In ~~June~~December 2012, the EPA ~~proposed a rule~~issued final rules that ~~strengthens~~strengthen the particulate standards. ~~States would~~Under the final rule, states and the EPA have until ~~2014~~2015 to identify ~~initial~~ non-attainment areas, 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 particulate matter (PM) rule is finalized and the sulfur dioxide maintenance and compliance plans are developed, PPL, PPL Energy Supply, LKE, LG&E and KU cannot predict which of their facilities may be located in a non-attainment area and what measures would be required to meet attainment status.

PPL, PPL Energy Supply, LKE, LG&E and KU anticipate that some of the measures required for compliance with the CAIR, the ~~Mercury and Air Toxic Standards (MATS),~~MATS, or the Regional Haze requirements, such as upgraded or new sulfur dioxide scrubbers at some of their plants and, in the case of LG&E and KU, the previously announced retirement of coal-fired generating units at the Cane Run, Green River and Tyrone plants, will help to achieve compliance with the new one-hour sulfur dioxide standard. If additional reductions were to be required, the financial impact could be significant.

~~Mercury~~

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

MATS

In May 2011, the EPA published a proposed regulation providing for stringent reductions of mercury and other hazardous air pollutants. In February 2012, the EPA published the final rule, known as the MATS, with an effective date of April 16, 2012. The rule is being challenged by industry groups and states.

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

Although the ~~need~~EPA had proposed certain modifications to ~~install pollution control equipment~~the final rule, it has not finalized those proposed rule modifications and has not provided an expected completion date. PPL does not expect the modifications to ~~meet~~significantly impact its compliance plans even if finalized.

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

With respect to PPL Energy Supply's Pennsylvania plants, PPL Energy Supply believes that certain coal-fired plants may require installation of chemical additive systems, the capital cost of which is not expected to be significant. PPL Energy Supply continues to analyze the potential impact on operating cost. With respect to 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, PPL Energy Supply announced in September 2012 its intention, beginning in April 2015, to place the plant in long-term reserve status, suspending the plant's operation, due to expected market conditions and the costs to comply with the MATS requirements. The Corette ~~plant's~~plant asset group's carrying ~~value~~amount at ~~September 30, 2012~~March 31, 2013 was ~~approximately $67~~$65 million. Although the Corette plant asset group was not determined to be impaired at ~~September 30, 2012,~~March 31, 2013, it is reasonably possible that an impairment ~~charge~~ could ~~be recorded in the fourth quarter of 2012 or~~occur in future periods, as higher priced sales contracts settle, adversely impacting projected cash flows. PPL Energy Supply, LG&E and KU are continuing to conduct in-depth reviews of the MATS, including the potential implications to scrubber wastewater discharges. See the discussion of effluent limitations guidelines and standards below.

On March 29, 2013, the EPA released its final rule revising certain emission limits and related requirements for new power plants under the MATS. The revised limits are somewhat less onerous than the original proposals, and thereby pose less of an impediment to the construction of new coal-fired power plants.

Regional Haze and Visibility

~~In January 2012,~~The Clean Air Act requires protection of visibility in Class I areas and, as such, the ~~EPA proposed limited approval of the Pennsylvania~~EPA's regional haze ~~State Implementation Plan (SIP). That proposal would essentially approve PPL's analysis that further particulate controls at PPL Energy Supply's Pennsylvania plants~~programs were developed to eliminate man-made visibility degradation by 2064. Under the programs, states are ~~not warranted. The limited approval does not address deficiencies~~required to take action via state plans to make reasonable progress every decade, including the application 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~~

Best Available Retrofit Technology (BART) on power plants commissioned between 1962 and 1977.

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

In addition to this exposure stemming from the remand of CSAPR, LG&E's Mill Creek Units 3 and 4 are required to reduce sulfuric acid mist emissions because they were determined to have a significant regional haze impact. These reductions are in the Kentucky Division of Air Quality's regional haze state implementation plan which it submitted to the ~~EPA for further rulemaking. In September 2012, several environmental groups filed a petition for review with the Court challenging the EPA's~~EPA. The costs of these reductions are not expected to be significant. LG&E intends to make these reductions through installation of sorbent injection technology after approval of the ~~Pennsylvania SIP. At this time, it is not known whether~~Kentucky plan by the EPA ~~will reinstate its previous determination that CAIR satisfies~~and revision of the ~~BART requirement or will require states to conduct source-specific BART studies.~~Mill Creek plant's air permit under Title V.

In Montana, the EPA Region 8 developed the regional haze plan as the Montana Department of Environmental Quality declined to develop a BART ~~SIP~~state implementation plan at ~~this~~the time. PPL submitted to the EPA its analyses of the visibility impacts of sulfur dioxide, nitrogen oxides and particulate emissions for Colstrip Units 1 and 2 and Corette. PPL's analyses concluded that further reductions are not warranted. PPL has also submitted data and analyses of various air emission control options under the rules to reduce air emissions related to the non-BART-affected emission sources of Colstrip Units 3 and 4. The analyses show that any incremental reductions would not be cost-effective and that further analysis is not warranted.

In ~~March and~~ September 2012, the EPA issued its ~~draft and~~ final Federal Implementation Plans (FIP) for the Montana regional haze rule. The final FIP indicated that no additional controls were ~~required~~assumed for Corette or Colstrip Units 3 and 4 but proposed tighter limits for Corette and Colstrip Units 1 and 2. PPL Energy Supply expects to meet these tighter permit limits at Corette without any significant changes to operations, although other requirements have led to the planned suspension of operations at Corette beginning in April 2015. See "Mercury and Other Hazardous Air Pollutants" discussion above. Under the final FIP, Colstrip Units 1 and 2 ~~will~~may require additional controls, including the possible installation of an SNCR and ~~spare scrubber vessel,~~other technology, to meet more stringent nitrogen oxide and sulfur dioxide limits. The cost of these potential additional controls, if required, could be significant. In November 2012, PPL ~~Energy Supply plans to challenge this FIP.~~

~~LG&E and KU also submitted analyses~~filed a petition for review of the ~~visibility impacts~~Montana Regional Haze FIP with the U.S. Court of ~~their Kentucky BART-eligible sources to~~Appeals for the ~~Kentucky Division~~Ninth Circuit. Environmental groups have also filed a petition for ~~Air Quality (KDAQ). Only LG&E's Mill Creek plant was determined to~~review. The two matters have ~~a significant regional haze impact. The KDAQ has submitted a regional haze SIP to~~been consolidated, and PPL Montana and the EPA which requires the Mill Creek plant to reduce its sulfuric acid mist emissions from Units 3 and 4, the costs of which are not expected to be significant. After approval of the Kentucky SIP by the EPA and revision of the Mill Creek plant's air permit under Title V, LG&E intends to install sorbent injection controls at the plant to reduce sulfuric acid mist emissions.environmental groups have each filed opening briefs.

New Source Review (NSR)

The EPA has continued its NSR enforcement efforts targeting coal-fired generating plants. The EPA has asserted that modification of these plants has increased their emissions and, consequently, that they are subject to stringent NSR requirements under the Clean Air Act. In April 2009, PPL received EPA information requests for its Montour and Brunner Island plants. The requests are similar to those that PPL received in the early 2000s for its Colstrip, Corette and Martins Creek plants. PPL and the EPA have exchanged certain information regarding this matter. In January 2009, PPL, PPL Energy Supply and other companies that own or operate the Keystone plant in Pennsylvania received a notice of violation from the EPA alleging that certain projects were undertaken without proper NSR compliance. In May and November 2012, PPL Montana received an information ~~request~~requests from the EPA regarding projects undertaken during the Spring 2012 maintenance outage at Colstrip Unit 1. In September 2012, PPL Montana received an information request from the Montana Department of Environmental Quality regarding 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 received information requests for the Mill Creek and Trimble County plants, and KU received requests for the Ghent plant, but they have received no further communications from the EPA since providing their responses. PPL, LKE, LG&E and KU cannot predict the outcome of these matters, and cannot estimate a range of reasonably possible losses, if any.

In March 2009, KU received a notice alleging that KU violated certain provisions of the Clean Air Act's rules governing NSR and prevention of significant deterioration by installing sulfur dioxide scrubbers and SCR controls at its Ghent plant without assessing potential increased sulfuric acid mist emissions. KU contends that the work in question, as pollution control projects, was exempt from the requirements cited by the EPA. In December 2009, the EPA issued an information request on this matter. In September 2012, the parties reached a tentative settlement addressing the Ghent NSR matter and a September 2007 notice of violation alleging opacity violations at the plant. ~~The settlement is subject to various administrative and judicial approvals.~~A consent decree was entered in the U.S. District Court for the Eastern District of Kentucky in December 2012. PPL, LKE and KU cannot predict the outcome of this matter until ~~a final~~the consent decree is entered by the ~~U.S. District~~ Court, ~~for the Eastern District of Kentucky,~~ but currently do not expect such outcome to result in ~~material~~costs in excess of amounts already accrued, which amounts are not material.

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

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

~~States~~Colstrip and ~~environmental groups also have initiated enforcement actions~~Corette Air Permits (PPL and ~~litigation alleging violations~~PPL Energy Supply)

In January 2013, Earthjustice, on behalf of the ~~NSR regulations by coal-fired generating plants. See "Legal Matters" above~~Sierra Club and the MEIC filed an administrative appeal with the Board of Environmental Review, setting forth challenges to certain components of the Title V permits for ~~information on a notice of intent to sue received~~Colstrip and Corette. These challenges include: 1) the regional haze requirements should have been included in ~~July 2012 by~~the Title V permits for Corette and Colstrip; 2) the MATS requirements should have been included in the Title V permits for Corette and Colstrip; 3) the particulate monitoring methodology is inadequate at Corette and Colstrip; and 4) sulfur dioxide monitoring is inadequate at Corette. PPL Montana is participating in these proceedings as an intervenor, but cannot predict the outcomes.

On January 31, 2013, the Sierra Club and ~~other owners~~the MEIC alleged identical claims in their joint petition to the EPA, requesting that the EPA object to the MDEQ's issuance of ~~Colstrip.~~Colstrip's and Corette's Title V permits. PPL ~~PPL Energy Supply, LKE, LG&E and KU are unable to~~Montana cannot predict ~~whether such actions will be brought against any~~the outcome of ~~their other plants.~~this parallel matter pending before the EPA.

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

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

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

~~Greenhouse Gas~~GHG Regulations and Tort Litigation

As a result of the April 2007 U.S. Supreme Court decision that the EPA has authority under the Clean Air Act to regulate GHG emissions from new motor vehicles, in April 2010, the EPA and the U.S. Department of Transportation issued new light-duty vehicle emissions standards that apply tobeginning with 2012 model year vehicles. The EPA ~~has~~ also clarified that this standard, beginning in 2011, ~~also~~ authorized regulation of GHG emissions from stationary sources under the NSR and Title V operating permit provisions of the Clean Air Act. As a result, any new sources or major modifications to existing GHG sources causing a net significant emissions increase ~~requires~~will require adherence to the BACT permit limits for GHGs. ~~These~~The rules were challenged, and in June 2012, the U.S. Court of Appeals for the District of Columbia Circuit upheld the EPA's regulations. In December 2012, the Court denied petitions for rehearing pertaining to the Court's June 2012 opinion.

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

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

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

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

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

A number of lawsuits have been filed asserting common law claims including nuisance, trespass and negligence against various companies with GHG emitting plants, and the law remains unsettled on these claims. In September 2009, the U.S. Court of Appeals for the Second Circuit in the case of AEP v. Connecticut reversed a federal district court's decision and ruled that several states and public interest groups, as well as the City of New York, could sue five electric utility companies under federal common law for allegedly causing a public nuisance as a result of their emissions of GHGs. In June 2011, the U.S. Supreme Court overturned the lower court and held that such federal common law claims were displaced by the Clean Air Act and regulatory actions of the EPA. In addition, in Comer v. Murphy Oil (Comer case), the U.S. Court of Appeals for the Fifth Circuit (Fifth Circuit) declined to overturn a district court ruling that plaintiffs did not have standing to pursue state common law claims against companies that emit GHGs. The complaint in the Comer case named the previous indirect parent of LKE as a defendant based upon emissions from the Kentucky plants. In January 2011, the Supreme Court denied a petition to reverse the Fifth Circuit's ruling. In May 2011, the plaintiffs in the Comer case filed a substantially similar complaint in federal district court in Mississippi against 87 companies, including KU and three other indirect subsidiaries of LKE, under a Mississippi statute that allows the re-filing of an action in certain circumstances. In March 2012, the Mississippi federal court granted defendants' motions to dismiss the state common law claims because plaintiffs had previously raised the same claims, plaintiffs lacked standing, plaintiffs' claims were displaced by the Clean Air Act, and on other grounds. In April 2012, plaintiffs filed a notice of appeal in the Fifth Circuit. Additional litigation in federal and state courts over these issues is continuing. PPL, LKE and KU cannot predict the outcome of this litigation 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. ~~In the 112th Congress, the Clean Energy Standard Act of 2012 (S.2146) was~~Federal legislation on renewable energy is not expected to be introduced which would mandate electric utilities to supply 24% of their electricity sales from qualified resources by 2015, increasing 3% per year up to 84% by 2035. This legislation will not likely be addressed in the remaining days of this ~~Congress.~~year. In Pennsylvania, bills were recently introduced calling for an increase in ~~both~~AEPS Tier 1 obligations and to create a $25 million permanent funding program for solar generation. Bills adding new hydropower to Montana's renewable portfolio standard have moved through the ~~Senate and House amending~~legislative process. PPL cannot predict the ~~existing Alternative Energy Portfolio Standard to accelerate the current solar obligation, but no action was taken before the end~~ultimate outcome of ~~the 2011-2012 legislative session.~~this legislation at this time.

PPL, ~~and~~ PPL Energy Supply, LKE, LG&E and KU believe there are financial, regulatory and logistical uncertainties related to ~~GHG reductions and~~ the implementation of renewable energy mandates that will need to be resolved before the impact of such requirements on ~~PPL and PPL Energy Supply~~them can be estimated. Such uncertainties, among others, include the need to provide back-up supply to augment intermittent renewable generation, potential generation over-supply that could result from such renewable generation and back-up, impacts to PJM's capacity market and the need for substantial changes to transmission and distribution systems to accommodate renewable energy sources. These uncertainties are not directly addressed by proposed legislation. PPL and PPL Energy Supply cannot predict at this time the effect on their competitive plants' future competitive position, results of operation, cash flows and financial position of renewable energy mandates that may be adopted, although the costs to implement and comply with any such requirements could be significant.

Water/Waste

Coal Combustion Residuals (CCRs) (PPL, PPL Energy Supply, LKE, LG&E and KU)

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

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

The EPA is continuing to evaluate the unprecedented number of comments it received on its June 2010 proposed regulations. In October 2011, the EPA issued a Notice of Data Availability (NODA) that requests comments on selected documents that the EPA received during the comment period for the proposed regulations. In addition, the U.S. House of Representatives in September 2012 approved a bill that was revised in the Senate to modify Subtitle D of the RCRA to provide for the proper management and disposal of CCRs and to preclude the EPA from regulating CCRs under Subtitle C of the RCRA. ~~This revised bill~~Similar legislation is being considered in the ~~Senate,~~2013 Congress and the prospect for passage ~~of this legislation~~ is uncertain.

In January 2012, a coalition of environmental groups filed a 60-day notice of intent to sue the EPA for failure to perform nondiscretionary duties under RCRA, which could require a deadline for the EPA to issue strict CCR regulations. In February 2012, two CCR recycling companies also issued a 60-day notice of intent to sue the EPA over its timeliness in issuing CCR regulations, but they requested that the EPA take a Subtitle D approach that would allow for continued recycling of CCRs. The coalition filed its lawsuit in April 2012 and litigation is continuing.

A final rulemaking is currently expected before the end of 2015. However, the timing of the final regulations could be accelerated by the outcome of the above litigation, which could require the EPA to issue its regulations sooner.

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

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

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

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

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

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

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

Seepages and Groundwater Infiltration - Pennsylvania, Montana and Kentucky

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

Seepages or groundwater infiltration have been detected at active and retired wastewater basins and landfills at various PPL, PPL Energy Supply, LKE, LG&E and KU plants. PPL, PPL Energy Supply, LKE, LG&E and KU have completed or are completing assessments of seepages or groundwater infiltration at various facilities and have completed or are working with agencies to implement abatement measures, where required. A range of reasonably possible losses cannot currently be estimated.

(PPL and PPL Energy Supply)

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

In August 2012, PPL Montana entered into an Administrative Order on Consent (AOC) with the ~~Montana Department of Environmental Quality (MDEQ)~~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 ~~is to~~ 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 ~~environmental groups~~the Sierra Club, the ~~Montana Environmental Information Center (MEIC),~~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 coal ash disposal and wastewater ponds at the Colstrip plant. The complaint seeks a declaration that the operations of the impoundments violate the statutes addressed above, requests a writ of mandamus directing the MDEQ to enforce the same, and seeks recovery of attorneys' fees and costs. PPL is vigorously defending these allegations, and PPL and PPL Energy Supply cannot predict the outcome of this matter. The petition filed in Rosebud County has been stayed pending the outcome of this matter.

Clean Water Act 316(b) (PPL, PPL Energy Supply, LKE, LG&E and KU)

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

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

~~In October 2009,~~On April 19, 2013, the EPA ~~released its Final Detailed Study~~issued proposed regulations to revise discharge limitations for steam electric generation wastewater permits. The proposed limitations are based on the EPA review of available treatment technologies and their capacity for reducing pollutants and include new requirements for fly ash and bottom ash handling and metal cleaning wastes, as well as new limits for scrubber wastewater, gasification wastewater and landfill leachate. The proposal contains several alternative approaches, some of which could significantly impact PPL's coal-fired plants. PPL will work with industry groups to comment on the ~~Steam Electric Power Generating effluent limitations guidelines and standards.~~proposed regulation. The ~~EPA~~final regulation is expected to ~~issue~~be issued in May 2014. At the ~~final regulations in 2014.~~present time, 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. Under the Clean Water Act, permits are subject to renewal every five years. PPL, PPL Energy Supply, LKE, LG&E and KU

are unable to predict the outcome of this matter or estimate a range of reasonably possible costs, but the costs could be significant.

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

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

The EPA is reassessing its polychlorinated biphenyls (PCB) regulations under the Toxics Substance Control Act, which currently allow certain PCB articles to remain in use. In April 2010, the EPA issued an Advanced Notice of Proposed Rulemaking for changes to these regulations. This rulemaking could lead to a phase-out of all PCB-containing equipment. The EPA is planning to propose the revised regulations in ~~late 2012 or 2013.~~2014. PCBs are found, in varying degrees, in all of the Registrants' operations. The Registrants cannot predict at this time the outcome of these proposed EPA regulations and what impact, if any, they would have on their facilities, but the costs could be significant.

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 to~~at 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 ~~methods~~method 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, the cost of which could be significant.

In ~~March 2012,~~May 2010, the subsidiary received a draft NPDES permit (renewed) for the Brunner Island plant from the PADEP. This permit includes new water quality-based limits for the scrubber wastewater plant. Some of these limits may not be achievable with the existing treatment system. Several agencies and environmental groups commented on the draft permit, raising issues that must be resolved ~~in order~~ to obtain a final permit for the plant. PPL Energy Supply cannot predict the outcome of the final resolution of the permit issues at this time, or what impact, if any, they would have on this facility, but the costs could be significant.

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

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

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

PPL Electric is potentially responsible for costs at several sites listed by the EPA under the federal Superfund program, including the Columbia Gas Plant site, the Metal Bank site and the Ward Transformer site. Clean-up actions have been or are being undertaken at all of these sites, the costs of which have not been significant to PPL Electric. However, should the EPA require different or additional measures in the future, or should PPL Electric's share of costs at multi-party sites increase substantially more than currently expected, the costs could be significant.

PPL Electric, LG&E and KU are remediating or have completed the remediation of several sites that were not addressed under a regulatory program such as Superfund, but for which PPL Electric, LG&E and KU may be liable for remediation. These include a number of former coal gas manufacturing plants in Pennsylvania and Kentucky previously owned or operated or currently owned by predecessors or affiliates of PPL Electric, LG&E and KU. There are additional sites, formerly owned or operated by PPL Electric, LG&E and KU predecessors or affiliates, for which PPL Electric, LG&E and KU lack information on current site conditions and are therefore unable to predict what, if any, potential liability they may have.

Depending on the outcome of investigations at sites where investigations have not begun or been completed or developments at sites for which PPL Electric, LG&E and KU currently lack information, the costs of remediation and other liabilities could be material. PPL, PPL Electric, LKE, LG&E and KU ~~are unable to~~cannot estimate a range of reasonably possible losses, if any, related to these matters.

The EPA is evaluating the risks associated with polycyclic aromatic hydrocarbons and naphthalene, chemical by-products of coal gas manufacturing. As a result of the EPA's evaluation, individual states may establish ~~more stringent~~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.

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

Under the property and replacement power insurance programs, PPL Susquehanna could be assessed retroactive premiums in the event of the insurers' adverse loss experience. ~~At September 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 ~~September 30, 2012.~~March 31, 2013. The total recorded liability at ~~September 30, 2012~~March 31, 2013 and December 31, ~~2011,~~2012, was $24 ~~million and $14~~ million for PPL and $20 ~~million and $11~~ million for LKE. The probability of expected payment/performance under each of these guarantees is remote except for "WPD guarantee of pension and other obligations of unconsolidated entities" and "Indemnification of lease termination and other divestitures." For reporting purposes, on a consolidated basis, all guarantees of PPL Energy Supply (other than the letters of credit), PPL Electric, LKE, LG&E and KU also apply to PPL, and all guarantees of LG&E and KU also apply to LKE.

Exposure at Expiration
September 30, 2012 (a) Date
PPL
Indemnifications related to the WPD Midlands acquisition (b)
WPD indemnifications for entities in liquidation and sales of assets $ 298 (c) 2014 - 2018
WPD guarantee of pension and other obligations of unconsolidated entities 91 (d) 2015
Tax indemnification related to unconsolidated WPD affiliates (e)

PPL Energy Supply
Letters of credit issued on behalf of affiliates 21 (f) 2012 - 2014
Retrospective premiums under nuclear insurance programs 48 (g)
Nuclear claims assessment under The Price-Anderson Act Amendments under The Energy Policy Act of 2005 235 (h)
Indemnifications for sales of assets 262 (i) 2012 - 2025
Indemnification to operators of jointly owned facilities 6 (j)
Guarantee of a portion of a divested unconsolidated entity's debt 22 (k) 2018

PPL Electric
Guarantee of inventory value 22 (l) 2016

LKE
Indemnification of lease termination and other divestitures 301 (m) 2021 - 2023

LG&E and KU
LG&E and KU guarantee of shortfall related to OVEC (n)

	Exposure at			Expiration
	March 31, 2013 (a)			Date
PPL
Indemnifications related to the WPD Midlands acquisition			(b)
WPD indemnifications for entities in liquidation and sales of assets	$	10	(c)	2018
WPD guarantee of pension and other obligations of unconsolidated entities		85	(d)	2015

	Exposure at			Expiration
	March 31, 2013 (a)			Date
PPL Energy Supply
Letters of credit issued on behalf of affiliates		23	(e)	2013 - 2014
Retrospective premiums under nuclear insurance programs		48	(f)
Nuclear claims assessment under The Price-Anderson Act as amended		235	(g)
Indemnifications for sales of assets		250	(h)	2025
Indemnification to operators of jointly owned facilities		6	(i)
Guarantee of a portion of a divested unconsolidated entity's debt		22	(j)	2018

PPL Electric
Guarantee of inventory value		24	(k)	2016

LKE
Indemnification of lease termination and other divestitures		301	(l)	2021 - 2023

LG&E and KU
LG&E and KU guarantee of shortfall related to OVEC			(m)

(a)	Represents the estimated maximum potential amount of future payments that could be required to be made under the guarantee.

(b)

Prior to PPL's acquisition, WPD Midlands Holdings Limited had agreed to indemnify certain former directors of a Turkish entity, in which WPD Midlands Holdings Limited previously owned an interest, for any liabilities that may arise as a result of an investigation by Turkish tax authorities, and PPL WEM has received a cross-indemnity from E.ON AG with respect to these indemnification obligations. Additionally, PPL subsidiaries agreed to provide indemnifications to subsidiaries of E.ON AG for certain liabilities relating to properties and assets owned by affiliates of E.ON AG that were transferred to WPD Midlands in connection with the acquisition. The maximum exposure and expiration of these indemnifications cannot be estimated because the maximum potential liability is not capped and the expiration date is not specified in the transaction documents.

(c)

In connection with the liquidation of wholly owned subsidiaries that have been deconsolidated upon turning the entities over to the liquidators, certain affiliates of PPL Global have agreed to indemnify the liquidators, directors and/or the entities themselves for any liabilities or expenses arising during the liquidation process, including liabilities and expenses of the entities placed into liquidation. In some cases, the indemnifications are limited to a maximum amount that is based on distributions made from the subsidiary to its parent either prior or subsequent to being placed into liquidation. In other cases, the maximum amount of the indemnifications is not explicitly stated in the agreements. The indemnifications generally expire two to seven years subsequent to the date of dissolution of the entities. The exposure noted only includes those cases in which the agreements provide for a specific limit on the amount of the indemnification, and the expiration date was based on an estimate of the dissolution date of the entities.

In connection with their sales of various businesses, WPD and its affiliates have provided the purchasers with indemnifications that are standard for such transactions, including indemnifications for certain pre-existing liabilities and environmental and tax matters. In addition, in connection with certain of these sales, WPD and its affiliates have agreed to continue their obligations under existing third-party guarantees, either for a set period of time following the transactions or upon the condition that the purchasers make reasonable efforts to terminate the guarantees. Finally, WPD and its affiliates remain secondarily responsible for lease payments under certain leases that they have assigned to third parties.

(d)

As a result of the privatization of the utility industry in the U.K., certain electric associations' roles and responsibilities were discontinued or modified. As a result, certain obligations, primarily pension-related, associated with these organizations have been guaranteed by the participating members. Costs are allocated to the members based on predetermined percentages as outlined in specific agreements. However, if a member becomes insolvent, costs can be reallocated to and are guaranteed by the remaining members. At ~~September 30, 2012,~~March 31, 2013, WPD has recorded an estimated discounted liability based on its current allocated percentage of the total expected costs for which the expected payment/performance is probable. Neither the expiration date nor the maximum amount of potential payments for certain obligations is explicitly stated in the related agreements. Therefore, they have been estimated based on the types of obligations.

(e)	Two WPD unconsolidated affiliates were refinanced during 2005. Under the terms of the refinancing, WPD indemnified the lender against certain tax and other liabilities. These indemnifications expired in the second quarter of 2012.

~~(f)~~

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.

~~(g)~~(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.

~~(h)~~(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.

~~(i)~~(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.

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 ~~certain~~most representations and warranties expired in the ~~second~~fourth 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.

~~(j)~~(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.

~~(k)~~(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.

~~(l)~~(k)

PPL Electric entered into a contract with a third party logistics firm that provides inventory procurement and fulfillment services. Under the contract, the logistics firm has title to the inventory purchased for PPL Electric's use. Upon termination of the contract, PPL Electric has guaranteed to purchase any remaining inventory that has not been used or sold by the logistics firm at the weighted-average cost at which the logistics firm purchased the ~~inventory, thus protecting the logistics firm from reductions in the fair value of the~~ inventory.

~~(m)~~(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 government fines and penalties fall outside the cumulative cap. LKE has contested the applicability of the indemnification requirement relating to one matter presented by a counterparty under this guarantee. Another guarantee with a maximum exposure of $100 million covering other indemnifications expires in 2023. In May 2012, LKE's indemnitee received an arbitration panel's decision affecting this matter, which granted LKE's indemnitee certain rights of first refusal to purchase excess power at a market-based price rather than at an absolute fixed price. In ~~July 2012,~~January 2013, LKE's indemnitee ~~filed~~commenced a ~~judicial action~~proceeding in the Kentucky Court of Appeals appealing the December 2012 order of the Henderson Circuit Court ~~seeking to vacate~~confirming the arbitration ~~decision and will present oral arguments in November 2012.~~award. LKE believes its indemnification obligations in this matter remain subject to various uncertainties, including the potential for additional legal ~~status of the court's review of~~challenges regarding the arbitration decision as well as future prices, availability and demand for the subject excess power. LKE continues to evaluate various legal and commercial options with respect to this indemnification matter. The ultimate outcomes of the WKE termination-related indemnifications cannot be predicted at this time. Additionally, LKE has indemnified various third parties related to historical obligations for other divested subsidiaries and affiliates. The indemnifications vary by entity and the maximum exposures range from being capped at the sale price to no specified maximum; however, LKE is not aware of formal claims under such indemnities made by any party at this time. LKE could be required to perform on these indemnifications in the event of covered losses or liabilities being claimed by an indemnified party. InLKE cannot predict 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. No additional material loss is anticipated by reasonultimate outcomes of such ~~indemnifications.~~indemnification circumstances, but does not currently expect such outcomes to result in significant losses above the amounts recorded.

~~(n)~~(m)

Pursuant to the OVEC power purchase contract, expiring in June 2040, LG&E and KU are obligated to pay a demand charge which includes, among other charges, debt service and amortization toward principal retirement, decommissioning costs, post-retirement and post-employment benefits costs (other than pensions), and reimbursement of plant operating, maintenance and other expenses. The demand charge is expected to cover LG&E's and KU's shares of the cost of the listed items over the term of the contract. However, in the event there is a shortfall in covering these costs, LG&E and KU are obligated to pay their share of the excess debt service, post-retirement and ~~post-employment 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.

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 $22 million and $60 million for the three and nine months ended September 30, 2012 and $5 million and $15 million during the same periods in 2011. The sales and purchases between PPL EnergyPlus and PPL Electric are included in the Statements of Income as "Wholesale energy marketing to affiliate" by PPL Energy Supply and as "Energy purchases from affiliate" by PPL Electric.

Under the standard Supply Master Agreement for the solicitation process, PPL Electric requires all suppliers to post collateral once credit exposures exceed defined credit limits. PPL EnergyPlus is required to post collateral with PPL ~~Electric~~Electric: (a) when the ~~aggregate credit exposure with respect to~~market 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 ~~September 30, 2012.~~March 31, 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 ~~September 30, 2012,~~March 31, 2013, PPL Energy Supply had a net credit exposure of ~~$39~~$23 million from PPL Electric from its commitment as a PLR supplier and from the sale of its accounts receivable to PPL Electric.

~~Wholesale Sales and Purchases~~ ~~(LG&E and KU)~~

LG&E and KU jointly dispatch their generation units with the lowest cost generation used to serve their retail native load. When LG&E has excess generation capacity after serving its own retail native load and its generation cost is lower than that of KU, KU purchases electricity from LG&E. When KU has excess generation capacity after serving its own retail native load and its generation cost is lower than that of LG&E, LG&E purchases electricity from KU. These transactions are reflected in the Statements of Income as "Electric revenue from affiliate" and "Energy purchases from affiliate" and are recorded at a price equal to the seller's fuel cost. Savings realized from such intercompany transactions are shared equally between the two companies. The volume of energy each company has to sell to the other is dependent on its native load needs and its available generation.

Allocations of ~~Corporate Service~~PPL 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 ~~September 30,~~March 31, which PPL management believes are reasonable, including amounts applied to accounts that are further distributed between capital and ~~expense:~~expense.

	Three Months				Nine Months				Three Months
	2012		2011		2012		2011		2013		2012

PPL Energy Supply	$	49	$	44	$	159	$	138	$	57	$	57
PPL Electric		35		34		116		108		38		42
LKE		3		3		11		12		4		5

Intercompany Billings by LKS (LG&E and KU)

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

Three Months Nine Months
2012 2011 2012 2011

LG&E $ 51 $ 51 $ 132 $ 134
KU 33 44 114 148

~~Intercompany Borrowings~~

~~(PPL Energy Supply)~~

A PPL Energy Supply subsidiary periodically holds revolving demand notes from certain affiliates. At September 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 "Notes receivable from affiliates" 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 not significant for the three and nine months ended September 30, 2012 and the three months ended September 30, 2011. For the nine months ended September 30, 2011, interest earned on the borrowings was $6 million, substantially all of which was attributable to borrowings by PPL Energy Funding.

~~(PPL Electric)~~

A PPL Electric subsidiary periodically holds revolving demand notes from certain affiliates. At September 30, 2012, there was a $210 million balance outstanding and no balance was outstanding at December 31, 2011. The note is reflected in "Notes receivable from affiliates" on the Balance Sheet. The interest rate on borrowings is equal to one-month LIBOR plus a spread. The interest rate on the outstanding borrowings at September 30, 2012 was 1.98%. For the three and nine months ended September 30, 2012 and 2011, the interest earned on these revolving facilities was not significant.

	Three Months
	2013		2012

LG&E	$	39	$	41
KU		66		46

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

Intercompany Borrowings (LKE)

LKE maintains a $300 million revolving demand note with a PPL Energy ~~Supply~~Funding subsidiary whereby LKE can borrow funds on a short-term basis at market-based rates. The interest rates on borrowings are equal to one-month LIBOR plus a spread. At ~~September 30, 2012~~March 31, 2013 and December 31, ~~2011, there were no balances outstanding. Interest expense incurred~~2012, $85 million and $25 million was outstanding and was reflected in "Notes payable with affiliates" on the ~~revolving~~Balance Sheet. The interest rate on the outstanding borrowing at March 31, 2013 was 1.7%. Interest on the demand note ~~with the PPL Energy Supply subsidiary~~ was not significant for the three ~~and nine~~ months ended ~~September 30, 2012~~March 31, 2013 and ~~2011.~~

LKE holds 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 September 30, 2012 and December 31, 2011, $6 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 September 30, 2012 and December 31, 2011 were 2.23% and 2.27%. Interest income on the note receivable was not significant for the three and nine months ended September 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 September 30, 2012 and December 31, 2011, there was no balance outstanding. Interest expense and interest income on the money pool agreement with LKE and/or KU was not significant for the three and nine months ended September 30, 2012 and 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 September 30, 2012 and December 31, 2011, there was no balance outstanding. Interest expense and interest income on the money pool agreement with LKE and/or LG&E was not significant for the three and nine months ended September 30, 2012 and 2011.

~~Trademark Royalties~~ ~~(PPL Energy Supply)~~

A PPL subsidiary owns PPL trademarks and billed certain affiliates for their use under a licensing agreement. This agreement was terminated in December 2011. PPL Energy Supply was charged $10 million and $30 million of license fees for the three and nine months ended September 30, 2011. These charges are primarily included in "Other operation and maintenance" on the Statement of Income.2012.

Intercompany ~~Insurance~~Derivatives (~~PPL Electric)~~LKE, LG&E and KU)

Periodically, LG&E and KU enter into forward-starting interest rate swaps with PPL. These hedging instruments have terms identical to forward-starting swaps entered into by PPL ~~Power Insurance Ltd. (PPL Power Insurance) is a subsidiary of PPL that provides insurance coverage to PPL and its subsidiaries~~with third parties. See Note 14 for ~~property damage, general/public liability and workers' compensation.~~

~~Due to damages resulting from several PUC-reportable storms that occurred in 2011, PPL Electric exceeded its deductible for the 2011 policy year. Probable recoveries~~additional information on insurance claims with PPL Power Insurance of $26.5 million were recorded at September 30, 2011, of which $7 million and $16 million were recorded during the three and nine months ended September 30, 2011 in "Other operation and maintenance" on the Statement of Income, with the remainder recorded in PP&E on the Balance Sheet. In September 2012, PPL Electric received $26.5 million from the settlement of its 2011 claims.intercompany derivatives.

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

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

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 ~~September 30~~March 31 was:

Three Months Nine Months
2012 2011 2012 2011
PPL
Other Income
Gain on redemption of debt (a) $ 22 $ 22
Earnings on securities in NDT funds $ 5 2 $ 17 20
Interest income 1 1 4 5
AFUDC - equity component 2 2 7 5
Net hedge gains associated with the 2011 Bridge Facility (b) 55
Earnings (losses) from equity method investments (1) 1 (7) 1
Miscellaneous - Domestic 3 2 8 9
Miscellaneous - U.K. (1) 1 1
Total Other Income 9 30 30 118
Other Expense
Economic foreign currency exchange contracts (Note 14) 47 (11) 40 (11)
Charitable contributions 1 2 7 7
WPD Midlands acquisition-related costs (Note 8) 36
Foreign currency loss on 2011 Bridge Facility (c) 57
U.K. stamp duty tax (Note 8) 21
Miscellaneous - Domestic 4 2 12 7
Miscellaneous - U.K. 1 2 3
Total Other Expense 53 (7) 61 120
Other Income (Expense) - net $ (44) $ 37 $ (31) $ (2)

		Three Months
		2013		2012
PPL
Other Income
	Earnings on securities in NDT funds	$	5	$	8
	Interest income		1		1
	AFUDC - equity component		3		2
	Miscellaneous - Domestic		2		2
	Miscellaneous - U.K.		1
	Total Other Income		12		13
Other Expense
	Economic foreign currency exchange contracts (Note 14)		(119)		18
	Charitable contributions		4		4
	Miscellaneous - Domestic		4		6
	Miscellaneous - U.K.		1		2
	Total Other Expense		(110)		30
Other Income (Expense) - net		$	122	$	(17)

Three Months Nine Months
2012 2011 2012 2011
PPL Energy Supply
Other Income
Earnings on securities in NDT funds $ 5 $ 2 $ 17 $ 20
Interest income 1 1 1
Miscellaneous 1 3 5
Total Other Income 6 3 21 26
Other Expense
Charitable contributions 1 1 2 2
Miscellaneous 1 5 4
Total Other Expense 2 1 7 6
Other Income (Expense) - net $ 4 $ 2 $ 14 $ 20

~~(a)~~

In July 2011, as a result of PPL Electric's redemption of 7.125% Senior Secured Bonds due 2013, PPL recorded a gain on the accelerated amortization of the fair value adjustment to the debt recorded in connection with previously settled fair value hedges.

~~(b)~~

~~Represents a gain on foreign currency contracts that hedged the repayment of the 2011 Bridge Facility borrowing.~~

~~(c)~~

~~Represents a foreign currency loss related to the repayment of the 2011 Bridge Facility borrowing.~~

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

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 nine~~ months ended ~~September 30,~~March 31, 2013 and 2012, there were no transfers between Level 1 and Level 2. See Note 1 in each Registrant's 2012 Form 10-K for information on the levels in the fair value hierarchy.

Recurring Fair Value Measurements

The assets and liabilities measured at fair value were:

			September 30, 2012								December 31, 2011										March 31, 2013								December 31, 2012
			Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3				Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
PPL	PPL																		PPL
Assets	Assets																		Assets
	Cash and cash equivalents		$	946	$	946					$	1,202	$	1,202					Cash and cash equivalents		$	853	$	853					$	901	$	901
	Restricted cash and cash equivalents (a)			169		169						209		209					Restricted cash and cash equivalents (a)			186		186						135		135
	Price risk management assets:																		Price risk management assets:
		Energy commodities		2,604		5	$	2,569	$	30		3,423		3	$	3,390	$	30		Energy commodities		1,676		3	$	1,651	$	22		2,068		2	$	2,037	$	29
		Interest rate swaps										3				3				Interest rate swaps		27				27				15				15
		Foreign currency contracts										18				18				Foreign currency contracts		96				96
		Cross-currency swaps		24				22		2		24				20		4		Cross-currency swaps		83				83				14				13		1
	Total price risk management assets			2,628		5		2,591		32		3,468		3		3,431		34	Total price risk management assets			1,882		3		1,857		22		2,097		2		2,065		30

8071

				March 31, 2013								December 31, 2012
				Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
	NDT funds:
		Cash and cash equivalents			8		8						11		11
		Equity securities
			U.S. large-cap		457		342		115				412		308		104
			U.S. mid/small-cap		68		28		40				60		25		35
		Debt securities
			U.S. Treasury		95		95						95		95
			U.S. government sponsored agency		9				9				9				9
			Municipality		83				83				82				82
			Investment-grade corporate		40				40				40				40
			Other		3				3				3				3
		Receivables (payables), net			1		(1)		2						(2)		2
	Total NDT funds				764		472		292				712		437		275
	Auction rate securities (b)				19				3		16		19				3		16
Total assets				$	3,704	$	1,514	$	2,152	$	38	$	3,864	$	1,475	$	2,343	$	46

Liabilities
	Price risk management liabilities:
		Energy commodities		$	1,432	$	2	$	1,422	$	8	$	1,566	$	2	$	1,557	$	7
		Interest rate swaps			69				69				80				80
		Foreign currency contracts			3				3				44				44
		Cross-currency swaps			1				1				4				4
	Total price risk management liabilities			$	1,505	$	2	$	1,495	$	8	$	1,694	$	2	$	1,685	$	7

PPL Energy Supply
Assets
	Cash and cash equivalents			$	147	$	147					$	413	$	413
	Restricted cash and cash equivalents (a)				122		122						63		63
	Price risk management assets:
		Energy commodities			1,676		3	$	1,651	$	22		2,068		2	$	2,037	$	29
	Total price risk management assets				1,676		3		1,651		22		2,068		2		2,037		29
	NDT funds:
		Cash and cash equivalents			8		8						11		11
		Equity securities
			U.S. large-cap		457		342		115				412		308		104
			U.S. mid/small-cap		68		28		40				60		25		35
		Debt securities
			U.S. Treasury		95		95						95		95
			U.S. government sponsored agency		9				9				9				9
			Municipality		83				83				82				82
			Investment-grade corporate		40				40				40				40
			Other		3				3				3				3
		Receivables (payables), net			1		(1)		2						(2)		2
	Total NDT funds				764		472		292				712		437		275
	Auction rate securities (b)				16				3		13		16				3		13
Total assets				$	2,725	$	744	$	1,946	$	35	$	3,272	$	915	$	2,315	$	42

Liabilities
	Price risk management liabilities:
		Energy commodities		$	1,432	$	2	$	1,422	$	8	$	1,566	$	2	$	1,557	$	7
	Total price risk management liabilities			$	1,432	$	2	$	1,422	$	8	$	1,566	$	2	$	1,557	$	7

PPL Electric
Assets
	Cash and cash equivalents			$	31	$	31					$	140	$	140
	Restricted cash and cash equivalents (c)				12		12						13		13
Total assets				$	43	$	43					$	153	$	153

September 30, 2012 December 31, 2011
Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3
NDT funds:
Cash and cash equivalents 12 12 12 12
Equity securities
U.S. large-cap 412 307 105 357 267 90
U.S. mid/small-cap 59 25 34 52 22 30
Debt securities
U.S. Treasury 95 95 86 86
U.S. government sponsored agency 9 9 10 10
Municipality 83 83 83 83
Investment-grade corporate 40 40 38 38
Other 2 2 2 2
Receivables (payables), net (1) (3) 2 (3) 3
Total NDT funds 711 436 275 640 384 256
Auction rate securities (b) 19 3 16 24 24
Total assets $ 4,473 $ 1,556 $ 2,869 $ 48 $ 5,543 $ 1,798 $ 3,687 $ 58

Liabilities
Price risk management liabilities:
Energy commodities $ 1,947 $ 5 $ 1,937 $ 5 $ 2,345 $ 1 $ 2,327 $ 17
Interest rate swaps 83 83 63 63
Foreign currency contracts 36 36
Cross-currency swaps 2 2 2 2
Total price risk management liabilities $ 2,068 $ 5 $ 2,058 $ 5 $ 2,410 $ 1 $ 2,392 $ 17

PPL Energy Supply
Assets
Cash and cash equivalents $ 432 $ 432 $ 379 $ 379
Restricted cash and cash equivalents (a) 98 98 145 145
Price risk management assets:
Energy commodities 2,604 5 $ 2,569 $ 30 3,423 3 $ 3,390 $ 30
Total price risk management assets 2,604 5 2,569 30 3,423 3 3,390 30
NDT funds:
Cash and cash equivalents 12 12 12 12
Equity securities
U.S. large-cap 412 307 105 357 267 90
U.S. mid/small-cap 59 25 34 52 22 30
Debt securities
U.S. Treasury 95 95 86 86
U.S. government sponsored agency 9 9 10 10
Municipality 83 83 83 83
Investment-grade corporate 40 40 38 38
Other 2 2 2 2
Receivables (payables), net (1) (3) 2 (3) 3
Total NDT funds 711 436 275 640 384 256
Auction rate securities (b) 16 3 13 19 19
Total assets $ 3,861 $ 971 $ 2,847 $ 43 $ 4,606 $ 911 $ 3,646 $ 49

Liabilities
Price risk management liabilities:
Energy commodities $ 1,947 $ 5 $ 1,937 $ 5 $ 2,345 $ 1 $ 2,327 $ 17
Total price risk management liabilities $ 1,947 $ 5 $ 1,937 $ 5 $ 2,345 $ 1 $ 2,327 $ 17

PPL Electric
Assets
Cash and cash equivalents $ 31 $ 31 $ 320 $ 320
Restricted cash and cash equivalents (c) 13 13 13 13
Total assets $ 44 $ 44 $ 333 $ 333

LKE	LKE														LKE
Assets	Assets														Assets
															Cash and cash equivalents			$	52	$	52			$	43	$	43
															Restricted cash and cash equivalents (d)				27		27				32		32
															Price risk management assets:
	Cash and cash equivalents		$	90	$	90			$	59	$	59					Interest rate swaps		24			$	24		14			$	14
	Restricted cash and cash equivalents (e)			32		32				29		29			Total price risk management assets				24				24		14				14
Total assets	Total assets		$	122	$	122			$	88	$	88			Total assets			$	103	$	79	$	24	$	89	$	75	$	14

Liabilities	Liabilities														Liabilities
	Price risk management liabilities:														Price risk management liabilities:
		Interest rate swaps (d)	$	62			$	62	$	60			$	60		Interest rate swaps		$	54			$	54	$	58			$	58
Total liabilities			$	62			$	62	$	60			$	60
Total price risk management liabilities															Total price risk management liabilities			$	54			$	54	$	58			$	58

8172

			September 30, 2012							December 31, 2011										March 31, 2013							December 31, 2012
			Total		Level 1		Level 2		Level 3	Total		Level 1		Level 2		Level 3				Total		Level 1		Level 2		Level 3	Total		Level 1		Level 2		Level 3
LG&E	LG&E																LG&E
Assets	Assets																Assets
	Cash and cash equivalents		$	48	$	48				$	25	$	25				Cash and cash equivalents			$	34	$	34				$	22	$	22
	Restricted cash and cash equivalents (e)			32		32					29		29				Restricted cash and cash equivalents (d)				27		27					32		32
																	Price risk management assets:
																			Interest rate swaps		12			$	12			7			$	7
Total price risk management assets																	Total price risk management assets				12				12			7				7
Total assets	Total assets		$	80	$	80				$	54	$	54				Total assets			$	73	$	61	$	12		$	61	$	54	$	7

Liabilities	Liabilities																Liabilities
	Price risk management liabilities:																Price risk management liabilities:
		Interest rate swaps (d)	$	62			$	62		$	60			$	60			Interest rate swaps		$	54			$	54		$	58			$	58
Total liabilities			$	62			$	62		$	60			$	60
Total price risk management liabilities																	Total price risk management liabilities			$	54			$	54		$	58			$	58

KU	KU																KU
Assets	Assets																Assets
	Cash and cash equivalents		$	42	$	42				$	31	$	31				Cash and cash equivalents			$	16	$	16				$	21	$	21
																	Price risk management assets:
																			Interest rate swaps		12			$	12			7			$	7
																	Total price risk management assets				12				12			7				7
Total assets	Total assets		$	42	$	42				$	31	$	31				Total assets			$	28	$	16	$	12		$	28	$	21	$	7

~~The Kentucky Regulated~~

(a)

Primarily represents costs incurred at the corporate level that have not been allocated or assigned to the segments, which is presented to reconcile segment ~~consists primarily of LKE's results from the operation of regulated electricity generation, transmission and distribution assets, primarily~~information to PPL's consolidated results. For 2012 there were no significant amounts in ~~Kentucky, as well as in Virginia and Tennessee. This segment also includes LKE's results from the regulated distribution and sale of natural gas in Kentucky.~~

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

Three Months Nine Months
2012 2011 % Change 2012 2011 % Change

Utility revenues $ 732 $ 736 (1) $ 2,095 $ 2,140 (2)
Fuel 249 245 2 677 666 2
Energy purchases 27 32 (16) 135 179 (25)
Other operation and maintenance 186 187 (1) 589 566 4
Depreciation 87 84 4 259 249 4
Taxes, other than income 11 10 10 34 28 21
Total operating expenses 560 558 1,694 1,688
Other Income (Expense) - net (4) n/a (14) (1) 1,300
Interest Expense (a) 54 53 2 163 161 1
Income Taxes 42 46 (9) 70 105 (33)
Income (Loss) from Discontinued Operations (1) (100) (6) (1) 500
Net Income Attributable to PPL Shareowners $ 72 $ 78 (8) $ 148 $ 184 (20)

~~109~~

~~(a)~~

Includes allocated interest expense of $17 million and $51 million for the three and nine months ended September 30, 2012 and $17 million and $53 million for the three and nine months ended September 30, 2011 related to the 2010 Equity Units and interest rate swaps.this category.

~~The changes in~~

(b)

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

Three Months Nine Months

Kentucky gross margins $ (4) $ (22)
Other operation and maintenance 3 (12)
Depreciation (2) (8)
Taxes, other than income (1) (6)
Other Income (Expense) - net (4) (13)
Other (2) (3)
Income Taxes 4 29
Special items, after-tax (1)
Total $ (6) $ (36)

~~See "Statement of Income Analysis - Margins - Changes in Non-GAAP Financial Measures" for an explanation of Kentucky Gross Margins.~~2013 diluted EPS.

·	~~Higher other operation and maintenance for the nine-month period, primarily due to $12 million of higher coal plant maintenance costs resulting from an increased scope of scheduled plant outages.~~

Earnings for the three months ended March 31, 2013 decreased 24% compared with 2012. See "Results of Operations" below for further discussion of PPL's business segments, details of special items and analysis of the consolidated results of operations.

·	~~Higher depreciation for the nine-month period, primarily due to PP&E additions.~~

Economic and Market Conditions

·	Higher taxes, other than income for the nine-month period, primarily due to an increase in property taxes resulting from property additions, higher assessed values, and changes in property classifications to categories with higher tax rates.

Unregulated Gross Energy Margins associated with PPL Energy Supply's competitive generation and marketing business are impacted by changes in market prices and demand for electricity and natural gas, power plant availability, competition in the markets for retail customers, fuel costs and availability, fuel transportation costs and other costs. Current depressed wholesale market prices for electricity and natural gas have resulted from general weak economic conditions and other factors, including the impact of expanded domestic shale gas development. As a result of these factors, lower future energy margins are expected to continue compared to the energy margins in 2012. As has been PPL Energy Supply's practice in periods of changing business conditions, PPL Energy Supply continues to review its future business and operational plans, including capital and operation and maintenance expenditures, as well as its hedging strategies.

PPL Energy Supply continues to monitor its Corette plant (which as previously announced will be placed in long-term reserve status, suspending the plant's operation due to expected market conditions and the costs to comply with the MATS beginning in April 2015) for impairment. The Corette plant asset group's carrying value at March 31, 2013 was $65 million. Although the Corette plant was not impaired at March 31, 2013, it is reasonably possible that an impairment could occur in future periods, as higher priced sales contracts settle, adversely impacting projected cash flows.

~~Lower other income (expense) - net for the nine-month period, primarily due to losses from an equity method investment.~~

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

~~Lower income taxes for the nine-month period, primarily due to lower 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 September 30.~~

Income Statement Three Months Nine Months
Line Item 2012 2011 2012 2011

Adjusted energy-related economic activity, net, net of tax of $0, ($1), $0, $0 Utility Revenues $ 1 $ 1
LKE acquisition-related adjustments:
Net operating loss carryforward and other tax-related adjustments Income Taxes and Other O&M $ 4
Other:
LKE discontinued operations, net of tax of $0, $1, $4, $0 (a) Disc. Operations (1) (5) (1)
Total $ (1)
Susquehanna Turbine Blade Inspection

~~(a)~~

~~The nine months ended September 30, 2012 includes an adjustment to an indemnification liability.~~

~~Outlook~~

Excluding special items, PPL projects lower segment earnings in 2012 compared with 2011, primarily driven by higher other operation and maintenance expense, higher depreciation, higher property taxes and losses from an equity method investment.

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. In November 2012, the KPSC issued an order for a settlement conference to begin on November 13, 2012. A hearing on the original application and subsequent testimony is scheduled to begin on November 27, 2012. LG&E and KU cannot predict the outcome of these proceedings, including the possibility of any agreed stipulations or settlement, which would remain subject to KPSC approval. A final order may be issued in December 2012 or January 2013.

~~110~~

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

~~U.K. Regulated Segment~~

~~The U.K. Regulated segment consists primarily of the electric distribution operations of WPD in the U.K.~~

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

Three Months Nine Months
2012 2011 % Change 2012 2011 % Change

Utility revenues $ 207 $ 194 7 $ 644 $ 613 5
Energy-related businesses 9 8 13 27 27
Total operating revenues 216 202 7 671 640 5
Other operation and maintenance 52 45 16 159 136 17
Depreciation 32 32 96 94 2
Taxes, other than income 13 14 (7) 39 40 (3)
Energy-related businesses 5 4 25 16 12 33
Total operating expenses 102 95 7 310 282 10
Other Income (Expense) - net (49) 10 (590) (39) 13 (400)
Interest Expense (a) 45 47 (4) 138 145 (5)
Income Taxes (34) (14) 143 6 14 (57)
WPD Midlands, net of tax (b) 151 118 28 392 183 114
WPD Midlands acquisition-related
adjustments, net of tax (3) (64) (95) (7) (164) (96)
Net Income Attributable to PPL Shareowners $ 202 $ 138 46 $ 563 $ 231 144
In the spring of 2013, PPL Energy Supply will begin making modifications to address the causes of turbine blade cracking at the PPL Susquehanna nuclear plant that was first identified in 2011. The modifications will be made during the Unit 2 refueling outage and an additional planned outage for Unit 1. Following completion of the modifications, PPL Energy Supply plans to continue monitoring the turbine blades using enhanced diagnostic equipment.

~~(a)~~

Includes allocated interest expense of $12 million and $35 million for the three and nine months ended September 30, 2012 and $12 million and $26 million for the three and nine months ended September 30, 2011, primarily related to the 2011 Equity Units.

Rate Case Proceedings

~~(b)~~

The nine months ended September 30, 2011 represent the results of operations of WPD Midlands for the period from the April 1, 2011 acquisition date through September 30, 2011, recorded on a one month lag. These amounts exclude acquisition-related adjustments. WPD Midlands' revenue from external customers was $312 million and $976 million for the three and nine months ended September 30, 2012 and $292 million and $499 million for the three and nine months ended September 30, 2011 (pre-tax).

The changes in the components of the U.K. Regulated segment's results between these periods were due to the following factors, which reflect reclassifications for certain items that management considers special. See additional detail of these special items in the table below. The amounts for PPL WW and WPD Midlands

Pennsylvania

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

Kentucky

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

RIIO-ED1

In October 2010, Ofgem announced changes to the regulatory framework that will be effective for the U.K. electricity distribution sector, including WPD, beginning April 2015. The framework, known as RIIO (Revenues = Incentives + Innovation + Outputs), is intended to encourage investment in regulated infrastructure. The next electricity distribution price control review is referred to as RIIO-ED1. Key components of the RIIO-ED1 are: an extension of the price review period to eight years, increased emphasis on outputs and incentives, enhanced stakeholder engagement including network customers, a stronger incentive framework to encourage more efficient investment and innovation, and continued use of a single weighted average cost of capital. Ofgem has also indicated that the depreciation of the RAV, for RAV additions after April 1, 2015, will change from 20 years to 45 years, but that they will consider transition arrangements. WPD published a draft of its 2015 - 2023 business plan on its website in March 2013 in order to solicit feedback from stakeholders on its plan prior to submission to Ofgem in July 2013. See "Item 1. Business - Background - U.K. Regulated Segment - Revenue and Regulation" in the 2012 Form 10-K for additional information. At this time, WPD cannot predict the outcome or the future financial impact of this matter.

Legislation - Regulatory Procedures and Mechanisms

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

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

FERC Formula Rates

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

Equity Forward Agreements

In connection with an April 2012 registered public offering of 9.9 million shares of PPL common stock, PPL entered into forward sale agreements with two counterparties. In conjunction with that offering, the underwriters exercised an overallotment option and PPL entered into additional forward sale agreements covering 591 thousand shares of PPL common stock.

In April 2013, PPL settled the initial forward sale agreements by the issuance of 8.4 million shares of PPL common stock and cash settlement of the remaining 1.5 million shares. PPL received net cash proceeds of $205 million, which was calculated based on an initial forward price of $27.02 per share reduced during the period the contracts were outstanding as specified in the forward sale agreements. PPL used the net proceeds to repay short-term debt obligations and for other general corporate purposes. Settlement of the forward sale agreements covering 591 thousand remaining shares will occur no later than July 2013. PPL may elect to issue common stock, cash settle or net share settle all or a portion of its rights or obligations under the forward sale agreements.

The forward sale agreements are classified as equity transactions. As a result, no amounts were recorded in the consolidated financial statements until the April 2013 settlement of the initial forward sale agreements. However, prior to the April 2013 settlement, incremental shares were included within the calculation of diluted EPS using the treasury stock method. See Note 4 to the Financial Statements for the impact on the calculation of diluted EPS.

Equity Units

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

The If-Converted Method of calculating diluted EPS was applied to the Equity Units beginning in the first quarter of 2013 resulting in $15 million of interest charges (after-tax) being added back to net income available to PPL common shareowners and 72 million shares of PPL common stock being treated as outstanding. See Note 4 to the Financial Statements for the impact on the calculation of diluted EPS.

Results of Operations

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

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.

Three Months Nine Months

PPL WW
Utility revenues $ 20 $ 47
Other operation and maintenance (6) (24)
Interest expense 2 13
Other (3) (5)
Income taxes 4 8
WPD Midlands, after-tax 29 214
U.S.
Interest expense and other (15)
Income taxes (3) (17)
Foreign currency exchange rates, after-tax (a) (7) (15)
Special items, after-tax 28 126
Total $ 64 $ 332

~~(a)~~

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

~~PPL WW~~

·	~~Higher utility revenues for the three-month period due to the April 1, 2012 price increase which resulted in $14 million of higher utility revenues and $3 million of lower regulatory recovery in 2011.~~

Higher utility revenues for the nine-month period due to the April 1, 2011 and 2012 price increases which resulted in $69 million of higher utility revenues, partially offset by $17 million of lower volumes due primarily to a downturn in the economy and the unfavorable effect of weather, and $8 million of lower regulatory recovery due to a 2012 charge to income for the over-recovery of revenues from customers.

~~111~~

·	Higher other operation and maintenance for the nine-month period primarily due to $15 million of higher pension expense resulting from an increase in amortization of actuarial losses and $8 million of higher network maintenance expense.

·	~~Lower interest expense for the nine-month period due to $11 million of lower interest expense on index-linked notes.~~

·	~~Lower income taxes for the three-month period primarily due to an income tax benefit related to the tax deductibility of interest on acquisition financing.~~

Lower income taxes for the nine-month period primarily due to a $13 million income tax benefit related to the tax deductibility of interest on acquisition financing, partially offset by higher income taxes of $8 million arising from higher pre-tax income.

~~WPD Midlands~~

·	~~Higher earnings for the three-month period due to the April 1, 2012 price increase, which resulted in $32 million of higher utility revenues.~~

·	~~The nine-month period ended September 30, 2012 is not comparable to 2011 as 2011 includes only five months of WPD Midlands' results.~~

~~U.S.~~

·	Higher interest expense and other for the nine-month period due to $13 million of higher interest expense associated with the 2011 Equity Units issued to finance the WPD Midlands acquisition due to 2012 including nine months of interest expense compared to five months in 2011.

·	~~Higher income taxes for the nine-month period due to $21 million of income tax benefits recorded in 2011 as a result of U.K. pension plan contributions.~~

~~Foreign Currency Exchange Rates~~

Changes in foreign currency exchange rates negatively affected earnings for the three and nine-month periods. The weighted-average exchange rates for British pound sterling, including the effects of foreign currency economic hedges, were approximately $1.57 in 2012 and $1.63 in 2011 for the three-month period and $1.58 in 2012 and $1.61 in 2011 for the nine-month period.

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

Income Statement Three Months Nine Months
Line Item 2012 2011 2012 2011

Foreign currency-related economic hedges, net of tax of $18, ($3), $17, ($4) (a) Other Income-net $ (30) $ 8 $ (28) $ 8
WPD Midlands acquisition-related adjustments:
2011 Bridge Facility costs, net of tax of $0, $0, $0, $13 (b) Interest Expense (30)
Foreign currency loss on 2011 Bridge Facility, net of tax of $0, $0, $0, $19 (c) Other Income-net (38)
Net hedge gains, net of tax of $0, $0, $0, ($17) (c) Other Income-net 38
Hedge ineffectiveness, net of tax of $0, $0, $0, $3 (d) Interest Expense (9)
U.K. stamp duty tax, net of tax of $0, $0, $0, $0 (e) Other Income-net (21)
Separation benefits, net of tax of $1, $22, $3, $24 (Note 8) Other O&M (1) (64) (9) (68)
Other acquisition-related adjustments, net of tax of $0, ($2), ($1), $9 (f) (2) 2 (36)
Other:
Change in U.K. tax rate (g) Income Taxes 74 69 74 69
Total $ 41 $ 13 $ 39 $ (87)

~~(a)~~

~~Represents unrealized gains (losses) on contracts that economically hedge anticipated earnings denominated in GBP.~~

~~(b)~~

~~Represents fees incurred in connection with establishing the 2011 Bridge Facility.~~

~~(c)~~

Represents the foreign currency loss on the repayment of the 2011 Bridge Facility, including a pre-tax foreign currency loss of $15 million associated with proceeds received on the U.S. dollar-denominated senior notes issued by PPL WEM in April 2011 that were used to repay a portion of PPL WEM's borrowing under the 2011 Bridge Facility. The foreign currency risk was economically hedged with forward contracts to purchase GBP, which resulted in pre-tax gains of $55 million. 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.~~

~~(e)~~

~~Tax on the transfer of ownership of property in the U.K. which is not tax deductible for income tax purposes.~~

~~112~~

~~(f)~~

The nine months ended September 30, 2011 primarily includes $36 million, pre-tax, of advisory, accounting and legal fees which are reflected in "Other Income (Expense) - net" on the Statements of Income. In addition, $9 million, pre-tax, of costs were recorded to "Other operation and maintenance" on the Statements of Income.

~~(g)~~

The U.K. Finance Act of 2011, enacted in July 2011, reduced the U.K. statutory income tax rate from 27% to 26% retroactive to April 1, 2011 and from 26% to 25% effective April 1, 2012. The U.K. Finance Act of 2012, enacted in July 2012, reduced the U.K. statutory income tax rate from 25% to 24% retroactive to April 1, 2012 and from 24% to 23% effective April 1, 2013. As a result, PPL reduced its net deferred tax liability and recognized a deferred tax benefit in the three and nine-month periods of 2012 and 2011. WPD Midlands' portion of the deferred tax benefit was $42 million for both periods in 2012 and $35 million for both periods in 2011.

~~Outlook~~

Excluding special items, PPL projects higher segment earnings in 2012 compared with 2011, primarily driven by four additional months of earnings from WPD Midlands and higher electricity delivery revenue. Partially offsetting these positive earnings drivers are higher other operation and maintenance expense, higher depreciation, higher interest expense, higher income taxes and a less favorable currency exchange rate.

Pennsylvania Regulated Segment

Supply

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

Business Strategy

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

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

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

Financial and Operational Developments

Net Income Attributable to PPL Shareowners

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

	Three Months
	2013		2012

Kentucky Regulated	$	85	$	42
U.K. Regulated		313		165
Pennsylvania Regulated		64		33
Supply		(46)		301
Corporate and Other (a)		(3)
Net Income Attributable to PPL Shareowners	$	413	$	541

EPS - basic	$	0.70	$	0.93
EPS - diluted (b)	$	0.65	$	0.93

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

Three Months Nine Months
2012 2011 % Change 2012 2011 % Change
Operating revenues
External $ 443 $ 454 (2) $ 1,303 $ 1,444 (10)
Intersegment 1 1 3 9 (67)
Total operating revenues 444 455 (2) 1,306 1,453 (10)
Energy purchases
External 137 171 (20) 410 591 (31)
Intersegment 23 5 360 61 15 307
Other operation and maintenance 148 146 1 431 402 7
Depreciation 41 38 8 119 108 10
Taxes, other than income 24 26 (8) 72 83 (13)
Total operating expenses 373 386 (3) 1,093 1,199 (9)
Other Income (Expense) - net 3 3 6 4 50
Interest Expense 25 26 (4) 73 74 (1)
Income Taxes 16 14 14 47 56 (16)
Net Income 33 32 3 99 128 (23)
Net Income Attributable to Noncontrolling Interests 4 (100) 4 12 (67)
Net Income Attributable to PPL Shareowners $ 33 $ 28 18 $ 95 $ 116 (18)

~~The changes in~~

(a)

Primarily represents costs incurred at the ~~components of the Pennsylvania Regulated segment's results between these periods were due~~corporate level that have not been allocated or assigned to the ~~following factors,~~segments, which ~~reflect reclassifications~~is presented to reconcile segment information to PPL's consolidated results. For 2012 there were no significant amounts in this category.

(b)

See "Equity Units" below for ~~items included in gross delivery margins.~~

Three Months Nine Months

Pennsylvania gross delivery margins $ 11 $ 1
Other operation and maintenance (7) (32)
Depreciation (3) (11)
Other 2 4
Income Taxes (2) 9
Noncontrolling Interests 4 8
Total $ 5 $ (21)

·	~~See "Statement of Income Analysis - Margins - Changes in Non-GAAP Financial Measures" for an explanation of Pennsylvania Gross Delivery Margins.~~information on the Equity Units' impact on the calculation of 2013 diluted EPS.

~~Higher~~Earnings for the three months ended March 31, 2013 decreased 24% compared with 2012. See "Results of Operations" below for further discussion of PPL's business segments, details of special items and analysis of the consolidated results of operations.

Economic and Market Conditions

Unregulated Gross Energy Margins associated with PPL Energy Supply's competitive generation and marketing business are impacted by changes in market prices and demand for electricity and natural gas, power plant availability, competition in the markets for retail customers, fuel costs and availability, fuel transportation costs and other operation and maintenance for the three-month period, primarily due to $9 million of higher payroll-related costs, $2 million of higher vegetation management costs and $2 million of higher corporate service costs, partially offset by $6 million of lower PUC-reportable storm costs. Current depressed wholesale market prices for electricity and natural gas have resulted from general weak economic conditions and other factors, including the impact of expanded domestic shale gas development. As a result of these factors, lower future energy margins are expected to continue compared to the energy margins in 2012. As has been PPL Energy Supply's practice in periods of changing business conditions, PPL Energy Supply continues to review its future business and operational plans, including capital and operation and maintenance expenditures, as well as its hedging strategies.

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

Susquehanna Turbine Blade Inspection

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

Rate Case Proceedings

Pennsylvania

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

Kentucky

RIIO-ED1

Legislation - Regulatory Procedures and Mechanisms

FERC Formula Rates

Equity Forward Agreements

Equity Units

Results of Operations

Segment Results

Kentucky Regulated Segment

The Kentucky Regulated segment consists primarily of LKE's regulated electricity generation, transmission and distribution operations. This segment also includes LKE's regulated distribution and sale of natural gas. In addition, the Kentucky Regulated segment is allocated certain financing costs.

Net Income Attributable to PPL Shareowners for the periods ended March 31 includes the following results:

		Three Months
		2013		2012		% Change

Utility revenues		$	800	$	705	13
Fuel			231		213	8
Energy purchases			86		74	16
Other operation and maintenance			197		206	(4)
Depreciation			82		86	(5)
Taxes, other than income			12		11	9
	Total operating expenses		608		590	3
Other Income (Expense) - net			(2)		(3)	(33)
Interest Expense			55		55
Income Taxes			50		15	233
Net Income Attributable to PPL Shareowners		$	85	$	42	102

The changes in the components of the Kentucky Regulated segment's results between these periods were due to the following factors, which reflect reclassifications for items included in Kentucky Gross Margins and certain items that management considers special. See additional detail of these special items in the table below.

	Three Months

Kentucky Gross Margins	$	75
Other operation and maintenance		10
Depreciation		(9)
Taxes, other than income		(1)
Income Taxes		(29)
Special items, after-tax		(3)
Total	$	43

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

~~113~~

~~Higher~~

Lower other operation and maintenance ~~for the nine-month period,~~ primarily due to ~~$16~~$14 million of ~~higher payroll-related~~lower costs ~~$10 million~~due to the timing and scope of ~~higher vegetation management costs, $7 million of higher corporate service costs and~~scheduled coal plant maintenance outages, partially offset by $4 million of ~~higher contractor~~adjustments to regulatory assets and liabilities.

Higher depreciation due to environmental costs related to the elimination of the 2005 and 2006 ECR plans now being included in base rates, which added $13 million to depreciation that is excluded from Margins, partially offset by ~~$13~~lower depreciation of $5 million due to revised rates that were effective January 1, 2013. Both of ~~lower PUC-reportable storm costs.~~these events are the result of the 2012 Kentucky rate case proceedings.

·	Higher depreciation for the nine-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 nine-month period, primarily due to lower~~

·	Higher income taxes primarily due to higher pre-tax income.

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

~~Outlook~~

~~PPL projects lower~~The following after-tax gains (losses), which management considers special items, also impacted the Kentucky Regulated segment's results during the periods ended March 31.

		Income Statement	Three Months
		Line Item	2013		2012

LKE acquisition-related adjustments:
		Income Taxes and Other Operation
	Net operating loss carryforward and other tax-related adjustments	and Maintenance			$	4
Other:
	EEI adjustments, net of tax of $0, $0	Other Income (Expense)-net	$	1
Total			$	1	$	4

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 compared with 2011, primarily driven by higher other 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 effective January 1, 2013. The proposed distribution rate increase would result in a 2.9% increase over PPL Electric's total rates at the time of the request. PPL Electric's application includes a request for an authorized return-on-equity of 11.25%. On October 19, 2012, the presiding Administrative Law Judge (ALJ) issued a decision recommending a rate increase of approximately $64 million, which represents an allowed return on equity of 9.74%. Exceptions to the ALJ's recommendation are due November 8, 2012. PPL Electric expects to file exceptions, together with certain other parties, to the ALJ's recommended decision. The PUC, which is expected to issue its order on the rate request in December 2012, can accept, reject or modify the ALJ's recommendation. PPL cannot predict the outcome of this proceeding.

U.K. Regulated Segment

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

Net Income Attributable to PPL Shareowners for the periods ended March 31 includes the following results:

		Three Months
		2013		2012		% Change

Utility revenues		$	638	$	552	16
Energy-related businesses			10		10
	Total operating revenues		648		562	15
Other operation and maintenance			117		113	4
Depreciation			74		67	10
Taxes, other than income			37		36	3
Energy-related businesses			7		5	40
	Total operating expenses		235		221	6
Other Income (Expense) - net			120		(20)	700
Interest Expense			107		103	4
Income Taxes			113		53	113
Net Income Attributable to PPL Shareowners		$	313	$	165	90

		Three Months

U.K.
	Utility revenues	$	75
	Other operation and maintenance		(6)
	Interest expense		(3)
	Other		(3)
	Income taxes		(10)
U.S.
	Income taxes		1
Foreign currency exchange rates, after-tax (a)			1
Special items, after-tax			93
Total		$	148

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

U.K.

·	Higher utility revenues due to the April 1, 2012 price increases that resulted in $57 million of higher utility revenues, $8 million of additional third-party engineering work, $5 million of higher volumes due primarily to weather and a $5 million reduction of regulatory over-recovery in 2013.

·	Higher other operation and maintenance due to $8 million of additional third-party engineering work and $7 million of higher network maintenance expense, primarily tree trimming, partially offset by $4 million of lower employee-related expenses.

·	Higher income taxes due to higher pre-tax income, which increased income taxes by $16 million, partially offset by $6 million of lower income taxes due to lower tax rates.

The following after-tax gains (losses), which management considers special items, also impacted the U.K. Regulated segment's results during the periods ended March 31.

		Income Statement	Three Months
		Line Item	2013		2012

Foreign currency-related economic hedges, net of tax of ($42), $7 (a)		Other Income (Expense)-net	$	78	$	(14)
WPD Midlands acquisition-related adjustments:
	Separation benefits, net of tax of $1, $2	Other Operation and Maintenance		(1)		(4)
	Other acquisition-related adjustments, net of tax of $0, $0	Other Operation and Maintenance		(2)
Total			$	75	$	(18)

(a)	Represents unrealized gains (losses) on contracts that economically hedge anticipated earnings denominated in GBP.

2013 Outlook

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

Earnings in future periods are subject to various risks and uncertainties. See "Forward-Looking Information," the rest of this Item 2, and Notes 5, 6 and 10 to the Financial Statements in this Form 10-Q and "Item 1. Business" and "Item 1A. Risk Factors" in PPL's 2012 Form 10-K for a discussion of the risks, uncertainties and factors that may impact future earnings.

Pennsylvania Regulated Segment

The Pennsylvania Regulated segment includes PPL Electric's regulated electricity transmission and distribution operations. In addition, the Pennsylvania Regulated segment is allocated certain financing costs.

Net Income Attributable to PPL Shareowners for the periods ended March 31 includes the following results:

		Three Months
		2013		2012		% Change
Utility revenues
	External	$	512	$	457	12
	Intersegment		1		1
	Total utility revenues		513		458	12
Energy purchases
	External		172		153	12
	Intersegment		14		21	(33)
Other operation and maintenance			133		140	(5)
Depreciation			43		39	10
Taxes, other than income			30		26	15
	Total operating expenses		392		379	3
Other Income (Expense) - net			1		2	(50)
Interest Expense			25		24	4
Income Taxes			33		20	65
Net Income			64		37	73
Net Income Attributable to Noncontrolling Interests					4	(100)
Net Income Attributable to PPL Shareowners		$	64	$	33	94

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

	Three Months

Pennsylvania Gross Delivery Margins	$	40
Other operation and maintenance		7
Depreciation		(4)
Other		(3)
Income Taxes		(13)
Noncontrolling Interests		4
Total	$	31

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

·	Lower other operation and maintenance primarily due to lower corporate service costs.

· Higher depreciation due to PP&E additions.

·	Higher income taxes primarily due to the impact of higher pre-tax income.

·	Lower noncontrolling interests due to PPL Electric's June 2012 redemption of all 2.5 million shares of its preference stock.

2013 Outlook

Excluding special items, PPL projects higher segment earnings in 2013 compared with 2012, primarily driven by higher distribution revenues from a distribution base rate increase and higher transmission margins, partially offset by higher depreciation.

Supply Segment

The Supply segment primarily consists of ~~the~~PPL Energy Supply's energy marketing and trading activities, as well as ~~the~~its 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 September 30 includes the following results:
Net Income Attributable to PPL Shareowners for the periods ended March 31 includes the following results:												Net Income Attributable to PPL Shareowners for the periods ended March 31 includes the following results:
						��
		Three Months					Nine Months						Three Months
		2012		2011		% Change	2012		2011		% Change		2013		2012		% Change
Energy revenues	Energy revenues											Energy revenues
	External (a)	$	567	$	1,305	(57)	$	3,673	$	3,437	7	External (a)	$	381	$	2,290	(83)
	Intersegment		23		5	360		61		15	307	Intersegment		14		21	(33)
Energy-related businesses	Energy-related businesses		133		132	1		346		360	(4)	Energy-related businesses		113		98	15
	Total operating revenues		723		1,442	(50)		4,080		3,812	7	Total operating revenues		508		2,409	(79)
Fuel (a)	Fuel (a)		321		358	(10)		728		826	(12)	Fuel (a)		298		211	41
Energy purchases	Energy purchases											Energy purchases
	External (a)		(150)		335	(145)		1,288		746	73	External (a)		(200)		1,247	(116)
	Intersegment		1		2	(50)		2		3	(33)	Intersegment		1		1
Other operation and maintenance	Other operation and maintenance		215		191	13		750		707	6	Other operation and maintenance		235		248	(5)
Depreciation	Depreciation		81		66	23		229		194	18	Depreciation		78		72	8
Taxes, other than income	Taxes, other than income		19		18	6		54		49	10	Taxes, other than income		17		18	(6)
Energy-related businesses	Energy-related businesses		129		131	(2)		339		356	(5)	Energy-related businesses		110		97	13
	Total operating expenses		616		1,101	(44)		3,390		2,881	18	Total operating expenses		539		1,894	(72)
Other Income (Expense) - net	Other Income (Expense) - net		6		22	(73)		15		41	(63)	Other Income (Expense) - net		4		5	(20)
Other-Than-Temporary Impairments					5	(100)		1		6	(83)
Interest Expense	Interest Expense		62		59	5		163		159	3	Interest Expense		60		48	25
Income Taxes	Income Taxes		3		99	(97)		180		299	(40)	Income Taxes		(41)		171	(124)
Income (Loss) from Discontinued Operations					1	(100)				3	(100)
Net Income			48		201	(76)		361		511	(29)
Net Income Attributable to Noncontrolling Interests					1	(100)				1	(100)
Net Income Attributable to PPL Shareowners		$	48	$	200	(76)	$	361	$	510	(29)
Net Income (Loss) Attributable to PPL Shareowners												Net Income (Loss) Attributable to PPL Shareowners	$	(46)	$	301	(115)

~~114~~

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

100

The changes in the components of the Supply segment's results between these periods were due to the following factors, which reflect reclassifications for items included in ~~unregulated gross energy margins~~Unregulated Gross Energy Margins and certain items that management considers special. See additional detail of these special items in the table below.

Three Months Nine Months

Unregulated gross energy margins $ (38) $ (125)
Other operation and maintenance (23) (42)
Depreciation (15) (35)
Other Income (Expense) - net (18) (30)
Other 7 1
Income Taxes 33 106
Discontinued operations, after-tax (1) 2
Special items, after-tax (97) (26)
Total $ (152) $ (149)

	Three Months

Unregulated Gross Energy Margins	$	(107)
Other operation and maintenance		6
Depreciation		(6)
Interest expense		(12)
Other		2
Income Taxes		33
Special items, after-tax		(263)
Total	$	(347)

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

~~Higher~~Lower other operation and maintenance ~~for the three-month period~~primarily due to $8$15 million of ~~higher~~lower costs at ~~PPL Susquehanna, $7 million~~eastern fossil and hydroelectric plants largely due to ~~a planned outage at PPL Brunner Island~~outages in ~~September~~ 2012, ~~and $4~~partially offset by $3 million of ~~higher~~additional costs ~~from Ironwood as a result of the acquisition.~~

Higher other operation and maintenance for the nine-month period primarily due to $27 million of higher costs at PPL Susquehanna including refueling outage costs, payroll-related costs and timing of projects and $13 million of higher costs from Ironwood as a result of the acquisition.

·	~~Higher depreciation for the three and nine-month periods due to the impact of PP&E additions, and $7 million and $11 million~~ due to the Ironwood Acquisition.

·	~~Lower other income (expense) - net for the three and nine-month periods~~Higher depreciation primarily due to the Ironwood Acquisition.

Higher interest expense primarily due to financings associated with PPL Ironwood, acquired in April 2012, which increased interest expense by $4 million, and $4 million due to the allocation of interest from a ~~$22 million gain on the redemption of~~June 2012 PPL Capital Funding debt ~~in the third quarter of 2011.~~issuance.

·	Lower income taxes ~~for the three-month period primarily~~ due to lower pre-tax ~~income.~~income in 2013, which reduced income taxes by $47 million, partially offset by an $11 million benefit from a state tax rate change recorded in 2012.

Lower income taxes for the nine-month period due to lower pre-tax income, which reduced income taxes by $73 million, $15 million of net deferred tax benefits from state tax adjustments recorded in 2012 and $11 million of Pennsylvania net operating loss valuation allowance adjustments recorded in 2011, driven primarily by the impact of bonus depreciation.

The following after-tax gains (losses), which management considers special items, also impacted the Supply segment's results during the periods ended ~~September 30.~~March 31.

		Income Statement	Three Months				Nine Months					Income Statement	Three Months
		Line Item	2012		2011		2012		2011			Line Item	2013		2012

Adjusted energy-related economic activity, net, net of tax of $63, $8, ($16), ($2)		(a)	$	(95)	$	(10)	$	23	$	4
Adjusted energy-related economic activity, net, net of tax of $79, ($102)											Adjusted energy-related economic activity, net, net of tax of $79, ($102)	(a)	$	(117)	$	150
Impairments:	Impairments:										Impairments:
	Emission allowances, net of tax of $0, $0, $0, $1	Other O&M								(1)
	Renewable energy credits, net of tax of $0, $0, $0, $2	Other O&M								(3)
	Adjustments - nuclear decommissioning trust investments, net of tax of $0, $2, ($2), $2	Other Income-net				(1)		1
LKE acquisition-related adjustments:
	Sale of certain non-core generation facilities, net of tax of $0, $0, $0, $0	Disc. Operations								(2)	Adjustments - nuclear decommissioning trust investments, net of tax of $0, ($1)	Other Income (Expense)-net				1
Other:	Other:										Other:
	Montana hydroelectric litigation, net of tax of $0, $0, $0, $1	Interest Expense				(1)				(2)	Counterparty bankruptcy, net of tax of $0, $5 (b)	Other Operation and Maintenance				(6)
	Litigation settlement - spent nuclear fuel storage, net of tax of $0, ($2), $0, ($23) (b)	Fuel				4				33	Ash basin leak remediation adjustment, net of tax of $0, ($1)	Other Operation and Maintenance				1
	Counterparty bankruptcy, net of tax of $0, $0, $5, $0 (c)	Other O&M						(6)
	Wholesale supply cost reimbursement, net of tax of $0, $0, $0, $0	(d)						1
	Ash basin leak remediation adjustment, net of tax of $0, $0, ($1), $0	Other O&M						1
	Coal contract modification payments, net of tax of $7, $0, $12, $0 (e)	Fuel		(10)				(17)
Total	Total		$	(105)	$	(8)	$	3	$	29	Total		$	(117)	$	146

~~115~~

(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 DOE'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. The amounts recorded through September 2011 cover the costs incurred from 1998 through December 2010.

~~(c)~~

In October 2011, a wholesale customer, SMGT, filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy code. In 2012, PPL EnergyPlus recorded an additional allowance for unpaid amounts under the long-term power contract. In March 2012, the U.S. Bankruptcy Court for the District of Montana approved the request to terminate the contract, effective April 1, 2012.

~~(d)~~

~~Recorded in "Wholesale energy marketing - Realized" on the Statement of Income.~~

~~(e)~~

~~As a result of lower electricity and natural gas prices, coal unit utilization has decreased. 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 ~~September 30,~~March 31, from the table within "Commodity Price Risk (Non-trading) - Economic Activity" in Note 14 to the Financial Statements to the special item identified as "Adjusted energy-related economic activity, net."

Three Months Nine Months
2012 2011 2012 2011
Operating Revenues
Unregulated retail electric and gas $ (13) $ 4 $ (15) $ 9
Wholesale energy marketing (716) 216 (322) 229
Operating Expenses
Fuel 3 (28) (11) (16)
Energy Purchases 569 (176) 420 (49)
Energy-related economic activity (a) (157) 16 72 173
Option premiums (b) 6 1 17
Adjusted energy-related economic activity (157) 22 73 190
Less: Economic activity realized, associated with the monetization of
certain full-requirement sales contracts in 2010 1 40 34 184
Adjusted energy-related economic activity, net, pre-tax $ (158) $ (18) $ 39 $ 6

Adjusted energy-related economic activity, net, after-tax $ (95) $ (10) $ 23 $ 4

101

			Three Months
			2013		2012
Operating Revenues
		Unregulated retail electric and gas	$	(8)	$	10
		Wholesale energy marketing		(822)		852
Operating Expenses
		Fuel		(1)		2
		Energy Purchases		634		(591)
Energy-related economic activity (a)				(197)		273
Option premiums				1
Adjusted energy-related economic activity				(196)		273
Less: Economic activity realized, associated with the monetization of certain
	full-requirement sales contracts in 2010					21
Adjusted energy-related economic activity, net, pre-tax			$	(196)	$	252

Adjusted energy-related economic activity, net, after-tax			$	(117)	$	150

(a)	See Note 14 to the Financial Statements for additional information.

~~(b)~~

Adjustment for the net deferral and amortization of option premiums over the delivery period of the item that was hedged or upon realization. Option premiums are recorded in "Wholesale energy marketing - Realized" and "Energy purchases - Realized" on the Statements of Income.

2013 Outlook

Excluding special items, PPL projects lower segment earnings in ~~2012~~2013 compared with ~~2011. The decrease is~~2012, primarily driven by lower energy ~~margins as a result of lower energy and capacity~~ prices, ~~and lower generation volumes,~~ higher ~~other~~fuel costs, higher operation and maintenance expense, higher depreciation, and higher ~~depreciation.~~financing costs, partially offset by higher capacity prices and higher nuclear generation output despite scheduled outages for both Susquehanna units to implement a long-term solution to turbine blade issues.

Earnings in ~~2012 and~~ 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's ~~2011~~2012 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 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.

~~116~~

PPL's three non-GAAP financial measures include:

"Kentucky Gross Margins" is a single financial performance measure of the Kentucky Regulated segment's electricity generation, transmission and distribution operations as well as its distribution and sale of natural gas. In calculating this measure, fuel and energy purchases are deducted from revenues. In addition, utility revenues and expenses associated with approved cost recovery ~~tracking~~ mechanisms are offset. ~~Certain costs associated with these mechanisms, primarily ECR and DSM, are recorded as "Other operation and maintenance" and "Depreciation."~~ These mechanisms allow for recovery of certain expenses, returns on capital investments and performance incentives. Certain costs associated with these mechanisms, primarily ECR, DSM and GLT, are recorded as "Other operation and maintenance" and "Depreciation." As a result, this measure represents the net revenues from the Kentucky Regulated segment's operations.

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

102

EnergyPlus, which are reflected in "PLR intersegment utility revenue (expense)" in the table below. As a result, this measure represents the net revenues from the Pennsylvania Regulated segment's electric delivery operations.

"Unregulated Gross Energy Margins" is a single financial performance measure of the Supply segment's competitive energy non-trading and trading activities. In calculating this measure, the Supply segment's energy revenues ~~which include operating revenues associated with certain Supply segment businesses that are classified as discontinued operations,~~ are offset by the cost of fuel, energy purchases, certain other operation and maintenance expenses, primarily ancillary charges and gross receipts tax, which is recorded in "Taxes, other than ~~income," and operating expenses associated with certain Supply segment businesses that are classified as discontinued operations.~~income". This performance measure is relevant to PPL due to the volatility in the individual revenue and expense lines on the Statements of Income that comprise "Unregulated Gross Energy Margins." This volatility stems from a number of factors, including the required netting of certain transactions with ISOs and significant ~~swings~~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 ~~reflected~~recorded in "PLR intersegment utility revenue (expense)" in the table below. PPL excludes from "Unregulated Gross Energy Margins" the Supply segment's adjusted energy-related economic activity, which includes the changes in fair value of positions used to economically hedge a portion of the economic value of PPL's competitive generation assets, full-requirement sales contracts and retail activities. This economic value is subject to changes in fair value due to market price volatility of the input and output commodities (e.g., fuel and power) prior to the delivery period that was hedged. Also included in adjusted energy-related economic activity is the premium amortization associated with options and for 2012 the ineffective portion of qualifying cash flow hedges and economic activity realized associated with the monetization of certain ~~full-requirement~~full requirement sales contracts ~~and premium amortization associated with options.~~in 2010. This economic activity is deferred, with the exception of the full-requirement sales contracts that were monetized, and included in ~~unregulated gross energy margins~~Unregulated Gross Energy Margins over the delivery period that was hedged or upon realization.

Reconciliation of Non-GAAP Financial Measures

The following ~~tables reconcile "Operating Income" to~~table reconciles PPL's three non-GAAP financial measures to "Operating Income" for the periods ended ~~September 30.~~March 31.

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 $ 732 $ 443 $ 518 (c) $ 1,693 $ 734 $ 454 $ 487 (c) $ 1,675
PLR intersegment utility
revenue (expense) (d) (23) $ 23 (5) $ 5
Unregulated retail
electric and gas 232 (14) (g) 218 186 3 (g) 189
Wholesale energy marketing
Realized 1,074 2 (f) 1,076 897 10 (f) 907
Unrealized economic
activity (716) (g) (716) 216 (g) 216
Net energy trading margins (11) (11) (7) (7)
Energy-related businesses 143 143 140 140
Total Operating Revenues 732 420 1,318 (67) 2,403 734 449 1,081 856 3,120

~~117~~

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 Expenses
Fuel 249 310 11 (e) 570 245 338 20 (e) 603
Energy purchases
Realized 27 137 418 1 (f) 583 32 171 119 40 (f) 362
Unrealized economic
activity (569) (g) (569) 176 (g) 176
Other operation and
maintenance 28 25 1 596 650 26 30 679 735
Depreciation 13 265 278 12 240 252
Taxes, other than income 23 11 56 90 24 8 58 90
Energy-related businesses 137 137 135 135
Intercompany eliminations (1) 1 (1) 1
Total Operating Expenses 317 184 741 497 1,739 315 224 466 1,348 2,353
Total $ 415 $ 236 $ 577 $ (564) $ 664 $ 419 $ 225 $ 615 $ (492) $ 767

					2012 Nine Months												2011 Nine Months																2013 Three Months												2012 Three Months
									Unregulated												Unregulated																Unregulated												Unregulated
					Kentucky		PA Gross			Gross							Kentucky		PA Gross			Gross											Kentucky		PA Gross			Gross							Kentucky		PA Gross			Gross
					Gross		Delivery			Energy					Operating		Gross		Delivery			Energy					Operating						Gross		Delivery			Energy					Operating		Gross		Delivery			Energy					Operating
					Margins		Margins			Margins		Other (a)			Income (b)		Margins		Margins			Margins		Other (a)			Income (b)						Margins		Margins			Margins		Other (a)			Income (b)		Margins		Margins			Margins		Other (a)			Income (b)

Operating Revenues	Operating Revenues																												Operating Revenues
	Utility				$	2,095	$	1,303				$	1,614	(c)	$	5,012	$	2,139	$	1,444				$	1,112	(c)	$	4,695	Utility				$	800	$	512				$	638	(c)	$	1,950	$	705	$	457				$	552	(c)	$	1,714
	PLR intersegment utility																												PLR intersegment utility
		revenue (expense) (d)						(61)		$	61									(15)		$	15							revenue (expense) (d)						(14)		$	14									(21)		$	21
	Unregulated retail																												Unregulated retail
		electric and gas									638		(18)	(g)		620							509		8	(g)		517		electric and gas									246		(9)	(f)		237							214		9	(f)		223
	Wholesale energy marketing																												Wholesale energy marketing
			Realized								3,353		14	(f)		3,367							2,635		42	(f)		2,677			Realized								977		(1)			976							1,204		4	(e)		1,208
			Unrealized economic																												Unrealized economic
				activity									(322)	(g)		(322)									229	(g)		229				activity									(822)	(f)		(822)									852	(f)		852
	Net energy trading margins										7					7							14					14	Net energy trading margins										(11)					(11)							8					8
	Energy-related businesses												380			380									387			387	Energy-related businesses												127			127									107			107
			Total Operating Revenues			2,095		1,242			4,059		1,668			9,064		2,139		1,429			3,173		1,778			8,519			Total Operating Revenues			800		498			1,226		(67)			2,457		705		436			1,447		1,524			4,112

Operating Expenses	Operating Expenses																												Operating Expenses
	Fuel					677					695		33	(e)		1,405		666					872		(46)	(e)		1,492	Fuel					231					299		(1)	(f)		529		213					214		(3)	(f)		424
	Energy purchases																												Energy purchases
			Realized			135		410			1,669		39	(f)		2,253		179		591			496		201	(f)		1,467			Realized			86		172			436		(3)			691		74		153			636		20	(e)		883
			Unrealized economic																												Unrealized economic
				activity									(420)	(g)		(420)									49	(g)		49				activity									(634)	(f)		(634)									591	(f)		591
	Other operation and															��													Other operation and
		maintenance				76		74			12		1,933			2,095		67		77			13		1,884			2,041		maintenance				25		22			5		624			676		22		22			4		658			706
	Depreciation					39							774			813		37							660			697	Depreciation												284			284		13							251			264
	Taxes, other than income							67			27		174			268				77			22		139			238	Taxes, other than income							28			8		60			96				25			8		58			91
	Energy-related businesses												363			363									368			368	Energy-related businesses												122			122									102			102
	Intercompany eliminations							(3)			2		1							(9)			3		6				Intercompany eliminations							(1)			1									(1)			1
			Total Operating Expenses			927		548			2,405		2,897			6,777		949		736			1,406		3,261			6,352			Total Operating Expenses			342		221			749		452			1,764		322		199			863		1,677			3,061
	Discontinued operations																						12		(12)	(h)
Total	Total				$	1,168	$	694		$	1,654	$	(1,229)		$	2,287	$	1,190	$	693		$	1,779	$	(1,495)		$	2,167	Total				$	458	$	277		$	477	$	(519)		$	693	$	383	$	237		$	584	$	(153)		$	1,051

(a)	Represents amounts excluded from Margins.

(b)	As reported on the Statements of Income.

(c)	Primarily represents WPD's utility revenue.

(d)	Primarily related to PLR supply sold by PPL EnergyPlus to PPL Electric.

~~(e)~~

Includes 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 nine months ended September 30, 2012, include pre-tax losses of $17 million and $29 million related to coal contract modification payments. The three and nine months ended September 30, 2011 include pre-tax credits of $6 million and $56 million for the spent nuclear fuel litigation settlement.

103

~~(f)~~(e)

Represents energy-related economic activity as described in "Commodity Price Risk (Non-trading) - Economic Activity" within Note 14 to the Financial Statements. For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2012, "Wholesale energy marketing - Realized" and "Energy purchases - Realized" ~~include~~includes a net pre-tax ~~losses~~loss of ~~$1 million and $34~~$21 million related to the monetization of certain full-requirement sales contracts. The three and nine months ended September 30, 2011 include net pre-tax losses of $40 million and $184 million related to the monetization of certain full-requirement sales contracts and net pre-tax gains of $6 million and $17 million related to the amortization of option premiums.

~~(g)~~(f)

Represents energy-related economic activity, which is subject to fluctuations in value due to market price volatility, as described in "Commodity Price Risk (Non-trading) - Economic Activity" within Note 14 to the Financial Statements.

~~(h)~~

Represents the net of certain revenues and expenses associated with certain businesses that are classified as discontinued operations. These revenues and expenses are not reflected in "Operating Income" on the Statements of Income.

~~118~~

Changes in Non-GAAP Financial Measures

The following table shows PPL's three non-GAAP financial measures for the periods ended ~~September 30~~March 31 as well as the change between periods. The factors that gave rise to the changes are described below the table.

		Three Months						Nine Months							Three Months
		2012		2011		Change		2012		2011		Change			2013		2012		Change

Kentucky Gross Margins	Kentucky Gross Margins	$	415	$	419	$	(4)	$	1,168	$	1,190	$	(22)	Kentucky Gross Margins	$	458	$	383	$	75
PA Gross Delivery Margins by Component	PA Gross Delivery Margins by Component													PA Gross Delivery Margins by Component
	Distribution	$	185	$	179	$	6	$	544	$	560	$	(16)	Distribution	$	224	$	189	$	35
	Transmission		51		46		5		150		133		17	Transmission		53		48		5
Total	Total	$	236	$	225	$	11	$	694	$	693	$	1	Total	$	277	$	237	$	40

Unregulated Gross Energy Margins by Region	Unregulated Gross Energy Margins by Region													Unregulated Gross Energy Margins by Region
Non-trading	Non-trading													Non-trading
	Eastern U.S.	$	521	$	530	$	(9)	$	1,417	$	1,502	$	(85)	Eastern U.S.	$	430	$	489	$	(59)
	Western U.S.		67		92		(25)		230		263		(33)	Western U.S.		58		87		(29)
Net energy trading	Net energy trading		(11)		(7)		(4)		7		14		(7)	Net energy trading		(11)		8		(19)
Total	Total	$	577	$	615	$	(38)	$	1,654	$	1,779	$	(125)	Total	$	477	$	584	$	(107)

Kentucky Gross Margins

Margins ~~decreased~~increased for the ~~nine~~three months ended ~~September 30, 2012~~March 31, 2013 compared with ~~the same period in 2011, primarily~~2012 due to ~~$16~~higher base rates of $31 million, higher volumes of ~~lower retail margins, as~~$19 million, environmental costs added to base rates of $18 million and increased environmental investments of $7 million.

The increase in base rates was the result of new KPSC rates going into effect on January 1, 2013. The increase in volumes ~~were impacted by unseasonably mild~~was attributable to colder weather ~~during the first four months of 2012, and $6 million of lower wholesale margins, as volumes were impacted by lower market prices.~~in 2013 compared with 2012. Total heating degree days ~~decreased 24% compared~~increased 41%. The environmental costs added to base rates was due to the ~~same period~~elimination of the 2005 and 2006 ECR plans as a result of the 2012 Kentucky rate case. This elimination results in ~~2011.~~depreciation and other operation and maintenance expenses associated with the 2005 and 2006 ECR plans being excluded from Margins in 2013.

Pennsylvania Gross Delivery Margins

Distribution

Margins ~~decreased~~increased for the ~~nine~~three months ended ~~September 30, 2012~~March 31, 2013 compared with ~~the same period in 2011,~~2012 primarily due to ~~an $18~~a $13 million ~~unfavorable~~favorable effect of mild weather ~~early~~ in ~~2012. The three~~2012 and ~~nine-month periods were impacted by~~ a $7$19 million ~~charge recorded in 2011 to reduce~~favorable effect of price, largely comprised of higher base rates, effective January 1, 2013 as a ~~portion~~result of the ~~transmission service charge regulatory asset associated with a 2005 undercollection that was not included in any subsequent~~2012 rate ~~reconciliations filed with the PUC.~~case and higher volumes of $3 million.

Transmission

Margins increased for the three ~~and nine-month periods~~months ended ~~September 30, 2012,~~March 31, 2013 compared with ~~the same periods in 2011,~~2012 primarily due to increased investment in plant and the recovery of additional costs through the FERC formula-based rates.

~~Unregulated Gross Energy Margins~~

Eastern U.S.

The changes in non-trading margins for the periods ended September 30, 2012 compared with 2011 were due to:

Three Months Nine Months

Baseload energy prices $ (44) $ (132)
Baseload capacity prices 3 (47)
Intermediate and peaking capacity prices 5 (22)
Impact of non-core generation facilities sold in the first quarter of 2011 (12)
Full-requirement sales contracts 3 (10)
Net economic availability of coal and hydroelectric units (7) 12
Retail electric 5 12
Ironwood acquisition which eliminates tolling expense (a) 14 27
Nuclear generation volume (b) 11 93
Other 1 (6)
$ (9) $ (85)

~~(a)~~Unregulated Gross Energy Margins

~~See Note 8 to the Financial Statements for additional information.~~

~~119~~104

	Three Months

Baseload energy prices	$	(125)
Coal prices		(10)
Nuclear fuel prices		(6)
Full-requirement sales contracts		5
Intermediate and peaking capacity prices		5
Baseload capacity prices		6
Intermediate and peaking Spark Spreads		14
Ironwood acquisition which eliminated tolling expense		15
Net economic availability of coal and hydroelectric plants		32
Other		5
Total	$	(59)

Western U.S.

Non-trading margins for the three ~~and nine~~ months ended ~~September 30, 2012~~March 31, 2013 compared with ~~the same periods in 2011~~2012 were lower due to ~~$14 million and $31~~$43 million of lower wholesale ~~sales, including $10 million and $23 million related to the bankruptcy of SMGT. The three-month period was also lower due to $5~~prices, partially offset by $12 million of higher ~~fuel costs.~~wholesale volumes.

Utility Revenues

The increase (decrease) in utility revenues for the periods ended September 30, 2012 compared with 2011 was due to:

Three Months Nine Months
Domestic:
PPL Electric (a) $ (11) $ (141)
LKE (b) (4) (45)
Total Domestic (15) (186)

U.K.:
PPL WW
Price (c) 14 69
Volume (d) (2) (17)
Recovery of allowed revenues (e) 3 (8)
Foreign currency exchange rates (7) (15)
Other 5 2
Total PPL WW 13 31
WPD Midlands (f) 20 472
Total U.K. 33 503
Total $ 18 $ 317
Net Energy Trading Margins

Net energy trading margins for the three months ended March 31, 2013 compared with 2012 decreased as a result of lower margins of $16 million on gas positions due to higher prices.

Utility Revenues

The increase (decrease) in utility revenues for the period ended March 31, 2013 compared with 2012 was due to:

		Three Months
Domestic:
	PPL Electric (a)	$	55
	LKE (b)		95
	Total Domestic		150

U.K.:
	Price (c)		57
	Volume		5
	Recovery of allowed revenues		5
	Foreign currency exchange rates		10
	Other (d)		9
	Total U.K.		86
Total		$	236

(a)	See "Pennsylvania Gross Delivery Margins" for further information.

(b)	See "Kentucky Gross Margins" for further information.

(c)	~~The three- and nine-month periods were impacted by a~~Due to price ~~increase~~increases effective April 1, 2012. ~~The nine-month period was also impacted by a price increase effective April 1, 2011.~~

(d)	~~The decrease for the nine-month period~~This increase is primarily due to ~~the downturn in the economy and the unfavorable effect of weather.~~

~~(e)~~

~~The decrease for the nine-month period is primarily due to a 2012 charge to income for the over-recovery of revenues from customers.~~

~~(f)~~

The increase for the three-month period is primarily due to a price increase effective April 1, 2012. The nine-month period ended September 30, 2012 is not comparable to 2011 as 2011 includes only five months of WPD Midlands' results.

~~Other Operation and Maintenance~~

~~The increase (decrease) in other operation and maintenance expense for the periods ended September 30, 2012 compared with 2011 were due to:~~

Three Months Nine Months
Domestic:
Uncollectible accounts (a) $ (5) $ 11
LKE coal plant maintenance costs (b) 2 13
LKE storm costs (c) 6
PPL Susquehanna nuclear plant costs (d) 8 27
Ironwood Acquisition (e) 4 13
PUC-reportable storm costs, net of insurance recoveries (3) (18)
Costs at Western fossil and hydroelectric plants (4) (9)
Costs at Eastern fossil and hydroelectric plants (f) 9 (4)
Payroll-related costs - PPL Electric 9 16
Vegetation management 3 12
Stock based compensation 2 15
Other 20
U.K.:
PPL WW (g) 4 21
WPD Midlands (h) (114) (69)
Total $ (85) $ 54

~~(a)~~

In October 2011, SMGT filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. The increase for the nine-month period primarily reflects an $11 million increase to a reserve on SMGT unpaid amounts.

~~(b)~~

~~The increase for the nine-month period is primarily due to 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-related costs and timing of projects.~~

~~(e)~~

~~There are no comparable amounts in the 2011 periods as the Ironwood Acquisition occurred in April 2012.~~

~~(f)~~

~~The increase for the three-month period is primarily due to a planned outage at PPL Brunner Island in September 2012.~~

~~(g)~~

~~The increase for the nine-month period includes $15 million of higher pension expense resulting from an increase in amortization of actuarial losses and~~ $8 million of ~~higher network maintenance expense.~~

~~120~~

~~(h)~~

~~The decrease for the three-month period~~third-party engineering work, which is ~~primarily due to lower charges recorded as a result of the acquisition, including $85 million for severance compensation, early retirement deficiency costs~~offset by expenses in "Other operation and outplacement services for employees separating from WPD Midlands and $5 million of other acquisition-related adjustments, and a decrease in pension costs of $6 million. The nine-month period ended September 30, 2012 is not comparable to 2011 as 2011 includes only five months of WPD Midlands' results. The nine-month period also reflects $81 million of lower charges recorded as a result of the acquisition for severance compensation, early retirement deficiency costs and outplacement services for employees separating from WPD Midlands and $12 million of lower other acquisition-related costs.

Depreciation

The increase (decrease) in depreciation expense for the periods ended September 30, 2012 compared with 2011 was due to:

Three Months Nine Months

Additions to PP&E $ 16 $ 52
WPD Midlands (a) 6 59
Ironwood Acquisition (Note 8) 7 11
Other (3) (6)
Total $ 26 $ 116

~~(a)~~

~~The nine-month period ended September 30, 2012 is not comparable to 2011 as 2011 includes only five months of WPD Midlands' results.~~maintenance".

~~Taxes,~~ Other ~~Than Income~~Operation and Maintenance

The increase (decrease) in ~~taxes,~~ other ~~than income~~operation and maintenance for the ~~nine months~~period ended ~~September 30, 2012~~March 31, 2013 compared with ~~2011~~2012 was due to:

		~~Nine~~
			Three Months
Domestic:
	Uncollectible accounts (a)		$	(16)
	LKE coal plant outages (b)			(14)
	Costs at eastern fossil and hydroelectric plants (c)			(11)
	Pension and postretirement costs			4
	Other			2
U.K.:
	Third-party engineering work (d)			8
	Network maintenance expense (e)			7
	Employee related expenses			(4)
	Severance compensation			(4)
	Other			(2)
Total			$	(30)

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

105

(b)	The decrease is primarily due to the timing and scope of scheduled outages.

(c)	The decrease is primarily due to Brunner Island Unit 3 outage costs of $15 million in 2012 compared with no major outage costs in 2013, partially offset by $3 million of additional costs due to the Ironwood Acquisition.

(d)	These expenses are offset by revenues reflected in "Utility" on the Statements of Income.

(e)	The increase is primarily due to higher tree trimming expense.

Depreciation

The increase (decrease) in depreciation for the period ended March 31, 2013 compared with 2012 was due to:

		Three Months

~~Pennsylvania gross receipts tax (a)~~Additions to PP&E		$	~~(14)~~21
~~Domestic property tax~~LKE lower depreciation rates effective January 1, 2013	7
~~WPD Midlands (b)~~	31(5)
Ironwood Acquisition			6
Other	6		(2)
Total		$	3020

~~(a)~~

The decrease for the nine-month period is primarily due to a decrease in taxable electric revenue. This tax is included in "Unregulated Gross Energy Margins" and "Pennsylvania Gross Delivery Margins."

~~(b)~~

~~The nine-month period ended September 30, 2012 is not comparable to 2011 as 2011 includes only five months of WPD Midlands' results.~~

Other Income (Expense) - net

Other Income (Expense) - net

The increase (decrease) in other income (expense) - net for the periods ended September 30, 2012 compared with 2011 was due to:

Three Months Nine Months

Change in the fair value of economic foreign currency exchange contracts (Note 14) $ (58) $ (51)
Net hedge gains associated with the 2011 Bridge Facility (a) (55)
Foreign currency loss on 2011 Bridge Facility (b) 57
Gain on redemption of debt (c) (22) (22)
WPD Midlands acquisition-related adjustments in 2011 (Note 8) 57
Earnings (losses) from equity method investments (2) (8)
Other 1 (7)
Total $ (81) $ (29)

~~(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.~~

~~(c)~~

The $139 million increase in other income (expense) - net for the three months ended March 31, 2013 compared with 2012 was primarily due to $119 million of realized and unrealized gains on economic foreign currency contracts compared with losses in 2012 of $18 million.

See Note 12 to the Financial Statements for further details.

Interest Expense

The increase (decrease) in interest expense for the ~~periods~~period ended ~~September 30, 2012~~March 31, 2013 compared with ~~2011~~2012 was due to:

	Three Months

Long-term debt interest expense (a)	$	14
Ironwood Acquisition (b)		4
Other		3
Total	$	21

~~121~~

Three Months Nine Months

2011 Bridge Facility costs related to financing the acquisition of WPD Midlands $ (43)
2011 Equity Units (a) 13
Long-term debt interest expense (b) $ (1) (11)
Short-term debt interest expense (c) (4) (11)
Hedging activity and ineffectiveness 6 25
Inflation adjustment on U.K. Index-linked Senior Unsecured Notes (3) (11)
Net amortization of debt discounts, premiums and issuance costs (6) (5)
WPD Midlands (d) 9 77
Ironwood Acquisition (Note 8) 4 8
Other 3 (6)
Total $ 8 $ 36

(a)

~~Interest related~~The increase was primarily due to PPL Capital Funding's June 2012 issuance of $400 million, 4.2% Senior Notes due 2022 and October 2012 issuance of $400 million, 3.5% Senior Notes due 2022. Also, contributing to the increase was higher accretion expense on WPD index linked bonds and interest on WPD (East Midlands') April 2012 issuance ~~in April 2011 to support the WPD Midlands acquisition.~~of £100 million, 5.25% Senior Notes due 2023.

(b)

The ~~decrease~~increase was ~~primarily~~ due to ~~the redemption of $250 million of 7.0% Senior Notes due 2046 in July 2011 along~~financings associated with the ~~repayment of $500 million of 6.4% Senior Notes and subsequent issuance of $500 million of 4.6% Senior Notes, both in the fourth quarter of 2011.~~Ironwood Acquisition.

~~(c)~~

~~The decrease was primarily due to lower interest rates on 2012 short-term borrowings.~~

~~(d)~~Income Taxes

The ~~nine-month~~increase (decrease) in income taxes for the period ended ~~September 30,~~March 31, 2013 compared with 2012 ~~is not comparable to 2011 as 2011 includes only five months of WPD Midlands' results.~~was due to:

	Three Months

Lower pre-tax book income	$	(119)
Foreign tax reserve adjustments		(3)
Net operating loss carryforward adjustments (a)		6
State deferred tax rate change (b)		11
Other		(3)
Total	$	(108)

Income Taxes

The increase (decrease) in income taxes for the periods ended September 30, 2012 compared with 2011 was due to:

Three Months Nine Months

Lower pre-tax book income $ (108) $ (131)
State valuation allowance adjustments (a) 2 (9)
Federal and state tax reserve adjustments (6) (8)
Federal and state tax return adjustments 2
U.S. income tax on foreign earnings net of foreign tax credit (b) 9 27
Foreign tax reserve adjustments (c) (5)
Net operating loss carryforward adjustments (d) (9)
Depreciation not normalized (a) (1) 1
WPD Midlands (e) 25 86
State deferred tax rate change (f) (6) (17)
Other (8) (2)
Total $ (93) $ (65)

(a)

In February 2011, the Pennsylvania Department of Revenue issued interpretive guidance on the treatment of bonus depreciation for Pennsylvania income tax purposes. In accordance with Corporation Tax Bulletin 2011-01, Pennsylvania allows 100% bonus depreciation for qualifying assets in the same year bonus depreciation is allowed for federal income tax purposes. Due to the decrease in projected taxable income related to bonus depreciation, PPL recorded an $11 million state deferred income tax expense during the nine months ended September 30, 2011 related to valuation allowances.

Additionally, the 100% Pennsylvania bonus depreciation deduction created a current state income tax benefit for the flow-through impact of Pennsylvania regulated state tax depreciation. The federal provision for 100% bonus depreciation generally applies to property placed in service before January 1, 2012. The placed in-service deadline is extended to January 1, 2013 for property that exceeds $1 million, has a production period longer than one year and has a tax life of at least 10 years.

~~(b)~~

During the three ~~and nine~~ months ended ~~September 30, 2011, PPL recorded a $7 million and $21 million federal income tax benefit related to U.K. pension contributions.~~

~~(c)~~

~~During the nine months ended September 30, 2012, PPL recorded a tax benefit following resolution of a U.K. tax issue related to interest expense.~~

~~(d)~~

~~During the nine months ended September 30,~~March 31, 2012, PPL recorded adjustments to deferred taxes related to net operating loss carryforwards of LKE based on income tax return adjustments.

~~(e)~~

The increase for the three-month period was due to an increase in pre-tax book income, which increased taxes by $30 million, partially offset by an incremental $6 million deferred tax benefit related to the 2012 U.K. Finance Act compared with the 2011 U.K. Finance Act. The nine-month period ended September 30, 2012 is not comparable to 2011 as 2011 includes only five months of WPD Midlands' results.

~~(f)~~(b)

During the three ~~and nine~~ months ended ~~September 30,~~March 31, 2012, PPL recorded adjustments related to state deferred tax liabilities.

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

~~Income (Loss) from Discontinued Operations (net of income taxes)~~

Loss from discontinued operations increased by $8 million for the nine months ended September 30, 2012, compared with 2011. The increase was primarily related to an adjustment to a liability for indemnifications related to the termination of the WKE lease in 2009.

~~122~~106

~~Noncontrolling Interests~~

"Net Income Attributable to Noncontrolling Interests" decreased by $5 million and $9 million for the three and nine months ended September 30, 2012 compared with 2011. The decrease is primarily due to PPL Electric's June 2012 redemption of all 2.5 million shares of its preference stock. 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:

September 30, 2012 December 31, 2011

Cash and cash equivalents $ 946 $ 1,202
Short-term investments 16
$ 946 $ 1,218
Short-term debt $ 526 $ 578

	March 31, 2013		December 31, 2012

Cash and cash equivalents	$	853	$	901
Short-term debt	$	1,061	$	652

At ~~September 30, 2012, $360~~March 31, 2013, $335 million of cash and cash equivalents were denominated in GBP. If these amounts would be remitted as dividends, PPL may be subject to additional U.S. taxes, net of allowable foreign tax credits. Historically, dividends paid by foreign subsidiaries have been distributions of the current year's earnings. See Note 5 to the Financial Statements in PPL's ~~2011~~2012 Form 10-K for additional information on undistributed earnings of WPD.

The ~~$256~~$48 million decrease in PPL's cash and cash equivalents position was primarily the net result of:

capital expenditures of ~~$2.1 billion;~~$828 million;

the payment of ~~$623~~$210 million of common stock dividends;

~~the redemption of preference stock of~~ a ~~subsidiary of $250 million;~~$52 million net increase in restricted cash and cash equivalents; and

~~the retirement~~$24 million of ~~long-term debt of $105 million;~~contract adjustment payments; partially offset by

proceeds of $432 million from the ~~Ironwood Acquisition for $84 million,~~issuance of long-term debt, net of ~~cash acquired;~~costs;

·	net increase in short-term debt of $416 million; and

·	net cash provided by operating activities of ~~$2.1 billion; and~~

~~proceeds of $824 million from the issuance of long-term debt.~~$244 million.

PPL's cash provided by operating activities ~~increased~~decreased by ~~$248~~$484 million for the ~~nine~~three months ended ~~September 30, 2012~~March 31, 2013 compared with ~~2011.~~2012. The ~~increase~~decrease was primarily due to:

·	a $336 million increase in cash used by components of working capital (primarily due to changes in accounts receivable of $219 million resulting from higher base rates and favorable effects of weather and counterparty collateral of $129 million); and

·	ana $221 million increase ~~of $185~~in defined benefit plans funding; partially offset by

·	a $72 million increase in net income, when adjusted for non-cash ~~components; and~~components.

~~a decrease of $39 million in defined benefit plan funding.~~

Capital expenditures increased by $146 million for the three months ended March 31, 2013 compared with 2012, primarily due to the Susquehanna-Roseland transmission project and environmental projects at Mill Creek and Ghent, and construction of Cane Run Unit 7.

Credit Facilities

PPL maintains credit facilities to provide liquidity and to backstop commercial paper issuances. At ~~September 30, 2012,~~March 31, 2013, PPL's total committed borrowing capacity under its credit facilities and the use of this borrowing capacity were:

Letters of
Credit Issued
and
Committed Commercial Unused
Capacity Borrowed Paper Backstop Capacity

PPL Energy Supply Credit Facilities $ 3,200 $ 594 $ 2,606
PPL Electric Credit Facilities (a) 400 1 399
LG&E Credit Facility 400 400
KU Credit Facilities (b) 598 198 400
Total Domestic Credit Facilities (c) (d) $ 4,598 $ 793 $ 3,805

PPL WW Credit Facility (e) £ 150 £ 107 n/a £ 43
WPD (South West) Credit Facility (f) 245 n/a 245
WPD (East Midlands) Credit Facility 300 300
WPD (West Midlands) Credit Facility 300 300
Total WPD Credit Facilities (g) £ 995 £ 107 £ 888

						Letters of
						Credit Issued
						and
		Committed				Commercial		Unused
		Capacity		Borrowed		Paper Backup		Capacity

PPL Energy Supply Credit Facilities (a)		$	3,200			$	764	$	2,436
PPL Electric Credit Facilities (b)			400				126		274
LG&E Syndicated Credit Facility			500				70		430
KU Credit Facilities (c)			598				313		285
	Total Domestic Credit Facilities (d)	$	4,698			$	1,273	$	3,425

PPL WW Syndicated Credit Facility (e)		£	210	£	109		n/a	£	101
WPD (South West) Syndicated Credit Facility			245				n/a		245
WPD (East Midlands) Syndicated Credit Facility (f)			300		65				235
WPD (West Midlands) Syndicated Credit Facility			300						300
	Total WPD Credit Facilities (g)	£	1,055	£	174			£	881

~~123~~

(a)	In February 2013, PPL Energy Supply extended a letter of credit facility expiration date from March 2013 and, effective April ~~2012, PPL Electric increased~~2013, the capacity ~~of its syndicated credit facility from $200 million~~was reduced to ~~$300~~$150 million.

Committed capacity includes a $100 million credit facility related to an asset-backed commercial paper program through which PPL Electric obtains financing by selling and contributing its eligible accounts receivable and unbilled revenue to a special purpose, wholly owned subsidiary on an ongoing basis. The subsidiary pledges these assets to secure loans of up to an aggregate of $100 million from a commercial paper conduit sponsored by a financial institution. At September 30, 2012, based on accounts receivable and unbilled revenue pledged, the amount available for borrowing under the facility was $100 million. In July 2012, PPL Electric and the subsidiary reduced the capacity from $150 million and in September 2012 extended the agreement to September 2013.

(b)

~~In August 2012, the KU letter of~~Committed capacity includes a $100 million credit facility ~~agreement~~related to an asset-backed commercial paper program through which PPL Electric obtains financing by selling and contributing its eligible accounts receivable and unbilled revenue to a special purpose, wholly owned subsidiary on an ongoing basis. The subsidiary pledges these assets to secure loans of up to an aggregate of $100 million from a commercial paper conduit sponsored by a financial institution. At March 31, 2013, based on accounts receivable and unbilled revenue pledged, the amount available for borrowing under the facility was ~~amended and restated to allow for certain payments under the~~$100 million.

(c)	In May 2013, KU extended its $198 million letter of credit facility to ~~be converted to loans rather than requiring immediate payment.~~May 2016.

~~(c)~~(d)

The commitments under PPL's domestic credit facilities are provided by a diverse bank group, with no one bank and its affiliates providing an aggregate commitment of more than 9% of the total committed capacity.

~~(d)~~

In November 2012, the syndicated credit facilities were amended to extend the expiration dates to November 2017 for PPL Energy Supply, LG&E and KU and to October 2017 for PPL Electric. In addition, LG&E increased the credit facility capacity to $500 million.

107

(e)

In December 2012, the PPL WW syndicated credit facility that was set to expire in January 2013 was replaced and the capacity was increased from £150 million. The amount ~~outstanding~~borrowed at ~~September 30, 2012~~March 31, 2013 was a USD-denominated borrowing of $171 million, which equated to ~~£107~~£109 million at the time of borrowing and bore interest at ~~0.8818%~~1.9034%.

(f)

~~In January 2012, WPD (South West) entered into~~The amount borrowed at March 31, 2013 was a ~~£245~~GBP-denominated borrowing of £65 million, ~~5-year syndicated credit facility~~which equated to ~~replace its previous £210~~$99 million 3-year syndicated credit facility. Under the 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~~bore interest at LIBOR-based rates plus a margin. The credit facility contains financial covenants that require WPD (South West) to maintain an interest coverage ratio of not less than 3.0 times consolidated earnings before income taxes, depreciation and amortization and total net debt not in excess of 85% of its RAV, in each case calculated in accordance with the credit facility.1.30%.

(g)

At ~~September 30, 2012,~~March 31, 2013, the ~~U.S. dollar~~USD equivalent of unused capacity under WPD's committed credit facilities was ~~$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 established~~PPL 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, if and when necessary. 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 September 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 ~~September 30,~~March 31, 2013 and December 31, 2012, PPL Energy Supply had ~~$355~~$481 million and $356 million of commercial paper outstanding, included in "Short-term debt" on the Balance ~~Sheet,~~Sheets, at a weighted-average interest ~~rate~~rates of ~~0.48%~~0.38% and 0.50%.

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

In April 2013, LG&E and KU each increased the capacity of their commercial paper programs from $250 million to $350 million to provide an additional financing source to fund their short-term liquidity needs, if and when necessary. Commercial paper issuances are supported by LG&E's and KU's Syndicated Credit Facilities. At March 31, 2013 and December 31, 2012, LG&E had $70 million and $55 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheets, at weighted-average interest rates of 0.36% and 0.42%. At March 31, 2013 and December 31, 2012, KU had $115 million and $70 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheets, at weighted-average interest rates of 0.36% and 0.42%.

Long-term Debt and Equity Securities

~~In April 2012, PPL made a registered underwritten public offering of 9.9 million shares of its common stock. In conjunction with that offering,~~See "Overview" above for information regarding equity forward agreements and the ~~underwriters exercised an option to purchase 591 thousand additional shares of PPL common stock solely to cover over-allotments.~~

In connection with the registered public offering, PPL entered into forward sale agreements with two counterparties covering the 9.9 million shares of PPL common stock. Settlement of these initial forward sale agreements will occur no later than April 2013. As a result of the underwriters' exercise of the overallotment option, PPL entered into additional forward sale agreements covering the additional 591 thousand shares of PPL common stock. Settlement of the subsequent forward sale agreements will occur in July 2013. Upon any physical settlement of any forward sale agreement, PPL will issue and deliver to the forward counterparties shares of its common stock in exchange for cash proceeds per share equal to the forward sale price. The forward sale price will be calculated based on an initial forward price of $27.02 ~~per share reduced during the period the contracts are outstanding as specified in the forward sale agreements.~~ ~~PPL may, in certain circumstances, elect cash settlement or net share settlement for all or a portion of its rights or obligations under the forward sale agreements.~~

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

~~124~~

The forward sale agreements are classified as equity transactions. As a result, no amounts will be recorded in the consolidated financial statements until the settlement of the forward sale agreements. Prior to those settlements, the only impact to the financial statements will be the inclusion of incremental shares within the calculation of diluted EPS using the treasury stock method.2010 Equity Units.

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 long-term debt of PPL Ironwood, LLC assumed through consolidation as part of the acquisition.

In April 2012, WPD (East Midlands) issued £100 million aggregate principal amount of 5.25% Senior Notes due 2023. WPD (East Midlands) received proceeds of approximately £111 million, which equated to $178 million at the time of issuance, net of underwriting fees. The net proceeds were used for general corporate purposes.

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

~~In June 2012,~~March 2013, PPL Capital Funding issued ~~$400~~$450 million of ~~4.20% Senior~~its 5.90% Junior Subordinated Notes due ~~2022. The notes may be redeemed at PPL Capital Funding's option any time prior to maturity at make-whole redemption prices.~~2073. PPL Capital Funding received proceeds of ~~$396~~$436 million, net of ~~a discount and~~ underwriting fees, which ~~were used for general corporate purposes.~~

~~In June 2012, PPL Electric redeemed all 2.5 million shares~~will be loaned to or invested in affiliates 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 August 2012,~~ PPL Capital Funding ~~redeemed at par, plus accrued interest, the $99 million outstanding principal amount of its 6.85% Senior Notes due 2047.~~

In August 2012, PPL Electric issued $250 million of 2.50% First Mortgage Bonds due 2022. The notes may be redeemed at PPL Electric's option any time prior to maturity at make-whole redemption prices. PPL Electric received proceeds of $247 million, net of a discount and ~~underwriting fees. The net proceeds were~~ used to ~~repay short-term indebtedness incurred to~~ fund ~~PPL Electric's redemption of its 6.25% Series Preference Stock in June 2012~~their capital expenditures and ~~for~~ other general corporate purposes.

In ~~October~~addition, PPL has reduced the estimate of its plans to issue new shares of common stock in 2013 by $100 million from the $350 million reported in its 2012 PPL Capital Funding issued $400 million of 3.50% Senior Notes due 2022. The notes may be redeemed at PPL Capital Funding's option any time prior to maturity at make-whole redemption prices. PPL Capital Funding received proceeds of $397 million, net of an underwriting discount and fees, which will be used to repay short-term debt obligations, including commercial paper borrowings and for general corporate purposes.Form 10-K.

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

Common Stock Dividends

In ~~August 2012,~~February 2013, PPL declared its quarterly common stock dividend, payable ~~October~~April 1, ~~2012,~~2013, at ~~36.0~~36.75 cents per share (equivalent to ~~$1.44~~$1.47 per annum). Future dividends, declared at the discretion of the Board of Directors, will be dependent upon future earnings, cash flows, financial and legal requirements and other factors.

Rating Agency Actions

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

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

108

A downgrade in PPL's or its subsidiaries' credit ratings could result in higher borrowing costs and reduced access to capital markets.

~~125~~

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 each~~have no credit rating triggers that would result in the reduction of access to capital markets or the ~~respective rating agencies' websites, which ratings together with all other information contained on such rating agency websites is, hereby, explicitly not incorporated by reference in this report.~~acceleration of maturity dates of outstanding debt.

The rating agencies took the following actions related to PPL and its ~~subsidiaries:~~

~~In January 2012, S&P affirmed its rating and revised its outlook for PPL Montana's Pass Through Certificates due 2020.~~subsidiaries during 2013:

In February ~~2012, Fitch assigned ratings~~2013, Moody's upgraded its rating, from B2 to Ba1, and revised the ~~two newly established commercial paper programs~~outlook from under review to stable for ~~LG&E and KU.~~PPL Ironwood.

In March ~~2012, Moody's affirmed the following ratings:~~

·	~~the long-term ratings of the First Mortgage Bonds for LG&E and KU;~~

·	~~the issuer ratings for LG&E and KU; and~~

·	~~the bank loan ratings for LG&E and KU.~~

~~Also in March 2012,~~2013, S&P, Moody's and ~~S&P each assigned short-term ratings to the two newly established commercial paper programs for LG&E and KU.~~

~~In March and May 2012, Moody's, S&P and Fitch affirmed the long-term ratings for LG&E's 2003 Series A and 2007 Series B pollution control bonds.~~

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

·	~~In March 2012, Moody's placed AES Ironwood, L.L.C.'s senior secured bonds under review for possible ratings upgrade.~~

·	~~In April 2012, S&P affirmed the rating of AES Ironwood, L.L.C.'s senior secured bonds.~~

~~In May 2012, Fitch downgraded its rating and revised its outlook for PPL Montana's Pass Through Certificates due 2020.~~

~~In June 2012,~~ Fitch assigned ~~a rating~~ratings of BB+, Ba1 and ~~outlook~~BB+ to PPL Capital Funding's ~~$400~~$450 million ~~of 4.20% Senior Notes.~~5.90% Junior Subordinated Notes due 2073. Fitch also assigned a stable outlook to these notes.

In ~~August 2012, Fitch assigned a rating and outlook to PPL Electric's $250 million First Mortgage Bonds.~~

~~In August 2012, S&P and Moody's assigned a rating to PPL Electric's $250 million First Mortgage Bonds.~~

~~In October 2012,~~April 2013, Fitch affirmed the ~~long-term issuer default~~BBB- rating and ~~senior unsecured rating of~~stable outlook at PPL ~~WW, WPD (South Wales) and WPD (South West).~~Montana.

~~In October 2012, Moody's, S&P and Fitch assigned a rating to PPL Capital Funding's $400 million of 3.50% Senior Notes.~~

~~In October 2012, S&P affirmed its rating for PPL.~~

~~In November 2012, S&P revised its outlook for PPL Montana's Pass Through Certificates due 2020.~~

Ratings Triggers

PPL and PPL Energy Supply have various ~~derivative and non-derivative~~ contracts, including contracts for the sale and purchase of electricity and fuel, commodity transportation and storage, tolling agreements and interest rate and foreign currency instruments, which contain provisions that require PPL and PPL Energy Supply to post additional collateral or permit the counterparty to terminate the contract, if PPL's or PPL Energy Supply's credit rating were to fall below investment grade. See Note 14 to the Financial Statements for a discussion of "Credit Risk-Related Contingent Features," including a discussion of the potential additional collateral that would have been required for derivative contracts in a net liability position at September 30, 2012. At September 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 $486 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.

~~126~~

~~Capital Expenditures~~

Capital expenditure plans are revised periodically to reflect changes in operational, market and regulatory conditions. PPL has lowered its projected environmental capital spending for the period 2012 through 2016 by approximately $0.5 billion from the previously disclosed $3.4 billion projection of environmental capital spending included in PPL's 2011 Form 10-K. The lower projected capital spending is based on current project evaluations and pricing contained in contracts executed to date for environmental construction projects. PPL continues to evaluate potential new generation supply sources, including self-build options and power sourced from the market, as an alternative to installing additional emission control equipment at E.W. Brown, which is jointly dispatched for LG&E and KU, and in lieu of the terminated Bluegrass CTs acquisition discussed in Notes 6 and 8 to the Financial Statements. PPL expects to complete its evaluation during the first half ofMarch 31, 2013. ~~The outcome of that evaluation may lead to additional changes in projected capital spending.~~

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 ~~2011~~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 ~~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 September 30, 2012 and December 31, 2011 was a net asset/(liability) of $491 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 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 ~~September 30.~~March 31. See Notes 13 and 14 to the Financial Statements for additional information.

Gains (Losses)
Three Months Nine Months
2012 2011 2012 2011

Fair value of contracts outstanding at the beginning of the period $ 961 $ 894 $ 1,082 $ 956
Contracts realized or otherwise settled during the period (224) (100) (764) (237)
Fair value of new contracts entered into during the period (a) (11) 4 1 19
Other changes in fair value (101) 46 306 106
Fair value of contracts outstanding at the end of the period $ 625 $ 844 $ 625 $ 844

109

	Gains (Losses)
	Three Months
	2013		2012

Fair value of contracts outstanding at the beginning of the period	$	473	$	1,082
Contracts realized or otherwise settled during the period		(137)		(279)
Fair value of new contracts entered into during the period (a)		9		(1)
Other changes in fair value		(116)		413
Fair value of contracts outstanding at the end of the period	$	229	$	1,215

(a)	Represents the fair value of contracts at the end of the quarter of their inception.

~~127~~

The following table segregates the net fair value of non-trading commodity derivative contracts at ~~September 30, 2012,~~March 31, 2013, based on the ~~level of~~ observability of the information used to determine the fair value.

		Net Asset (Liability)											Net Asset (Liability)
		Maturity						Maturity					Maturity						Maturity
		Less Than		Maturity		Maturity		in Excess		Total Fair			Less Than		Maturity		Maturity		in Excess		Total Fair
		1 Year		1-3 Years		4-5 Years		of 5 Years		Value			1 Year		1-3 Years		4-5 Years		of 5 Years		Value
Source of Fair Value	Source of Fair Value											Source of Fair Value
Prices based on significant observable inputs (Level 2)	Prices based on significant observable inputs (Level 2)	$	520	$	94	$	(19)	$	7	$	602	Prices based on significant observable inputs (Level 2)	$	238	$	(21)	$	(8)	$	6	$	215
Prices based on significant unobservable inputs (Level 3)	Prices based on significant unobservable inputs (Level 3)		11		8		4				23	Prices based on significant unobservable inputs (Level 3)		(1)		12		3				14
Fair value of contracts outstanding at the end of the period	Fair value of contracts outstanding at the end of the period	$	531	$	102	$	(15)	$	7	$	625	Fair value of contracts outstanding at the end of the period	$	237	$	(9)	$	(5)	$	6	$	229

PPL sells electricity, capacity and related services and buys fuel on a forward basis to hedge the value of energy from its generation assets. If PPL were unable to deliver firm capacity and energy or to accept the delivery of fuel under its agreements, under certain circumstances it could be required to pay liquidating damages. These damages ~~could~~would be based on the difference between the market price and the contract price of the commodity. Depending on price changes in the wholesale energy markets, such damages could be significant. Extreme weather conditions, unplanned power plant outages, transmission disruptions, nonperformance by counterparties (or their ~~own~~ counterparties) with which it has energy contracts and other factors could affect PPL's ability to meet its obligations, or cause significant increases in the market price of replacement energy. Although PPL attempts to mitigate these risks, there can be no assurance that it will be able to fully meet its firm obligations, that it will not be required to pay damages for failure to perform, or that it will not experience counterparty nonperformance in the future. In connection with its bankruptcy proceedings, a significant counterparty, SMGT, had been purchasing lower volumes of electricity than prescribed in the contract and effective April 1, 2012 the contract was terminated. PPL 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 range in maturity through 2017. The following table sets forth changes in the net fair value of trading commodity derivative contracts for the periods ended ~~September 30.~~March 31. See Notes 13 and 14 to the Financial Statements for additional information.

	Gains (Losses)								Gains (Losses)
	Three Months				Nine Months				Three Months
	2012		2011		2012		2011		2013		2012

Fair value of contracts outstanding at the beginning of the period	$	17	$	15	$	(4)	$	4	$	29	$	(4)
Contracts realized or otherwise settled during the period		17		(10)		16		(7)		(2)
Fair value of new contracts entered into during the period (a)		13		(2)		18		6		(12)		6
Other changes in fair value		(15)		4		2		4
Fair value of contracts outstanding at the end of the period	$	32	$	7	$	32	$	7	$	15	$	2

(a)	Represents the fair value of contracts at the end of the quarter of their inception.

~~Unrealized gains of approximately $4 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 ~~September 30, 2012,~~March 31, 2013, based on the ~~level of~~ observability of the information used to determine the fair value.

	Net Asset (Liability)									Net Asset (Liability)
	Maturity						Maturity			Maturity					Maturity
	Less Than		Maturity		Maturity		in Excess	Total Fair		Less Than		Maturity		Maturity	in Excess	Total Fair
	1 Year		1-3 Years		4-5 Years		of 5 Years	Value		1 Year		1-3 Years		4-5 Years	of 5 Years	Value
Source of Fair Value
Prices quoted in active markets for identical instruments (Level 1)										$	1					$	1
Prices based on significant observable inputs (Level 2)	$	18	$	11	$	1		$	30		5	$	9				14
Prices based on significant unobservable inputs (Level 3)		2							2
Fair value of contracts outstanding at the end of the period	$	20	$	11	$	1		$	32	$	6	$	9			$	15

~~128~~110

VaR Models

A VaR model is utilized to measure commodity price risk in ~~domestic~~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 ~~conservative~~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 ~~period~~periods was as follows.

Trading VaR Non-Trading VaR
Nine Months Twelve Months Nine Months Twelve Months
Ended Ended Ended Ended
September 30, December 31, September 30, December 31,
2012 2011 2012 2011
95% Confidence Level, Five-Day Holding Period
Period End $ 6 $ 1 $ 10 $ 6
Average for the Period 3 3 9 5
High 8 6 11 7
Low 1 1 7 4

		Trading VaR		Non-Trading VaR
		Three Months		Three Months
		Ended		Ended
		March 31,		March 31,
		2013		2013
95% Confidence Level, Five-Day Holding Period
	Period End	$	6	$	8
	Average for the Period		5		9
	High		6		9
	Low		3		8

The trading portfolio includes all ~~speculative~~proprietary trading positions, regardless of the delivery period. All positions not considered ~~speculative~~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 ~~September 30, 2012.~~March 31, 2013.

Interest Rate Risk

PPL and its subsidiaries issue debt to finance their operations, which exposes them to interest rate risk. PPL utilizes various financial derivative instruments to adjust the mix of fixed and floating interest rates in its debt portfolio, adjust the duration of its debt portfolio and lock in benchmark interest rates in anticipation of future financing, when appropriate. Risk limits under the risk management program are designed to balance risk exposure to volatility in interest expense and changes in the fair value of PPL's debt portfolio due to changes in the absolute level of interest rates.

At ~~September 30, 2012,~~March 31, 2013, PPL's potential annual exposure to increased interest expense, based on a 10% increase in interest rates, was not significant.

PPL is also exposed to changes in the fair value of its domestic and international debt portfolios. PPL estimated that a 10% decrease in interest rates at ~~September 30, 2012~~March 31, 2013 would increase the fair value of its debt portfolio by ~~$609~~$563 million.

At ~~September 30, 2012,~~March 31, 2013, PPL had the following interest rate hedges outstanding:

						Effect of a							Effect of a
				Fair Value,		10% Adverse					Fair Value,		10% Adverse
		Exposure		Net - Asset		Movement			Exposure		Net - Asset		Movement
		Hedged		(Liability) (a)		in Rates (b)			Hedged		(Liability) (a)		in Rates (b)
Cash flow hedges	Cash flow hedges							Cash flow hedges
	Interest rate swaps (c)	$	618	$	(21)	$	(14)	Interest rate swaps (c)	$	1,148	$	12	$	(35)
	Cross-currency swaps (d)		1,262		20		(180)	Cross-currency swaps (d)		1,262		82		(171)
Economic hedges
Economic activity								Economic activity
	Interest rate swaps (e)		179		(62)		(3)	Interest rate swaps (e)		179		(55)		(3)

(a)	Includes accrued interest, if applicable.

(b)	Effects of adverse movements decrease assets or increase liabilities, as applicable, which could result in an asset becoming a liability. Sensitivities represent a 10% adverse movement in interest rates, except for cross-currency swaps which also includes foreign currency exchange rates.

(c)

PPL utilizes various risk management instruments to reduce its exposure to the expected future cash flow variability of its debt instruments. These risks include exposure to adverse interest rate movements for outstanding variable rate debt and for future anticipated financing. While PPL is exposed to changes in the fair value of these instruments, any changes in the fair value of such cash flow hedges are recorded in ~~equity.~~equity or as regulatory assets or liabilities, if recoverable through regulated rates. The changes in fair value of these instruments are then reclassified into earnings in the same period during which the item being hedged affects earnings. ~~Sensitivities represent a 10% adverse movement in interest rates.~~ The positions outstanding at ~~September 30, 2012~~March 31, 2013 mature through ~~2024.~~2043.

(d)

PPL utilizes cross-currency swaps to hedge the interest payments and principal of WPD's U.S. dollar-denominated senior notes. While PPL is exposed to changes in the fair value of these instruments, any change in the fair value of these instruments is recorded in equity and reclassified into earnings in the same period during which the item being hedged affects earnings. ~~Sensitivities represent a 10% adverse movement in both interest rates and foreign currency exchange rates.~~ The positions outstanding at ~~September 30, 2012~~March 31, 2013 mature through 2028.

(e)

PPL utilizes various risk management instruments to reduce its exposure to the expected future cash flow variability of its debt instruments. These risks include exposure to adverse interest rate movements for outstanding variable rate debt and for future anticipated financing. While PPL is exposed to changes in the fair value of these instruments, any realized changes in the fair value of such economic ~~hedges~~positions 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 ~~September 30, 2012~~March 31, 2013 mature through 2033.

~~129~~111

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 September 30, 2012,~~ PPL had the following foreign currency hedges ~~outstanding:~~

outstanding March 31, 2013:

						Effect of a							Effect of a
						10%							10%
						Adverse							Adverse
						Movement							Movement
						in Foreign							in Foreign
				Fair Value,		Currency					Fair Value,		Currency
		Exposure		Net - Asset		Exchange			Exposure		Net - Asset		Exchange
		Hedged		(Liability)		Rates (a)			Hedged		(Liability)		Rates (a)

Net investment hedges (b)	Net investment hedges (b)	£	163	$	(1)	$	(26)	Net investment hedges (b)	£	162	$	15	$	(25)
Economic hedges (c)			1,199		(35)		(185)
Economic activity (c)								Economic activity (c)		1,175		78		(167)

(a)	Effects of adverse movements decrease assets or increase liabilities, as applicable, which could result in an asset becoming a liability.

(b)

To protect the value of a portion of its net investment in WPD, PPL executes forward contracts to sell GBP. The positions outstanding at ~~September 30, 2012~~March 31, 2013 mature through 2013. Excludes the amount of an intercompany loan classified as a net investment hedge. See Note 14 to the Financial Statements for additional information.

(c)

To economically hedge the translation of expected income denominated in GBP to U.S. dollars, PPL enters into a combination of average rate forwards and average rate options to sell GBP. The ~~positions~~forwards and options outstanding at ~~September 30, 2012~~March 31, 2013 mature through ~~2014.~~2015.

NDT Funds - Securities Price Risk

In connection with certain NRC requirements, PPL Susquehanna maintains trust funds to fund certain costs of decommissioning the PPL Susquehanna nuclear plant (Susquehanna). At ~~September 30, 2012,~~March 31, 2013, these funds were invested primarily in domestic equity securities and fixed-rate, fixed-income securities and are reflected at fair value on the Balance Sheet. The mix of securities is designed to provide returns sufficient to fund Susquehanna's decommissioning and to compensate for inflationary increases in decommissioning costs. However, the equity securities included in the trusts are exposed to price fluctuation in equity markets, and the values of fixed-rate, fixed-income securities are primarily exposed to changes in interest rates. PPL actively monitors the investment performance and periodically reviews asset allocation in accordance with its ~~NDT~~nuclear decommissioning trust policy statement. At ~~September 30, 2012,~~March 31, 2013, a hypothetical 10% increase in interest rates and a 10% decrease in equity prices would have resulted in an estimated ~~$49~~$55 million reduction in the fair value of the trust assets. See Notes 13 and 17 to the Financial Statements for additional information regarding the NDT funds.

Credit Risk

See Notes 13 and 14 to the Financial Statements in this Form 10-Q and "Risk Management - Energy Marketing & Trading and Other - Credit Risk" in PPL's ~~2011~~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 ~~these~~this exchange ~~rates~~rate resulted in a foreign currency translation loss of $256 million for the three months ended March 31, 2013, which primarily reflected a $696 million decrease to PP&E and goodwill offset by a decrease of $440 million to net liabilities. Changes in this exchange rate resulted in a foreign currency translation gain of ~~$53~~$76 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2012, which primarily reflected a ~~$93~~$188 million increase to PP&E and goodwill offset by an increase of $40 million to net liabilities. Changes in these exchange rates resulted in a foreign currency translation gain of $154 million for the nine months ended September 30, 2011, which primarily reflected a $242 million increase to PP&E offset by an increase of $88$112 million to net liabilities. The impact of foreign currency translation is recorded in AOCI.

Related Party Transactions

PPL is not aware of any material ownership interests or operating responsibility by senior management of PPL, PPL Energy Supply, PPL Electric, LKE, LG&E or KU in outside partnerships, including leasing transactions with variable interest entities or other entities doing business with PPL. ~~See Note 11 to the Financial Statements for additional information on related party transactions.~~

~~130~~112

Acquisitions, Development and Divestitures

~~See Note 8~~PPL from time to ~~the Financial Statements~~time evaluates opportunities for ~~information on the April 2012 Ironwood Acquisition~~potential acquisitions, divestitures and ~~LG&E's and KU's June 2012 termination of the asset purchase agreement for the Bluegrass CTs.~~

~~See Note 8 to the Financial Statements in this Form 10-Q and Note 10 to the Financial Statements in PPL's 2011 Form 10-K for information on PPL's April 2011 acquisition of WPD Midlands.~~

development projects. Development projects are ~~continuously~~ reexamined based on market conditions and other factors to determine whether to proceed with the projects, sell, cancel or expand them, execute tolling agreements or pursue other options. See Note 8 to the Financial Statements for ~~additional~~ information on the more significant activities.

Environmental Matters

Extensive federal, state and local environmental laws and regulations are applicable to PPL's air emissions, water discharges and the management of hazardous and solid waste, ~~among~~as well as other ~~areas; and the~~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 ~~regulatory~~ agencies. Costs may take the form of increased capital expenditures or operating and maintenance ~~expenses;~~expenses, monetary fines, penalties or other restrictions. Many of these environmental law considerations are also applicable to the operations of key suppliers, or customers, such as coal producers and industrial power users, and may impact the ~~cost of~~costs for their products or their demand for PPL's services.

Physical effects associated with climate change could include the impact of changes in weather patterns, such as storm frequency and intensity, and the resultant potential damage to PPL's generation assets, electricity transmission and distribution systems, as well as impacts on customers. In addition, changed weather patterns could potentially reduce annual rainfall in areas where PPL has hydro generating facilities or where river water is used to cool its fossil and nuclear powered generators. PPL cannot currently predict whether its businesses will experience these potential climate change-related risks or estimate the potential cost of their related consequences.

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

Coal Combustion Residuals (CCRs)

In June 2010, the EPA proposed two approaches to regulating the disposal and management of CCRs (as either hazardous or non-hazardous) under existing solid waste regulations. A final rulemaking is currently expected before the end of 2015. However, the timing of the final regulations could be accelerated by certain litigation that could require the EPA to issue its regulations sooner. Regulations could impact handling, disposal and/or beneficial use of CCRs. The financial impact could be material if CCRs are regulated as hazardous waste, and significant if regulated as non-hazardous, in accordance with the proposed rule.

Effluent Limitation Guidelines

On April 19, 2013, the EPA issued proposed regulations to revise discharge limitations for steam electric generation wastewater permits. The proposed limitations are based on the EPA review of available treatment technologies and their capacity for reducing pollutants and include new requirements for fly ash and bottom ash handling and metal cleaning wastes, as well as new limits for scrubber wastewater, gasification wastewater and landfill leachate. The proposal contains several alternative approaches, some of which could significantly impact PPL's coal-fired plants. PPL will work with industry groups to comment on the proposed regulation. The final regulation is expected in May 2014. At the present time, PPL is unable to predict the outcome of this matter or estimate a range of reasonably possible costs, but the costs could be significant.

316(b) Cooling Water Intake Structure Rule

In April 2011, the EPA published a draft regulation under Section 316(b) of the Clean Water Act, which regulates cooling water intakes for power plants. The draft rule has two provisions: one requires installation of Best Technology Available (BTA) to reduce mortality of aquatic organisms that are pulled into the plant cooling water system (entrainment), and the second imposes standards for reduction of mortality of aquatic organisms trapped on water intake screens (impingement). A final rule is expected in June 2013. The proposed regulation would apply to nearly all PPL-owned steam electric plants in Pennsylvania, Kentucky, and Montana, potentially even including those equipped with closed-cycle cooling systems. PPL's compliance costs could be significant, especially if the final rule requires closed-cycle systems at plants that do not currently have them or conversions of once-through systems to closed-cycle.

113

GHG Regulations

In 2013, the EPA is expected to finalize limits on GHG emissions from new power plants and to begin working on a proposal for such emissions from existing power plants. The EPA's proposal on GHG emissions from new power plants would effectively preclude construction of any coal-fired plants and could even be difficult for new gas-fired plants to meet. With respect to existing power plants, the impact could be significant, depending on the structure and stringency of the final rule. PPL, along with others in the industry, filed comments on the EPA's proposal related to GHG emissions from new plants.

MATS

The EPA finalized MATS requiring fossil-fuel fired plants to reduce emissions of mercury and other hazardous air pollutants by April 16, 2015. The rule is being challenged by industry groups and states. The EPA has subsequently proposed changes to the rule with respect to new sources to address the concern that the rule effectively precludes construction of any new coal-fired plants. PPL is generally well-positioned to comply with MATS, primarily due to recent investments in environmental controls and approved ECR plans to install additional controls at some of its Kentucky plants. Additionally, PPL is evaluating chemical additive systems for mercury control at Brunner Island, and modifications to existing controls at Colstrip for improved particulate matter reductions. In September 2012, PPL announced its intention to place its Corette plant in long-term reserve status beginning in April 2015 due to expected market conditions and costs to comply with MATS. The anticipated retirements of certain coal-fired electric generating units are in response to this and other environmental regulations.

CSAPR and CAIR

In 2011, the EPA finalized its CSAPR regulating emissions of nitrous oxide and sulfur dioxide through new allowance trading programs which were to be implemented in two phases (2012 and 2014). Like its predecessor, the CAIR, CSAPR targeted sources in the eastern United States. In December 2011, the U.S. Court of Appeals for the District of Columbia Circuit (the Court) stayed implementation of CSAPR, leaving CAIR in place. Subsequently, in August 2012, the Court vacated and remanded CSAPR back to the EPA for further rulemaking, again leaving CAIR in place. PPL plants in Pennsylvania and Kentucky will continue to comply with CAIR through optimization of existing controls, balanced with emission allowance purchases. The Court's August decision leaves plants in CSAPR-affected states potentially exposed to more stringent emission reductions due to regional haze implementation (it was previously determined that CSAPR or CAIR participation satisfies regional haze requirements), and/or petitions to the EPA by downwind states under Section 126 of the Clean Air Act requesting the EPA to require plants that allegedly contribute to downwind non-attainment to take action to reduce emissions.

Regional Haze - Montana

The EPA signed its final Federal Implementation Plan of the Regional Haze Rules for Montana in September 2012, with tighter emissions limits for Colstrip Units 1 & 2 based on the installation of new controls (no limits or additional controls were specified for Colstrip Units 3 & 4), and tighter emission limits for Corette (which are not based on additional controls). The cost of the potential additional controls for Colstrip Units 1 & 2, if required, could be significant. PPL expects to meet the tighter permit limits at Corette without any significant changes to operations, although other requirements have led to the planned suspension of operations at Corette beginning in April 2015 (see "MATS" discussion above).

See Note 10 to the Financial Statements in this Form 10-Q and "Item 1. Business - Environmental Matters" in PPL's ~~2011~~2012 Form 10-K for a discussion of environmental matters.

New Accounting Guidance

See Notes 2 and 1819 to the Financial Statements for a discussion of new accounting guidance adopted and pending adoption.

Application of Critical Accounting Policies

Financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies. The following accounting policies are particularly important to the financial condition or results of operations, and require estimates or other judgments of matters inherently uncertain: price risk management, defined benefits, asset impairment (excluding investments), loss accruals, AROs, income taxes, and regulatory assets and ~~liabilities and business combinations - purchase price allocation.~~liabilities. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in PPL's ~~2011~~2012 Form 10-K for a discussion of each critical accounting policy.

~~131~~114

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~~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 nine~~ months ended ~~September 30, 2012~~March 31, 2013 with ~~the same periods in 2011.~~2012.

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

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

Overview

Introduction

PPL Energy Supply is an energy company with headquarters in Allentown, Pennsylvania. Through its subsidiaries, PPL Energy Supply is primarily engaged in the competitive generation and marketing of electricity in two key markets - the northeastern and northwestern U.S.

Business Strategy

PPL Energy Supply's ~~overall~~ strategy is to achieve disciplined optimization of energy supply margins while mitigating volatility in both cash flows and earnings. More specifically, PPL Energy Supply's strategy is to optimize the value from its competitive generation and marketing 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 ~~risk,~~volatility, counterparty credit risk and operational risk. PPL Energy Supply is focused on maintaining profitability during the current and projected period of low commodity prices by controlling its capital and operation and maintenance expenditures.

To manage financing costs and access to credit markets, a key objective offor PPL Energy ~~Supply's business strategy~~Supply is to maintain a strong credit ~~profile. PPL Energy Supply continually focuses on maintaining an appropriate capital structure~~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 ~~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 (Loss) Attributable to PPL Energy Supply Member

Net Income (Loss) Attributable to PPL Energy Supply Member for the three ~~and nine~~ months ended ~~September 30, 2012~~March 31, 2013 was ~~$54 million and $382~~$(38) million compared to ~~$169~~$309 million ~~and $472 million for the same periods~~ in ~~2011,~~2012, representing ~~decreases of 68% and 19% from the same periods in 2011.~~a 112% decrease.

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

~~132~~115

Economic and Market Conditions

Unregulated ~~gross energy margins~~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 89% 70%
Montana coal plants 87% 59%
Combined-cycle gas plants 70% 96%

~~(a)~~

~~All periods reflect the nine months ending September 30.~~

This reduction in coal-fired generation output had resulted in a surplus of coal inventory at certain of PPL Energy Supply's Pennsylvania coal plants. To mitigate the risk of exceeding available coal storage, PPL Energy Supply incurred pre-tax charges of $17 million and $29 million during the three and nine months ended September 30, 2012 to reduce its 2012 and 2013 contracted coal deliveries. PPL Energy Supply will continue to manage its coal inventory to mitigate the financial impact and physical implications of an oversupply.

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

PPL Energy Supply's businesses are also 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 10 to the Financial Statements in this Form 10-Q and Note 15 to the Financial Statements in PPL Energy Supply's 2011 Form 10-K for additional information on these requirements. As a result of these requirements, PPL Energy Supply ~~announced in September 2012 its intention, beginning in April 2015,~~continues to ~~place~~monitor its Corette plant (which as previously announced will be placed in long-term reserve status, suspending the plant's operation due to expected market conditions and the costs to comply with the ~~Mercury and Air Toxics Standards.~~MATS beginning in April 2015) for impairment. The Corette ~~plant's~~plant asset group's carrying value at ~~September 30, 2012~~March 31, 2013 was ~~approximately $67~~$65 million. Although the Corette plant was not ~~determined to be~~ impaired at ~~September 30, 2012,~~March 31, 2013, it is reasonably possible that an impairment ~~charge~~ could ~~be recorded in the fourth quarter of 2012 or~~occur in future periods, as higher priced sales contracts settle, adversely impacting projected cash flows.

In light of these economic and market conditions, as well as current and projected environmental regulatory requirements, PPL Energy Supply considered whether certain of its other generating assets were impaired, and determined that no impairment charges were required at September 30, 2012. PPL Energy Supply is unable to predict whether future environmental requirements or market conditions will result in impairment charges for other generating assets or additional 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.

~~133~~

Susquehanna Turbine Blade Inspection

In the spring of 2013, PPL Energy Supply ~~previously announced that a shutdown of Unit 1 of its Susquehanna nuclear power plant in October 2012~~ will ~~include an inspection of that unit's turbine blades that could lead~~begin making modifications to address the ~~finalization of a plan to resolve the issue~~causes of turbine blade cracking at the Susquehanna nuclear plant that was first identified in 2011. The modifications will be made during the Unit ~~1 is expected to resume operations by November 8, 2012.~~2 refueling outage and an additional planned outage for Unit 1. Following completion of the modifications, PPL Energy Supply plans to ~~take an inspection outage for Unit 2. The projected pre-tax earnings impact of these inspections, including reduced energy-sales margins and possible repair expenses, is estimated in~~continue monitoring the ~~range of $43 million to $58 million ($26 million to $35 million, after-tax), and the ultimate financial impact will depend on the duration of the Unit 2 outage.~~

~~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 facility and received the facility's full electricity output and capacity value pursuant to a tolling agreement that expires in 2021. The acquisition provides PPL Energy Supply, through its subsidiaries, operational control of additional combined-cycle gas generation in PJM. See Note 8 to the Financial Statements for additional information.

~~Bankruptcy of SMGT~~

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

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

~~PPL EnergyPlus' receivable under the SMGT Contract totaled approximately $21 million at September 30, 2012, which has been fully reserved.~~

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

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

Results of Operations

The following discussion provides a summary of PPL Energy Supply's earnings and a description of key factors that are expected to impact future earnings. This section ends with "Statement of Income Analysis," which includes explanations of significant changes in Unregulated Gross Energy Margins by region and principal line items on PPL Energy Supply's Statements of Income, comparing the three ~~and nine~~ months ended ~~September 30, 2012~~March 31, 2013 with ~~the same periods in 2011.~~2012.

~~134~~

Earnings

Net Income Attributable to PPL Energy Supply Member for the periods ended September 30 was:

Three Months Nine Months
2012 2011 2012 2011

Net Income Attributable to PPL Energy Supply Member $ 54 $ 169 $ 382 $ 472

Earnings

Net Income (Loss) Attributable to PPL Energy Supply Member for the periods ended March 31 was:

	Three Months
	2013		2012

Net Income (Loss) Attributable to PPL Energy Supply Member	$	(38)	$	309

The changes in the components of Net Income (Loss) Attributable to PPL Energy Supply Member between these periods were due to the following factors, which reflect reclassifications for items included in ~~unregulated gross energy margins~~Unregulated Gross Energy Margins and certain items that management considers special. See additional detail of these special items in the tables below.

Three Months Nine Months

Unregulated gross energy margins $ (38) $ (125)
Other operation and maintenance (11) (27)
Depreciation (11) (25)
Other Income (Expense) - net (10)
Interest Expense 8 24
Other 9 6
Income Taxes 25 90
Discontinued operations, after-tax 3
Special items, after-tax (97) (26)
Total $ (115) $ (90)

	Three Months

Unregulated Gross Energy Margins	$	(107)
Other operation and maintenance		13
Depreciation		(14)
Interest Expense		(9)
Income Taxes		33
Special items, after-tax		(263)
Total	$	(347)

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

116

~~Higher~~Lower other operation and maintenance ~~for the three-month period~~ primarily due to $8$15 million of ~~higher~~lower costs at ~~PPL Susquehanna, $7 million~~eastern fossil and hydroelectric plants largely due to ~~a planned outage at PPL Brunner Island~~outages in ~~September~~ 2012, ~~and $4 million of higher costs from Ironwood as a result of the acquisition,~~ partially offset by $9$3 million of ~~trademark royalties with an affiliate in 2011 for which the agreement was terminated December 31, 2011.~~

~~Higher other operation and maintenance for the nine-month period primarily due to $27 million of higher~~additional costs at PPL Susquehanna including refueling outage costs, payroll-related costs and timing of projects, $17 million from higher systems-related costs and timing of projects and $13 million of higher costs from Ironwood as a result of the acquisition, partially offset by $26 million of trademark royalties with an affiliate in 2011 for which the agreement was terminated December 31, 2011.

·	~~Higher depreciation for the three and nine-month periods due to the impact of PP&E additions, including $7 million and $11 million~~ due to the Ironwood Acquisition.

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

Lower interest expense for the three and nine-month periods due to 2011 including the acceleration of deferred financing fees of $7 million related to the July 2011 redemption of $250 million of 7.00% Senior Notes. In addition, the nine-month period was lower due to a $10 million impact of not replacing the $250 million of debt, a $7 million impact from $500 million in debt that matured in 2011 being replaced with debt at a lower interest rate, and a $10 million impact from less short-term debt in 2012, partially offset by an $8 million increase related to the debt assumed through consolidation as a result of the Ironwood Acquisition.

·	~~Lower income taxes for the three-month period~~Higher interest expense primarily due to financings associated with PPL Ironwood, acquired in April 2012, which increased interest expense by $4 million and $3 million due to lower ~~pre-tax income.~~capitalized interest.

Lower income taxes ~~for the nine-month period~~ due to lower pre-tax income in 2013, which reduced income taxes by ~~$67~~$47 million, ~~$15~~partially offset by an $11 million ~~of net deferred tax benefits~~benefit from a state tax ~~adjustments~~rate change recorded in ~~2012 and $6 million of Pennsylvania net operating loss valuation allowance adjustments recorded in 2011, driven primarily by the impact of bonus depreciation.~~2012.

~~135~~

The following after-tax gains (losses), which management considers special items, also impacted the results during the periods ended ~~September 30.~~March 31.

		Income Statement	Three Months				Nine Months					Income Statement	Three Months
		Line Item	2012		2011		2012		2011			Line Item	2013		2012

Adjusted energy-related economic activity, net, net of tax of $63, $8, ($16), ($2)		(a)	$	(95)	$	(10)	$	23	$	4
Adjusted energy-related economic activity, net, net of tax of $79, ($102)											Adjusted energy-related economic activity, net, net of tax of $79, ($102)	(a)	$	(117)	$	150
Impairments:	Impairments:										Impairments:
	Emission allowances, net of tax of $0, $0, $0, $1	Other O&M								(1)
	Renewable energy credits, net of tax of $0, $0, $0, $2	Other O&M								(3)
	Adjustments - nuclear decommissioning trust investments, net of tax of $0, $2, ($2), $2	Other Income-net				(1)		1
LKE acquisition-related adjustments:
	Sale of certain non-core generation facilities, net of tax of $0, $0, $0, $0	Disc. Operations								(2)	Adjustments - nuclear decommissioning trust investments, net of tax of $0, ($1)	Other Income (Expense)-net				1
Other:	Other:										Other:
	Montana hydroelectric litigation, net of tax of $0, $0, $0, $1	Interest Expense				(1)				(2)	Counterparty bankruptcy, net of tax of $0, $5 (b)	Other Operation and Maintenance				(6)
	Litigation settlement - spent nuclear fuel storage, net of tax of $0, ($2), $0, ($23) (b)	Fuel				4				33	Ash basin leak remediation adjustment, net of tax of $0, ($1)	Other Operation and Maintenance				1
	Counterparty bankruptcy, net of tax of $0, $0, $5, $0 (c)	Other O&M						(6)
	Wholesale supply cost reimbursement, net of tax of $0, $0, $0, $0	(d)						1
	Ash basin leak remediation adjustment, net of tax of $0, $0, ($1), $0	Other O&M						1
	Coal contract modification payments, net of tax of $7, $0, $12, $0 (e)	Fuel		(10)				(17)
Total	Total		$	(105)	$	(8)	$	3	$	29	Total		$	(117)	$	146

(a)	See "Reconciliation of Economic Activity" below.

(b)

~~(c)~~

~~(d)~~

~~Recorded in "Wholesale energy marketing - Realized" on the Statement of Income.~~

~~(e)~~

~~As a result of lower electricity and natural gas prices, coal unit utilization has decreased. Contract modification payments were incurred to reduce 2012 and 2013 contracted coal deliveries.~~

Reconciliation of Economic Activity

			Three Months				Nine Months						Three Months
			2012		2011		2012		2011				2013		2012
Operating Revenues	Operating Revenues										Operating Revenues
		Unregulated retail electric and gas	$	(13)	$	4	$	(15)	$	9		Unregulated retail electric and gas	$	(8)	$	10
		Wholesale energy marketing		(716)		216		(322)		229		Wholesale energy marketing		(822)		852
Operating Expenses	Operating Expenses										Operating Expenses
		Fuel		3		(28)		(11)		(16)		Fuel		(1)		2
		Energy Purchases		569		(176)		420		(49)		Energy Purchases		634		(591)
Energy-related economic activity (a)	Energy-related economic activity (a)			(157)		16		72		173	Energy-related economic activity (a)			(197)		273
Option premiums ~~(b)~~	Option premiums ~~(b)~~					6		1		17	Option premiums ~~(b)~~			1
Adjusted energy-related economic activity	Adjusted energy-related economic activity			(157)		22		73		190	Adjusted energy-related economic activity			(196)		273
Less: Economic activity realized, associated with the monetization of
Less: Economic activity realized, associated with the monetization of certain											Less: Economic activity realized, associated with the monetization of certain
	certain full-requirement sales contracts in 2010			1		40		34		184	full-requirement sales contracts in 2010					21
Adjusted energy-related economic activity, net, pre-tax	Adjusted energy-related economic activity, net, pre-tax		$	(158)	$	(18)	$	39	$	6	Adjusted energy-related economic activity, net, pre-tax		$	(196)	$	252

Adjusted energy-related economic activity, net, after-tax	Adjusted energy-related economic activity, net, after-tax		$	(95)	$	(10)	$	23	$	4	Adjusted energy-related economic activity, net, after-tax		$	(117)	$	150

(a)	See Note 14 to the Financial Statements for additional information.

~~(b)~~

2013 Outlook

Excluding special items, PPL Energy Supply projects lower earnings in ~~2012~~2013 compared with ~~2011. The decrease is~~2012, primarily driven by lower energy ~~margins as a result of lower energy and capacity~~ prices, ~~and lower generation volumes,~~ higher ~~other~~fuel costs, higher operation and maintenance expense, higher depreciation, and higher ~~depreciation.~~financing costs, partially offset by higher capacity prices and higher nuclear generation output despite scheduled outages for both Susquehanna units to implement a long-term solution to turbine blade issues.

~~136~~

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

117

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 ~~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, and 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.~~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 ~~swings~~fluctuations in unrealized gains and losses. Such factors could result in gains or losses being recorded in either "Wholesale energy marketing" or "Energy purchases" on the Statements of Income. This performance measure includes PLR revenues from energy sales to PPL Electric by PPL EnergyPlus, which are recorded in "Wholesale energy marketing to affiliate" revenue. PPL Energy Supply excludes from "Unregulated Gross Energy Margins" adjusted energy-related economic activity, which includes the changes in fair value of positions used to economically hedge a portion of the economic value of PPL Energy Supply's competitive generation assets, full-requirement sales contracts and retail activities. This economic value is subject to changes in fair value due to market price volatility of the input and output commodities (e.g., fuel and power) prior to the delivery period that was hedged. Also included in adjusted energy-related economic activity is the premium amortization associated with options and for 2012 the ineffective portion of qualifying cash flow hedges and economic activity realized associated with the monetization of certain full-requirement sales contracts ~~and premium amortization associated with options.~~in 2010. This economic activity is deferred, with the exception of the full-requirement sales contracts that were monetized, and included in "Unregulated Gross Energy 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 "Operating Income" to~~table reconciles "Unregulated Gross Energy Margins" as defined by PPL Energy Supply to "Operating Income" for the periods ended ~~September 30.~~March 31.

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 $ 1,074 $ 2 (c) $ 1,076 $ 897 $ 10 (c) $ 907
Unrealized economic activity (716) (d) (716) 216 (d) 216
Wholesale energy marketing
to affiliate 23 23 5 5
Unregulated retail electric and gas 232 (13) (d) 219 186 4 (d) 190
Net energy trading margins (11) (11) (7) (7)
Energy-related businesses 128 128 130 130
Total Operating Revenues 1,318 (599) 719 1,081 360 1,441

					2013 Three Months							2012 Three Months
					Unregulated							Unregulated
					Gross Energy					Operating		Gross Energy					Operating
					Margins		Other (a)			Income (b)		Margins		Other (a)			Income (b)

Operating Revenues
	Wholesale energy marketing
				Realized	$	977	$	(1)		$	976	$	1,204	$	4	(c)	$	1,208
				Unrealized economic activity				(822)	(d)		(822)				852	(d)		852
	Wholesale energy marketing
		to affiliate				14					14		21					21
	Unregulated retail electric and gas					246		(8)	(d)		238		214		10	(d)		224
	Net energy trading margins					(11)					(11)		8					8
	Energy-related businesses							113			113				96			96
			Total Operating Revenues			1,226		(718)			508		1,447		962			2,409

Operating Expenses
	Fuel					299		(1)	(d)		298		214		(3)	(d)		211
	Energy purchases
				Realized		436		(2)			434		636		23	(c)		659
				Unrealized economic activity				(634)	(d)		(634)				591	(d)		591
	Energy purchases from affiliate					1					1		1					1
	Other operation and maintenance					5		230			235		4		251			255
	Depreciation							78			78				64			64
	Taxes, other than income					8		9			17		8		10			18
	Energy-related businesses							110			110				92			92
			Total Operating Expenses			749		(210)			539		863		1,028			1,891
Total					$	477	$	(508)		$	(31)	$	584	$	(66)		$	518

~~137~~118

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 Expenses
Fuel 310 11 (e) 321 338 20 (e) 358
Energy purchases
Realized 418 3 (c) 421 119 42 (c) 161
Unrealized economic activity (569) (d) (569) 176 (d) 176
Energy purchases from affiliate 1 1 1 1
Other operation and maintenance 1 219 220 208 208
Depreciation 73 73 62 62
Taxes, other than income 11 7 18 8 10 18
Energy-related businesses 125 125 130 130
Total Operating Expenses 741 (131) 610 466 648 1,114
Total $ 577 $ (468) $ 109 $ 615 $ (288) $ 327

2012 Nine Months 2011 Nine 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 $ 3,353 $ 14 (c) $ 3,367 $ 2,635 $ 42 (c) $ 2,677
Unrealized economic activity (322) (d) (322) 229 (d) 229
Wholesale energy marketing
to affiliate 61 61 15 15
Unregulated retail electric and gas 638 (15) (d) 623 509 9 (d) 518
Net energy trading margins 7 7 14 14
Energy-related businesses 336 336 354 354
Total Operating Revenues 4,059 13 4,072 3,173 634 3,807

Operating Expenses
Fuel 695 33 (e) 728 872 (46) (e) 826
Energy purchases
Realized 1,669 46 (c) 1,715 496 205 (c) 701
Unrealized economic activity (420) (d) (420) 49 (d) 49
Energy purchases from affiliate 2 2 3 3
Other operation and maintenance 12 757 769 13 728 741
Depreciation 206 206 181 181
Taxes, other than income 27 26 53 22 28 50
Energy-related businesses 326 326 350 350
Total Operating Expenses 2,405 974 3,379 1,406 1,495 2,901
Discontinued Operations 12 (12) (f)
Total $ 1,654 $ (961) $ 693 $ 1,779 $ (873) $ 906

(a)	Represents amounts excluded from Margins.

(b)	As reported on the Statements of Income.

(c)

(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 nine months ended September 30, 2012 include pre-tax losses of $17 million and $29 million related to coal contract modification payments. The three and nine months ended September 30, 2011 include pre-tax credits of $6 million and $56 million for the spent nuclear fuel litigation settlement.

~~(f)~~

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 ~~September 30,~~March 31, as well as the change between periods. The factors that gave rise to the changes are described below the table.

~~138~~

		Three Months
		2013		2012		Change

Non-trading
	Eastern U.S.	$	430	$	489	$	(59)
	Western U.S.		58		87		(29)
Net energy trading			(11)		8		(19)
Total		$	477	$	584	$	(107)

Three Months Nine Months
2012 2011 Change 2012 2011 Change

Non-trading
Eastern U.S. $ 521 $ 530 $ (9) $ 1,417 $ 1,502 $ (85)
Western U.S. 67 92 (25) 230 263 (33)
Net energy trading (11) (7) (4) 7 14 (7)
Total $ 577 $ 615 $ (38) $ 1,654 $ 1,779 $ (125)

Unregulated Gross Energy Margins

Eastern U.S.

The change in non-trading margins for the period ended March 31, 2013 compared with 2012 was due to:

	Three Months

Baseload energy prices	$	(125)
Coal prices		(10)
Nuclear fuel prices		(6)
Full-requirement sales contracts		5
Intermediate and peaking capacity prices		5
Baseload capacity prices		6
Intermediate and peaking Spark Spreads		14
Ironwood acquisition which eliminated tolling expense		15
Net economic availability of coal and hydroelectric plants		32
Other		5
Total	$	(59)

~~(a)~~

~~See Note 8 to the Financial Statements for additional information.~~

~~(b)~~

Volumes were higher for the nine-month period due to a shorter outage period for blade inspections, an unplanned outage in March 2011 and an uprate in the third quarter of 2011. Volumes were higher for the three-month period due to higher availability in 2012.

Western U.S.

Other Operation and Maintenance

The increase (decrease) in other operation and maintenance expense for the periods ended September 30, 2012 compared with 2011 was due to:

Three Months Nine Months

Susquehanna nuclear plant costs (a) $ 8 $ 27
Uncollectible accounts (b) (2) 9
Ironwood acquisition (c) 4 13
Costs at Western fossil and hydroelectric plants (4) (9)
Costs at Eastern fossil and hydroelectric plants (d) 9 (4)
Gain on disposition of RECs (2) (8)
Trademark royalties (e) (9) (26)
Corporate service costs (f) 5 19
Other 3 7
Total $ 12 $ 28
Net Energy Trading Margins

Net energy trading margins for the three months ended March 31, 2013 compared with 2012 decreased as a result of lower margins of $16 million on gas positions due to higher prices.

Other Operation and Maintenance

The increase (decrease) in other operation and maintenance for the period ended March 31, 2013 compared with 2012 was due to:

		Three Months

Uncollectible accounts (a)	~~Primarily~~	$	(11)
Costs at eastern fossil and hydroelectric plants (b)			(11)
Other			2
Total		$	(20)

119

(a)	The decrease is primarily due to ~~refueling outage costs, payroll-related costs and timing of projects.~~

~~(b)~~

~~In October 2011,~~ SMGT ~~filed~~filing for ~~bankruptcy~~ protection under Chapter 11 of the U.S. Bankruptcy ~~Code. The increase for the nine-month period primarily reflects an~~Code in 2011. $11 million ~~increase~~of damages billed to ~~a reserve on~~ SMGT ~~unpaid amounts.~~

~~(c)~~

~~There are no comparable amounts~~were fully reserved in ~~the 2011 periods as the Ironwood Acquisition occurred in April~~ 2012.

~~(d)~~

~~Increase for the three-month period primarily due to a planned outage at PPL Brunner Island in September 2012.~~

~~(e)~~

~~In 2011, PPL Energy Supply was charged trademark royalties by an affiliate. The agreement was terminated December 31, 2011.~~

~~(f)~~

~~Primarily due to systems-related costs and timing of projects.~~

~~139~~

Depreciation

The increase (decrease) in depreciation expense for the periods ended September 30, 2012 compared with 2011 was due to:

Three Months Nine Months

Additions to PP&E $ 4 $ 14
Ironwood Acquisition (Note 8) 7 11
Total $ 11 $ 25

~~Other Income (Expense) - net~~

~~See Note 12 to the Financial Statements for details.~~

Interest Expense

The increase (decrease) in interest expense for the periods ended September 30, 2012 compared with 2011 was due to:

Three Months Nine Months

Long-term debt interest expense (a) $ (3) $ (13)
Short-term debt interest expense (b) (3) (10)
Ironwood Acquisition (Note 8) 4 8
Net amortization of debt discounts, premiums and issuance costs (c) (8) (9)
Other 1 (3)
Total $ (9) $ (27)

~~(a)~~

The decrease was primarily due to the redemption of $250 million of 7.0% Senior Notes due 2046 in July 2011 along with the repayment of $500 million of 6.4% Senior Notes and subsequent issuance of $500 million of 4.6% Senior Notes, both in the fourth quarter of 2011.

(b)	The decrease ~~was~~is primarily due to ~~lower interest rates on 2012 short-term borrowings.~~

~~(c)~~

~~The three and nine-month periods include the impact~~Brunner Island Unit 3 outage costs of ~~accelerating the amortization of deferred financing fees of $7~~$15 million in ~~2011,~~2012 compared with no major outage costs in 2013, partially offset by $3 million of additional costs due to the ~~July 2011 redemption.~~Ironwood Acquisition.

Income Taxes

The increase (decrease) in income taxes for the periods ended September 30, 2012 compared with 2011 was due to:

Three Months Nine Months

Lower pre-tax book income $ (82) $ (80)
State valuation allowance adjustments (a) 2 (4)
State deferred tax rate change (b) (6) (17)
Other (2) (2)
Total $ (88) $ (103)
Depreciation

Depreciation increased by $14 million for the three months ended March 31, 2013 compared with 2012, primarily due to $10 million related to PP&E additions and $6 million attributable to the Ironwood Acquisition.

Interest Expense

The increase (decrease) in interest expense for the period ended March 31, 2013 compared with 2012 was due to:

	Three Months

Ironwood Acquisition (a)	$	4
Capitalized interest		3
Other		2
Total	$	9

(a)

~~In February 2011,~~The increase was due to financings associated with 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 $6 million of state deferred income tax expense during the nine months ended September 30, 2011 related to valuation allowances on state net operating loss carryforwards.Ironwood Acquisition.

~~(b)~~Income Taxes

The increase (decrease) in income taxes for the period ended March 31, 2013 compared with 2012 was due to:


	Three Months

Lower pre-tax book income	$	(225)
State deferred tax rate change (a)		11
Other		2
Total	$	(212)

(a)	During the three ~~and nine~~ months ended ~~September 30,~~March 31, 2012, PPL Energy Supply recorded adjustments related to state deferred tax liabilities.

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

Financial Condition

Liquidity and Capital Resources

PPL Energy Supply had the following at:

	September 30, 2012		December 31, 2011		March 31, 2013		December 31, 2012

Cash and cash equivalents	$	432	$	379	$	147	$	413
Short-term debt	$	355	$	400	$	481	$	356

~~140~~

The ~~$53~~$266 million ~~increase~~decrease in PPL Energy Supply's cash and cash equivalents position was primarily the net result of:

·	~~net cash provided by operating activities of $674 million;~~

· ~~contributions from Member of $472 million;~~

·	~~a net decrease in notes receivable from affiliate of $198 million;~~

·	distributions to ~~Member~~member of ~~$733~~$313 million;

·	capital expenditures of ~~$460~~$124 million;

·	a net increase in restricted cash and cash equivalents of $59 million;

·	net cash provided by operating activities of $125 million; and

·	~~the Ironwood Acquisition for $84 million,~~a net increase in short-term debt of ~~cash acquired.~~$125 million.

PPL Energy Supply's cash provided by operating activities ~~increased~~decreased by ~~$234~~$129 million for the ~~nine~~three months ended ~~September 30, 2012,~~March 31, 2013, compared with ~~2011.~~2012. This was primarily due to a ~~$177~~$45 million increase in cash ~~from~~used by working capital components, a decrease in net income when adjusted for non-cash components of ~~working capital (primarily due to changes in counterparty collateral, partially offset by changes in unbilled revenues and accrued taxes)~~$31 million and a ~~$66~~$36 million ~~decrease~~increase in defined benefit ~~plan~~plans funding.

120

Credit Facilities

PPL Energy Supply maintains credit facilities to provide liquidity and to backstop commercial paper issuances. At ~~September 30, 2012,~~March 31, 2013, PPL Energy Supply's total committed borrowing capacity under its credit facilities and the use of this borrowing capacity were:

						Letters of									Letters of
						Credit Issued									Credit Issued
						and									and
		Committed				Commercial		Unused			Committed				Commercial		Unused
		Capacity		Borrowed		Paper Backstop		Capacity			Capacity		Borrowed		Paper Backup		Capacity

Syndicated Credit Facility ~~(a)~~	Syndicated Credit Facility ~~(a)~~	$	3,000			$	468	$	2,532	Syndicated Credit Facility ~~(a)~~	$	3,000			$	641	$	2,359
Letter of Credit Facility(a)	Letter of Credit Facility(a)		200		n/a		126		74	Letter of Credit Facility(a)		200		n/a		123		77
Total PPL Energy Supply Credit Facilities (b)	Total PPL Energy Supply Credit Facilities (b)	$	3,200			$	594	$	2,606	Total PPL Energy Supply Credit Facilities (b)	$	3,200			$	764	$	2,436

(a)	In ~~November 2012,~~February 2013, PPL Energy Supply ~~amended its syndicated credit facility to extend~~extended the expiration date from March 2013 and, effective April 2013, the capacity was reduced to ~~November 2017.~~$150 million.

(b)	The commitments under PPL Energy Supply's credit facilities are provided by a diverse bank group, with no one bank and its affiliates providing an aggregate commitment of more than 11% of the total committed capacity.

See Note 7 to the Financial Statements for further discussion of PPL Energy Supply's credit facilities.

Commercial Paper

~~In April 2012,~~ PPL Energy Supply ~~increased the capacity of its~~maintains a commercial paper program ~~from $500 million~~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 ~~September 30,~~March 31, 2013 and December 31, 2012, PPL Energy Supply had ~~$355~~$481 million and $356 million of commercial paper outstanding, included in "Short-term debt" on the Balance ~~Sheet,~~Sheets, at a weighted-average interest ~~rate~~rates of ~~0.48%.~~

~~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~~0.38% and ~~the debt of PPL Ironwood, LLC assumed through consolidation as part of the acquisition.~~0.50%.

Rating Agency Actions

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

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

A downgrade in PPL Energy Supply's or its subsidiaries' credit ratings could result in higher borrowing costs and reduced access to capital markets.

~~141~~

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~~have no credit rating triggers that would result in the reduction of access to capital markets or the ~~respective rating agencies' websites, which ratings together with all other information contained on such rating agency websites is, hereby, explicitly not incorporated by reference in this report.~~acceleration of maturity dates of outstanding debt.

The rating agencies took the following actions related to PPL Energy Supply and its ~~subsidiaries:~~subsidiaries in 2013:

In ~~January 2012, S&P affirmed~~February 2013, Moody's upgraded its rating, from B2 to Ba1, and revised ~~its~~the outlook from under review to stable for PPL ~~Montana's Pass Through Certificates due 2020.~~Ironwood.

~~Following~~In April 2013, Fitch affirmed the ~~announcement of the then-pending acquisition of AES Ironwood, L.L.C. in February 2012, the~~BBB- rating ~~agencies took the following actions:~~and stable outlook at PPL Montana.

·	~~In March 2012, Moody's placed AES Ironwood, L.L.C.'s senior secured bonds under review for possible ratings upgrade.~~

·	~~In April 2012, S&P affirmed the rating of AES Ironwood, L.L.C.'s senior secured bonds.~~

·	~~In May 2012, Fitch downgraded its rating and revised its outlook for PPL Montana's Pass Through Certificates due 2020.~~

·	~~In November 2012, S&P 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 September 30, 2012. At September 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 $341 million of collateral to counterparties for both derivative and non-derivative commodity and commodity-related contracts used in its generation, marketing and trading operations and interest rate contracts.March 31, 2013.

121

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~~2012 Form 10-K.

Risk Management

Market Risk

See Notes 13 and 14 to the Financial Statements for information about PPL Energy Supply's risk management objectives, valuation techniques and accounting designations.

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 ~~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 September 30, 2012 and December 31, 2011 was a net asset/(liability) of $491~~

~~142~~

~~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 the net fair value of non-trading commodity derivative contracts for the ~~periods~~period ended ~~September 30.~~March 31. See Notes 13 and 14 to the Financial Statements for additional information.

	Gains (Losses)								Gains (Losses)
	Three Months				Nine Months				Three Months
	2012		2011		2012		2011		2013		2012

Fair value of contracts outstanding at the beginning of the period	$	961	$	896	$	1,082	$	958	$	473	$	1,082
Contracts realized or otherwise settled during the period		(224)		(99)		(764)		(234)		(137)		(279)
Fair value of new contracts entered into during the period (a)		(11)		4		1		19		9		(1)
Other changes in fair value		(101)		43		306		101		(116)		413
Fair value of contracts outstanding at the end of the period	$	625	$	844	$	625	$	844	$	229	$	1,215

(a)	Represents the fair value of contracts at the end of the quarter of their inception.

		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	Source of Fair Value											Source of Fair Value
Prices based on significant observable inputs (Level 2)	Prices based on significant observable inputs (Level 2)	$	520	$	94	$	(19)	$	7	$	602	Prices based on significant observable inputs (Level 2)	$	238	$	(21)	$	(8)	$	6	$	215
Prices based on significant unobservable inputs (Level 3)	Prices based on significant unobservable inputs (Level 3)		11		8		4				23	Prices based on significant unobservable inputs (Level 3)		(1)		12		3				14
Fair value of contracts outstanding at the end of the period	Fair value of contracts outstanding at the end of the period	$	531	$	102	$	(15)	$	7	$	625	Fair value of contracts outstanding at the end of the period	$	237	$	(9)	$	(5)	$	6	$	229

122

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~~would be based on the difference between the market price and the contract price of the commodity. Depending on price changes in the wholesale energy markets, such damages could be significant. Extreme weather conditions, unplanned power plant outages, transmission disruptions, nonperformance by counterparties (or their ~~own~~ counterparties) with which it has energy contracts and other factors could affect PPL Energy Supply's ability to meet its obligations, or cause significant increases in the market price of replacement energy. Although PPL Energy Supply attempts to mitigate these risks, there can be no assurance that it will be able to fully meet its firm obligations, that it will not be required to pay damages for failure to perform, or that it will not experience counterparty nonperformance in the future. In connection with its bankruptcy proceedings, a significant counterparty, SMGT, had been purchasing lower volumes of electricity than prescribed in the contract and effective April 1, 2012 the contract was terminated. PPL Energy Supply cannot predict the prices or other terms on which it will be able to market to third parties the power that SMGT will not purchase from PPL EnergyPlus due to the termination of this contract. See Note 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~~period ended ~~September 30.~~March 31. See Notes 13 and 14 to the Financial Statements for additional information.

	Gains (Losses)
	Three Months				Nine Months				Three Months
	2012		2011		2012		2011		2013		2012

Fair value of contracts outstanding at the beginning of the period	$	17	$	15	$	(4)	$	4	$	29	$	(4)
Contracts realized or otherwise settled during the period		17		(10)		16		(7)		(2)
Fair value of new contracts entered into during the period (a)		13		(2)		18		6		(12)		6
Other changes in fair value		(15)		4		2		4
Fair value of contracts outstanding at the end of the period	$	32	$	7	$	32	$	7	$	15	$	2

~~143~~

(a)	Represents the fair value of contracts at the end of the quarter of their inception.

~~Unrealized gains of approximately $4 million will be reversed over the next three months as the transactions are realized.~~

	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 quoted in active markets for identical instruments (Level 1)											$	1					$	1
Prices based on significant observable inputs (Level 2)	$	18	$	11	$	1			$	30		5	$	9				14
Prices based on significant unobservable inputs (Level 3)		2								2
Fair value of contracts outstanding at the end of the period	$	20	$	11	$	1		��	$	32	$	6	$	9			$	15

VaR Models

		Trading VaR		Non-Trading VaR
		Three Months		Three Months
		Ended		Ended
		March 31,		March 31,
		2013		2013
95% Confidence Level, Five-Day Holding Period
	Period End	$	6	$	8
	Average for the Period		5		9
	High		6		9
	Low		3		8

123

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 ~~September 30, 2012.~~March 31, 2013.

At ~~September 30, 2012,~~March 31, 2013, PPL Energy Supply's potential annual exposure to increased interest expense, based on a 10% increase in interest rates, was not significant.

PPL Energy Supply is also exposed to changes in the fair value of its debt portfolio. PPL Energy Supply estimated that a 10% decrease in interest rates at ~~September 30, 2012~~March 31, 2013 would increase the fair value of its debt portfolio by ~~$56~~$47 million.

~~144~~

NDT Funds - Securities Price Risk

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~~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 ~~continuously~~ reexamined based on market conditions and other factors to determine whether to proceed with the projects, sell, cancel or expand them, execute tolling agreements or pursue other options. See Note 8 to the Financial Statements for information on the more significant ~~activities, including the April 2012 Ironwood Acquisition.~~activities.

Environmental Matters

Extensive federal, state and local environmental laws and regulations are applicable to PPL Energy Supply's air emissions, water discharges and the management of hazardous and solid waste, ~~among~~as well as other ~~areas; and the costs~~aspects of PPL Energy Supply's business. The cost of compliance or alleged non-compliance cannot be predicted with certainty but could be material. In addition, ~~cost~~costs may increase significantly if the requirements or scope of environmental laws or regulations, or similar rules, are expanded or changed by the relevant ~~regulatory~~ agencies. Costs may take the form of increased capital expenditures or operating and maintenance ~~expenses;~~expenses, monetary fines, penalties or other restrictions. Many of these environmental law considerations are also applicable to the operations of key suppliers, or customers, such as coal producers and industrial power users, and may impact the costs of their products or their demand for PPL Energy Supply's services.

124

Physical effects associated with climate change could include the impact of changes in weather patterns, such as storm frequency and intensity, and the resultant potential damage to PPL Energy Supply's generation assets as well as impacts on customers. In addition, changed weather patterns could potentially reduce annual rainfall in areas where PPL Energy Supply has hydro generating facilities or where river water is used to cool its fossil and nuclear powered generators. PPL Energy Supply cannot currently predict whether its businesses will experience these potential climate change-related risks or estimate the potential cost of their related consequences.

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

Coal Combustion Residuals (CCRs)

Effluent Limitation Guidelines

On April 19, 2013, the EPA issued proposed regulations to revise discharge limitations for steam electric generation wastewater permits. The proposed limitations are based on the EPA review of available treatment technologies and their capacity for reducing pollutants and include new requirements for fly ash and bottom ash handling and metal cleaning wastes, as well as new limits for scrubber wastewater, gasification wastewater and landfill leachate. The proposal contains several alternative approaches, some of which could significantly impact PPL Energy Supply's coal-fired plants. PPL Energy Supply will work with industry groups to comment on the proposed regulation. A final regulation is expected in May 2014. At the present time, PPL Energy Supply is unable to predict the outcome of this matter or estimate a range of reasonably possible costs, but the costs could be significant.

316(b) Cooling Water Intake Structures Rule

In April 2011, the EPA published a draft regulation under Section 316(b) of the Clean Water Act, which regulates cooling water intakes for power plants. The draft rule has two provisions: one requires installation of Best Technology Available (BTA) to reduce mortality of aquatic organisms that are pulled into the plants cooling water system (entrainment), and the second imposes standards for reduction of mortality of aquatic organisms trapped on water intake screens (impingement). A final rule is expected in June 2013. The proposed regulation would apply to nearly all PPL Energy Supply-owned steam electric plants in Pennsylvania and Montana, potentially even including those equipped with closed-cycle cooling systems. PPL Energy Supply's compliance costs could be significant, especially if the final rule requires closed-cycle systems at plants that do not currently have them or conversions of once-through systems to closed-cycle.

GHG Regulations

In 2013, the EPA is expected to finalize limits on GHG emissions from new power plants and to begin working on a proposal for such emissions from existing power plants. The EPA's proposal on GHG emissions from new power plants would effectively preclude construction on any coal-fired plants and could even be difficult for new gas-fired plants to meet. With respect to existing power plants, the impact could be significant, depending on the structure and stringency of the final rule. PPL Energy Supply, along with others in the industry, filed comments on the EPA's proposal related to GHG emissions from new plants.

MATS

The EPA finalized MATS requiring fossil-fuel fired plants to reduce emissions of mercury and other hazardous air pollutants by April 16, 2015. The rule is being challenged by industry groups and states. The EPA has subsequently proposed changes to the rule with respect to new sources to address the concern that the rule effectively precludes construction of any new coal-fired plants. PPL Energy Supply is generally well-positioned to comply with MATS due to its recent investment in, and installation of, environmental controls such as wet flue gas desulfurization systems. PPL Energy Supply is evaluating chemical additive systems for mercury control at Brunner Island, and modifications to existing controls at Colstrip for improved particulate matter reductions. In September 2012, PPL Energy Supply announced its intention to place its Corette plant in long-term reserve status beginning in April 2015 due to expected market conditions and costs to comply with MATS.

CSAPR and CAIR

125

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

Regional Haze - Montana

The EPA signed its final Federal Implementation Plan of the Regional Haze Rules for Montana in September 2012, with tighter emissions limits for Colstrip Units 1 & 2 based on the installation of new controls (no limits or additional controls were specified for Colstrip Units 3 & 4), and tighter emission limits for Corette (which are not based on additional controls). The cost of the potential additional controls for Colstrip Units 1 & 2, if required, could be significant. PPL Energy Supply expects to meet the tighter permit limits at Corette without any significant changes to operations, although other requirements have led to the planned suspension of operations at Corette beginning in April 2015 (see "MATS" discussion above).

See Note 10 to the Financial Statements in this Form 10-Q and "Item 1. Business - Environmental Matters" in PPL Energy Supply's ~~2011~~2012 Form 10-K for a discussion of environmental matters.

New Accounting Guidance

See Notes 2 and 1819 to the Financial Statements for a discussion of new accounting guidance adopted and pending adoption.

Application of Critical Accounting Policies

Financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies. The following accounting policies are particularly important to the financial condition or results of operations, and require estimates or other judgments of matters inherently uncertain: price risk management, defined benefits, asset impairment (excluding investments), loss accruals, AROs and income taxes. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in PPL Energy Supply's ~~2011~~2012 Form 10-K for a discussion of each critical accounting policy.

~~145~~126

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~~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 nine~~ months ended ~~September 30, 2012~~March 31, 2013 with ~~the same periods in 2011.~~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 ~~and principal challenge is to own and operate~~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 ~~the most~~maintaining existing assets and improving system reliability. PPL Electric is focused on timely recovery of costs, efficient ~~cost while maintaining high quality~~operations, strong customer service and ~~reliability. PPL Electric anticipates that it will have significant capital expenditure requirements for at least the next five years. In order to~~constructive regulatory relationships.

To manage financing costs and access to credit markets and to fund its capital expenditure program, a key objective for PPL ~~Electric's business strategy~~Electric is to maintain a strong credit ~~profile. PPL Electric continually focuses on maintaining an appropriate capital structure~~profile and strong liquidity position.

Timely recovery of costs to maintain and enhance the reliability of its delivery system, including the replacement of aging distribution assets, is required in order to maintain strong cash flows and a strong credit profile. Traditionally, such cost recovery would be pursued through periodic base rate case proceedings with the PUC. As such costs continue to increase, more frequent rate case proceedings may be required or an alternative rate making process would need to be implemented in order to achieve more timely recovery. See ~~"Regulatory Matters - Pennsylvania Activities - Legislation~~"Legislation - Regulatory Procedures and Mechanisms" ~~in Note 6 to the Financial Statements~~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.

~~146~~127

Financial and Operational Developments

Pennsylvania Gross Delivery Margins

Distribution

Margins increased for the three months ended March 31, 2013 compared with 2012 primarily due to a $13 million favorable effect of mild weather in 2012 and a $19 million favorable effect of price, largely comprised of higher base rates, effective January 1, 2013 as a result of the 2012 rate case and higher volumes of $3 million.

Transmission

Margins increased for the three months ended March 31, 2013 compared with 2012 primarily due to increased investment in plant and the recovery of additional costs through the FERC formula-based rates.

104

	Three Months

Baseload energy prices	$	(125)
Coal prices		(10)
Nuclear fuel prices		(6)
Full-requirement sales contracts		5
Intermediate and peaking capacity prices		5
Baseload capacity prices		6
Intermediate and peaking Spark Spreads		14
Ironwood acquisition which eliminated tolling expense		15
Net economic availability of coal and hydroelectric plants		32
Other		5
Total	$	(59)

Western U.S.

Non-trading margins for the three months ended March 31, 2013 compared with 2012 were lower due to $43 million of lower wholesale prices, partially offset by $12 million of higher wholesale volumes.

Net Energy Trading Margins

Net energy trading margins for the three months ended March 31, 2013 compared with 2012 decreased as a result of lower margins of $16 million on gas positions due to higher prices.

Utility Revenues

The increase (decrease) in utility revenues for the period ended March 31, 2013 compared with 2012 was due to:

		Three Months
Domestic:
	PPL Electric (a)	$	55
	LKE (b)		95
	Total Domestic		150

U.K.:
	Price (c)		57
	Volume		5
	Recovery of allowed revenues		5
	Foreign currency exchange rates		10
	Other (d)		9
	Total U.K.		86
Total		$	236

(a)	See "Pennsylvania Gross Delivery Margins" for further information.

(b)	See "Kentucky Gross Margins" for further information.

(c)	Due to price increases effective April 1, 2012.

(d)	This increase is primarily due to $8 million of third-party engineering work, which is offset by expenses in "Other operation and maintenance".

Other Operation and Maintenance

The increase (decrease) in other operation and maintenance for the period ended March 31, 2013 compared with 2012 was due to:


		Three Months
Domestic:
	Uncollectible accounts (a)	$	(16)
	LKE coal plant outages (b)		(14)
	Costs at eastern fossil and hydroelectric plants (c)		(11)
	Pension and postretirement costs		4
	Other		2
U.K.:
	Third-party engineering work (d)		8
	Network maintenance expense (e)		7
	Employee related expenses		(4)
	Severance compensation		(4)
	Other		(2)
Total		$	(30)

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

105

(b)	The decrease is primarily due to the timing and scope of scheduled outages.

(c)	The decrease is primarily due to Brunner Island Unit 3 outage costs of $15 million in 2012 compared with no major outage costs in 2013, partially offset by $3 million of additional costs due to the Ironwood Acquisition.

(d)	These expenses are offset by revenues reflected in "Utility" on the Statements of Income.

(e)	The increase is primarily due to higher tree trimming expense.

Depreciation

The increase (decrease) in depreciation for the period ended March 31, 2013 compared with 2012 was due to:

	Three Months

Additions to PP&E	$	21
LKE lower depreciation rates effective January 1, 2013		(5)
Ironwood Acquisition		6
Other		(2)
Total	$	20

Other Income ~~Available~~(Expense) - net

See Note 12 to the Financial Statements for further details.

Interest Expense

The increase (decrease) in interest expense for the period ended March 31, 2013 compared with 2012 was due to:

	Three Months

Long-term debt interest expense (a)	$	14
Ironwood Acquisition (b)		4
Other		3
Total	$	21

(a)

The increase was primarily due to PPL Capital Funding's June 2012 issuance of $400 million, 4.2% Senior Notes due 2022 and October 2012 issuance of $400 million, 3.5% Senior Notes due 2022. Also, contributing to the increase was higher accretion expense on WPD index linked bonds and interest on WPD (East Midlands') April 2012 issuance of £100 million, 5.25% Senior Notes due 2023.

(b)	The increase was due to financings associated with the Ironwood Acquisition.

Income Taxes

The increase (decrease) in income taxes for the period ended March 31, 2013 compared with 2012 was due to:

	Three Months

Lower pre-tax book income	$	(119)
Foreign tax reserve adjustments		(3)
Net operating loss carryforward adjustments (a)		6
State deferred tax rate change (b)		11
Other		(3)
Total	$	(108)

(a)	During the three months ended March 31, 2012, PPL recorded adjustments to deferred taxes related to net operating loss carryforwards of LKE based on income tax return adjustments.

(b)	During the three months ended March 31, 2012, PPL recorded adjustments related to state deferred tax liabilities.

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

106

	March 31, 2013		December 31, 2012

Cash and cash equivalents	$	853	$	901
Short-term debt	$	1,061	$	652

At March 31, 2013, $335 million of cash and cash equivalents were denominated in GBP. If these amounts would be remitted as dividends, PPL may be subject to additional U.S. taxes, net of allowable foreign tax credits. Historically, dividends paid by foreign subsidiaries have been distributions of the current year's earnings. See Note 5 to the Financial Statements in PPL's 2012 Form 10-K for additional information on undistributed earnings of WPD.

The $48 million decrease in PPL's cash and cash equivalents position was primarily the net result of:

·	capital expenditures of $828 million;

·	the payment of $210 million of common stock dividends;

·	a $52 million net increase in restricted cash and cash equivalents; and

·	$24 million of contract adjustment payments; partially offset by

·	proceeds of $432 million from the issuance of long-term debt, net of costs;

·	net increase in short-term debt of $416 million; and

·	net cash provided by operating activities of $244 million.

PPL's cash provided by operating activities decreased by $484 million for the three months ended March 31, 2013 compared with 2012. The decrease was primarily due to:

·	a $336 million increase in cash used by components of working capital (primarily due to changes in accounts receivable of $219 million resulting from higher base rates and favorable effects of weather and counterparty collateral of $129 million); and

·	a $221 million increase in defined benefit plans funding; partially offset by

·	a $72 million increase in net income, when adjusted for non-cash components.

Credit Facilities

PPL maintains credit facilities to provide liquidity and to backstop commercial paper issuances. At March 31, 2013, PPL's total committed borrowing capacity under its credit facilities and the use of this borrowing capacity were:

						Letters of
						Credit Issued
						and
		Committed				Commercial		Unused
		Capacity		Borrowed		Paper Backup		Capacity

PPL Energy Supply Credit Facilities (a)		$	3,200			$	764	$	2,436
PPL Electric Credit Facilities (b)			400				126		274
LG&E Syndicated Credit Facility			500				70		430
KU Credit Facilities (c)			598				313		285
	Total Domestic Credit Facilities (d)	$	4,698			$	1,273	$	3,425

PPL WW Syndicated Credit Facility (e)		£	210	£	109		n/a	£	101
WPD (South West) Syndicated Credit Facility			245				n/a		245
WPD (East Midlands) Syndicated Credit Facility (f)			300		65				235
WPD (West Midlands) Syndicated Credit Facility			300						300
	Total WPD Credit Facilities (g)	£	1,055	£	174			£	881

(a)	In February 2013, PPL Energy Supply extended a letter of credit facility expiration date from March 2013 and, effective April 2013, the capacity was reduced to $150 million.

(b)

Committed capacity includes a $100 million credit facility related to an asset-backed commercial paper program through which PPL Electric obtains financing by selling and contributing its eligible accounts receivable and unbilled revenue to a special purpose, wholly owned subsidiary on an ongoing basis. The subsidiary pledges these assets to secure loans of up to an aggregate of $100 million from a commercial paper conduit sponsored by a financial institution. At March 31, 2013, based on accounts receivable and unbilled revenue pledged, the amount available for borrowing under the facility was $100 million.

(c)	In May 2013, KU extended its $198 million letter of credit facility to May 2016.

(d)	The commitments under PPL's domestic credit facilities are provided by a diverse bank group, with no one bank and its affiliates providing an aggregate commitment of more than 9% of the total committed capacity.

107

(e)

In December 2012, the PPL WW syndicated credit facility that was set to expire in January 2013 was replaced and the capacity was increased from £150 million. The amount borrowed at March 31, 2013 was a USD-denominated borrowing of $171 million, which equated to £109 million at the time of borrowing and bore interest at 1.9034%.

(f)	The amount borrowed at March 31, 2013 was a GBP-denominated borrowing of £65 million, which equated to $99 million and bore interest at 1.30%.

(g)	At March 31, 2013, the USD equivalent of unused capacity under WPD's committed credit facilities was $1.3 billion. The commitments under WPD's credit facilities are provided by a diverse bank group with no one bank providing more than 13% of the total committed capacity.

See Note 7 to the Financial Statements for further discussion of PPL's credit facilities.

Commercial Paper

PPL Energy Supply maintains a commercial paper program for up to $750 million to provide an additional financing source to fund its short-term liquidity needs, if and when necessary. Commercial paper issuances are supported by PPL Energy Supply's Syndicated Credit Facility. At March 31, 2013 and December 31, 2012, PPL Energy Supply had $481 million and $356 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheets, at weighted-average interest rates of 0.38% and 0.50%.

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

Long-term Debt and Equity Securities

See "Overview" above for information regarding equity forward agreements and the 2010 Equity Units.

In March 2013, PPL Capital Funding issued $450 million of its 5.90% Junior Subordinated Notes due 2073. PPL Capital Funding received proceeds of $436 million, net of underwriting fees, which will be loaned to or invested in affiliates of PPL Capital Funding and used to fund their capital expenditures and other general corporate purposes.

In addition, PPL has reduced the estimate of its plans to issue new shares of common stock in 2013 by $100 million from the $350 million reported in its 2012 Form 10-K.

Common Stock Dividends

In February 2013, PPL declared its quarterly common stock dividend, payable April 1, 2013, at 36.75 cents per share (equivalent to $1.47 per annum). Future dividends, declared at the discretion of the Board of Directors, will be dependent upon future earnings, cash flows, financial and legal requirements and other factors.

Rating Agency Actions

108

A downgrade in PPL's or its subsidiaries' credit ratings could result in higher borrowing costs and reduced access to capital markets. PPL and its subsidiaries have no credit rating triggers that would result in the reduction of access to capital markets or the acceleration of maturity dates of outstanding debt.

The rating agencies took the following actions related to PPL and its subsidiaries during 2013:

In February 2013, Moody's upgraded its rating, from B2 to Ba1, and revised the outlook from under review to stable for PPL Ironwood.

In March 2013, S&P, Moody's and Fitch assigned ratings of BB+, Ba1 and BB+ to PPL Capital Funding's $450 million 5.90% Junior Subordinated Notes due 2073. Fitch also assigned a stable outlook to these notes.

In April 2013, Fitch affirmed the BBB- rating and stable outlook at PPL Montana.

Ratings Triggers

PPL and PPL Energy Supply have various contracts, including contracts for the sale and purchase of electricity and fuel, commodity transportation and storage, tolling agreements and interest rate and foreign currency instruments, which contain provisions that require PPL and PPL Energy Supply to post additional collateral or permit the counterparty to terminate the contract, if PPL's or PPL Energy Supply's credit rating were to fall below investment grade. See Note 14 to the Financial Statements for a discussion of "Credit Risk-Related Contingent Features," including a discussion of the potential additional collateral that would have been required for derivative contracts in a net liability position at March 31, 2013.

For additional information on PPL's liquidity and capital resources, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," in PPL's 2012 Form 10-K.

Risk Management

Market Risk

See Notes 13 and 14 to the Financial Statements for information about PPL's risk management objectives, valuation techniques and accounting designations.

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.

The following table sets forth the changes in the net fair value of non-trading commodity derivative contracts for the periods ended March 31. See Notes 13 and 14 to the Financial Statements for additional information.

109

	Gains (Losses)
	Three Months
	2013		2012

Fair value of contracts outstanding at the beginning of the period	$	473	$	1,082
Contracts realized or otherwise settled during the period		(137)		(279)
Fair value of new contracts entered into during the period (a)		9		(1)
Other changes in fair value		(116)		413
Fair value of contracts outstanding at the end of the period	$	229	$	1,215

(a)	Represents the fair value of contracts at the end of the quarter of their inception.

The following table segregates the net fair value of non-trading commodity derivative contracts at March 31, 2013, based on the observability of the information used to determine the fair value.

	Net Asset (Liability)
	Maturity						Maturity
	Less Than		Maturity		Maturity		in Excess		Total Fair
	1 Year		1-3 Years		4-5 Years		of 5 Years		Value
Source of Fair Value
Prices based on significant observable inputs (Level 2)	$	238	$	(21)	$	(8)	$	6	$	215
Prices based on significant unobservable inputs (Level 3)		(1)		12		3				14
Fair value of contracts outstanding at the end of the period	$	237	$	(9)	$	(5)	$	6	$	229

Commodity Price Risk (Trading)

PPL's trading commodity derivative contracts range in maturity through 2017. The following table sets forth changes in the net fair value of trading commodity derivative contracts for the periods ended March 31. See Notes 13 and 14 to the Financial Statements for additional information.

	Gains (Losses)
	Three Months
	2013		2012

Fair value of contracts outstanding at the beginning of the period	$	29	$	(4)
Contracts realized or otherwise settled during the period		(2)
Fair value of new contracts entered into during the period (a)		(12)		6
Fair value of contracts outstanding at the end of the period	$	15	$	2

(a)	Represents the fair value of contracts at the end of the quarter of their inception.

The following table segregates the net fair value of trading commodity derivative contracts at March 31, 2013, based on the observability of the information used to determine the fair value.

	Net Asset (Liability)
	Maturity					Maturity
	Less Than		Maturity		Maturity	in Excess	Total Fair
	1 Year		1-3 Years		4-5 Years	of 5 Years	Value
Source of Fair Value
Prices quoted in active markets for identical instruments (Level 1)	$	1					$	1
Prices based on significant observable inputs (Level 2)		5	$	9				14
Fair value of contracts outstanding at the end of the period	$	6	$	9			$	15

110

VaR Models

A VaR model is utilized to measure commodity price risk in unregulated gross energy margins for the non-trading and trading portfolios. VaR is a statistical model that attempts to estimate the value of potential loss over a given holding period under normal market conditions at a given confidence level. VaR is calculated using a Monte Carlo simulation technique based on a five-day holding period at a 95% confidence level. Given the company's disciplined hedging program, the non-trading VaR exposure is expected to be limited in the short-term. The VaR for portfolios using end-of-month results for the periods was as follows.

		Trading VaR		Non-Trading VaR
		Three Months		Three Months
		Ended		Ended
		March 31,		March 31,
		2013		2013
95% Confidence Level, Five-Day Holding Period
	Period End	$	6	$	8
	Average for the Period		5		9
	High		6		9
	Low		3		8

The trading portfolio includes all proprietary trading positions, regardless of the delivery period. All positions not considered proprietary trading are considered non-trading. The non-trading portfolio includes the entire portfolio, including generation, with delivery periods through the next 12 months. Both the trading and non-trading VaR computations exclude FTRs due to the absence of reliable spot and forward markets. The fair value of the non-trading and trading FTR positions was insignificant at March 31, 2013.

Interest Rate Risk

At March 31, 2013, PPL's potential annual exposure to increased interest expense, based on a 10% increase in interest rates, was not significant.

PPL is also exposed to changes in the fair value of its domestic and international debt portfolios. PPL estimated that a 10% decrease in interest rates at March 31, 2013 would increase the fair value of its debt portfolio by $563 million.

At March 31, 2013, PPL had the following interest rate hedges outstanding:

						Effect of a
				Fair Value,		10% Adverse
		Exposure		Net - Asset		Movement
		Hedged		(Liability) (a)		in Rates (b)
Cash flow hedges
	Interest rate swaps (c)	$	1,148	$	12	$	(35)
	Cross-currency swaps (d)		1,262		82		(171)
Economic activity
	Interest rate swaps (e)		179		(55)		(3)

(a)	Includes accrued interest, if applicable.

(b)	Effects of adverse movements decrease assets or increase liabilities, as applicable, which could result in an asset becoming a liability. Sensitivities represent a 10% adverse movement in interest rates, except for cross-currency swaps which also includes foreign currency exchange rates.

(c)

PPL utilizes various risk management instruments to reduce its exposure to the expected future cash flow variability of its debt instruments. These risks include exposure to adverse interest rate movements for outstanding variable rate debt and for future anticipated financing. While PPL is exposed to changes in the fair value of these instruments, any changes in the fair value of such cash flow hedges are recorded in equity or as regulatory assets or liabilities, if recoverable through regulated rates. The changes in fair value of these instruments are then reclassified into earnings in the same period during which the item being hedged affects earnings. The positions outstanding at March 31, 2013 mature through 2043.

(d)

PPL utilizes cross-currency swaps to hedge the interest payments and principal of WPD's U.S. dollar-denominated senior notes. While PPL is exposed to changes in the fair value of these instruments, any change in the fair value of these instruments is recorded in equity and reclassified into earnings in the same period during which the item being hedged affects earnings. The positions outstanding at March 31, 2013 mature through 2028.

(e)

PPL utilizes various risk management instruments to reduce its exposure to the expected future cash flow variability of its debt instruments. These risks include exposure to adverse interest rate movements for outstanding variable rate debt and for future anticipated financing. While PPL is exposed to changes in the fair value of these instruments, any realized changes in the fair value of such economic positions are recoverable through regulated rates and any subsequent changes in fair value of these derivatives are included in regulatory assets or liabilities. The positions outstanding at March 31, 2013 mature through 2033.

111

Foreign Currency Risk

PPL had the following foreign currency hedges outstanding March 31, 2013:

					Effect of a
					10%
					Adverse
					Movement
					in Foreign
			Fair Value,		Currency
	Exposure		Net - Asset		Exchange
	Hedged		(Liability)		Rates (a)

Net investment hedges (b)	£	162	$	15	$	(25)
Economic activity (c)		1,175		78		(167)

(a)	Effects of adverse movements decrease assets or increase liabilities, as applicable, which could result in an asset becoming a liability.

(b)

To protect the value of a portion of its net investment in WPD, PPL executes forward contracts to sell GBP. The positions outstanding at March 31, 2013 mature through 2013. Excludes the amount of an intercompany loan classified as a net investment hedge. See Note 14 to the Financial Statements for additional information.

(c)	To economically hedge the translation of expected income denominated in GBP to U.S. dollars, PPL enters into a combination of average rate forwards and average rate options to sell GBP. The forwards and options outstanding at March 31, 2013 mature through 2015.

NDT Funds - Securities Price Risk

In connection with certain NRC requirements, PPL Susquehanna maintains trust funds to fund certain costs of decommissioning the PPL Susquehanna nuclear plant (Susquehanna). At March 31, 2013, these funds were invested primarily in domestic equity securities and fixed-rate, fixed-income securities and are reflected at fair value on the Balance Sheet. The mix of securities is designed to provide returns sufficient to fund Susquehanna's decommissioning and to compensate for inflationary increases in decommissioning costs. However, the equity securities included in the trusts are exposed to price fluctuation in equity markets, and the values of fixed-rate, fixed-income securities are primarily exposed to changes in interest rates. PPL actively monitors the investment performance and periodically reviews asset allocation in accordance with its nuclear decommissioning trust policy statement. At March 31, 2013, a hypothetical 10% increase in interest rates and a 10% decrease in equity prices would have resulted in an estimated $55 million reduction in the fair value of the trust assets. See Notes 13 and 17 to the Financial Statements for additional information regarding the NDT funds.

Credit Risk

See Notes 13 and 14 to the Financial Statements in this Form 10-Q and "Risk Management - Energy Marketing & Trading and Other - Credit Risk" in PPL's 2012 Form 10-K for additional information.

Foreign Currency Translation

The value of the British pound sterling fluctuates in relation to the U.S. dollar. Changes in this exchange rate resulted in a foreign currency translation loss of $256 million for the three months ended March 31, 2013, which primarily reflected a $696 million decrease to PP&E and goodwill offset by a decrease of $440 million to net liabilities. Changes in this exchange rate resulted in a foreign currency translation gain of $76 million for the three months ended March 31, 2012, which primarily reflected a $188 million increase to PP&E and goodwill offset by an increase of $112 million to net liabilities. The impact of foreign currency translation is recorded in AOCI.

Related Party Transactions

112

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.

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

Coal Combustion Residuals (CCRs)

Effluent Limitation Guidelines

316(b) Cooling Water Intake Structure Rule

113

GHG Regulations

MATS

CSAPR and CAIR

Regional Haze - Montana

See Note 10 to the Financial Statements in this Form 10-Q and "Item 1. Business - Environmental Matters" in PPL's 2012 Form 10-K for a discussion of environmental matters.

New Accounting Guidance

See Notes 2 and 19 to the Financial Statements for a discussion of new accounting guidance adopted and pending adoption.

Application of Critical Accounting Policies

Financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies. The following accounting policies are particularly important to the financial condition or results of operations, and require estimates or other judgments of matters inherently uncertain: price risk management, defined benefits, asset impairment (excluding investments), loss accruals, AROs, income taxes, and regulatory assets and liabilities. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in PPL's 2012 Form 10-K for a discussion of each critical accounting policy.

114

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.

·	"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

Business Strategy

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

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

Financial and Operational Developments

Net Income ~~Available~~(Loss) Attributable to PPL Energy Supply Member

Net Income (Loss) Attributable to PPL Energy Supply Member for the three ~~and nine~~ months ended ~~September 30, 2012~~March 31, 2013 was ~~$33 million and $95~~$(38) million compared to ~~$28~~$309 million ~~and $116 million for the same periods~~ in ~~2011,~~2012, representing ~~an 18% increase over and an 18% decrease from the same periods in 2011.~~a 112% decrease.

See "Results of Operations" below for afurther discussion and analysis of ~~PPL Electric's earnings.~~the consolidated results of operations.

~~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."

~~Hurricane Sandy~~

In late October 2012, PPL Electric experienced widespread significant damage to its transmission and distribution network from Hurricane Sandy. The total costs associated with the restoration efforts are still being finalized but are estimated to be in excess of $60 million. PPL Electric has insurance coverage that could cover a portion of the costs incurred from Hurricane Sandy. PPL Electric will have the ability to file a request with the PUC for permission to defer for future recovery certain of the costs incurred to repair the distribution network in excess of the insurance coverage. Costs incurred to repair the transmission network are recoverable through the FERC Formula Rate mechanism which is updated annually.

~~Regional Transmission Line Expansion Plan~~

On October 1, 2012, the National Park Service (NPS) issued its Record of Decision (ROD) on the proposed Susquehanna-Roseland transmission line affirming the route chosen by PPL Electric and Public Service Electric & Gas as the preferred alternative under the NPS's National Environmental Policy Act review. On October 15, 2012, a complaint was filed in the United States District Court for the District of Columbia by various environmental groups, including the Sierra Club, challenging the ROD and seeking to prohibit its implementation. Construction activities have begun on portions of the 101-mile route in Pennsylvania. The line is expected to be in service before the peak summer demand period of 2015. The chosen route had previously been approved by the PUC and New Jersey Board of Public Utilities. An appeal of the New Jersey Board of Public Utilities approval is pending before the New Jersey Superior Court Appellate Division. PPL Electric cannot predict the ultimate outcome or timing of 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 September 30, 2012, PPL Electric's estimated share of the project cost was $560 million, an increase from approximately $500 million at December 31, 2011, due primarily to increased material costs. See Note 8 in PPL Electric's 2011 Form 10-K for additional information.

On October 9, 2012, the FERC issued an order in response to PPL Electric's December 2011 request for ratemaking incentives for the Northeast/Pocono Reliability project (a new 58-mile 230 kV transmission line, three new substations and upgrades to adjacent facilities). The incentives were specifically tailored to address the risks and challenges PPL Electric will face in building the project. The FERC granted the incentive for inclusion of 100% of prudently incurred construction work in progress (CWIP) costs in rate base and denied the request for a 100 basis point adder to the return on equity incentive. The order requires a follow-up compliance filing from PPL Electric to ensure proper accounting treatment of AFUDC and CWIP for the project. PPL Electric estimates the project costs to be approximately $180 million.

~~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 (DSIC). 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. 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.

~~147~~115

Economic and Market Conditions

~~In September 2012,~~Unregulated Gross Energy Margins associated with PPL ~~Electric filed its Long Term Infrastructure Improvement Plan (LTIIP) describing projects eligible~~Energy Supply's competitive generation and marketing business are impacted by changes in market prices and demand for ~~inclusion~~electricity and natural gas, power plant availability, competition in the ~~DSIC. In October 2012, several parties filed comments~~markets for retail customers, fuel costs and availability, fuel transportation costs and other costs. Current depressed wholesale market prices for electricity and natural gas have resulted from general weak economic conditions and other factors, including the impact of expanded domestic shale gas development. As a result of these factors, lower future energy margins are expected to continue compared to the ~~LTIIP but none~~energy margins in 2012. As has been PPL Energy Supply's practice in periods of changing business conditions, PPL Energy Supply continues to review its future business and operational plans, including capital and operation and maintenance expenditures, as well as its hedging strategies.

PPL Energy Supply continues to monitor its Corette plant (which as previously announced will be placed in long-term reserve status, suspending the ~~comments requested evidentiary hearings on~~plant's operation due to expected market conditions and the ~~LTIIP. A decision on~~costs to comply with the ~~LTIIP is expected in January 2013. PPL Electric expects to file a petition requesting permission to establish a DSIC in January 2013 with rates proposed to be effective~~MATS beginning in April ~~2013.~~2015) for impairment. The Corette plant asset group's carrying value at March 31, 2013 was $65 million. Although the Corette plant was not impaired at March 31, 2013, it is reasonably possible that an impairment could occur in future periods, as higher priced sales contracts settle, adversely impacting projected cash flows.

~~FERC Formula Rates~~PPL Energy Supply cannot predict the future impact that economic and market conditions and regulatory requirements may have on its financial condition or results of operations.

Susquehanna Turbine Blade Inspection

In ~~March 2012,~~the spring of 2013, PPL ~~Electric filed a request with~~Energy Supply will begin making modifications to address the ~~FERC seeking recovery, over a 34-year period beginning in June 2012,~~causes of ~~its unrecovered regulatory asset related to the deferred state tax liability that existed~~turbine blade cracking at the ~~time~~Susquehanna nuclear plant that was first identified in 2011. The modifications will be made during the Unit 2 refueling outage and an additional planned outage for Unit 1. Following completion of the ~~transition from~~modifications, PPL Energy Supply plans to continue monitoring the flow-through treatment of state income taxes to full normalization. This change in tax treatment occurred in 2008 as a result of prior FERC initiatives that transferred regulatory jurisdiction of certain transmission assets from the PUC to FERC. A regulatory asset of approximately $50 million related to this transition, classified as taxes recoverable through future rates, is included in "Other Noncurrent Assets - Regulatory assets" on the Balance Sheets at September 30, 2012 and December 31, 2011. In May 2012, the FERC issued an order approving PPL Electric's request effective June 1, 2012.turbine blades using enhanced diagnostic equipment.

Results of Operations

The following discussion provides a summary of PPL ~~Electric's~~Energy Supply's earnings and a description of key factors that ~~management expects may~~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 ~~Electric's~~Energy Supply's Statements of Income, comparing the three ~~and nine~~ months ended ~~September 30, 2012~~March 31, 2013 with ~~the same periods in 2011.~~2012.

Earnings

Net Income Available to PPL for the periods ended September 30 was:

Three Months Nine Months
2012 2011 2012 2011

Net Income Available to PPL $ 33 $ 28 $ 95 $ 116

Earnings

Net Income (Loss) Attributable to PPL Energy Supply Member for the periods ended March 31 was:

	Three Months
	2013		2012

Net Income (Loss) Attributable to PPL Energy Supply Member	$	(38)	$	309

The changes in the components of Net Income ~~Available~~(Loss) Attributable to PPL Energy Supply Member between these periods were due to the following factors, which reflect reclassifications for items included in ~~gross delivery margins.~~Unregulated Gross Energy Margins and certain items that management considers special. See additional detail of these special items in the tables below.

Three Months Nine Months

Pennsylvania gross delivery margins $ 11 $ 1
Other operation and maintenance (7) (32)
Depreciation (3) (11)
Other 2 4
Income Taxes (2) 9
Distributions on preference stock 4 8
Total $ 5 $ (21)

	Three Months

Unregulated Gross Energy Margins	$	(107)
Other operation and maintenance		13
Depreciation		(14)
Interest Expense		(9)
Income Taxes		33
Special items, after-tax		(263)
Total	$	(347)

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

116

·	Lower other operation and maintenance primarily due to $15 million of lower costs at eastern fossil and hydroelectric plants largely due to outages in 2012, partially offset by $3 million of additional costs due to the Ironwood Acquisition.

Higher ~~other operation and maintenance for the three-month period,~~depreciation primarily due to $9 million of higher payroll-related costs, $2 million of higher vegetation management costs and $2 million of higher corporate service costs, partially offset by $6 million of lower PUC-reportable storm costs.the Ironwood Acquisition.

Higher other operation and maintenance for the nine-month period, primarily due to $16 million of higher payroll-related costs, $10 million of higher vegetation management costs, $7 million of higher corporate service costs and $4 million of higher contractor costs, partially offset by $13 million of lower PUC-reportable storm costs.

Higher ~~depreciation for the nine-month period,~~interest expense primarily due to ~~the impact of PP&E additions related~~financings associated with PPL Ironwood, acquired in April 2012, which increased interest expense by $4 million and $3 million due to ~~the ongoing efforts to ensure the reliability of the delivery system and replace aging infrastructure.~~lower capitalized interest.

·	Lower income taxes ~~for the nine-month period, primarily~~ due to lower pre-tax ~~income.~~

~~148~~

·	~~Lower distributions on preference stock for the three and nine month periods due to the preference stock redemption~~income in ~~June~~2013, which reduced income taxes by $47 million, partially offset by an $11 million benefit from a state tax rate change recorded in 2012.

The following after-tax gains (losses), which management considers special items, also impacted the results during the periods ended March 31.

		Income Statement	Three Months
		Line Item	2013		2012

Adjusted energy-related economic activity, net, net of tax of $79, ($102)		(a)	$	(117)	$	150
Impairments:
	Adjustments - nuclear decommissioning trust investments, net of tax of $0, ($1)	Other Income (Expense)-net				1
Other:
	Counterparty bankruptcy, net of tax of $0, $5 (b)	Other Operation and Maintenance				(6)
	Ash basin leak remediation adjustment, net of tax of $0, ($1)	Other Operation and Maintenance				1
Total			$	(117)	$	146

(a)	See "Reconciliation of Economic Activity" below.

(b)

Reconciliation of Economic Activity

The following table reconciles unrealized pre-tax gains (losses) for the periods ended March 31, from the table within "Commodity Price Risk (Non-trading) - Economic Activity" in Note 14 to the Financial Statements to the special item identified as "Adjusted energy-related economic activity, net."

			Three Months
			2013		2012
Operating Revenues
		Unregulated retail electric and gas	$	(8)	$	10
		Wholesale energy marketing		(822)		852
Operating Expenses
		Fuel		(1)		2
		Energy Purchases		634		(591)
Energy-related economic activity (a)				(197)		273
Option premiums				1
Adjusted energy-related economic activity				(196)		273
Less: Economic activity realized, associated with the monetization of certain
	full-requirement sales contracts in 2010					21
Adjusted energy-related economic activity, net, pre-tax			$	(196)	$	252

Adjusted energy-related economic activity, net, after-tax			$	(117)	$	150

(a)	See Note 14 to the Financial Statements for additional information.

2013 Outlook

Excluding special items, PPL ~~Electric~~Energy Supply projects lower earnings in ~~2012~~2013 compared with ~~2011,~~2012, primarily driven by lower energy prices, higher ~~other~~fuel costs, higher operation and maintenance expense, higher depreciation, and ~~lower distribution revenue, which are expected to be~~higher financing costs, partially offset by higher ~~transmission revenue, lower financing costs,~~capacity prices and ~~lower income taxes.~~higher nuclear generation output despite scheduled outages for both Susquehanna units to implement a long-term solution to turbine blade issues.

Earnings in ~~2012 and~~ future periods are subject to various risks and uncertainties. See "Forward-Looking Information," the rest of this Item 2, and ~~Notes 6 and~~Note 10 to the Financial Statements in this Form 10-Q and "Item 1. Business" and "Item 1A. Risk Factors" in PPL ~~Electric's 2011~~Energy Supply's 2012 Form 10-K for a discussion of the risks, uncertainties and factors that may impact future earnings.

117

Statement of Income Analysis --

Unregulated Gross Energy Margins

Non-GAAP Financial Measure

The following discussion includes financial information prepared in accordance with GAAP, as well as a non-GAAP financial measure, "Unregulated Gross Energy Margins." "Unregulated Gross Energy Margins" is a single financial performance measure of PPL Energy Supply's competitive energy non-trading and trading activities. In calculating this measure, PPL Energy Supply's energy revenues are offset by the cost of fuel, energy purchases, certain other operation and maintenance expenses, primarily ancillary charges, and gross receipts tax, which is recorded in "Taxes, other than income". This performance measure is relevant to PPL Energy Supply due to the volatility in the individual revenue and expense lines on the Statements of Income that comprise "Unregulated Gross Energy Margins." This volatility stems from a number of factors, including the required netting of certain transactions with ISOs and significant fluctuations in unrealized gains and losses. Such factors could result in gains or losses being recorded in either "Wholesale energy marketing" or "Energy purchases" on the Statements of Income. This performance measure includes PLR revenues from energy sales to PPL Electric by PPL EnergyPlus, which are recorded in "Wholesale energy marketing to affiliate" revenue. PPL Energy Supply excludes from "Unregulated Gross Energy Margins" adjusted energy-related economic activity, which includes the changes in fair value of positions used to economically hedge a portion of the economic value of PPL Energy Supply's competitive generation assets, full-requirement sales contracts and retail activities. This economic value is subject to changes in fair value due to market price volatility of the input and output commodities (e.g., fuel and power) prior to the delivery period that was hedged. Also included in adjusted energy-related economic activity is the premium amortization associated with options and for 2012 the ineffective portion of qualifying cash flow hedges and economic activity realized associated with the monetization of certain full-requirement sales contracts in 2010. This economic activity is deferred, with the exception of the full-requirement sales contracts that were monetized, and included in "Unregulated Gross Energy Margins" over the delivery period that was hedged or upon realization. This measure is not intended to replace "Operating Income," which is determined in accordance with GAAP, as an indicator of overall operating performance. Other companies may use different measures to analyze and to report on the results of their operations. PPL Energy Supply believes that "Unregulated Gross Energy Margins" provides another criterion to make investment decisions. This performance measure is used, in conjunction with other information, internally by senior management to manage PPL Energy Supply's operations, analyze actual results compared with budget and measure certain corporate financial goals used in determining variable compensation.

Reconciliation of Non-GAAP Financial Measures

The following table reconciles "Unregulated Gross Energy Margins" as defined by PPL Energy Supply to "Operating Income" for the periods ended March 31.

					2013 Three Months							2012 Three Months
					Unregulated							Unregulated
					Gross Energy					Operating		Gross Energy					Operating
					Margins		Other (a)			Income (b)		Margins		Other (a)			Income (b)

Operating Revenues
	Wholesale energy marketing
				Realized	$	977	$	(1)		$	976	$	1,204	$	4	(c)	$	1,208
				Unrealized economic activity				(822)	(d)		(822)				852	(d)		852
	Wholesale energy marketing
		to affiliate				14					14		21					21
	Unregulated retail electric and gas					246		(8)	(d)		238		214		10	(d)		224
	Net energy trading margins					(11)					(11)		8					8
	Energy-related businesses							113			113				96			96
			Total Operating Revenues			1,226		(718)			508		1,447		962			2,409

Operating Expenses
	Fuel					299		(1)	(d)		298		214		(3)	(d)		211
	Energy purchases
				Realized		436		(2)			434		636		23	(c)		659
				Unrealized economic activity				(634)	(d)		(634)				591	(d)		591
	Energy purchases from affiliate					1					1		1					1
	Other operation and maintenance					5		230			235		4		251			255
	Depreciation							78			78				64			64
	Taxes, other than income					8		9			17		8		10			18
	Energy-related businesses							110			110				92			92
			Total Operating Expenses			749		(210)			539		863		1,028			1,891
Total					$	477	$	(508)		$	(31)	$	584	$	(66)		$	518

118

(a)	Represents amounts excluded from Margins.

(b)	As reported on the Statements of Income.

(c)

(d)	Represents energy-related economic activity, which is subject to fluctuations in value due to market price volatility, as described in "Commodity Price Risk (Non-trading) - Economic Activity" within Note 14 to the Financial Statements.

Changes in Non-GAAP Financial Measures

Unregulated Gross Energy Margins are generated through PPL Energy Supply's competitive non-trading and trading activities. PPL Energy Supply's non-trading energy business is managed on a geographic basis that is aligned with its generation fleet. The following table shows PPL Energy Supply's non-GAAP financial measure, Unregulated Gross Energy Margins, for the periods ended March 31, as well as the change between periods. The factors that gave rise to the changes are described below the table.

		Three Months
		2013		2012		Change

Non-trading
	Eastern U.S.	$	430	$	489	$	(59)
	Western U.S.		58		87		(29)
Net energy trading			(11)		8		(19)
Total		$	477	$	584	$	(107)

Unregulated Gross Energy Margins

Eastern U.S.

The change in non-trading margins for the period ended March 31, 2013 compared with 2012 was due to:

	Three Months

Baseload energy prices	$	(125)
Coal prices		(10)
Nuclear fuel prices		(6)
Full-requirement sales contracts		5
Intermediate and peaking capacity prices		5
Baseload capacity prices		6
Intermediate and peaking Spark Spreads		14
Ironwood acquisition which eliminated tolling expense		15
Net economic availability of coal and hydroelectric plants		32
Other		5
Total	$	(59)

Western U.S.

Non-trading margins for the three months ended March 31, 2013 compared with 2012 were lower due to $43 million of lower wholesale prices, partially offset by $12 million of higher wholesale volumes.

Net Energy Trading Margins

Net energy trading margins for the three months ended March 31, 2013 compared with 2012 decreased as a result of lower margins of $16 million on gas positions due to higher prices.

Other Operation and Maintenance

The increase (decrease) in other operation and maintenance for the period ended March 31, 2013 compared with 2012 was due to:

	Three Months

Uncollectible accounts (a)	$	(11)
Costs at eastern fossil and hydroelectric plants (b)		(11)
Other		2
Total	$	(20)

119

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

(b)	The decrease is primarily due to Brunner Island Unit 3 outage costs of $15 million in 2012 compared with no major outage costs in 2013, partially offset by $3 million of additional costs due to the Ironwood Acquisition.

Depreciation

Interest Expense

The increase (decrease) in interest expense for the period ended March 31, 2013 compared with 2012 was due to:

	Three Months

Ironwood Acquisition (a)	$	4
Capitalized interest		3
Other		2
Total	$	9

(a)	The increase was due to financings associated with the Ironwood Acquisition.

Income Taxes

The increase (decrease) in income taxes for the period ended March 31, 2013 compared with 2012 was due to:


	Three Months

Lower pre-tax book income	$	(225)
State deferred tax rate change (a)		11
Other		2
Total	$	(212)

(a)	During the three months ended March 31, 2012, PPL Energy Supply recorded adjustments related to state deferred tax liabilities.

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

Financial Condition

Liquidity and Capital Resources

PPL Energy Supply had the following at:

	March 31, 2013		December 31, 2012

Cash and cash equivalents	$	147	$	413
Short-term debt	$	481	$	356

The $266 million decrease in PPL Energy Supply's cash and cash equivalents position was primarily the net result of:

·	distributions to member of $313 million;

·	capital expenditures of $124 million;

·	a net increase in restricted cash and cash equivalents of $59 million;

·	net cash provided by operating activities of $125 million; and

·	a net increase in short-term debt of $125 million.

PPL Energy Supply's cash provided by operating activities decreased by $129 million for the three months ended March 31, 2013, compared with 2012. This was primarily due to a $45 million increase in cash used by working capital components, a decrease in net income when adjusted for non-cash components of $31 million and a $36 million increase in defined benefit plans funding.

120

Credit Facilities

PPL Energy Supply maintains credit facilities to provide liquidity and to backstop commercial paper issuances. At March 31, 2013, PPL Energy Supply's total committed borrowing capacity under its credit facilities and the use of this borrowing capacity were:

					Letters of
					Credit Issued
					and
	Committed				Commercial		Unused
	Capacity		Borrowed		Paper Backup		Capacity

Syndicated Credit Facility	$	3,000			$	641	$	2,359
Letter of Credit Facility (a)		200		n/a		123		77
Total PPL Energy Supply Credit Facilities (b)	$	3,200			$	764	$	2,436

(a)	In February 2013, PPL Energy Supply extended the expiration date from March 2013 and, effective April 2013, the capacity was reduced to $150 million.

(b)	The commitments under PPL Energy Supply's credit facilities are provided by a diverse bank group, with no one bank and its affiliates providing an aggregate commitment of more than 11% of the total committed capacity.

See Note 7 to the Financial Statements for further discussion of PPL Energy Supply's credit facilities.

Commercial Paper

PPL Energy Supply maintains a commercial paper program up to $750 million to provide an additional financing source to fund its short-term liquidity needs, if and when necessary. Commercial paper issuances are supported by PPL Energy Supply's Syndicated Credit Facility. At March 31, 2013 and December 31, 2012, PPL Energy Supply had $481 million and $356 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheets, at weighted-average interest rates of 0.38% and 0.50%.

Rating Agency Actions

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

A downgrade in PPL Energy Supply's or its subsidiaries' credit ratings could result in higher borrowing costs and reduced access to capital markets. PPL Energy Supply and its subsidiaries have no credit rating triggers that would result in the reduction of access to capital markets or the acceleration of maturity dates of outstanding debt.

The rating agencies took the following actions related to PPL Energy Supply and its subsidiaries in 2013:

In February 2013, Moody's upgraded its rating, from B2 to Ba1, and revised the outlook from under review to stable for PPL Ironwood.

In April 2013, Fitch affirmed the BBB- rating and stable outlook at PPL Montana.

Ratings Triggers

PPL Energy Supply has various contracts, including contracts for the sale and purchase of electricity and fuel, commodity transportation and storage, tolling agreements and interest rate instruments, which contain provisions that require PPL Energy Supply to post additional collateral or permit the counterparty to terminate the contract if PPL Energy Supply's credit rating were to fall below investment grade. See Note 14 to the Financial Statements for a discussion of "Credit Risk-Related Contingent Features," including a discussion of the potential additional collateral that would have been required for derivative contracts in a net liability position at March 31, 2013.

121

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.

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.

The following table sets forth the changes in the net fair value of non-trading commodity derivative contracts for the period ended March 31. See Notes 13 and 14 to the Financial Statements for additional information.

	Gains (Losses)
	Three Months
	2013		2012

Fair value of contracts outstanding at the beginning of the period	$	473	$	1,082
Contracts realized or otherwise settled during the period		(137)		(279)
Fair value of new contracts entered into during the period (a)		9		(1)
Other changes in fair value		(116)		413
Fair value of contracts outstanding at the end of the period	$	229	$	1,215

(a)	Represents the fair value of contracts at the end of the quarter of their inception.

The following table segregates the net fair value of non-trading commodity derivative contracts at March 31, 2013, based on the observability of the information used to determine the fair value.

	Net Asset (Liability)
	Maturity						Maturity
	Less Than		Maturity		Maturity		in Excess		Total Fair
	1 Year		1-3 Years		4-5 Years		of 5 Years		Value
Source of Fair Value
Prices based on significant observable inputs (Level 2)	$	238	$	(21)	$	(8)	$	6	$	215
Prices based on significant unobservable inputs (Level 3)		(1)		12		3				14
Fair value of contracts outstanding at the end of the period	$	237	$	(9)	$	(5)	$	6	$	229

122

Commodity Price Risk (Trading)

PPL Energy Supply's trading commodity derivative contracts range in maturity through 2017. The following table sets forth changes in the net fair value of trading commodity derivative contracts for the period ended March 31. See Notes 13 and 14 to the Financial Statements for additional information.

	Three Months
	2013		2012

Fair value of contracts outstanding at the beginning of the period	$	29	$	(4)
Contracts realized or otherwise settled during the period		(2)
Fair value of new contracts entered into during the period (a)		(12)		6
Fair value of contracts outstanding at the end of the period	$	15	$	2

(a)	Represents the fair value of contracts at the end of the quarter of their inception.

The following table segregates the net fair value of trading commodity derivative contracts at March 31, 2013, based on the observability of the information used to determine the fair value.

	Net Asset (Liability)
	Maturity					Maturity
	Less Than		Maturity		Maturity	in Excess	Total Fair
	1 Year		1-3 Years		4-5 Years	of 5 Years	Value
Source of Fair Value
Prices quoted in active markets for identical instruments (Level 1)	$	1					$	1
Prices based on significant observable inputs (Level 2)		5	$	9				14
Fair value of contracts outstanding at the end of the period	$	6	$	9			$	15

VaR Models

		Trading VaR		Non-Trading VaR
		Three Months		Three Months
		Ended		Ended
		March 31,		March 31,
		2013		2013
95% Confidence Level, Five-Day Holding Period
	Period End	$	6	$	8
	Average for the Period		5		9
	High		6		9
	Low		3		8

123

Interest Rate Risk

At March 31, 2013, PPL Energy Supply's potential annual exposure to increased interest expense, based on a 10% increase in interest rates, was not significant.

PPL Energy Supply is also exposed to changes in the fair value of its debt portfolio. PPL Energy Supply estimated that a 10% decrease in interest rates at March 31, 2013 would increase the fair value of its debt portfolio by $47 million.

NDT Funds - Securities Price Risk

In connection with certain NRC requirements, PPL Susquehanna maintains trust funds to fund certain costs of decommissioning the PPL Susquehanna nuclear plant (Susquehanna). At March 31, 2013, these funds were invested primarily in domestic equity securities and fixed-rate, fixed-income securities and are reflected at fair value on the Balance Sheet. The mix of securities is designed to provide returns sufficient to fund Susquehanna's decommissioning and to compensate for inflationary increases in decommissioning costs. However, the equity securities included in the trusts are exposed to price fluctuation in equity markets, and the values of fixed-rate, fixed-income securities are primarily exposed to changes in interest rates. PPL actively monitors the investment performance and periodically reviews asset allocation in accordance with its nuclear decommissioning trust policy statement. At March 31, 2013, a hypothetical 10% increase in interest rates and a 10% decrease in equity prices would have resulted in an estimated $55 million reduction in the fair value of the trust assets. See Notes 13 and 17 to the Financial Statements for additional information regarding the NDT funds.

Credit Risk

See Notes 11, 13 and 14 to the Financial Statements in this Form 10-Q and "Risk Management - Energy Marketing & Trading and Other - Credit Risk" in PPL Energy Supply's 2012 Form 10-K for additional information.

Related Party Transactions

Acquisitions, Development and Divestitures

PPL Energy Supply from time to time evaluates opportunities for potential acquisitions, divestitures and development projects. Development projects are reexamined based on market conditions and other factors to determine whether to proceed with the projects, sell, cancel or expand them, execute tolling agreements or pursue other options. See Note 8 to the Financial Statements for information on the more significant activities.

Environmental Matters

Extensive federal, state and local environmental laws and regulations are applicable to PPL Energy Supply's air emissions, water discharges and the management of hazardous and solid waste, as well as other aspects of PPL Energy Supply's business. The cost of compliance or alleged non-compliance cannot be predicted with certainty but could be material. In addition, costs may increase significantly if the requirements or scope of environmental laws or regulations, or similar rules, are expanded or changed by the relevant agencies. Costs may take the form of increased capital expenditures or operating and maintenance expenses, monetary fines, penalties or other restrictions. Many of these environmental law considerations are also applicable to the operations of key suppliers, or customers, such as coal producers and industrial power users, and may impact the costs of their products or their demand for PPL Energy Supply's services.

124

Physical effects associated with climate change could include the impact of changes in weather patterns, such as storm frequency and intensity, and the resultant potential damage to PPL Energy Supply's generation assets as well as impacts on customers. In addition, changed weather patterns could potentially reduce annual rainfall in areas where PPL Energy Supply has hydro generating facilities or where river water is used to cool its fossil and nuclear powered generators. PPL Energy Supply cannot currently predict whether its businesses will experience these potential climate change-related risks or estimate the potential cost of their related consequences.

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

Coal Combustion Residuals (CCRs)

Effluent Limitation Guidelines

On April 19, 2013, the EPA issued proposed regulations to revise discharge limitations for steam electric generation wastewater permits. The proposed limitations are based on the EPA review of available treatment technologies and their capacity for reducing pollutants and include new requirements for fly ash and bottom ash handling and metal cleaning wastes, as well as new limits for scrubber wastewater, gasification wastewater and landfill leachate. The proposal contains several alternative approaches, some of which could significantly impact PPL Energy Supply's coal-fired plants. PPL Energy Supply will work with industry groups to comment on the proposed regulation. A final regulation is expected in May 2014. At the present time, PPL Energy Supply is unable to predict the outcome of this matter or estimate a range of reasonably possible costs, but the costs could be significant.

316(b) Cooling Water Intake Structures Rule

In April 2011, the EPA published a draft regulation under Section 316(b) of the Clean Water Act, which regulates cooling water intakes for power plants. The draft rule has two provisions: one requires installation of Best Technology Available (BTA) to reduce mortality of aquatic organisms that are pulled into the plants cooling water system (entrainment), and the second imposes standards for reduction of mortality of aquatic organisms trapped on water intake screens (impingement). A final rule is expected in June 2013. The proposed regulation would apply to nearly all PPL Energy Supply-owned steam electric plants in Pennsylvania and Montana, potentially even including those equipped with closed-cycle cooling systems. PPL Energy Supply's compliance costs could be significant, especially if the final rule requires closed-cycle systems at plants that do not currently have them or conversions of once-through systems to closed-cycle.

GHG Regulations

In 2013, the EPA is expected to finalize limits on GHG emissions from new power plants and to begin working on a proposal for such emissions from existing power plants. The EPA's proposal on GHG emissions from new power plants would effectively preclude construction on any coal-fired plants and could even be difficult for new gas-fired plants to meet. With respect to existing power plants, the impact could be significant, depending on the structure and stringency of the final rule. PPL Energy Supply, along with others in the industry, filed comments on the EPA's proposal related to GHG emissions from new plants.

MATS

The EPA finalized MATS requiring fossil-fuel fired plants to reduce emissions of mercury and other hazardous air pollutants by April 16, 2015. The rule is being challenged by industry groups and states. The EPA has subsequently proposed changes to the rule with respect to new sources to address the concern that the rule effectively precludes construction of any new coal-fired plants. PPL Energy Supply is generally well-positioned to comply with MATS due to its recent investment in, and installation of, environmental controls such as wet flue gas desulfurization systems. PPL Energy Supply is evaluating chemical additive systems for mercury control at Brunner Island, and modifications to existing controls at Colstrip for improved particulate matter reductions. In September 2012, PPL Energy Supply announced its intention to place its Corette plant in long-term reserve status beginning in April 2015 due to expected market conditions and costs to comply with MATS.

CSAPR and CAIR

125

Regional Haze - Montana

The EPA signed its final Federal Implementation Plan of the Regional Haze Rules for Montana in September 2012, with tighter emissions limits for Colstrip Units 1 & 2 based on the installation of new controls (no limits or additional controls were specified for Colstrip Units 3 & 4), and tighter emission limits for Corette (which are not based on additional controls). The cost of the potential additional controls for Colstrip Units 1 & 2, if required, could be significant. PPL Energy Supply expects to meet the tighter permit limits at Corette without any significant changes to operations, although other requirements have led to the planned suspension of operations at Corette beginning in April 2015 (see "MATS" discussion above).

See Note 10 to the Financial Statements in this Form 10-Q and "Item 1. Business - Environmental Matters" in PPL Energy Supply's 2012 Form 10-K for a discussion of environmental matters.

New Accounting Guidance

See Notes 2 and 19 to the Financial Statements for a discussion of new accounting guidance adopted and pending adoption.

Application of Critical Accounting Policies

Financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies. The following accounting policies are particularly important to the financial condition or results of operations, and require estimates or other judgments of matters inherently uncertain: price risk management, defined benefits, asset impairment (excluding investments), loss accruals, AROs and income taxes. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in PPL Energy Supply's 2012 Form 10-K for a discussion of each critical accounting policy.

126

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.

·	"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

Business Strategy

PPL Electric's strategy for its regulated electricity delivery business is to provide safe, reliable service to its customers and achieve stable, long-term growth in earnings and rate base. Rate base is expected to grow as a result of significant capital expenditure programs aimed at maintaining existing assets and improving system reliability. PPL Electric is focused on timely recovery of costs, efficient operations, strong customer service and constructive regulatory relationships.

To manage financing costs and access to credit markets and to fund its capital expenditure program, a key objective for PPL Electric is to maintain a strong credit profile and strong liquidity position.

Timely recovery of costs to maintain and enhance the reliability of its delivery system, including the replacement of aging distribution assets, is required in order to maintain strong cash flows and a strong credit profile. Traditionally, such cost recovery would be pursued through periodic base rate case proceedings with the PUC. As such costs continue to increase, more frequent rate case proceedings may be required or an alternative rate making process would need to be implemented in order to achieve more timely recovery. See "Legislation - Regulatory Procedures and Mechanisms" below for information on Pennsylvania's new alternative rate-making mechanism.

127

Financial and Operational Developments

Pennsylvania Gross Delivery Margins

Distribution

Transmission

104

	Three Months

Baseload energy prices	$	(125)
Coal prices		(10)
Nuclear fuel prices		(6)
Full-requirement sales contracts		5
Intermediate and peaking capacity prices		5
Baseload capacity prices		6
Intermediate and peaking Spark Spreads		14
Ironwood acquisition which eliminated tolling expense		15
Net economic availability of coal and hydroelectric plants		32
Other		5
Total	$	(59)

Western U.S.

Non-trading margins for the three months ended March 31, 2013 compared with 2012 were lower due to $43 million of lower wholesale prices, partially offset by $12 million of higher wholesale volumes.

Net Energy Trading Margins

Net energy trading margins for the three months ended March 31, 2013 compared with 2012 decreased as a result of lower margins of $16 million on gas positions due to higher prices.

Utility Revenues

The increase (decrease) in utility revenues for the period ended March 31, 2013 compared with 2012 was due to:

		Three Months
Domestic:
	PPL Electric (a)	$	55
	LKE (b)		95
	Total Domestic		150

U.K.:
	Price (c)		57
	Volume		5
	Recovery of allowed revenues		5
	Foreign currency exchange rates		10
	Other (d)		9
	Total U.K.		86
Total		$	236

(a)	See "Pennsylvania Gross Delivery Margins" for further information.

(b)	See "Kentucky Gross Margins" for further information.

(c)	Due to price increases effective April 1, 2012.

(d)	This increase is primarily due to $8 million of third-party engineering work, which is offset by expenses in "Other operation and maintenance".

Other Operation and Maintenance

The increase (decrease) in other operation and maintenance for the period ended March 31, 2013 compared with 2012 was due to:


		Three Months
Domestic:
	Uncollectible accounts (a)	$	(16)
	LKE coal plant outages (b)		(14)
	Costs at eastern fossil and hydroelectric plants (c)		(11)
	Pension and postretirement costs		4
	Other		2
U.K.:
	Third-party engineering work (d)		8
	Network maintenance expense (e)		7
	Employee related expenses		(4)
	Severance compensation		(4)
	Other		(2)
Total		$	(30)

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

105

(b)	The decrease is primarily due to the timing and scope of scheduled outages.

(c)	The decrease is primarily due to Brunner Island Unit 3 outage costs of $15 million in 2012 compared with no major outage costs in 2013, partially offset by $3 million of additional costs due to the Ironwood Acquisition.

(d)	These expenses are offset by revenues reflected in "Utility" on the Statements of Income.

(e)	The increase is primarily due to higher tree trimming expense.

Depreciation

The increase (decrease) in depreciation for the period ended March 31, 2013 compared with 2012 was due to:

	Three Months

Additions to PP&E	$	21
LKE lower depreciation rates effective January 1, 2013		(5)
Ironwood Acquisition		6
Other		(2)
Total	$	20

Other Income (Expense) - net

See Note 12 to the Financial Statements for further details.

Interest Expense

The increase (decrease) in interest expense for the period ended March 31, 2013 compared with 2012 was due to:

	Three Months

Long-term debt interest expense (a)	$	14
Ironwood Acquisition (b)		4
Other		3
Total	$	21

(a)

(b)	The increase was due to financings associated with the Ironwood Acquisition.

Income Taxes

The increase (decrease) in income taxes for the period ended March 31, 2013 compared with 2012 was due to:

	Three Months

Lower pre-tax book income	$	(119)
Foreign tax reserve adjustments		(3)
Net operating loss carryforward adjustments (a)		6
State deferred tax rate change (b)		11
Other		(3)
Total	$	(108)

(a)	During the three months ended March 31, 2012, PPL recorded adjustments to deferred taxes related to net operating loss carryforwards of LKE based on income tax return adjustments.

(b)	During the three months ended March 31, 2012, PPL recorded adjustments related to state deferred tax liabilities.

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

106

	March 31, 2013		December 31, 2012

Cash and cash equivalents	$	853	$	901
Short-term debt	$	1,061	$	652

The $48 million decrease in PPL's cash and cash equivalents position was primarily the net result of:

·	capital expenditures of $828 million;

·	the payment of $210 million of common stock dividends;

·	a $52 million net increase in restricted cash and cash equivalents; and

·	$24 million of contract adjustment payments; partially offset by

·	proceeds of $432 million from the issuance of long-term debt, net of costs;

·	net increase in short-term debt of $416 million; and

·	net cash provided by operating activities of $244 million.

PPL's cash provided by operating activities decreased by $484 million for the three months ended March 31, 2013 compared with 2012. The decrease was primarily due to:

·	a $336 million increase in cash used by components of working capital (primarily due to changes in accounts receivable of $219 million resulting from higher base rates and favorable effects of weather and counterparty collateral of $129 million); and

·	a $221 million increase in defined benefit plans funding; partially offset by

·	a $72 million increase in net income, when adjusted for non-cash components.

Credit Facilities

						Letters of
						Credit Issued
						and
		Committed				Commercial		Unused
		Capacity		Borrowed		Paper Backup		Capacity

PPL Energy Supply Credit Facilities (a)		$	3,200			$	764	$	2,436
PPL Electric Credit Facilities (b)			400				126		274
LG&E Syndicated Credit Facility			500				70		430
KU Credit Facilities (c)			598				313		285
	Total Domestic Credit Facilities (d)	$	4,698			$	1,273	$	3,425

PPL WW Syndicated Credit Facility (e)		£	210	£	109		n/a	£	101
WPD (South West) Syndicated Credit Facility			245				n/a		245
WPD (East Midlands) Syndicated Credit Facility (f)			300		65				235
WPD (West Midlands) Syndicated Credit Facility			300						300
	Total WPD Credit Facilities (g)	£	1,055	£	174			£	881

(a)	In February 2013, PPL Energy Supply extended a letter of credit facility expiration date from March 2013 and, effective April 2013, the capacity was reduced to $150 million.

(b)

Committed capacity includes a $100 million credit facility related to an asset-backed commercial paper program through which PPL Electric obtains financing by selling and contributing its eligible accounts receivable and unbilled revenue to a special purpose, wholly owned subsidiary on an ongoing basis. The subsidiary pledges these assets to secure loans of up to an aggregate of $100 million from a commercial paper conduit sponsored by a financial institution. At March 31, 2013, based on accounts receivable and unbilled revenue pledged, the amount available for borrowing under the facility was $100 million.

(c)	In May 2013, KU extended its $198 million letter of credit facility to May 2016.

(d)	The commitments under PPL's domestic credit facilities are provided by a diverse bank group, with no one bank and its affiliates providing an aggregate commitment of more than 9% of the total committed capacity.

107

(e)

(f)	The amount borrowed at March 31, 2013 was a GBP-denominated borrowing of £65 million, which equated to $99 million and bore interest at 1.30%.

(g)	At March 31, 2013, the USD equivalent of unused capacity under WPD's committed credit facilities was $1.3 billion. The commitments under WPD's credit facilities are provided by a diverse bank group with no one bank providing more than 13% of the total committed capacity.

See Note 7 to the Financial Statements for further discussion of PPL's credit facilities.

Commercial Paper

Long-term Debt and Equity Securities

See "Overview" above for information regarding equity forward agreements and the 2010 Equity Units.

In addition, PPL has reduced the estimate of its plans to issue new shares of common stock in 2013 by $100 million from the $350 million reported in its 2012 Form 10-K.

Common Stock Dividends

Rating Agency Actions

108

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 April 2013, Fitch affirmed the BBB- rating and stable outlook at PPL Montana.

Ratings Triggers

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.

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.

109

	Gains (Losses)
	Three Months
	2013		2012

Fair value of contracts outstanding at the beginning of the period	$	473	$	1,082
Contracts realized or otherwise settled during the period		(137)		(279)
Fair value of new contracts entered into during the period (a)		9		(1)
Other changes in fair value		(116)		413
Fair value of contracts outstanding at the end of the period	$	229	$	1,215

(a)	Represents the fair value of contracts at the end of the quarter of their inception.

The following table segregates the net fair value of non-trading commodity derivative contracts at March 31, 2013, based on the observability of the information used to determine the fair value.

	Net Asset (Liability)
	Maturity						Maturity
	Less Than		Maturity		Maturity		in Excess		Total Fair
	1 Year		1-3 Years		4-5 Years		of 5 Years		Value
Source of Fair Value
Prices based on significant observable inputs (Level 2)	$	238	$	(21)	$	(8)	$	6	$	215
Prices based on significant unobservable inputs (Level 3)		(1)		12		3				14
Fair value of contracts outstanding at the end of the period	$	237	$	(9)	$	(5)	$	6	$	229

Commodity Price Risk (Trading)

PPL's trading commodity derivative contracts range in maturity through 2017. The following table sets forth changes in the net fair value of trading commodity derivative contracts for the periods ended March 31. See Notes 13 and 14 to the Financial Statements for additional information.

	Gains (Losses)
	Three Months
	2013		2012

Fair value of contracts outstanding at the beginning of the period	$	29	$	(4)
Contracts realized or otherwise settled during the period		(2)
Fair value of new contracts entered into during the period (a)		(12)		6
Fair value of contracts outstanding at the end of the period	$	15	$	2

(a)	Represents the fair value of contracts at the end of the quarter of their inception.

The following table segregates the net fair value of trading commodity derivative contracts at March 31, 2013, based on the observability of the information used to determine the fair value.

	Net Asset (Liability)
	Maturity					Maturity
	Less Than		Maturity		Maturity	in Excess	Total Fair
	1 Year		1-3 Years		4-5 Years	of 5 Years	Value
Source of Fair Value
Prices quoted in active markets for identical instruments (Level 1)	$	1					$	1
Prices based on significant observable inputs (Level 2)		5	$	9				14
Fair value of contracts outstanding at the end of the period	$	6	$	9			$	15

110

VaR Models

		Trading VaR		Non-Trading VaR
		Three Months		Three Months
		Ended		Ended
		March 31,		March 31,
		2013		2013
95% Confidence Level, Five-Day Holding Period
	Period End	$	6	$	8
	Average for the Period		5		9
	High		6		9
	Low		3		8

Interest Rate Risk

At March 31, 2013, PPL's potential annual exposure to increased interest expense, based on a 10% increase in interest rates, was not significant.

At March 31, 2013, PPL had the following interest rate hedges outstanding:

						Effect of a
				Fair Value,		10% Adverse
		Exposure		Net - Asset		Movement
		Hedged		(Liability) (a)		in Rates (b)
Cash flow hedges
	Interest rate swaps (c)	$	1,148	$	12	$	(35)
	Cross-currency swaps (d)		1,262		82		(171)
Economic activity
	Interest rate swaps (e)		179		(55)		(3)

(a)	Includes accrued interest, if applicable.

(b)	Effects of adverse movements decrease assets or increase liabilities, as applicable, which could result in an asset becoming a liability. Sensitivities represent a 10% adverse movement in interest rates, except for cross-currency swaps which also includes foreign currency exchange rates.

(c)

PPL utilizes various risk management instruments to reduce its exposure to the expected future cash flow variability of its debt instruments. These risks include exposure to adverse interest rate movements for outstanding variable rate debt and for future anticipated financing. While PPL is exposed to changes in the fair value of these instruments, any changes in the fair value of such cash flow hedges are recorded in equity or as regulatory assets or liabilities, if recoverable through regulated rates. The changes in fair value of these instruments are then reclassified into earnings in the same period during which the item being hedged affects earnings. The positions outstanding at March 31, 2013 mature through 2043.

(d)

PPL utilizes cross-currency swaps to hedge the interest payments and principal of WPD's U.S. dollar-denominated senior notes. While PPL is exposed to changes in the fair value of these instruments, any change in the fair value of these instruments is recorded in equity and reclassified into earnings in the same period during which the item being hedged affects earnings. The positions outstanding at March 31, 2013 mature through 2028.

(e)

PPL utilizes various risk management instruments to reduce its exposure to the expected future cash flow variability of its debt instruments. These risks include exposure to adverse interest rate movements for outstanding variable rate debt and for future anticipated financing. While PPL is exposed to changes in the fair value of these instruments, any realized changes in the fair value of such economic positions are recoverable through regulated rates and any subsequent changes in fair value of these derivatives are included in regulatory assets or liabilities. The positions outstanding at March 31, 2013 mature through 2033.

111

Foreign Currency Risk

PPL had the following foreign currency hedges outstanding March 31, 2013:

					Effect of a
					10%
					Adverse
					Movement
					in Foreign
			Fair Value,		Currency
	Exposure		Net - Asset		Exchange
	Hedged		(Liability)		Rates (a)

Net investment hedges (b)	£	162	$	15	$	(25)
Economic activity (c)		1,175		78		(167)

(a)	Effects of adverse movements decrease assets or increase liabilities, as applicable, which could result in an asset becoming a liability.

(b)

(c)	To economically hedge the translation of expected income denominated in GBP to U.S. dollars, PPL enters into a combination of average rate forwards and average rate options to sell GBP. The forwards and options outstanding at March 31, 2013 mature through 2015.

NDT Funds - Securities Price Risk

In connection with certain NRC requirements, PPL Susquehanna maintains trust funds to fund certain costs of decommissioning the PPL Susquehanna nuclear plant (Susquehanna). At March 31, 2013, these funds were invested primarily in domestic equity securities and fixed-rate, fixed-income securities and are reflected at fair value on the Balance Sheet. The mix of securities is designed to provide returns sufficient to fund Susquehanna's decommissioning and to compensate for inflationary increases in decommissioning costs. However, the equity securities included in the trusts are exposed to price fluctuation in equity markets, and the values of fixed-rate, fixed-income securities are primarily exposed to changes in interest rates. PPL actively monitors the investment performance and periodically reviews asset allocation in accordance with its nuclear decommissioning trust policy statement. At March 31, 2013, a hypothetical 10% increase in interest rates and a 10% decrease in equity prices would have resulted in an estimated $55 million reduction in the fair value of the trust assets. See Notes 13 and 17 to the Financial Statements for additional information regarding the NDT funds.

Credit Risk

See Notes 13 and 14 to the Financial Statements in this Form 10-Q and "Risk Management - Energy Marketing & Trading and Other - Credit Risk" in PPL's 2012 Form 10-K for additional information.

Foreign Currency Translation

Related Party Transactions

112

Acquisitions, Development and Divestitures

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.

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

Coal Combustion Residuals (CCRs)

Effluent Limitation Guidelines

316(b) Cooling Water Intake Structure Rule

113

GHG Regulations

MATS

CSAPR and CAIR

Regional Haze - Montana

See Note 10 to the Financial Statements in this Form 10-Q and "Item 1. Business - Environmental Matters" in PPL's 2012 Form 10-K for a discussion of environmental matters.

New Accounting Guidance

See Notes 2 and 19 to the Financial Statements for a discussion of new accounting guidance adopted and pending adoption.

Application of Critical Accounting Policies

Financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies. The following accounting policies are particularly important to the financial condition or results of operations, and require estimates or other judgments of matters inherently uncertain: price risk management, defined benefits, asset impairment (excluding investments), loss accruals, AROs, income taxes, and regulatory assets and liabilities. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in PPL's 2012 Form 10-K for a discussion of each critical accounting policy.

114

PPL ENERGY SUPPLY, LLC AND SUBSIDIARIES

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

"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.

·	"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

Business Strategy

Financial and Operational Developments

Net Income (Loss) Attributable to PPL Energy Supply Member

Net Income (Loss) Attributable to PPL Energy Supply Member for the three months ended March 31, 2013 was $(38) million compared to $309 million in 2012, representing a 112% decrease.

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

115

Economic and Market Conditions

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

Susquehanna Turbine Blade Inspection

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

Results of Operations

Earnings

Net Income (Loss) Attributable to PPL Energy Supply Member for the periods ended March 31 was:

	Three Months
	2013		2012

Net Income (Loss) Attributable to PPL Energy Supply Member	$	(38)	$	309

The changes in the components of Net Income (Loss) Attributable to PPL Energy Supply Member between these periods were due to the following factors, which reflect reclassifications for items included in Unregulated Gross Energy Margins and certain items that management considers special. See additional detail of these special items in the tables below.

	Three Months

Unregulated Gross Energy Margins	$	(107)
Other operation and maintenance		13
Depreciation		(14)
Interest Expense		(9)
Income Taxes		33
Special items, after-tax		(263)
Total	$	(347)

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

116

·	Lower other operation and maintenance primarily due to $15 million of lower costs at eastern fossil and hydroelectric plants largely due to outages in 2012, partially offset by $3 million of additional costs due to the Ironwood Acquisition.

·	Higher depreciation primarily due to the Ironwood Acquisition.

·	Higher interest expense primarily due to financings associated with PPL Ironwood, acquired in April 2012, which increased interest expense by $4 million and $3 million due to lower capitalized interest.

·	Lower income taxes due to lower pre-tax income in 2013, which reduced income taxes by $47 million, partially offset by an $11 million benefit from a state tax rate change recorded in 2012.

The following after-tax gains (losses), which management considers special items, also impacted the results during the periods ended March 31.

		Income Statement	Three Months
		Line Item	2013		2012

Adjusted energy-related economic activity, net, net of tax of $79, ($102)		(a)	$	(117)	$	150
Impairments:
	Adjustments - nuclear decommissioning trust investments, net of tax of $0, ($1)	Other Income (Expense)-net				1
Other:
	Counterparty bankruptcy, net of tax of $0, $5 (b)	Other Operation and Maintenance				(6)
	Ash basin leak remediation adjustment, net of tax of $0, ($1)	Other Operation and Maintenance				1
Total			$	(117)	$	146

(a)	See "Reconciliation of Economic Activity" below.

(b)

Reconciliation of Economic Activity

			Three Months
			2013		2012
Operating Revenues
		Unregulated retail electric and gas	$	(8)	$	10
		Wholesale energy marketing		(822)		852
Operating Expenses
		Fuel		(1)		2
		Energy Purchases		634		(591)
Energy-related economic activity (a)				(197)		273
Option premiums				1
Adjusted energy-related economic activity				(196)		273
Less: Economic activity realized, associated with the monetization of certain
	full-requirement sales contracts in 2010					21
Adjusted energy-related economic activity, net, pre-tax			$	(196)	$	252

Adjusted energy-related economic activity, net, after-tax			$	(117)	$	150

(a)	See Note 14 to the Financial Statements for additional information.

2013 Outlook

Excluding special items, PPL Energy Supply projects lower earnings in 2013 compared with 2012, primarily driven by lower energy prices, higher fuel costs, higher operation and maintenance expense, higher depreciation, and higher financing costs, partially offset by higher capacity prices and higher nuclear generation output despite scheduled outages for both Susquehanna units to implement a long-term solution to turbine blade issues.

Earnings in future periods are subject to various risks and uncertainties. See "Forward-Looking Information," the rest of this Item 2, and Note 10 to the Financial Statements in this Form 10-Q and "Item 1. Business" and "Item 1A. Risk Factors" in PPL Energy Supply's 2012 Form 10-K for a discussion of the risks, uncertainties and factors that may impact future earnings.

117

Statement of Income Analysis --

Unregulated Gross Energy Margins

Non-GAAP Financial Measure

The following discussion includes financial information prepared in accordance with GAAP, as well as a non-GAAP financial measure, "Unregulated Gross Energy Margins." "Unregulated Gross Energy Margins" is a single financial performance measure of PPL Energy Supply's competitive energy non-trading and trading activities. In calculating this measure, PPL Energy Supply's energy revenues are offset by the cost of fuel, energy purchases, certain other operation and maintenance expenses, primarily ancillary charges, and gross receipts tax, which is recorded in "Taxes, other than income". This performance measure is relevant to PPL Energy Supply due to the volatility in the individual revenue and expense lines on the Statements of Income that comprise "Unregulated Gross Energy Margins." This volatility stems from a number of factors, including the required netting of certain transactions with ISOs and significant fluctuations in unrealized gains and losses. Such factors could result in gains or losses being recorded in either "Wholesale energy marketing" or "Energy purchases" on the Statements of Income. This performance measure includes PLR revenues from energy sales to PPL Electric by PPL EnergyPlus, which are recorded in "Wholesale energy marketing to affiliate" revenue. PPL Energy Supply excludes from "Unregulated Gross Energy Margins" adjusted energy-related economic activity, which includes the changes in fair value of positions used to economically hedge a portion of the economic value of PPL Energy Supply's competitive generation assets, full-requirement sales contracts and retail activities. This economic value is subject to changes in fair value due to market price volatility of the input and output commodities (e.g., fuel and power) prior to the delivery period that was hedged. Also included in adjusted energy-related economic activity is the premium amortization associated with options and for 2012 the ineffective portion of qualifying cash flow hedges and economic activity realized associated with the monetization of certain full-requirement sales contracts in 2010. This economic activity is deferred, with the exception of the full-requirement sales contracts that were monetized, and included in "Unregulated Gross Energy Margins" over the delivery period that was hedged or upon realization. This measure is not intended to replace "Operating Income," which is determined in accordance with GAAP, as an indicator of overall operating performance. Other companies may use different measures to analyze and to report on the results of their operations. PPL Energy Supply believes that "Unregulated Gross Energy Margins" provides another criterion to make investment decisions. This performance measure is used, in conjunction with other information, internally by senior management to manage PPL Energy Supply's operations, analyze actual results compared with budget and measure certain corporate financial goals used in determining variable compensation.

Reconciliation of Non-GAAP Financial Measures

The following table reconciles "Unregulated Gross Energy Margins" as defined by PPL Energy Supply to "Operating Income" for the periods ended March 31.

					2013 Three Months							2012 Three Months
					Unregulated							Unregulated
					Gross Energy					Operating		Gross Energy					Operating
					Margins		Other (a)			Income (b)		Margins		Other (a)			Income (b)

Operating Revenues
	Wholesale energy marketing
				Realized	$	977	$	(1)		$	976	$	1,204	$	4	(c)	$	1,208
				Unrealized economic activity				(822)	(d)		(822)				852	(d)		852
	Wholesale energy marketing
		to affiliate				14					14		21					21
	Unregulated retail electric and gas					246		(8)	(d)		238		214		10	(d)		224
	Net energy trading margins					(11)					(11)		8					8
	Energy-related businesses							113			113				96			96
			Total Operating Revenues			1,226		(718)			508		1,447		962			2,409

Operating Expenses
	Fuel					299		(1)	(d)		298		214		(3)	(d)		211
	Energy purchases
				Realized		436		(2)			434		636		23	(c)		659
				Unrealized economic activity				(634)	(d)		(634)				591	(d)		591
	Energy purchases from affiliate					1					1		1					1
	Other operation and maintenance					5		230			235		4		251			255
	Depreciation							78			78				64			64
	Taxes, other than income					8		9			17		8		10			18
	Energy-related businesses							110			110				92			92
			Total Operating Expenses			749		(210)			539		863		1,028			1,891
Total					$	477	$	(508)		$	(31)	$	584	$	(66)		$	518

118

(a)	Represents amounts excluded from Margins.

(b)	As reported on the Statements of Income.

(c)

(d)	Represents energy-related economic activity, which is subject to fluctuations in value due to market price volatility, as described in "Commodity Price Risk (Non-trading) - Economic Activity" within Note 14 to the Financial Statements.

Changes in Non-GAAP Financial Measures

Unregulated Gross Energy Margins are generated through PPL Energy Supply's competitive non-trading and trading activities. PPL Energy Supply's non-trading energy business is managed on a geographic basis that is aligned with its generation fleet. The following table shows PPL Energy Supply's non-GAAP financial measure, Unregulated Gross Energy Margins, for the periods ended March 31, as well as the change between periods. The factors that gave rise to the changes are described below the table.

		Three Months
		2013		2012		Change

Non-trading
	Eastern U.S.	$	430	$	489	$	(59)
	Western U.S.		58		87		(29)
Net energy trading			(11)		8		(19)
Total		$	477	$	584	$	(107)

Unregulated Gross Energy Margins

Eastern U.S.

The change in non-trading margins for the period ended March 31, 2013 compared with 2012 was due to:

	Three Months

Baseload energy prices	$	(125)
Coal prices		(10)
Nuclear fuel prices		(6)
Full-requirement sales contracts		5
Intermediate and peaking capacity prices		5
Baseload capacity prices		6
Intermediate and peaking Spark Spreads		14
Ironwood acquisition which eliminated tolling expense		15
Net economic availability of coal and hydroelectric plants		32
Other		5
Total	$	(59)

Western U.S.

Non-trading margins for the three months ended March 31, 2013 compared with 2012 were lower due to $43 million of lower wholesale prices, partially offset by $12 million of higher wholesale volumes.

Net Energy Trading Margins

Net energy trading margins for the three months ended March 31, 2013 compared with 2012 decreased as a result of lower margins of $16 million on gas positions due to higher prices.

Other Operation and Maintenance

The increase (decrease) in other operation and maintenance for the period ended March 31, 2013 compared with 2012 was due to:

	Three Months

Uncollectible accounts (a)	$	(11)
Costs at eastern fossil and hydroelectric plants (b)		(11)
Other		2
Total	$	(20)

119

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

(b)	The decrease is primarily due to Brunner Island Unit 3 outage costs of $15 million in 2012 compared with no major outage costs in 2013, partially offset by $3 million of additional costs due to the Ironwood Acquisition.

Depreciation

Interest Expense

The increase (decrease) in interest expense for the period ended March 31, 2013 compared with 2012 was due to:

	Three Months

Ironwood Acquisition (a)	$	4
Capitalized interest		3
Other		2
Total	$	9

(a)	The increase was due to financings associated with the Ironwood Acquisition.

Income Taxes

The increase (decrease) in income taxes for the period ended March 31, 2013 compared with 2012 was due to:


	Three Months

Lower pre-tax book income	$	(225)
State deferred tax rate change (a)		11
Other		2
Total	$	(212)

(a)	During the three months ended March 31, 2012, PPL Energy Supply recorded adjustments related to state deferred tax liabilities.

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

Financial Condition

Liquidity and Capital Resources

PPL Energy Supply had the following at:

	March 31, 2013		December 31, 2012

Cash and cash equivalents	$	147	$	413
Short-term debt	$	481	$	356

The $266 million decrease in PPL Energy Supply's cash and cash equivalents position was primarily the net result of:

·	distributions to member of $313 million;

·	capital expenditures of $124 million;

·	a net increase in restricted cash and cash equivalents of $59 million;

·	net cash provided by operating activities of $125 million; and

·	a net increase in short-term debt of $125 million.

120

Credit Facilities

					Letters of
					Credit Issued
					and
	Committed				Commercial		Unused
	Capacity		Borrowed		Paper Backup		Capacity

Syndicated Credit Facility	$	3,000			$	641	$	2,359
Letter of Credit Facility (a)		200		n/a		123		77
Total PPL Energy Supply Credit Facilities (b)	$	3,200			$	764	$	2,436

(a)	In February 2013, PPL Energy Supply extended the expiration date from March 2013 and, effective April 2013, the capacity was reduced to $150 million.

(b)	The commitments under PPL Energy Supply's credit facilities are provided by a diverse bank group, with no one bank and its affiliates providing an aggregate commitment of more than 11% of the total committed capacity.

See Note 7 to the Financial Statements for further discussion of PPL Energy Supply's credit facilities.

Commercial Paper

Rating Agency Actions

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

The rating agencies took the following actions related to PPL Energy Supply and its subsidiaries in 2013:

In February 2013, Moody's upgraded its rating, from B2 to Ba1, and revised the outlook from under review to stable for PPL Ironwood.

In April 2013, Fitch affirmed the BBB- rating and stable outlook at PPL Montana.

Ratings Triggers

121

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.

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.

	Gains (Losses)
	Three Months
	2013		2012

Fair value of contracts outstanding at the beginning of the period	$	473	$	1,082
Contracts realized or otherwise settled during the period		(137)		(279)
Fair value of new contracts entered into during the period (a)		9		(1)
Other changes in fair value		(116)		413
Fair value of contracts outstanding at the end of the period	$	229	$	1,215

(a)	Represents the fair value of contracts at the end of the quarter of their inception.

The following table segregates the net fair value of non-trading commodity derivative contracts at March 31, 2013, based on the observability of the information used to determine the fair value.

	Net Asset (Liability)
	Maturity						Maturity
	Less Than		Maturity		Maturity		in Excess		Total Fair
	1 Year		1-3 Years		4-5 Years		of 5 Years		Value
Source of Fair Value
Prices based on significant observable inputs (Level 2)	$	238	$	(21)	$	(8)	$	6	$	215
Prices based on significant unobservable inputs (Level 3)		(1)		12		3				14
Fair value of contracts outstanding at the end of the period	$	237	$	(9)	$	(5)	$	6	$	229

122

Commodity Price Risk (Trading)

	Three Months
	2013		2012

Fair value of contracts outstanding at the beginning of the period	$	29	$	(4)
Contracts realized or otherwise settled during the period		(2)
Fair value of new contracts entered into during the period (a)		(12)		6
Fair value of contracts outstanding at the end of the period	$	15	$	2

(a)	Represents the fair value of contracts at the end of the quarter of their inception.

The following table segregates the net fair value of trading commodity derivative contracts at March 31, 2013, based on the observability of the information used to determine the fair value.

	Net Asset (Liability)
	Maturity					Maturity
	Less Than		Maturity		Maturity	in Excess	Total Fair
	1 Year		1-3 Years		4-5 Years	of 5 Years	Value
Source of Fair Value
Prices quoted in active markets for identical instruments (Level 1)	$	1					$	1
Prices based on significant observable inputs (Level 2)		5	$	9				14
Fair value of contracts outstanding at the end of the period	$	6	$	9			$	15

VaR Models

		Trading VaR		Non-Trading VaR
		Three Months		Three Months
		Ended		Ended
		March 31,		March 31,
		2013		2013
95% Confidence Level, Five-Day Holding Period
	Period End	$	6	$	8
	Average for the Period		5		9
	High		6		9
	Low		3		8

123

Interest Rate Risk

At March 31, 2013, PPL Energy Supply's potential annual exposure to increased interest expense, based on a 10% increase in interest rates, was not significant.

NDT Funds - Securities Price Risk

In connection with certain NRC requirements, PPL Susquehanna maintains trust funds to fund certain costs of decommissioning the PPL Susquehanna nuclear plant (Susquehanna). At March 31, 2013, these funds were invested primarily in domestic equity securities and fixed-rate, fixed-income securities and are reflected at fair value on the Balance Sheet. The mix of securities is designed to provide returns sufficient to fund Susquehanna's decommissioning and to compensate for inflationary increases in decommissioning costs. However, the equity securities included in the trusts are exposed to price fluctuation in equity markets, and the values of fixed-rate, fixed-income securities are primarily exposed to changes in interest rates. PPL actively monitors the investment performance and periodically reviews asset allocation in accordance with its nuclear decommissioning trust policy statement. At March 31, 2013, a hypothetical 10% increase in interest rates and a 10% decrease in equity prices would have resulted in an estimated $55 million reduction in the fair value of the trust assets. See Notes 13 and 17 to the Financial Statements for additional information regarding the NDT funds.

Credit Risk

Related Party Transactions

Acquisitions, Development and Divestitures

Environmental Matters

Extensive federal, state and local environmental laws and regulations are applicable to PPL Energy Supply's air emissions, water discharges and the management of hazardous and solid waste, as well as other aspects of PPL Energy Supply's business. The cost of compliance or alleged non-compliance cannot be predicted with certainty but could be material. In addition, costs may increase significantly if the requirements or scope of environmental laws or regulations, or similar rules, are expanded or changed by the relevant agencies. Costs may take the form of increased capital expenditures or operating and maintenance expenses, monetary fines, penalties or other restrictions. Many of these environmental law considerations are also applicable to the operations of key suppliers, or customers, such as coal producers and industrial power users, and may impact the costs of their products or their demand for PPL Energy Supply's services.

124

Physical effects associated with climate change could include the impact of changes in weather patterns, such as storm frequency and intensity, and the resultant potential damage to PPL Energy Supply's generation assets as well as impacts on customers. In addition, changed weather patterns could potentially reduce annual rainfall in areas where PPL Energy Supply has hydro generating facilities or where river water is used to cool its fossil and nuclear powered generators. PPL Energy Supply cannot currently predict whether its businesses will experience these potential climate change-related risks or estimate the potential cost of their related consequences.

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

Coal Combustion Residuals (CCRs)

Effluent Limitation Guidelines

On April 19, 2013, the EPA issued proposed regulations to revise discharge limitations for steam electric generation wastewater permits. The proposed limitations are based on the EPA review of available treatment technologies and their capacity for reducing pollutants and include new requirements for fly ash and bottom ash handling and metal cleaning wastes, as well as new limits for scrubber wastewater, gasification wastewater and landfill leachate. The proposal contains several alternative approaches, some of which could significantly impact PPL Energy Supply's coal-fired plants. PPL Energy Supply will work with industry groups to comment on the proposed regulation. A final regulation is expected in May 2014. At the present time, PPL Energy Supply is unable to predict the outcome of this matter or estimate a range of reasonably possible costs, but the costs could be significant.

316(b) Cooling Water Intake Structures Rule

In April 2011, the EPA published a draft regulation under Section 316(b) of the Clean Water Act, which regulates cooling water intakes for power plants. The draft rule has two provisions: one requires installation of Best Technology Available (BTA) to reduce mortality of aquatic organisms that are pulled into the plants cooling water system (entrainment), and the second imposes standards for reduction of mortality of aquatic organisms trapped on water intake screens (impingement). A final rule is expected in June 2013. The proposed regulation would apply to nearly all PPL Energy Supply-owned steam electric plants in Pennsylvania and Montana, potentially even including those equipped with closed-cycle cooling systems. PPL Energy Supply's compliance costs could be significant, especially if the final rule requires closed-cycle systems at plants that do not currently have them or conversions of once-through systems to closed-cycle.

GHG Regulations

In 2013, the EPA is expected to finalize limits on GHG emissions from new power plants and to begin working on a proposal for such emissions from existing power plants. The EPA's proposal on GHG emissions from new power plants would effectively preclude construction on any coal-fired plants and could even be difficult for new gas-fired plants to meet. With respect to existing power plants, the impact could be significant, depending on the structure and stringency of the final rule. PPL Energy Supply, along with others in the industry, filed comments on the EPA's proposal related to GHG emissions from new plants.

MATS

The EPA finalized MATS requiring fossil-fuel fired plants to reduce emissions of mercury and other hazardous air pollutants by April 16, 2015. The rule is being challenged by industry groups and states. The EPA has subsequently proposed changes to the rule with respect to new sources to address the concern that the rule effectively precludes construction of any new coal-fired plants. PPL Energy Supply is generally well-positioned to comply with MATS due to its recent investment in, and installation of, environmental controls such as wet flue gas desulfurization systems. PPL Energy Supply is evaluating chemical additive systems for mercury control at Brunner Island, and modifications to existing controls at Colstrip for improved particulate matter reductions. In September 2012, PPL Energy Supply announced its intention to place its Corette plant in long-term reserve status beginning in April 2015 due to expected market conditions and costs to comply with MATS.

CSAPR and CAIR

125

Regional Haze - Montana

The EPA signed its final Federal Implementation Plan of the Regional Haze Rules for Montana in September 2012, with tighter emissions limits for Colstrip Units 1 & 2 based on the installation of new controls (no limits or additional controls were specified for Colstrip Units 3 & 4), and tighter emission limits for Corette (which are not based on additional controls). The cost of the potential additional controls for Colstrip Units 1 & 2, if required, could be significant. PPL Energy Supply expects to meet the tighter permit limits at Corette without any significant changes to operations, although other requirements have led to the planned suspension of operations at Corette beginning in April 2015 (see "MATS" discussion above).

See Note 10 to the Financial Statements in this Form 10-Q and "Item 1. Business - Environmental Matters" in PPL Energy Supply's 2012 Form 10-K for a discussion of environmental matters.

New Accounting Guidance

See Notes 2 and 19 to the Financial Statements for a discussion of new accounting guidance adopted and pending adoption.

Application of Critical Accounting Policies

Financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies. The following accounting policies are particularly important to the financial condition or results of operations, and require estimates or other judgments of matters inherently uncertain: price risk management, defined benefits, asset impairment (excluding investments), loss accruals, AROs and income taxes. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in PPL Energy Supply's 2012 Form 10-K for a discussion of each critical accounting policy.

126

PPL ELECTRIC UTILITIES CORPORATION AND SUBSIDIARIES

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

"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.

·	"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

Business Strategy

Timely recovery of costs to maintain and enhance the reliability of its delivery system, including the replacement of aging distribution assets, is required in order to maintain strong cash flows and a strong credit profile. Traditionally, such cost recovery would be pursued through periodic base rate case proceedings with the PUC. As such costs continue to increase, more frequent rate case proceedings may be required or an alternative rate making process would need to be implemented in order to achieve more timely recovery. See "Legislation - Regulatory Procedures and Mechanisms" below for information on Pennsylvania's new alternative rate-making mechanism.

127

Financial and Operational Developments

Net Income Available to PPL

Net Income Available to PPL for the three months ended March 31, 2013 was $64 million compared to $33 million in 2012, representing a 94% increase.

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

Rate Case Proceeding

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

Legislation - Regulatory Procedures and Mechanisms

FERC Formula Rates

Results of Operations

The following discussion provides a summary of PPL Electric's earnings and a description of key factors that are expected to impact future earnings. This section ends with "Statement of Income Analysis," which includes explanations of significant changes in Pennsylvania Gross Delivery Margins by component and principal line items on PPL Electric's Statements of Income, comparing the three months ended March 31, 2013 with 2012.

128

Earnings

Net Income Available to PPL for the periods ended March 31 was:

	Three Months
	2013		2012

Net Income Available to PPL	$	64	$	33

The changes in the components of Net Income Available to PPL between these periods were due to the following factors which reflect reclassifications for items included in Pennsylvania Gross Delivery Margins.

	Three Months

Pennsylvania Gross Delivery Margins	$	40
Other operation and maintenance		7
Depreciation		(4)
Other		(3)
Income Taxes		(13)
Distributions on Preference Stock		4
Total	$	31

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

·	Lower other operation and maintenance primarily due to lower corporate service costs.

· Higher depreciation due to PP&E additions.

·	Higher income taxes primarily due to the impact of higher pre-tax income.

·	Lower distributions on preference stock due to the June 2012 redemption of all 2.5 million shares of preference stock.

2013 Outlook

Excluding special items, PPL Electric projects higher earnings in 2013 compared with 2012, primarily driven by higher distribution revenues from a distribution base rate increase and higher transmission margins, partially offset by higher depreciation.

Earnings in future periods are subject to various risks and uncertainties. See "Forward-Looking Information," the rest of this Item 2, and Notes 6 and 10 to the Financial Statements in this Form 10-Q and "Item 1. Business" and "Item 1A. Risk Factors" in PPL Electric's 2012 Form 10-K for a discussion of the risks, uncertainties and factors that may impact future earnings.

Statement of Income Analysis --

Pennsylvania Gross Delivery Margins

Non-GAAP Financial Measure

The following discussion includes financial information prepared in accordance with GAAP, as well as a non-GAAP financial measure, "Pennsylvania Gross Delivery Margins." "Pennsylvania Gross Delivery Margins" is a single financial performance measure of PPL Electric's Pennsylvania regulated electric delivery operations, which includes transmission and distribution activities. In calculating this measure, utility revenues and expenses associated with approved recovery mechanisms, including energy provided as a PLR, are offset with minimal impact on earnings. Costs associated with these mechanisms are recorded in "Energy purchases," "Energy purchases from affiliate," "Other operation and maintenance," which is primarily Act 129 costs, and "Taxes, other than income" which is primarily gross receipts tax. As a result, this measure represents the net revenues from PPL Electric's Pennsylvania regulated electric delivery operations. This measure is not intended to replace "Operating Income," which is determined in accordance with GAAP, as an indicator of overall operating performance. Other companies may use different measures to analyze and to report on the results of their operations. PPL Electric believes that "Pennsylvania Gross Delivery Margins" provides another criterion to make investment decisions. This performance measure is used, in conjunction with other information, internally by senior management to manage PPL Electric's operations and analyze actual results to budget.

129

Reconciliation of Non-GAAP Financial Measures

The following ~~tables reconcile "Operating Income" to~~table reconciles "Pennsylvania Gross Delivery Margins" as defined by PPL Electric to "Operating Income" for the periods ended ~~September 30.~~March 31.

2012 Three Months 2011 Three Months
PA Gross PA Gross
Delivery Operating Delivery Operating
Margins Other (a) Income (b) Margins Other (a) Income (b)

Operating Revenues
Retail electric $ 443 $ 443 $ 454 $ 454
Electric revenue from affiliate 1 1 1 1
Total Operating Revenues 444 444 455 455

~~149~~

																	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															Operating Revenues
			2012 Three Months						2011 Three Months						Retail electric		$	512			$	512	$	457			$	457
			PA Gross						PA Gross						Electric revenue from affiliate			1				1		1				1
			Delivery				Operating		Delivery				Operating			Total Operating Revenues		513				513		458				458
			Margins		Other (a)		Income (b)		Margins		Other (a)		Income (b)
Operating Expenses	Operating Expenses														Operating Expenses
	Energy purchases			137				137		171				171	Energy purchases			172				172		153				153
	Energy purchases from affiliate			23				23		5				5	Energy purchases from affiliate			14				14		21				21
	Other operation and maintenance			25	$	123		148		30	$	116		146	Other operation and maintenance			22	$	111		133		22	$	118		140
	Depreciation					41		41				38		38	Depreciation					43		43				39		39
	Taxes, other than income			23		1		24		24		2		26	Taxes, other than income			28		2		30		25		1		26
		Total Operating Expenses		208		165		373		230		156		386		Total Operating Expenses		236		156		392		221		158		379
Total	Total		$	236	$	(165)	$	71	$	225	$	(156)	$	69	Total		$	277	$	(156)	$	121	$	237	$	(158)	$	79

2012 Nine Months 2011 Nine Months
PA Gross PA Gross
Delivery Operating Delivery Operating
Margins Other (a) Income (b) Margins Other (a) Income (b)

Operating Revenues
Retail electric $ 1,303 $ 1,303 $ 1,444 $ 1,444
Electric revenue from affiliate 3 3 9 9
Total Operating Revenues 1,306 1,306 1,453 1,453

Operating Expenses
Energy purchases 410 410 591 591
Energy purchases from affiliate 61 61 15 15
Other operation and maintenance 74 $ 357 431 77 $ 325 402
Depreciation 119 119 108 108
Taxes, other than income 67 5 72 77 6 83
Total Operating Expenses 612 481 1,093 760 439 1,199
Total $ 694 $ (481) $ 213 $ 693 $ (439) $ 254

(a)	Represents amounts excluded from Margins.

(b)	As reported on the Statements of Income.

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 ~~September 30,~~March 31, as well as the change between periods. The factors that gave rise to the change are described below the table.

Three Months Nine Months
2012 2011 Change 2012 2011 Change

PA Gross Delivery Margins by Component
Distribution $ 185 $ 179 $ 6 $ 544 $ 560 $ (16)
Transmission 51 46 5 150 133 17
Total $ 236 $ 225 $ 11 $ 694 $ 693 $ 1

		Three Months
		2013		2012		Change
PA Gross Delivery Margins by Component
	Distribution	$	224	$	189	$	35
	Transmission		53		48		5
	Total	$	277	$	237	$	40

Distribution

Transmission

Other Operation and Maintenance

The increase (decrease) in other operation and maintenance for the period ended March 31, 2013 compared with 2012 was due to:

	Three Months


Uncollectible accounts	$	(2)
Corporate service costs (a)		(5)
Total	$	(7)

(a)	The decrease is partially due to $2 million of storm insurance policy premiums for coverage that was in place in 2012 but was not renewed in 2013.

~~150~~130

Other Operation and Maintenance

The increase (decrease) in other operation and maintenance expense for the periods ended September 30, 2012 compared with 2011 was due to:

Three Months Nine Months

Payroll-related costs $ 9 $ 16
Contractor-related expenses 1 4
Vegetation management 2 10
PUC-reportable storm costs, net of insurance recovery (6) (13)
Act 129 costs (5) (6)
Uncollectible accounts (1) 3
Allocation of certain corporate support group costs 2 7
Other 8
Total $ 2 $ 29

Depreciation

Depreciation ~~expense~~ increased by ~~$11~~$4 million for the ~~nine~~three months ended ~~September 30, 2012~~March 31, 2013 compared with ~~2011,~~2012, primarily due to PP&E additions ~~related~~as part of ongoing investments to ~~PPL Electric's ongoing efforts to ensure the reliability of its delivery~~enhance system ~~and replace aging infrastructure.~~reliability.

Taxes, Other Than Income

Taxes, other than income ~~decreased~~increased by ~~$11~~$4 million for the ~~nine~~three months ended ~~September 30, 2012~~March 31, 2013 compared with ~~2011,~~2012, primarily due to ~~lower~~higher Pennsylvania gross receipts tax expense due to ~~a decrease in taxable electric~~higher retail electricity revenue. This tax is included in "Pennsylvania Gross Delivery Margins."

Financing Costs

The increase (decrease) in financing costs for the periods ended September 30, 2012 compared with 2011 was due to:

Three Months Nine Months

Long-term debt interest expense $ 1 $ (1)
Distributions on preference stock (a) (4) (8)
Amortization of debt issuance costs (2) 1
Other (1)
Total $ (5) $ (9)
Financing Costs

Financing costs, which consist of "Interest Expense" and "Distributions on Preference Stock," decreased by $3 million for the three months ended March 31, 2013, compared with 2012. The decrease was primarily due to the June 2012 redemption of all 2.5 million shares of preference stock.

~~(a)~~Income Taxes	~~Decreases~~	��

The increase (decrease) in income taxes for ~~both periods are~~the period ended March 31, 2013 compared with 2012 was due ~~to the June 2012 redemption of all 2.5 million shares of preference stock.~~to:


			Three Months

Higher pre-tax book income			$	16
Depreciation not normalized				(2)
Other				(1)
Total			$	13

Income Taxes

The increase (decrease) in income taxes for the periods ended September 30, 2012 compared with 2011 was due to:

Three Months Nine Months

Higher (lower) pre-tax book income $ 1 $ (15)
Federal and state tax reserve adjustments 1
Federal and state tax return adjustments (a) 2
Depreciation not normalized (a) 1
Other 1 2
Total $ 2 $ (9)

~~(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.

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

~~151~~

Financial Condition

Liquidity and Capital Resources

PPL Electric had the following at:

	September 30, 2012		December 31, 2011		March 31, 2013		December 31, 2012

Cash and cash equivalents	$	31	$	320	$	31	$	140
Short-term debt					$	125

The ~~$289~~$109 million decrease in PPL Electric's cash and cash equivalents position was primarily the net result of:

·	capital expenditures of ~~$407~~$189 million;

·	~~redemption~~net cash used in operating activities of ~~preference~~$77 million;

·	the payment of $25 million of common stock ~~of $250 million;~~dividends to parent; partially offset by

·	a net increase in ~~notes receivable from affiliate~~short-term debt of ~~$210 million;~~

·	~~the payment of $75 million of common stock dividends to parent;~~

·	~~net cash provided by operating activities of $261 million;~~

·	~~long-term debt issuance of $249~~$125 million; and

·	contributions from parent of ~~$150~~$60 million.

PPL Electric's cash used in operating activities increased by $67 million for the three months ended March 31, 2013 compared with 2012. The increase was a net effect of:

·	a $77 million increase in cash used by components of working capital (primarily due to a $76 million change in accounts receivable resulting from higher base rates and favorable effects of weather); and

·	a $34 million increase in defined benefit plan funding; partially offset by

·	a $27 million increase in net income.

131

Credit Facilities

PPL Electric maintains credit facilities to provide liquidity and to backstop commercial paper issuances. At ~~September 30, 2012,~~March 31, 2013, PPL Electric's total committed borrowing capacity under its credit facilities and the use of this borrowing capacity were:

					Letters of								Letters of
					Credit Issued								Credit Issued
					and								and
		Committed			Commercial		Unused			Committed			Commercial		Unused
		Capacity		Borrowed	Paper Backstop		Capacity			Capacity		Borrowed	Paper Backup		Capacity

Syndicated Credit Facility (a) (b)		$	300		$	1	$	299
Syndicated Credit Facility (a)									Syndicated Credit Facility (a)	$	300		$	126	$	174
Asset-backed Credit Facility ~~(c)~~(b)	Asset-backed Credit Facility ~~(c)~~(b)		100			n/a		100	Asset-backed Credit Facility ~~(c)~~(b)		100			n/a		100
Total PPL Electric Credit Facilities	Total PPL Electric Credit Facilities	$	400		$	1	$	399	Total PPL Electric Credit Facilities	$	400		$	126	$	274

(a)	The commitments under this credit facility are provided by a diverse bank group, with no one bank and its affiliates providing an aggregate commitment of more than 7%5% of the total committed capacity.

(b)	~~In November 2012, PPL Electric amended its syndicated credit facility to extend the expiration date to October 2017.~~

~~(c)~~

PPL Electric obtains financing by selling and contributing its eligible accounts receivable and unbilled revenue to a special purpose, wholly owned subsidiary on an ongoing basis. The subsidiary pledges these assets to secure loans of up to an aggregate of $100 million from a commercial paper conduit sponsored by a financial institution. At ~~September 30, 2012,~~March 31, 2013, based on accounts receivable and unbilled revenue pledged, the amount available for borrowing under the facility was $100 million. ~~In July 2012, PPL Electric and the subsidiary extended this agreement to September 2012 and reduced the capacity from $150 million. In September 2012, the agreement was extended to September 2013.~~

See Note 7 to the Financial Statements for further discussion of PPL Electric's credit facilities.

Commercial Paper

~~Long-term Debt and Equity Securities~~

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

In August 2012, PPL Electric issued $250 million of 2.50% First Mortgage Bonds due 2022. The notes may be redeemed at PPL Electric's option any time prior to maturity at make-whole redemption prices. PPL Electric received proceeds of $247 million, net of a discount and underwriting fees. The net proceeds were used to repay short-term indebtedness incurred to fund PPL Electric's redemption of its 6.25% Series Preference Stock in June 2012 and for other general corporate purposes.

~~152~~

2012.

Rating Agency Actions

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

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

A downgrade in PPL Electric's credit ratings could result in higher borrowing costs and reduced access to capital markets.

~~As a result of the passage of the Dodd-Frank Act,~~ PPL Electric ~~is limiting its~~does not have credit rating ~~disclosure~~triggers that would result in the reduction of access to ~~a description~~capital 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 ~~took the following~~did not take any actions related to PPL ~~Electric:~~

~~In August 2012, Fitch assigned a rating and outlook to PPL Electric's $250 million First Mortgage Bonds.~~

~~In August 2012, S&P and Moody's assigned a rating to PPL Electric's $250 million First Mortgage Bonds.~~Electric in 2013.

For additional information on PPL Electric's liquidity and capital resources, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," in PPL Electric's ~~2011~~2012 Form 10-K.

Risk Management

Market Risk and Credit Risk

PPL Electric issues debt to finance its operations, which exposes it to interest rate risk. At ~~September 30, 2012,~~March 31, 2013, PPL ~~Electric had no~~Electric's potential annual exposure to increased interest expense, based on ~~its current debt portfolio.~~a 10% increase in interest rates, 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 ~~September 30, 2012~~March 31, 2013 would increase the fair value of its debt portfolio by ~~$97~~$71 million.

See Notes 13 and 14 to the Financial Statements in this Form 10-Q and "Risk Management" in PPL Electric's ~~2011~~2012 Form 10-K for additional information on market and credit risk.

132

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.

Environmental Matters

See Note 10 to the Financial Statements in this Form 10-Q and "Item 1. Business - Environmental Matters" in PPL Electric's ~~2011~~2012 Form 10-K for a discussion of environmental matters.

~~153~~

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 ~~2011~~2012 Form 10-K for a discussion of each critical accounting policy.

~~154~~133

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 ~~2011~~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 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 nine~~ months ended ~~September 30, 2012~~March 31, 2013 with ~~the same periods in 2011.~~2012.

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

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

Overview

Introduction

LKE, headquartered in Louisville, Kentucky, is a holding company ~~with~~and 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 ~~gas~~gas. LG&E and KU maintain their separate identities and serve customers in ~~Kentucky.~~Kentucky under their respective names. KU also serves customers in Virginia under the Old Dominion Power name and in Tennessee under the KU name.

Business Strategy

LKE's overall strategy is to provide reliable, safe, ~~and~~ competitively priced energy to its ~~customers.~~customers and reasonable returns on regulated investments to its member.

A key objective for LKE is to maintain a strong credit profile through managing financing costs and access to credit markets. LKE continually focuses on maintaining an appropriate capital structure and liquidity position.

Financial and Operational Developments

Net Income

Net Income for the three ~~and nine~~ months ended ~~September 30, 2012~~March 31, 2013 was ~~$83 million and $180~~$96 million compared to ~~$89~~$53 million ~~and $217 million for the same periods~~ in ~~2011~~2012 representing ~~decreases of 7% and 17% from the same periods in 2011.~~an 81% increase over 2012.

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

~~Terminated Bluegrass CTs Acquisition~~Rate Case Proceedings

In ~~September 2011,~~December 2012, the KPSC approved a rate case settlement agreement providing for increases in annual base electricity rates of $34 million for LG&E and $51 million for KU ~~entered into~~and an ~~asset purchase agreement with Bluegrass Generation~~increase in annual base gas rates of $15 million for the purchase of the Bluegrass CTs, aggregating approximately 495 MW, plus limited associated contractual arrangements required for operation of the units, for a purchase price of $110 million, pending receipt of applicable regulatory approvals. In May 2012, the KPSC issued an order approving the request to purchase the Bluegrass CTs. Also in May 2012, the FERC issued an order conditionally authorizing the acquisition of the Bluegrass CTs, subject to approval by the FERC of satisfactory mitigation measures to address market-power concerns. After a review of potentially available mitigation options, LG&E and KU determined that the options were not commercially justifiable. In June 2012, LG&E and KU terminated the asset purchase agreement for the Bluegrass CTs in accordance with its terms and made applicable filings withusing a 10.25% return on equity. The approved rates became effective January 1, 2013.

~~155~~134

~~the KPSC and FERC. LG&E and KU are currently assessing the impact of the asset purchase agreement termination and potential future generation capacity options.~~

~~NGCC Construction~~

In September 2011, LG&E and KU filed a CPCN with the KPSC requesting approval to build a 640 MW NGCC at the existing Cane Run plant site in Kentucky. In May 2012, the KPSC issued an order approving the request. LG&E will own a 22% undivided interest and KU will own a 78% undivided interest in the new NGCC. LG&E and KU commenced preliminary construction activities in the third quarter of 2012 and project construction is expected to be completed by May 2015. The project, which includes building a natural gas supply pipeline and related transmission projects, has an estimated cost of approximately $600 million.

In conjunction with this construction and to meet new, more stringent 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.

~~Capital Expenditures~~

Capital expenditure plans are revised periodically to reflect changes in operational, market and regulatory conditions. LKE has lowered its projected environmental capital spending for the period 2012 through 2016 by approximately $0.5 billion from the previously disclosed $3.1 billion projection included in LKE's 2011 Form 10-K. The lower projected capital spending is based on current project evaluations and pricing contained in contracts executed to date for environmental construction projects. LKE continues to evaluate potential new generation supply sources, including self-build options and power sourced from the market, as alternatives to installing additional emission control equipment at E.W. Brown, which is jointly dispatched for LG&E and KU, and in lieu of the terminated Bluegrass CTs acquisition discussed in Notes 6 and 8 to the Financial Statements. LKE expects to complete its evaluation during the first half of 2013. The outcome of that evaluation may lead to additional changes in projected capital spending.

~~Registered Debt Exchange Offer by LKE~~

~~Commercial Paper~~

In February 2012, LG&E and KU each established a commercial paper program for up to $250 million to provide an additional financing source to fund their short-term liquidity needs, if and when necessary. Commercial paper issuances are supported by LG&E's and KU's Syndicated Credit Facilities. LG&E and KU had no commercial paper outstanding at September 30, 2012.

Results of Operations

The following discussion provides a summary of LKE's earnings and a description of key factors ~~that management expects may~~expected 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 nine~~ months ended ~~September 30, 2012~~March 31, 2013 with ~~the same periods in 2011.~~2012.

Earnings

Net Income for the periods ended September 30 was:
Net Income for the period ended March 31 was:										Net Income for the period ended March 31 was:

		Three Months				Nine Months					Three Months
		2012		2011		2012		2011			2013		2012

Net Income	Net Income	$	83	$	89	$	180	$	217	Net Income	$	96	$	53

~~156~~

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 and certain items that management considers special. See additional detail of these special items in the table below.

Three Months Nine Months

Margins $ (4) $ (22)
Other operation and maintenance 3 (12)
Depreciation (2) (8)
Taxes, other than income (1) (6)
Other (2) (5)
Other Income (Expense) - net (4) (13)
Income Taxes 4 30
Special items (1)
Total $ (6) $ (37)

	Three Months

Margins	$	75
Other operation and maintenance		10
Depreciation		(9)
Taxes, other than income		(1)
Interest Expense		1
Income Taxes		(30)
Special items, after-tax		(3)
Total	$	43

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

~~Higher~~Lower other operation and maintenance ~~for the nine-month period,~~ primarily due to ~~$12~~$14 million of ~~higher~~lower costs due to the timing and scope of scheduled coal plant maintenance ~~costs resulting from an increased scope~~outages, partially offset by $4 million of ~~scheduled plant outages.~~adjustments to regulatory assets and liabilities.

Higher depreciation ~~for the nine-month period, primarily~~ due to ~~PP&E additions.~~environmental costs related to the elimination of the 2005 and 2006 ECR plans now being included in base rates, which added $13 million to depreciation that is excluded from Margins, partially offset by lower depreciation of $5 million due to revised rates that were effective January 1, 2013. Both of these events are the result of the 2012 Kentucky rate case proceedings.

·	Higher ~~taxes, other than~~ income ~~for the nine-month period,~~taxes primarily due to ~~an increase in property taxes resulting from property additions,~~ higher ~~assessed values, and changes in property classifications to categories with higher tax rates.~~

·	~~Lower other income (expense) - net for the nine-month period, primarily due to losses from an equity method investment.~~

·	~~Lower income taxes for the nine-month period, primarily due to lower~~ pre-tax income.

The following after-tax gains (losses), which management considers special items, also impacted earnings during the periods ended ~~September 30.~~March 31.

Income Statement Three Months Nine Months
Line Item 2012 2011 2012 2011

Acquisition-related adjustments:
Net operating loss carryforward and other tax related adjustments Income Taxes and Other O&M $ 4
Other:
Discontinued Operations, net of tax of $0, $1, $4, $1 (a) Discontinued Operations $ (1) (5) $ (1)
Energy-related economic activity, net of tax of $0, ($1), $0, $0 Operating Revenues 1 1
Total $ (1)

	Income Statement	Three Months
	Line Item	2013		2012

EEI adjustments	Other Income (Expense) - net	$	1
Net operating loss carryforward and other tax-related adjustments	Income Taxes and Other O&M			$	4
Total		$	1	$	4

~~(a)~~

~~The nine months ended September 30, 2012 includes an adjustment to an indemnification liability.~~

2013 Outlook

Excluding special items, LKE projects ~~lower~~higher earnings in ~~2012~~2013 compared with ~~2011 as a result of~~2012, primarily driven by electric and gas base rate increases, returns on additional environmental capital investments and load growth, partially offset by higher ~~other~~ operation and maintenance ~~expense, higher depreciation, higher property taxes and losses from an equity method investment.~~

expense.

135

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

~~157~~

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 operations and analyze actual results compared towith budget.

Reconciliation of Non-GAAP Financial Measures

The following ~~tables reconcile~~table reconciles "Margins" to "Operating Income" ~~to "Margins"~~ as defined by LKE for the periods ended ~~September 30.~~March 31.

			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 Revenues	Operating Revenues		$	732			$	732	$	734	$	2	$	736	Operating Revenues		$	800			$	800	$	705			$	705
Operating Expenses	Operating Expenses														Operating Expenses
	Fuel			249				249		245				245	Fuel			231				231		213				213
	Energy purchases			27				27		32				32	Energy purchases			86				86		74				74
	Other operation and maintenance			28	$	158		186		26		161		187	Other operation and maintenance			25	$	172		197		22	$	184		206
	Depreciation			13		74		87		12		72		84	Depreciation					82		82		13		73		86
	Taxes, other than income					11		11				10		10	Taxes, other than income					12		12				11		11
		Total Operating Expenses		317		243		560		315		243		558		Total Operating Expenses		342		266		608		322		268		590
Total	Total		$	415	$	(243)	$	172	$	419	$	(241)	$	178	Total		$	458	$	(266)	$	192	$	383	$	(268)	$	115

2012 Nine Months 2011 Nine Months
Operating Operating
Margins Other (a) Income (b) Margins Other (a) Income (b)

Operating Revenues $ 2,095 $ 2,095 $ 2,139 $ 1 $ 2,140
Operating Expenses
Fuel 677 677 666 666
Energy purchases 135 135 179 179
Other operation and maintenance 76 $ 513 589 67 499 566
Depreciation 39 220 259 37 212 249
Taxes, other than income 34 34 28 28
Total Operating Expenses 927 767 1,694 949 739 1,688
Total $ 1,168 $ (767) $ 401 $ 1,190 $ (738) $ 452

(a)	Represents amounts excluded from Margins.

(b)	As reported on the Statements of Income.

Changes in Non-GAAP Financial Measures

Margins ~~decreased~~increased by ~~$22~~$75 million for the ~~nine~~three months ended ~~September 30, 2012~~March 31, 2013 compared with ~~the same period in 2011, primarily~~2012 due to ~~$16~~higher base rates of $31 million, higher volumes of ~~lower retail margins, as~~$19 million, environmental costs added to base rates of $18 million and increased environmental investments of $7 million.

~~158~~136

~~Other Operation and Maintenance~~

	Three Months

Coal plant outages (a)	$	(14)
Bad debt expense		(3)
Adjustments to regulatory assets and liabilities		4
Other		4
Total	$	(9)

~~Other operation and maintenance increased by $23 million for the nine months ended September 30, 2012 compared with 2011, primarily due to:~~

·(a)	~~a $13 million increase in coal plant maintenance costs, including certain amounts included in margins,~~Decrease is primarily ~~resulting from an increased~~due to the timing and scope of scheduled ~~outages;~~outages.

·	~~a $6 million credit to establish a regulatory asset was recorded in the first quarter of 2011 related to 2009 storm costs; and~~

·Depreciation		~~a $3 million~~

The increase (decrease) in ~~restricted stock awards.~~depreciation for the period ended March 31, 2013 compared with 2012 was due to:

	Three Months

Lower depreciation rates effective January 1, 2013	$	(5)
Additions to PP&E		2
Other		(1)
Total	$	(4)

~~Depreciation~~

~~Depreciation increased by $3 million and $10 million for the three and nine months ended September 30, 2012 compared with 2011, primarily due to PP&E additions.~~

~~Taxes, Other Than Income~~

Taxes, other than income increased by $6 million for the nine months ended September 30, 2012 compared with 2011, primarily due to an increase in property taxes resulting from property additions, higher assessed values, and changes in property classifications to categories with higher tax rates.

~~Other Income (Expense) - net~~

~~Other income (expense) - net decreased by $13 million for the nine months ended September 30, 2012, compared with 2011, primarily due to $8 million in losses from an equity method investment.~~

Income Taxes

Income taxes ~~decreased~~increased by $36 million for the ~~nine~~three months ended ~~September 30, 2012,~~March 31, 2013 compared with ~~2011,~~2012 primarily due to ~~a $68 million decrease in~~higher pre-tax ~~income and $9 million of adjustments to deferred taxes related to net operating loss carryforwards based on income tax return adjustments.~~income.

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

~~Income (Loss) from Discontinued Operations (net of income taxes)~~

Financial Condition

Liquidity and Capital Resources

LKE had the following at:

	March 31, 2013		December 31, 2012

Cash and cash equivalents	$	52	$	43

Short-term debt (a)	$	185	$	125

Notes payable with affiliates	$	85	$	25

Loss from discontinued operations increased by $5 million for the nine months ended September 30, 2012, compared with 2011. The increase was primarily related to an adjustment to the estimated liability for indemnifications related to the termination of the WKE lease in 2009.

Financial Condition

Liquidity and Capital Resources

LKE had the following at:

September 30, 2012 December 31, 2011

Cash and cash equivalents $ 90 $ 59

(a)	Represents borrowings under LG&E's and KU's commercial paper programs. See Note 7 to the Financial Statements for additional information.

The ~~$31~~$9 million increase in LKE's cash and cash equivalents position was primarily the net result of:

·	cash provided by operating activities of ~~$646~~$85 million;

·	an increase in short term debt of $60 million;

·	an increase in notes payable with affiliates of $60 million; and

·	capital contributions from member of $75 million; offset by

·	capital expenditures of ~~$525 million; and~~

·	~~distributions to member of $95~~$271 million.

LKE's cash provided by operating activities decreased by ~~$37~~$147 million for the ~~nine~~three months ended ~~September 30, 2012,~~March 31, 2013, compared with ~~2011,~~2012, primarily ~~due to:~~

as a result of:

~~159~~

·	an increase in cash outflows from other operating activities of $110 million driven by a $96 million increase in discretionary defined benefit plan contributions; and

a ~~decrease~~decline in working capital cash flow changes of $98 million driven primarily by changes in accounts receivable and unbilled revenues due to higher sales volumes, higher rates and extended payment terms, offset by lower inventory levels in 2013 compared with 2012 driven by increased generation; offset by

an increase in net income ~~of $37 million due to unseasonably mild weather during the first four months of 2012 and higher operation and maintenance expenses,~~ adjusted for non-cash ~~effects~~items of ~~$103~~$61 million (deferred income taxes and investment tax credits of ~~$114~~$13 million, ~~and~~ defined benefit plans - expense of $8$7 million ~~partially~~and other non-cash items of $2 million, offset by depreciation of ~~$10 million and other noncash items of $9~~$4 million)~~; and~~.

·	~~a decrease in cash inflows related to income tax receivable of $37 million due to fewer income tax payments received from member; partially offset by~~

·	~~a decrease in cash outflows related to accrued taxes of $49 million primarily due to the timing of property and income tax payments; and~~

·	~~a decrease in cash outflows of $93 million due to a reduction in discretionary defined benefit plan contributions.~~

~~LKE's cash used in investing activities~~

137

Capital expenditures increased by ~~$383~~$97 million ~~for~~during the ~~nine~~three months ended ~~September 30, 2012,~~March 31, 2013 compared with ~~2011,~~2012 primarily due to ~~proceeds from the sale~~environmental air projects at Mill Creek and Ghent, and construction of other investments of $163 million in 2011 and an increase in capital expenditures of $229 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 $292 million for the nine months ended September 30, 2012, compared with 2011, primarily due to the issuance of long-term debt of $250 million and a repayment on a revolving line of credit of $163 million in 2011 and lower distributions to member of $374 million in 2012.Cane Run Unit 7.

Credit Facilities

At ~~September 30, 2012,~~March 31, 2013, LKE's total committed borrowing capacity under its credit facilities and the use of this borrowing capacity were:

		Committed			Letters of		Unused							Letters of
		Capacity		Borrowed	Credit Issued		Capacity							Credit Issued
														and
LKE Credit Facility with a subsidiary of PPL Energy Supply		$	300				$	300
										Committed				Commercial		Unused
										Capacity		Borrowed		Paper Backup		Capacity

LKE Credit Facility with a subsidiary of PPL Energy Funding Corporation									LKE Credit Facility with a subsidiary of PPL Energy Funding Corporation	$	300	$	85			$	215
LG&E Credit Facility (a)	LG&E Credit Facility (a)		400					400	LG&E Credit Facility (a)		500			$	70		430
KU Credit Facilities (a) (b)	KU Credit Facilities (a) (b)		598		$	198		400	KU Credit Facilities (a) (b)		598				313		285
	Total Credit Facilities (c)	$	1,298		$	198	$	1,100	Total Credit Facilities (c)	$	1,398	$	85	$	383	$	930

(a)

~~In November 2012, LG&E and KU amended the~~Each company pays customary fees under their respective syndicated credit ~~facility to extend the expiration dates to November 2017. In addition, LG&E increased the~~facilities, as well as KU's letter of credit facility, ~~capacity to $500 million.~~and borrowings generally bear interest at LIBOR-based rates plus an applicable margin.

(b)	In ~~August 2012, the~~May 2013, KU ~~letter of credit facility agreement was amended and restated to allow for certain payments under the~~extended its $198 million letter of credit facility to ~~be converted to loans rather than requiring immediate payment.~~May 2016.

(c)

The $1.098 billion of commitments under ~~LKE's~~LG&E's and KU's domestic credit facilities are provided by a diverse bank group, with no one bank and its affiliates providing an aggregate commitment of more than ~~10%~~11% of the total committed capacity; however, the PPL affiliate ~~provides~~provided 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.

Long-term Debt Securities

LKE's long-term debt securities activity through September 30, 2012 was:

Debt
Issuances Retirement

Non-cash Exchanges (a)
LKE Senior Unsecured Notes $ 250 $ (250)

~~(a)~~

In June 2012, LKE completed an exchange of all of its outstanding 4.375% Senior Notes due 2021 issued in September 2011, in a transaction not registered under the Securities Act of 1933, for similar securities that were issued in a transaction registered with the SEC.

LG&E and KU currently plan to issue, subject to market conditions, up to $350 million for LG&E and $300 million for KU, of first mortgage bond indebtedness in 2013, the proceeds of which will be used to fund capital expenditures and for other general corporate purposes.

See Note 7 to the Financial Statements for additional information about long-term debt securities.

Rating Agency Actions

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

~~160~~

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 each~~cost 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~~did not take any actions related to LKE and its ~~subsidiaries:~~

~~In February 2012, Fitch assigned ratings to~~subsidiaries during the ~~two newly established commercial paper programs for LG&E and KU.~~

~~In March 2012, Moody's affirmed the following ratings:~~

·	~~the long-term ratings of the First Mortgage Bonds for LG&E and KU;~~

·	~~the issuer ratings for LG&E and KU; and~~

·	~~the bank loan ratings for LG&E and KU.~~

~~Also in March 2012, Moody's and S&P each assigned short-term ratings to the two newly established commercial paper programs for LG&E and KU.~~

~~In March and May 2012, Moody's, S&P and Fitch affirmed the long-term ratings for LG&E's 2003 Series A and 2007 Series B pollution control bonds.~~first quarter of 2013.

Ratings Triggers

LKE and its subsidiaries have various derivative and non-derivative contracts, including contracts for the sale and purchase of electricity, fuel, commodity transportation and storage and interest rate instruments, which contain provisions requiring LKE and its subsidiaries to post additional collateral, or permitting the counterparty to terminate the contract, if LKE's or its subsidiaries' credit ratings were to fall below investment grade. See Note 14 to the Financial Statements for a discussion of "Credit Risk-Related Contingent Features," including a discussion of the potential additional collateral that would have been required for derivative contracts in a net liability position at September 30, 2012. At September 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 $87 million for both derivative and non-derivative commodity and commodity-related contracts used in its generation and marketing operations, gas supply and interest rate contracts.March 31, 2013.

138

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.

~~161~~

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 activities~~sells excess economic generation to maximize the value of the physical assets at times when the assets are not required to serve LG&E's ~~and~~or 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 ~~September 30, 2012,~~March 31, 2013, LKE's potential annual exposure to increased interest expense, based on a 10% increase in interest rates, was not significant.

LKE is also exposed to changes in the fair value of its debt portfolio. LKE estimated that a 10% decrease in interest rates at ~~September 30, 2012,~~March 31, 2013, would increase the fair value of its debt portfolio by ~~$117~~$111 million.

At September 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 $ (62) $ (3)

At March 31, 2013, LKE had the following interest rate hedges outstanding:

						Effect of a
						10% Adverse
				Fair Value,		Movement
		Exposure		Net - Asset		in Interest
		Hedged		(Liability) (a)		Rates
Economic activity
	Interest rate swaps (b)	$	179	$	(55)	$	(3)
Cash flow hedges
	Interest rate swaps (b)		300		24		(17)

(a)	Includes accrued interest.

(b)

LKE utilizes various risk management instruments to reduce its exposure to the expected future cash flow variability of its debt instruments. These risks include exposure to adverse interest rate movements for outstanding variable rate debt and for future anticipated financing. While LKE is exposed to changes in the fair value of these instruments, any realized changes in the fair value of such economic positions and cash flow hedges are recoverable through regulated rates and any subsequent changes in fair value of these derivatives are included in regulatory assets or liabilities. ~~Sensitivities represent a 10% adverse movement in interest rates.~~ The positions outstanding at ~~September 30, 2012~~March 31, 2013 mature through ~~2033.~~2043.

Credit Risk

See Notes 13 and 14 to the Financial Statements in this Form 10-Q and "Risk Management - Energy Marketing & Trading and Other - Credit Risk" in LKE's ~~2011~~2012 Form 10-K for additional information.

Related Party Transactions

LKE is not aware of any material ownership interest or operating responsibility by senior management of LKE, LG&E or KU in outside partnerships, including leasing transactions with variable interest entities, or other entities doing business with LKE. See Note 11 to the Financial Statements for additional information on related party transactions.

139

Environmental Matters

~~Protection of the environment is a major priority for LKE and a significant element of its business activities.~~ Extensive federal, state and local environmental laws and regulations are applicable to ~~LKE's~~LG&E's and KU's air emissions, water discharges and the management of hazardous and solid waste, ~~among~~as well as other ~~areas, and the costs~~aspects 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 ~~costs~~cost for their products or their demand for ~~LKE's~~LG&E's and KU's services.

Physical effects associated with climate change could include the impact of changes in weather patterns, such as storm frequency and intensity, and the resultant potential damage to LG&E's and KU's generation assets, electricity transmission and distribution systems, as well as impacts on customers. In addition, changed weather patterns could potentially reduce annual rainfall in areas where LG&E and KU have hydro generating facilities or where river water is used to cool its fossil-powered generators. LKE cannot currently predict whether its businesses will experience these potential climate change-related risks or estimate the potential costs of their related consequences.

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

Coal Combustion Residuals (CCRs)

Effluent Limitation Guidelines

On April 19, 2013, the EPA issued proposed regulations to revise discharge limitations for steam electric generation wastewater permits. The proposed limitations are based on the EPA review of available treatment technologies and their capacity for reducing pollutants and include new requirements for fly ash and bottom ash handling and metal cleaning wastes as well as new limits for scrubber wastewater, gasification wastewater and landfill leachate. The proposal contains several alternative approaches, some of which could significantly impact LG&E's and KU's coal-fired plants. LG&E and KU will comment on the proposed regulation. The final regulation is expected in May 2014. At the present time, LKE is unable to predict the outcome of this matter or estimate a range of reasonably possible costs, but the costs could be significant.

316(b) Cooling Water Intake Structure Rule

In April 2011, the EPA published a draft regulation under Section 316(b) of the Clean Water Act, which regulates cooling water intakes for power plants. The draft rule has two provisions: one requires installation of Best Technology Available (BTA) to reduce mortality of aquatic organisms that are pulled into the plant cooling water system (entrainment), and the second imposes standards for reduction of mortality of aquatic organisms trapped on water intake screens (impingement). A final rule is expected in June 2013. The proposed regulation would apply to nearly all LG&E and KU-owned steam electric plants in Kentucky, potentially even including those equipped with closed-cycle cooling systems.

GHG Regulations

In 2013, the EPA is expected to finalize limits on GHG emissions from new power plants and to begin working on a proposal for such emissions from existing power plants. The EPA's proposal on GHG emissions from new power plants would effectively preclude construction of any coal-fired plants and could even be difficult for new gas-fired plants to meet. With respect to existing power plants, the impact could be very significant, depending on the structure and stringency of the final rule. On behalf of LG&E and KU, PPL, along with others in the industry, filed comments on the EPA's proposal related to GHG emissions from new plants.

140

MATS

The EPA finalized MATS requiring fossil-fuel fired plants to reduce emissions of mercury and other hazardous air pollutants by April 16, 2015. The rule is being challenged by industry groups and states. The EPA has subsequently proposed changes to the rule with respect to new sources to address the concern that the rule effectively precludes construction of any new coal-fired plants. LG&E and KU are generally well-positioned to comply with MATS, primarily due to recent investments in environmental controls and approved ECR plans to install additional controls at some of their Kentucky plants. LG&E and KU are evaluating, among other measures, chemical additive systems for mercury control at Trimble County and Brown plants. The anticipated retirements of certain coal-fired electric generating units is in response to this and other environmental regulations.

CSAPR and CAIR

In 2011, the EPA finalized its CSAPR regulating emissions of nitrous oxide and sulfur dioxide through new allowance trading programs which were to be implemented in two phases (2012 and 2014). Like its predecessor, the CAIR, CSAPR targeted sources in the eastern United States. In December 2011, the U.S. Court of Appeals for the District of Columbia Circuit (the Court) stayed implementation of CSAPR, leaving CAIR in place. Subsequently, in August 2012, the Court vacated and remanded CSAPR back to the EPA for further rulemaking, again leaving CAIR in place. LG&E and KU plants in Kentucky will continue to comply with CAIR through optimization of existing controls, balanced with emission allowance purchases. The Court's August decision leaves plants in CSAPR-affected states potentially exposed to more stringent emission reductions due to regional haze implementation (it was previously determined that CSAPR or CAIR participation satisfies regional haze requirements), and/or petitions to the EPA by downwind states under Section 126 of the Clean Air Act requesting the EPA to require plants that allegedly contribute to downwind non-attainment to take action to reduce emissions.

National Ambient Air Quality Standards

During 2010 and 2012, the EPA issued new ambient air standards for sulfur dioxide and particulates, respectively. In 2013, the EPA preliminarily designated Jefferson County, Kentucky, as a partial non-attainment area for sulfur dioxide. Final designations of non-attainment areas may occur in 2013 and 2014, respectively. Existing environmental plans for LG&E's and KU's Kentucky plants, including announced retirements of certain plants and ECR-approved new or upgraded scrubbers or baghouses at other plants, may aid in achievement of eventual ambient air requirements. However, depending upon the specifics of final non-attainment designations and consequent compliance plans, additional controls may be required, the financial impact of which could be significant.

See Note 10 to the Financial Statements in this Form 10-Q report and "Item 1. Business - Environmental Matters" in LKE's ~~2011~~2012 Form 10-K ~~and Note 10 to the Financial Statements~~ for a discussion of environmental matters.

~~162~~

New Accounting Guidance

See Notes 2 and 1819 to the Financial Statements for a discussion of new accounting guidance adopted and pending adoption.

Application of Critical Accounting Policies

Financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies. The following accounting policies are particularly important to the financial condition or results of operations and require estimates or other judgments of matters inherently uncertain: revenue recognition - unbilled revenue, ~~price risk management,~~ defined benefits, asset impairment (excluding investments), loss accruals, AROs, income taxes, and regulatory assets and liabilities. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in LKE's ~~2011~~2012 Form 10-K for a discussion of each critical accounting policy.

~~163~~141

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 ~~2011~~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 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 nine~~ months ended ~~September 30, 2012~~March 31, 2013 with ~~the same periods in 2011.~~2012.

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

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

Overview

Introduction

LG&E, headquartered in Louisville, Kentucky, is a regulated utility engaged in the generation, transmission, distribution and sale of ~~electricity~~electric energy and ~~the~~ distribution and sale of natural gas in Kentucky. LG&E and its affiliate, KU, are wholly owned subsidiaries of LKE. LKE is an intermediary holding company in PPL's group of companies.

Business Strategy

LG&E's overall strategy is to provide reliable, safe, ~~and~~ competitively priced energy to its ~~customers.~~customers and reasonable returns on regulated investments to its shareowner.

A key objective for LG&E is to maintain a strong credit profile through managing financing costs and access to credit markets. LG&E continually focuses on maintaining an appropriate capital structure and liquidity position.

Financial and Operational Developments

Net Income

Net Income for the three ~~and nine~~ months ended ~~September 30, 2012~~March 31, 2013 was ~~$43 million and $94~~$44 million compared to ~~$43~~$25 million ~~and $102 million for the same periods~~ in ~~2011~~2012 representing ~~an 8% decrease from the nine-month period in 2011.~~a 76% increase over 2012.

See "Results of Operations" for a discussion and analysis of LG&E's earnings.

~~Terminated Bluegrass CTs Acquisition~~Rate Case Proceedings

In September 2011, LG&E and KU entered into an asset purchase agreement with Bluegrass Generation for the purchase of the Bluegrass CTs, aggregating approximately 495 MW, plus limited associated contractual arrangements required for operation of the units, for a purchase price of $110 million, pending receipt of applicable regulatory approvals. In MayDecember 2012, the KPSC ~~issued~~approved a rate case settlement agreement providing for increases in annual base electricity rates of $34 million and an ~~order approving the request to purchase the Bluegrass CTs. Also~~increase in ~~May 2012, the FERC issued an order conditionally authorizing the acquisition~~annual base gas rates of ~~the Bluegrass CTs, subject to approval by the FERC of satisfactory mitigation measures to address market-power concerns. After~~$15 million using a review of potentially available mitigation options, LG&E and KU determined that the options were not commercially justifiable. In June 2012, LG&E and KU terminated the asset purchase agreement for the Bluegrass CTs in accordance with its terms and made applicable filings with the KPSC and FERC. LG&E and KU are currently assessing the impact of the asset purchase agreement termination and potential future generation capacity options.10.25% return on equity. The approved rates became effective January 1, 2013.

~~164~~142

~~NGCC Construction~~

~~Capital Expenditures~~

Capital expenditure plans are revised periodically to reflect changes in operational, market and regulatory conditions. LG&E has lowered its projected environmental capital spending for the period 2012 through 2016 by approximately $0.4 billion from the previously disclosed $1.6 billion projection included in LG&E's 2011 Form 10-K. The lower projected capital spending is based on current project evaluations and pricing contained in contracts executed to date for environmental construction projects. LG&E continues to evaluate potential new generation supply sources, including self-build options and power sourced from the market, as alternatives to installing additional emission control equipment at E.W. Brown, which is jointly dispatched for LG&E and KU, and in lieu of the terminated Bluegrass CTs acquisition discussed in Notes 6 and 8 to the Financial Statements. LG&E expects to complete its evaluation during the first half of 2013. The outcome of that evaluation may lead to additional changes in projected capital spending.

~~Commercial Paper~~

In February 2012, LG&E established a commercial paper program for up to $250 million to provide an additional financing source to fund its short-term liquidity needs, if and when necessary. Commercial paper issuances are supported by LG&E's Syndicated Credit Facility. LG&E had no commercial paper outstanding at September 30, 2012.

Results of Operations

The following discussion provides a summary of LG&E's earnings and a description of key factors ~~that management expects may~~expected 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 nine~~ months ended ~~September 30, 2012~~March 31, 2013 with ~~the same periods in 2011.~~2012.

Earnings

Net Income for the periods ended September 30 was:
Net Income for the periods ended March 31 was:										Net Income for the periods ended March 31 was:

		Three Months				Nine Months					Three Months
		2012		2011		2012		2011			2013		2012

Net Income	Net Income	$	43	$	43	$	94	$	102	Net Income	$	44	$	25

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 Nine Months

Margin $ (1) $ (5)
Other operation and maintenance 7 1
Depreciation (1) (4)
Taxes, other than income (1) (3)
Other (4) 3
Total $ $ (8)

~~165~~

	Three Months

Margins	$	22
Other operation and maintenance		8
Depreciation		1
Taxes, other than income		(1)
Other Income (Expense) - net		(2)
Interest Expense		1
Income Taxes		(10)
Total	$	19

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

Lower other operation and maintenance ~~for the three-month period,~~primarily due to ~~less storm restoration~~the timing and ~~tree trimming costs, less gas operation and~~scope of scheduled coal plant maintenance ~~costs, lower bad debt expenses as a result of milder weather and improving economy and lower pension expenses.~~outages.

·	Higher income taxes primarily due to higher pre-tax income.

2013 Outlook

LG&E projects ~~lower~~higher earnings in ~~2012~~2013 compared with ~~2011 as a result of~~2012, primarily driven by electric and gas base rate increases, returns on additional environmental capital investments and retail load growth, partially offset by higher ~~other~~ operation and maintenance ~~expense, higher depreciation and higher property taxes.~~

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%. In November 2012, the KPSC issued an order for a settlement conference to begin on November 13, 2012. A hearing on the original application and subsequent testimony is scheduled to begin on November 27, 2012. LG&E cannot predict the outcome of these proceedings, including the possibility of any agreed stipulations or settlement, which would remain subject to KPSC approval. A final order may be issued in December 2012 or January 2013.expense.

Earnings in ~~2012 and~~ future 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 ~~2011~~2012 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

143

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 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~~table reconciles "Margins" to "Operating Income" ~~to "Margins"~~ as defined by LG&E for the periods ended ~~September 30.~~March 31.

2012 Three Months 2011 Three Months
Operating Operating
Margins Other (a) Income (b) Margins Other (a) Income (b)

Operating Revenues $ 333 $ 333 $ 339 $ 1 $ 340
Operating Expenses
Fuel 100 100 98 98
Energy purchases 21 21 31 31
Other operation and maintenance 13 $ 74 87 10 81 91
Depreciation 1 37 38 1 36 37
Taxes, other than income 6 6 5 5
Total Operating Expenses 135 117 252 140 122 262
Total $ 198 $ (117) $ 81 $ 199 $ (121) $ 78

~~166~~

			2012 Nine Months						2011 Nine Months
							Operating						Operating				2013 Three Months						2012 Three Months
			Margins		Other (a)		Income (b)		Margins		Other (a)		Income (b)								Operating						Operating
																	Margins		Other (a)		Income (b)		Margins		Other (a)		Income (b)

Operating Revenues	Operating Revenues		$	990			$	990	$	1,034	$	1	$	1,035	Operating Revenues		$	390			$	390	$	353			$	353
Operating Expenses	Operating Expenses														Operating Expenses
	Fuel			281				281		265				265	Fuel			96				96		89				89
	Energy purchases			119				119		180				180	Energy purchases			81				81		73				73
	Other operation and maintenance			36	$	241		277		30		242		272	Other operation and maintenance			11	$	80		91		10	$	88		98
	Depreciation			2		112		114		2		108		110	Depreciation					36		36		1		37		38
	Taxes, other than income					17		17				14		14	Taxes, other than income					6		6				5		5
		Total Operating Expenses		438		370		808		477		364		841		Total Operating Expenses		188		122		310		173		130		303
Total	Total		$	552	$	(370)	$	182	$	557	$	(363)	$	194	Total		$	202	$	(122)	$	80	$	180	$	(130)	$	50

(a)	Represents amounts excluded from Margins.

(b)	As reported on the Statements of Income.

Changes in Non-GAAP Financial Measures

Margins ~~decreased~~increased by $5$22 million ~~during~~for the ~~nine~~three months ended ~~September 30, 2012~~March 31, 2013 compared with ~~the same period in 2011, primarily~~2012 due to $4higher base rates of $13 million, higher volumes of ~~lower wholesale margins, as~~$6 million, increased environmental investments of $2 million and environmental costs added to base rates of $1 million.

The increase in base rates was the result of new KPSC rates going into effect on January 1, 2013. The increase in volumes ~~were impacted by lower market prices. Retail margins were consistent~~was attributable to colder weather in 2013 compared with ~~the prior year as increased industrial sales offset declines associated with unseasonably mild weather during the first four months of~~ 2012. Total heating degree days ~~decreased 28% compared~~increased 48%. The environmental costs added to base rates was due to the ~~same period~~elimination of the 2005 and 2006 ECR plans as a result of the 2012 Kentucky rate case. This elimination results in ~~2011.~~

~~Other Operation~~depreciation and ~~Maintenance~~

~~Other~~other operation and maintenance expenses associated with the 2005 and 2006 ECR plans being excluded from Margins in 2013.

Other Operation and Maintenance

The increase (decrease) in other operation and maintenance expense for the period ended March 31, 2013 compared with 2012 was due to:

	Three Months

Coal plant outages (a)	$	(8)
Other		1
Total	$	(7)

(a)	Decrease is due to the timing and scope of scheduled outages.

Income Taxes

Income taxes increased by $5$10 million for the ~~nine~~three months ended ~~September 30, 2012~~March 31, 2013 compared with ~~2011,~~2012 primarily due to ~~an $8 million increase in coal plant maintenance costs, primarily resulting from an increased scope of scheduled outages. This increase was offset by a $2 million decrease in pension expense.~~higher pre-tax income.

Financial Condition

Liquidity and Capital Resources

LG&E had the following at:

September 30, 2012 December 31, 2011

Cash and cash equivalents $ 48 $ 25
See Note 5 to the Financial Statements for additional information on income taxes.

144

Financial Condition

Liquidity and Capital Resources

LG&E had the following at:

	March 31, 2013		December 31, 2012

Cash and cash equivalents	$	34	$	22

Short-term debt (a)	$	70	$	55

(a)	Represents borrowings under LG&E's commercial paper program. See Note 7 to the Financial Statements for additional information.

The ~~$23~~$12 million increase in LG&E's cash and cash equivalents position was primarily the net result of:

·	cash provided by operating activities of ~~$267 million,~~$85 million;

·	capital contributions from parent of $25 million; and

·	an increase in short term debt of $15 million; partially offset by

·	capital expenditures of ~~$193~~$98 million; and

·	the payment of common stock dividends to parent of ~~$47~~$19 million.

LG&E's cash provided by operating activities decreased by ~~$12~~$17 million for the ~~nine~~three months ended ~~September 30, 2012,~~March 31, 2013, compared with ~~2011,~~2012, primarily due to:

~~a decrease~~an increase in cash ~~inflows~~outflows from ~~accounts receivable~~other operating activities of ~~$26~~$18 million ~~which is primarily the result of~~driven by a ~~decrease~~$19 million increase in ~~accounts receivable from affiliates of $20 million for receivables from KU for TC2 coal inventory and other shared costs and from LKE for income tax settlements;~~discretionary defined benefit plan contributions; and

a ~~decrease~~decline in ~~coal consumption resulting~~working capital cash flow changes of $12 million driven primarily ~~from lower coal-fired generation~~by changes in accounts receivable and unbilled revenues due to ~~the mild winter weather~~higher sales volume, higher rates and ~~an increase in combustion turbine generation that led to an increase of $34 million in coal inventory,~~extended payment terms, partially offset by lower fuel levels in 2013 compared with 2012 driven by increased generation and a ~~$7 million greater decline~~higher federal income tax accrual in ~~gas storage in comparison to 2011; partially~~2013; offset by

~~a decrease~~an increase in ~~cash outflows~~net income adjusted for non-cash items of ~~$42~~$13 million ~~due to a reduction in discretionary~~(amortization of $3 million and defined benefit ~~plan contributions.~~plans - expense of $2 million partially offset by deferred income taxes and investment tax credits of $5 million, other non-cash items of $4 million and depreciation of $2 million).

~~LG&E's cash used in investing activities~~Capital expenditures increased by ~~$221~~$38 million ~~for~~during the ~~nine~~three months ended ~~September 30, 2012,~~March 31, 2013 compared with ~~2011,~~2012 primarily due to ~~proceeds from the sale~~environmental air projects at Mill Creek, and construction of other investments of $163 million in 2011 and an increase in capital expenditures of $66 million as a result of increased environmental spending, primarily related to landfills; and infrastructure improvements at generation, distribution and transmission facilities.

~~167~~

LG&E's cash used in financing activities decreased by $183 million for the nine months ended September 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 $8 million in 2012.Cane Run Unit 7.

Credit Facilities

At ~~September 30, 2012,~~March 31, 2013, LG&E's committed borrowing capacity under its credit facilities and the use of this borrowing capacity were:

Committed Letters of Unused
Capacity Borrowed Credit Issued Capacity

Syndicated Credit Facility (a) (b) $ 400 $ 400

Letters of

Credit Issued

and

Committed

Commercial

Unused

Capacity

Borrowed

Paper Backup

Capacity

Syndicated Credit Facility (a) (b)

500

430

(a)	The commitments under LG&E's Syndicated Credit Facility are provided by a diverse bank group, with no one bank and its affiliates providing an aggregate commitment of more than 6% of the total committed capacity available to LG&E.

(b)

~~In November 2012,~~ LG&E ~~amended the~~pays customary fees under its syndicated credit facility, ~~to extend the expiration date to November 2017. In addition, LG&E increased the credit facility capacity to $500 million.~~and borrowings generally bear interest at LIBOR-based rates plus an applicable margin.

See Note 7 to the Financial Statements for further discussion of LG&E's credit facilities.

145

Long-term Debt Securities

LG&E currently plans to issue, subject to market conditions, up to $350 million of first mortgage bond indebtedness in 2013, the proceeds of which will be used to fund capital expenditures and for other general corporate purposes.

See Note 7 to the Financial Statements for additional information about long-term debt securities.

Rating Agency Actions

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

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

~~As a result~~markets 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 following~~did not take any actions related to LG~~&E:~~&E during the first quarter of 2013.

~~In February 2012, Fitch assigned ratings to LG&E's newly established commercial paper program.~~

~~In March 2012, Moody's affirmed the following ratings:~~

·	~~the long-term ratings of the First Mortgage Bonds for LG&E;~~

·	~~the issuer ratings for LG&E; and~~

·	~~the bank loan ratings for LG&E.~~

~~Also in March 2012, Moody's and S&P each assigned short-term ratings to LG&E's newly established commercial paper program.~~

~~In March and May 2012, Moody's, S&P and Fitch affirmed the long-term ratings for LG&E's 2003 Series A and 2007 Series B pollution control bonds.~~

~~168~~

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 September 30, 2012. At September 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 $62 million for both derivative and non-derivative commodity and commodity-related contracts used in its generation and marketing operations, gas supply and interest rate contracts.March 31, 2013.

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.

Commodity Price Risk (Non-trading)

LG&E's rates are set by a regulatory ~~commission~~commissions and the fuel costs incurred are directly recoverable from customers. As a result, LG&E is subject to commodity price risk for only a small portion of on-going business operations. LG&E ~~conducts energy trading and risk management activities~~sells excess economic generation to maximize the value of the physical assets at times when the assets are not required to serve LG&E's or KU's customers. See Note 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 ~~September 30, 2012,~~March 31, 2013, LG&E's potential annual exposure to increased interest expense, based on a 10% increase in interest rates, was not significant.

LG&E is also exposed to changes in the fair value of its debt portfolio. LG&E estimated that a 10% decrease in interest rates at ~~September 30, 2012,~~March 31, 2013, would increase the fair value of its debt portfolio by $27 million.

At September 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 $ (62) $ (3)

146

At March 31, 2013, LG&E had the following interest rate hedges outstanding:

						Effect of a
						10% Adverse
				Fair Value,		Movement
		Exposure		Net - Asset		in Interest
		Hedged		(Liability) (a)		Rates
Economic activity
	Interest rate swaps (b)	$	179	$	(55)	$	(3)
Cash flow hedges
	Interest rate swaps (b)		150		12		(8)

(a)	Includes accrued interest.

(b)

LG&E utilizes various risk management instruments to reduce its exposure to the expected future cash flow variability of its debt instruments. These risks include exposure to adverse interest rate movements for outstanding variable rate debt and for future anticipated financing. While LG&E is exposed to changes in the fair value of these instruments, any realized changes in the fair value of such economic positions and cash flow hedges are recoverable through regulated rates and any subsequent changes in fair value of these derivatives are included in regulatory assets or liabilities. ~~Sensitivities represent a 10% adverse movement in interest rates.~~ The positions outstanding at ~~September 30, 2012~~March 31, 2013 mature through ~~2033.~~2043.

~~169~~

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 LG&E's ~~2011~~2012 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, ~~among~~as well as other ~~areas, and the costs~~aspects 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 ~~costs~~cost for their products or their demand for LG&E's services.

Physical effects associated with climate change could include the impact of changes in weather patterns, such as storm frequency and intensity, and the resultant potential damage to LG&E's generation assets, electricity transmission and distribution systems, as well as impacts on customers. In addition, changed weather patterns could potentially reduce annual rainfall in areas where LG&E has hydro generating facilities or where river water is used to cool its fossil-powered generators. LG&E cannot currently predict whether its businesses will experience these potential climate change-related risks or estimate the potential costs of their related consequences.

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

Coal Combustion Residuals (CCRs)

147

Effluent Limitation Guidelines

On April 19, 2013, the EPA issued proposed regulations to revise discharge limitations for steam electric generation wastewater permits. The proposed limitations are based on the EPA review of available treatment technologies and their capacity for reducing pollutants and include new requirements for fly ash and bottom ash handling and metal cleaning wastes as well as new limits for scrubber wastewater, gasification wastewater and landfill leachate. The proposal contains several alternative approaches, some of which could significantly impact LG&E's coal-fired plants. LG&E will comment on the proposed regulation. The final regulation is expected in May 2014. At the present time, LG&E is unable to predict the outcome of this matter or estimate a range of reasonably possible costs, but the costs could be significant.

316(b) Cooling Water Intake Structure Rule

In April 2011, the EPA published a draft regulation under Section 316(b) of the Clean Water Act, which regulates cooling water intakes for power plants. The draft rule has two provisions: one requires installation of Best Technology Available (BTA) to reduce mortality of aquatic organisms that are pulled into the plant cooling water system (entrainment), and the second imposes standards for reduction of mortality of aquatic organisms trapped on water intake screens (impingement). A final rule is expected in June 2013. The proposed regulation would apply to nearly all LG&E-owned steam electric plants in Kentucky, potentially even including those equipped with closed-cycle cooling systems.

GHG Regulations

In 2013, the EPA is expected to finalize limits on GHG emissions from new power plants and to begin working on a proposal for such emissions from existing power plants. The EPA's proposal on GHG emissions from new power plants would effectively preclude construction of any coal-fired plants and could even be difficult for new gas-fired plants to meet. With respect to existing power plants, the impact could be very significant, depending on the structure and stringency of the final rule. On behalf of LG&E, PPL, along with others in the industry, filed comments on the EPA's proposal related to GHG emissions from new plants.

MATS

The EPA finalized MATS requiring fossil-fuel fired plants to reduce emissions of mercury and other hazardous air pollutants by April 16, 2015. The rule is being challenged by industry groups and states. The EPA has subsequently proposed changes to the rule with respect to new sources to address the concern that the rule effectively precludes construction of any new coal-fired plants. LG&E is generally well-positioned to comply with MATS, primarily due to recent investments in environmental controls and approved ECR plans to install additional controls at some of its Kentucky plants. LG&E is evaluating, among other measures, chemical additive systems for mercury control at Trimble County plant. The anticipated retirements of certain coal-fired electric generating units is in response to this and other environmental regulations.

CSAPR and CAIR

In 2011, the EPA finalized its CSAPR regulating emissions of nitrous oxide and sulfur dioxide through new allowance trading programs which were to be implemented in two phases (2012 and 2014). Like its predecessor, the CAIR, CSAPR targeted sources in the eastern United States. In December 2011, the U.S. Court of Appeals for the District of Columbia Circuit (the Court) stayed implementation of CSAPR, leaving CAIR in place. Subsequently, in August 2012, the Court vacated and remanded CSAPR back to the EPA for further rulemaking, again leaving CAIR in place. LG&E plants in Kentucky will continue to comply with CAIR through optimization of existing controls, balanced with emission allowance purchases. The Court's August decision leaves plants in CSAPR-affected states potentially exposed to more stringent emission reductions due to regional haze implementation (it was previously determined that CSAPR or CAIR participation satisfies regional haze requirements), and/or petitions to the EPA by downwind states under Section 126 of the Clean Air Act requesting the EPA to require plants that allegedly contribute to downwind non-attainment to take action to reduce emissions.

National Ambient Air Quality Standards

During 2010 and 2012, the EPA issued new ambient air standards for sulfur dioxide and particulates, respectively. In 2013, the EPA preliminarily designated Jefferson County, Kentucky, as a partial non-attainment area for sulfur dioxide. Final designations of non-attainment areas may occur in 2013 and 2014, respectively. Existing environmental plans for LG&E's Kentucky plants, including announced retirements of certain plants and ECR-approved new or upgraded scrubbers or baghouses at other plants, may aid in achievement of eventual ambient air requirements. However, depending upon the specifics of final non-attainment designations and consequent compliance plans, additional controls may be required, the financial impact of which could be significant.

See Note 10 to the Financial Statements in this Form 10-Q report and "Item 1. Business - Environmental Matters" in LG&E's ~~2011~~2012 Form 10-K ~~and Note 10 to the Financial Statements~~ for a discussion of environmental matters.

148

New Accounting Guidance

See Notes 2 and 1819 to the Financial Statements for a discussion of new accounting guidance adopted and pending adoption.

Application of Critical Accounting Policies

Financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies. The following accounting policies are particularly important to the financial condition or results of operations and require estimates or other judgments of matters inherently uncertain: revenue recognition - unbilled revenue, ~~price risk management,~~ defined benefits, asset impairment (excluding investments), loss accruals, AROs, income taxes, and regulatory assets and liabilities. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in LG&E's ~~2011~~2012 Form 10-K for a discussion of each critical accounting policy.

~~170~~149

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 ~~2011~~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 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 nine~~ months ended ~~September 30, 2012~~March 31, 2013 with ~~the same periods in 2011.~~2012.

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

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

Overview

Introduction

KU, headquartered in Lexington, Kentucky, is a regulated utility engaged in the generation, transmission, distribution and sale of ~~electricity,~~electric energy in Kentucky, Virginia and Tennessee. KU and its affiliate, LG&E, are wholly owned subsidiaries of LKE. LKE is an intermediary holding company in PPL's group of companies.

Business Strategy

KU's overall strategy is to provide reliable, safe, ~~and~~ competitively priced energy to its ~~customers.~~customers and reasonable returns on regulated investments to its shareowner.

A key objective for KU is to maintain a strong credit profile through managing financing costs and access to credit markets. KU continually focuses on maintaining an appropriate capital structure and liquidity position.

Financial and Operational Developments

Net Income

Net Income for the three ~~and nine~~ months ended ~~September 30, 2012~~March 31, 2013 was ~~$50 million and $118~~$64 million compared to ~~$56~~$38 million ~~and $144 million for the same periods~~ in ~~2011~~2012 representing ~~decreases of 11% and 18% from the same periods in 2011.~~a 68% increase over 2012.

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

~~Terminated Bluegrass CTs Acquisition~~Rate Case Proceedings

In September 2011, KU and LG&E entered into an asset purchase agreement with Bluegrass Generation for the purchase of the Bluegrass CTs, aggregating approximately 495 MW, plus limited associated contractual arrangements required for operation of the units, for a purchase price of $110 million, pending receipt of applicable regulatory approvals. In MayDecember 2012, the KPSC ~~issued an order approving the request to purchase the Bluegrass CTs. Also~~approved a rate case settlement agreement providing for increases in ~~May 2012, the FERC issued an order conditionally authorizing the acquisition~~annual base electricity rates of ~~the Bluegrass CTs, subject to approval by the FERC of satisfactory mitigation measures to address market-power concerns. After~~$51 million using a review of potentially available mitigation options, KU and LG&E determined that the options were not commercially justifiable. In June 2012, KU and LG&E terminated the asset purchase agreement for the Bluegrass CTs in accordance with its terms and made applicable filings with the KPSC and FERC. KU and LG&E are currently assessing the impact of the asset purchase agreement termination and potential future generation capacity options.

~~171~~

~~NGCC Construction~~

In September 2011, KU and LG&E filed a CPCN with the KPSC requesting approval to build a 640 MW NGCC at the existing Cane Run plant site in Kentucky. In May 2012, the KPSC issued an order approving the request. KU will own a 78% undivided interest and LG&E will own a 22% undivided interest in the new NGCC. KU and LG&E commenced preliminary construction activities in the third quarter of 2012 and project construction is expected to be completed by May 2015.10.25% return on equity. The ~~project, which includes building a natural gas supply pipeline and related transmission projects, has an estimated cost of approximately $600 million.~~

In conjunction with this construction and to meet new, more stringent federal EPA regulations with a 2015 compliance date, KU and LG&E anticipate retiring six older coal-fired electric generating units at the Cane Run, Green River and Tyrone plants, which have a combined summer capacity rating of 797 MW.

~~Capital Expenditures~~

Capital expenditure plans are revised periodically to reflect changes in operational, market and regulatory conditions. KU has lowered its projected environmental capital spending for the period 2012 through 2016 by approximately $0.1 billion from the previously disclosed $1.5 billion projection included in KU's 2011 Form 10-K. The lower projected capital spending is based on current project evaluations and pricing contained in contracts executed to date for environmental construction projects. KU continues to evaluate potential new generation supply sources, including self-build options and power sourced from the market, as alternatives to installing additional emission control equipment at E.W. Brown, which is jointly dispatched for KU and LG&E, and in lieu of the terminated Bluegrass CTs acquisition discussed in Notes 6 and 8 to the Financial Statements. KU expects to complete its evaluation during the first half ofapproved rates became effective January 1, 2013. ~~The outcome of that evaluation may lead to additional changes in projected capital spending.~~

~~Commercial Paper~~

In February 2012, KU established a commercial paper program for up to $250 million to provide an additional financing source to fund its short-term liquidity needs, if and when necessary. Commercial paper issuances are supported by KU's Syndicated Credit Facility. KU had no commercial paper outstanding at September 30, 2012.

Results of Operations

The following discussion provides a summary of KU's earnings and a description of key factors ~~that management expects may~~expected 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 nine~~ months ended ~~September 30, 2012~~March 31, 2013 with ~~the same periods in 2011.~~2012.

150

Earnings

Net Income for the periods ended September 30 was:
Net Income for the periods ended March 31 was:										Net Income for the periods ended March 31 was:

		Three Months				Nine Months					Three Months
		2012		2011		2012		2011			2013		2012

Net Income	Net Income	$	50	$	56	$	118	$	144	Net Income	$	64	$	38

The changes in the components of Net Income between these periods were due to the following factors, which reflect reclassifications for items included in ~~margins.~~

~~172~~

Three Months Nine Months

Margin $ (5) $ (17)
Other operation and maintenance (1) (8)
Depreciation (2) (5)
Other (1) (2)
Other Income (Expense) - net 1 (6)
Income Taxes 2 12
Total $ (6) $ (26)
Margins.

		Three Months

Margins		$	53
Depreciation			(10)
Other Income (Expense) - net			(1)
Income Taxes			(17)
Special item - EEI adjustments, after-tax	��		1
Total		$	26

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

Higher ~~other operation and maintenance for the nine-month period primarily~~depreciation due to ~~a $6 million credit recorded in 2011 to establish a regulatory asset~~environmental costs related to ~~2009 storm costs.~~the elimination of the 2005 and 2006 ECR plans now being included in base rates, which added $12 million to depreciation that is excluded from Margins, partially offset by lower depreciation of $3 million due to revised rates that were effective January 1, 2013. Both of these events are the result of the 2012 Kentucky rate case proceedings.

Higher ~~depreciation for the three and nine-month periods~~income taxes primarily due to ~~PP&E additions.~~

~~Lower other income (expense) - net for the nine-month period primarily due to losses from an equity method investment.~~

~~Lower income taxes for the nine-month period primarily due to lower~~higher pre-tax income.

2013 Outlook

Excluding special items, KU projects ~~lower~~higher earnings in ~~2012~~2013 compared with ~~2011 as a result of~~2012, primarily driven by electric base rate increases, returns on additional environmental capital investments and load growth, partially offset by higher ~~other~~ operation and maintenance ~~expense, higher depreciation, higher property taxes and losses from an equity method investment.~~

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%. In November 2012, the KPSC issued an order for a settlement conference to begin on November 13, 2012. A hearing on the original application and subsequent testimony is scheduled to begin on November 27, 2012. KU cannot predict the outcome of these proceedings, including the possibility of any agreed stipulations or settlement, which would remain subject to KPSC approval. A final order may be issued in December 2012 or January 2013.expense.

Earnings in ~~2012 and~~ future 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 ~~2011~~2012 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." 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.

~~173~~151

Reconciliation of Non-GAAP Financial Measures

The following ~~tables reconcile~~table reconciles "Margins" to "Operating Income" ~~to "Margins"~~ as defined by KU for the periods ended ~~September 30.~~March 31.

2012 Three Months 2011 Three Months
Operating Operating
Margins Other (a) Income (b) Margins Other (a) Income (b)

Operating Revenues $ 411 $ 411 $ 419 $ 1 $ 420
Operating Expenses
Fuel 149 149 147 147
Energy purchases 18 18 25 25
Other operation and maintenance 16 $ 77 93 14 76 90
Depreciation 12 37 49 12 35 47
Taxes, other than income 5 5 5 5
Total Operating Expenses 195 119 314 198 116 314
Total $ 216 $ (119) $ 97 $ 221 $ (115) $ 106

			2012 Nine Months						2011 Nine 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 Revenues	Operating Revenues		$	1,165			$	1,165	$	1,191			$	1,191	Operating Revenues		$	432			$	432	$	380			$	380
Operating Expenses	Operating Expenses														Operating Expenses
	Fuel			396				396		401				401	Fuel			135				135		124				124
	Energy purchases			76				76		85				85	Energy purchases			27				27		29				29
	Other operation and maintenance			41	$	245		286		37	$	237		274	Other operation and maintenance			14	$	83		97		12	$	83		95
	Depreciation			36		109		145		35		104		139	Depreciation					46		46		12		36		48
	Taxes, other than income					17		17				14		14	Taxes, other than income					6		6				6		6
		Total Operating Expenses		549		371		920		558		355		913		Total Operating Expenses		176		135		311		177		125		302
Total	Total		$	616	$	(371)	$	245	$	633	$	(355)	$	278	Total		$	256	$	(135)	$	121	$	203	$	(125)	$	78

(a)	Represents amounts excluded from Margins.

(b)	As reported on the Statements of Income.

Changes in Non-GAAP Financial Measures

Margins ~~decreased~~increased by $5$53 million for the three months ended ~~September 30, 2012~~March 31, 2013 compared with ~~the same period in 2011, primarily~~2012, due to $4higher base rates of $18 million, environmental costs added to base rates of ~~lower retail margins.~~$16 million, higher volumes of $13 million and increased environmental investments of $5 million.

~~Margins decreased by $17 million for~~The increase in base rates was the ~~nine months ended September 30, 2012~~result of new KPSC rates going into effect on January 1, 2013. The increase in volumes was attributable to colder weather in 2013 compared with ~~the same period in 2011, primarily due to $16 million of lower retail margins, as volumes were impacted by unseasonably mild weather during the first four months of~~ 2012. Total heating degree days ~~decreased 21% as compared~~increased 35%. The environmental costs added to base rates was due to the ~~same period~~elimination of the 2005 and 2006 ECR plans as a result of the 2012 Kentucky rate case. This elimination results in ~~2011.~~

~~Other Operation~~depreciation and ~~Maintenance~~

~~Other~~other operation and maintenance ~~increased by $12 million for~~expenses associated with the ~~nine months ended September 30, 2012 compared with 2011, primarily due to a $6 million credit to establish a regulatory asset was recorded~~2005 and 2006 ECR plans being excluded from Margins in ~~the first quarter of 2011 related to 2009 storm costs, and a $5 million increase in coal plant maintenance costs, primarily resulting from an increased scope of scheduled outages.~~

~~Depreciation~~2013.

~~Depreciation increased by $2 million and $6 million for the three and nine months ended September 30, 2012 compared with 2011, primarily due to PP&E additions.~~

Other Operation and Maintenance

The increase (decrease) in other operation and maintenance expense for the period ended March 31, 2013 compared with 2012 was due to:

	Three Months

Coal plant outages (a)	$	(5)
Adjustments to regulatory assets and liabilities		4
Other		3
Total	$	2

~~Other Income (Expense) - net~~

~~Other income (expense) - net decreased by $6 million for the nine months ended September 30, 2012, compared with 2011, primarily due to losses from an equity method investment.~~

(a)	Decrease is due to the timing and scope of scheduled outages.

Income Taxes

Income taxes ~~decreased~~increased by ~~$12~~$17 million for the ~~nine~~three months ended ~~September 30, 2012,~~March 31, 2013 compared with ~~2011,~~2012 primarily due to ~~a $38 million decrease in~~higher pre-tax income.

~~174~~

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

Financial Condition

Liquidity and Capital Resources

KU had the following at:

	September 30, 2012		December 31, 2011		March 31, 2013		December 31, 2012

Cash and cash equivalents	$	42	$	31	$	16	$	21

Short-term debt (a)					$	115	$	70

152

(a)	Represents borrowings made under KU's commercial paper program. See Note 7 to the Financial Statements for additional information.

The ~~$11~~$5 million ~~increase~~decrease in KU's cash and cash equivalents position was the net result of:

·	capital expenditures of $172 million; and

·	the payment of common stock dividends to parent of $13 million; partially offset by

·	cash provided by operating activities of ~~$410~~$85 million; ~~partially offset by~~

·	capital ~~expenditures~~contributions from parent of ~~$331~~$50 million; and

·	~~common stock dividends~~an increase in short term debt of ~~$68~~$45 million.

KU's cash provided by operating activities ~~increased~~decreased by ~~$51~~$67 million for the ~~nine~~three months ended ~~September 30, 2012,~~March 31, 2013, compared with ~~2011,~~2012, primarily due to:

~~a decrease~~an increase in cash outflows ~~for accounts payable to affiliates~~from other operating activities of ~~$17~~$61 million ~~primarily as a result of payables to LG&E for TC2 coal inventory and other shared costs, partially offset~~driven by a ~~decrease in income tax settlements with LKE in 2011;~~

·	~~a decrease in cash outflows of $26~~$43 million ~~due to a reduction~~increase in discretionary defined benefit plan contributions; and

a ~~decrease~~decline in working capital cash flow changes of $49 million driven primarily by changes in accounts receivable and unbilled revenues due to higher sales volumes, higher rates and extended payment terms and a lower federal income tax accrual in 2013 as a result of federal settlement payment, offset by an increase in cash ~~outflows related to accrued taxes of $31 million~~from accounts payable primarily due to ~~the~~ timing of ~~property~~fuel purchase commitments and ~~income tax~~ payments; ~~partially~~ offset by

~~a decrease in cash inflows for accounts receivable of $42 million due to~~ an increase in ~~customer receivables in 2012 resulting from increased revenues in 2012 following unseasonably mild weather in December 2011~~net income adjusted for non-cash items of $43 million (deferred income taxes and ~~the timing~~investment tax credits of ~~cash receipts~~$10 million, amortization of $4 million, other non-cash items of $3 million and ~~payments, and an increase in accounts receivable from affiliates balance for income tax settlements with LKE in 2012.~~defined benefit plans - expense of $2 million offset by depreciation of $2 million)

KU's cash used in investing activities increased by $163 million for the nine months ended September 30, 2012, compared with 2011, due to an increase in capital expenditures of $163 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~~Capital expenditures increased by ~~$32~~$59 million ~~for~~during the ~~nine~~three months ended ~~September 30, 2012,~~March 31, 2013 compared with ~~2011,~~2012 primarily due to ~~lower common stock dividends paid to LKE~~environmental air projects at Ghent and construction of ~~$20 million in 2012.~~Cane Run Unit 7.

Credit Facilities

At ~~September 30, 2012,~~March 31, 2013, KU's committed borrowing capacity under its credit facilities and the use of this borrowing capacity were:

													Letters of
													Credit Issued
													and
		Committed			Letters of		Unused			Committed			Commercial		Unused
		Capacity		Borrowed	Credit Issued		Capacity			Capacity		Borrowed	Paper Backup		Capacity

Syndicated Credit Facility (a)	Syndicated Credit Facility (a)	$	400				$	400	Syndicated Credit Facility (a)	$	400		$	115	$	285
Letter of Credit Facility (b)			198		$	198
Letter of Credit Facility (a) (b)									Letter of Credit Facility (a) (b)		198			198
	Total Credit Facilities (c)	$	598		$	198	$	400	Total Credit Facilities (c)	$	598		$	313	$	285

(a)	~~In November 2012,~~ KU ~~amended the~~pays customary fees under its syndicated credit facility ~~to extend the expiration date to November 2017.~~as well as its letter of credit facility, and borrowings generally bear interest at LIBOR-based rates plus an applicable margin.

(b)	In ~~August 2012, the~~May 2013, KU ~~letter of credit facility agreement was amended and restated to allow for certain payments under the~~extended its $198 million letter of credit facility to ~~be converted to loans rather than requiring immediate payment.~~May 2016.

(c)	The commitments under KU's credit facilities are provided by a diverse bank group, with no one bank and its affiliates providing an aggregate commitment of more than 19% of the total committed capacity available to KU.

See ~~Notes~~Note 7 ~~and 11~~ to the Financial Statements for further discussion of KU's credit facilities.

Long-term Debt Securities

KU currently plans to issue, subject to market conditions, up to $300 million of first mortgage bond indebtedness in 2013, the proceeds of which will be used to fund capital expenditures and for other general corporate purposes.

See Note 7 to the Financial Statements for additional information about long-term debt securities.

~~175~~153

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's~~The credit ratings ~~could result in higher borrowing costs and reduced~~of KU affect its liquidity, access to capital ~~markets.~~

~~As a result~~markets 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, KU is limitingborrowing under 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.facilities.

The rating agencies ~~took the following~~did not take any actions related to ~~KU:~~

~~In February 2012, Fitch assigned ratings to KU's newly established commercial paper program.~~

~~In March 2012, Moody's affirmed~~KU during the ~~following ratings:~~

·	~~the long-term ratings of the First Mortgage Bonds for KU;~~

·	~~the issuer ratings for KU; and~~

·	~~the bank loan ratings for KU.~~

~~Also in March 2012, Moody's and S&P each assigned short-term ratings to KU's newly established commercial paper program.~~first quarter of 2013.

Ratings Triggers

KU has various derivative and non-derivative contracts, including contracts for the sale and purchase of electricity, fuel, and commodity transportation and storage, which contain provisions requiring KU to post additional collateral, or permitting the counterparty to terminate the contract, if KU's credit rating were to fall below investment grade. See Note 14 to the Financial Statements for a discussion of "Credit Risk-Related Contingent Features," including a discussion of the potential additional collateral that would have been required for derivative contracts in a net liability position at September 30, 2012. At September 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 $25 million for both derivative and non-derivative commodity and commodity-related contracts used in its generation and marketing operations.March 31, 2013.

Risk Management

Market Risk

See Notes 13 and 14 to the Financial Statements for information about KU's risk management objectives, valuation techniques and accounting designations.

~~176~~

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 activities~~sells excess economic generation to maximize the value of the physical assets at times when the assets are not required to serve ~~KU's~~LG&E's or ~~LG&E's~~KU's customers. See Note 14 to the Financial Statements for additional disclosures.

Interest Rate Risk

KU issues debt to finance its operations, which exposes it to interest rate risk. KU utilizes various financial derivative instruments to adjust the mix of fixed and floating interest rates in its debt portfolio when appropriate. Risk limits under KU's risk management program are designed to balance risk, exposure to volatility in interest expense and changes in the fair value of KU's debt portfolio due to changes in the absolute level of interest rates.

At ~~September 30, 2012,~~March 31, 2013, KU's potential annual exposure to increased interest expense, based on a 10% increase in interest rates, was not significant.

KU is also exposed to changes in the fair value of its debt portfolio. KU estimated that a 10% decrease in interest rates at ~~September 30, 2012,~~March 31, 2013, would increase the fair value of its debt portfolio by ~~$70~~$68 million.

At March 31, 2013, KU had the following interest rate hedges outstanding:

						Effect of a
						10% Adverse
				Fair Value,		Movement
		Exposure		Net - Asset		in Interest
		Hedged		(Liability)		Rates
Cash flow hedges
	Interest rate swaps (a)	$	150	$	12	$	(8)

154

(a)

KU utilizes various risk management instruments to reduce its exposure to the expected future cash flow variability of its debt instruments. These risks include exposure to adverse interest rate movements for outstanding variable rate debt and for future anticipated financing. While KU is exposed to changes in the fair value of these instruments, any realized changes in the fair value of such cash flow hedges are recoverable through regulated rates and any subsequent changes in fair value of these derivatives are included in regulatory assets or liabilities. The positions outstanding at March 31, 2013 mature through 2043.

Credit Risk

See Notes 13 and 14 to the Financial Statements in this Form 10-Q and "Risk Management - Energy Marketing & Trading and Other - Credit Risk" in KU's ~~2011~~2012 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, ~~among~~as well as other ~~areas, and the costs~~aspects 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 ~~costs~~cost for their products or their demand for KU's services.

Physical effects associated with climate change could include the impact of changes in weather patterns, such as storm frequency and intensity, and the resultant potential damage to KU's generation assets, electricity transmission and distribution systems, as well as impacts on customers. In addition, changed weather patterns could potentially reduce annual rainfall in areas where KU has hydro generating facilities or where river water is used to cool its fossil-powered generators. KU cannot currently predict whether its businesses will experience these potential climate change-related risks or estimate the potential costs of their related consequences.

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

Coal Combustion Residuals (CCRs)

Effluent Limitation Guidelines

On April 19, 2013, the EPA issued proposed regulations to revise discharge limitations for steam electric generation wastewater permits. The proposed limitations are based on the EPA review of available treatment technologies and their capacity for reducing pollutants and include new requirements for fly ash and bottom ash handling and metal cleaning wastes as well as new limits for scrubber wastewater, gasification wastewater and landfill leachate. The proposal contains several alternative approaches, some of which could significantly impact KU's coal-fired plants. KU will comment on the proposed regulation. The final regulation is expected in May 2014. At the present time, KU is unable to predict the outcome of this matter or estimate a range of reasonably possible costs, but the costs could be significant.

316(b) Cooling Water Intake Structure Rule

In April 2011, the EPA published a draft regulation under Section 316(b) of the Clean Water Act, which regulates cooling water intakes for power plants. The draft rule has two provisions: one requires installation of Best Technology Available (BTA) to reduce mortality of aquatic organisms that are pulled into the plant cooling water system (entrainment), and the second imposes standards for reduction of mortality of aquatic organisms trapped on water intake screens (impingement). A final rule is expected in June 2013. The proposed regulation would apply to nearly all KU-owned steam electric plants in Kentucky, potentially even including those equipped with closed-cycle cooling systems.

155

GHG Regulations

In 2013, the EPA is expected to finalize limits on GHG emissions from new power plants and to begin working on a proposal for such emissions from existing power plants. The EPA's proposal on GHG emissions from new power plants would effectively preclude construction of any coal-fired plants and could even be difficult for new gas-fired plants to meet. With respect to existing power plants, the impact could be very significant, depending on the structure and stringency of the final rule. On behalf of KU, PPL, along with others in the industry, filed comments on the EPA's proposal related to GHG emissions from new plants.

MATS

The EPA finalized MATS requiring fossil-fuel fired plants to reduce emissions of mercury and other hazardous air pollutants by April 16, 2015. The rule is being challenged by industry groups and states. The EPA has subsequently proposed changes to the rule with respect to new sources to address the concern that the rule effectively precludes construction of any new coal-fired plants. KU is generally well-positioned to comply with MATS, primarily due to recent investments in environmental controls and approved ECR plans to install additional controls at some of its Kentucky plants. KU is evaluating, among other measures, chemical additive systems for mercury control at Trimble County and Brown plants. The anticipated retirements of certain coal-fired electric generating units is in response to this and other environmental regulations.

CSAPR and CAIR

In 2011, the EPA finalized its CSAPR regulating emissions of nitrous oxide and sulfur dioxide through new allowance trading programs which were to be implemented in two phases (2012 and 2014). Like its predecessor, the CAIR, CSAPR targeted sources in the eastern United States. In December 2011, the U.S. Court of Appeals for the District of Columbia Circuit (the Court) stayed implementation of CSAPR, leaving CAIR in place. Subsequently, in August 2012, the Court vacated and remanded CSAPR back to the EPA for further rulemaking, again leaving CAIR in place. KU plants in Kentucky will continue to comply with CAIR through optimization of existing controls, balanced with emission allowance purchases. The Court's August decision leaves plants in CSAPR-affected states potentially exposed to more stringent emission reductions due to regional haze implementation (it was previously determined that CSAPR or CAIR participation satisfies regional haze requirements), and/or petitions to the EPA by downwind states under Section 126 of the Clean Air Act requesting the EPA to require plants that allegedly contribute to downwind non-attainment to take action to reduce emissions.

National Ambient Air Quality Standards

During 2010 and 2012, the EPA issued new ambient air standards for sulfur dioxide and particulates, respectively. In 2013, the EPA preliminarily designated Jefferson County, Kentucky, as a partial non-attainment area for sulfur dioxide. Final designations of non-attainment areas may occur in 2013 and 2014, respectively. Existing environmental plans for KU's Kentucky plants, including announced retirements of certain plants and ECR-approved new or upgraded scrubbers or baghouses at other plants, may aid in achievement of eventual ambient air requirements. However, depending upon the specifics of final non-attainment designations and consequent compliance plans, additional controls may be required, the financial impact of which could be significant.

See Note 10 to the Financial Statements in this Form 10-Q report and "Item 1. Business - Environmental Matters" in KU's ~~2011~~2012 Form 10-K ~~and Note 10 to the Financial Statements~~ for a discussion of environmental matters.

New Accounting Guidance

See Notes 2 and 1819 to the Financial Statements for a discussion of new accounting guidance adopted and pending adoption.

Application of Critical Accounting Policies

Financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies. The following accounting policies are particularly important to the financial condition or results of operations and require estimates or other judgments of matters inherently uncertain: revenue recognition - unbilled revenue, ~~price risk management,~~ defined benefits, asset impairment (excluding investments), loss accruals, AROs, income taxes, and regulatory assets and liabilities. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in KU's ~~2011~~2012 Form 10-K for a discussion of each critical accounting policy.

~~177~~156

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 ~~September 30, 2012,~~March 31, 2013, the registrants' disclosure controls and procedures are effective to ensure that material information relating to the registrants and their consolidated subsidiaries is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms, particularly during the period for which this quarterly report has been prepared. The aforementioned principal officers have concluded that the disclosure controls and procedures are also effective to ensure that information required to be disclosed in reports filed under the Exchange Act is accumulated and communicated to management, including the principal executive and principal financial officers, to allow for timely decisions regarding required disclosure.

(b) Change in internal controls over financial reporting.

PPL Corporation,

The registrant's principal executive officer and principal financial officer have concluded that there were no changes in the registrant's internal control over financial reporting during the registrant's third 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 systems migration were partially mitigated by PPL's expanded internal control over financial reporting that were implemented subsequent to the acquisition and PPL's existing policy of consolidating foreign subsidiaries on a one-month lag, which provided management additional time for review and analysis of WPD Midlands' results and their incorporation into PPL's consolidated financial statements.

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

The registrants' principal executive officers and principal financial officers have concluded that there were no changes in the registrants' internal control over financial reporting during the registrants' ~~third~~first fiscal quarter that have materially affected, or are reasonably likely to materially affect, the registrants' internal control over financial reporting.

~~178~~

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 ~~2011~~2012 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 ~~2011~~2012 Form 10-K.

Item 4. Mine Safety Disclosures

Not applicable.

~~179~~157

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.

4(a)	-	Supplemental Indenture No. ~~14,~~4, dated as of August 1, 2012, made and entered into by and between PPL Electric Utilities Corporation and The Bank of New York Mellon, as Trustee, under the Indenture dated as of August 1, 2001 (Exhibit 4(a) to PPL Corporation Form 8-K Report (File No. 1-11459) dated August 24, 2012)
~~4(b)~~	-	~~Supplemental Indenture No. 9, dated as of October~~March 15, ~~2012,~~2013, among PPL Capital Funding, Inc., PPL Corporation and The Bank of New York Mellon ~~(as successor to JPMorgan Chase Bank, N. A.~~ (formerly known as The ~~Chase Manhattan Bank))~~Bank of New York), as Trustee (Exhibit 4(b) to PPL Corporation Form 8-K Report (File No. 1-11459) dated ~~October~~March 15, ~~2012)~~2013)
*10(a)	-	Amendment No. ~~6 to Credit and Security Agreement,~~1, dated as of ~~July 24, 2012, by~~May 1, 2013, to $198,309,583.05 Amended and ~~among PPL Receivables Corporation, as Borrower, PPL Electric Utilities Corporation, as Servicer, Victory Receivables Corporation, as a Lender, and The Bank~~Restated Letter of ~~Tokyo-Mitsubishi UFJ, Ltd., New York Branch, as Liquidity Bank and as Agent~~
*10(b)	-	~~Amendment No. 7 to~~ Credit and Security Agreement, dated as of September 24, 2012, by and among PPL Receivables Corporation, as Borrower, PPL Electric Utilities Corporation, as Servicer, Victory Receivables Corporation, as a Lender, and The Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch, as Liquidity Bank and as Agent
*10(c)	-	~~Amendment and Restatement~~ Agreement dated as of August 16, 2012 ~~to Letter of Credit Agreement, dated as of April 29, 2011, as amended,~~ among Kentucky Utilities Company, ~~the Borrower;~~ the Lenders from time to time party thereto, ~~the Lenders;~~and Banco Bilbao Vizcaya Argentaria, S.A., New York Branch, ~~the~~as Administrative Agent and Sumitomo Mitsui Banking Corporation, New York Branch ~~the~~as Issuing Lender ~~and Lender~~
*~~12(a)~~10(b)	-	Amendment No. 2, dated as of May 1, 2013, to $198,309,583.05 Amended and Restated Letter of Credit Agreement dated as of August 16, 2012 among Kentucky Utilities Company, the Lenders from time to time party thereto, Sumitomo Mitsui Banking Corporation, New York Branch, as successor Administrative Agent and Sumitomo Mitsui Banking Corporation, New York Branch as Issuing Lender
*12(a)	-	PPL Corporation and Subsidiaries Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
*12(b)	-	PPL Energy Supply, LLC and Subsidiaries Computation of Ratio of Earnings to Fixed Charges
*12(c)	-	PPL Electric Utilities Corporation and Subsidiaries Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
*12(d)	-	LG&E and KU Energy LLC and Subsidiaries Computation of Ratio of Earnings to ~~Combined~~ Fixed Charges ~~and Preferred Stock Dividends~~
*12(e)	-	Louisville Gas and Electric Company Computation of Ratio of Earnings to ~~Combined~~ Fixed Charges ~~and Preferred Stock Dividends~~
*12(f)	-	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 ~~September 30, 2012,~~March 31, 2013, filed by the following officers for the following companies:

*31(a)	-	PPL Corporation's principal executive officer
*31(b)	-	PPL Corporation's principal financial officer
*31(c)	-	PPL Energy Supply, LLC's principal executive officer
*31(d)	-	PPL Energy Supply, LLC's principal financial officer
*31(e)	-	PPL Electric Utilities Corporation's principal executive officer
*31(f)	-	PPL Electric Utilities Corporation's principal financial officer
*31(g)	-	LG&E and KU Energy LLC's principal executive officer
*31(h)	-	LG&E and KU Energy LLC's principal financial officer
*31(i)	-	Louisville Gas and Electric Company's principal executive officer
*31(j)	-	Louisville Gas and Electric Company's principal financial officer

~~180~~

*31(k)	-	Kentucky Utilities Company's principal executive officer
*31(l)	-	Kentucky Utilities Company's principal financial officer

158

Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, for the quarterly period ended ~~September 30, 2012,~~March 31, 2013, furnished by the following officers for the following companies:

*32(a)	-	PPL Corporation's principal executive officer and principal financial officer
*32(b)	-	PPL Energy Supply, LLC's principal executive officer and principal financial officer
*32(c)	-	PPL Electric Utilities Corporation's principal executive officer and principal financial officer
*32(d)	-	LG&E and KU Energy LLC's principal executive officer and principal financial officer
*32(e)	-	Louisville Gas and Electric Company's principal executive officer and principal financial officer
*32(f)	-	Kentucky Utilities Company's principal executive officer 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

~~181~~159

SIGNATURES~~SIGNATURES~~

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: ~~November 8, 2012~~May 3, 2013	/s/ Vincent Sorgi
	Vincent Sorgi
	Vice President and Controller
	(Principal Accounting Officer)



	PPL Electric Utilities Corporation
	(Registrant)



Date: ~~November 8, 2012~~May 3, 2013	/s/ Vincent Sorgi
	Vincent Sorgi
	Vice President and
	Chief Accounting Officer
	(Principal Financial and Accounting Officer)

	LG&E and KU Energy LLC
	(Registrant)

	Louisville Gas and Electric Company
	(Registrant)

	Kentucky Utilities Company
	(Registrant)



Date: ~~November 8, 2012~~May 3, 2013	/s/ Kent W. Blake
	Kent W. Blake Chief Financial Officer
	(Principal Financial Officer and Principal Accounting Officer)

~~182~~160

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 ~~September 30, 2012~~March 31, 2013
OR
[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from _________ to ___________

Commission File Number	Registrant; State of Incorporation; Address and Telephone Number	IRS Employer Identification No.

1-11459	PPL Corporation (Exact name of Registrant as specified in its charter) (Pennsylvania) Two North Ninth Street Allentown, PA 18101-1179 (610) 774-5151	23-2758192

1-32944	PPL Energy Supply, LLC (Exact name of Registrant as specified in its charter) (Delaware) Two North Ninth Street Allentown, PA 18101-1179 (610) 774-5151	23-3074920

1-905	PPL Electric Utilities Corporation (Exact name of Registrant as specified in its charter) (Pennsylvania) Two North Ninth Street Allentown, PA 18101-1179 (610) 774-5151	23-0959590

333-173665	LG&E and KU Energy LLC (Exact name of Registrant as specified in its charter) (Kentucky) 220 West Main Street Louisville, KY 40202-1377 (502) 627-2000	20-0523163

1-2893	Louisville Gas and Electric Company (Exact name of Registrant as specified in its charter) (Kentucky) 220 West Main Street Louisville, KY 40202-1377 (502) 627-2000	61-0264150

1-3464	Kentucky Utilities Company (Exact name of Registrant as specified in its charter) (Kentucky and Virginia) One Quality Street Lexington, KY 40507-1462 (502) 627-2000	61-0247570

	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 ]	[ ]

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


GLOSSARY OF TERMS AND ABBREVIATIONS				i
FORWARD-LOOKING INFORMATION				1
PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
		PPL Corporation and Subsidiaries
			Condensed Consolidated Statements of Income	3
			Condensed Consolidated Statements of Comprehensive Income	4
			Condensed Consolidated Statements of Cash Flows	5
			Condensed Consolidated Balance Sheets	6
			Condensed Consolidated Statements of Equity	8
		PPL Energy Supply, LLC and Subsidiaries
			Condensed Consolidated Statements of Income	9
			Condensed Consolidated Statements of Comprehensive Income	10
			Condensed Consolidated Statements of Cash Flows	11
			Condensed Consolidated Balance Sheets	12
			Condensed Consolidated Statements of Equity	14
		PPL Electric Utilities Corporation and Subsidiaries
			Condensed Consolidated Statements of Income	16
			Condensed Consolidated Statements of Cash Flows	17
			Condensed Consolidated Balance Sheets	18
			Condensed Consolidated Statements of Shareowners' Equity	20
		LG&E and KU Energy LLC and Subsidiaries
			Condensed Consolidated Statements of Income	22
			Condensed Consolidated Statements of Cash Flows	23
			Condensed Consolidated Balance Sheets	24
			Condensed Consolidated Statements of Equity	26

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

	PPL Corporation	Common stock, $0.01 par value, ~~581,705,916~~592,339,687 shares outstanding at ~~October 31, 2012.~~April 30, 2013.

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

	PPL Electric Utilities Corporation	Common stock, no par value, 66,368,056 shares outstanding and all held by PPL Corporation at ~~October 31, 2012.~~April 30, 2013.

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

	Louisville Gas and Electric Company	Common stock, no par value, 21,294,223 shares outstanding and all held by LG&E and KU Energy LLC at ~~October 31, 2012.~~April 30, 2013.

	Kentucky Utilities Company	Common stock, no par value, 37,817,878 shares outstanding and all held by LG&E and KU Energy LLC at ~~October 31, 2012.~~April 30, 2013.

CONDENSED CONSOLIDATED BALANCE SHEETS													PPL Corporation and Subsidiaries	(Unaudited)	(Millions of Dollars, shares in thousands)
			September 30,		December 31,				March 31,		December 31,
			2012		2011				2013		2012
Liabilities and Equity	Liabilities and Equity						Liabilities and Equity

Current Liabilities	Current Liabilities						Current Liabilities
	Short-term debt		$	526	$	578	Short-term debt		$	1,061	$	652
	Long-term debt due within one year			313			Long-term debt due within one year			751		751
	Accounts payable			1,071		1,214	Accounts payable			1,071		1,252
	Taxes			95		65	Taxes			138		90
	Interest			335		287	Interest			352		325
	Dividends			210		207	Dividends			215		210
	Price risk management liabilities			1,184		1,570	Price risk management liabilities			972		1,065
	Regulatory liabilities			65		73	Regulatory liabilities			61		61
	Other current liabilities			1,088		1,261	Other current liabilities			1,029		1,219
	Total Current Liabilities			4,887		5,255	Total Current Liabilities			5,650		5,625

Long-term Debt	Long-term Debt			18,711		17,993	Long-term Debt			18,881		18,725

Deferred Credits and Other Noncurrent Liabilities	Deferred Credits and Other Noncurrent Liabilities						Deferred Credits and Other Noncurrent Liabilities
	Deferred income taxes			3,705		3,326	Deferred income taxes			3,577		3,387
	Investment tax credits			315		285	Investment tax credits			340		328
	Price risk management liabilities			884		840	Price risk management liabilities			533		629
	Accrued pension obligations			1,086		1,313	Accrued pension obligations			1,596		2,076
	Asset retirement obligations			500		484	Asset retirement obligations			540		536
	Regulatory liabilities			999		1,010	Regulatory liabilities			1,016		1,010
	Other deferred credits and noncurrent liabilities			921		1,046	Other deferred credits and noncurrent liabilities			666		820
	Total Deferred Credits and Other Noncurrent Liabilities			8,410		8,304	Total Deferred Credits and Other Noncurrent Liabilities			8,268		8,786

Commitments and Contingent Liabilities (Notes 6 and 10)
Commitments and Contingent Liabilities (Notes 5, 6 and 10)							Commitments and Contingent Liabilities (Notes 5, 6 and 10)

Equity	Equity						Equity
	PPL 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		6,912		6,813		Additional paid-in capital		6,988		6,936
		Earnings reinvested		5,335		4,797		Earnings reinvested		5,676		5,478
		Accumulated other comprehensive loss		(1,039)		(788)		Accumulated other comprehensive loss		(2,146)		(1,940)
		Total PPL Shareowners' Common Equity		11,214		10,828		Total PPL Shareowners' Common Equity		10,524		10,480
	Noncontrolling Interests			18		268	Noncontrolling Interests			18		18
	Total Equity			11,232		11,096	Total Equity			10,542		10,498

Total Liabilities and Equity	Total Liabilities and Equity		$	43,240	$	42,648	Total Liabilities and Equity		$	43,341	$	43,634

(Shares in thousands)	(Shares in thousands)	Three Months		Nine Months		(Shares in thousands)	Three Months
							2013	2012
Stock-based compensation plans (a)	Stock-based compensation plans (a)		159		512	Stock-based compensation plans (a)	446	277
ESOP	ESOP				280	ESOP	275	280
DRIP	DRIP		598		1,773	DRIP	549	558

(PPL Energy Supply)	(PPL Energy Supply)											(PPL Energy Supply)

				Three Months				Nine Months						Three Months
				2012		2011		2012		2011				2013		2012
Reconciliation of Income Tax Expense
	Federal income tax on Income from Continuing Operations Before
		Income Taxes at statutory tax rate - 35%		$	25	$	96	$	205	$	272
Federal income tax on Income (Loss) Before Income Taxes at statutory tax rate - 35%												Federal income tax on Income (Loss) Before Income Taxes at statutory tax rate - 35%		$	(26)	$	170
Increase (decrease) due to:	Increase (decrease) due to:											Increase (decrease) due to:
	State income taxes, net of federal income tax benefit				1		11		25		38	State income taxes, net of federal income tax benefit			(6)		23
	State valuation allowance adjustments (a)				2				2		6	Federal income tax credits			(3)		(4)
	Federal and state tax reserve adjustments						1				2	State deferred tax rate change (a)					(11)
	Federal income tax credits				(4)		(5)		(10)		(11)	Other					(1)
	State deferred tax rate change (b)				(6)				(17)				Total increase (decrease)		(9)		7
	Other				(2)		1		(3)		(2)
			Total increase (decrease)		(9)		8		(3)		33
Total income taxes from continuing operations				$	16	$	104	$	202	$	305
Total income taxes												Total income taxes		$	(35)	$	177

(PPL Electric)	(PPL Electric)											(PPL Electric)

				Three Months				Nine Months						Three Months
				2012		2011		2012		2011				2013		2012
Reconciliation of Income Tax Expense
	Federal income tax on Income Before Income Taxes at statutory
		tax rate - 35%		$	17	$	16	$	51	$	64
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%												Federal income tax on Income Before Income Taxes at statutory tax rate - 35%		$	34	$	20
Increase (decrease) due to:	Increase (decrease) due to:											Increase (decrease) due to:
	State income taxes, net of federal income tax benefit				2		2		7		9	State income taxes, net of federal income tax benefit			5		2
	Federal and state tax reserve adjustments				(2)		(2)		(5)		(6)	Federal and state tax reserve adjustments			(2)		(1)
	Federal and state income tax return adjustments (a)										(2)	Depreciation not normalized			(3)		(1)
	Depreciation not normalized (a)				(1)		(1)		(5)		(6)	Other			(1)
	Other						(1)		(1)		(3)		Total increase (decrease)		(1)
			Total increase (decrease)		(1)		(2)		(4)		(8)
Total income taxes	Total income taxes			$	16	$	14	$	47	$	56	Total income taxes		$	33	$	20

(LKE)	(LKE)											(LKE)

				Three Months				Nine Months						Three Months
				2012		2011		2012		2011				2013		2012
Reconciliation of Income Tax Expense
	Federal income tax on Income from Continuing Operations Before
		Income Taxes at statutory tax rate - 35%		$	46	$	50	$	96	$	120
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%												Federal income tax on Income Before Income Taxes at statutory tax rate - 35%		$	54	$	26
Increase (decrease) due to:	Increase (decrease) due to:											Increase (decrease) due to:
	State income taxes, net of federal income tax benefit				5		4		7		11	State income taxes, net of federal income tax benefit			5		2
	Amortization of investment tax credit				(1)		(1)		(4)		(4)	Net operating loss carryforward adjustments (a)					(6)
	Net operating loss carryforward adjustments (a)								(9)			Other			(2)		(1)
	Other				(2)		(1)		(1)		(2)		Total increase (decrease)		3		(5)
			Total increase (decrease)		2		2		(7)		5
Total income taxes from continuing operations				$	48	$	52	$	89	$	125
Total income taxes												Total income taxes		$	57	$	21

(LG&E)	(LG&E)											(LG&E)

				Three Months				Nine Months						Three Months
				2012		2011		2012		2011				2013		2012
Reconciliation of Income Tax Expense
	Federal income tax on Income Before Income Taxes at statutory
		tax rate - 35%		$	24	$	23	$	52	$	56
Federal income tax on Income Before Income Taxes at statutory tax rate - 35%												Federal income tax on Income Before Income Taxes at statutory tax rate - 35%		$	24	$	14
Increase (decrease) due to:	Increase (decrease) due to:											Increase (decrease) due to:
	State income taxes, net of federal income tax benefit				2		2		5		5	State income taxes, net of federal income tax benefit			3		1
	Other				(1)		(1)		(3)		(3)	Other			(2)
			Total increase (decrease)		1		1		2		2		Total increase (decrease)		1		1
Total income taxes	Total income taxes			$	25	$	24	$	54	$	58	Total income taxes		$	25	$	15

(KU)

				Three Months				Nine Months
				2012		2011		2012		2011
Reconciliation of Income Tax Expense
	Federal income tax on Income Before Income Taxes at statutory
		tax rate - 35%		$	28	$	31	$	66	$	79
Increase (decrease) due to:
	State income taxes, net of federal income tax benefit				3		3		6		7
	Other				(1)		(2)		(2)		(4)
			Total increase (decrease)		2		1		4		3
Total income taxes				$	30	$	32	$	70	$	82

		Increase		Decrease			Increase		Decrease

PPL	PPL	$	21	$	105	PPL	$	10	$	88
PPL Energy Supply	PPL Energy Supply		1		31	PPL Energy Supply				30
PPL Electric	PPL Electric		22		38	PPL Electric		10		22


Current Regulatory Liabilities:
	Generation supply charge	$	28	$	27	$	28	$	27
	ECR				4
	Gas supply clause		1		4
	Transmission service charge		12		6		12		6
	Universal service rider		15		17		15		17
	Other		5		3		2		2
Total current regulatory liabilities		$	61	$	61	$	57	$	52

Noncurrent Regulatory Liabilities:
	Accumulated cost of removal of utility plant	$	687	$	679
	Coal contracts (a)		130		141
	Power purchase agreement - OVEC (a)		107		108
	Net deferred tax assets		33		34
	Act 129 compliance rider		13		8	$	13	$	8
	Defined benefit plans		17		17
	Interest rate swaps		24		14
	Other		5		9
Total noncurrent regulatory liabilities		$	1,016	$	1,010	$	13	$	8

		PPL Energy											PPL Energy
		Supply		PPL Electric		LKE		LG&E		KU			Supply		PPL Electric		LKE		LG&E		KU

Dividends/distributions paid to parent/member	Dividends/distributions paid to parent/member	$	733	$	75	$	95	$	47	$	68	Dividends/distributions paid to parent/member	$	313	$	25	$	4	$	19	$	13
Capital contributions received from parent/member	Capital contributions received from parent/member		472		150							Capital contributions received from parent/member				60		75		25		50

~~Aggregate enterprise consideration~~	$	~~326~~
~~Less: Estimated fair value of long-term debt outstanding assumed through consolidation (a)~~		~~258~~
~~Plus: Restricted cash debt service reserves~~		17
~~Cash consideration paid for equity interests (including working capital adjustments)~~	$	85

~~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

	~~Income Statement~~
	~~Line Item~~	~~Nine Months~~

~~2011 Bridge Facility costs (a)~~	~~Interest Expense~~	$	~~(43)~~
~~Foreign currency loss on 2011 Bridge Facility (b)~~	~~Other Income (Expense) - net~~		~~(57)~~
~~Net hedge gains associated with the 2011 Bridge Facility (c)~~	~~Other Income (Expense) - net~~		55
~~Hedge ineffectiveness (d)~~	~~Interest Expense~~		~~(12)~~
~~U.K. stamp duty tax (e)~~	~~Other Income (Expense) - net~~		~~(21)~~
~~Separation benefits (f)~~	~~Other operation and maintenance~~		~~(92)~~
~~Other acquisition-related adjustments (g)~~	~~Other Income (Expense) - net~~		~~(45)~~

			Pension Benefits																		Pension Benefits								Other Postretirement Benefits
			Three Months								Nine Months										U.S.				U.K.
			U.S.				U.K.				U.S.				U.K.						Three Months
			2012		2011		2012		2011		2012		2011		2012		2011				2013		2012		2013		2012		2013		2012
PPL	PPL																		PPL
Service cost	Service cost		$	25	$	24	$	13	$	14	$	77	$	71	$	40	$	31	Service cost		$	31	$	26	$	18	$	13	$	4	$	3
Interest cost	Interest cost			55		54		85		88		165		163		254		200	Interest cost			54		56		81		84		7		8
Expected return on plan assets	Expected return on plan assets			(65)		(61)		(115)		(103)		(195)		(184)		(340)		(243)	Expected return on plan assets			(74)		(66)		(118)		(111)		(6)		(6)
Amortization of:	Amortization of:																		Amortization of:
		Prior service cost		6		6		1		1		18		18		3		3		Transition obligation												1
		Actuarial (gain) loss		11		7		19		15		32		21		59		44		Prior service cost		6		6				1
																				Actuarial (gain) loss		20		10		38		20		1		1
Net periodic defined benefit	Net periodic defined benefit																		Net periodic defined benefit
	costs (credits) prior to																		costs (credits)		$	37	$	32	$	19	$	7	$	6	$	7
	termination benefits			32		30		3		15		97		89		16		35
Termination benefits (a)										45								47
Net periodic defined benefit
	costs (credits)		$	32	$	30	$	3	$	60	$	97	$	89	$	16	$	82

	Exposure at			Expiration
	September 30, 2012 (a)			Date
PPL
Indemnifications related to the WPD Midlands acquisition			(b)
WPD indemnifications for entities in liquidation and sales of assets	$	298	(c)	2014 - 2018
WPD guarantee of pension and other obligations of unconsolidated entities		91	(d)	2015
Tax indemnification related to unconsolidated WPD affiliates			(e)

PPL Energy Supply
Letters of credit issued on behalf of affiliates		21	(f)	2012 - 2014
Retrospective premiums under nuclear insurance programs		48	(g)
Nuclear claims assessment under The Price-Anderson Act Amendments under The Energy Policy Act of 2005		235	(h)
Indemnifications for sales of assets		262	(i)	2012 - 2025
Indemnification to operators of jointly owned facilities		6	(j)
Guarantee of a portion of a divested unconsolidated entity's debt		22	(k)	2018

PPL Electric
Guarantee of inventory value		22	(l)	2016

LKE
Indemnification of lease termination and other divestitures		301	(m)	2021 - 2023

LG&E and KU
LG&E and KU guarantee of shortfall related to OVEC			(n)

A reconciliation of net assets and liabilities classified as Level 3 for the periods ended September 30, 2012 is as follows:
A reconciliation of net assets and liabilities classified as Level 3 for the three months ended March 31 is as follows:																					A reconciliation of net assets and liabilities classified as Level 3 for the three months ended March 31 is as follows:

					Fair Value Measurements Using Significant Unobservable Inputs (Level 3)																				Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
					Three Months								Nine Months												2013								2012
					Energy		Auction		Cross-				Energy		Auction		Cross-								Energy		Auction		Cross-				Energy		Auction		Cross-
					Commodities,		Rate		Currency				Commodities,		Rate		Currency								Commodities,		Rate		Currency				Commodities,		Rate		Currency
					net		Securities		Swaps		Total		net		Securities		Swaps		Total						net		Securities		Swaps		Total		net		Securities		Swaps		Total
PPL	PPL																				PPL
Balance at beginning of	Balance at beginning of																				Balance at beginning of
	period				$	34	$	15	$	10	$	59	$	13	$	24	$	4	$	41
		Total realized/unrealized																			period				$	22	$	16	$	1	$	39	$	13	$	24	$	4	$	41
			gains (losses)																			Total realized/unrealized
				Included in earnings		(17)						(17)		(1)				(1)		(2)			gains (losses)
				Included in OCI (a)				1		(8)		(7)		1				2		3				Included in earnings		(8)						(8)		18						18
		Sales														(5)				(5)				Included in OCI (a)						3		3		2				2		4
		Settlements				2						2		(9)						(9)		Settlements				(1)						(1)		(6)						(6)
		Transfers into Level 3				(2)						(2)		12						12		Transfers into Level 3				1						1
		Transfers out of Level 3				8						8		9		(3)		(3)		3		Transfers out of Level 3								(4)		(4)		(8)				(3)		(11)
Balance at end of period	Balance at end of period				$	25	$	16	$	2	$	43	$	25	$	16	$	2	$	43	Balance at end of period				$	14	$	16	$		$	30	$	19	$	24	$	3	$	46

PPL Energy Supply	PPL Energy Supply																				PPL Energy Supply
Balance at beginning of	Balance at beginning of																				Balance at beginning of
	period				$	34	$	12			$	46	$	13	$	19			$	32	period				$	22	$	13			$	35	$	13	$	19			$	32
		Total realized/unrealized																				Total realized/unrealized
			gains (losses)																				gains (losses)
				Included in earnings		(17)						(17)		(1)						(1)				Included in earnings		(8)						(8)		18						18
				Included in OCI (a)				1				1		1						1				Included in OCI (a)										2						2
		Sales														(3)				(3)		Settlements				(1)						(1)		(6)						(6)
		Settlements				2						2		(9)						(9)		Transfers into Level 3				1						1
		Transfers into Level 3				(2)						(2)		12						12		Transfers out of Level 3												(8)						(8)
		Transfers out of Level 3				8						8		9		(3)				6
Balance at end of period	Balance at end of period				$	25	$	13			$	38	$	25	$	13			$	38	Balance at end of period				$	14	$	13			$	27	$	19	$	19			$	38

		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		$	(3)	$	6	$	(4)	$	(1)	$	(8)	$	1	$	(2)
Change in unrealized gains (losses) relating
	to positions still held at the reporting date		(2)		3		(1)				2		1			$	1

PPL Energy Supply
Total gains (losses) included in earnings		$	(3)	$	6	$	(4)	$	(1)	$	(8)	$	1	$	(2)
Change in unrealized gains (losses) relating
	to positions still held at the reporting date		(2)		3		(1)				2		1			$	1

		March 31, 2013				December 31, 2012
		Carrying				Carrying
		Amount		Fair Value		Amount		Fair Value
LKE
	Long-term debt		4,075		4,413		4,075		4,423
LG&E
	Long-term debt		1,112		1,177		1,112		1,178
KU
	Long-term debt		1,842		2,052		1,842		2,056

		Volume (a)
Commodity	Unit of Measure	2013 (b)	2014	2015	Thereafter

Power	MWh	(27,422,031)	(22,385,959)	(490,995)	1,415,573
Capacity	MW-Month	(11,655)	(6,630)	(13)	525
Gas	MMBtu	(5,339,243)	(25,106,607)	(4,091,856)	(3,678,883)
Coal	Tons	(186,000)	186,000
FTRs	MW-Month	14,224	5,063	1,465
Oil	Barrels	46,118	240,000	300,000	240,000

	Derivative	Total Power	Fuel Purchases (c)
Year	Sales (a)	Sales (b)	Coal	Nuclear

2012 (d)	93%	100%	105%	100%
2013	88%	95%	97%	100%
2014 (e)	50%	55%	77%	100%

	Units	2012 (a)	2013

Net Power Sales (b)	GWh	(919)	(610)
Net Fuel Purchases (b) (c)	Bcf	11.8	5.9

						September 30, 2012								December 31, 2011
						Derivatives designated as				Derivatives not designated				Derivatives designated as				Derivatives not designated
						hedging instruments				as hedging instruments (a)				hedging instruments				as hedging instruments (a)
						Assets		Liabilities		Assets		Liabilities		Assets		Liabilities		Assets		Liabilities
Current:
	Price Risk Management
		Assets/Liabilities (b):
			Interest rate swaps					$	16			$	5	$	3	$	3			$	5
			Cross-currency swaps			$	1		2								2
			Foreign currency
				contracts					1				19		7			$	11
			Commodity contracts				66		1	$	1,701		1,140		872		3		1,655		1,557
					Total current		67		20		1,701		1,164		882		8		1,666		1,562
Noncurrent:
	Price Risk Management
		Assets/Liabilities (b):
			Interest rate swaps						5				57								55
			Cross-currency swaps				23								24
			Foreign currency
				contracts									16
			Commodity contracts				30		1		807		805		42		2		854		783
					Total noncurrent		53		6		807		878		66		2		854		838
Total derivatives						$	120	$	26	$	2,508	$	2,042	$	948	$	10	$	2,520	$	2,400

									2013				2012
											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			2013		2012		on Derivative		Portion)		Testing)		Portion)		Testing)
Cash Flow Hedges:
	Interest rate swaps		$	9	$	3	Interest expense		$	(5)			$	(4)
	Cross-currency swaps			73		12	Interest expense							(1)
							Other income
								(expense) - net		69				(19)
	Commodity contracts					113	Wholesale energy
								marketing		67	$	1		272	$	4
							Depreciation							1
							Energy purchases			(16)				(40)		(4)
Total			$	82	$	128			$	115	$	1	$	209

Net Investment Hedges:
		Foreign currency contracts	$	16	$	(3)

Derivatives Not Designated as	Location of Gain (Loss) Recognized in					Location of Gain (Loss) Recognized in
Hedging Instruments:	Income on Derivatives	Three Months		Nine Months
Hedging Instruments						Income on Derivative	2013		2012

Foreign currency contracts	Other income (expense) - net	$	(47)	$	(40)	Other income (expense) - net	$	119	$	(18)
Interest rate swaps	Interest expense		(2)		(4)	Interest expense		(2)		(2)
Commodity contracts	Unregulated retail electric and gas		(3)		20	Unregulated retail electric and gas		(7)		22
	Wholesale energy marketing		(476)		900	Wholesale energy marketing		(699)		1,343
	Net energy trading margins (a)		(10)		12	Net energy trading margins (a)		(7)		9
	Fuel		6			Fuel		1		6
	Energy purchases		364		(717)	Energy purchases		586		(1,070)
	Total	$	(168)	$	171	Total	$	(9)	$	290

Derivatives Not Designated as	Location of Gain (Loss) Recognized as					Location of Gain (Loss) Recognized as
Hedging Instruments:	Regulatory Liabilities/Assets	Three Months		Nine Months
Hedging Instruments						Regulatory Liabilities/Assets	2013		2012

Interest rate swaps	Regulatory assets - noncurrent	$	(9)	$	(3)	Regulatory assets - noncurrent	$	4	$	7

Derivatives Designated as						Location of Gain (Loss) Recognized as
Cash Flow Hedges						Regulatory Liabilities/Assets	2013		2012

Interest rate swaps						Regulatory liabilities - noncurrent	$	10

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

PPL Energy Supply
	Energy Commodities	$	1,676	$	1,306	$	48	$	322	$	1,432	$	1,306	$	15	$	111

				PPL
		PPL		Energy Supply		LKE		LG&E

Aggregate fair value of derivative instruments in a net liability
	position with credit contingent provisions	$	225	$	127	$	40	$	40
Aggregate fair value of collateral posted on these derivative instruments			33		1		32		32
Aggregate fair value of additional collateral requirements in the event of
	a credit downgrade below investment grade (a)		201		134		9		9

~~Volumes were higher~~

Eastern U.S.

The change in non-trading margins for the ~~nine-month~~ period ended March 31, 2013 compared with 2012 was due to a shorter outage period for blade inspections, an unplanned outage in March 2011 and an uprate in the third quarter of 2011. Volumes were higher for the three-month period due to higher availability in 2012.to: