ 1   81   80   4  $ 1   83   Municipality  77   2  $ 2   77   78   5  $ 1   82 
  Investment-grade corporate  32   3     35   35   3     38   Investment-grade corporate  37   2     39   36   4     40 
  Other  2       2   2       2   Other  3       3   3       3 
 Receivables/payables, net   (1)         (1)             Receivables/payables, net   3          3             
 Total NDT funds   466    216    1    681    454    187    1    640  Total NDT funds   484    289    2    771    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 $ 501  $ 289  $ 3  $ 787  $ 491  $ 239  $ 2  $ 728 

There were no securities with credit losses at June 30, 20122013 and December 31, 2011.2012.

The following table shows the scheduled maturity dates of debt securities held at June 30, 2012.2013.

  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 $ 12  $ 81  $ 61  $ 77  $ 231 
Fair valueFair value  5   87   67   83   242 Fair value  12   84   63   80   239 
                      
PPL Energy SupplyPPL Energy Supply          PPL Energy Supply          
Amortized costAmortized cost $ 5  $ 84  $ 61  $ 73  $ 223 Amortized cost $ 12  $ 81  $ 61  $ 74  $ 228 
Fair valueFair value  5   87   67   80   239 Fair value  12   84   63   77   236 

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

 
9994

 

   Three Months Six Months
   2013  2012  2013  2012 
PPL            
Proceeds from sales of NDT securities (a) $ 35  $ 45  $ 59  $ 79 
Other proceeds from sales      5       5 
Gross realized gains (b)   3    8    7    13 
Gross realized losses (b)   2    5    4    6 
              
PPL Energy Supply            
Proceeds from sales of NDT securities (a) $ 35  $ 45  $ 59  $ 79 
Other proceeds from sales      3       3 
Gross realized gains (b)   3    8    7    13 
Gross realized losses (b)   2    5    4    6 

(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.

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 amount of tax-exempt revenue bonds issuedThe 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 thethree and six months ended June 30, 2011, LG&E received $163 million for its investments in these bonds when they2013 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                       
March 31, 2013$ (394) $ 134  $ 114  $ 1  $ (13) $ (1,989) $ 1  $ (2,146)
Amounts arising during the period  (7)   2    24                19 
Reclassifications from AOCI     (1)   (36)      2    34       (1)
Net OCI during the period  (7)   1    (12)      2    34       18 
June 30, 2013$ (401) $ 135  $ 102  $ 1  $ (11) $ (1,955) $ 1  $ (2,128)
                         
December 31, 2012$ (149) $ 112  $ 132  $ 1  $ (14) $ (2,023) $ 1  $ (1,940)
Amounts arising during the period  (252)   25    86                (141)
Reclassifications from AOCI     (2)   (116)      3    68       (47)
Net OCI during the period  (252)   23    (30)      3    68       (188)
June 30, 2013$ (401) $ 135  $ 102  $ 1  $ (11) $ (1,955) $ 1  $ (2,128)
                         
PPL Energy Supply                       
March 31, 2013   $ 134  $ 181     $ (9) $ (261)    $ 45 
Amounts arising during the period     2                   2 
Reclassifications from AOCI     (1)   (37)      1    4       (33)
Net OCI during the period     1    (37)      1    4       (31)
June 30, 2013   $ 135  $ 144     $ (8) $ (257)    $ 14 
                         
December 31, 2012   $ 112  $ 211     $ (10) $ (265)    $ 48 
Amounts arising during the period     25                   25 
Reclassifications from AOCI     (2)   (67)      2    8       (59)
Net OCI during the period     23    (67)      2    8       (34)
June 30, 2013   $ 135  $ 144     $ (8) $ (257)    $ 14 

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

95


   Three Months
   Affected Line Item on the Statements of Income
           Other            
   Wholesale       Income            
   energy Energy    (Expense), Interest Total Income Total
Details about AOCI marketing purchases Depreciation net Expense Pre-tax Taxes After-tax
PPL                        
Available-for-sale securities          $ 1     $ 1     $ 1 
Qualifying derivatives                        
 Interest rate swaps             $ (4)   (4) $ 2    (2)
 Cross-currency swaps            1    1    2       2 
 Energy commodities $ 73  $ (14) $ 1          60    (24)   36 
 Total $ 73  $ (14) $ 1  $ 1  $ (3)   58    (22)   36 
Defined benefit plans                        
 Prior service costs                  (3)   1    (2)
 Net actuarial loss                  (46)   12    (34)
 Total                $ (49) $ 13    (36)
                          
Total reclassifications                      
 during the period                      $ 1 
                          
PPL Energy Supply                        
Available-for-sale securities          $ 1     $ 1     $ 1 
Qualifying derivatives                        
 Energy commodities $ 73  $ (14) $ 1          60  $ (23)   37 
 Total $ 73  $ (14) $ 1          60    (23)   37 
Defined benefit plans                        
 Prior service costs                  (1)      (1)
 Net actuarial loss                  (7)   3    (4)
 Total                $ (8) $ 3    (5)
                          
Total reclassifications                      
 during the period                      $ 33 
                          
   Six Months
   Affected Line Item on the Statements of Income
           Other            
   Wholesale       Income            
   energy Energy    (Expense), Interest Total Income Total
Details about AOCI marketing purchases Depreciation net Expense Pre-tax Taxes After-tax
PPL                        
Available-for-sale securities          $ 3     $ 3  $ (1) $ 2 
Qualifying derivatives                        
 Interest rate swaps             $ (9)   (9)   4    (5)
 Cross-currency swaps            70    1    71    (17)   54 
 Energy commodities $ 140  $ (30) $ 1          111    (44)   67 
 Total $ 140  $ (30) $ 1  $ 70  $ (8)   173    (57)   116 
Defined benefit plans                        
 Prior service costs                  (5)   2    (3)
 Net actuarial loss                  (93)   25    (68)
 Total                $ (98) $ 27    (71)
                          
Total reclassifications                      
 during the period                      $ 47 
                          
PPL Energy Supply                        
Available-for-sale securities          $ 3     $ 3  $ (1) $ 2 
Qualifying derivatives                        
 Energy commodities $ 140  $ (30) $ 1          111    (44)   67 
 Total $ 140  $ (30) $ 1          111    (44)   67 
Defined benefit plans                        
 Prior service costs                  (3)   1    (2)
 Net actuarial loss                  (13)   5    (8)
 Total                $ (16) $ 6    (10)
                          
Total reclassifications                      
 during the period                      $ 59 

For the three and six months ended June 30, 2013, the changes in AOCI and the effect of reclassifications from AOCI on the statement of income for LKE and KU were recorded on these securities, as the difference between carrying value and fair value was not significant.  insignificant.

96


18.19.  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, which is not expected to be material.

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

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

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

Testing Indefinite-Lived Intangible AssetsInclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for ImpairmentHedge Accounting Purposes

Effective January 1,July 17, 2013, the Registrants will prospectively adoptadopted accounting guidance that allows an entity to electpermits the option to first make a qualitative evaluation about the likelihood of an impairment of an indefinite-lived intangible asset.  If, based on this assessment, the entity determines that it is more likely than not that the fair value of the indefinite-lived intangible asset exceeds the carrying amount, the fair value of that asset does not needFed Funds Swap Rate (or Overnight Index Swap Rate) to be calculated.  Ifused as a U.S. benchmark interest rate for hedge accounting purposes, in addition to interest rates on direct U.S. Treasury obligations and the entity concludes otherwise, a quantitative impairment test must be performed by determiningLondon Interbank Offer Rate.  This guidance also removed the fair value of the asset and comparing it with the carrying value.  The entity would record an impairment charge, if necessary.restrictions on using different benchmark interest rates for similar hedges.

UponThis guidance is effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013.  The adoption of this guidance is not expected to have a significant impact on the Registrants.

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

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

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

 
10097

 

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, 20122013 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
  


 
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The capacity (summer rating) of PPL's regulated and competitive electricity generation facilities at June 30, 2013 was:

Ownership or
Lease Interest
Primary Fuelin MW (a)
Regulated
Coal (c)
 5,940 
Natural Gas/Oil (b)
 2,098 
Hydro
 78 
Total Regulated
 8,116 
Competitive
Coal (b) (c)
 4,146 
Natural Gas/Oil
 3,316 
Nuclear (c)
 2,275 
Hydro
 807 
Other (d)
 70 
Total Competitive
 10,614 
Total
 18,730 

(a)The capacity of generation units is based on a number of factors, including the operating experience and physical conditions of the units, and may be revised periodically to reflect changed circumstances.  See "Item 2. Properties" in PPL's 2012 Form 10-K for additional information on ownership percentages.
(b)Includes leasehold interests.  See Note 11 to the Financial Statements in PPL's 2012 Form 10-K for additional information.
(c)Includes units that are jointly owned or subject to a power purchase agreement.  Each owner is entitled to its proportionate share of the unit's total output and funds its proportionate share of fuel and other operating costs.  See Notes 14 and 15 to the Financial Statements in PPL's 2012 Form 10-K for additional information.
(d)Includes facilities owned, controlled or for which PPL Energy Supply has the rights to the output.

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 near-term 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 managing profitability for its energy supply business during the current and projected period of low commodity prices.  See "Financial and Operational Developments - Economic and Market Conditions" below.

To manage financing costs and access to credit markets and to fund capital expenditure programs, 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 CorporationShareowners for the periods ended June 30 by segment, and reconciled to PPL's consolidated results, was:

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   Three Months Six Months
   2013  2012  2013  2012 
              
Kentucky Regulated $ 49  $ 34  $ 134  $ 76 
U.K. Regulated   245    196    558    361 
Pennsylvania Regulated   45    29    109    62 
Supply   77    12    31    313 
Corporate and Other (a)   (11)      (14)   
Net Income Attributable to PPL Shareowners $ 405  $ 271  $ 818  $ 812 
              
EPS - basic $ 0.68  $ 0.46  $ 1.39  $ 1.39 
EPS - diluted (b) $ 0.63  $ 0.46  $ 1.28  $ 1.39 

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

Earnings for the three and six months ended June 30, 2012 was $271 million2013 increased 49% and $812 million1% compared to $196 million and $597 million forwith the same periods in 2011 representing a 38% and 36% increase over 2011.  Net Income Attributable to PPL Corporation for the periods ended June 30 by segment was:

   Three Months Six Months
   2012  2011  2012  2011 
              
Kentucky Regulated $ 34  $ 31  $ 76  $ 106 
U.K. Regulated (a)   196    38    361    93 
Pennsylvania Regulated   29    36    62    88 
Supply   12    91    313    310 
Net Income Attributable to PPL Corporation $ 271  $ 196  $ 812  $ 597 
              
EPS - basic $ 0.46  $ 0.35  $ 1.39  $ 1.14 
EPS - diluted $ 0.46  $ 0.35  $ 1.39  $ 1.14 
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(a)WPD Midlands was acquired on April 1, 2011 and its results are recorded on a one-month lag.  Therefore, the 2012 periods include three and six months of WPD Midlands' results while the 2011 periods both include two months of WPD Midlands' results.

The changes in Net Income Attributable to PPL Corporation from period to period were, in part, attributable to certain items that management considers special.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 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.development and additional renewable energy sources, primarily wind in the western U.S.  Unregulated Gross Energy Margins associated with PPL Energy Supply's competitive generation and marketing business are impacted by changes in energy and capacity market prices and demand for electricity and natural gas, power plant availability, competition in the markets for retail customers, fuel costs and availability, transmission constraints that impact the locational pricing of electricity at PPL's power plants, fuel transportation costs and the level and price of hedging activities.  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 when compared to the hedged2012 energy margins in 2012.margins.  As has been PPL Energy Supply's practice in periods of changing business conditions, PPL Energy Supply continues to review its future business and operational plans, including capital and operation and maintenance expenditures, as well as its hedging strategies.strategies and potential plant modifications to burn lower cost fuels.

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

In 2012, PPL Energy Supply'sSupply announced its intention, beginning in April 2015, to place its Corette plant in long-term reserve status, suspending the plant's operation due to expected market conditions and the costs to comply with MATS.  PPL Energy Supply continues to monitor its Corette plant for potential impairment.  The Corette plant asset group's carrying value at June 30, 2013 was $68 million.  See Note 10 to the Financial Statements for additional information.  PPL Energy Supply believes its remaining competitive generation assets are well positioned to meet thesethe additional environmental requirements certain regulated generation assetsbased on prior and planned investments and does not currently anticipate the need to temporarily or permanently shut down additional coal-fired plants.

The additional environmental requirements discussed above have also resulted in LKE's projected $2.1 billion in capital investment over the next five years and the anticipated retirement by 2015 of five coal-fired units with a combined summer capacity rating of 726 MW.  KU retired the 71 MW unit at LG&E and KU will require substantial capital investment.the Tyrone plant in February 2013.  The retirement of the five coal-fired units is not expected to have a material impact on the financial condition or results of operations of PPL.  See Note 158 to the Financial Statements in PPL's 20112012 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 approvalsplans to build a NGCC facility.combined-cycle natural gas facility in Kentucky.

In lightThe KPSC has adopted a series of these economicregulatory mechanisms (ECR, DSM, GLT, fuel adjustment clause, gas supply clause and market conditions, as well as current and projected environmental regulatory requirements, PPL considered whetherrecovery on certain construction work-in-progress) that provide for recovery of its generating assets were impaired, and determined that no 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 impacted 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 beprudently incurred costs.  The Kentucky utility businesses are impacted by reductionschanges in customer usage levels which can be driven by a number of factors including weather conditions and economic factors that impact the credit ratings of financial institutionsload utilized by industrial 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.commercial customers. 

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

Ironwood Acquisition

In April 2012, an indirect, wholly owned subsidiary of PPL Energy Supply completed the acquisition of the equity interests in the owner and operator of the Ironwood Facility.  The Ironwood Facility began operation in 2001 and, since 2008,

 
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Susquehanna Turbine Blade Inspection

In the spring of 2013, PPL EnergyPlus has supplied naturalSusquehanna made modifications to address the causes of turbine blade cracking at the PPL Susquehanna nuclear plant that was first identified in 2011.  The modifications were made during the Unit 2 refueling outage and an additional planned outage for Unit 1.  Additional modifications will be made during planned outages in 2014 and 2015.  Following completion of these modifications, PPL Susquehanna will 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.

Ofgem Review of Line Loss Calculation

Ofgem is currently consulting on the methodology to be used by all network operators to calculate the final line loss incentive/penalty for the operationDPCR4.  In April 2013, Ofgem stated that their expectation was to issue a decision in the second half of 2013.  In July 2013, Ofgem issued a decision paper on the process to follow for closing out the line loss incentive/penalty.  Based on one element of the Ironwood Facilitydecision paper, WPD has concluded that certain data, which had previously served to reduce the liability calculation, could not be included.  Additional information in the decision paper has increased the level of uncertainty regarding the ultimate settlement of this liability.

WPD currently estimates the potential loss exposure to be in the range of $97 million to $251 million.  As a result, during the three and receivedsix months ended June 30, 2013, WPD increased the facility's full electricity output and capacity value pursuantliability by $24 million, to a tolling agreement that expires in 2021.  The acquisition providestotal of $97 million.  PPL Energy Supply, through its subsidiaries, operational controlcannot predict the outcome of additional combined-cycle gas generation in PJM.this matter.  See Note 86 to the Financial Statements for additional information. 

RIIO-ED1

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

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

Distribution System Improvement Charge

Act 11 authorizes the PUC to approve two specific ratemaking mechanisms - the use of a fully projected future test year in base rate proceedings and, subject to certain conditions, the use of a DSIC.  Such alternative ratemaking procedures and

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mechanisms provide opportunity for accelerated cost-recovery.  In May 2013, the PUC approved PPL Electric's proposed DSIC, with an initial rate effective July 1, 2013, subject to refund after hearings.  See Note 6 to the Financial Statements for additional information.

BankruptcyFERC Formula Rates

PPL Electric must follow FERC's Uniform System of SMGTAccounts, which requires subsidiaries to be presented, for FERC reporting purposes, using the equity method of accounting unless a waiver has been granted.  The FERC has granted waivers of this requirement to other utilities when alternative accounting would more accurately present the integrated operations of a utility and its subsidiaries.  In March 2013, as part of a routine FERC audit of PPL and its subsidiaries, PPL Electric determined that it never obtained a required waiver of the equity method accounting requirement for its subsidiary, PPL Receivables Corporation (PPL Receivables) for FERC Form No. 1 reporting.  In March 2013, PPL Electric filed a request for waiver with the 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.  If PPL Electric is not successful in obtaining the waiver, its 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.  See Note 6 to the Financial Statements for additional information.

Equity Forward Agreements

In October 2011, SMGT, a Montana cooperativethe second quarter of 2013, PPL settled forward sale agreements for 10.5 million shares of PPL common stock by issuing 8.4 million shares and purchasercash settling the remaining 2.1 million shares.  PPL received net cash proceeds of electricity under a long-term supply contract with PPL EnergyPlus expiring in June 2019 (SMGT Contract), filed$201 million, which was used to repay short-term debt obligations and for protection under Chapter 11other general corporate purposes.  See Note 7 to the Financial Statements for additional information.  Prior to settlement, incremental shares were included within the calculation of diluted EPS using the treasury stock method.  See Note 4 to the Financial Statements for the impact on the calculation of diluted EPS.

Equity Units

During 2013, several events occurred related to the components of the U.S. Bankruptcy Code2010 Equity Units.  During the first quarter of 2013, financing plans were finalized to remarket the Junior Subordinated Notes component of the 2010 Equity Units and in the U.S. Bankruptcy Court forsecond quarter, PPL Capital Funding completed the District of Montana.  At the timeremarketing of the bankruptcy filing, SMGT wasJunior Subordinated Notes and the simultaneous exchange into Senior Notes.  The transaction resulted in a $10 million loss on extinguishment of the Junior Subordinated Notes.  Additionally, in July 2013, PPL EnergyPlus' largest unsecured credit exposure.issued 40 million shares of common stock at $28.73 per share to settle the 2010 Purchase Contracts.  PPL received net cash proceeds of $1.150 billion, which will be used to repay short-term and long-term debt obligations and for other general corporate purposes.  See Note 7 to the Financial Statements for additional information.

The SMGT Contract provided for fixed volume purchases on a monthly basis at established prices.  PursuantIf-Converted Method of calculating diluted EPS was applied 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 specifiedEquity Units beginning in the SMGT Contract,first quarter of 2013.  This resulted in $15 million and made timely payments for such purchases, but at lower volumes than$30 million of interest charges (after-tax) being added back to income available to PPL common shareowners, and 73 million shares of PPL common stock being treated as prescribed in the SMGT Contract.  In January 2012, the trustee notified PPL EnergyPlus that SMGT would not purchase electricity under the SMGT Contractoutstanding for the month of February.  In March 2012,three and six months ended June 30, 2013.  See Note 4 to the U.S. Bankruptcy CourtFinancial Statements for the Districtimpact on the calculation 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.diluted EPS.

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,May 2013, the U.S. TaxSupreme Court (Tax Court) ruled in PPL's favor in a dispute withreversed the IRS, concluding thatDecember 2011 ruling of 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.U. S. Court of Appeals for the Third Circuit, (Third Circuit).  In December 2011,on the Third Circuit issued its opinion reversing the Tax Court's decision, holding thatcreditability for U.S. income tax purposes of the U.K. WPT is not a creditable tax.Windfall Profits Tax.  As a result of the Third Circuit's adverse determination,this decision, PPL recorded a $39an income tax benefit of $44 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&Ethree 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.  Insix months ended 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 challenges30, 2013.  See Note 5 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-KFinancial Statements for additional information.

FERC Formula Rates

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. Tax Rate Change

In July 2012,2013, the U.K. Finance Act 2012 (the Act)2013 was enacted.  The Act reducedenacted, which reduces the U.K.'s statutory income tax rate from 25%23% to 24%21%, effective April 1, 20122014 and from 24%21% to 23%20%, effective April 1, 2013.2015.  As a result of these changes, PPL expects to recordreduce its net deferred tax liabilities and recognize a deferred tax benefit in the range of $65$90 million to $75$100 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.  PPL cannot predict the outcome of this matter.
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Equity Forward Contract

In April 2012, PPL made a registered underwritten public offering of 9.9 million shares of its common stock.  In conjunction with that offering, the underwriters exercised an option to purchase 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, PPL entered into additional forward sale agreements covering the additional 591 thousand shares of PPL common stock.  Settlement of the subsequent forward sale agreements will occur in July 2013.

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

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

Redemption of PPL Electric Preference Stock

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

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

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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, 20122013 with the same periods in 2011.

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.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.

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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The capacity (summer rating) of PPL's regulated and competitive electricity generation facilities at June 30, 2013 was:

Kentucky Regulated Segment

The Kentucky Regulated segment consists primarily of LKE's results from the operation of regulated electricity generation, transmission and distribution assets, primarily
Ownership or
Lease Interest
Primary Fuelin 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.MW (a)
Regulated
Coal (c)

 5,940 
Natural Gas/Oil (b)
 2,098 
Hydro
 78 
Total Regulated
 8,116 
Competitive
Coal (b) (c)
 4,146 
Natural Gas/Oil
 3,316 
106Nuclear (c)
 2,275 

Hydro
 807 
Other (d)
 70 
Total Competitive
 10,614 
Total

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. 18,730 

(a)The changes incapacity of generation units is based on a number of factors, including the componentsoperating experience and physical conditions of the Kentucky Regulated segment's results between these periods were dueunits, and may be revised periodically to the following factors, which reflect reclassificationschanged circumstances.  See "Item 2. Properties" in PPL's 2012 Form 10-K 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.information on ownership percentages.

·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.

·Lower other income (expense) - net for the three and six-month periods, primarily due to equity losses from an unconsolidated affiliate.

·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)   

(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.
(b)Includes leasehold interests.  See "Forward-Looking Information," the rest of this Item 2 and Notes 6 and 10Note 11 to the Financial Statements in this Form 10-Q and "Item 1. Business" and "Item 1A. Risk Factors" in PPL's 20112012 Form 10-K for additional information.
(c)Includes units that are jointly owned or subject to a discussionpower purchase agreement.  Each owner is entitled to its proportionate share of the risks, uncertaintiesunit's total output and factors that may impact future earnings.

U.K. Regulated Segment

The U.K. Regulated segment consists primarilyfunds its proportionate share of fuel and other operating costs.  See Notes 14 and 15 to the electric distribution operations of WPDFinancial Statements in the U.K.

Net Income Attributable to PPL CorporationPPL's 2012 Form 10-K 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 

(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.additional information.

The changes in
(d)Includes facilities owned, controlled or for which PPL Energy Supply has the components of the U.K. Regulated segment's results between these periods were duerights 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 

(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.output.

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.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 near-term 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 managing profitability for its energy supply business during the current and projected period of low commodity prices.  See "Financial and Operational Developments - Economic and Market Conditions" below.

To manage financing costs and access to credit markets and to fund capital expenditure programs, 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 June 30 by segment, and reconciled to PPL's consolidated results, was:

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   Three Months Six Months
   2013  2012  2013  2012 
              
Kentucky Regulated $ 49  $ 34  $ 134  $ 76 
U.K. Regulated   245    196    558    361 
Pennsylvania Regulated   45    29    109    62 
Supply   77    12    31    313 
Corporate and Other (a)   (11)      (14)   
Net Income Attributable to PPL Shareowners $ 405  $ 271  $ 818  $ 812 
              
EPS - basic $ 0.68  $ 0.46  $ 1.39  $ 1.39 
EPS - diluted (b) $ 0.63  $ 0.46  $ 1.28  $ 1.39 

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

·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.
Earnings for the three and six months ended June 30, 2013 increased 49% and 1% compared with the same periods in 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.

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.
Economic and Market Conditions

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

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

·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.
In 2012, PPL Energy Supply announced its intention, beginning in April 2015, to place its Corette plant in long-term reserve status, suspending the plant's operation due to expected market conditions and the costs to comply with MATS.  PPL Energy Supply continues to monitor its Corette plant for potential impairment.  The Corette plant asset group's carrying value at June 30, 2013 was $68 million.  See Note 10 to the Financial Statements for additional information.  PPL Energy Supply believes its remaining competitive generation assets are well positioned to meet the additional environmental requirements based on prior and planned investments and does not currently anticipate the need to temporarily or permanently shut down additional coal-fired plants.

·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)
The additional environmental requirements discussed above have also resulted in LKE's projected $2.1 billion in capital investment over the next five years and the anticipated retirement by 2015 of five coal-fired units with a combined summer capacity rating of 726 MW.  KU retired the 71 MW unit at the Tyrone plant in February 2013.  The retirement of the five coal-fired units is not expected to have a material impact on the financial condition or results of operations of PPL.  See Note 8 to the Financial Statements in PPL's 2012 Form 10-K  for additional information regarding the anticipated retirement of these units as well as plans to build a combined-cycle natural gas facility in Kentucky.

(a)Represents unrealized gains (losses) on contracts that economically hedge anticipated earnings denominated in GBP.
The KPSC has adopted a series of regulatory mechanisms (ECR, DSM, GLT, fuel adjustment clause, gas supply clause and recovery on certain construction work-in-progress) that provide for recovery of prudently incurred costs.  The Kentucky utility businesses are impacted by changes in customer usage levels which can be driven by a number of factors including weather conditions and economic factors that impact the load utilized by industrial and commercial customers. 
(b)Represents fees incurred in connection with establishing the 2011 Bridge Facility.

(c)RepresentsPPL cannot predict the future impact that economic and market conditions and changes in regulatory requirements may have on its financial condition or results of operations.

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Susquehanna Turbine Blade Inspection

In the spring of 2013, PPL Susquehanna made modifications to address the causes of turbine blade cracking at the PPL Susquehanna nuclear plant that was first identified in 2011.  The modifications were made during the Unit 2 refueling outage and an additional planned outage for Unit 1.  Additional modifications will be made during planned outages in 2014 and 2015.  Following completion of these modifications, PPL Susquehanna will 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.

Ofgem Review of Line Loss Calculation

Ofgem is currently consulting on the methodology to be used by all network operators to calculate the final line loss incentive/penalty for the DPCR4.  In April 2013, Ofgem stated that their expectation was to issue a decision in the second half of 2013.  In July 2013, Ofgem issued a decision paper on the process to follow for closing out the line loss incentive/penalty.  Based on one element of the decision paper, WPD has concluded that certain data, which had previously served to reduce the liability calculation, could not be included.  Additional information in the decision paper has increased the level of uncertainty regarding the ultimate settlement of this liability.

WPD currently estimates the potential loss exposure to be in the range of $97 million to $251 million.  As a result, during the three and six months ended June 30, 2013, WPD increased the liability by $24 million, to a total of $97 million.  PPL cannot predict the outcome of this matter.  See Note 6 to the Financial Statements for additional information. 

RIIO-ED1

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

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

Distribution System Improvement Charge

Act 11 authorizes the PUC to approve two specific ratemaking mechanisms - the use of a fully projected future test year in base rate proceedings and, subject to certain conditions, the use of a DSIC.  Such alternative ratemaking procedures and

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mechanisms provide opportunity for accelerated cost-recovery.  In May 2013, the PUC approved PPL Electric's proposed DSIC, with an initial rate effective July 1, 2013, subject to refund after hearings.  See Note 6 to the Financial Statements for additional information.

FERC Formula Rates

PPL Electric must follow FERC's Uniform System of Accounts, which requires subsidiaries to be presented, for FERC reporting purposes, using the equity method of accounting unless a waiver has been granted.  The FERC has granted waivers of this requirement to other utilities when alternative accounting would more accurately present the integrated operations of a utility and its subsidiaries.  In March 2013, as part of a routine FERC audit of PPL and its subsidiaries, PPL Electric determined that it never obtained a required waiver of the equity method accounting requirement for its subsidiary, PPL Receivables Corporation (PPL Receivables) for FERC Form No. 1 reporting.  In March 2013, PPL Electric filed a request for waiver with the 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.  If PPL Electric is not successful in obtaining the waiver, its 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.  See Note 6 to the Financial Statements for additional information.

Equity Forward Agreements

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

Equity Units

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

The If-Converted Method of calculating diluted EPS was applied to the Equity Units beginning in the first quarter of 2013.  This resulted in $15 million and $30 million of interest charges (after-tax) being added back to income available to PPL common shareowners, and 73 million shares of PPL common stock being treated as outstanding for the three and six months ended June 30, 2013.  See Note 4 to the Financial Statements for the impact on the calculation of diluted EPS.

Tax Litigation

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

U.K. Tax Rate Change

In July 2013, the U.K. Finance Act 2013 was enacted, which reduces the U.K.'s statutory income tax rate from 23% to 21%, effective April 1, 2014 and from 21% to 20%, effective April 1, 2015.  As a result of these changes, PPL expects to reduce its net deferred tax liabilities and recognize a deferred tax benefit in the range of $90 million to $100 million in the third quarter of 2013.

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

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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, 2013 with the same periods in 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.

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

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 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 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.

·Higher 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
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The capacity (summer rating) of PPL's regulated and competitive electricity generation facilities at June 30, 2013 was:

Ownership or
Lease Interest
Primary Fuelin MW (a)
Regulated
Coal (c)
 5,940 
Natural Gas/Oil (b)
 2,098 
Hydro
 78 
Total Regulated
 8,116 
Competitive
Coal (b) (c)
 4,146 
Natural Gas/Oil
 3,316 
Nuclear (c)
 2,275 
Hydro
 807 
Other (d)
 70 
Total Competitive
 10,614 
Total
 18,730 

(a)The capacity of generation units is based on a number of factors, including the operating experience and physical conditions of the units, and may be revised periodically to reflect changed circumstances.  See "Item 2. Properties" in PPL's 2012 Form 10-K for additional information on ownership percentages.
(b)Includes leasehold interests.  See Note 11 to the Financial Statements in PPL's 2012 Form 10-K for additional information.
(c)Includes units that are jointly owned or subject to a power purchase agreement.  Each owner is entitled to its proportionate share of the unit's total output and funds its proportionate share of fuel and other operating costs.  See Notes 14 and 15 to the Financial Statements in PPL's 2012 Form 10-K for additional information.
(d)Includes facilities owned, controlled or for which PPL Energy Supply has the rights to the output.

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.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 near-term 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 managing profitability for its energy supply business during the current and projected period of low commodity prices.  See "Financial and Operational Developments - Economic and Market Conditions" below.

To manage financing costs and access to credit markets and to fund capital expenditure programs, 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 June 30 by segment, and reconciled to PPL's consolidated results, was:

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   Three Months Six Months
   2013  2012  2013  2012 
              
Kentucky Regulated $ 49  $ 34  $ 134  $ 76 
U.K. Regulated   245    196    558    361 
Pennsylvania Regulated   45    29    109    62 
Supply   77    12    31    313 
Corporate and Other (a)   (11)      (14)   
Net Income Attributable to PPL Shareowners $ 405  $ 271  $ 818  $ 812 
              
EPS - basic $ 0.68  $ 0.46  $ 1.39  $ 1.39 
EPS - diluted (b) $ 0.63  $ 0.46  $ 1.28  $ 1.39 

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

Earnings for the three and six months ended June 30, 2013 increased 49% and 1% compared with the same periods in 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

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

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

In 2012, PPL Energy Supply announced its intention, beginning in April 2015, to place its Corette plant in long-term reserve status, suspending the plant's operation due to expected market conditions and the costs to comply with MATS.  PPL Energy Supply continues to monitor its Corette plant for potential impairment.  The Corette plant asset group's carrying value at June 30, 2013 was $68 million.  See Note 10 to the Financial Statements for additional information.  PPL Energy Supply believes its remaining competitive generation assets are well positioned to meet the additional environmental requirements based on prior and planned investments and does not currently anticipate the need to temporarily or permanently shut down additional coal-fired plants.

The additional environmental requirements discussed above have also resulted in LKE's projected $2.1 billion in capital investment over the next five years and the anticipated retirement by 2015 of five coal-fired units with a combined summer capacity rating of 726 MW.  KU retired the 71 MW unit at the Tyrone plant in February 2013.  The retirement of the five coal-fired units is not expected to have a material impact on the financial condition or results of operations of PPL.  See Note 8 to the Financial Statements in PPL's 2012 Form 10-K  for additional information regarding the anticipated retirement of these units as well as plans to build a combined-cycle natural gas facility in Kentucky.

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

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

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Susquehanna Turbine Blade Inspection

In the spring of 2013, PPL Susquehanna made modifications to address the causes of turbine blade cracking at the PPL Susquehanna nuclear plant that was first identified in 2011.  The modifications were made during the Unit 2 refueling outage and an additional planned outage for Unit 1.  Additional modifications will be made during planned outages in 2014 and 2015.  Following completion of these modifications, PPL Susquehanna will 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.

Ofgem Review of Line Loss Calculation

Ofgem is currently consulting on the methodology to be used by all network operators to calculate the final line loss incentive/penalty for the DPCR4.  In April 2013, Ofgem stated that their expectation was to issue a decision in the second half of 2013.  In July 2013, Ofgem issued a decision paper on the process to follow for closing out the line loss incentive/penalty.  Based on one element of the decision paper, WPD has concluded that certain data, which had previously served to reduce the liability calculation, could not be included.  Additional information in the decision paper has increased the level of uncertainty regarding the ultimate settlement of this liability.

WPD currently estimates the potential loss exposure to be in the range of $97 million to $251 million.  As a result, during the three and six months ended June 30, 2013, WPD increased the liability by $24 million, to a total of $97 million.  PPL cannot predict the outcome of this matter.  See Note 6 to the Financial Statements for additional information. 

RIIO-ED1

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

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

Distribution System Improvement Charge

Act 11 authorizes the PUC to approve two specific ratemaking mechanisms - the use of a fully projected future test year in base rate proceedings and, subject to certain conditions, the use of a DSIC.  Such alternative ratemaking procedures and

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mechanisms provide opportunity for accelerated cost-recovery.  In May 2013, the PUC approved PPL Electric's proposed DSIC, with an initial rate effective July 1, 2013, subject to refund after hearings.  See Note 6 to the Financial Statements for additional information.

FERC Formula Rates

PPL Electric must follow FERC's Uniform System of Accounts, which requires subsidiaries to be presented, for FERC reporting purposes, using the equity method of accounting unless a waiver has been granted.  The FERC has granted waivers of this requirement to other utilities when alternative accounting would more accurately present the integrated operations of a utility and its subsidiaries.  In March 2013, as part of a routine FERC audit of PPL and its subsidiaries, PPL Electric determined that it never obtained a required waiver of the equity method accounting requirement for its subsidiary, PPL Receivables Corporation (PPL Receivables) for FERC Form No. 1 reporting.  In March 2013, PPL Electric filed a request for waiver with the 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.  If PPL Electric is not successful in obtaining the waiver, its 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.  See Note 6 to the Financial Statements for additional information.

Equity Forward Agreements

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

Equity Units

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

The If-Converted Method of calculating diluted EPS was applied to the Equity Units beginning in the first quarter of 2013.  This resulted in $15 million and $30 million of interest charges (after-tax) being added back to income available to PPL common shareowners, and 73 million shares of PPL common stock being treated as outstanding for the three and six months ended June 30, 2013.  See Note 4 to the Financial Statements for the impact on the calculation of diluted EPS.

Tax Litigation

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

U.K. Tax Rate Change

In July 2013, the U.K. Finance Act 2013 was enacted, which reduces the U.K.'s statutory income tax rate from 23% to 21%, effective April 1, 2014 and from 21% to 20%, effective April 1, 2015.  As a result of these changes, PPL expects to reduce its net deferred tax liabilities and recognize a deferred tax benefit in the range of $90 million to $100 million in the third quarter of 2013.

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

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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, 2013 with the same periods in 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.

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 June 30 includes the following results:

   Three Months Six Months
   2013  2012  % Change 2013  2012  % Change
                 
Utility revenues $ 682  $ 658   4  $ 1,482  $ 1,363   9 
Fuel   216    215      447    428   4 
Energy purchases   37    34   9    123    108   14 
Other operation and maintenance   197    197      394    403   (2)
Depreciation   83    86   (3)   165    172   (4)
Taxes, other than income   12    12      24    23   4 
 Total operating expenses   545    544      1,153    1,134   2 
Other Income (Expense) - net      (7)  (100)   (2)   (10)  (80)
Interest Expense   61    54   13    116    109   6 
Income Taxes   28    13   115    78    28   179 
Income (Loss) from Discontinued Operations   1    (6)  (117)   1    (6)  (117)
Net Income Attributable to PPL Shareowners $ 49  $ 34   44  $ 134  $ 76   76 

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 Six Months
       
Kentucky Gross Margins $ 32  $ 107 
Other operation and maintenance      10 
Depreciation   (8)   (17)
Taxes, other than income      (1)
Other Income (Expense) - net   7    7 
Interest Expense   (7)   (7)
Income Taxes   (15)   (44)
Special items, after-tax   6    3 
Total $ 15  $ 58 

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

·Lower other operation and maintenance for the six-month period primarily due to $17 million of lower costs due to the timing and scope of scheduled coal plant maintenance outages.  This decrease was partially offset by $4 million of adjustments to regulatory assets and liabilities and increased coal plant operation costs of $3 million.

·Higher depreciation for the three and six-month periods primarily 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 and $26 million to 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.

·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.
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that is excluded from Kentucky Gross Margins.  This increase was partially offset by lower depreciation of $6 million and $11 million due to revised rates that were effective January 1, 2013.  Both events are the result of the 2012 rate case proceedings.

·  Lower noncontrolling interests for the three and six-month periods due to the preference stock redemption in June 2012.

Outlook

PPL projects lower segment earnings
·Higher other income (expense) - net for the three and six-month periods primarily due to losses from the EEI investment recorded in 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.2012.  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 expectedEEI investment was fully impaired in the fourth quarter of 2012.  PPL Electric cannot predict the outcome of this proceeding.

Earnings in 2012 are subject to various risks
·Higher interest expense for the three and uncertainties.  See "Forward-Looking Information," the rest of this Item 2 and Notes 6 and 10six-month periods primarily due to the Financial Statements in this Form 10-Qremarketing of the PPL Capital Funding Junior Subordinated Notes component of the 2010 Equity Units and "Item 1. Business"simultaneous exchange into Senior Notes.  Interest expense associated with the 2010 Equity Units is allocated to the Kentucky Regulated segment.

·Higher income taxes for the three and "Item 1A.  Risk Factors" in PPL's 2011six-month periods primarily due to higher pre-tax income.

The following after-tax gains (losses), 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 2013  2012  2013  2012 
                
LKE acquisition-related adjustments:             
 Income Taxes and Other            
 Net operating loss carryforward and other tax-related adjustmentsOperation and Maintenance          $ 4 
Other:             
 LKE discontinued operations, net of tax of ($1), $4, ($1), $4 (a)Discontinued Operations $ 1  $ (5) $ 1    (5)
 EEI adjustments, net of tax of $0, $0, $0, $0Other Income (Expense)-net         1    
Total  $ 1  $ (5) $ 2  $ (1)

(a)2012 includes an adjustment to an indemnification liability.

2013 Outlook

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.

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.

U.K. Regulated Segment

The U.K. Regulated segment consists of PPL Global which primarily includes WPD's regulated electricity distribution operations and certain costs, such as U.S. income taxes, administrative costs and allocated financing costs.

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

   Three Months Six Months
   2013  2012  % Change 2013  2012  % Change
                  
Utility revenues $ 559  $ 543   3  $ 1,197  $ 1,095   9 
Energy-related businesses   13    14   (7)   23    24   (4)
 Total operating revenues   572    557   3    1,220    1,119   9 
Other operation and maintenance   112    112      229    225   2 
Depreciation   72    70   3    146    137   7 
Taxes, other than income   36    36      73    72   1 
Energy-related businesses   7    11   (36)   14    16   (13)
 Total operating expenses   227    229   (1)   462    450   3 
Other Income (Expense) - net   4    31   (87)   124    11   1,027 
Interest Expense   104    105   (1)   211    208   1 
Income Taxes      58   (100)   113    111   2 
Net Income Attributable to PPL Shareowners $ 245  $ 196   25  $ 558  $ 361   55 
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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 Six Months
        
U.K.      
 Utility revenues $ 68  $ 143 
 Other operation and maintenance   (4)   (10)
 Depreciation   (6)   (11)
 Interest expense   (3)   (7)
 Other   (2)   
 Income taxes   (11)   (21)
U.S.      
 Interest expense and other   (1)   1 
 Income taxes   9    9 
Foreign currency exchange rates, after-tax (a)   (4)   (3)
Special items, after-tax   3    96 
Total $ 49  $ 197 

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

U.K.

·Higher utility revenues for the three-month period primarily due to the April 1, 2013 and 2012 price increases which resulted in $50 million of higher utility revenues and $23 million of higher volume due primarily to weather, partially offset by $6 million of lower third-party engineering work.

Higher utility revenues for the six-month period primarily due to the April 1, 2013 and 2012 price increases, which resulted in $113 million of higher utility revenues and $28 million of higher volume due primarily to weather.

·Higher other operation and maintenance for the three-month period primarily due to $6 million of higher network maintenance expense, partially offset by $3 million of lower third-party engineering costs.

Higher other operation and maintenance for the six-month period primarily due to $13 million of higher network maintenance expense.

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

·Higher interest expense for the six-month period primarily due to $4 million of higher interest expense on index-linked notes and $3 million on other long-term debt arising from an April 2012 debt issuance.

·Higher income taxes for the three-month period primarily due to higher pre-tax income, which increased income taxes by $14 million, and $9 million from a benefit recorded in 2012 due to the tax deductibility of interest on the acquisition financing for WPD Midlands, partially offset by $5 million of lower effective income tax rates and $5 million of prior year adjustments.
Higher income taxes for the six-month period primarily due to higher pre-tax income, which increased income taxes by $30 million, and $9 million from a benefit recorded in 2012 due to the tax deductibility of interest on the acquisition financing for WPD Midlands, partially offset by $11 million of lower effective income tax rates and $6 million of prior year adjustments.
U.S.

·Lower income taxes for the three-month period primarily due to a $19 million 2013 adjustment related to a ruling obtained from the IRS regarding 2010 U.K. earnings and profits calculations and $4 million of lower income taxes on intercompany loans, partially offset by a $12 million increase to income tax expense attributable to a revision in the expected taxable amount of cash repatriation in 2013.

Lower income taxes for the six-month period primarily due to a $19 million 2013 adjustment related to a ruling obtained from the IRS regarding 2010 U.K. earnings and profits calculations and $8 million of lower income taxes on intercompany loans, partially offset by a $15 million increase to income tax expense attributable to a revision in the expected taxable amount of cash repatriation in 2013.

105

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

   Income Statement Three Months Six Months
   Line Item 2013  2012  2013  2012 
                
 Other Income            
Foreign currency-related economic hedges, net of tax of $3, ($8), ($39), ($1) (a)(Expense)-net $ (5) $ 16  $ 73  $ 2 
WPD Midlands acquisition-related adjustments:             
   Other Operation            
 Separation benefits, net of tax of $0, $0, $1, $2and Maintenance      (4)   (1)   (8)
   Other Operation            
 Other acquisition-related adjustments, net of tax of $0, ($1), $0, ($1)and Maintenance      4    (2)   4 
Other:             
 Windfall Profits Tax litigation (b)Income Taxes   43       43    
 Change in WPD line loss accrual, net of tax of $5, $0, $5, $0 (c)Utility   (19)      (19)   
Total  $ 19  $ 16  $ 94  $ (2)

(a)Represents unrealized gains (losses) on contracts that economically hedge anticipated earnings denominated in GBP.
(b)In May 2013, the U.S. Supreme Court reversed the December 2011 ruling, by the U.S. Court of Appeals for the Third Circuit, on the creditability for income tax purposes of the U.K. Windfall Profits Tax.  As a result of the U.S. Supreme Court ruling, PPL recorded an income tax benefit during the three and six months ended June 30, 2013.  See Note 5 to the Financial Statements for additional information.
(c)WPD Midlands recorded an adjustment to its line loss accrual in June 2013 based on information provided by Ofgem regarding the calculation of line loss incentive/penalty for all network operators related to DPCR4, a price control period that ended prior to PPL's acquisition of WPD Midlands.  See Note 6 to the Financial Statements for additional information.

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 June 30 includes the following results:
                  
   Three Months Six Months
   2013  2012  % Change 2013  2012  % Change
Utility revenues                
 External $ 413  $ 403   2  $ 925  $ 860   8 
 Intersegment   1    1      2    2   
 Total utility revenues   414    404   2    927    862   8 
Energy purchases                
 External   120    120      292    273   7 
 Intersegment   12    17   (29)   26    38   (32)
Other operation and maintenance   124    143   (13)   257    283   (9)
Depreciation   44    39   13    87    78   12 
Taxes, other than income   22    22      52    48   8 
 Total operating expenses   322    341   (6)   714    720   (1)
Other Income (Expense) - net   2    1   100    3    3   
Interest Expense   25    24   4    50    48   4 
Income Taxes   24    11   118    57    31   84 
Net Income   45    29   55    109    66   65 
Net Income Attributable to Noncontrolling Interests       n/a      4   (100)
Net Income Attributable to PPL Shareowners $ 45  $ 29   55  $ 109  $ 62   76 

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.

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  Three Months Six Months
       
Pennsylvania Gross Delivery Margins $ 21  $ 61 
Other operation and maintenance   13    20 
Depreciation   (5)   (9)
Interest Expense   (1)   (2)
Other   1    (1)
Income Taxes   (13)   (26)
Noncontrolling Interests      4 
Total $ 16  $ 47 

·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 for the three-month period primarily due to lower corporate service costs of $6 million and lower vegetation management of $2 million.

Lower other operation and maintenance for the six-month period primarily due to lower corporate service costs of $11 million and lower vegetation management of $3 million.

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

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

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 and higher operation and maintenance expense.

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.

Net Income Attributable to PPL Shareowners for the periods ended June 30 includes the following results:
                  
   Three Months Six Months
   2013  2012  % Change 2013  2012  % Change
Energy revenues                
 External (a) $ 1,658  $ 816   103  $ 2,039  $ 3,106   (34)
 Intersegment   12    17   (29)   26    38   (32)
Energy-related businesses   122    115   6    235    213   10 
 Total operating revenues   1,792    948   89    2,300    3,357   (31)
Fuel (a)   224    196   14    522    407   28 
Energy purchases                
 External (a)   897    191   370    697    1,438   (52)
 Intersegment   1     n/a   2    1   100 
Other operation and maintenance   270    293   (8)   505    548   (8)
Depreciation   79    70   13    157    135   16 
Taxes, other than income   16    17   (6)   33    35   (6)
Energy-related businesses   118    113   4    228    210   9 
 Total operating expenses   1,605    880   82    2,144    2,774   (23)
Other Income (Expense) - net   12    4   200    16    9   78 
Other-Than-Temporary Impairments      1   (100)      1   (100)
Interest Expense   60    53   13    120    101   19 
Income Taxes   62    6   933    21    177   (88)
Net Income Attributable to PPL Shareowners $ 77  $ 12   542  $ 31  $ 313   (90)

 
111107

 


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
Energy revenues                
 External (a) $ 816  $ 879   (7) $ 3,106  $ 2,132   46 
 Intersegment   17    4   325    38    10   280 
Energy-related businesses   115    116   (1)   213    228   (7)
 Total operating revenues   948    999   (5)   3,357    2,370   42 
Fuel (a)  196   208  (6)  407   468  (13)
Energy purchases                
 External (a)   191    116   65    1,438    411   250 
 Intersegment       n/a   1    1   
Other operation and maintenance   287    283   1    535    516   4 
Depreciation   76    64   19    148    128   16 
Taxes, other than income   17    15   13    35    31   13 
Energy-related businesses   113    116   (3)   210    225   (7)
 Total operating expenses   880    802   10    2,774    1,780   56 
Other Income (Expense) - net   4    4      9    19   (53)
Other-Than-Temporary Impairments   1     n/a   1    1   
Interest Expense   53    51   4    101    100   1 
Income Taxes   6    58   (90)   177    200   (12)
Income (Loss) from Discontinued Operations      (1)  (100)      2   (100)
Net Income Attributable to PPL Corporation $ 12  $ 91   (87) $ 313  $ 310   1 

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

The changes in the components of the Supply segment's results between these periods were due to the 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 Three Months Six Months
        
Unregulated gross energy margins   $ (87)
Unregulated Gross Energy Margins $ (88) $ (195)
Other operation and maintenance $ (8)  (19)  16   29 
Depreciation  (12)  (20)  (9)  (22)
Taxes, other than income  3   4 
Other Income (Expense) - net  (2)  (12)  9   10 
Interest expense  (7)  (19)
Other  (4)  (6)  2   2 
Income Taxes  8   73   27   60 
Discontinued operations, after-tax    3 
Special items, after-tax   (61)   71    112    (151)
Total $ (79) $ 3  $ 65  $ (282)

·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 expensefor the three-month period primarily due to $11 million of lower 2013 project and refueling outage costs at PPL Susquehanna and $4 million of Brunner Island Unit 3 outage costs in 2012 with no comparable outage in 2013.

Lower other operation and maintenance for the six-month period primarily due to $19 million of Brunner Island Unit 3 outage costs in 2012 with no comparable outage in 2013 and $17 million of lower 2013 project and refueling outage costs at PPL Susquehanna, partially offset by $5 million of Conemaugh Unit 2 outage costs in 2013 with no comparable outage in 2012.

·Higher depreciation for the three and six-month periods in partprimarily due to $11PP&E additions.  The six-month period also includes $6 million and $17 million of higher costs at PPL Susquehanna, including refueling outage costs, payroll-related costs and timing of projects.attributable to the Ironwood Acquisition.

·Higher depreciation expenseother income (expense) - net for the three and six-month periods partially due to the impact of PP&E additions.a worker's compensation adjustment of $4 million.

·Lower other income (expense) - netHigher interest expense for the six-month period primarilydue to $7 million from PPL Capital Funding's June 2012 $400 million debt issuance, $6 million due to lower earnings on securitiescapitalized interest in 2013 and $4 million due to financing associated with PPL Ironwood.  Interest expense associated with certain PPL Capital Funding debt issuances is allocated to the NDT funds.Supply segment.

·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$30 million and $46 million.  The$77 million, partially offset for the six-month period was also lower due toby 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.

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  Income Statement Three Months Six Months  Income Statement Three Months Six Months
  Line Item 2012  2011  2012  2011   Line Item 2013  2012  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 ($51), $23, $28, ($79)Adjusted energy-related economic activity, net, net of tax of ($51), $23, $28, ($79)(a) $ 76  $ (32) $ (41) $ 118 
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), $0, ($2)Other Income-net        1 
Other:Other:         Other:         
Montana hydroelectric litigation, net of tax of $0, $0, $0, $1Interest Expense    (1)    (1)Change in tax accounting method related to repairsIncome Taxes  (3)    (3)  
Litigation settlement - spent nuclear fuel storage, net of tax of $0, ($21), $0, ($21) (b)Fuel    29     29  Other Operation        
Counterparty bankruptcy, net of tax of $0, $0, $5, $0 (c)Other O&M      (6)  Counterparty bankruptcy, net of tax of ($1), $0, ($1), $5 (b)and Maintenance  1     1   (6)
Wholesale supply cost reimbursement, net of tax of $0, $0, $0, $0(d)  1     1   Wholesale supply cost reimbursement, net of tax of $0, $0, $0, $0(c)    1     1 
Ash basin leak remediation adjustment, net of tax of $0, $0, ($1), $0Other O&M      1     Other Operation        
Coal contract modification payments, net of tax of $5, $0, $5, $0 (e)Fuel   (7)      (7)   Ash basin leak remediation adjustment, net of tax of $0, $0, $0, ($1)and Maintenance        1 
Coal contract modification payments, net of tax of $0, $5, $0, $5 (d)Fuel      (7)      (7)
TotalTotal  $ (38) $ 23  $ 108  $ 37 Total  $ 74  $ (38) $ (43) $ 108 

(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.

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(c)(b)In October 2011, a wholesale customer, SMGT, filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy code.  In 2012, PPL EnergyPlus recorded an additional allowance for unpaid amounts under the long-term power contract.  In March 2012, the U.S. Bankruptcy Court for the District of Montana approved the request to terminate the contract, effective April 1, 2012.  In June 2013, PPL EnergyPlus received an approval for an administrative claim in the amount of $2 million.
(d)(c)Recorded in "Wholesale energy marketing - Realized" on the Statement of Income.
(e)(d)As a result of lower electricity and natural gas prices, coal unit runtimes have decreased.coal-fired generation output decreased during 2012.  Contract modification payments were incurred to reduce the2012 and 2013 contracted coal quantities scheduled for delivery.deliveries.

Reconciliation of Economic Activity

The following table reconciles unrealized pre-tax gains (losses) for the periods ended June 30, 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 Six Months
   2012  2011  2012  2011    2013  2012  2013  2012 
Operating RevenuesOperating Revenues        Operating Revenues        
 Unregulated retail electric and gas $ (12) $ 1  $ (2) $ 5  Unregulated retail electric and gas $ 20  $ (12) $ 12  $ (2)
 Wholesale energy marketing  (458)  (44)  394   13  Wholesale energy marketing  590   (458)  (232)  394 
Operating ExpensesOperating Expenses        Operating Expenses        
 Fuel  (16)  (11)  (14)  12  Fuel  (4)  (16)  (5)  (14)
 Energy Purchases   442    109    (149)   127  Energy Purchases   (479)   442    155    (149)
Energy-related economic activity (a)Energy-related economic activity (a)  (44)  55   229   157 Energy-related economic activity (a)  127   (44)  (70)  229 
Option premiums (b)Option premiums (b)   1    6    1    11 Option premiums (b)      1    1    1 
Adjusted energy-related economic activityAdjusted energy-related economic activity  (43)  61   230   168 Adjusted energy-related economic activity  127   (43)  (69)  230 
Less: Economic activity realized, associated with the monetization ofLess: Economic activity realized, associated with the monetization of        Less: Economic activity realized, associated with the monetization of        
certain full-requirement sales contracts in 2010   12    66    33    144 certain full-requirement sales contracts in 2010      12       33 
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 $ 127  $ (55) $ (69) $ 197 
                    
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 $ 76  $ (32) $ (41) $ 118 

(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 depreciation and higher financing costs, partially offset by lower operation and maintenance expense, higher capacity prices and higher depreciation.  See "Overview" for a discussion on economic and market conditions.nuclear generation output.

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:

109

·"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.  These mechanisms allow for recovery of certain expenses, return on capital investments and performance incentives.  Certain costs associated with these mechanisms, primarily ECR, DSM and DSM,GLT, are recorded as "Other operation and maintenance" and "Depreciation."  These mechanisms allow for recovery of certain expenses, returns on capital investments and performance incentives.  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.

·"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 realized economic activity associated with the monetization of certain full-requirement sales contracts and premium amortization associated with options.in 2010.  This economic activity iswas 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" to PPL's three non-GAAP financial measures to "Operating Income" for the periods ended June 30.

      2012 Three Months 2011 Three 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 $ 658  $ 403     $ 544 (c) $ 1,605  $ 639  $ 436     $ 409 (c) $ 1,484 
 PLR intersegment utility                                
  revenue (expense) (d)      (17) $ 17              (4) $ 4        
 Unregulated retail                                
  electric and gas         192    (13)    179          180    1     181 
 Wholesale energy marketing                                
   Realized         1,075    8 (f)   1,083          716    16 (f)   732 
   Unrealized economic                                
    activity            (458)(g)   (458)            (44)(g)   (44)
 Net energy trading margins         10        10          10        10 
 Energy-related businesses            130     130             126     126 
   Total Operating Revenues   658    386    1,294    211     2,549    639    432    910    508     2,489 
                                     
Operating Expenses                                
 Fuel   215       170    26 (e)   411    206       250    (42)(e)   414 
 Energy purchases                                
   Realized   34    120    617    16 (f)   787    40    169    150    75 (f)   434 
   Unrealized economic                                
    activity            (442)(g)   (442)            (109)(g)   (109)
 Other operation and                                
  maintenance   24    26    7    682     739    21    29    9    664     723 
 Depreciation   13          258     271    12          225     237 
 Taxes, other than income      20    7    60     87       20    7    48     75 
 Energy-related businesses            124     124             120     120 
 Intercompany eliminations      (1)      1           (4)   1    3     
   Total Operating Expenses   286    165    801    725     1,977    279    214    417    984     1,894 
Total $ 372  $ 221  $ 493  $ (514)  $ 572  $ 360  $ 218  $ 493  $ (476)  $ 595 
      2013 Three Months 2012 Three Months
          Unregulated          Unregulated      
      Kentucky PA Gross Gross    Operating Kentucky PA Gross Gross    Operating
      Gross Delivery Energy    Income Gross Delivery Energy     Income
      Margins Margins Margins Other (a) (b) Margins Margins Margins Other (a) (b)
                           
Operating Revenues                                
 Utility $ 682  $ 413     $ 560 (c) $ 1,655  $ 658  $ 403     $ 544 (c) $ 1,605 
 PLR intersegment utility                                
  revenue (expense) (d)      (12) $ 12              (17) $ 17        
 Unregulated retail                                
  electric and gas         237    20 (f)   257          192    (13)(f)   179 
 Wholesale energy marketing                                
   Realized         812    (1)    811          1,075    8 (e)   1,083 
   Unrealized economic                                
    activity            590 (f)   590             (458)(f)   (458)
 Net energy trading margins                         10        10 
 Energy-related businesses            137     137             130     130 
   Total Operating Revenues   682    401    1,061    1,306     3,450    658    386    1,294    211     2,549 

      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 

 
115110

 
      2013 Three Months 2012 Three Months
          Unregulated          Unregulated      
      Kentucky PA Gross Gross     Operating Kentucky PA Gross Gross    Operating
      Gross Delivery Energy    Income Gross Delivery Energy     Income
      Margins Margins Margins Other (a) (b) Margins Margins Margins Other (a) (b)
                           
Operating Expenses                                
 Fuel   216       223    2     441    215       170    26 (g)   411 
 Energy purchases                                
   Realized   37    120    419    (4)    572    34    120    617    16 (e)   787 
   Unrealized economic                                
    activity            479 (f)   479             (442)(f)   (442)
 Other operation and                                
  maintenance   23    21    3    651     698    24    26    7    682     739 
 Depreciation   2          284     286    13          258     271 
 Taxes, other than income      19    10    57     86       20    7    60     87 
 Energy-related businesses            130     130             124     124 
 Intercompany eliminations      (1)   1              (1)      1     
   Total Operating Expenses   278    159    656    1,599     2,692    286    165    801    725     1,977 
Total $ 404  $ 242  $ 405  $ (293)  $ 758  $ 372  $ 221  $ 493  $ (514)  $ 572 

      2013 Six Months 2012 Six Months
          Unregulated          Unregulated      
      Kentucky PA Gross Gross    Operating Kentucky PA Gross Gross    Operating
      Gross Delivery Energy    Income Gross Delivery Energy     Income
      Margins Margins Margins Other (a) (b) Margins Margins Margins Other (a) (b)
                           
Operating Revenues                                
 Utility $ 1,482  $ 925     $ 1,198 (c) $ 3,605  $ 1,363  $ 860     $ 1,096 (c) $ 3,319 
 PLR intersegment utility                                
  revenue (expense) (d)      (26) $ 26              (38) $ 38        
 Unregulated retail                                
  electric and gas         483    11 (f)   494          406    (4)(f)   402 
 Wholesale energy marketing                                
   Realized         1,789    (2)    1,787          2,279    12 (e)   2,291 
   Unrealized economic                                
    activity            (232)(f)   (232)            394 (f)   394 
 Net energy trading margins         (11)       (11)         18        18 
 Energy-related businesses            264     264             237     237 
   Total Operating Revenues   1,482    899    2,287    1,239     5,907    1,363    822    2,741    1,735     6,661 
                                     
Operating Expenses                                
 Fuel   447       522    1     970    428       385    22 (g)   835 
 Energy purchases                                
   Realized   123    292    855    (7)    1,263    108    273    1,251    38 (e)   1,670 
   Unrealized economic                                
    activity            (155)(f)   (155)            149 (f)   149 
 Other operation and                                
  maintenance   48    43    8    1,275     1,374    46    49    11    1,339     1,445 
 Depreciation   2          568     570    26          509     535 
 Taxes, other than income      47    18    117     182       44    16    118     178 
 Energy-related businesses            252     252             226     226 
 Intercompany eliminations      (2)   2              (2)   1    1     
   Total Operating Expenses   620    380    1,405    2,051     4,456    608    364    1,664    2,402     5,038 
Total $ 862  $ 519  $ 882  $ (812)  $ 1,451  $ 755  $ 458  $ 1,077  $ (667)  $ 1,623 

(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.
(f)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, 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 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 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)(g)RepresentsIncludes economic activity related to fuel as described in "Commodity Price Risk (Non-trading) - Economic Activity" within Note 14 to the netFinancial Statements.  The three and six months ended June 30, 2012 include a pre-tax loss 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.$12 million related to coal contract modification payments.

Changes in Non-GAAP Financial Measures

The following table shows PPL's three non-GAAP financial measures 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
                    
Kentucky Gross Margins $ 372  $ 360  $ 12  $ 755  $ 771  $ (16)
                    
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)
                    
Unregulated Gross Energy Margins by Region                  
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)
111

   Three Months Six Months
   2013  2012  Change 2013  2012  Change
                    
Kentucky Gross Margins $ 404  $ 372  $ 32  $ 862  $ 755  $ 107 
PA Gross Delivery Margins by Component                  
 Distribution $ 183  $ 170  $ 13  $ 407  $ 359  $ 48 
 Transmission   59    51    8    112    99    13 
Total $ 242  $ 221  $ 21  $ 519  $ 458  $ 61 
                    
Unregulated Gross Energy Margins by Region                  
Non-trading                  
 Eastern U.S. $ 349  $ 407  $ (58) $ 779  $ 896  $ (117)
 Western U.S.   56    76    (20)   114    163    (49)
Net energy trading      10    (10)   (11)   18    (29)
Total $ 405  $ 493  $ (88) $ 882  $ 1,077  $ (195)

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.  Total2013 compared with 2012, primarily due to higher base rates of $25 million, environmental cost recoveries added to base rates of $14 million and increased environmental investments of $3 million, partially offset by lower volumes of $9 million.  The change in volumes was partially attributable to weather, as cooling degree days increased 9%decreased 14% compared to the same period in 2011.2012.

Margins decreasedincreased for the six-month periodsix months ended June 30, 2012,2013 compared with 2011,2012, primarily due to $13higher base rates of $56 million, environmental cost recoveries added to base rates of lower retail margins,$32 million, increased environmental investments of $10 million and higher volumes of $10 million.  The change in volumes was attributable to weather, 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.  Total heating degree days decreased 24%increased 40% compared to the same period in 2011.2012, offsetting the lower cooling degree days for the three-month period.

The increase in base rates was the result of new KPSC rates effective January 1, 2013.  The environmental cost recoveries added to base rates were due to the elimination of the 2005 and 2006 ECR plans as a result of the 2012 Kentucky rate cases.  This elimination results in depreciation and other operation and maintenance expenses associated with the 2005 and 2006 ECR plans being excluded from Margins in 2013, while the recovery of such costs remain in Margins through base rates.

Pennsylvania Gross Delivery Margins

Distribution

Margins decreasedincreased for the three and six month periodsmonths ended June 30, 2012,2013 compared with 2011,2012, primarily due to an $11 million favorable effect of price as a result of higher base rates, effective January 1, 2013.

Margins increased for the six months ended June 30, 2013 compared with 2012, primarily due to the effectsa $13 million adverse effect of weather.mild weather in 2012 and a $32 million favorable effect of price, largely comprised of higher base rates, effective January 1, 2013, and higher volumes of $4 million.

Transmission

Margins increased for the three and six month periodsmonths ended June 30, 2012,2013 compared with 2011,2012, primarily due to increased investment in plant and the recovery of additional costs through the FERC formula-based rates.

 
116112

 

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)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.
Eastern U.S.      
       
The increase (decrease) in non-trading margins for the periods ended June 30, 2013 compared with 2012 were due to:
       
  Three Months Six Months
       
Baseload energy prices $ (121) $ (246)
Nuclear fuel prices   (4)   (10)
Coal prices   1    (9)
Intermediate and peaking Spark Spreads   (7)   7 
Nuclear generation volume   9    9 
Full-requirement sales contracts   5    10 
Gas optimization and storage   10    11 
Ironwood Acquisition which eliminated tolling expense   2    17 
Net economic availability of coal and hydroelectric plants   7    39 
Capacity prices   36    47 
Other   4    8 
Total $ (58) $ (117)

Western U.S.

Non-trading margins for the three and six months ended June 30, 2012,2013 compared with the same periods in 20112012 were lower primarily due to $14$20 million related to the bankruptcyand $59 million of SMGT.lower wholesale prices.  The six-month period was partially offset by $7 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 June 30, 2013 compared with the same period in 2012 decreased as a result of lower margins of $5 million on power positions and $3 million on FTRs.

Net energy trading margins for the six months ended June 30, 2013 compared with the same period in 2012 decreased as a result of lower margins of $15 million on gas positions and $7 million on power positions.

Utility Revenues  
          
The increase (decrease) in utility revenues for the periods ended June 30, 2013 compared with 2012 was due to:  
          
     Three Months Six Months
Domestic:      
 PPL Electric (a) $ 10  $ 65 
 LKE (b)   24    119 
 Total Domestic   34    184 
          
U.K.:      
 Price (c)   50    113 
 Volume (d)   23    28 
 DPCR4 accrual adjustments (e)   (24)   (24)
 Foreign currency exchange rates   (26)   (16)
 Other (f)   (7)   1 
 Total U.K.   16    102 
Total $ 50  $ 286 

(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 due to price increases effective April 1, 20122013 and 2011.April 1, 2012.
(d)The decreaseincrease for the three and six-month periodperiods is primarily due to the downturn in the economy andfavorable effect of weather.
(e)The decrease for the three and six-month periods is primarily due to a 2012 charge$24 million reduction in revenue based on information provided by Ofgem regarding the calculation of line loss incentive/penalty for all network operators related to incomeDPCR4.  See Note 6 to the Financial Statements for the over-recovery of revenues from customers, compared to a credit to income in 2011.additional information.
(f)Periods are not comparable.  The decrease for the three month period is primarily related to a $6 million reduction in third-party engineering revenue, which is partially offset by a reduction in costs in "Other operation and maintenance" on the Statements of Income.

Other Operation and Maintenance
The increase (decrease) in other operation and maintenance for the periods ended June 30, 2012 include three and six months of WPD Midlands' results,2013 compared with two months for the same periods in 2011.2012 was due to:

 
117113

 

Other Operation and Maintenance    
        Three Months Six Months
The increase (decrease) in other operation and maintenance expense for the periods ended June 30, 2012 compared with 2011 were due to:
Domestic:Domestic:    
      Uncollectible accounts (a)$ (4) $ (20)
      LKE coal plant outages (b)  (4)  (17)
  Three Months Six Months
Domestic:    
Uncollectible accounts (a)$ 4  $18 Brunner Island Unit 3 outage in 2012  (4)  (19)
LKE steam maintenance plant costs (b)   11 PPL Susquehanna projects  (6)  (9)
LKE storm costs (c)   PPL Susquehanna refueling outage  (5)  (8)
PPL Susquehanna nuclear plant costs (d)  11  17 Act 129 (c)  (7)  (7)
Vegetation management  6  Conemaugh Unit 2 outage in 2013  3  
Stock based compensation   Other generation plant costs  (7)  (1)
Other   Other  (7)  1 
U.K.:U.K.:    U.K.:    
      Third-party engineering (d)  (3)  2 
PPL WW (e)  7  17 Network maintenance (e)  6   13 
WPD Midlands (f)  (12)  45 Insurance claim provision release  6   6 
Severance compensation (f)  (4)  (8)
Pension  (2)  (4)
Foreign currency exchange rates  (5)  (3)
Other  2    (2)
TotalTotal$ 16  $ 139 Total$ (41) $ (71)

(a)In October 2011,The decrease for the six-month period 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.
(b)Increase primarily due to steam maintenance costs, resulting from an increased scope of scheduled outages.
(c)A credit to establish a regulatory asset was recorded in the first quarter of 2011 related to 2009 storm costs.
(d)Primarily due to refueling outage costs, payroll costs and timing of projects.
(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 was primarily due to the impact of acquisition-related adjustments.

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)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.

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 primarilyis due to a decrease in taxable electric revenue.  This tax is included in "Unregulated Gross Energy Margins"the timing and "Pennsylvania Gross Delivery Margins".scope of scheduled outages.
(b)(c)Periods are not comparable.  The periods ended June 30, 2012 includedecrease for the three and six monthsmonth periods is due to a reduction in Act 129 energy efficiency and conservation plan costs for Phase 1 programs.   Phase 1 ended May 31, 2013.
(d)These costs are offset by revenues reflected in "Utility" on the Statement of WPD Midlands' results, compared with two monthsIncome.
(e)The increase for the samethree and six month periods in 2011.is primarily due to higher vegetation management costs.
(f)The decrease for the three and six month periods is primarily due to costs incurred in 2012 related to the WPD Midlands reorganization.

Depreciation  
        
The increase (decrease) in depreciation for the periods ended June 30, 2013 compared with 2012 was due to:
        
   Three Months Six Months
        
Additions to PP&E $ 23  $ 44 
LKE lower depreciation rates effective January 1, 2013   (6)   (11)
Ironwood Acquisition      6 
Other   (2)   (4)
Total $ 15  $ 35 

Other Income (Expense) - net

The $64$17 million increasedecrease in other income (expense) - net for the three months ended June 30, 20122013 compared with 20112012 was primarily due to:

·$47 million of other WPD Midlands acquisition-related adjustments in 2011;
·a $23 million increase in gains from economic foreign currency exchange contracts; and

118


·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.
to a decrease of $21 million from realized and unrealized gains on foreign currency contracts.

The $52$122 million increase in other income (expense) - net for the six months ended June 30, 20122013 compared with 20112012 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.
to an increase of $116 million from realized and unrealized gains on foreign currency contracts.

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 
additional information on other income (expense) - net.
 
Interest Expense   
        
The increase (decrease) in interest expense for the periods ended June 30, 2013 compared with 2012 was due to:
     
   Three Months Six Months
        
Long-term debt interest expense (a) $ 8  $ 22 
Loss on extinguishment of debt (b)  10   10 
Ironwood Acquisition financing      4 
Capitalized interest   3    4 
Other   1    3 
Total $ 22  $ 43 
(a)Interest relatedThe increase for the three-month period was primarily due to PPL Capital Funding's debt issuances in March 2013, June 2012 and October 2012.  See Note 7 to the issuanceFinancial Statements in April 2011 to support the WPD Midlands acquisition.this Form 10-Q and in PPL's 2012 Form 10-K for additional information.

The increase for the six-month period was primarily due to PPL Capital Funding's debt issuances as discussed above as well as higher accretion expense on WPD index linked notes and interest on WPD (East Midlands') April 2012 issuance of £100 million, 5.25% Senior Notes due 2023.

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(b)Short-term weighted average ratesIn May 2013, PPL Capital Funding remarketed and exchanged junior subordinated notes that were 0.69% and 0.73%originally issued in June 2010 as a component of PPL's 2010 Equity Units.  See Note 7 to the Financial Statements for additional information.
Income Taxes  
        
The increase (decrease) in income taxes for the periods ended June 30, 2013 compared with 2012 was due to:
    
   Three Months Six Months
        
Higher (lower) pre-tax income $ 52  $ (67)
Federal and state tax reserve adjustments (a)   (35)   (35)
U.S. income tax on foreign earnings net of foreign tax credit (b)   (6)   (6)
Foreign tax reserve adjustments (c)   8    5 
Foreign tax return adjustments   (4)   (4)
Net operating loss carryforward adjustments (d)   3    9 
State deferred tax rate change (e)      11 
Other   3    
Total $ 21  $ (87)

(a)In May 2013, the U.S. Supreme Court reversed the December 2011 ruling of the U.S. Court of Appeals for the Third Circuit on the creditability of U.K. Windfall Profits Tax for tax purposes.  As a result of this decision, PPL recorded a tax benefit of $44 million during the 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, compared 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.

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 

(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.  Due2013.  See Note 5 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.Financial Statements for additional information.

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, 2011,2013, PPL recorded a $7 million and $14 million federalincrease to income tax expense primarily attributable to a revision in the expected taxable amount of cash repatriation in 2013 and recorded a tax benefit related toof $19 million associated with a ruling obtained from the IRS impacting the recalculation of 2010 U.K. pension contributions.earnings and profits that will be reflected on an amended 2010 U.S. tax return.

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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 the tax deductibility of interest expense.
(d)During the three and six months ended June 30, 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)During the six months ended June 30, 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

"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).

Financial Condition
        
Liquidity and Capital Resources
        
PPL had the following at:
        
 June 30, 2012 December 31, 2011 June 30, 2013 December 31, 2012
        
Cash and cash equivalents $ 981  $ 1,202  $ 711  $ 901 
Short-term investments      16 
 $ 981  $ 1,218 
Short-term debt $ 889  $ 578  $ 1,206  $ 652 

At June 30, 2012, $3572013, $178 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. income taxes, net of allowable foreign income tax credits.  Historically, dividends paid by foreign subsidiaries have been distributions of the current year's earnings.  See Note 5 to the Financial Statements in PPL's 20112012 Form 10-K for additional information on undistributed earnings of WPD.

The $221$190 million decrease in PPL's cash and cash equivalents position was primarily the net result of:

·capital expenditures of $1.3$1.8 billion;
·the payment of $413$426 million of common stock dividends;
·the redemption of preference stock of a subsidiary of $250 million;
·the Ironwood Acquisition for $84 million, net of cash acquired;
·net cash provided by operating activities of $947 million;
·net increase in short-term debt of $563 million; and
·proceeds of $575$450 million from the issuance of long-term debt; and
·a net increase in short-term debt of $311 million.debt.

PPL's cash provided by operating activities increased by $133 millionhad no net change for the six months ended June 30, 20122013 compared with 2011.2012. The increaseresult was the net effect of:

·ana $219 million increase of $211 million in net income, (primarily from the U.K. Regulated segment);when adjusted for non-cash components; and
·a $25 million decrease of $57 million in defined benefit plan funding; partiallyfunding, offset by
·ana $245 million increase in cash used by components of working capital (primarily due to changes in accounts receivable of $117 million.$210 million and in counterparty collateral of $118 million, partially offset by a $95 million change in fuel, materials and supplies).

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Capital expenditures increased by $488 million for the six months ended June 30, 2013 compared with 2012, primarily due to PPL Electric's Susquehanna-Roseland transmission project and projects to enhance system reliability, and LKE's 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, 2012,2013, 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 $ 3,150     $ 785  $ 2,365 
PPL Electric Credit Facilities   400       86    314 
LG&E Syndicated Credit Facility   500       80    420 
KU Credit Facilities   598       370    228 
 Total Domestic Credit Facilities (a) $ 4,648     $ 1,321  $ 3,327 
              
Total WPD Credit Facilities (b) £ 1,055  £ 193     £ 862 

(a)In April 2012, PPL Electric increased the capacity of its syndicated credit facility from $200 million to $300 million.

Committed capacity includes a $150 million credit facility related to an asset-backed commercial paper program through which PPL Electric obtains financing by selling and contributing its eligible accounts receivable and unbilled 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 million from a commercial paper conduit sponsored by a financial institution.  At June 30, 2012, 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)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%8% of the total committed capacity.
(c)The borrowing outstanding at June 30, 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%.
(d)In January 2012, WPD (South West) entered into a new £245 million syndicated credit facility to replace its previous £210 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 bear 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.
(e)(b)At June 30, 2012,2013, 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, 2013 and December 31, 2012, PPL Energy Supply had $520$575 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%0.29% 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, 2012,2013, PPL Electric had $195$85 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheet, at a weighted-average interest rate of approximately 0.49%0.34%.  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 June 30, 2013 and December 31, 2012, LG&E had $80 million and $55 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheets, at weighted-average interest rates of 0.32% and 0.42%.  At June 30, 2013 and December 31, 2012, KU had $172 million and $70 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheets, at weighted-average interest rates of 0.33% and 0.42%.

Long-term Debt and Equity Securities

In April 2012,See "Overview - Financial and Operational Developments" above for information regarding equity forward agreements and the 2010 Equity Units.  PPL made a registered underwritten public offering of 9.9 millionhas no plans to issue new shares of common stock for the remainder of 2013.

In March 2013, PPL Capital Funding issued $450 million 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 was loaned to purchase an additional 591 thousand sharesor invested in affiliates of PPL common stock solelyCapital Funding and used to cover over-allotments.fund their capital expenditures and other general corporate purposes.
 
121116

 

In connection with the registered public offering,July 2013, PPL entered into forward sale agreements with two counterparties covering the 9.9Electric issued $350 million shares of PPL's common stock.  Settlement4.75% First Mortgage Bonds due 2043.  PPL Electric received proceeds of these initial forward sale agreements will occur no later than April 2013.  As$345 million, net of 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 issuediscount 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 priceunderwriting fees, which 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 settlementused 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 intendscapital expenditures, to use any net proceeds that it receives upon settlement to repay short-term debtfund pension obligations and for other general corporate purposes.

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

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'sto the Financial Statements for further discussion of Long-term Debt and LKE's 2011 Form 10-K for additional information.Equity Securities.

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 2012,2013, PPL declared its quarterly common stock dividend, payable July 2, 2012,1, 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

Fitch, Moody's and 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 Fitch, Moody's and 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.

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:subsidiaries during 2013:

In January 2012,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, Fitch, Moody's and S&P assigned ratings of BB+, Ba1 and BB+ to PPL Capital Funding's $450 million 5.90% Junior Subordinated Notes due 2073.  Fitch also assigned a stable outlook to these notes.

In April 2013, Fitch affirmed itsthe BBB- rating and revised itsstable outlook foron PPL Montana's Pass Through Certificatespass-through trust certificates due 2020.

In February 2012,May 2013, Fitch, Moody's and S&P assigned ratings of BBB, Baa3 and BBB- to the two newly established commercial paper programs for LG&EPPL Capital Funding's $250 million 1.90% Senior Notes due 2018, $600 million 3.40% Senior Notes due 2023 and KU.$300 million 4.70% Senior Notes due 2043.  Fitch also assigned a stable outlook to these notes.

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,July 2013, Fitch, Moody's and S&P each assigned short-term ratings of A-, A3 and A- to the two newly established commercial paper programs for LG&EPPL Electric's $350 million 4.75% First Mortgage Bonds due 2043.  Fitch also assigned a stable outlook to these notes and KU.S&P assigned a recovery rating of 1+.

In March and May 2012, Moody's,July 2013, S&P and Fitch affirmedconfirmed the long-termAA+ ratings for LG&E's 2003KU's 2000 Series A Solid Waste Disposal Facility Revenue Bonds and 2007KU's 2004 Series A, 2006 Series B pollution control bonds.

Followingand 2008 Series A Environmental Facilities Revenue Bonds.  S&P also confirmed the announcement of the then-pending acquisition of AES Ironwood, L.L.C. in February 2012, theA-1+ short term 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.
on these Bonds.

In May 2012, Fitch downgradedJuly 2013, Moody's withdrew its rating and revisedoutlook for PPL Ironwood.

In July 2013, S&P lowered its rating, from BBB- to BB+, and retained the negative outlook for PPL Montana's Pass Through Certificatespass-through trust certificates due 2020.

In June 2012, Fitch assigned a rating and outlook to PPL Capital Funding's Senior Notes.

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

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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.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.  See Notes 13 and 14 to the Financial Statements for additional information.

 Gains (Losses) Gains (Losses)
 Three Months Six Months Three Months Six Months
 2012  2011  2012  2011  2013  2012  2013  2012 
                
Fair value of contracts outstanding at the beginning of the period $ 1,215  $ 997  $ 1,082  $ 947  $ 229  $ 1,215  $ 473  $ 1,082 
Contracts realized or otherwise settled during the period  (261)  (85)  (540)  (128)  (100)  (261)  (237)  (540)
Fair value of new contracts entered into during the period (a)  13   31   12   15   37   13   46   12 
Other changes in fair value   (6)   (49)   407    60    119    (6)   3    407 
Fair value of contracts outstanding at the end of the period $ 961  $ 894  $ 961  $ 894  $ 285  $ 961  $ 285  $ 961 

(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, 2012,2013, 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) $ 226  $ 32  $ (10) $ 5  $ 253 
Prices based on significant unobservable inputs (Level 3)Prices based on significant unobservable inputs (Level 3)   10    18    4       32 
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 $ 236  $ 50  $ (6) $ 5  $ 285 


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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 2017.2018.  The following table sets forth changes in the net fair value of PPL's trading commodity derivative contracts for the periods ended June 30.  See Notes 13 and 14 to the Financial Statements for additional information.

 Gains (Losses) Gains (Losses)
 Three Months Six Months Three Months Six Months
 2012  2011  2012  2011  2013  2012  2013  2012 
                
Fair value of contracts outstanding at the beginning of the period $ 2  $ 7  $ (4) $ 4  $ 15  $ 2  $ 29  $ (4)
Contracts realized or otherwise settled during the period  (1)  1   (1)  3     (1)  (2)  (1)
Fair value of new contracts entered into during the period (a)  (1)  5   5   8   (4)  (1)  (16)  5 
Other changes in fair value   17    2    17       7    17    7    17 
Fair value of contracts outstanding at the end of the period $ 17  $ 15  $ 17  $ 15  $ 18  $ 17  $ 18  $ 17 

(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, 2012,2013, 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 based on significant observable inputs (Level 2) $ 4  $ 6       $ 10 
Prices based on significant unobservable inputs (Level 3)   6    2          8 
Fair value of contracts outstanding at the end of the period $ 8  $ 8  $ 1     $ 17  $ 10  $ 8        $ 18 

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 periodsix months ended June 30, 2013 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 
      Non-Trading
   Trading VaR VaR
95% Confidence Level, Five-Day Holding Period      
 Period End $ 2  $
 Average for the Period   4   
 High   6   10 
 Low   2   

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, 2012.2013.

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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, 2012,2013, 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, 20122013 would increase the fair value of its debt portfolio by $601$631 million.

At June 30, 2012,2013, 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) $ 1,930  $ 129  $ (74)
 Cross-currency swaps (d)   1,262    61    (171)
Economic activity         
 Interest rate swaps (e)   179    (44)   (4)

(a)Includes accrued interest, if applicable.
(b)Effects of adverse movements decrease assets or increase liabilities, as applicable, which could result in an asset becoming a liability.  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 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, 20122013 mature through 2023.2044.
(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, 20122013 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, 20122013 mature through 2033.

Foreign Currency RiskUnregulated Gross Energy Margins

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.
Eastern U.S.      
       
The increase (decrease) in non-trading margins for the periods ended June 30, 2013 compared with 2012 were due to:
       
  Three Months Six Months
       
Baseload energy prices $ (121) $ (246)
Nuclear fuel prices   (4)   (10)
Coal prices   1    (9)
Intermediate and peaking Spark Spreads   (7)   7 
Nuclear generation volume   9    9 
Full-requirement sales contracts   5    10 
Gas optimization and storage   10    11 
Ironwood Acquisition which eliminated tolling expense   2    17 
Net economic availability of coal and hydroelectric plants   7    39 
Capacity prices   36    47 
Other   4    8 
Total $ (58) $ (117)

PPL has adoptedWestern U.S.

Non-trading margins for the three and six months ended June 30, 2013 compared with the same periods in 2012 were lower due to $20 million and $59 million of lower wholesale prices.  The six-month period was partially offset by $7 million of higher wholesale volumes.

Net Energy Trading Margins

Net energy trading margins for the three months ended June 30, 2013 compared with the same period in 2012 decreased as a foreign currency risk management program designed to hedge certain foreign currency exposures, including firm commitments, recognized assets or liabilities, anticipated transactionsresult of lower margins of $5 million on power positions and net investments.  In addition, PPL enters into financial instruments to protect against foreign currency translation risk$3 million on FTRs.

Net energy trading margins for the six months ended June 30, 2013 compared with the same period in 2012 decreased as a result of expected earnings.lower margins of $15 million on gas positions and $7 million on power positions.

Utility Revenues  
          
The increase (decrease) in utility revenues for the periods ended June 30, 2013 compared with 2012 was due to:  
          
     Three Months Six Months
Domestic:      
 PPL Electric (a) $ 10  $ 65 
 LKE (b)   24    119 
 Total Domestic   34    184 
          
U.K.:      
 Price (c)   50    113 
 Volume (d)   23    28 
 DPCR4 accrual adjustments (e)   (24)   (24)
 Foreign currency exchange rates   (26)   (16)
 Other (f)   (7)   1 
 Total U.K.   16    102 
Total $ 50  $ 286 

(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 due to price increases effective April 1, 2013 and April 1, 2012.
(d)The increase for the three and six-month periods is primarily due to the favorable effect of weather.
(e)The decrease for the three and six-month periods is due to a $24 million reduction in revenue based on information provided by Ofgem regarding the calculation of line loss incentive/penalty for all network operators related to DPCR4.  See Note 6 to the Financial Statements for additional information.
(f)The decrease for the three month period is primarily related to a $6 million reduction in third-party engineering revenue, which is partially offset by a reduction in costs in "Other operation and maintenance" on the Statements of Income.

Other Operation and Maintenance
The increase (decrease) in other operation and maintenance for the periods ended June 30, 2013 compared with 2012 was due to:

 
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   Three Months Six Months
Domestic:     
 Uncollectible accounts (a)$ (4) $ (20)
 LKE coal plant outages (b)  (4)   (17)
 Brunner Island Unit 3 outage in 2012  (4)   (19)
 PPL Susquehanna projects  (6)   (9)
 PPL Susquehanna refueling outage  (5)   (8)
 Act 129 (c)  (7)   (7)
 Conemaugh Unit 2 outage in 2013  3   
 Other generation plant costs  (7)   (1)
 Other  (7)   1 
U.K.:     
 Third-party engineering (d)  (3)   2 
 Network maintenance (e)  6    13 
 Insurance claim provision release  6    6 
 Severance compensation (f)  (4)   (8)
 Pension  (2)   (4)
 Foreign currency exchange rates  (5)   (3)
 Other  2    (2)
Total$ (41) $ (71)

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

Depreciation  
        
The increase (decrease) in depreciation for the periods ended June 30, 2013 compared with 2012 was due to:
        
   Three Months Six Months
        
Additions to PP&E $ 23  $ 44 
LKE lower depreciation rates effective January 1, 2013   (6)   (11)
Ironwood Acquisition      6 
Other   (2)   (4)
Total $ 15  $ 35 

Other Income (Expense) - net

The $17 million decrease in other income (expense) - net for the three months ended June 30, 2013 compared with 2012 was primarily due to a decrease of $21 million from realized and unrealized gains on foreign currency contracts.

The $122 million increase in other income (expense) - net for the six months ended June 30, 2013 compared with 2012 was primarily due to an increase of $116 million from realized and unrealized gains on foreign currency contracts.

See Note 12 to the Financial Statements for additional information on other income (expense) - net.
Interest Expense   
        
The increase (decrease) in interest expense for the periods ended June 30, 2013 compared with 2012 was due to:
     
   Three Months Six Months
        
Long-term debt interest expense (a) $ 8  $ 22 
Loss on extinguishment of debt (b)  10   10 
Ironwood Acquisition financing      4 
Capitalized interest   3    4 
Other   1    3 
Total $ 22  $ 43 
(a)The increase for the three-month period was primarily due to PPL Capital Funding's debt issuances in March 2013, June 2012 and October 2012.  See Note 7 to the Financial Statements in this Form 10-Q and in PPL's 2012 Form 10-K for additional information.

The increase for the six-month period was primarily due to PPL Capital Funding's debt issuances as discussed above as well as higher accretion expense on WPD index linked notes and interest on WPD (East Midlands') April 2012 issuance of £100 million, 5.25% Senior Notes due 2023.

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(b)In May 2013, PPL Capital Funding remarketed and exchanged junior subordinated notes that were originally issued in June 2010 as a component of PPL's 2010 Equity Units.  See Note 7 to the Financial Statements for additional information.
Income Taxes  
        
The increase (decrease) in income taxes for the periods ended June 30, 2013 compared with 2012 was due to:
    
   Three Months Six Months
        
Higher (lower) pre-tax income $ 52  $ (67)
Federal and state tax reserve adjustments (a)   (35)   (35)
U.S. income tax on foreign earnings net of foreign tax credit (b)   (6)   (6)
Foreign tax reserve adjustments (c)   8    5 
Foreign tax return adjustments   (4)   (4)
Net operating loss carryforward adjustments (d)   3    9 
State deferred tax rate change (e)      11 
Other   3    
Total $ 21  $ (87)

(a)In May 2013, the U.S. Supreme Court reversed the December 2011 ruling of the U.S. Court of Appeals for the Third Circuit on the creditability of U.K. Windfall Profits Tax for tax purposes.  As a result of this decision, PPL recorded a tax benefit of $44 million during the three and six months ended June 30, 2013.  See Note 5 to the Financial Statements for additional information.
(b)During the three and six months ended June 30, 2013, PPL recorded a $14 million increase to income tax expense primarily attributable to a revision in the expected taxable amount of cash repatriation in 2013 and recorded a tax benefit of $19 million associated with a ruling obtained from the IRS impacting the recalculation of 2010 U.K. earnings and profits that will be reflected on an amended 2010 U.S. tax return.
(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 the tax deductibility of interest expense.
(d)During the three and six months ended June 30, 2012, PPL recorded adjustments to deferred taxes related to net operating loss carryforwards of LKE based on income tax return adjustments.
(e)During the six months ended June 30, 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:
       
  June 30, 2013 December 31, 2012
       
Cash and cash equivalents $ 711  $ 901 
Short-term debt $ 1,206  $ 652 

At June 30, 2013, $178 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. income taxes, net of allowable foreign income tax credits.  Historically, dividends paid by foreign subsidiaries have been distributions of the current year's earnings.  See Note 5 to the Financial Statements in PPL's 2012 Form 10-K for additional information on undistributed earnings of WPD.

The $190 million decrease in PPL's cash and cash equivalents position was primarily the net result of:

·capital expenditures of $1.8 billion;
·the payment of $426 million of common stock dividends;
·net cash provided by operating activities of $947 million;
·net increase in short-term debt of $563 million; and
·proceeds of $450 million from the issuance of long-term debt.

PPL's cash provided by operating activities had no net change for the six months ended June 30, 2013 compared with 2012. The result was the net effect of:

·a $219 million increase in net income, when adjusted for non-cash components; and
·a $25 million decrease in defined benefit plan funding, offset by
·a $245 million increase in cash used by components of working capital (primarily due to changes in accounts receivable of $210 million and in counterparty collateral of $118 million, partially offset by a $95 million change in fuel, materials and supplies).

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Capital expenditures increased by $488 million for the six months ended June 30, 2013 compared with 2012, primarily due to PPL Electric's Susquehanna-Roseland transmission project and projects to enhance system reliability, and LKE's 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, 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 $ 3,150     $ 785  $ 2,365 
PPL Electric Credit Facilities   400       86    314 
LG&E Syndicated Credit Facility   500       80    420 
KU Credit Facilities   598       370    228 
 Total Domestic Credit Facilities (a) $ 4,648     $ 1,321  $ 3,327 
              
Total WPD Credit Facilities (b) £ 1,055  £ 193     £ 862 

(a)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 8% of the total committed capacity.
(b)At June 30, 2013, the USD equivalent of unused capacity under WPD's committed credit facilities was $1.3 billion.  The commitments under WPD's credit facilities are provided by a diverse bank group with no one bank providing more than 13% of the total committed capacity.

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 June 30, 2013 and December 31, 2012, PPL Energy Supply had $575 million and $356 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheets, at weighted-average interest rates of 0.29% 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 June 30, 2013, PPL Electric had $85 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheet, at a weighted-average interest rate of 0.34%.  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 June 30, 2013 and December 31, 2012, LG&E had $80 million and $55 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheets, at weighted-average interest rates of 0.32% and 0.42%.  At June 30, 2013 and December 31, 2012, KU had $172 million and $70 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheets, at weighted-average interest rates of 0.33% and 0.42%.

Long-term Debt and Equity Securities

See "Overview - Financial and Operational Developments" above for information regarding equity forward agreements and the 2010 Equity Units.  PPL has no plans to issue new shares of common stock for the remainder of 2013.

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

See Note 7 to the Financial Statements for further discussion of Long-term Debt and Equity Securities.

Common Stock Dividends

In May 2013, PPL declared its quarterly common stock dividend, payable July 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

Fitch, Moody's and S&P 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 Fitch, Moody's and S&P are not a recommendation to buy, sell or hold any securities of PPL or its subsidiaries.  Such ratings may be subject to revisions or withdrawal by the agencies at any time and should be evaluated independently of each other and any other rating that may be assigned to the securities.

A downgrade in PPL's or its subsidiaries' credit ratings could result in higher borrowing costs and reduced access to capital markets.  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, Fitch, Moody's and S&P assigned ratings of BB+, Ba1 and BB+ to PPL Capital Funding's $450 million 5.90% Junior Subordinated Notes due 2073.  Fitch also assigned a stable outlook to these notes.

In April 2013, Fitch affirmed the BBB- rating and stable outlook on PPL Montana's pass-through trust certificates due 2020.

In May 2013, Fitch, Moody's and S&P assigned ratings of BBB, Baa3 and BBB- to PPL Capital Funding's $250 million 1.90% Senior Notes due 2018, $600 million 3.40% Senior Notes due 2023 and $300 million 4.70% Senior Notes due 2043.  Fitch also assigned a stable outlook to these notes.

In July 2013, Fitch, Moody's and S&P assigned ratings of A-, A3 and A- to PPL Electric's $350 million 4.75% First Mortgage Bonds due 2043.  Fitch also assigned a stable outlook to these notes and S&P assigned a recovery rating of 1+.

In July 2013, S&P confirmed the AA+ ratings for KU's 2000 Series A Solid Waste Disposal Facility Revenue Bonds and KU's 2004 Series A, 2006 Series B and 2008 Series A Environmental Facilities Revenue Bonds.  S&P also confirmed the A-1+ short term rating on these Bonds.

In July 2013, Moody's withdrew its rating and outlook for PPL Ironwood.

In July 2013, S&P lowered its rating, from BBB- to BB+, and retained the negative outlook for PPL Montana's pass-through trust certificates due 2020.

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

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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, 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 June 30.  See Notes 13 and 14 to the Financial Statements for additional information.

  Gains (Losses)
  Three Months Six Months
  2013  2012  2013  2012 
             
Fair value of contracts outstanding at the beginning of the period $ 229  $ 1,215  $ 473  $ 1,082 
Contracts realized or otherwise settled during the period   (100)   (261)   (237)   (540)
Fair value of new contracts entered into during the period (a)   37    13    46    12 
Other changes in fair value   119    (6)   3    407 
Fair value of contracts outstanding at the end of the period $ 285  $ 961  $ 285  $ 961 

(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, 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) $ 226  $ 32  $ (10) $ 5  $ 253 
Prices based on significant unobservable inputs (Level 3)   10    18    4       32 
Fair value of contracts outstanding at the end of the period $ 236  $ 50  $ (6) $ 5  $ 285 


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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 2018.  The following table sets forth changes in the net fair value of trading commodity derivative contracts for the periods ended June 30.  See Notes 13 and 14 to the Financial Statements for additional information.

  Gains (Losses)
  Three Months Six Months
  2013  2012  2013  2012 
             
Fair value of contracts outstanding at the beginning of the period $ 15  $ 2  $ 29  $ (4)
Contracts realized or otherwise settled during the period      (1)   (2)   (1)
Fair value of new contracts entered into during the period (a)   (4)   (1)   (16)   5 
Other changes in fair value   7    17    7    17 
Fair value of contracts outstanding at the end of the period $ 18  $ 17  $ 18  $ 17 

(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 June 30, 2013, based on the observability of the information used to determine the fair value.

  Net Asset (Liability)
  Maturity      Maturity  
  Less Than Maturity Maturity in Excess Total Fair
  1 Year 1-3 Years 4-5 Years of 5 Years Value
Source of Fair Value               
Prices based on significant observable inputs (Level 2) $ 4  $ 6        $ 10 
Prices based on significant unobservable inputs (Level 3)   6    2          8 
Fair value of contracts outstanding at the end of the period $ 10  $ 8        $ 18 

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 six months ended June 30, 2013 was as follows.

      Non-Trading
   Trading VaR VaR
95% Confidence Level, Five-Day Holding Period      
 Period End $ 2  $
 Average for the Period   4   
 High   6   10 
 Low   2   

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 June 30, 2013.

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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, 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, 2013 would increase the fair value of its debt portfolio by $631 million.

At June 30, 2013, PPL had the following foreign currencyinterest rate hedges outstanding:

       Effect of a
       10%
       Adverse
       Movement
       in Foreign
     Fair Value, Currency
   Exposure Net - Asset Exchange
   Hedged (Liability) Rates (a)
           
Net investment hedges (b) £ 96  $ 3  $ (15)
Economic hedges (c)   1,022    12    (153)
       Effect of a
     Fair Value, 10% Adverse
    Exposure Net - Asset Movement
   Hedged (Liability) (a) in Rates (b)
Cash flow hedges         
 Interest rate swaps (c) $ 1,930  $ 129  $ (74)
 Cross-currency swaps (d)   1,262    61    (171)
Economic activity         
 Interest rate swaps (e)   179    (44)   (4)

(a)Includes accrued interest, if applicable.
(b)Effects of adverse movements decrease assets or increase liabilities, as applicable, which could result in an asset becoming a liability.  Sensitivities represent a 10% adverse movement in interest rates, except for cross-currency swaps which also includes foreign currency exchange rates.
(b)(c)To protectPPL 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 a portionthese instruments, any changes in the fair value of its net investmentsuch cash flow hedges are recorded in WPD, PPL executes forward contracts to sell GBP.equity or as regulatory assets or liabilities, if recoverable through rates.  The changes in fair value of these instruments are then reclassified into earnings in the same period during which the item being hedged affects earnings.  The positions outstanding at June 30, 20122013 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.2044.
(c)(d)To economicallyPPL utilizes cross-currency swaps to hedge the translationinterest payments and principal of expected income denominatedWPD's U.S. dollar-denominated senior notes.  While PPL is exposed to changes in GBP to U.S. dollars, PPL entersthe fair value of these instruments, any change in the fair value of these instruments is recorded in equity and reclassified into a combination of average rate forwards and average rate options to sell GBP.earnings in the same period during which the item being hedged affects earnings.  The positions outstanding at June 30, 20122013 mature through 2014.

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, 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 NDT policy statement.  At June 30, 2012, a hypothetical 10% increase in interest rates and a 10% decrease in equity prices would have resulted in an estimated $47 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 2011 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 these exchange rates resulted in a foreign currency translation loss of $104 million for the six months ended June 30, 2012, which primarily reflected a $196 million reduction to PP&E offset by a reduction of $92 million to net liabilities.  Changes in these exchange rates resulted in a foreign currency translation gain of $162 million for the six months ended June 30, 2011, which primarily reflected a $336 million increase to PP&E offset by an increase of $174 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.

Acquisitions, Development and Divestitures

See Note 8 to the Financial Statements for information on the April 2012 Ironwood Acquisition 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 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, among other areas; and the cost of compliance or alleged non-compliance cannot be predicted with certainty but could be material.  In addition, costs may increase significantly if the requirements or scope of environmental laws or regulations, or similar rules, are expanded or changed by the relevant regulatory agencies.  Costs may take the form of increased capital or operating and maintenance expenses; monetary fines, penalties or other restrictions.  Many of these environmental law considerations are also applicable to the operations of key suppliers, or customers, such as coal producers and industrial power users, and may impact the cost of their products or their demand for PPL's services.  See Note 10 to the Financial Statements in this Form 10-Q and "Item 1. Business - Environmental Matters" in PPL's 2011 Form 10-K for a discussion of environmental matters.

New Accounting Guidance

See Notes 2 and 18 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, loss accruals, AROs, income taxes, regulatory assets and liabilities and business combinations - purchase price allocation.  See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in PPL's 2011 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 2011 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 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 factors expected to impact future earnings.  This section ends with explanations of significant changes in principal items on PPL Energy Supply's Statements of Income, comparing the three and six months ended June 30, 2012 with the same periods in 2011.

·  "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 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.  PPL Energy Supply endeavors to do this by matching energy supply with load, or customer demand, under contracts of varying durations with creditworthy counterparties to capture profits while effectively managing exposure to energy and fuel price volatility, counterparty credit risk and operational risk.

To manage financing costs and access to credit markets, a key objective of PPL Energy Supply's business is to maintain a strong credit profile.  PPL Energy Supply continually focuses on maintaining an appropriate capital structure and liquidity position.  In addition, PPL Energy Supply has 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 Attributable to PPL Energy Supply for the three and six months ended June 30, 2012 was $19 million and $328 million compared to $89 million and $303 million for the same periods in 2011 representing a 79% decrease and an 8% increase over the same periods in 2011.

See "Results of Operations" for details of special items 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, 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) 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 subject to extensive federal, state and local environmental laws, rules and regulations.  PPL Energy Supply's competitive generation assets are well positioned 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 and market conditions, as well as current and projected environmental regulatory requirements, PPL Energy Supply considered whether certain of its generating assets were impaired, and determined that no 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 impacted 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.

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 Acquisition

In April 2012, an indirect, wholly owned subsidiary of PPL Energy Supply completed the acquisition of the equity interests in the owner and operator of the Ironwood Facility.  The Ironwood Facility began operation in 2001 and, since 2008, PPL EnergyPlus has 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.
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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.

Results of Operations

The following discussion provides a summary of PPL Energy Supply's earnings and a description of factors that are expected to impact future earnings.  This section ends with "Statement of Income Analysis," which includes explanations of significant changes in principal items on PPL Energy Supply's Statements of Income, comparing the three and six months ended June 30, 2012 with the same periods in 2011.

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 

The changes in the components of Net Income Attributable to PPL Energy Supply 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 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 

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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.

·Higher other operation and maintenance expense for the three-month period primarily due to $11 million of higher costs at PPL Susquehanna, including refueling outage costs, payroll-related costs and timing of projects, and $7 million from higher system-related costs and timing of projects, partially offset by $8 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 primarily 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.

·Higher depreciation expense for the three and six-month periods due to the impact of PP&E additions.

·Lower other income (expense) - net for the six-month period primarily due to lower earnings on securities in the NDT funds.

·Lower interest expense for the three and six-month period, reflecting a $5 million and $10 million impact of lower interest rates, as a result of the redemption of 7.00% Senior Unsecured Notes in July 2011.

·Lower income taxes for the six-month period primarily due to lower pre-tax income, which reduced income taxes by $48 million.  The six-month period was also lower due to an $11 million deferred tax benefit from a state tax rate adjustment 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.


The following after-tax amounts, which management considers special items, also impacted the 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:             
Adjusted energy-related economic activity, net, net of tax of $23, $2, ($79), ($10)(a) $ (32) $ (3) $ 118  $ 14 
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)
Other:             
 Montana hydroelectric litigation, net of tax of $0, $0, $0, $1Interest Expense      (1)      (1)
 Litigation settlement - spent nuclear fuel storage, net of tax of $0, ($21), $0, ($21) (b)Fuel      29       29 
 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)   
Total  $ (38) $ 23  $ 108  $ 37 

(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.2028.
(e)As a result of lower electricity and  natural gas prices, coal unit runtimes have decreased.  Contract modification payments were incurredPPL utilizes various risk management instruments to reduce its exposure to the contracted coal quantities scheduledexpected future cash flow variability of its debt instruments.  These risks include exposure to adverse interest rate movements for delivery.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 June 30, 2013 mature through 2033.


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Reconciliation of Economic Activity

The following table reconciles unrealized pre-tax gains (losses) for the periods ended June 30, 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 

(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.

Outlook

Excluding special items, PPL Energy Supply projects lower earnings in 2012 compared with 2011, primarily driven by lower energy margins as a result of lower energy and capacity prices, higher fuel costs, higher operation and maintenance expense, and higher depreciation.  See "Overview" for a discussion on economic and market conditions.

Earnings in 2012 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 2011 Form 10-K for a discussion of the risks, uncertainties and factors that may impact future earnings.

Statement of Income Analysis --

UnregulatedPennsylvania Gross EnergyDelivery Margins

Non-GAAP Financial MeasureDistribution

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, which include operating revenues associated 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, primarily ancillary charges, gross receipts tax, which is recorded in "Taxes, other than income," and operating expenses associated with certain PPL Energy Supply businesses that are classified as discontinued operations.  This performance measure is relevant to PPL Energy Supply due to the volatility in the individual revenue and expense lines on the Statements of Income that comprise "Unregulated Gross Energy Margins."  This volatility stems from a number of factors, including the required netting of certain transactions with ISOs and significant 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 in
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"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 SupplyMargins increased 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.
(b)As reported on the Statements of Income.
(c)Represents energy-related economic activity as described in "Commodity Price Risk (Non-trading) - Economic Activity" within Note 14 to the Financial Statements.  For the three and 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 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 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.
(d)Represents energy-related economic activity, which is subject to fluctuations in value due to market price volatility, as described in "Commodity Price Risk (Non-trading) - Economic Activity" within Note 14 to the Financial Statements.
(e)Includes economic activity related to fuel as described in "Commodity Price Risk (Non-trading) - Economic Activity" within Note 14 to the Financial Statements.  The three and 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, 2013 compared with 2012, primarily due to an $11 million favorable effect of price as well as the change between periods.  The factors that gave rise to the changes are described below the table.a result of higher base rates, effective January 1, 2013.

   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)
Margins increased for the six months ended June 30, 2013 compared with 2012, primarily due to a $13 million adverse effect of mild weather in 2012 and a $32 million favorable effect of price, largely comprised of higher base rates, effective January 1, 2013, and higher volumes of $4 million.

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)
Transmission

(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.

Western U.S.

Non-trading marginsMargins increased for the three and six months ended June 30, 2012,2013 compared with the same periods in 2011 were lower2012, primarily due to $14 million related toincreased investment in plant and the bankruptcyrecovery of SMGT.additional costs through the FERC formula-based rates.

 
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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 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 

(a)Primarily due to refueling outage costs, payroll-related costs and timing of projects.
(b)In October 2011, SMGT filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code.  The increase for the six-month period reflects an $11 million increase to a reserve on unpaid amounts.
(c)In 2011, PPL Energy Supply was charged trademark royalties by an affiliate.  The agreement was terminated December 31, 2011.
(d)Primarily due to systems-related costs and timing of projects.

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 

Other Income (Expense) - net

The $8 million decrease in other income (expense) - net for the six months ended June 30, 2012 compared with 2011 was primarily due to a $6 million decrease in earnings on securities in the NDT funds.

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)

(a)Long-term weighted average rates of 5.88% at June 30, 2012 compared with 6.24% at June 30, 2011.

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)

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(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 Energy Supply recorded state deferred income tax expense during the six months ended June 30, 2011 related to valuation allowances.
(b)During the six months ended June 30, 2012, PPL Energy Supply recorded an adjustment 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 

The $67 million increase in PPL Energy Supply's cash and cash equivalents position was primarily the net result of:

·      contributions from Member of $472 million;
·net cash provided by operating activities of $308 million;
·a net decrease in note receivable from affiliate of $198 million;
·a net increase in short-term debt of $120 million;
·distributions to Member of $657 million;
·capital expenditures of $316 million; and
·the Ironwood Acquisition for $84 million, net of cash acquired.

PPL Energy Supply's cash provided by operating activities increased by $120 million for the six months ended June 30, 2012, compared with 2011.  This was primarily due to a $68 million decrease in defined benefit plan funding and a $104 million increase in cash from components of working capital (primarily due to changes in counterparty collateral, partially offset by changes in accounts receivable, unbilled revenue and accrued taxes).

Credit Facilities

PPL Energy Supply maintains credit facilities to provide liquidity and to backstop commercial paper issuances.  At June 30, 2012, 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 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 

(a)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

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, 2012, PPL Energy Supply had $520 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheet, at a weighted-average interest rate of approximately 0.48%.
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Long-term Debt Securities

In April 2012, an indirect, wholly owned subsidiary of PPL Energy Supply completed the Ironwood Acquisition.  See Note 8 to the Financial Statements for information on the transaction and the debt of PPL Ironwood, LLC assumed through consolidation as part of the acquisition.

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.

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 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.

The rating agencies took the following actions related to PPL Energy Supply and its subsidiaries.

In January 2012, S&P affirmed its rating and revised its outlook for PPL Montana's Pass Through Certificates due 2020.

Following the announcement of the then-pending acquisition of AES Ironwood, L.L.C. in February 2012, the rating agencies took the following actions:

·In March 2012, Moody'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.

Ratings Triggers

PPL Energy Supply has various derivative and non-derivative contracts, including contracts for the sale and purchase of electricity and fuel, commodity transportation and storage, tolling agreements and interest rate 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 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.

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 2011 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'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, 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'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 net fair value of PPL Energy Supply's non-trading commodity derivative contracts for the periods ended June 30.  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 

(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, based on the level of observability of the information used to determine the fair value.

   Net Asset (Liability)
   Maturity       Maturity   
   Less Than Maturity Maturity in Excess Total Fair
   1 Year 1-3 Years 4-5 Years of 5 Years Value
Source of Fair Value               
Prices based on significant other observable inputs $ 703  $ 237  $ (21) $ 8  $ 927 
Prices based on significant unobservable inputs   21    9    4       34 
Fair value of contracts outstanding at the end of the period $ 724  $ 246  $ (17) $ 8  $ 961 

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 could 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'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'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.  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 $ 2  $ 7  $ (4) $ 4 
Contracts realized or otherwise settled during the period   (1)   1    (1)   3 
Fair value of new contracts entered into during the period (a)   (1)   5    5    8 
Other changes in fair value   17    2    17    
Fair value of contracts outstanding at the end of the period $ 17  $ 15  $ 17  $ 15 

(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, based on the level of observability of the information used to determine the fair value.

  Net Asset (Liability)
  Maturity      Maturity  
  Less Than Maturity Maturity in Excess Total Fair
  1 Year 1-3 Years 4-5 Years of 5 Years Value
Source of Fair Value               
Prices based on significant other observable inputs $ 8  $ 8  $ 1     $ 17 
Fair value of contracts outstanding at the end of the period $ 8  $ 8  $ 1     $ 17 

VaR Models

A VaR model is utilized to measure commodity price risk in domestic 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 conservative 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 period 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 

The trading portfolio includes all speculative positions, regardless of the delivery period.  All positions not considered speculative 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.

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 June 30, 2012.

At June 30, 2012, 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 June 30, 2012 would increase the fair value of its debt portfolio by $56 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 June 30, 2012, 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 NDT policy statement.  At June 30, 2012, a hypothetical 10% increase in interest rates and a 10% decrease in equity prices would have resulted in an estimated $47 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 2011 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

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.

Environmental Matters

Extensive federal, state and local environmental laws and regulations are applicable to PPL Energy Supply's air emissions, water discharges and the management of hazardous and solid waste, among other areas; and the costs of compliance or alleged non-compliance cannot be predicted with certainty but could be material.  In addition, cost 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 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.  See Note 10 to the Financial Statements in this Form 10-Q and "Item 1. Business - Environmental Matters" in PPL Energy Supply's 2011 Form 10-K for a discussion of environmental matters.

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New Accounting Guidance

See Notes 2 and 18 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, 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 2011 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 2011 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 Corporation 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 factors expected to impact future earnings.  This section ends with explanations of significant changes in principal items on PPL Electric's Statements of Income, comparing the three and six months ended June 30, 2012 with the same periods in 2011.

·  "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 delivery 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 and principal challenge is to own and operate its electricity delivery business at the most efficient cost while maintaining high quality customer service and reliability.  PPL Electric anticipates that it will have significant capital expenditure requirements in the future.  In order to manage financing costs and access to credit markets, a key objective for PPL Electric's business is to maintain a strong credit profile.  PPL Electric continually focuses on maintaining an appropriate capital structure and 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 "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 to PPL Corporation

Net Income Available to PPL Corporation for the three and six months ended June 30, 2012 was $29 million and $62 million compared to $36 million and $88 million for the same periods in 2011 representing a 19% and 30% decrease from the same periods in 2011.

See "Results of Operations" for a discussion and analysis of PPL Electric's earnings.

Redemption of Preference Stock

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

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 a 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, 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 Rates

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.

Results of Operations

The following discussion provides a summary of PPL Electric's earnings and a description of factors that management expects may impact future earnings.  This section ends with "Statement of Income Analysis," which includes explanations of significant changes in principal items on PPL Electric's Statements of Income, comparing the three and six months ended June 30, 2012 with the same periods in 2011.

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 

The changes in the components of Net Income Available to PPL Corporation between these periods were due to the following factors which reflect reclassifications for items included in gross delivery margins.

  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)

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

·Higher 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.

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.

·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.

·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.

·  Lower distributions on preference stock for the three and six-month periods due to the preference stock redemption in June 2012.

Outlook

PPL Electric projects lower earnings in 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 Electric's 2011 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 June 30, 2013 compared with 2012, primarily due to an $11 million favorable effect of price as a result of higher base rates, effective January 1, 2013.

Margins increased for the six months ended June 30, 2013 compared with 2012, primarily due to a $13 million adverse effect of mild weather in 2012 and a $32 million favorable effect of price, largely comprised of higher base rates, effective January 1, 2013, and higher volumes of $4 million.

Transmission

Margins increased for the three and six months ended June 30, 2013 compared with 2012, primarily due to increased investment in plant and the recovery of additional costs through the FERC formula-based rates.

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Unregulated Gross Energy Margins

Eastern U.S.      
       
The increase (decrease) in non-trading margins for the periods ended June 30, 2013 compared with 2012 were due to:
       
  Three Months Six Months
       
Baseload energy prices $ (121) $ (246)
Nuclear fuel prices   (4)   (10)
Coal prices   1    (9)
Intermediate and peaking Spark Spreads   (7)   7 
Nuclear generation volume   9    9 
Full-requirement sales contracts   5    10 
Gas optimization and storage   10    11 
Ironwood Acquisition which eliminated tolling expense   2    17 
Net economic availability of coal and hydroelectric plants   7    39 
Capacity prices   36    47 
Other   4    8 
Total $ (58) $ (117)

Western U.S.

Non-trading margins for the three and six months ended June 30, 2013 compared with the same periods in 2012 were lower due to $20 million and $59 million of lower wholesale prices.  The six-month period was partially offset by $7 million of higher wholesale volumes.

Net Energy Trading Margins

Net energy trading margins for the three months ended June 30, 2013 compared with the same period in 2012 decreased as a result of lower margins of $5 million on power positions and $3 million on FTRs.

Net energy trading margins for the six months ended June 30, 2013 compared with the same period in 2012 decreased as a result of lower margins of $15 million on gas positions and $7 million on power positions.

Utility Revenues  
          
The increase (decrease) in utility revenues for the periods ended June 30, 2013 compared with 2012 was due to:  
          
     Three Months Six Months
Domestic:      
 PPL Electric (a) $ 10  $ 65 
 LKE (b)   24    119 
 Total Domestic   34    184 
          
U.K.:      
 Price (c)   50    113 
 Volume (d)   23    28 
 DPCR4 accrual adjustments (e)   (24)   (24)
 Foreign currency exchange rates   (26)   (16)
 Other (f)   (7)   1 
 Total U.K.   16    102 
Total $ 50  $ 286 

(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 due to price increases effective April 1, 2013 and April 1, 2012.
(d)The increase for the three and six-month periods is primarily due to the favorable effect of weather.
(e)The decrease for the three and six-month periods is due to a $24 million reduction in revenue based on information provided by Ofgem regarding the calculation of line loss incentive/penalty for all network operators related to DPCR4.  See Note 6 to the Financial Statements for additional information.
(f)The decrease for the three month period is primarily related to a $6 million reduction in third-party engineering revenue, which is partially offset by a reduction in costs in "Other operation and maintenance" on the Statements of Income.

Other Operation and Maintenance
The increase (decrease) in other operation and maintenance for the periods ended June 30, 2013 compared with 2012 was due to:

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   Three Months Six Months
Domestic:     
 Uncollectible accounts (a)$ (4) $ (20)
 LKE coal plant outages (b)  (4)   (17)
 Brunner Island Unit 3 outage in 2012  (4)   (19)
 PPL Susquehanna projects  (6)   (9)
 PPL Susquehanna refueling outage  (5)   (8)
 Act 129 (c)  (7)   (7)
 Conemaugh Unit 2 outage in 2013  3   
 Other generation plant costs  (7)   (1)
 Other  (7)   1 
U.K.:     
 Third-party engineering (d)  (3)   2 
 Network maintenance (e)  6    13 
 Insurance claim provision release  6    6 
 Severance compensation (f)  (4)   (8)
 Pension  (2)   (4)
 Foreign currency exchange rates  (5)   (3)
 Other  2    (2)
Total$ (41) $ (71)

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

Depreciation  
        
The increase (decrease) in depreciation for the periods ended June 30, 2013 compared with 2012 was due to:
        
   Three Months Six Months
        
Additions to PP&E $ 23  $ 44 
LKE lower depreciation rates effective January 1, 2013   (6)   (11)
Ironwood Acquisition      6 
Other   (2)   (4)
Total $ 15  $ 35 

Other Income (Expense) - net

The $17 million decrease in other income (expense) - net for the three months ended June 30, 2013 compared with 2012 was primarily due to a decrease of $21 million from realized and unrealized gains on foreign currency contracts.

The $122 million increase in other income (expense) - net for the six months ended June 30, 2013 compared with 2012 was primarily due to an increase of $116 million from realized and unrealized gains on foreign currency contracts.

See Note 12 to the Financial Statements for additional information on other income (expense) - net.
Interest Expense   
        
The increase (decrease) in interest expense for the periods ended June 30, 2013 compared with 2012 was due to:
     
   Three Months Six Months
        
Long-term debt interest expense (a) $ 8  $ 22 
Loss on extinguishment of debt (b)  10   10 
Ironwood Acquisition financing      4 
Capitalized interest   3    4 
Other   1    3 
Total $ 22  $ 43 
(a)The increase for the three-month period was primarily due to PPL Capital Funding's debt issuances in March 2013, June 2012 and October 2012.  See Note 7 to the Financial Statements in this Form 10-Q and in PPL's 2012 Form 10-K for additional information.

The increase for the six-month period was primarily due to PPL Capital Funding's debt issuances as discussed above as well as higher accretion expense on WPD index linked notes and interest on WPD (East Midlands') April 2012 issuance of £100 million, 5.25% Senior Notes due 2023.

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(b)In May 2013, PPL Capital Funding remarketed and exchanged junior subordinated notes that were originally issued in June 2010 as a component of PPL's 2010 Equity Units.  See Note 7 to the Financial Statements for additional information.
Income Taxes  
        
The increase (decrease) in income taxes for the periods ended June 30, 2013 compared with 2012 was due to:
    
   Three Months Six Months
        
Higher (lower) pre-tax income $ 52  $ (67)
Federal and state tax reserve adjustments (a)   (35)   (35)
U.S. income tax on foreign earnings net of foreign tax credit (b)   (6)   (6)
Foreign tax reserve adjustments (c)   8    5 
Foreign tax return adjustments   (4)   (4)
Net operating loss carryforward adjustments (d)   3    9 
State deferred tax rate change (e)      11 
Other   3    
Total $ 21  $ (87)

(a)In May 2013, the U.S. Supreme Court reversed the December 2011 ruling of the U.S. Court of Appeals for the Third Circuit on the creditability of U.K. Windfall Profits Tax for tax purposes.  As a result of this decision, PPL recorded a tax benefit of $44 million during the three and six months ended June 30, 2013.  See Note 5 to the Financial Statements for additional information.
(b)During the three and six months ended June 30, 2013, PPL recorded a $14 million increase to income tax expense primarily attributable to a revision in the expected taxable amount of cash repatriation in 2013 and recorded a tax benefit of $19 million associated with a ruling obtained from the IRS impacting the recalculation of 2010 U.K. earnings and profits that will be reflected on an amended 2010 U.S. tax return.
(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 the tax deductibility of interest expense.
(d)During the three and six months ended June 30, 2012, PPL recorded adjustments to deferred taxes related to net operating loss carryforwards of LKE based on income tax return adjustments.
(e)During the six months ended June 30, 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:
       
  June 30, 2013 December 31, 2012
       
Cash and cash equivalents $ 711  $ 901 
Short-term debt $ 1,206  $ 652 

At June 30, 2013, $178 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. income taxes, net of allowable foreign income tax credits.  Historically, dividends paid by foreign subsidiaries have been distributions of the current year's earnings.  See Note 5 to the Financial Statements in PPL's 2012 Form 10-K for additional information on undistributed earnings of WPD.

The $190 million decrease in PPL's cash and cash equivalents position was primarily the net result of:

·capital expenditures of $1.8 billion;
·the payment of $426 million of common stock dividends;
·net cash provided by operating activities of $947 million;
·net increase in short-term debt of $563 million; and
·proceeds of $450 million from the issuance of long-term debt.

PPL's cash provided by operating activities had no net change for the six months ended June 30, 2013 compared with 2012. The result was the net effect of:

·a $219 million increase in net income, when adjusted for non-cash components; and
·a $25 million decrease in defined benefit plan funding, offset by
·a $245 million increase in cash used by components of working capital (primarily due to changes in accounts receivable of $210 million and in counterparty collateral of $118 million, partially offset by a $95 million change in fuel, materials and supplies).

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Capital expenditures increased by $488 million for the six months ended June 30, 2013 compared with 2012, primarily due to PPL Electric's Susquehanna-Roseland transmission project and projects to enhance system reliability, and LKE's 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, 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 $ 3,150     $ 785  $ 2,365 
PPL Electric Credit Facilities   400       86    314 
LG&E Syndicated Credit Facility   500       80    420 
KU Credit Facilities   598       370    228 
 Total Domestic Credit Facilities (a) $ 4,648     $ 1,321  $ 3,327 
              
Total WPD Credit Facilities (b) £ 1,055  £ 193     £ 862 

(a)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 8% of the total committed capacity.
(b)At June 30, 2013, the USD equivalent of unused capacity under WPD's committed credit facilities was $1.3 billion.  The commitments under WPD's credit facilities are provided by a diverse bank group with no one bank providing more than 13% of the total committed capacity.

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 June 30, 2013 and December 31, 2012, PPL Energy Supply had $575 million and $356 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheets, at weighted-average interest rates of 0.29% 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 June 30, 2013, PPL Electric had $85 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheet, at a weighted-average interest rate of 0.34%.  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 June 30, 2013 and December 31, 2012, LG&E had $80 million and $55 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheets, at weighted-average interest rates of 0.32% and 0.42%.  At June 30, 2013 and December 31, 2012, KU had $172 million and $70 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheets, at weighted-average interest rates of 0.33% and 0.42%.

Long-term Debt and Equity Securities

See "Overview - Financial and Operational Developments" above for information regarding equity forward agreements and the 2010 Equity Units.  PPL has no plans to issue new shares of common stock for the remainder of 2013.

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

See Note 7 to the Financial Statements for further discussion of Long-term Debt and Equity Securities.

Common Stock Dividends

In May 2013, PPL declared its quarterly common stock dividend, payable July 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

Fitch, Moody's and S&P 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 Fitch, Moody's and S&P are not a recommendation to buy, sell or hold any securities of PPL or its subsidiaries.  Such ratings may be subject to revisions or withdrawal by the agencies at any time and should be evaluated independently of each other and any other rating that may be assigned to the securities.

A downgrade in PPL's or its subsidiaries' credit ratings could result in higher borrowing costs and reduced access to capital markets.  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, Fitch, Moody's and S&P assigned ratings of BB+, Ba1 and BB+ to PPL Capital Funding's $450 million 5.90% Junior Subordinated Notes due 2073.  Fitch also assigned a stable outlook to these notes.

In April 2013, Fitch affirmed the BBB- rating and stable outlook on PPL Montana's pass-through trust certificates due 2020.

In May 2013, Fitch, Moody's and S&P assigned ratings of BBB, Baa3 and BBB- to PPL Capital Funding's $250 million 1.90% Senior Notes due 2018, $600 million 3.40% Senior Notes due 2023 and $300 million 4.70% Senior Notes due 2043.  Fitch also assigned a stable outlook to these notes.

In July 2013, Fitch, Moody's and S&P assigned ratings of A-, A3 and A- to PPL Electric's $350 million 4.75% First Mortgage Bonds due 2043.  Fitch also assigned a stable outlook to these notes and S&P assigned a recovery rating of 1+.

In July 2013, S&P confirmed the AA+ ratings for KU's 2000 Series A Solid Waste Disposal Facility Revenue Bonds and KU's 2004 Series A, 2006 Series B and 2008 Series A Environmental Facilities Revenue Bonds.  S&P also confirmed the A-1+ short term rating on these Bonds.

In July 2013, Moody's withdrew its rating and outlook for PPL Ironwood.

In July 2013, S&P lowered its rating, from BBB- to BB+, and retained the negative outlook for PPL Montana's pass-through trust certificates due 2020.

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

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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, 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 June 30.  See Notes 13 and 14 to the Financial Statements for additional information.

  Gains (Losses)
  Three Months Six Months
  2013  2012  2013  2012 
             
Fair value of contracts outstanding at the beginning of the period $ 229  $ 1,215  $ 473  $ 1,082 
Contracts realized or otherwise settled during the period   (100)   (261)   (237)   (540)
Fair value of new contracts entered into during the period (a)   37    13    46    12 
Other changes in fair value   119    (6)   3    407 
Fair value of contracts outstanding at the end of the period $ 285  $ 961  $ 285  $ 961 

(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, 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) $ 226  $ 32  $ (10) $ 5  $ 253 
Prices based on significant unobservable inputs (Level 3)   10    18    4       32 
Fair value of contracts outstanding at the end of the period $ 236  $ 50  $ (6) $ 5  $ 285 


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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 2018.  The following table sets forth changes in the net fair value of trading commodity derivative contracts for the periods ended June 30.  See Notes 13 and 14 to the Financial Statements for additional information.

  Gains (Losses)
  Three Months Six Months
  2013  2012  2013  2012 
             
Fair value of contracts outstanding at the beginning of the period $ 15  $ 2  $ 29  $ (4)
Contracts realized or otherwise settled during the period      (1)   (2)   (1)
Fair value of new contracts entered into during the period (a)   (4)   (1)   (16)   5 
Other changes in fair value   7    17    7    17 
Fair value of contracts outstanding at the end of the period $ 18  $ 17  $ 18  $ 17 

(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 June 30, 2013, based on the observability of the information used to determine the fair value.

  Net Asset (Liability)
  Maturity      Maturity  
  Less Than Maturity Maturity in Excess Total Fair
  1 Year 1-3 Years 4-5 Years of 5 Years Value
Source of Fair Value               
Prices based on significant observable inputs (Level 2) $ 4  $ 6        $ 10 
Prices based on significant unobservable inputs (Level 3)   6    2          8 
Fair value of contracts outstanding at the end of the period $ 10  $ 8        $ 18 

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 six months ended June 30, 2013 was as follows.

      Non-Trading
   Trading VaR VaR
95% Confidence Level, Five-Day Holding Period      
 Period End $ 2  $
 Average for the Period   4   
 High   6   10 
 Low   2   

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 June 30, 2013.

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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, 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, 2013 would increase the fair value of its debt portfolio by $631 million.

At June 30, 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) $ 1,930  $ 129  $ (74)
 Cross-currency swaps (d)   1,262    61    (171)
Economic activity         
 Interest rate swaps (e)   179    (44)   (4)

(a)Includes accrued interest, if applicable.
(b)Effects of adverse movements decrease assets or increase liabilities, as applicable, which could result in an asset becoming a liability.  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 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 June 30, 2013 mature through 2044.
(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 June 30, 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 June 30, 2013 mature through 2033.

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.

At June 30, 2013, PPL had the following foreign currency hedges outstanding:

       Effect of a
       10%
       Adverse
       Movement
       in Foreign
     Fair Value, Currency
   Exposure Net - Asset Exchange
   Hedged (Liability) Rates (a)
           
Net investment hedges (b) £ 166  $ 11  $ (25)
Economic activity (c)   1,185    71    (171)

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(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, 2013 mature through 2014.  Excludes the amount of intercompany loans classified as net investment hedges.  See Note 14 to the Financial Statements for additional information.
(c)To economically hedge the translation of expected income denominated in GBP to U.S. dollars, PPL enters into a combination of average rate forwards and average rate options to sell GBP.  The forwards and options outstanding at June 30, 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, 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 June 30, 2013, a hypothetical 10% increase in interest rates and a 10% decrease in equity prices would have resulted in an estimated $57 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 $269 million for the six months ended June 30, 2013, which primarily reflected a $714 million reduction to PP&E and goodwill offset by a reduction of $445 million to net liabilities.  Changes in this exchange rate resulted in a foreign currency translation loss of $104 million for the six months ended June 30, 2012, which primarily reflected a $259 million reduction to PP&E and goodwill offset by a reduction of $155 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.

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.
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Physical effects associated with possible climate change could include the impact of changes in weather patterns, such as storm frequency and intensity, and the resultant potential damage 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 hydroelectric 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 waste) 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.  On July 25, 2013, the U.S. House of Representatives passed House Bill H.R. 2218, the Coal Residuals and Reuse Management Act of 2013, which would preempt the EPA from regulating CCRs under RCRA and sets rules governing state programs.  Prospects remain uncertain for similar legislation to pass in the U.S. Senate.

Effluent Limitation Guidelines (ELGs)
In June 2013, the EPA published proposed regulations to revise discharge limitations for steam electric generation wastewater permits.  The proposed limitations are based on the EPA review of available treatment technologies and their capacity for reducing pollutants and include new requirements for fly ash and bottom ash transport water and metal cleaning waste waters, as well as new limits for scrubber wastewater and landfill leachate.  The EPA's proposed ELG regulations also contain some requirements that would affect the inspection and operation of CCR facilities, if finalized.  The proposal contains several alternative approaches, some of which could significantly impact PPL's 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: requiring installation of Best Technology Available (BTA) to reduce mortality of aquatic organisms that are pulled into the plant cooling water system (entrainment); and imposing standards for reduction of mortality of aquatic organisms trapped on water intake screens (impingement).  A final rule is expected to be issued in November 2013.  The proposed regulation would apply to nearly all PPL-owned steam electric plants in Pennsylvania, Kentucky, and Montana, potentially even including those equipped with closed-cycle cooling systems.  PPL's compliance costs could be significant, especially if the final rule requires closed-cycle systems at plants that do not currently have them or conversions of once-through systems to closed-cycle.

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

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

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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.

Regional Haze
Under the EPA's regional haze programs (developed to eliminate man-made visibility degradation by 2064), states are required to make reasonable progress every decade, including the application of Best Available Retrofit Technology (BART) on power plants commissioned between 1962 and 1977.  For the eastern U.S., the EPA had determined that region-wide reductions under the CAIR or CSAPR trading program could be utilized by state programs to satisfy BART requirements.  However, the August 2012 decision by the U.S. Court of Appeals for the District of Columbia Circuit (Circuit Court) to vacate and remand CSAPR exposes power plants located in the eastern U.S., including PPL's plants in Pennsylvania and Kentucky, to reductions in sulfur dioxide and nitrogen oxides as required by BART.

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).

CSAPR and CAIR
In 2011, the EPA finalized its CSAPR regulating emissions of nitrogen oxide and sulfur dioxide through new allowance trading programs which were to be implemented in two phases (2012 and 2014).  Like its predecessor, the CAIR, CSAPR targeted sources in the eastern U.S.  In December 2011, the Circuit Court stayed implementation of CSAPR, leaving CAIR in place.  Subsequently, in August 2012, the Circuit Court vacated and remanded CSAPR back to the EPA for further rulemaking, again leaving CAIR in place in the interim, and on June 24, 2013 the U.S. Supreme Court granted the EPA's petition for review of the Circuit Court's decision.

PPL plants in Pennsylvania and Kentucky will continue to comply with CAIR through optimization of existing controls, balanced with emission allowance purchases.  The Circuit Court's August 2012 decision leaves plants in CSAPR-affected states potentially exposed to more stringent emission reductions due to regional haze implementation (it was previously determined that CSAPR or CAIR participation satisfies regional haze requirements), and/or petitions to the EPA by downwind states under Section 126 of the Clean Air Act requesting the EPA to require plants that allegedly contribute to downwind non-attainment to take action to reduce emissions.

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 additional information on 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 and six months ended June 30, 2013 with the same periods in 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.

The capacity (summer rating) of PPL Energy Supply's competitive electricity generation facilities at June 30, 2013 was:

Ownership or
Lease Interest
Primary Fuelin MW (a)
Coal (b) (c)
 4,146 
Natural Gas/Oil
 3,316 
Nuclear (c)
 2,275 
Hydro
 807 
Other (d)
 70 
Total
 10,614 

(a)The capacity of generation units is based on a number of factors, including the operating experience and physical conditions of the units, and may be revised periodically to reflect changed circumstances.  See "Item 2. Properties" in PPL Energy Supply's 2012 Form 10-K for additional information on ownership percentages.
(b)Includes a leasehold interest held by PPL Montana.  See Note 11 to the Financial Statements in PPL Energy Supply's 2012 Form 10-K for additional information.
(c)Includes units that are jointly owned.  Each owner is entitled to its proportionate share of the unit's total output and funds its proportionate share of fuel and other operating costs.  See Note 14 to the Financial Statements in PPL Energy Supply's 2012 Form 10-K for additional information.
(d)Includes facilities owned, controlled or for which PPL Energy Supply has the rights to the output.

Business Strategy

PPL Energy Supply's strategy is to achieve disciplined optimization of energy supply margins while mitigating near-term 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

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Supply is focused on managing profitability during the current and projected period of low commodity prices.  See "Financial and Operational Developments - Economic and Market Conditions" below.

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 Attributable to PPL Energy Supply Member

Net Income Attributable to PPL Energy Supply Member for the three and six months ended June 30, 2013 was $86 million and $48 million compared to $19 million and $328 million for the same periods in 2012.

See "Results of Operations" below for further discussion and analysis of the consolidated results of operations.

Economic and Market Conditions

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

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

In 2012, PPL Energy Supply announced its intention, beginning in April 2015, to place its Corette plant in long-term reserve status, suspending the plant's operation due to expected market conditions and the costs to comply with MATS.  PPL Energy Supply continues to monitor its Corette plant for potential impairment.  The Corette plant asset group's carrying value at June 30, 2013 was $68 million.  See Note 10 to the Financial Statements for additional information.  PPL Energy Supply believes its remaining competitive generation assets are well positioned to meet the additional environmental requirements based on prior and planned investments and does not currently anticipate the need to temporarily or permanently shut down additional coal-fired plants.
PPL Energy Supply cannot predict the future impact that economic and market conditions and changes in regulatory requirements may have on its financial condition or results of operations.

Susquehanna Turbine Blade Inspection

In the spring of 2013, PPL Susquehanna made modifications to address the causes of turbine blade cracking at the PPL Susquehanna nuclear plant that was first identified in 2011.  The modifications were made during the Unit 2 refueling outage and an additional planned outage for Unit 1.  Additional modifications will be made during the planned outages in 2014 and 2015. Following completion of these modifications, PPL Susquehanna will continue monitoring the turbine blades using enhanced diagnostic equipment.

Colstrip Unit 4 Outage

On July 1, 2013, Colstrip Unit 4 tripped off line as a result of damage that occurred in the unit's generator.  The cost to repair Unit 4 is estimated to be between $30 million to $40 million and is expected to take at least six months to complete.  Property damage insurance for Unit 4 is subject to a $2.5 million self-insured retention.  PPL Montana operates Unit 4 pursuant to an agreement with the owners and, pursuant to a separate agreement with NorthWestern, is entitled to receive 15% of Unit 4's

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electricity output and is responsible for 15% of the capital, operating, maintenance and repair costs associated with Unit 4.  PPL Montana's estimated pre-tax loss of earnings attributable to the Unit 4 outage is between $5 million and $10 million.

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, 2013 with the same periods in 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 Member for the periods ended June 30 was:
              
   Three Months Six Months
   2013  2012  2013  2012 
              
Net Income Attributable to PPL Energy Supply Member $ 86  $ 19  $ 48  $ 328 

The changes in the components of Net Income 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 Six Months
       
Unregulated Gross Energy Margins $ (88) $ (195)
Other operation and maintenance   17    30 
Depreciation   (10)   (24)
Taxes, other than income   3    4 
Other Income (Expense) - net   7    8 
Interest Expense   (3)   (12)
Other   4    2 
Income Taxes   25    58 
Special items, after-tax   112    (151)
Total $ 67  $ (280)

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

·Lower other operation and maintenance for the three-month period primarily due to $11 million of lower 2013 project and refueling outage costs at PPL Susquehanna and $4 million of Brunner Island Unit 3 outage costs in 2012 with no comparable outage in 2013.

Lower other operation and maintenance for the six-month period primarily due to $19 million of Brunner Island Unit 3 outage costs in 2012 with no comparable outage in 2013 and $17 million of lower 2013 project and refueling outage costs at PPL Susquehanna, partially offset by $5 million of Conemaugh Unit 2 outage costs in 2013 with no comparable outage in 2012.

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

·Higher other income (expense) - net for the three and six-month periods partially due to the impact of a worker's compensation adjustment of $4 million.

·Higher interest expense for the six-month period primarily due to $6 million of lower capitalized interest in 2013 and $4 million due to financings associated with PPL Ironwood.

·Lower income taxes for the three and six-month periods due to lower pre-tax income in 2013, which reduced income taxes by $30 million and $77 million, partially offset for the six-month period by an $11 million benefit from a state tax rate change recorded in 2012.

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The following after-tax gains (losses), which management considers special items, also impacted the results during the periods ended June 30.

   Income Statement Three Months Six Months
   Line Item 2013  2012  2013  2012 
                
Adjusted energy-related economic activity, net, net of tax of ($51), $23, $28, ($79)(a) $ 76  $ (32) $ (41) $ 118 
Impairments:             
 Adjustments - nuclear decommissioning trust investments, net of tax of $0, ($1), $0, ($2)Other Income-net            1 
Other:             
 Change in tax accounting method related to repairsIncome Taxes   (3)      (3)   
  Other Operation            
 Counterparty bankruptcy, net of tax of ($1), $0, ($1), $5 (b)and Maintenance   1       1    (6)
 Wholesale supply cost reimbursement, net of tax of $0, $0, $0, $0(c)      1       1 
   Other Operation            
 Ash basin leak remediation adjustment, net of tax of $0, $0, $0, ($1)and Maintenance            1 
 Coal contract modification payments, net of tax of $0, $5, $0, $5 (d)Fuel      (7)      (7)
Total  $ 74  $ (38) $ (43) $ 108 

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

Reconciliation of Economic Activity

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

    Three Months Six Months
    2013  2012  2013  2012 
Operating Revenues            
  Unregulated retail electric and gas $ 20  $ (12) $ 12  $ (2)
  Wholesale energy marketing   590    (458)   (232)   394 
Operating Expenses            
  Fuel   (4)   (16)   (5)   (14)
  Energy Purchases   (479)   442    155    (149)
Energy-related economic activity (a)   127    (44)   (70)   229 
Option premiums      1    1    1 
Adjusted energy-related economic activity   127    (43)   (69)   230 
Less:  Economic activity realized, associated with the monetization of            
 certain full-requirement sales contracts in 2010      12       33 
Adjusted energy-related economic activity, net, pre-tax $ 127  $ (55) $ (69) $ 197 
               
Adjusted energy-related economic activity, net, after-tax $ 76  $ (32) $ (41) $ 118 

(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 depreciation and higher financing costs, partially offset by lower operation and maintenance expense, higher capacity prices and higher nuclear generation output.

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 realized economic activity associated with the monetization of certain full-requirement sales contracts in 2010.  This economic activity was deferred, with the exception of the full-requirement sales contracts that were monetized, and included in "Unregulated Gross Energy Margins" over the delivery period that was hedged or upon realization.  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 tables reconcile "Unregulated Gross Energy Margins" as defined by PPL Energy Supply to "Operating Income" for the periods ended June 30.

     2013 Three Months 2012 Three Months
     Unregulated       Unregulated      
     Gross Energy    Operating Gross Energy     Operating
     Margins Other (a) Income (b) Margins Other (a) Income (b)
                  
Operating Revenues                   
 Wholesale energy marketing                   
    Realized$ 812  $ (1)  $ 811  $ 1,075  $ 8 (c) $ 1,083 
    Unrealized economic activity     590 (d)   590       (458)(d)   (458)
 Wholesale energy marketing                   
  to affiliate  12        12    17        17 
 Unregulated retail electric and gas  237    20 (d)   257    192    (12)(d)   180 
 Net energy trading margins            10        10 
 Energy-related businesses     122     122       112     112 
   Total Operating Revenues  1,061    731     1,792    1,294    (350)    944 
                        
Operating Expenses                   
 Fuel  223    1     224    170    26 (e)   196 
 Energy purchases                   
    Realized  419    (1)    418    617    18 (c)   635 
    Unrealized economic activity     479 (d)   479       (442)(d)   (442)
 Energy purchases from affiliate  1        1           
 Other operation and maintenance  3    267     270    7    287     294 
 Depreciation     79     79       69     69 
 Taxes, other than income  10    6     16    7    10     17 
 Energy-related businesses     118     118       109     109 
   Total Operating Expenses  656    949     1,605    801    77     878 
Total$ 405  $ (218)  $ 187  $ 493  $ (427)  $ 66 

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      2013 Six Months 2012 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 $ 1,789  $ (2)  $ 1,787  $ 2,279  $ 12 (c) $ 2,291 
    Unrealized economic activity      (232)(d)   (232)      394 (d)   394 
 Wholesale energy marketing                    
  to affiliate   26        26    38        38 
 Unregulated retail electric and gas   483    12 (d)   495    406    (2)(d)   404 
 Net energy trading margins   (11)       (11)   18        18 
 Energy-related businesses      235     235       208     208 
   Total Operating Revenues   2,287    13     2,300    2,741    612     3,353 
                         
Operating Expenses                    
 Fuel   522        522    385    22 (e)   407 
 Energy purchases                    
    Realized   855    (3)    852    1,251    43 (c)   1,294 
    Unrealized economic activity      (155)(d)   (155)      149 (d)   149 
 Energy purchases from affiliate   2        2    1        1 
 Other operation and maintenance   8    497     505    11    538     549 
 Depreciation      157     157       133     133 
 Taxes, other than income   18    15     33    16    19     35 
 Energy-related businesses      228     228       201     201 
   Total Operating Expenses   1,405    739     2,144    1,664    1,105     2,769 
Total $ 882  $ (726)  $ 156  $ 1,077  $ (493)  $ 584 

(a)Represents amounts excluded from Margins.
(b)As reported on the Statements of Income.
(c)Represents energy-related economic activity as described in "Commodity Price Risk (Non-trading) - Economic Activity" within Note 14 to the Financial Statements.  For the three and six months ended June 30, 2012, "Wholesale energy marketing - Realized" and "Energy purchases - Realized" include net pre-tax losses of $12 million and $33 million related to the monetization of certain full-requirement sales contracts.
(d)Represents energy-related economic activity, which is subject to fluctuations in value due to market price volatility, as described in "Commodity Price Risk (Non-trading) - Economic Activity" within Note 14 to the Financial Statements.
(e)Includes economic activity related to fuel as described in "Commodity Price Risk (Non-trading) - Economic Activity" within Note 14 to the Financial Statements.  The three and six months ended June 30, 2012 include a pre-tax loss of $12 million related to coal contract modification payments.

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
   2013  2012  Change 2013  2012  Change
                    
Non-trading                  
 Eastern U.S. $ 349  $ 407  $ (58) $ 779  $ 896  $ (117)
 Western U.S.   56    76    (20)   114    163    (49)
Net energy trading      10    (10)   (11)   18    (29)
Total $ 405  $ 493  $ (88) $ 882  $ 1,077  $ (195)

Unregulated Gross Energy Margins

Eastern U.S.
The increase (decrease) in non-trading margins for the periods ended June 30, 2013 compared with 2012 were due to:

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  Three Months Six Months
       
Baseload energy prices $ (121) $ (246)
Nuclear fuel prices   (4)   (10)
Coal prices   1    (9)
Intermediate and peaking Spark Spreads   (7)   7 
Nuclear generation volume   9    9 
Full-requirement sales contracts   5    10 
Gas optimization and storage   10    11 
Ironwood Acquisition which eliminated tolling expense   2    17 
Net economic availability of coal and hydroelectric plants   7    39 
Capacity prices   36    47 
Other   4    8 
Total $ (58) $ (117)

Western U.S.

Non-trading margins for the three and six months ended June 30, 2013 compared with the same periods in 2012 were lower due to $20 million and $59 million of lower wholesale prices.  The six-month period was partially offset by $7 million of higher wholesale volumes.

Net Energy Trading Margins

Net energy trading margins for the three months ended June 30, 2013 compared with the same period in 2012 decreased as a result of lower margins of $5 million on power positions and $3 million on FTRs.

Net energy trading margins for the six months ended June 30, 2013 compared with the same period in 2012 decreased as a result of lower margins of $15 million on gas positions and $7 million on power positions.

Other Operation and Maintenance     
       
The increase (decrease) in other operation and maintenance for the periods ended June 30, 2013 compared with 2012 was due to:
   
  Three Months Six Months
       
Brunner Island Unit 3 outage in 2012$ (4) $ (19)
Uncollectible accounts (a)  (4)   (15)
PPL Susquehanna projects  (6)   (9)
PPL Susquehanna refueling outage  (5)   (8)
Conemaugh Unit 2 outage in 2013  3    5 
Other generation plant costs  (7)   (1)
Other  (1)   3 
Total$ (24) $ (44)

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

Depreciation

Depreciation increased by $10 million and $24 million for the three and six months ended June 30, 2013 compared with 2012, primarily due to $10 million and $20 million related to PP&E additions, and $6 million attributable to the Ironwood Acquisition for the six-month period.

Other Income (Expense) - net

For the three and six months ended June 30, 2013 compared with 2012, other income (expense) - net increased by $6 million and $5 million, primarily due to the impact of a $4 million worker's compensation adjustment.

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

Interest Expense
The increase (decrease) in interest expense for the periods ended June 30, 2013 compared with 2012 was due to:

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  Three Months Six Months
        
Ironwood Acquisition financing    $ 4 
Capitalized interest $ 3    6 
Other      2 
Total $ 3  $ 12 

Income Taxes      
       
The increase (decrease) in income taxes for the periods ended June 30, 2013 compared with 2012 was due to:
       
    
  Three Months Six Months
       
Higher (lower) pre-tax income $ 53  $ (172)
Federal and state tax reserve adjustments (a)   7    6 
State deferred tax rate change (b)      11 
Other   (2)   1 
Total $ 58  $ (154)

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

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

Financial Condition
       
Liquidity and Capital Resources
       
PPL Energy Supply had the following at:
       
  June 30, 2013 December 31, 2012
       
Cash and cash equivalents $ 265  $ 413 
Short-term debt $ 575  $ 356 

The $148 million decrease in PPL Energy Supply's cash and cash equivalents position was primarily the net result of:

·distributions to Member of $408 million;
·capital expenditures of $241 million;
·net cash provided by operating activities of $227 million;
·contributions from Member of $105 million; and
·an increase in short-term debt of $219 million.

PPL Energy Supply's cash provided by operating activities decreased by $81 million for the six months ended June 30, 2013, compared with 2012.  This was partially due to a $37 million increase in defined benefit plans funding and an $11 million increase in cash used by components of working capital (primarily due to changes in counterparty collateral of $118 million, partially offset by changes in fuel, materials and supplies of $79 million).  In addition, a change of $31 million in other operating activities contributed to the decrease, partially due to changes in certain tax-related accounts.

Credit Facilities

PPL Energy Supply maintains credit facilities to provide liquidity and to backstop commercial paper issuances.  At June 30, 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
              
PPL Energy Supply Credit Facilities (a) $ 3,150     $ 785  $ 2,365 

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(a)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 9% 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 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 June 30, 2013 and December 31, 2012, PPL Energy Supply had $575 million and $356 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheets, at weighted-average interest rates of 0.29% and 0.50%.

Rating Agency Actions

Fitch, Moody's and S&P 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 Fitch, Moody's and S&P 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 on PPL Montana's pass-through trust certificates due 2020.

In July 2013, Moody's withdrew its rating and outlook for PPL Ironwood.

In July 2013, S&P lowered its rating, from BBB- to BB+, and retained the negative outlook for PPL Montana's pass-through trust certificates due 2020.

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 June 30, 2013.

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.
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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 periods ended June 30.  See Notes 13 and 14 to the Financial Statements for additional information.

  Gains (Losses)
  Three Months Six Months
  2013  2012  2013  2012 
             
Fair value of contracts outstanding at the beginning of the period $ 229  $ 1,215  $ 473  $ 1,082 
Contracts realized or otherwise settled during the period   (100)   (261)   (237)   (540)
Fair value of new contracts entered into during the period (a)   37    13    46    12 
Other changes in fair value   119    (6)   3    407 
Fair value of contracts outstanding at the end of the period $ 285  $ 961  $ 285  $ 961 

(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, 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) $ 226  $ 32  $ (10) $ 5  $ 253 
Prices based on significant unobservable inputs (Level 3)   10    18    4       32 
Fair value of contracts outstanding at the end of the period $ 236  $ 50  $ (6) $ 5  $ 285 

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

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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 2018.  The following table sets forth changes in the net fair value of trading commodity derivative contracts for the periods ended June 30.  See Notes 13 and 14 to the Financial Statements for additional information.

  Gains (Losses)
  Three Months Six Months
  2013  2012  2013  2012 
             
Fair value of contracts outstanding at the beginning of the period $ 15  $ 2  $ 29  $ (4)
Contracts realized or otherwise settled during the period      (1)   (2)   (1)
Fair value of new contracts entered into during the period (a)   (4)   (1)   (16)   5 
Other changes in fair value   7    17    7    17 
Fair value of contracts outstanding at the end of the period $ 18  $ 17  $ 18  $ 17 

(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 June 30, 2013, based on the observability of the information used to determine the fair value.

  Net Asset (Liability)
  Maturity      Maturity  
  Less Than Maturity Maturity in Excess Total Fair
  1 Year 1-3 Years 4-5 Years of 5 Years Value
Source of Fair Value               
Prices based on significant observable inputs (Level 2) $ 4  $ 6        $ 10 
Prices based on significant unobservable inputs (Level 3)   6    2          8 
Fair value of contracts outstanding at the end of the period $ 10  $ 8        $ 18 

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 six months ended June 30, 2013 was as follows.

      Non-Trading
   Trading VaR VaR
95% Confidence Level, Five-Day Holding Period      
 Period End $ 2  $
 Average for the Period   4   
 High   6   10 
 Low   2   

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 June 30, 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 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 June 30, 2013.

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At June 30, 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 June 30, 2013 would increase the fair value of its debt portfolio by $50 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 June 30, 2013, these funds were invested primarily in domestic equity securities and fixed-rate, fixed-income securities and are reflected at fair value on the Balance Sheet.  The mix of securities is designed to provide returns sufficient to fund Susquehanna's decommissioning and to compensate for inflationary increases in decommissioning costs.  However, the equity securities included in the trusts are exposed to price fluctuation in equity markets, and the values of fixed-rate, fixed-income securities are primarily exposed to changes in interest rates.  PPL actively monitors the investment performance and periodically reviews asset allocation in accordance with its nuclear decommissioning trust policy statement.  At June 30, 2013, a hypothetical 10% increase in interest rates and a 10% decrease in equity prices would have resulted in an estimated $57 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 costs of compliance or alleged non-compliance cannot be predicted with certainty but could be material.  In addition, cost 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 Energy Supply's services.

Physical effects associated with possible climate change could include the impact of changes in weather patterns, such as storm frequency and intensity, and the resultant potential damage 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 hydroelectric 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.
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Coal Combustion Residuals (CCRs)
In June 2010, the EPA proposed two approaches to regulating the disposal and management of CCRs (as either hazardous or non-hazardous waste) under existing solid waste regulations.  A final rulemaking is currently expected 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.  On July 25, 2013, the U.S. House of Representatives passed House Bill H.R. 2218, the Coal Residuals and Reuse Management Act of 2013, which would preempt the EPA from regulating CCRs under RCRA and sets rules governing state programs.  Prospects remain uncertain for similar legislation to pass in the U.S. Senate.

Effluent Limitation Guidelines (ELGs)
In June 2013, the EPA published proposed regulations to revise discharge limitations for steam electric generation wastewater permits.  The proposed limitations are based on the EPA review of available treatment technologies and their capacity for reducing pollutants and include new requirements for fly ash and bottom ash transport water and metal cleaning waste waters, as well as new limits for scrubber wastewater and landfill leachate.  The EPA's proposed ELG regulations also contain some requirements that would affect the inspection and operation of CCR facilities, if finalized.  The proposal contains several alternative approaches, some of which could significantly impact PPL 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: requiring installation of Best Technology Available (BTA) to reduce mortality of aquatic organisms that are pulled into the plants cooling water system (entrainment); and imposing standards for reduction of mortality of aquatic organisms trapped on water intake screens (impingement).  A final rule is expected to be issued in November 2013.  The proposed regulation would apply to nearly all PPL 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 June 2013, President Obama released his Climate Action Plan which reiterates the goal of reducing greenhouse gas emissions in the U.S. "in the range of" 17% below 2005 levels by 2020 through such actions as regulating power plant emissions, promoting increased use of renewables and clean energy technology, and establishing tighter energy efficiency standards.  Also, by Presidential Memorandum the EPA was directed to issue a new proposal for new power plants by September 20, 2013, with a final rule to be issued in a timely fashion thereafter, and to issue proposed standards for existing power plants by June 1, 2014 with a final rule by June 1, 2015.  The EPA was further directed to require that states develop implementation plans for existing plants by June 2016.  Regulation of existing plants could have a significant industry-wide impact depending on the structure and stringency of the final rule and the state implementation plans.  The Administration's recent increase in its estimate of the "social cost of carbon" (which is used to calculate benefits associated with proposed regulations) from $23.80 to $38 per metric ton in 2015 may lead to more costly regulatory requirements.

MATS
The EPA finalized MATS requiring fossil-fuel fired plants to reduce emissions of mercury and other hazardous air pollutants by April 16, 2015.  The rule is being challenged by industry groups and states.  The EPA has subsequently proposed changes to the rule with respect to new sources to address the concern that the rule effectively precludes 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.

Regional Haze
Under the EPA's regional haze programs (developed to eliminate man-made visibility degradation by 2064), states are required to make reasonable progress every decade, including the application of Best Available Retrofit Technology (BART) on power plants commissioned between 1962 and 1977.  For the eastern U.S. the EPA had determined that region-wide reductions under the CAIR or CSAPR trading program could be utilized by states programs to satisfy BART requirements.  However, the August 2012 decision by the U.S. Court of Appeals for the District of Columbia Circuit (Circuit Court) to
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vacate and remand CSAPR will likely expose power plants located in the eastern U.S., including PPL Energy Supply's plants in Pennsylvania, to reductions in sulfur dioxide and nitrogen oxides as required by BART.

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).

CSAPR and CAIR
In 2011, the EPA finalized its CSAPR regulating emissions of nitrogen oxide and sulfur dioxide through new allowance trading programs which were to be implemented in two phases (2012 and 2014).  Like its predecessor, the CAIR, CSAPR targeted sources in the eastern U.S.  In December 2011, the Circuit Court stayed implementation of CSAPR, leaving CAIR in place.  Subsequently, in August 2012, the Circuit Court vacated and remanded CSAPR back to the EPA for further rulemaking, again leaving CAIR in place in the interim, and on June 24, 2013 the U.S. Supreme Court granted the EPA's petition for review of the Circuit Court's decision.

PPL Energy Supply plants in Pennsylvania will continue to comply with CAIR through optimization of existing controls, balanced with emission allowance purchases.  The Circuit Court's August 2012 decision leaves plants in CSAPR-affected states potentially exposed to more stringent emission reductions due to regional haze implementation (it was previously determined that CSAPR or CAIR participation satisfies regional haze requirements), and/or petitions to the EPA by downwind states under Section 126 of the Clean Air Act requesting the EPA to require plants that allegedly contribute to downwind non-attainment to take action to reduce emissions.

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 additional information on 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 and six months ended June 30, 2013 with the same periods in 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 capital expenditure programs, 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 in order to achieve more timely recovery.  The recently approved DSIC mechanism will help reduce regulatory lag on distribution reliability-related capital investment.  See "Financial and Operational Developments - Distribution System Improvement Charge" 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 and six months ended June 30, 2013 was $45 million and $109 million compared to $29 million and $62 million for the same periods in 2012, representing a 55% and 76% increase over the same periods in 2012.

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.

Distribution System Improvement Charge

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

FERC Formula Rates

PPL Electric must follow FERC's Uniform System of Accounts, which requires subsidiaries to be presented, for FERC reporting purposes, using the equity method of accounting unless a waiver has been granted.  The FERC has granted waivers of this requirement to other utilities when alternative accounting would more accurately present the integrated operations of a utility and its subsidiaries.  In March 2013, as part of a routine FERC audit of PPL and its subsidiaries, PPL Electric determined that it never obtained a required waiver of the equity method accounting requirement for its subsidiary, PPL Receivables Corporation (PPL Receivables) for FERC Form No. 1 reporting.  In March 2013, PPL Electric filed a request for waiver with the FERC that, if approved, would allow it to continue to consolidate the results of PPL Receivables, as it has done since 2004.  If PPL Electric is not successful in obtaining the waiver, its 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.  See Note 6 to the Financial Statements for additional information.

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 and six months ended June 30, 2013 with the same periods in 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 Available to PPL for the periods ended June 30 was:
              
   Three Months Six Months
   2013  2012  2013  2012 
              
Net Income Available to PPL $ 45  $ 29  $ 109  $ 62 

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.

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  Three Months Six Months
       
Pennsylvania Gross Delivery Margins $ 21  $ 61 
Other operation and maintenance   13    20 
Depreciation   (5)   (9)
Interest Expense   (1)   (2)
Other   1    (1)
Income Taxes   (13)   (26)
Distributions on preference stock      4 
Total $ 16  $ 47 

·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 for the three-month period primarily due to lower corporate service costs of $6 million and lower vegetation management of $2 million.

Lower other operation and maintenance for the six-month period primarily due to lower corporate service costs of $11 million and lower vegetation management of $3 million.

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

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

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 and higher operation and maintenance expense.

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.

Reconciliation of Non-GAAP Financial Measures

The following tables reconcile "Operating Income" to "Pennsylvania Gross Delivery Margins" to "Operating Income" as defined by PPL Electric for the periods ended June 30.

     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 
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     2013 Three Months 2012 Three Months
     PA Gross      PA Gross     
     Delivery   Operating Delivery    Operating
     Margins Other (a) Income (b) Margins Other (a) Income (b)
                
Operating Revenues                 
 Retail electric$ 413     $ 413  $ 403     $ 403 
 Electric revenue from affiliate  1       1    1       1 
   Total Operating Revenues  414       414    404       404 
                      
Operating Expenses                 
 Energy purchases  120       120    120       120 
 Energy purchases from affiliate  12       12    17       17 
 Other operation and maintenance  21  $ 103    124    26  $ 117    143 
 Depreciation     44    44       39    39 
 Taxes, other than income  19    3    22    20    2    22 
   Total Operating Expenses  172    150    322    183    158    341 
Total$ 242  $ (150) $ 92  $ 221  $ (158) $ 63 

   2012 Six Months 2011 Six Months   2013 Six Months 2012 Six 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 $ 925    $ 925  $ 860    $ 860 
Electric revenue from affiliate   2       2    8       8 Electric revenue from affiliate   2       2    2       2 
 Total Operating Revenues   862       862    998       998  Total Operating Revenues   927       927    862       862 
                            
Operating ExpensesOperating Expenses            Operating Expenses            
Energy purchases  273     273   420     420 Energy purchases  292     292   273     273 
Energy purchases from affiliate  38     38   10     10 Energy purchases from affiliate  26     26   38     38 
Other operation and maintenance  49  $ 234   283   47  $ 209   256 Other operation and maintenance  43  $ 214   257   49  $ 234   283 
Depreciation    78   78     70   70 Depreciation    87   87     78   78 
Taxes, other than income   44    4    48    53    4    57 Taxes, other than income   47    5    52    44    4    48 
 Total Operating Expenses   404    316    720    530    283    813  Total Operating Expenses   408    306    714    404    316    720 
TotalTotal $ 458  $ (316) $ 142  $ 468  $ (283) $ 185 Total $ 519  $ (306) $ 213  $ 458  $ (316) $ 142 

(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, 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 Six Months
   2013  2012  Change 2013  2012  Change
                    
PA Gross Delivery Margins by Component                  
 Distribution $ 183  $ 170  $ 13  $ 407  $ 359  $ 48 
 Transmission   59    51    8    112    99    13 
 Total $ 242  $ 221  $ 21  $ 519  $ 458  $ 61 

Distribution

Margins decreasedincreased for the three and six month periodsmonths ended June 30, 2012,2013 compared with 2011,2012, primarily due to an $11 million favorable effect of price as a result of higher base rates, effective January 1, 2013.

Margins increased for the six months ended June 30, 2013 compared with 2012, primarily due to the effectsa $13 million adverse effect of weather.mild weather in 2012 and a $32 million favorable effect of price, largely comprised of higher base rates, effective January 1, 2013, and higher volumes of $4 million.

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Transmission

Margins increased for the three and six month periodsmonths ended June 30, 2012,2013 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 MaintenanceOther Operation and Maintenance    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:
The increase (decrease) in other operation and maintenance for the periods ended June 30, 2013 compared with 2012 was due to:The increase (decrease) in other operation and maintenance for the periods ended June 30, 2013 compared with 2012 was due to:
    
 Three Months Six Months Three Months Six Months
          
         
Payroll-related costs$ 4  $ 7 
Vegetation managementVegetation management  6   8 Vegetation management$ (2) $ (3)
PUC-reportable storm costs, net of insurance recovery  (2)  (7)
Act 129 costs (a)Act 129 costs (a)  (7)  (7)
Uncollectible accountsUncollectible accounts  2   4 Uncollectible accounts  (1)  (3)
Allocation of certain corporate support group costs  2   5 
Corporate service costs (b)Corporate service costs (b)  (6)  (11)
OtherOther  5    10 Other  (3)   (2)
TotalTotal$ 17  $ 27 Total$ (19) $ (26)

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

Depreciation

Depreciation increased by $8$5 million and $9 million for the three and six months ended June 30, 20122013 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 six months ended June 30, 20122013 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)

(a)      Decreases for both periods are 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)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.  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.
Income Taxes      
       
The increase (decrease) in income taxes for the periods ended June 30, 2013 compared with 2012 was due to:
       
    
  Three Months Six Months
       
Higher (lower) pre-tax income $ 11  $ 27 
Depreciation not normalized   2    
Other      (1)
Total $ 13  $ 26 

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 June 30, 2013 December 31, 2012
        
Cash and cash equivalents $ 45  $ 320  $ 24  $ 140 
Short-term debt $ 195  $  $ 85  $ 

The $275$116 million decrease in PPL Electric's cash and cash equivalents position was primarily the net result of:

·capital expenditures of $256 million;
·redemption of preference stock of $250$451 million;
·the payment of $56$66 million of common stock dividends to parent;
·the net increase in short-term debtcontributions from parent of $195$205 million; and
·net cash provided by operating activities of $101$115 million; and
·a net increase in short-term debt of $85 million.

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PPL Electric's cash provided by operating activities increased by $38$14 million for the six months ended June 30, 2012,2013 compared with 2011,2012.  The increase was primarily the net effect of a $72 million increase in net income when adjusted for non-cash components, partially offset by an increase of $55 million in cash used by components of working capital.

Capital expenditures increased by $195 million for the six months ended June 30, 2013 compared with 2012, primarily due to a $48 million decrease in defined benefit plan funding.the Susquehanna-Roseland transmission project and projects to enhance system reliability.

Credit Facilities

PPL Electric maintains credit facilities to provide liquidity and to backstop commercial paper issuances.  At June 30, 2012,2013, PPL Electric'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 (a) $ 300     $ 196  $ 104 
Asset-backed Credit Facility (b)   150      n/a   150 
Total PPL Electric Credit Facilities $ 450     $ 196  $ 254 
         Letters of   
         Credit Issued   
       and  
   Committed   Commercial Unused
   Capacity Borrowed Paper Backup Capacity
          
PPL Electric Credit Facilities (a) $ 400     $ 86  $ 314 

(a)The commitments under thisthe $300 million syndicated 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 million from a commercial paper conduit sponsored by a financial institution.  At June 30, 2012, based on accounts receivable and unbilled revenue pledged, the amount available for borrowing under this 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, 2012,2013, PPL Electric had $195$85 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheet, at a weighted-average interest rate of approximately 0.49%0.34%.  PPL Electric had no commercial paper outstanding at December 31, 2012.

Equity SecuritiesLong-term Debt

In June 2012,July 2013, PPL Electric redeemed all 2.5issued $350 million shares of its 6.25% Series Preference Stock, par value $100 per share.  The price paid4.75% First Mortgage Bonds due 2043.  PPL Electric received proceeds of $345 million, net of a discount and underwriting fees, which will be used for the redemption was the par value, without premium ($250 million in the aggregate).  At December 31, 2011, the preference stock was reflected in "Preference stock" on PPL Electric's Balance Sheet.capital expenditures, to fund pension obligations and for other general corporate purposes.

Rating Agency Actions

Fitch, Moody's and 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 Fitch, Moody's and 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 anytook the following actions related to PPL Electric in 2012.2013:

In July 2013, Fitch, Moody's and S&P assigned ratings of A-, A3 and A- to PPL Electric's $350 million 4.75% First Mortgage Bonds due 2043.  Fitch also assigned a stable outlook to these notes and S&P assigned a recovery rating of 1+.

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.

143

Risk Management

Market Risk and Credit Risk

PPL Electric issues debt to finance its operations, which exposes it to interest rate risk.  At June 30, 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, 20122013 would increase the fair value of its debt portfolio by $77$95 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.

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.
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Environmental Matters

Physical effects associated with possible climate change could include the impact of changes in weather patterns, such as storm frequency and intensity, and the resultant potential damage 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.

The following is a discussion of the more significant environmental matters.

GHG Regulations
In June 2013, President Obama released his Climate Action Plan which, among other things, calls for actions to be taken to prepare the U.S. for the impacts of climate change.  PPL Electric and others in the industry could be affected by resulting guidelines and standards which may require transmission system modifications to improve the ability of critical infrastructure to withstand major storms.

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 ofadditional information on 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, 20122013 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.  Rate base is expected to grow as a result of significant capital expenditure programs to maintain reliable service and comply with federal and state regulations.  LKE is focused on efficient operations, strong customer service, timely recovery of costs and constructive regulatory relationships. 

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, 20122013 was $64 million and $160 million compared to $44 million and $97 million compared to $41 million and $128 million for the same periods in 20112012 representing a 7% increaseincreases of 45% and a 24% decrease65% over the same periods in 2011.2012. 

See "Results of Operations" for a discussion and analysis of LKE's earnings.

Terminated Bluegrass CTs AcquisitionEconomic and Market Conditions

In September 2011, LG&EThe KPSC has adopted a series of regulatory mechanisms (ECR, DSM, GLT, a fuel adjustment clause, a gas supply clause and KU entered into an asset purchase agreement with Bluegrass Generationrecovery on certain construction work-in-progress) that provide for the purchaserecovery 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 withprudently incurred costs.  The utility

 
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businesses are impacted by changes in customer usage levels which can be driven by a number of factors including weather conditions and economic factors that impact the KPSCload utilized by industrial and FERC.commercial customers.   

LKE's businesses are subject to extensive federal, state and local environmental laws, rules and regulations.  Certain regulated generation assets at 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,will require substantial capital investment.  LG&E and KU filed a CPCNproject $2.1 billion of capital investment over the next five years to satisfy certain of these requirements.  See Note 10 to the Financial Statements for additional information on these requirements.  These requirements have resulted in LKE's anticipated retirement by 2015 of five coal-fired units 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 797726 MW.  KU retired the 71 MW unit at the Tyrone plant in February 2013.  The Cane Run and Green River coalretirement of the five coal-fired units are anticipatedis not expected to remain operational untilhave a material impact on the NGCC generation and associated transmission project is completed.

Registered Debt Exchange Offer by LKE

In June 2012, LKE completed an exchangefinancial condition or results of all its outstanding 4.375% Senior Notes due 2021 issued in September 2011 in a transaction not registered under the Securities Actoperations of 1933, for similar securities that were issued in a transaction registered with the SEC.LKE.  See Note 78 to the Financial Statements in LKE's 20112012 Form 10-K for additional information.information regarding the anticipated retirement of these units as well as plans to build a combined-cycle natural gas facility in Kentucky.

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

Rate Case Proceedings

In FebruaryDecember 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 each established a commercial paper programand an increase in annual base gas rates of $15 million 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.using a 10.25% return on equity.  The approved rates became effective January 1, 2013.

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, 20122013 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 June 30 was:        Net Income for the periods ended June 30 was:        
                  
  Three Months Six Months  Three Months Six Months
  2012  2011  2012  2011   2013  2012  2013  2012 
                  
Net IncomeNet Income $ 44  $ 41  $ 97  $ 128 Net Income $ 64  $ 44  $ 160  $ 97 

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 Three Months Six Months
        
Margins $ 12  $ (16) $ 32  $ 107 
Other operation and maintenance  4   (17)    10 
Depreciation  (1)  (5)  (8)  (17)
Taxes, other than income  (3)  (5)    (1)
Other  (1)  (4)
Other Income (Expense) - net  (7)  (9)  7   7 
Interest Expense    1 
Income Taxes  4   26   (17)  (47)
Special items   (5)   (1)
Special items, after-tax   6    3 
Total $ 3  $ (31) $ 20  $ 63 


152


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

146


·HigherLower other operation and maintenance for the six-month period primarily due to $11$17 million of higher steam maintenancelower costs resulting from an increaseddue to the timing and scope of scheduled coal plant maintenance outages.  Also, a $6This decrease was partially offset by $4 million credit was recorded in 2011of adjustments to establish a regulatory asset related to 2009 storm costs.assets and liabilities and increased coal plant operation costs of $3 million.

·LowerHigher depreciation for the three and six-month periods primarily 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 and $26 million to depreciation that is excluded from Margins. This increase was partially offset by lower depreciation of $6 million and $11 million due to revised rates that were effective January 1, 2013.  Both events are the result of the 2012 rate case proceedings.

·Higher other income (expense) - net for the three and six-month periods primarily due to equity losses from an unconsolidated affiliate.the EEI investment recorded in 2012.  The EEI investment was fully impaired in the fourth quarter of 2012.

·LowerHigher income taxes for the three and six-month period,periods 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 30:30.

  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 Six Months
  Line Item 2013  2012  2013  2012 
               
EEI adjustmentsOther Income (Expense) - net       $ 1    
  Income Taxes and Other            
Net operating loss carryforward and other tax-related adjustmentsOperation and Maintenance          $ 4 
Discontinued Operations, net of tax of ($1), $4, ($1), $4Discontinued Operations $ 1  $ (5)   1    (5)
Total  $ 1  $ (5) $ 2  $ (1)

(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.

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 reconcile "Margins" to "Operating Income" to "Margins" as defined by LKE for the periods ended June 30.

      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 
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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 $ 1,363    $ 1,363  $ 1,404    $ 1,404 Operating Revenues $ 682    $ 682  $ 658    $ 658 
Operating ExpensesOperating Expenses            Operating Expenses            
Fuel  428     428   421     421 Fuel  216     216   215     215 
Energy purchases  108     108   147     147 Energy purchases  37     37   34     34 
Other operation and maintenance  46  $ 357   403   41  $ 338   379 Other operation and maintenance  23  $ 174   197   24  $ 173   197 
Depreciation  26   146   172   24   141   165 Depreciation  2   81   83   13   73   86 
Taxes, other than income      23    23       18    18 Taxes, other than income      12    12       12    12 
 Total Operating Expenses   608    526    1,134    633    497    1,130  Total Operating Expenses   278    267    545    286    258    544 
TotalTotal $ 755  $ (526) $ 229  $ 771  $ (497) $ 274 Total $ 404  $ (267) $ 137  $ 372  $ (258) $ 114 

      2013 Six Months  2012 Six Months
          Operating       Operating
      Margins Other (a) Income (b)  Margins Other (a) Income (b)
                  
Operating Revenues $ 1,482     $ 1,482   $ 1,363     $ 1,363 
Operating Expenses                   
 Fuel   447       447     428       428 
 Energy purchases   123       123     108       108 
 Other operation and maintenance   48  $ 346    394     46  $ 357    403 
 Depreciation   2    163    165     26    146    172 
 Taxes, other than income      24    24        23    23 
   Total Operating Expenses   620    533    1,153     608    526    1,134 
Total $ 862  $ (533) $ 329   $ 755  $ (526) $ 229 

(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$32 million for the three-month period primarily due to higher retail margins,base rates of $25 million, environmental cost recoveries added to base rates of $14 million and increased environmental investments of $3 million, partially offset by lower volumes of $9 million.  The change in volumes was partially attributable to weather, 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 days increased 9%decreased 14% compared to the same period in 2011.2012.

Margins decreasedincreased by $16$107 million for the six-month period primarily due to $13higher base rates of $56 million, environmental cost recoveries added to base rates of lower retail margins,$32 million, increased environmental investments of $10 million and higher volumes of $10 million.  The change in volumes was attributable to weather, 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.  Total heating degree days decreased 24%increased 40% compared to the same period in 2011.2012, offsetting the lower cooling degree days for the three-month period.

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 
The increase in base rates was the result of new KPSC rates effective January 1, 2013.  The environmental cost recoveries added to base rates were due to the elimination of the 2005 and 2006 ECR plans as a result of the 2012 Kentucky rate cases.  This elimination results in depreciation and other operation and maintenance expenses associated with the 2005 and 2006 ECR plans being excluded from Margins in 2013, while the recovery of such costs remain in Margins through base rates.

Other Operation and Maintenance     
       
The increase (decrease) in other operation and maintenance expense for the periods ended June 30, 2013 compared with 2012 was due to:
   
 Three Months Six Months
       
Coal plant outages (a)$ (4) $ (17)
Adjustments to regulatory assets and liabilities     4 
Coal plant operations     3 
Other  4    1 
Total$  $ (9)

(a)Steam maintenance costs increased $11 million duringDecrease is due to the six months ended June 30, 2011, primarily resulting from an increasedtiming and scope of scheduled outages.
(b)A $6 million credit to establish a regulatory asset was recorded in the first quarter of 2011 related to 2009 storm costs.

Depreciation

DepreciationThe increase (decrease) in depreciation for the periods ended June 30, 2013 compared with 2012 was due to:

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  Three Months Six Months
      
Lower depreciation rates effective January 1, 2013$ (6) $ (11)
Additions to PP&E  2    4 
Other  1    
Total$ (3) $ (7)

Other Income (Expense) - net

Other income (expense) - net increased by $2$7 million and $7$8 million for the three and six months ended June 30, 20122013 compared with 2011,2012 primarily due to PP&E additions.


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Other Income (Expense) - netlosses from the EEI investment recorded in 2012.  The EEI investment was fully impaired in the fourth quarter of 2012.

The increase (decrease) in other income (expense) - netIncome Taxes

Income taxes increased by $17 million and $53 million for the periodsthree and six months ended June 30, 2012,2013 compared with 2011, was2012 primarily 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.
to 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)

LossIncome (loss) from discontinued operations increased by $6$7 million for the three and six months ended June 30, 2012,2013 compared with 2011.2012.  The increase was primarily related to an adjustment to the estimated liability for indemnifications.indemnifications related to the 2009 termination of the WKE lease recorded in 2012.

Financial Condition
        
Liquidity and Capital Resources
        
LKE had the following at:
        
 June 30, 2012 December 31, 2011 June 30, 2013 December 31, 2012
        
Cash and cash equivalents $ 29  $ 59  $ 23  $ 43 
    
Short-term debt (a) $ 252  $ 125 
    
Notes payable with affiliates $ 72  $ 25 

(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$20 million decrease in LKE's cash and cash equivalents position was primarily the net result of:

·capital expenditures of $324 million$579 million; and
·the payment of $60 million of distributions to PPL,member of $69 million; partially offset by
·cash provided by operating activities of $354$297 million;
·capital contributions from member of $146 million;
·an increase in short term debt of $127 million; and
·an increase in notes payable with affiliates of $47 million.

LKE's cash provided by operating activities decreased by $53$57 million for the six months ended June 30, 2012,2013, compared with 2011,2012, primarily due to:

·an increase in cash outflows from other operating activities of $119 million driven by a decrease$94 million increase in discretionary defined benefit plan contributions; and
·a decline in working capital cash flow changes of $36 million driven primarily by increases in accounts receivable and unbilled revenues due to extended payment terms and higher rates and a lower federal income tax accrual in 2013 as a result of a federal settlement payment, offset by an increase in accounts payable primarily due to timing of fuel purchase commitments and payments, and lower inventory levels in 2013 compared with 2012 driven by increased generation at the plants and higher gas consumption from storage; partially offset by

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·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$98 million (deferred income taxes and investment tax credits of $90$39 million, and defined benefit plans - expense of $5$7 million, partially offset by depreciation of $7 million and other noncashnon-cash 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 activitiesCapital expenditures increased by $273$255 million forduring the six months ended June 30, 2012,2013 compared with 2011,2012 primarily due to proceeds fromenvironmental air projects at the saleMill Creek and Ghent plants, coal consumption residual projects at the Ghent plant and construction of other investments of $163 million in 2011 and an increase in capital
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expenditures of $144 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 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 in 2011 and lower distributions to PPL of $86 million in 2012.Cane Run Unit 7.

Credit Facilities

At June 30, 2012,2013, 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  $ 72     $ 228 
LG&E Credit Facility (a)   500     $ 80    420 
KU Credit Facilities (a) (b)   598       370    228 
Total LG&E and KU Credit Facilities (c) $ 1,398  $ 72  $ 450  $ 876 

(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%13% 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.
During 2012, LG&E and KU received KPSC and other state approvals to issue, up to $350 million for LG&E and $300 million for KU, of first mortgage bond indebtedness in 2013, the proceeds 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 following actionsaction related to LKE and its subsidiaries:subsidiaries during 2013:

In February 2012, Fitch assigned ratings to 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 andJuly 2013, 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 affirmedconfirmed the long-term AA+ ratings for LG&E's 2003KU's 2000 Series A Solid Waste Disposal Facility Revenue Bonds and 2007KU's 2004 Series A, 2006 Series B pollution control bonds.and 2008 Series A Environmental Facilities Revenue Bonds. S&P also confirmed the A-1+ short-term rating on these Bonds.

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

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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.

Capital Expenditures

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.2013.

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, 2012,2013, LKE's potential annual exposure to increased interest expense, based on a 10% increase in interest rates, was not significant.


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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, 2012,2013, would increase the fair value of its debt portfolio by $120$112 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 June 30, 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  $ (44) $ (4)
Cash flow hedges         
 Interest rate swaps (b)   500    72    (32)

(a)Includes accrued interest.
(b)LKE utilizes various risk management instruments to reduce its exposure to the expected future cash flow variability of its debt instruments.  These risks include exposure to adverse interest rate movements for outstanding variable rate debt and for future anticipated financing.  While LKE is exposed to changes in the fair value of these instruments, any realized changes in the fair value of such economic and cash flow hedges are recoverable through regulated rates and any subsequent changes in fair value of these derivatives are included in regulatory assets or liabilities.  Sensitivities represent a 10% adverse movement in interest rates.  The positions outstanding at June 30, 20122013 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.

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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.

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 possible 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 hydroelectric 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 waste) 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.  On July 25, 2013, the U.S. House of Representatives passed House Bill H.R. 2218, the Coal Residuals and Reuse Management Act of 2013, which would preempt the EPA from regulating CCRs under RCRA and sets rules governing state programs.  Prospects remain uncertain for similar legislation to pass in the U.S. Senate.

Effluent Limitation Guidelines (ELGs)
In June 2013, the EPA published proposed regulations to revise discharge limitations for steam electric generation wastewater permits.  The proposed limitations are based on the EPA review of available treatment technologies and their capacity for reducing pollutants and include new requirements for fly ash and bottom ash transport water and metal cleaning waste waters, as well as new limits for scrubber wastewater and landfill leachate.  The EPA's proposed ELG regulations also contain some requirements that would affect the inspection and operation of CCR facilities, if finalized.  The proposal contains several alternative approaches, some of which could significantly impact 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: requiring installation of Best Technology Available (BTA) to reduce mortality of aquatic organisms that are pulled into the plant cooling water system (entrainment); and imposing standards for reduction of mortality of aquatic organisms trapped on water intake screens (impingement).  A final rule is expected to be issued in November 2013.  The proposed regulation would apply to nearly all LG&E and KU-owned steam electric plants in Kentucky, potentially even including those equipped with closed-cycle cooling systems.

GHG Regulations
In June 2013, President Obama released his Climate Action Plan, which reiterates the goal of reducing greenhouse gas emissions in the U.S. "in the range of" 17% below 2005 levels by 2020 through such actions as regulating power plant emissions, promoting increased use of renewables and clean energy technology, and establishing tighter energy efficiency standards.  Also, by Presidential Memorandum, the EPA was directed to issue a new proposal for new power plants by

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September 20, 2013, with a final rule to be issued in a timely fashion thereafter, and to issue proposed standards for existing power plants by June 1, 2014 with a final rule by June 1, 2015.  The EPA was further directed to require that states develop implementation plans for existing plants by June 2016.  Regulation of existing plants could have a significant industry-wide impact depending on the structure and stringency of the final rule and state implementation plans.  The Administration's recent increase in its estimate of the "social cost of carbon" (which is used to calculate benefits associated with proposed regulations) from $23.80 to $38 per metric ton in 2015 may lead to more costly regulatory requirements.  Additionally, the Climate Action Plan requirements related to preparing the U.S. for the impacts of climate change could affect LKE and others in the industry as transmission system modifications to improve the ability to withstand major storms may be needed in order to meet those requirements.

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.  In connection with a unanimous settlement agreement filed with the KPSC in November 2011, KU agreed to defer the requested approval for certain environmental upgrades to Units 1 and 2 at its E.W. Brown generating plant which represented approximately $200 million in capital costs.  LG&E and KU are evaluating, among other measures, chemical additive systems for mercury control at Trimble County and Brown plants.  These measures, combined with the completion of recent feasibility studies conducted based on current market conditions, provide alternative compliance options for KU on Units 1 and 2 at the E.W. Brown station.  The anticipated retirements of certain coal-fired 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 nitrogen oxide and sulfur dioxide through new allowance trading programs which were to be implemented in two phases (2012 and 2014).  Like its predecessor, the CAIR, CSAPR targeted sources in the eastern U.S.  In December 2011, the Circuit Court stayed implementation of CSAPR, leaving CAIR in place.  Subsequently, in August 2012, the Circuit Court vacated and remanded CSAPR back to the EPA for further rulemaking, again leaving CAIR in place in the interim, and on June 24, 2013, the U.S. Supreme Court granted the EPA's petition for review of the Circuit Court's decision.

LG&E and KU plants in Kentucky will continue to comply with CAIR through optimization of existing controls, balanced with emission allowance purchases.  The Circuit Court's August 2012 decision leaves plants in CSAPR-affected states potentially exposed to more stringent emission reductions due to regional haze implementation (it was previously determined that CSAPR or CAIR participation satisfies regional haze requirements), and/or petitions to the EPA by downwind states under Section 126 of the Clean Air Act requesting the EPA to require plants that allegedly contribute to downwind non-attainment to take action to reduce emissions.

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 and "Item 1. Business - Environmental Matters" in LKE's 20112012 Form 10-K and Note 10 to the Financial Statements for a discussion ofadditional information on 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.


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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, 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, 20122013 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.  Rate base is expected to grow as a result of significant capital expenditure programs to maintain reliable service and comply with federal and state regulations.  LG&E is focused on efficient operations, strong customer service, timely recovery of costs and constructive regulatory relationships.

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, 20122013 was $29 million and $73 million compared to $26 million and $51 million compared to $20 million and $59 million for the same periods in 20112012 representing a 30% increaseincreases of 12% and a 14% decrease43% over the same periods in 2011.2012. 

See "Results of Operations" for a discussion and analysis of LG&E's earnings.

Terminated Bluegrass CTs AcquisitionEconomic and Market Conditions

In September 2011,The KPSC has adopted a series of regulatory mechanisms (ECR, DSM, GLT, a fuel adjustment clause, a gas supply clause and recovery on certain construction work-in-progress) that provide for recovery of prudently incurred costs.  LG&E is impacted by changes in customer usage levels which can be driven by a number of factors including weather conditions and KU entered into an asset purchase agreement with Bluegrass Generation foreconomic factors that impact 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 approvalload utilized by the FERC of satisfactory mitigation measures to address market-power concerns.  After a review of potentially available mitigation options, LG&Eindustrial 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 withcommercial customers.   

 
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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 is subject to extensive federal, state 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 agreementslocal environmental laws, rules 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 forregulations.  Certain regulated generation assets will require substantial capital investment.  LG&E and upprojects $1.1 billion of capital investment over the next five years to $470 millionsatisfy certain of these requirements.  See Note 10 to the Financial Statements for KU).

In conjunctionadditional information on these requirements.  These requirements have resulted in LG&E's anticipated retirement by 2015 of three coal-fired units 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 797563 MW.  The Cane Run and Green River coalretirement of the three coal-fired units areis not expected to have a material impact on the financial condition or results of operations of LG&E.  See Note 8 to the Financial Statements in LG&E's 2012 Form 10-K for additional information regarding the anticipated retirement of these units as well as plans to remain operational until the NGCC generation and associated transmission project is completed.build a combined-cycle natural gas facility in Kentucky. 

Commercial PaperLG&E cannot predict the future impact that these economic and market conditions and changes in regulatory requirements may have on its financial condition or results of operations.

Rate Case Proceedings

In FebruaryDecember 2012, LG&E establishedthe KPSC approved a commercial paper programrate case settlement agreement providing for up to $250increases in annual base electricity rates of $34 million to provideand 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.increase in annual base gas rates of $15 million using a 10.25% return on equity.  The approved rates became effective January 1, 2013.

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, 20122013 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:
                  
  Three Months Six Months  Three Months Six Months
  2012  2011  2012  2011   2013  2012  2013  2012 
                  
Net IncomeNet Income $ 26  $ 20  $ 51  $ 59 Net Income $ 29  $ 26  $ 73  $ 51 

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 Three Months Six Months
        
Margin $ 8  $ (3)
Margins $ 8  $ 29 
Other operation and maintenance  2   (7)  (3)  5 
Depreciation  (1)  (3)  1   3 
Taxes, other than income  (1)  (2)    (1)
Other Income (Expense) - net  (2)      (2)
Interest Expense  2   2     1 
Income Taxes   (2)   5    (3)   (13)
Total $ 6  $ (8) $ 3  $ 22 

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

·Lower other operation and maintenance for the six-month period primarily due to the timing and scope of scheduled coal plant maintenance outages.

·Higher other operation and maintenanceincome taxes for the six-month period primarily due to $7 million of higher steam maintenance costs primarily resulting from an increased scope of scheduled plant outages.pre-tax income.

2013 Outlook

LG&E projects higher earnings in 2013 compared with 2012, primarily driven by electric and gas base rate increases, returns

 
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Outlook

LG&E projects lower earnings in 2012 compared with 2011, as margin increases are not expected toon 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, 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 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 reconcile "Margins" to "Operating Income" to "Margins" as defined by LG&E for the periods ended June 30.

   2012 Three Months 2011 Three 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 $ 304    $ 304  $ 297    $ 297 Operating Revenues $ 316    $ 316  $ 304    $ 304 
Operating ExpensesOperating Expenses            Operating Expenses            
Fuel  92     92   82     82 Fuel  88     88   92     92 
Energy purchases  25     25   39     39 Energy purchases  34     34   25     25 
Other operation and maintenance  11  $ 81   92   8  $ 83   91 Other operation and maintenance  10  $ 84   94   11  $ 81   92 
Depreciation  1   37   38   1   36   37 Depreciation  1   36   37   1   37   38 
Taxes, other than income      6    6       5    5 Taxes, other than income      6    6       6    6 
 Total Operating Expenses   129    124    253    130    124    254  Total Operating Expenses   133    126    259    129    124    253 
TotalTotal $ 175  $ (124) $ 51  $ 167  $ (124) $ 43 Total $ 183  $ (126) $ 57  $ 175  $ (124) $ 51 

      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 Six Months  2012 Six Months
          Operating       Operating
      Margins Other (a) Income (b)  Margins Other (a) Income (b)
                  
                    
Operating Revenues $ 706     $ 706   $ 657     $ 657 
Operating Expenses                   
 Fuel   184       184     181       181 
 Energy purchases   115       115     98       98 
 Other operation and maintenance   21  $ 164    185     21  $ 169    190 
 Depreciation   1    72    73     1    75    76 
 Taxes, other than income      12    12        11    11 
   Total Operating Expenses   321    248    569     301   255    556 
Total $ 385  $ (248) $ 137   $ 356  $ (255) $ 101 

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

Changes in Non-GAAP Financial Measures

Margins increased by $8 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 duringfor the three-month period primarily resulted from $8due to higher base rates of $10 million and increased environmental investments of higher retail margins,$3 million, partially offset by lower volumes of $5 million.  The change in volumes was partially attributable to weather, as volumes were impacted by increases in production levels at some of LG&E's larger industrial customers and warmer weather during the three months ended June 30, 2012.  Total cooling degree days increased by 14%decreased 25% compared to the same period in 2011.  The negative impact during2012.

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Margins increased by $29 million for the six-month period due to higher base rates of $22 million and increased environmental investments of $5 million.

The increase in base rates was the result of new KPSC rates effective January 1, 2013.

Other Operation and Maintenance

Other operation and maintenance decreased by $5 million for the six months ended June 30, 2013 compared with 2012 primarily resulted from $3due to $7 million of lower wholesale margins, as volumes were impacted by lower market prices.costs due to the timing and scope of scheduled coal plant maintenance outages.

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 
Income Taxes

(a)Higher steam maintenance costs of $7 million for the six-month period due to an increased 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 increased by $13 million for the six months ended June 30, 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 June 30, 2013 December 31, 2012
        
Cash and cash equivalents $ 25  $ 25  $ 13  $ 22 
    
Short-term debt (a) $ 80  $ 55 

(a)Represents borrowings under LG&E's commercial paper program.  See Note 7 to the Financial Statements for additional information.

The $9 million decrease in LG&E's cash and cash equivalents position was primarily the net result of:

·cash provided by operating activitiescapital expenditures of $160 million,$236 million; and
·the payment of common stock dividends to parent of $48 million; partially offset by
·capital expenditurescash provided by operating activities of $120 million;$186 million,
·the paymentcapital contributions from parent of $31 million of common stock dividends;$54 million; and
·notes receivable from affiliatesan increase in short term debt of $6$25 million.

LG&E's cash provided by operating activities decreasedincreased by $17$26 million for the six months ended June 30, 2012,2013, compared with 2011,2012, primarily due to:

·a netan increase in cash outflows related to working capital excludingcash flow changes of $26 million driven primarily by lower fuel materialslevels in 2013 compared with 2012 due to increased generation at the plants and supplies, of $37 millionhigher gas consumption from storage compared to 2012 due to the timing of cash receiptsunseasonably milder weather in December 2011; and payments, including an $8 million increase in accounts payable invoices paid on behalf of KU and an $8 million increase in tax settlements with LKE;
·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 $30 million in coal inventory, along with an increase in price per ton of coal in comparison to 2011; and

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·a decrease 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$18 million (defined benefit plans - expense of $2 million and other noncash(other non-cash items of $6 million,million; partially offset by depreciation of $3 million and deferred income taxes and investment tax credits of $1$7 million and depreciation of $3 million); partially offset by
·a decreasean increase in cash outflows from other operating activities of $42$18 million due todriven by a reduction$19 million increase 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.contributions.

LG&E's cash used in investing activitiesCapital expenditures increased by $208$116 million forduring the six months ended June 30, 2012,2013 compared with 2011,2012 primarily due to proceeds from the saleenvironmental air projects at Mill Creek plant 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.Cane Run Unit 7.

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.

Credit Facilities,

At June 30, 2012,2013, 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 

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         Letters of   
         Credit Issued   
         and   
   Committed   Commercial Unused
   Capacity Borrowed Paper Backup Capacity
          
Syndicated Credit Facility (a) (b) $ 500     $ 80  $ 420 

(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, 20122013 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.

Long-term Debt Securities

During 2012, LG&E received KPSC and other state approvals to issue, 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.second 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.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.

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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, 2012,2013, 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, 2012,2013, 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 June 30, 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  $ (44) $ (4)
Cash flow hedges         
 Interest rate swaps (b)   250    36    (16)

(a)Includes accrued interest.
(b)LG&E utilizes various risk management instruments to reduce its exposure to the expected future cash flow variability of its debt instruments.  These risks include exposure to adverse interest rate movements for outstanding variable rate debt and for future anticipated financing.  While LG&E is exposed to changes in the fair value of these instruments, any realized changes in the fair value of such economic and cash flow hedges are recoverable through regulated rates and any subsequent changes in fair value of these derivatives are included in regulatory assets or liabilities.  Sensitivities represent a 10% adverse movement in interest rates.  The positions outstanding at June 30, 20122013 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 possible 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
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distribution systems, as well as impacts on customers.  In addition, changed weather patterns could potentially reduce annual rainfall in areas where LG&E has hydroelectric generating facilities or where river water is used to cool its fossil-powered generators.  LG&E cannot currently predict whether its business 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 waste) 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.  On July 25, 2013, the U.S. House of Representatives passed House Bill H.R. 2218, the Coal Residuals and Reuse Management Act of 2013, which would preempt the EPA from regulating CCRs under RCRA and sets rules governing state programs.  Prospects remain uncertain for similar legislation to pass in the U.S. Senate.

Effluent Limitation Guidelines (ELGs)
In June 2013, the EPA published proposed regulations to revise discharge limitations for steam electric generation wastewater permits.  The proposed limitations are based on the EPA review of available treatment technologies and their capacity for reducing pollutants and include new requirements for fly ash and bottom ash transport water and metal cleaning waste waters, as well as new limits for scrubber wastewater and landfill leachate.  The EPA's proposed ELG regulations also contain some requirements that would affect the inspection and operation of CCR facilities, if finalized.  The proposal contains several alternative approaches, some of which could significantly impact 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: requiring installation of Best Technology Available (BTA) to reduce mortality of aquatic organisms that are pulled into the plant cooling water system (entrainment); and imposing standards for reduction of mortality of aquatic organisms trapped on water intake screens (impingement).  A final rule is expected to be issued in November 2013.  The proposed regulation would apply to nearly all LG&E-owned steam electric plants in Kentucky, potentially even including those equipped with closed-cycle cooling systems.

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

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.
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CSAPR and CAIR
In 2011, the EPA finalized its CSAPR regulating emissions of nitrogen oxide and sulfur dioxide through new allowance trading programs which were to be implemented in two phases (2012 and 2014).  Like its predecessor, the CAIR, CSAPR targeted sources in the eastern U.S.  In December 2011, Circuit Court stayed implementation of CSAPR, leaving CAIR in place.  Subsequently, in August 2012, the Circuit Court vacated and remanded CSAPR back to the EPA for further rulemaking, again leaving CAIR in place in the interim, and on June 24, 2013, the U.S. Supreme Court granted the EPA's petition for review of the Circuit Court's decision.

LG&E plants in Kentucky will continue to comply with CAIR through optimization of existing controls, balanced with emission allowance purchases.  The Circuit Court's August 2012 decision leaves plants in CSAPR-affected states potentially exposed to more stringent emission reductions due to regional haze implementation (it was previously determined that CSAPR or CAIR participation satisfies regional haze requirements), and/or petitions to the EPA by downwind states under Section 126 of the Clean Air Act requesting the EPA to require plants that allegedly contribute to downwind non-attainment to take action to reduce emissions.

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 and "Item 1. Business - Environmental Matters" in LG&E's 20112012 Form 10-K and Note 10 to the Financial Statements for a discussion ofadditional information on 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, 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, 20122013 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.  Rate base is expected to grow as a result of significant capital expenditure programs to maintain reliable service and comply with federal and state regulations.  KU is focused on efficient operations, strong customer service, timely recovery of costs and constructive regulatory relationships.

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, 20122013 was $30$44 million and $68$108 million compared to $30 million and $88$68 million for the same periods in 20112012 representing a 23% decrease for the six-month period.increases of 47% and 59% over 2012. 

See "Results of Operations" for a discussion and analysis of KU's earnings.

Terminated Bluegrass CTs AcquisitionEconomic and Market Conditions

In September 2011,The KPSC has adopted a series of regulatory mechanisms (ECR, DSM, a fuel adjustment clause and recovery on certain construction work-in-progress) that provide for recovery of prudently incurred costs.  KU is impacted by changes in customer usage levels which can be driven by a number of factors including weather conditions and LG&E entered into an asset purchase agreement with Bluegrass Generation foreconomic factors that impact 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 approvalload utilized by the FERC of satisfactory mitigation measures to address market-power concerns.  After a review of potentially available mitigation options, KUindustrial 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.commercial customers.   

 
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NGCC Construction

In September 2011, KU is subject to extensive federal, state and LG&E filed a CPCNlocal environmental laws, rules and regulations.  Certain regulated generation assets will require substantial capital investment.  KU projects $1 billion of capital investment over the next five years to satisfy certain of these requirements.  See Note 10 to the Financial Statements for additional information on these requirements.  These requirements have resulted in KU's anticipated retirement by 2015 of two coal-fired units 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 ($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 797163 MW.  KU retired the 71 MW unit at the Tyrone plant in February 2013.  The Cane Run and Green River coalretirement of the two coal-fired units areis not expected to have a material impact on the financial condition or results of operations of KU.  See Note 8 to the Financial Statements in KU's 2012 Form 10-K for additional information regarding the anticipated retirement of these units as well as plans to remain operational until the NGCC generation and associated transmission project is completed.build a combined-cycle natural gas facility in Kentucky. 

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

Rate Case Proceedings

Virginia

During April 2013, KU filed an application with the VSCC to increase annual Virginia base electric revenue by approximately $7 million, representing an increase of 9.6%.  KU proposed an authorized 10.8% return on equity.  Subject to regulatory approval, new rates would become effective January 1, 2014.

Kentucky

In FebruaryDecember 2012, KU establishedthe KPSC approved a commercial paper programrate case settlement agreement providing for up to $250increases in annual base electricity rates of $51 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.using a 10.25% return on equity.  The 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, 20122013 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:
                  
  Three Months Six Months  Three Months Six Months
  2012  2011  2012  2011   2013  2012  2013  2012 
                  
Net IncomeNet Income $ 30  $ 30  $ 68  $ 88 Net Income $ 44  $ 30  $ 108  $ 68 

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 Three Months Six Months
        
Margin $ 5  $ (12)
Margins $ 23  $ 77 
Other operation and maintenance  2   (6)  1   
Depreciation  (1)  (3)  (9)  (19)
Taxes, other than income  (2)  (3)
Other  1   1 
Other Income (Expense) - net  (5)  (7)  7   6 
Income Taxes      10   (8)  (25)
Special item - EEI adjustments, after-tax      1 
Total $  $ (20) $ 14  $ 40 

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

·Higher other operation and maintenancedepreciation for the three and six-month periodperiods primarily 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 and $24 million to depreciation

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that is excluded from Margins.  This increase was partially offset by lower depreciation of $3 million and $7 million due to revised rates that were effective January 1, 2013.  Both events are the result of the 2012 rate case proceedings.

·Higher other income (expense) - net for the three and six-month periods primarily due to equity losses from an unconsolidated affiliate.the EEI investment recorded in 2012.  The EEI investment was fully impaired in the fourth quarter of 2012.

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·LowerHigher income taxes for the three and six-month periodperiods primarily due to the change inhigher pre-tax income.

2013 Outlook

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.

Reconciliation of Non-GAAP Financial Measures

The following tables reconcile "Margins" to "Operating Income" to "Margins" as defined by KU for the periods ended June 30.

   2012 Three Months 2011 Three 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 $ 374    $ 374  $ 366  $ (1) $ 365 Operating Revenues $ 383    $ 383  $ 374    $ 374 
Operating ExpensesOperating Expenses            Operating Expenses            
Fuel  123     123   124     124 Fuel  128     128   123     123 
Energy purchases  29     29   25     25 Energy purchases  20     20   29     29 
Other operation and maintenance  12  $ 86   98   12   88   100 Other operation and maintenance  13  $ 85   98   12  $ 86   98 
Depreciation  12   36   48   12   35   47 Depreciation  1   45   46   12   36   48 
Taxes, other than income      6    6       4    4 Taxes, other than income      6    6       6    6 
 Total Operating Expenses   176    128    304    173    127    300  Total Operating Expenses   162    136    298    176    128    304 
TotalTotal $ 198  $ (128) $ 70  $ 193  $ (128) $ 65 Total $ 221  $ (136) $ 85  $ 198  $ (128) $ 70 


 
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   2012 Six Months 2011 Six Months   2013 Six Months 2012 Six 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 $ 815    $ 815  $ 754    $ 754 
Operating ExpensesOperating Expenses              Operating Expenses            
Fuel  247     247     254     254 Fuel  263     263   247     247 
Energy purchases  58     58     60     60 Energy purchases  47     47   58     58 
Other operation and maintenance  25  $ 168   193     22  $ 162   184 Other operation and maintenance  27  $ 168   195   25  $ 168   193 
Depreciation  24   72   96     23   69   92 Depreciation  1   91   92   24   72   96 
Taxes, other than income      12    12        9    9 Taxes, other than income      12    12       12    12 
 Total Operating Expenses   354    252    606     359    240    599  Total Operating Expenses   338    271    609    354    252    606 
TotalTotal $ 400  $ (252) $ 148   $ 412  $ (240) $ 172 Total $ 477  $ (271) $ 206  $ 400  $ (252) $ 148 

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

Changes in Non-GAAP Financial Measures

Margins increased by $5$23 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 duringfor the three-month period primarily resulted fromdue to higher base rates of $15 million and environmental cost recoveries added to base rates of $13 million, partially offset by lower volumes of $4 million.

Margins increased by $77 million for the six-month period due to higher base rates of $33 million, environmental cost recoveries added to base rates of $30 million, higher retail margins,volumes of $9 million and increased environmental investments of $5 million.  The change in volumes was attributable to weather, as volumes were impacted by increases in production levels at some of KU's larger industrial customers and warmer weather during the three months ended June 30, 2012.  Total coolingheating degree days increased 2%31% compared to the same period in 2011.  2012.

The negative impact duringincrease in base rates was the six-month period primarily resulted from $12 millionresult of lower retail margins, as volumesnew KPSC rates effective January 1, 2013.  The environmental cost recoveries added to base rates were impacted by unseasonably mild weather during the first four months of 2012.  Total heating degree days decreased 21% compareddue 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, while the recovery of such costs remain in Margins through base rates.

Other Operation and MaintenanceOther Operation and Maintenance    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:
The increase (decrease) in other operation and maintenance expense for the periods ended June 30, 2013 compared with 2012 was due to:The increase (decrease) in other operation and maintenance expense for the periods ended June 30, 2013 compared with 2012 was due to:
    
 Three Months Six Months Three Months Six Months
          
Distribution maintenance (a)   $ 7 
Coal plant outages (a)Coal plant outages (a)$ (5) $ (10)
Coal plant operationsCoal plant operations  2   4 
Adjustments to regulatory assets and liabilitiesAdjustments to regulatory assets and liabilities    4 
OtherOther$ (2)   2 Other  3    4 
TotalTotal$ (2) $ 9 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.

Depreciation

The increase (decrease) in depreciation for the periods ended June 30, 2013 compared with 2012 was due to:

  Three Months Six Months
       
Lower depreciation rates effective January 1, 2013$ (3) $ (7)
Additions to PP&E  1    3 
Total$ (2) $ (4)

Other Income (Expense) - net

The increase (decrease) in Other Income (Expense)income (expense) - net increased by $7 million for the periodsthree and six months ended June 30, 2012,2013 compared with 2011,2012 primarily due to losses from the EEI investment recorded in 2012.  The EEI investment was due to:
fully impaired in the fourth quarter of 2012.
  Three Months Six Months
       
Equity losses from an unconsolidated affiliate$ (4) $ (6)
Other  (1)   (1)
Total$ (5) $ (7)

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Income Taxes

Income taxes decreasedincreased by $10$8 million and $25 million for the three and six months ended June 30, 2012,2013 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
       
Cash and cash equivalents $ 3  $ 31 

Financial Condition
       
Liquidity and Capital Resources
       
KU had the following at:
       
  June 30, 2013 December 31, 2012
       
Cash and cash equivalents $ 10  $ 21 
       
Short-term debt (a) $ 172  $ 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$11 million decrease in KU's cash and cash equivalents position was the net result of:

·capital expenditures of $203 million$341 million; and
·the payment of $48 million of common stock dividends to parent of $55 million; partially offset by
·cash provided by operating activities of $217 million$190 million;
·an increase in short term debt of $102 million; and
·notes payable with affiliatescapital contributions from parent of $6$92 million.

KU's cash provided by operating activities increaseddecreased by $32$27 million for the six months ended June 30, 2012,2013, compared with 2011,2012, primarily due to a decrease in cash outflows of $27 million due to a reduction in discretionary defined benefit plan contributions.to:

KU's cash used in investing
·an increase in cash outflows from other operating activities of $69 million driven by a $43 million increase in discretionary defined benefit plan contributions; and
·a decline in working capital cash flow of $18 million driven primarily by increases in accounts receivable due to higher sales volumes, higher rates and extended payment terms and a lower tax accrual due to timing of settlements, partially offset by an increase in accounts payable primarily due to timing of fuel purchase commitments and payments; partially offset by
·an increase in net income adjusted for non-cash items of $60 million (deferred income taxes and investment tax credits of $19 million and defined benefit plans - expense of $7 million, partially offset by depreciation of $4 million and other non-cash items of $2 million).

Capital expenditures increased by $102$138 million forduring the six months ended June 30, 2012,2013 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 LKEenvironmental air projects and coal consumption residual projects at the Ghent plant and construction of $20 million in 2012 and a higher notes payable with affiliates.Cane Run Unit 7.

Credit Facilities

At June 30, 2012,2013, 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
          
Total KU Credit Facilities (a) (b) $ 598     $ 370  $ 228 

(a)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%22% of the total committed capacity available to KU.
(b)KU pays customary fees under its syndicated credit facility, and borrowings generally bear interest at LIBOR-based rates plus an applicable margin.

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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 million2013 and at December 31, 2011,2012, there was no balance outstanding.

See Notes 7 and 11 to the Financial Statements for further discussion of KU's credit facilities.

Long-term Debt Securities

During 2012, KU received KPSC and other state approvals to issue, 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.

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 following actionsaction related to KU:KU during 2013:

In February 2012, Fitch assignedJuly 2013, S&P confirmed the long-term AA+ ratings tofor KU's newly established commercial paper program.

In March 2012, Moody's affirmed2000 Series A Solid Waste Disposal Facility Revenue Bonds and KU's 2004 Series A, 2006 Series B and 2008 Series A Environmental Facilities Revenue Bonds. S&P also confirmed the 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 assignedA-1+ short-term ratings to KU's newly established commercial paper programs.rating on these Bonds.

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.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.
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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, 2012,2013, 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, 2012,2013, would increase the fair value of its debt portfolio by $71$68 million.

At June 30, 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) $ 250  $ 36  $ (16)
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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 June 30, 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 possible 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 hydroelectric generating facilities or where river water is used to cool its fossil-powered generators.  KU cannot currently predict whether its business 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 waste) under existing solid waste regulations.  A final rulemaking is currently expected before the end of

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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.  On July 25, 2013, the U.S. House of Representatives passed House Bill H.R. 2218, the Coal Residuals and Reuse Management Act of 2013, which would preempt the EPA from regulating CCRs under RCRA and sets rules governing state programs.  Prospects remain uncertain for similar legislation to pass in the U.S. Senate.

Effluent Limitation Guidelines (ELGs)
In June 2013, the EPA published proposed regulations to revise discharge limitations for steam electric generation wastewater permits.  The proposed limitations are based on the EPA review of available treatment technologies and their capacity for reducing pollutants and include new requirements for fly ash and bottom ash transport water and metal cleaning waste waters, as well as new limits for scrubber wastewater and landfill leachate.  The EPA's proposed ELG regulations also contain some requirements that would affect the inspection and operation of CCR facilities, if finalized.  The proposal contains several alternative approaches, some of which could significantly impact 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: requiring installation of Best Technology Available (BTA) to reduce mortality of aquatic organisms that are pulled into the plant cooling water system (entrainment); and imposing standards for reduction of mortality of aquatic organisms trapped on water intake screens (impingement).  A final rule is expected to be issued in November of 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.

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

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.  In connection with a unanimous settlement agreement filed with the KPSC in November 2011, KU agreed to defer the requested approval for certain environmental upgrades to Units 1 and 2 at its E.W. Brown generating plant which represented approximately $200 million in capital costs.  KU is evaluating, among other measures, chemical additive systems for mercury control at Trimble County and Brown plants.  These measures, combined with the completion of recent feasibility studies conducted based on current market conditions, provide alternative compliance options for KU on Units 1 and 2 at the E.W. Brown station.  The anticipated retirements of certain coal-fired 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 nitrogen oxide and sulfur dioxide through new allowance trading programs which were to be implemented in two phases (2012 and 2014).  Like its predecessor, the CAIR, CSAPR targeted sources in the eastern U.S.  In December 2011, the Circuit Court stayed implementation of CSAPR, leaving CAIR in place.  Subsequently, in August 2012, the Circuit Court vacated and remanded CSAPR back to the EPA for further
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rulemaking, again leaving CAIR in place in the interim, and on June 24, 2013, the U.S. Supreme Court granted the EPA's petition for review of the Circuit Court's decision.

KU plants in Kentucky will continue to comply with CAIR through optimization of existing controls, balanced with emission allowance purchases.  The Circuit Court's August 2012 decision leaves plants in CSAPR-affected states potentially exposed to more stringent emission reductions due to regional haze implementation (it was previously determined that CSAPR or CAIR participation satisfies regional haze requirements), and/or petitions to the EPA by downwind states under Section 126 of the Clean Air Act requesting the EPA to require plants that allegedly contribute to downwind non-attainment to take action to reduce emissions.

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 and "Item 1. Business - Environmental Matters" in KU's 20112012 Form 10-K and Note 10 to the Financial Statements for a discussion ofadditional information on 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, 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, 2012,2013, 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 of the above listed registrants have concluded that there were no changesthe implementation of a financial consolidation and reporting system for PPL and its primary U.S. subsidiaries during the quarter ended June 30, 2013 resulted in a material change to the registrants' internal control over financial reporting.  The new system enhances the consolidation of subsidiary accounts, provides reporting tools for analysis and automates certain aspects of financial statement preparation for each of the registrants.  Processes and controls over the consolidation and reporting processes that were previously considered to be effective were replaced with new or modified controls that were also determined to be effective.

The new consolidation and reporting system was subject to extensive testing and data reconciliation during implementation.  Post-implementation reviews have been and will continue to be conducted to enable us to determine the effectiveness of the internal controls relating to the system implementation processes and to key business processes.

PPL Corporation

PPL's principal executive officer and principal financial officer have concluded that the implementation of a new general ledger system and a financial reporting system at WPD during the registrants' second fiscal quarter that have materially affected, or are reasonably likelyended June 30, 2013 resulted in a material change to materially affect, the registrants'its internal control over financial reporting.  The general ledger system that was implemented at WPD replaced the existing mainframe system and resulted in more automation and enhanced controls over general ledger processing and consolidation.  The reporting system that was implemented at WPD improves and automates controls over data transfer included in PPL's consolidation process and improves controls over GAAP and foreign currency adjustments.  In each of the WPD system implementations, controls that were previously determined to be effective were replaced with new or modified controls that were also determined to be effective.

 
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The general ledger and reporting systems were subject to extensive testing and data reconciliation during their implementation.  Post-implementation reviews have been and will continue to be conducted to enable us to determine the effectiveness of the internal controls relating to the system implementation processes and to key business processes remain effective.  Risks related to the system implementations at WPD were also partially mitigated by PPL's existing policy of consolidating foreign subsidiaries on a one-month lag, which provided management additional time for review and analysis of WPD results and their incorporation into PPL's consolidated financial statements.

PART II.  OTHER INFORMATION

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 2.  Unregistered Sales of Equity Securities and Use of Proceeds
              
 Issuer Purchase of Equity Securities during the Second Quarter of 2013:   
              
    (a)(b)(c)(d)
              
             Maximum Number (or
             Approximate Dollar
          Total Number ofValue) of Shares
          Shares (or Units)(or Units) that May
    Total Number ofAverage PricePurchased as Part ofYet Be Purchased
    Shares (or Units)Paid per SharePublicly AnnouncedUnder the Plans
Period  Purchased (1)(or Unit)Plans of Programsor Programs
April 1 to April 30, 2013      
May 1 to May 31, 2013      
June 1 to June 30, 2013   930,000 $29.92  
Total   930,000 $29.92  
(1)Represents shares of common stock repurchased in the open market to offset a portion of shares issued under stock based compensation plans.

Item 4.  Mine Safety Disclosures

Not applicable.

 
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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.

3(a)-Amendment No. 7Amended and Restated Articles of Incorporation of PPL Corporation, effective as of May 15, 2013 (Exhibit 3(i) to PPL Employee Stock Ownership Plan,Corporation Form 8-K Report (File No. 1-11459) dated May 30, 201220, 2013)
3(b)-Amendment No. 8Amended and Restated Bylaws of PPL Corporation, effective as of May 15, 2013 (Exhibit 3(ii) to PPL Employee Stock Ownership Plan,Corporation Form 8-K Report (File No. 1-11459) dated July 17, 2012May 20, 2013)
4(c)4(a)-Supplemental Indenture No. 8,10, dated as of June 14, 2012,May 24, 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)4.2 to PPL Corporation Form 8-K Report (File No. 1-11459) dated June 14, 2012)May 24, 2013)
[_]10(a)4(b)-Supplemental Indenture No. 11, dated as of May 24, 2013, among PPL Capital Funding, Inc., PPL Corporation 2012 Stock Incentive Plan (Annex Aand The Bank of New York Mellon (formerly known as The Bank of New York), as Trustee (Exhibit 4.3 to Proxy Statement of PPL Corporation Form 8-K Report (File No. 1-11459) dated April 3, 2012)May 24, 2013)
4(c)-Uncommitted LineSupplemental Indenture No. 12, dated as of Credit Letter Agreement,May 24, 2013, among PPL Capital Funding, Inc., PPL Corporation and The Bank of New York Mellon (formerly known as The Bank of New York), as Trustee (Exhibit 4.4 to PPL Corporation Form 8-K Report (File No. 1-11459) dated May 24, 2013)
4(d)-Supplemental Indenture No. 15, dated as of July 1, 2012, between2013, of PPL Energy Supply, LLC, the Borrower, and Banco Bilbao Vizcaya Argentaria, S.A., the Bank
-Reimbursement Agreement, dated as of July 1, 2012, between PPL Energy Supply, LLC and Banco Bilbao Vizcaya Argentaria, S.A.
-PPLElectric Utilities 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 Imperialto The Bank of Commerce, New York AgencyMellon, as Trustee (Exhibit 4(a) to PPL Electric Utilities Corporation Form 8-K Report (File No. 1-905) dated July 11, 2013)
-
PPL Corporation and Subsidiaries Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
-PPL Energy Supply, LLC and Subsidiaries Computation of Ratio of Earnings to Fixed Charges
-PPL Electric Utilities Corporation and Subsidiaries Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
-LG&E and KU Energy LLC and Subsidiaries Computation of Ratio of Earnings to Fixed Charges
-Louisville Gas and Electric Company Computation of Ratio of Earnings to Fixed Charges
-Kentucky Utilities Company Computation of Ratio of Earnings to Fixed Charges
   
Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, for the quarterly period ended June 30, 2012,2013, 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, 2012,2013, furnished by the following officers for the following companies:
   
-PPL Corporation's principal executive officer and principal financial officer
-PPL Corporation'sEnergy Supply, LLC's principal executive officer and principal financial officer
-PPL Energy Supply, LLC'sElectric Utilities Corporation's principal executive officer
-PPL Energy Supply, LLC's and 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 and principal financial officer
   
101.INS-XBRL Instance Document for PPL Corporation, PPL Energy Supply, LLC, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company
101.SCH-XBRL Taxonomy Extension Schema for PPL Corporation, PPL Energy Supply, LLC, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company
101.CAL-XBRL Taxonomy Extension Calculation Linkbase for PPL Corporation, PPL Energy Supply, LLC, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company
101.DEF-XBRL Taxonomy Extension Definition Linkbase for PPL Corporation, PPL Energy Supply, LLC, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company
101.LAB-XBRL Taxonomy Extension Label Linkbase for PPL Corporation, PPL Energy Supply, LLC, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company
101.PRE-XBRL Taxonomy Extension Presentation Linkbase for PPL Corporation, PPL Energy Supply, LLC, PPL Electric Utilities Corporation, LG&E and KU Energy LLC, Louisville Gas and Electric Company and Kentucky Utilities Company

 
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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, 20122, 2013/s/  Vincent Sorgi 
 Vincent Sorgi 
 Vice President and Controller 
 (Principal Accounting Officer) 
   
   
   
 PPL Electric Utilities Corporation
 (Registrant) 
   
   
   
Date:  August 8, 20122, 2013/s/  Vincent SorgiDennis A. Urban, Jr. 
 Vincent SorgiDennis A. Urban, Jr. 
 Vice President and
Chief Accounting OfficerController 
 (Principal Financial Officer and Principal Accounting Officer) 


 LG&E and KU Energy LLC
 (Registrant) 
   
 Louisville Gas and Electric Company
 (Registrant) 
   
 Kentucky Utilities Company
 (Registrant) 
   
   
   
Date:  August 8, 20122, 2013/s/  Kent W. Blake 
 
Kent W. Blake
Chief Financial Officer
 
 (Principal Financial Officer and Principal Accounting Officer) 
 
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