PPL PPL Electric
September 30, December 31, September 30, December 31,
2012 2011 2012 2011
Current Regulatory Liabilities:
Generation supply charge $ 24 $ 42 $ 24 $ 42
ECR 7 7
Gas supply clause 5 6
Transmission service charge 5 2 5 2
Transmission formula rate 8 5 8 5
Universal service rider 12 1 12 1
Other 4 10 3 3
Total current regulatory liabilities $ 65 $ 73 $ 52 $ 53

Noncurrent Regulatory Liabilities:
Accumulated cost of removal of utility plant $ 673 $ 651
Coal contracts (a) 151 180
Power purchase agreement - OVEC (a) 110 116
Net deferred tax assets 35 39
Act 129 compliance rider 12 7 $ 12 $ 7
Defined benefit plans 10 9
Other 8 8
Total noncurrent regulatory liabilities $ 999 $ 1,010 $ 12 $ 7

		LKE				LG&E				KU					LKE				LG&E				KU
		September 30,		December 31,		September 30,		December 31,		September 30,		December 31,			September 30,		December 31,		September 30,		December 31,		September 30,		December 31,
		2012		2011		2012		2011		2012		2011			2013		2012		2013		2012		2013		2012

Current Regulatory Assets:
	Gas supply clause	$	6	$	6	$	6	$	6
	Fuel adjustment clause		13		3		10		3	$	3
	Other		2				1				1
Total current regulatory assets		$	21	$	9	$	17	$	9	$	4

Noncurrent Regulatory Assets:	Noncurrent Regulatory Assets:													Noncurrent Regulatory Assets:
	Defined benefit plans	$	317	$	339	$	210	$	225	$	107	$	114	Defined benefit plans	$	338	$	368	$	212	$	232	$	126	$	136
	Storm costs		112		123		61		66		51		57	Storm costs		97		109		53		59		44		50
	Unamortized loss on debt		31		33		20		21		11		12	Unamortized loss on debt		30		31		19		20		11		11
	Interest rate swaps		71		69		71		69					Interest rate swaps		49		67		49		67
	Coal contracts (a)		5		11		2		5		3		6	AROs		37		26		20		15		17		11
	AROs		26		18		14		11		12		7	Other		15		29		6		7		9		22
	Other		28		27		6		6		22		21
Total noncurrent regulatory assets	Total noncurrent regulatory assets	$	590	$	620	$	384	$	403	$	206	$	217	Total noncurrent regulatory assets	$	566	$	630	$	359	$	400	$	207	$	230

Current Regulatory Liabilities:	Current Regulatory Liabilities:														Current Regulatory Liabilities:
																ECR			$	4							$	4
		ECR	$	7	$	7					$	7	$	7		Gas supply clause	$	2		4	$	2	$	4
		Gas supply clause		5		6	$	5	$	6						Gas line tracker		6				6
		Other		1		7				4		1		3		Other		9		1		3			$	6		1
Total current regulatory liabilities	Total current regulatory liabilities		$	13	$	20	$	5	$	10	$	8	$	10	Total current regulatory liabilities		$	17	$	9	$	11	$	4	$	6	$	5

Noncurrent Regulatory Liabilities:	Noncurrent Regulatory Liabilities:														Noncurrent Regulatory Liabilities:
	Accumulated cost of removal														Accumulated cost of removal
		of utility plant	$	673	$	651	$	294	$	286	$	379	$	365		of utility plant	$	690	$	679	$	300	$	297	$	390	$	382
	Coal contracts (a)			151		180		66		78		85		102	Coal contracts (a)			108		141		47		61		61		80
	Power purchase agreement - OVEC (a)			110		116		76		80		34		36	Power purchase agreement - OVEC (a)			102		108		71		75		31		33
	Net deferred tax assets			35		39		28		31		7		8	Net deferred tax assets			32		34		26		28		6		6
	Defined benefit plans			10		9						10		9	Defined benefit plans			18		17						18		17
	Other			8		8		3		3		5		5	Interest rate swaps			84		14		42		7		42		7
															Other			6		9		3		3		3		6
Total noncurrent regulatory liabilities	Total noncurrent regulatory liabilities		$	987	$	1,003	$	467	$	478	$	520	$	525	Total noncurrent regulatory liabilities		$	1,040	$	1,002	$	489	$	471	$	551	$	531

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

Regulatory Matters

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

~~CPCN Filing~~

LG&E will own a 22% undivided interest and KU will own a 78% undivided interest in the new NGCC. A formal request for recovery of the costs associated with the NGCC construction was not included in the CPCN filing with the KPSC but is expected to be included in future rate proceedings. See Note 8 for additional information.

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

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

~~Kentucky Acquisition Commitments~~

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

Rate Case Proceedings

In ~~June~~December 2012, ~~LG&E and KU filed requests with~~ the KPSC approved a rate case settlement agreement providing for increases in annual base ~~electric~~electricity rates of ~~approximately $62~~$34 million atfor LG&E and ~~approximately $82~~$51 million atfor KU and an increase in annual base gas rates of ~~approximately $17~~$15 million ~~at LG&E. The proposed base rate increases would result in electric rate increases of 6.9% at~~for LG&E ~~and 6.5% at KU and~~using a ~~gas rate increase of 7.0% at LG&E and would be~~10.25% return on equity. The approved rates became 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 January1, 2013.

~~Independent Transmission Operators~~

In September 2012, LG&E and KU completed the transition of their independent transmission operator contractual arrangements from Southwest Power Pool, Inc. to TranServ International, Inc. This change had previously received approvals of the FERC and the KPSC.

~~Storm Costs~~ ~~(PPL, LKE and LG&E)~~

In August 2011, a strong storm hit LG&E's service area causing significant damage and widespread outages for approximately 139,000 customers. LG&E filed an application with the KPSC in September 2011, requesting approval of a regulatory asset recorded to defer, for future recovery, $7 million in incremental operation and maintenance expenses related to the storm restoration. An order was received in December 2011 granting the request, while the recovery of the regulatory asset will be determined within the current base rate case discussed above in "Rate Case Proceedings".

Pennsylvania Activities

(~~PPL and PPL Electric)~~

~~PUC Investigation of Retail Market~~

In April 2011, the PUC opened an investigation of Pennsylvania's retail electricity market to be conducted in two phases. Phase one addressed the status of the existing retail market and explored potential changes. Questions issued by the PUC for this phase of the investigation focused primarily on default service issues. Phase two was initiated in July 2011 to develop specific proposals for changes to the retail market and default service model. In December 2011, the PUC issued a final order providing guidance to Electric Distribution Companies (EDCs) on the design of their next default service procurement plan filings. In December 2011, the PUC also issued a tentative order proposing an intermediate work plan to address issues raised in the investigation. In March 2012, the PUC entered a final order on the intermediate work plan, issued three possible models for the default service "end state" and held a hearing regarding those three models. In September 2012, the PUC issued a Secretarial Letter setting forth an "RMI End State Proposal" for discussion. The PUC is expected to issue a tentative implementation order in early November 2012, following which parties will have 30 days to provide comment. A final implementation order is expected to be issued in the first quarter of 2013. PPL and PPL Electric ~~cannot predict the outcome of the investigation or its impact on their financial condition, or results of operations.~~)

~~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. In September 2012, PPL Electric filed its Long Term Infrastructure Improvement Plan (LTIIP) describing projects eligible for inclusion in the DSIC. In October 2012, several parties filed comments to the LTIIP but none of the comments requested evidentiary hearings on the LTIIP. A decision on 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 in April 2013.

Rate Case Proceeding

In December 2012, the PUC approved a total distribution revenue increase of about $71 million for PPL Electric, using a 10.40% return on equity. The approved rates became effective January 1, 2013.

Storm Damage Expense Rider

In ~~March~~its December 28, 2012 final rate case order, the PUC directed PPL Electric to file a proposed Storm Damage Expense Rider (SDER). PPL Electric filed ~~a request with~~its proposed SDER on March 28, 2013, including requested recovery of the 2012 qualifying storm costs related to Hurricane Sandy, which the PUC ~~to increase distribution rates by approximately $105 million,~~previously approved for deferral. PPL Electric proposed that the SDER become effective January 1, 2013 for storm costs incurred in 2013, with those costs and the 2012 Hurricane Sandy costs included in rates effective January 1, 2014. Several parties filed comments opposing the SDER. PPL Electric and several other parties filed reply comments in May 2013. ~~The proposed distribution rate increase would result in a 2.9% increase over~~In October 2013, the PUC adopted an Order requesting submission of additional comments and reply comments on PPL Electric's ~~total rates at~~proposal. This matter remains pending before 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 and PPL Electric cannot predict the outcome of this proceeding.PUC.

~~ACT~~

Act 129

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

Under Act 129, EDCs must file an energy efficiency and conservation plan (EE&C Plan) with the PUC and contract with conservation service providers to implement all or a portion of the EE&C Plan. ~~Act 129 requires~~ EDCs to reduce overall electricity consumption by 1.0% by May 2011 and 3.0% by May 2013, and reduce peak demand by 4.5% for the 100 hours of highest demand by May 2013 (which is determined by actual demand reduction during the June 2012 through September 2012 period). EDCs will beare able to recover the costs (capped at 2%2.0% of the EDC's 2006 revenue) of implementing their EE&C Plans. In October 2009, the PUC approved PPL Electric's Phase 1 EE&C ~~Plan.~~Plan ending May 31, 2013.

Act 129 requires EDCs to reduce overall electricity consumption by 1.0% by May 2011 and by 3.0% by May 2013, and reduce peak demand by 4.5%. The ~~PUC has confirmed that~~overall consumption reduction is measured against PUC-forecasted consumption for the twelve months ended May 31, 2010. The peak demand reduction must occur for the 100 hours of highest demand, which is determined by actual demand reduction during the June 2012 through September 2012 period. PPL Electric believes it has met the May 2011 ~~requirement.~~requirement and will determine if it met the May 2013 peak demand reduction and energy reduction targets after it completes the final program evaluation in the fourth quarter of 2013. PPL Electric does not expect the PUC to formally determine compliance for either the 2011 or 2013 requirements before the first quarter of 2014.

Act 129 requires the PUC to evaluate the costs and benefits of the EE&C program by November 30, 2013 and adopt additional reductions if the benefits of the program exceed the costs. In ~~March 2012, the PUC began the process of designing Phase II of the EE&C program. In~~ August 2012, after receiving input from stakeholders, the PUC issued a Final Implementation Order establishing a three-year Phase II program, ending May 31, 2016, with individual consumption reduction targets for each EDC. PPL Electric's Phase II reduction target is 2.1%. of the total energy consumption forecasted by the PUC for the twelve months ended May 31, 2010. The PUC did not establish ~~any~~ demand reduction targets for the Phase II program. ~~In August~~PPL Electric filed its Phase II EE&C Plan with the PUC on November 15, 2012 and, in March 2013, the PUC approved PPL Electric's Phase II EE&C Plan with minor modifications. PPL Electric filed a ~~Petition for Reconsideration of~~Revised Phase II EE&C Plan on May 13, 2013 pursuant to the PUC's ~~Order, which~~March Order. On July 11, 2013, the PUC ~~denied. In August 2012,~~issued an Order approving PPL Electric's Revised Phase II EE&C Plan. PPL Electric ~~also filed a Petition for an Evidentiary Hearing regarding~~began its consumption reduction target. The PUC assigned the petition to an ALJ. A hearing on the petition was held on October 18, 2012. The ALJ will certify the record of the hearing to the PUC for a decision. EDCs must file Phase II ~~plans with the PUC by November 15, 2012. PPL and PPL Electric cannot predict the outcome of the foregoing proceedings.~~Plan implementation on June 1, 2013.

Act 129 also requires ~~the~~ Default Service ~~Provider~~Providers (DSP) to provide electric generation supply service to customers pursuant to a PUC-approved default service procurement plan through auctions, requests for proposal and bilateral contracts at the sole discretion of the DSP. Act 129 requires a mix of spot market purchases, short-term contracts and long-term contracts (4 to 20 years), with long-term contracts limited to 25% of ~~the~~ load unless otherwise approved by the PUC. ~~The~~A DSP ~~will be~~is able to recover the costs associated with ~~a competitive~~its default service procurement plan.

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

The PUC has directed all EDCs to file default service procurement plans for the period June 1, 2013 through May 31, 2015. PPL Electric filed its plan in May 2012. In that plan, PPL Electric proposed a process to obtain supply for its default service customers and a number of initiatives designed to encourage more customers to purchase electricity from the competitive retail market. ~~The~~In January 2013, the PUC ~~assigned~~approved PPL Electric's plan with modifications and directed PPL Electric to establish collaborative processes to address several retail competition issues. In February 2013, PPL Electric filed a revised Default Service Supply Master Agreement and a revised Request for Proposals Process and Rules which the PUC approved. PPL Electric filed revised retail competition initiatives and a revised plan consistent with the PUC's January order, and in May 2013, the PUC approved PPL Electric's most recent filing with minor changes. PPL Electric began implementing its revised plan on June 1, 2013. See Note 10 for additional information.

Smart Meter Rider

Act 129 also requires installation of smart meters for new construction, upon the request of consumers and at their cost, or on a depreciation schedule not exceeding 15 years. Under Act 129, EDCs are able to recover the costs of providing smart metering technology. All of PPL Electric's metered customers currently have advanced meters installed at their service locations capable of many of the functions required under Act 129. PPL Electric continues to conduct pilot projects to evaluate additional applications of its current advanced metering technology pursuant to the requirements of Act 129. PPL Electric recovers the cost of its pilot projects through a cost recovery mechanism, the Smart Meter Rider (SMR). In August 2013, PPL Electric filed with the PUC an ~~ALJ. Hearings were held~~annual report describing the actions it was taking under its Smart Meter Plan during 2013 and its planned actions for 2014. PPL Electric also submitted revised SMR charges that will become effective January 1, 2014. PPL Electric will submit its final Smart Meter Plan by June 30, 2014.

PUC Investigation of Retail Electricity Market

Distribution System Improvement Charge

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

In September 2012, PPL Electric filed its LTIIP describing projects eligible for inclusion in the DSIC. The PUC approved the LTIIP on January 10, 2013 and, on January 15, 2013, PPL Electric filed a petition requesting permission to establish a DSIC. Several parties filed responses to PPL Electric's petition. In an order entered on May 23, 2013, the PUC approved PPL Electric's proposed DSIC with an initial rate effective July 1, 2013, subject to refund after hearings. The PUC also assigned four specific issues to the Office of Administrative Law Judge for hearing and preparation of a recommended decision. The Judge's recommended decision is expected in early 2014. The case remains pending before the ~~fourth quarter of 2012. The PUC is expected to rule on the plan in early 2013.~~PUC.

~~Storm Costs~~Federal Matters

FERC Audit Proceedings (All Registrants except PPL Electric experienced several PUC-reportable storms during the three and nine months ended September 30, 2011 resulting in total restoration costs of $34 million and $59 million, of which $23 million and $39 million were recorded in "Other operation and maintenance" on the Statement of Income. Although PPL Electric has storm insurance with a PPL affiliate, the costs associated with the unusually high number of PUC-reportable storms exceeded policy limits. Probable recoveries on insurance claims 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 December 2011, PPL Electric received orders from the PUC granting permission to defer qualifying storm costs in excess of insurance recoveries associated with Hurricane Irene and a late October 2011 snowstorm. In the recommended decision in the distribution rate proceeding discussed above in "Pennsylvania Activities - Rate Case Proceeding," the presiding ALJ recommended that PPL Electric be allowed to recover deferred storm costs of approximately $27 million over a five-year period. The PUC, which is expected to issue its order in December 2012, can accept, reject or modify the ALJ's recommendation. New rates will become effective on January 1, 2013. PPL and PPL Electric cannot predict the outcome of this proceeding. In 2012, PPL Electric increased the deductible under its insurance policy to $15.75 million and, therefore, would only request insurance recovery of reportable storm costs exceeding that amount. During the three and nine months ended September 30, 2012, PPL Electric incurred $13 million in restoration costs, of which $9 million was recorded in "Other operation and maintenance" on the Statement of Income.

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.

~~Transmission Service Charge Adjustment~~ ~~(PPL Electric)~~

During the three and nine months ended September 30, 2011, PPL Electric recorded a $7 million ($4 million after-tax) charge to "Retail electric" revenue on the Statement of Income to reduce a portion of the transmission service charge regulatory asset associated with a 2005 undercollection that was not included in any subsequent rate reconciliations filed with the PUC. The impact of this charge was not material to any previously reported financial statements and was not material to the financial statements for the full year of 2011.

~~Federal Matters(PPL and PPL Electric~~Energy Supply)

In November 2011, the FERC ~~Formula Rates~~commenced an audit of PPL and its subsidiaries, including an audit of the FERC transmission formula rate mechanisms at PPL Electric, LG&E and KU beginning in April 2012. The audit identified several matters related to separate aspects of formula rate mechanics at PPL Electric, LG&E and KU. As previously reported, among the audit matters related to PPL Electric was the determination that PPL Electric had not obtained a waiver of the equity method accounting requirement with respect to its wholly owned subsidiary, PPL Receivables Corporation, which was formed in 2004 to purchase eligible accounts receivable and unbilled revenue from PPL Electric to collateralize commercial paper issuances and reduce borrowing costs. PPL, PPL Electric, LKE, LG&E and KU currently believe that the total amount of refunds, if any, that may be required with respect to the formula rate and all other issues identified during the course of the audit will not be material to any of these Registrants. PPL, PPL Electric, LKE, LG&E and KU, however, cannot predict the ultimate outcome of these matters.

Transmission rates are regulated by the FERC. PPL Electric's transmission revenues are billed in accordance with a FERC-approved PJM open access transmission tariff that utilizes a formula-based rate recovery mechanism.

~~In May 2010,~~ The formula rate is calculated, in part, based on financial results as reported in PPL Electric's annual FERC Form No. 1, filed under the FERC's Uniform System of Accounts. PPL Electric has initiated ~~its~~separate formula rate Annual Updates for each of the years 2010-2013. The 2010, ~~Annual Update. In November 2010,~~2011, and 2012 updates were subsequently challenged by a group of municipal customers, ~~taking transmission service in~~which challenges PPL ~~Electric's transmission zone filed a preliminary challenge to the update and, in December 2010, filed a formal challenge.~~Electric has opposed. In August 2011, the FERC issued an order substantially rejecting the 2010 formal challenge and ~~accepting PPL Electric's 2010 Annual Update. The group of~~the municipal customers filed a request for rehearing of that order.

In May 2011, PPL Electric initiated its formula rate 2011 Annual Update. In October 2011, the group of municipal customers filed a preliminary challenge to the update and, in December 2011, filed a formal challenge. In January 2012, PPL Electric filed a response to that formal challenge. In September 2012, the FERC issued an order setting for evidentiary hearings and settlement judge procedures a number of issues raised in the 2010 and 2011 formal ~~challenge~~challenges. Settlement conferences were held in late 2012 and early 2013. In February 2013, the FERC set for evidentiary hearings and settlement judge procedures a number of issues ~~raised~~ in the 2012 formal challenge and consolidated that challenge with the 2010 and 2011 ~~formal challenge. The FERC held the hearings in abeyance for settlement judge proceedings and assigned a settlement judge.~~challenges. PPL Electric filed a request for rehearing of the ~~September 2012 order in late October 2012. An initial settlement meeting will be scheduled in November 2012.~~

~~In May 2012,~~February Order which remains pending before the FERC. PPL Electric ~~initiated its formula rate 2012 Annual Update which currently is in the 180-day review~~ and ~~challenge period. In October 2012,~~ the group of municipal customers ~~filed a preliminary challenge to the 2012 Annual Update.~~have exchanged confidential settlement proposals and PPL Electric anticipates that there will ~~meet with representatives of the customers~~be additional settlement conferences held in ~~an attempt to resolve the challenge.~~2013. PPL and PPL Electric cannot predict the outcome of the foregoing proceedings, which remain pending before the FERC.

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

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

Ofgem Review of Line Loss Calculation

WPD has a $172 million liability recorded at September 30, 2012 compared with $170 million at December 31, 2011, calculated in accordance with Ofgem's accepted methodology, related to the close-out of line losses for the prior price control period, DPCR4.

Ofgem is currently consulting on the methodology to be used by all network operators to calculate the final line loss incentive/penalty for the DPCR4. ~~In October 2011, Ofgem issued a consultation paper citing two potential changes to the methodology, both of which would result in a reduction of the liability. In March 2012,~~On July 12, 2013, Ofgem issued a decision ~~regarding~~paper on the ~~preferred methodology. In~~process to follow for closing out the line loss incentive/penalty. Subsequent to the July ~~2012,~~2013 decision paper, WPD received additional information from Ofgem and as a result revised the estimated potential loss exposure to be in the range of $93 million to $226 million as of September 30, 2013. On October 21, 2013, Ofgem issued a further consultation paper ~~regarding certain aspects of~~requesting additional information. During the ~~preferred methodology as it relates~~three and nine months ended September 30, 2013, WPD recorded $21 million and $45 million increases to the ~~DPCR4~~liability with reductions to "Utility" revenue on the Statement of Income. At September 30, 2013, the liability was $93 million compared with $94 million at December 31, 2012. Other changes to this line loss ~~incentive/penalty~~liability included reductions of $41 million resulting from refunds being included in tariffs and ~~a proposal to delay~~foreign exchange movements during the target date for making a final decision until April 2013 together with a proposal to remove the line loss incentive/penalty for DPCR5. In October 2012, a license modification was issued to allow Ofgem to publish the final decisions on these matters by Aprilnine months ended September 30, 2013. PPL cannot predict the outcome of this matter.

~~European Market Infrastructure Regulation~~

Regulation No. 648/2012 of the European Parliament and of the Council, commonly referred to as the European Market Infrastructure Regulation (EMIR), entered into force on August 16, 2012 and, subject to approval by the European Commission of final technical standards, is expected to become effective in January 2013. The EMIR establishes certain transaction clearing and other recordkeeping requirements for parties to over-the-counter derivatives transactions. Included in the derivative transactions that are subject to EMIR are certain interest rate and currency derivative contracts utilized by WPD. Generally, WPD is expected to qualify under the EMIR as a non-financial counterparty to the transactions in which it engages and further to qualify for certain exemptions that will relieve WPD from the mandatory clearing obligations imposed by the EMIR. Although the EMIR will potentially impose significant additional recordkeeping requirements on WPD, the effect of the EMIR is not currently expected to have a significant adverse impact on WPD's financial condition or results of operation.

7. Financing Activities

Credit Arrangements and Short-term Debt

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

The Registrants maintain credit facilities to enhance liquidity, provide credit support, and provide a backstop to commercial paper programs. For reporting purposes, on a consolidated basis, the credit facilities and commercial paper programs of PPL Energy Supply, PPL Electric, LG&E and KU also apply to PPL and the credit facilities and commercial paper programs of LG&E and KU also apply to LKE. The amounts borrowed below are recorded as "Short-term debt" on the Balance Sheets. The following credit facilities were in place at:

September 30, 2012 December 31, 2011
Letters of Letters of
Credit Issued Credit Issued
and and
Commercial Commercial
Expiration Borrowed Paper Unused Borrowed Paper
Date Capacity (a) Backstop Capacity (a) Backstop
PPL
WPD Credit Facilities
PPL WW Syndicated
Credit Facility (b) Jan. 2013 £ 150 £ 107 n/a £ 43 £ 111 n/a
WPD (South West)
Syndicated Credit Facility (c) Jan. 2017 245 n/a 245 n/a
WPD (East Midlands)
Syndicated Credit Facility Apr. 2016 300 300 £ 70
WPD (West Midlands)
Syndicated Credit Facility Apr. 2016 300 300 71
Uncommitted Credit Facilities 84 £ 4 80 3
Total WPD Credit Facilities (d) £ 1,079 £ 107 £ 4 £ 968 £ 111 £ 144

PPL Energy Supply
Syndicated Credit Facility (e) Oct. 2016 $ 3,000 $ 468 $ 2,532 $ 541
Letter of Credit Facility Mar. 2013 200 n/a 126 74 n/a 89
Uncommitted Credit Facilities (f) 175 n/a 32 143 n/a n/a
Total PPL Energy Supply
Credit Facilities $ 3,375 $ 626 $ 2,749 $ 630

PPL Electric
Syndicated Credit Facility (e) (g) Oct. 2016 $ 300 $ 1 $ 299 $ 1
Asset-backed Credit Facility (h) Sept. 2013 100 n/a 100 n/a
Total PPL Electric Credit Facilities $ 400 $ 1 $ 399 $ 1

LG&E
Syndicated Credit Facility (e) Oct. 2016 $ 400 $ 400

KU
Syndicated Credit Facility (e) Oct. 2016 $ 400 $ 400
Letter of Credit Facility (i) Apr. 2014 198 $ 198 n/a $ 198
Total KU Credit Facilities $ 598 $ 198 $ 400 $ 198

~~(a)~~

~~Amounts borrowed are recorded as "Short-term debt" on the Balance Sheets.~~

~~(b)~~

~~The amount outstanding at September 30, 2012 was a USD-denominated borrowing of $171 million, which equated to £107 million at the time of borrowing and bore interest at 0.8818%.~~

				September 30, 2013										December 31, 2012
										Letters of						Letters of
										Credit Issued						Credit Issued
										and						and
										Commercial						Commercial
				Expiration						Paper		Unused				Paper
				Date		Capacity		Borrowed		Backup		Capacity		Borrowed		Backup
PPL
	WPD Credit Facilities
		PPL WW Syndicated
			Credit Facility (a) (b)		Dec. 2016	£	210	£	106		n/a	£	104	£	106		n/a
		WPD (South West)
			Syndicated Credit Facility		Jan. 2017		245				n/a		245				n/a
		WPD (East Midlands)
			Syndicated Credit Facility (b)		Apr. 2016		300		44				256
		WPD (West Midlands)
			Syndicated Credit Facility (b)		Apr. 2016		300		34				266
		Uncommitted Credit Facilities					84			£	5		79			£	4
			Total WPD Credit Facilities (c)			£	1,139	£	184	£	5	£	950	£	106	£	4

PPL Energy Supply
	Syndicated Credit Facility				Nov. 2017	$	3,000			$	61	$	2,939			$	499
	Letter of Credit Facility (d)				Mar. 2014		150		n/a		109		41		n/a		132
	Uncommitted Credit Facilities (e)						175		n/a		51		124		n/a		40
			Total PPL Energy Supply Credit Facilities			$	3,325			$	221	$	3,104			$	671

PPL Electric
	Syndicated Credit Facility				Oct. 2017	$	300			$	1	$	299			$	1

LG&E
	Syndicated Credit Facility				Nov. 2017	$	500			$	72	$	428			$	55

KU
	Syndicated Credit Facility				Nov. 2017	$	400			$	140	$	260			$	70
	Letter of Credit Facility (f)				May 2016		198				198						198
			Total KU Credit Facilities			$	598			$	338	$	260			$	268

~~(c)~~(a)

In ~~January~~December 2012, ~~WPD (South West) entered into a £245 million 5-year syndicated credit facility to replace~~ the ~~previous £210 million 3-year~~PPL WW syndicated credit facility that was set to expire in ~~July 2012. Under~~January 2013 was replaced and 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 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.capacity was increased from £150 million.

~~(d)~~(b)

PPL WW's amounts borrowed at September 30, 2013 and December 31, 2012 were USD-denominated borrowings of $166 million and $171 million, which equated to £106 million at the time of borrowings and bore interest at 1.89% and 0.85%. WPD (East Midlands) amount borrowed at September 30, 2013 was a GBP-denominated borrowing of £44 million, which equated to $68 million and bore interest at 1.30%. WPD (West Midlands) amount borrowed at September 30, 2013 was a GBP-denominated borrowing of £34 million, which equated to $53 million and bore interest at 1.30%.

(c)	At September 30, ~~2012,~~2013, the ~~U.S. dollar~~USD equivalent of unused capacity under WPD's credit facilities was $1.5 billion.

(d)	In February 2013, PPL Energy Supply extended the expiration date from March 2013 and, effective April 2013, the capacity was reduced from $200 million.

(e)	In ~~November 2012,~~August 2013, 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~~was reduced from $200 million.

(f)

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

~~(g)~~

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

~~(h)~~

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

At September 30, 2012 and December 31, 2011, $240 million and $251 million of accounts receivable and $80 million and $98 million of unbilled revenue were pledged by the subsidiary under the credit agreement related to PPL Electric's and the subsidiary's participation in the asset-backed commercial paper program. Based on the accounts receivable and unbilled revenue pledged at September 30, 2012, the amount available for borrowing under the facility was $100 million. PPL Electric's sale to its subsidiary of the accounts receivable and unbilled revenue is an absolute sale of assets, and PPL Electric does not retain an interest in these assets. However, for financial reporting purposes, the subsidiary's financial results are consolidated in PPL Electric's financial statements. PPL Electric performs certain record-keeping and cash collection functions with respect to the assets in return for a servicing fee from the subsidiary.

~~In July 2012, PPL Electric and the subsidiary reduced the capacity from $150 million and in September 2012~~May 2013, KU extended ~~the agreement to September 2013.~~

~~(i)~~

~~In August 2012, the KU letter of credit facility agreement was amended and restated to allow for certain payments under~~ the letter of credit facility ~~to be converted to loans rather than requiring immediate payment.~~ from April 2014.

In September 2013, PPL Electric terminated its asset-backed commercial paper program sponsored by a financial institution. See Note 7 in PPL's and PPL Electric's 2012 Form 10-K for more information regarding the asset-backed commercial paper program.

In October 2013, LKE entered into a $75 million syndicated credit facility that expires in October 2018.

PPL Energy Supply, PPL Electric, LG&E and KU maintain commercial paper programs to provide an additional financing source to fund their short-term liquidity needs, if and when necessary. Commercial paper issuances, included in "Short-term debt" on the Balance Sheets, are supported by the respective Registrant's Syndicated Credit Facility. The following commercial paper programs were in place at:

		September 30, 2013								December 31, 2012
		Weighted -				Commercial				Weighted -		Commercial
		Average				Paper		Unused		Average		Paper
		Interest Rate		Capacity		Issuances		Capacity		Interest Rate		Issuances

PPL Energy Supply				$	750			$	750		0.50%	$	356
PPL Electric					300				300
LG&E (a)			0.28%		350	$	72		278		0.42%		55
KU (a)			0.28%		350		140		210		0.42%		70
	Total			$	1,750	$	212	$	1,538			$	481

(a)	In April 2013, the capacity was increased from $250 million.

(PPL and PPL Energy Supply)

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

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

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, 2012, PPL Energy Supply had $355 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheet, at a weighted-average interest rate of 0.48%.

~~(PPL and PPL Electric)~~

In May 2012, PPL Electric increased the capacity of its commercial paper program from $200 million 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. PPL Electric had no commercial paper outstanding at September 30, 2012.

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

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.

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

See Note 11 for discussion of intercompany borrowings.

Long-term Debt and Equity Securities

(PPL)

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

In April 2013, PPL settled the ~~subsequent~~initial 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~~by issuing 8.4 million shares of ~~its~~PPL common stock ~~in exchange for~~and cash settling the remaining 1.5 million shares. PPL received net cash proceeds ~~per share equal to the forward sale price. The forward sale price will be~~of $205 million, which was calculated based on an initial forward price of $27.02 per share, reduced during the period the contracts ~~are~~were 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~~used the ~~forward sale agreements.~~

~~PPL will not receive any proceeds or issue any shares of common stock until settlement of the forward sale agreements. PPL intends to use any~~ net proceeds ~~that it receives upon settlement~~ to repay short-term debt obligations and for other general corporate purposes. In May 2013, PPL cash settled the forward sale agreements covering the 591 thousand remaining shares for $4 million.

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

In ~~April 2012,~~March 2013, PPL Capital Funding issued $450 million of 5.90% Junior Subordinated Notes due 2073. PPL Capital Funding received proceeds of $436 million, net of underwriting fees, which was loaned to or invested in affiliates of PPL Capital Funding and used to fund their capital expenditures and for other general corporate purposes.

In May 2013, PPL Capital Funding remarketed $1.150 billion of 4.625% Junior Subordinated Notes due 2018 that were originally issued in June 2010 as a component of PPL's 2010 Equity Units. In connection with the remarketing, PPL Capital Funding issued $300 million of 2.04% Junior Subordinated Notes due 2016 and $850 million of 2.77% Junior Subordinated Notes due 2018, which were simultaneously exchanged into three tranches of Senior Notes. As a result of the exchange, the new Senior Notes include $250 million of 1.90% Senior Notes due 2018, $600 million of 3.40% Senior Notes due 2023 and $300 million of 4.70% Senior Notes due 2043. The transaction was accounted for as a debt extinguishment, resulting in a $10 million loss on extinguishment of the Junior Subordinated Notes, which was recorded to "Interest Expense" on the Statement of Income. The transaction was considered non-cash activity that was excluded from the 2013 Statement of Cash Flows.

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

During the nine months ended September 30, 2013, PPL repurchased 2.4 million shares of its common stock for $74 million to offset the 2013 issuances of common stock under stock-based compensation plans, ESOP and DRIP. These repurchases were recorded as a reduction to "Additional paid-in capital" on the Balance Sheet.

In September 2013, WPD (East Midlands) issued ~~£100~~£40 million aggregate principal amount of ~~5.25%~~1.676% Index-linked Senior Notes due ~~2023.~~2052. WPD (East Midlands) received proceeds of ~~£111~~£40 million, which equated to ~~$178~~$64 million at the time of issuance. The proceeds will be used for general corporate purposes. Although WPD's results are generally recorded on a one-month lag, this transaction was recognized in the current period financial statements.

In October 2013, WPD (East Midlands) issued £25 million aggregate principal amount of 1.676% Index-linked Senior Notes due 2052. WPD (East Midlands) received proceeds of £25 million, which equated to $40 million at the time of issuance. The proceeds will be used for general corporate purposes.

In October 2013, WPD (West Midlands) issued £400 million aggregate principal amount of 3.875% Senior Notes due 2024. WPD (West Midlands) received proceeds of £394 million, which equated to $637 million at the time of issuance, net of a discount and underwriting fees. The net proceeds ~~were~~will be used for general corporate purposes.

~~In June~~See Note 7 in PPL's 2012 ~~PPL Capital Funding issued $400~~Form 10-K for information on the 2011 Equity Units (with respect to which the related $978 million of ~~4.20% Senior~~ Notes ~~due 2022. The notes may~~are expected to be ~~redeemed at~~ remarketed as early as the first quarter of 2014).

(PPL ~~Capital Funding's option any time prior to maturity at make-whole redemption prices.~~and PPL ~~Capital Funding received proceeds of $396 million, net of a discount and underwriting fees, which were used for general corporate purposes.~~Energy Supply)

In ~~August 2012,~~February 2013, PPL ~~Capital Funding redeemed~~Energy Supply completed an offer to exchange up to all, but not less than a majority, of PPL Ironwood's 8.857% Senior Secured Bonds due 2025, (Ironwood Bonds), for newly issued PPL Energy Supply Senior Notes, Series 4.60% due 2021. A total of $167 million aggregate principal amount of outstanding Ironwood Bonds was exchanged for $212 million aggregate principal amount of Senior Notes, Series 4.60% due 2021. This transaction was accounted for as a modification of the existing debt; therefore, the amount of debt on the Balance Sheet remained at ~~par, plus accrued interest,~~$167 million and will be accreted to $212 million over the ~~$99~~life of the new Senior Notes. No gain or loss was recorded and the exchange was considered non-cash activity that was excluded from the 2013 Statement of Cash Flows.

In July 2013, PPL Energy Supply repaid the entire $300 million ~~outstanding~~ principal amount of its ~~6.85%~~6.30% Senior Notes ~~due 2047.~~upon maturity.

(PPL and PPL Electric)

In ~~October 2012,~~July 2013, PPL ~~Capital Funding~~Electric issued ~~$400~~$350 million of ~~3.50% Senior Notes~~4.75% First Mortgage Bonds due ~~2022. The notes may be redeemed at~~2043. PPL ~~Capital Funding's option any time prior to maturity at make-whole redemption prices. PPL Capital Funding~~Electric received proceeds of ~~$397~~$345 million, net of a discount and underwriting fees, which will be used ~~to repay short-term debt obligations, including commercial paper borrowings, and~~ for ~~general corporate purposes.~~

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.

~~(PPL and PPL Energy Supply)~~

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

~~(PPL and PPL Electric)~~

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

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 incurredcapital expenditures, to fund ~~PPL Electric's redemption of its 6.25% Series Preference Stock in June 2012~~pension obligations and for other general corporate purposes.

~~(PPL and LKE)~~

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

Legal Separateness

(~~PPL, PPL Energy Supply, PPL Electric and LKE)~~All Registrants)

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

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

Distributions and Capital Contributions

(PPL)

In August ~~2012,~~2013, PPL declared its quarterly common stock dividend, payable October 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.

(~~PPL Energy Supply, PPL Electric, LKE, LG&E and KU)~~All Registrants except PPL)

During the nine months ended September 30, ~~2012,~~2013, the following distributions and capital contributions occurred:

PPL Energy
Supply PPL Electric LKE LG&E KU

Dividends/distributions paid to parent/member $ 733 $ 75 $ 95 $ 47 $ 68
Capital contributions received from parent/member 472 150

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

Since the payment of dividends from jurisdictional public utilities is governed by the Federal Power Act, LG&E and KU petitioned the FERC requesting authorization to pay dividends in the future based on retained earnings balances calculated without giving effect to the impact of purchase accounting adjustments for the acquisition of LKE by PPL. In May 2012, FERC approved the petitions; however, each utility's adjusted equity ratio must equal or exceed 30% of total capitalization in order to pay dividends. LG&E and KU do not intend to change their dividend practices as a result of this order.

	PPL Energy
	Supply		PPL Electric		LKE		LG&E		KU

Dividends/distributions paid to parent/member	$	408	$	94	$	116	$	67	$	83
Capital contributions received from parent/member		980		205		146		54		92

8. Acquisitions, Development and Divestitures

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

The Registrants ~~periodically~~from time to time evaluate opportunities for potential acquisitions, divestitures and development projects. Development projects are ~~periodically~~ reexamined based on market conditions and other factors to determine whether to proceed with the projects, sell, cancel or expand them, execute tolling agreements or pursue other options. Any resulting transactions may impact future financial results.

Acquisitions

Ironwood Acquisition (PPL and PPL Energy Supply)

On April 13, 2012, an indirect, wholly owned subsidiary of PPL Energy Supply completed the acquisition of all of the equity interests of two subsidiaries of The AES Corporation, AES Ironwood, L.L.C. (subsequently renamed PPL Ironwood, LLC) and AES Prescott, L.L.C. (subsequently renamed PPL Prescott, LLC), which own and operate, respectively, the Ironwood Facility. The Ironwood Facility began operation in 2001 and, since 2008, PPL EnergyPlus has supplied natural gas for the facility and received the facility's full electricity output and capacity value pursuant to a tolling agreement that expires in 2021. See Note 1110 in PPL's and PPL Energy Supply's ~~2011~~2012 Form 10-K for ~~additional~~ information on the ~~tolling agreement. The acquisition provides PPL Energy Supply, through its subsidiaries, operational control~~April 13, 2012 Ironwood Acquisition. See Note 7 for information on the February 2013 exchange of ~~additional combined-cycle gas generation in PJM.~~

~~The consideration paid for this acquisition, subject to finalization~~a portion of ~~net indebtedness and fair value adjustments, was as follows.~~

~~Aggregate enterprise consideration~~	$	~~326~~
~~Less: Estimated fair value of long-term debt outstanding assumed through consolidation (a)~~		~~258~~
~~Plus: Restricted cash debt service reserves~~		17
~~Cash consideration paid for equity interests (including working capital adjustments)~~	$	85

~~(a)~~

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

~~Preliminary Purchase Price Allocation~~

The following table summarizes the preliminary allocation of the purchase price to the estimated fair value of the major classes of assets acquired and liabilities assumed through consolidation, and the effective settlement of the tolling agreement through consolidation.

~~PP&E~~	$	~~505~~
~~Long-term debt (current and noncurrent) (a)~~		~~(258)~~
~~Tolling agreement assets eliminated (b)~~		~~(170)~~
~~Other net assets~~		8
~~Net identifiable assets acquired (c)~~	$	85

~~(a)~~

~~Represents non-cash activity excluded from the Statement of Cash Flows for the nine months ended September 30, 2012.~~

(b)

~~Primarily an intangible asset~~, which represented PPL EnergyPlus' rights to and the related accounting for the tolling agreement with PPL Ironwood, LLC prior to the acquisition. On the acquisition date, PPL Ironwood, LLC recorded a liability, recognized at estimated fair value, for its obligation to PPL EnergyPlus. The tolling agreement assets of PPL EnergyPlus and the tolling agreement liability of PPL Ironwood, LLC eliminate in consolidation for PPL and PPL Energy Supply as a result of the acquisition, and therefore the agreement is considered effectively settled. Any difference between the tolling agreement assets and liability will result in a gain or loss on the effective settlement of the agreement. That amount is currently estimated to be insignificant.

~~(c)~~

~~Goodwill is currently estimated to be insignificant.~~

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

In addition, Note 20 of PPL's and PPL Energy Supply's 2011 Form 10-K included annual forecasted amortization expense of $15 million for each of the years 2012 through 2016 related to the PPL EnergyPlus tolling agreement intangible asset. This amortization will eliminate in consolidation for PPL and PPL Energy Supply as PPL Ironwood, LLC is now a subsidiary of PPL Energy Supply as a result of the acquisition.

The purchase price allocation is preliminary and could change in subsequent periods. The preliminary purchase price allocation was based on PPL Energy Supply's best estimates using information obtained as of the reporting date. Any changes to the purchase price allocation that result in material changes to the consolidated financial results will be adjusted retrospectively. The final purchase price allocation is expected to be completed by the end of 2012. The items pending finalization include, but are not limited to, the valuation of PP&E, long-term debt, certain contractual liabilities, including the tolling agreement, the resulting gain (loss) and goodwill.

~~Acquisition of WPD Midlands(PPL)~~

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

~~Separation Benefits - U.K. Regulated Segment~~

In connection with the 2011 acquisition, PPL completed a reorganization designed to transition WPD Midlands from a functional operating structure to a regional operating structure requiring a smaller combined support structure, reducing duplication and implementing more efficient procedures. More than 700 employees of WPD Midlands will have received separation benefits as a result of the reorganization by the end of 2012.

Separation benefits totaling $104 million, pre-tax, were associated with the reorganization. For the three and nine months ended September 30, 2011, $84 million of separation benefits were recorded, of which $41 million related to severance compensation and $43 million related to Early Retirement Deficiency Costs (ERDC). The accrued severance compensation is reflected in "Other current liabilities" and the ERDC reduced "Other noncurrent assets" on the Balance Sheets. Severance compensation of $7 million and ERDC of $2 million also were recorded in the fourth quarter of 2011. All separation benefits are included in "Other operation and maintenance" on the Statements of Income.

These amounts do not include $3 million and $9 million recorded in the three and nine months ended September 30, 2011 for separation benefits related to certain employees who separated from the WPD Midlands companies, but were not part of the reorganization.

~~Additional severance compensation was recorded during the three and nine months ended September 30, 2012, as shown in the table below.~~

~~The changes in the carrying amounts of accrued severance for the periods ended September 30, 2012 were as follows:~~

Three Months Nine Months

Accrued severance at the beginning of period $ 8 $ 21
Severance compensation 2 12
Severance paid (2) (25)
Accrued severance at the end of period $ 8 $ 8

~~Pro forma Information~~

~~The pro forma financial information for the nine months ended September 30, 2011, which includes WPD Midlands as if the acquisition had occurred January 1, 2010, is as follows.~~

~~Operating Revenues - PPL consolidated pro forma~~

~~8,922~~

~~Net Income Attributable to PPL Shareowners - PPL consolidated pro forma~~

~~1,322~~

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

The pro forma financial information presented above includes adjustments to depreciation, net periodic pension costs, interest expense and the related income tax effects to reflect the impact of the acquisition. The pre-tax nonrecurring credits (expenses) for the nine months ended September 30, 2011 presented in the following table were directly attributable to the WPD Midlands acquisition and adjustments were included in the calculation of pro forma operating revenue and net income to remove the effect of these nonrecurring items and the related income tax effects.

5753

	~~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)~~

~~(a)~~

~~The 2011 Bridge Facility costs, primarily commitment and structuring fees, were incurred to establish a bridge facility for purposes of funding the WPD Midlands acquisition purchase price.~~

~~(b)~~

The 2011 Bridge Facility was denominated in GBP. The amount includes a $42 million foreign currency loss on PPL Capital Funding's repayment of its 2011 Bridge Facility borrowing and a $15 million foreign currency loss associated with proceeds received on the U.S. dollar-denominated senior notes issued by PPL WEM in April 2011 that were used to repay a portion of PPL WEM's borrowing under the 2011 Bridge Facility.

~~(c)~~

The repayment of borrowings on the 2011 Bridge Facility was economically hedged to mitigate the effects of changes in foreign currency exchange rates with forward contracts to purchase GBP, which resulted in net hedge gains.

~~(d)~~

The hedge ineffectiveness includes a combination of ineffectiveness associated with closed out interest rate swaps and a charge recorded as a result of certain interest rate swaps failing hedge effectiveness testing, both associated with the acquisition financing.

~~(e)~~

~~The U.K. stamp duty tax represents a tax on the transfer of ownership of property in the U.K. incurred in connection with the acquisition.~~

~~(f)~~

~~See "Separation Benefits - U.K. Regulated Segment" above.~~

~~(g)~~

~~Primarily includes acquisition-related advisory, accounting and legal fees.~~

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

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

Development

~~NGCC Construction~~Future Capacity Needs (PPL ~~LKE, LG&E~~ and ~~KU)~~Kentucky Registrants)

Construction activity continues on the previously announced natural gas combined-cycle generating unit at the Cane Run station, scheduled to be operational in May 2015. In ~~September 2011,~~October 2013, LG&E and KU ~~filed a CPCN with the KPSC requesting approval~~announced plans to build a ~~640 MW NGCC~~second natural gas combined-cycle generating unit at KU's Green River generating site. Subject to finalizing details, regulatory applications, permitting and construction schedules, 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 constructionfacility is expected to ~~be completed by May 2015. The project, which includes building a natural gas supply pipeline and related transmission projects, has~~have approximately 700 MW of capacity at an estimated cost of ~~approximately $600~~$700 million and is planned to be operational in 2018. At the same time, LG&E and KU also announced plans for a potential 10 MW solar generation facility to be operational in 2016 at an estimated cost of $25 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. See Note 6 for additional information.

~~Bell Bend COLA~~(PPL and PPL Energy Supply)

Bell Bend COLA

The NRC continues to review the COLA submitted by a PPL Energy Supply subsidiary, PPL Bell Bend, LLC (PPL Bell Bend) for the proposed construction of the Bell Bend nuclear generating unit (Bell Bend) ~~to be built~~ adjacent to PPL's Susquehanna nuclear generating plant. PPL Bell Bend does not expect to complete the ~~Susquehanna plant.~~COLA review process with the NRC prior to 2016. PPL Bell Bend has made no decision to proceed with construction of Bell Bend and expects that such decision will not be made for several years given the anticipated lengthy NRC license approval process. Additionally, PPL Bell Bend ~~has announced that it~~ does not expect to proceed with construction absent favorable economics, a joint arrangement with other interested parties and a federal loan guarantee or other acceptable financing. PPL Bell Bend is currently authorized to spend up to ~~$162~~$205 million ~~through 2012~~ on the COLA and other permitting costs ~~(including land costs)~~ necessary for ~~construction.~~construction, which is expected to be sufficient to fund the project through receipt of the license. At September 30, ~~2012~~2013 and December 31, ~~2011, $148~~2012, $169 million and ~~$131~~$154 million of costs, which includes capitalized interest, associated with the licensing application were capitalized and are included on the Balance Sheets in noncurrent "Other intangibles." PPL Bell Bend believes that the estimated fair value of the COLA currently exceeds the costs expected to be

capitalized associated with the licensing application. ~~PPL Bell Bend remains active in the DOE loan guarantee application process.~~ See Note 8 in PPL's and PPL Energy Supply's ~~2011~~2012 Form 10-K for additional information.

Hydroelectric Expansion Project

In the first quarter of 2013, the 63 MW Rainbow hydroelectric redevelopment project in Great Falls, Montana was placed in service.

~~Susquehanna-Roseland~~Regional Transmission Line Expansion Plan (PPL and PPL Electric)

Susquehanna-Roseland

On August 19, 2013, the environmental groups filed a petition for injunctive relief seeking to prohibit all construction activities until the court issued a final decision on the complaint. On August 30, 2013, the District Court ruled in favor of PPL Electric, PSE&G and the U.S. Government and dismissed the lawsuit filed by the environmental groups. The environmental groups have publicly stated that they do not intend to appeal the District Court decision. PPL Electric began construction on the National Park Service lands in Pennsylvania on October 1, 2013.

Construction activities have ~~begun~~been underway on other portions of the 101-mile route in ~~Pennsylvania.~~Pennsylvania since 2012. The line is expected to be ~~in service~~completed 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~~At September 30, 2013, PPL Electric's estimated share 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. project cost was $630 million.

PPL and PPL Electric cannot predict any future legal challenges to the project or what additional actions, if any, PJM might take in the event of a further delay to ~~its~~the scheduled in-service date for the new line.

Northeast/Pocono

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

In December 2012, PPL Electric submitted an application to the PUC requesting permission to site and construct the project. A number of parties have protested the application, which has been assigned to an Administrative Law Judge (ALJ). Evidentiary hearings were held in July 2013. In October 2013, the ALJ concluded that PPL met its burden on all issues, and recommended that the PUC approve the siting application, two zoning petitions, and the remaining eminent domain applications. A final PUC order is expected in the first quarter of 2014. PPL Electric expects the project to be completed in 2017. At September 30, ~~2012,~~2013, PPL Electric's estimated ~~share~~cost of the project ~~cost~~ was ~~$560~~$335 million, an increase from ~~approximately $500~~its original estimate of $200 million at December 31, ~~2011,~~2012. The increased cost is primarily related to higher material and labor costs and additional scope due ~~primarily~~ to ~~increased material costs.~~revised construction standards. Of the total estimated cost, $308 million qualifies for the CWIP treatment.

See Note 8 in PPL's and PPL Electric's ~~2011~~2012 Form 10-K for additional information.

Other (PPL and PPL Energy Supply)

Montana Transactions

In September 2013, PPL Montana executed a definitive agreement to sell 633 MW of hydroelectric facilities to NorthWestern for $900 million in cash, subject to certain adjustments. The sale, which is not expected to close before the second half of 2014, includes 11 hydroelectric power facilities and related assets. The sale is subject to closing conditions, including receipt of regulatory approvals by the FERC and Montana Public Service Commission and certain third-party consents. Due to the uncertainties related to certain of these conditions as of September 30, 2013, the sale did not meet the applicable accounting criteria for the assets and liabilities included in the transaction to be classified as held for sale on the Balance Sheet.

In a related transaction, in September 2013, PPL Montana negotiated and entered into an agreement to pay $271 million to terminate a sale-leaseback arrangement and reacquire its interests in the Colstrip coal-fired facilities. See Note 11 in PPL's and PPL Energy Supply's 2012 Form 10-K for additional information on the sale-leaseback. This transaction is anticipated to occur by the end of the first quarter of 2014, subject to approval by the FERC. At lease termination, in addition to recording a charge for the cash payment, a non-cash charge is expected to be recorded related to the existing lease-related assets on PPL's and PPL Energy Supply's Balance Sheets. The book value of these assets was approximately $450 million at September 30, 2013. These lease-related assets will be written-off and the reacquired Colstrip assets will be recorded at fair value as of the acquisition date. The total loss is currently estimated at between $310 million and $430 million, after-tax, which is dependent on the fair value assigned to the reacquired Colstrip assets.

Lower Mt. Bethel Plant Transaction

In December 2001, a subsidiary of PPL Energy Supply entered into an operating lease arrangement, as lessee, for the development, construction and operation of the Lower Mt. Bethel plant. The owner/lessor of the Lower Mt. Bethel plant was determined to be a VIE and has been consolidated in PPL's and PPL Energy Supply's financial statements since December 31, 2003. See Note 22 in PPL's and PPL Energy Supply's 2012 Form 10-K for additional information on the VIE. A subsidiary of PPL Energy Supply now intends to purchase the Lower Mt. Bethel plant for $455 million at the lease termination date in December 2013, subject to approval by the FERC. The proceeds are expected to be used by the VIE to repay outstanding debt and make a distribution to its equity investors (currently presented as noncontrolling interests in PPL's and PPL Energy Supply's financial statements). The transaction will not result in any gain or loss as it will be treated as a

transfer of assets between entities under common control and will not result in any change to the presentation of the Lower Mt. Bethel plant assets as they are currently included in PPL's and PPL Energy Supply's consolidated financial statements.

9. Defined Benefits

(All Registrants except PPL ~~PPL Energy Supply~~Electric and ~~PPL Electric)~~KU)

Prior to January 1, 2012, the majority of PPL's Montana and Pennsylvania employees were eligible for pension benefits under PPL Montana's cash balance pension plan or PPL's qualified and non-qualified non-contributoryCertain net periodic defined benefit ~~pension~~costs are applied to accounts that are further distributed between capital and expense, including certain costs allocated to applicable subsidiaries for plans ~~with benefits based on length of service~~sponsored by PPL Services and final average pay, as defined by the plans. Effective January 1, 2012, these plans were closed to newly hired salaried employees. Newly hired bargaining unit employees will continue to be eligible under these plans based on their collective bargaining agreements. Salaried employees hired on or after January 1, 2012 will be eligible to participate in the new PPL Retirement Savings Plan, a 401(k) savings plan with enhanced employer matching.

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

LKE. Following are the net periodic defined benefit costs (credits) of the plans sponsored by PPL, PPL Energy Supply, LKE and LG&E for the periods ended September 30:

			Pension Benefits																		Pension Benefits
			Three Months								Nine Months										Three Months								Nine Months
			U.S.				U.K.				U.S.				U.K.						U.S.				U.K.				U.S.				U.K.
			2012		2011		2012		2011		2012		2011		2012		2011				2013		2012		2013		2012		2013		2012		2013		2012
PPL	PPL																		PPL
Service cost	Service cost		$	25	$	24	$	13	$	14	$	77	$	71	$	40	$	31	Service cost		$	31	$	25	$	18	$	13	$	94	$	77	$	52	$	40
Interest cost	Interest cost			55		54		85		88		165		163		254		200	Interest cost			53		55		79		85		160		165		238		254
Expected return on plan assets	Expected return on plan assets			(65)		(61)		(115)		(103)		(195)		(184)		(340)		(243)	Expected return on plan assets			(73)		(65)		(115)		(115)		(220)		(195)		(346)		(340)
Amortization of:	Amortization of:																		Amortization of:
		Prior service cost		6		6		1		1		18		18		3		3		Prior service cost		6		6				1		17		18				3
		Actuarial (gain) loss		11		7		19		15		32		21		59		44		Actuarial (gain) loss		20		11		37		19		60		32		112		59
Net periodic defined benefit	Net periodic defined benefit																		Net periodic defined benefit
	costs (credits) prior to																		costs (credits)		$	37	$	32	$	19	$	3	$	111	$	97	$	56	$	16
	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

~~(a)~~

In 2011, WPD Midlands recorded early retirement deficiency costs payable under applicable pension plans related to employees leaving the WPD Midlands companies. See Note 8 for additional information.

		Pension Benefits
		Three Months				Nine Months
		2013		2012		2013		2012
PPL Energy Supply
Service cost		$	1	$	1	$	5	$	4
Interest cost			2		2		6		6
Expected return on plan assets			(2)		(2)		(7)		(7)
Amortization of:
	Actuarial (gain) loss		1		1		2		2
Net periodic defined benefit costs (credits)		$	2	$	2	$	6	$	5

LKE
Service cost		$	6	$	5	$	19	$	16
Interest cost			16		16		47		48
Expected return on plan assets			(20)		(17)		(61)		(52)
Amortization of:
	Prior service cost		1		2		3		4
	Actuarial (gain) loss		8		5		25		16
Net periodic defined benefit costs (credits)		$	11	$	11	$	33	$	32

LG&E
Service cost		$	1			$	2	$	1
Interest cost			3	$	4		10		11
Expected return on plan assets			(5)		(5)		(15)		(14)
Amortization of:
	Prior service cost		1		1		2		2
	Actuarial (gain) loss		3		3		10		8
Net periodic defined benefit costs (credits)		$	3	$	3	$	9	$	8

		Other Postretirement Benefits
		Three Months				Nine Months
		2013		2012		2013		2012
PPL
Service cost		$	4	$	3	$	11	$	9
Interest cost			7		7		21		23
Expected return on plan assets			(6)		(6)		(18)		(17)
Amortization of:
	Transition obligation								1
	Prior service cost				1				1
	Actuarial (gain) loss		1		1		4		3
Net periodic defined benefit costs (credits)		$	6	$	6	$	18	$	20

5956

Through its subsidiaries, PPL Energy Supply made spot market bilateral sales of power in the Pacific Northwest during the period from December 2000 through June 2001. Several parties subsequently claimed refunds at FERC as a result of these sales. In June 2003, the FERC terminated proceedings to consider whether to order refunds for spot market bilateral sales made in the Pacific Northwest, including sales made by PPL Montana, during the period December 2000 through June 2001. In August 2007, the U.S. Court of Appeals for the Ninth Circuit reversed the FERC's decision and ordered the FERC to

consider additional evidence. In October 2011, FERC initiated proceedings to consider additional evidence. ~~At June 30, 2012, there were two remaining claims against PPL Energy Supply totaling $73 million.~~ In July 2012, PPL Montana and the City of Tacoma, one of the two parties claiming refunds at FERC, reached a settlement whereby PPL Montana ~~would pay~~paid $75 thousand to resolve the City of Tacoma's $23 million ~~claim, $9 million of which represents interest.~~claim. The settlement does not resolve the remaining claim outstanding at September 30, ~~2012~~2013 by the City of Seattle for approximately $50 million. In April 2013, the FERC issued an order on reconsideration allowing the parties to seek refunds for the period January 2000 through December 2000. As a result, the City of Seattle may be able to seek refunds from PPL Montana for such period. Hearings before a FERC Administrative Law Judge regarding the City of Seattle's refund claims were completed in October 2013. A briefing schedule has been set and an initial decision is expected in mid-March 2014.

Although PPL and its subsidiaries believe ~~that~~ they have not engaged in any improper trading or marketing practices affecting the Pacific Northwest markets, PPL and PPL Energy Supply cannot predict the outcome of the above-described proceedings or whether any subsidiaries will be the subject of any additional governmental investigations or named in other lawsuits or refund proceedings. Consequently, PPL and PPL Energy Supply cannot estimate a range of reasonably possible losses, if any, related to this matter.

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

~~FERC Market-Based Rate Authority~~

In 1998, the FERC authorized LG&E and KU and PPL EnergyPlus to make wholesale sales of electric power and related products at market-based rates. In those orders, the FERC directed LG&E, KU and PPL EnergyPlus, respectively, to file an updated market analysis within three years after the order, and every three years thereafter. Since then, periodic market-based rate filings with the FERC have been made by LG&E, KU, PPL EnergyPlus, PPL Electric PPL Montana and most of PPL Generation's subsidiaries. These filings consisted of a Northwest market-based rate filing for PPL Montana and a Northeast market-based rate filing for most of the other PPL subsidiaries in PJM's region. In June 2011, FERC approved PPL's market-based rate update for the Eastern region and PPL's market-based rate update for the Western region. Also, in June 2011, PPL filed its market-based rate update for the Southeast region, including LG&E and KU in addition to PPL EnergyPlus. In June 2011, the FERC issued an order approving LG&E's and KU's request for a determination that they no longer be deemed to have market power in the BREC balancing area and removing restrictions on their market-based rate authority in such region.

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

~~Energy Policy Act of 2005~~ - Reliability Standards(All Registrants)

The NERC is responsible for establishing and enforcing mandatory reliability standards (Reliability Standards) regarding the bulk power system. The FERC oversees this process and independently enforces the Reliability Standards. The Reliability Standards have the force and effect of law and apply to certain users of the bulk power electricity system, including electric utility companies, generators and marketers. Under the Federal Power Act, the FERC may assess civil penalties of up to $1 million per day, per violation, for certain violations.

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

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

OnIn October ~~18,~~ 2012, the FERC issued a Notice of Proposed Rulemaking (NOPR) concerning Reliability Standards for ~~Geomagnetic Disturbances.~~geomagnetic disturbances (GMDs). The FERC ~~proposes~~proposed to direct the NERC to submit for approval Reliability Standards that address the impact of ~~geomagnetic disturbances~~GMDs on the reliable operation of the bulk-power system. ~~The~~In May 2013, the FERC ~~proposes to direct~~issued its Final Rule, Order No. 779, which directs the NERC to ~~file~~submit GMD Reliability Standards to the FERC for approval in two stages. In the first stage, the NERC must submit one or more Reliability Standards by January 22, 2014 that ~~include measures to protect against damage to~~require owners and operators of the bulk-power system to develop and implement operational procedures to mitigate the effects of GMDs on the bulk-power system. In the second stage, the NERC must submit one or more Reliability Standards by January 22, 2015 that require owners and operators of bulk-power system facilities to assess yet to be determined "benchmark GMD events" and develop and implement plans to protect the bulk-power system from such as the installation of equipment that blocks geomagnetically induced currents on implicated transformers. If the NOPR is adopted by the FERC, it is expected to require the Registrants to make significant expenditures in new equipment and/or modifications to their facilities.GMD events. The Registrants are unable to predict ~~whether~~ the ~~NOPR~~specific requirements that will be ~~adopted as proposed by~~contained in the ~~FERC~~Reliability Standards that the NERC has been directed to submit or the amount of any expenditures that may be required as a result of the ~~adoption~~approval of any such Reliability ~~Standards for geomagnetic disturbances.~~

~~Settled Litigation~~ ~~(PPL and PPL Energy Supply)~~Standards.

~~Spent Nuclear Fuel Litigation~~

In May 2011, PPL Susquehanna entered into a settlement agreement with the U.S. Government relating to PPL Susquehanna's lawsuit, seeking damages for the Department of Energy's failure to accept spent nuclear fuel from the PPL Susquehanna plant. PPL Susquehanna recorded credits totaling $56 million to "Fuel" on the Statement of Income during the nine months ended September 30, 2011 to recognize recovery, under the settlement agreement, of certain costs to store spent nuclear fuel at the Susquehanna plant. The amounts recorded through September 2011 cover costs incurred from 1998 through December 2010.

Environmental Matters - Domestic

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

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

LG&E and KU are entitled to recover, through the ECR mechanism, ~~the cost~~certain costs of complying with the ~~Federal~~ Clean Air Act as amended and those federal, state or local environmental requirements ~~which apply~~applicable to coal combustion wastes and by-products from facilities ~~utilized for production of energy~~that generate electricity from coal in accordance with ~~their~~ approved compliance plans. Costs not covered by the ECR mechanism for LG&E and KU and all such costs for PPL Electric are subject to rate recovery before ~~their~~the companies' respective state regulatory authorities, or the FERC, if applicable. Because PPL Electric does not own any generating plants,

its exposure to related environmental compliance costs is reduced. As PPL Energy Supply is not a rate regulated entity, it ~~does not have any mechanism for seeking rate recovery of~~cannot seek to recover environmental compliance ~~costs.~~costs through the mechanism of rate recovery. PPL, PPL Electric, LKE, LG&E and KU can provide no assurances as to the ultimate outcome of future environmental or rate proceedings before regulatory authorities.

(All Registrants except PPL ~~PPL Energy Supply, LKE, LG&E and KU)~~Electric)

Air

CSAPR (formerly Clean Air Transport Rule) and CAIR

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

~~The CSAPR was meant to facilitate attainment of ambient air quality standards for ozone and fine particulates by requiring~~required reductions in sulfur dioxide and nitrogen ~~oxides. The CSAPR established new sulfur dioxide~~oxides in two phases (2012 and nitrogen oxide emission allowance cap-and-trade programs that were more restrictive than previously under CAIR. The CSAPR provided for two-phased programs of sulfur dioxide and nitrogen oxide emissions reductions, with initial reductions in 2012 and more stringent reductions in 2014.2014).

In December 2011, the D.C. Circuit Court stayed implementation of the CSAPR and left CAIR in effect pending a final decision on the validity of the rule. In August 2012, the D.C. Circuit Court issued a ruling invalidating CSAPR, remanding the rule to the EPA for further action, and leaving CAIR in place during the interim. ~~That ruling will not become effective until~~In June 2013, the U.S. Supreme Court ~~rules on~~granted the EPA's petition for review of the D.C. Circuit Court's August 2012 decision. Oral argument before the U.S. Supreme Court has been scheduled for December 2013. Prior to a ~~pending motion for rehearing. A further~~ revised rule ~~is not expected~~ from the EPA, ~~for at least two years.~~coal-fired generating plants could face tighter nitrous oxide emission limitations through state action.

The Kentucky fossil-fueled generating plants can meet the CAIR sulfur dioxide emission requirements by utilizing sulfur dioxide allowances (including banked ~~allowances)~~allowances and optimizing existing controls). To meet nitrogen oxide standards under the CAIR, the Kentucky companies will need to buy allowances and/or make operational changes. LG&E and KU do not currently anticipate that the costs of meeting these reinstated CAIR requirements or standards towill be significant.

PPL Energy Supply's Pennsylvania fossil-fueled generating plants can meet the CAIR sulfur dioxide emission requirements with the existing scrubbers that were placed in service in 2008 and 2009. To meet the CAIR nitrogen oxide standards, ~~under the CAIR,~~ PPL Energy Supply will need to buy allowances and/or make operational changes, the costs of which are not anticipated to be significant.

National Ambient Air Quality Standards

~~In addition to the reductions in sulfur dioxide and nitrogen oxide emissions required under the CAIR for its Pennsylvania and Kentucky plants, PPL's~~PPL fossil-fueled generating plants ~~including those in Montana,~~ may face further reductions in ~~sulfur dioxide and nitrogen oxide~~ emissions as a result of more stringent national ambient air quality standards for ozone, nitrogen oxide, sulfur dioxide and/or fine particulates.

In 2010, the EPA finalized a new one-hour standard for sulfur dioxide, and states are required to identify areas that meet those standards and areas that are in non-attainment. ~~For~~In July 2013, the EPA finalized non-attainment ~~areas, states~~designations for parts of the country, including part of Yellowstone County in Montana (Billings area), including the Corette plant and its immediate vicinity, and part of Jefferson County in Kentucky. Attainment must be achieved by 2018. States are required to develop plans by 2014 to achieve attainment by 2017. For areas that are in attainment or are unclassifiable, states are required to develop maintenance plans by mid-2013 that demonstrate continued attainment. working on designations for other areas.

In ~~June~~December 2012, the EPA ~~proposed a rule~~issued final rules that ~~strengthens~~strengthen the fine particulate standards. ~~States would~~Under the final rules, 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, or the ~~Mercury and Air Toxic Standards (MATS),~~MATS, or the Regional Haze requirements (as discussed below), such as upgraded or new sulfur dioxide scrubbers at ~~some of their~~certain plants and, in the case of LG&E and KU, the previously announced retirement of coal-fired generating units at the Cane Run, Green River and Tyrone plants, will help to achieve compliance with the new one-hour sulfur dioxide standard. If additional reductions were to be required, the financial impact could be significant. The short-term impact on the Corette plant from the EPA's final designation of part of Yellowstone County in Montana as non-attainment as noted above is not expected to be significant, as PPL Energy Supply previously announced its intent to place the plant in long-term reserve status beginning in April 2015 (see "MATS" below). The longer-term impact will depend on the status of plant operations at that time and what the MDEQ requires in its State Implementation Plan for reestablishing attainment, due in January 2015.

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

~~Mercury and Other Hazardous Air Pollutants~~MATS

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

states in the D.C. Circuit Court, where oral argument is scheduled for December 2013. 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~~PPL has received two extensions in Kentucky and has requested an extension for one plant in Pennsylvania. Other extension requests are under consideration.

At the ~~need to install pollution control equipment to meet~~time the ~~provisions of 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 expected need to install environmental controls, including chemical additive and fabric-filter baghouses to remove certain ~~hazardous~~ air pollutants. Recovery of the cost of certain controls was granted by the KPSC in December 2011. ~~See Note 6 for information on~~ LG&E's and KU's anticipated retirement of certain coal-fired ~~electric~~electricity generating units is in response to this and other environmental ~~regulation. With the publication of the final MATS rule,~~regulations. LG&E and KU are ~~currently assessing~~continuing to assess 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 may be necessary at certain coal-fired plants, the capital cost of which is not expected to be significant. PPL Energy Supply continues to analyze the potential impact of MATS on operating costs. With respect to PPL Energy Supply's Montana plants, modifications to the ~~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~~2013 was ~~approximately~~ $67 million. Although the Corette plant asset group was not determined to be impaired at September 30, ~~2012,~~2013, it is reasonably possible that an impairment ~~charge~~ could ~~be recorded in the fourth quarter of 2012 or~~occur in future periods, as the Company continues to assess its plans for Corette and 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.

Upon reconsideration of the MATS rule, in March 2013 the EPA revised certain emission limits and related requirements for new power plants. The revised limits are somewhat less onerous than the original proposal, and thereby pose less of an impediment to the construction of new coal-fired power plants.

Regional Haze and Visibility

~~In January 2012,~~The EPA's regional haze programs were developed under the Clean Air Act to eliminate man-made visibility degradation by 2064. Under the programs, states are required to take action via state plans to make reasonable progress every decade, including the application of Best Available Retrofit Technology (BART) on power plants commissioned between 1962 and 1977.

The primary power plant emissions affecting visibility are sulfur dioxide, nitrogen oxide and particulates. To date, the focus of regional haze activity has been the western U.S. because, until recently, BART requirements for sulfur dioxide and nitrogen oxide reductions in the eastern U.S. were largely addressed through compliance with other regulatory programs, such as CSAPR or CAIR. More specifically, before CAIR was temporarily invalidated in 2008, the EPA ~~proposed limited approval of~~had determined, and the D.C. Circuit Court had affirmed, that a state could accept region-wide reductions under the CAIR trading program to satisfy BART requirements. After CAIR was temporarily invalidated, the EPA adopted a final rule providing that states subject to CSAPR (which replaced CAIR) may rely on participation in the CSAPR trading program as an alternative to BART. However, the D.C. Circuit Court's August 2012 decision to vacate and remand CSAPR and to implement CAIR in its place on an interim basis leaves power plants located in the eastern U.S., including PPL's plants in Pennsylvania 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 are not warranted. The limited approval does not address deficiencies ofand Kentucky, exposed to reductions in sulfur dioxide and nitrogen oxides as required by BART, unless the ~~state plan arising~~D.C. Circuit Court's decision, now pending before the U.S. Supreme Court, is overturned.

In addition to this exposure stemming from the remand of ~~the CAIR rule. Previously, the EPA had~~CSAPR, LG&E's Mill Creek Units 3 and 4 are required to reduce sulfuric acid mist emissions because they were determined ~~that implementation of the CAIR requirements would meet~~to have a significant regional haze impact. These reductions are in the Kentucky Division of Air Quality's regional haze state implementation plan that was submitted to the EPA. LG&E is

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~~Best Available Retrofit Technology (BART) requirements for sulfur dioxide and nitrogen oxides. In 2012,~~currently installing sorbent injection technology to comply with these reductions, the ~~EPA finalized a rule providing that implementation~~costs 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, the U.S. Court of Appeals for the District of Columbia Circuit (Court) vacated and remanded the CSAPR backwhich are not expected to the EPA for further rulemaking. In September 2012, several environmental groups filed a petition for review with the Court challenging the EPA's approval of the Pennsylvania SIP. At this time, it is not known whether the EPA will reinstate its previous determination that CAIR satisfies the BART requirement or will require states to conduct source-specific BART studies.be significant.

In Montana, the EPA Region 8 developed the regional haze plan as the ~~Montana Department of Environmental Quality~~MDEQ declined to develop a BART SIP at this 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.

state implementation plan. In ~~March and~~ September 2012, the EPA issued its ~~draft and~~ final Federal Implementation ~~Plans~~Plan (FIP) for the Montana regional haze rule. The final FIP ~~indicated that~~assumed no additional controls ~~were required~~ 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.~~2015 (see "MATS" 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 the EPA which requires the Mill Creek plant to reduce its sulfuric acid mist emissions from Units 3~~been consolidated, 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.litigation is on-going.

New Source Review (NSR)

The EPA has continued its NSR enforcement efforts targeting coal-fired generating plants. The EPA has asserted that modification of these plants has increased their emissions and, consequently, that they are subject to stringent NSR requirements under the Clean Air Act. In April 2009, PPL received EPA information requests for its Montour and Brunner Island plants. ~~The requests are similar to those that PPL received 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~~a Spring 2012 maintenance outage at Colstrip Unit 1. In September 2012, PPL Montana received an information request from the Montana Department of Environmental Quality regarding Colstrip Unit 1 and other projects. PPL and PPL Energy Supply cannot predict the outcome of these matters, and cannot estimate a range of reasonably possible losses, if any.

In ~~addition,~~March 2009, KU received an EPA notice alleging that KU violated certain provisions of the Clean Air Act's rules governing NSR and prevention of significant deterioration by installing sulfur dioxide scrubbers and SCR controls at its Ghent plant without assessing potential increased sulfuric acid mist emissions. KU contends that the projects in question were pollution control projects, and therefore exempt from the requirements cited by the EPA. In December 2009, the EPA issued an information request on this matter. In September 2012, the parties reached a tentative settlement addressing the Ghent NSR matter that seeks to resolve a September 2007 notice of violation alleging opacity violations at the plant. The parties subsequently entered into a consent decree which was approved by the court on September 11, 2013. The consent decree requires the incurrence of non-material costs that have already been accrued.

In August 2007, LG&E 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~~States and environmental groups also have commenced litigation alleging ~~that KU violated certain provisions~~violations of the ~~Clean Air Act's rules governing~~ NSR regulations by coal-fired generating plants across the nation. See "Legal Matters" above for information on a lawsuit filed by environmental groups in March 2013 against PPL Montana and ~~prevention~~other owners 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. PPL, LKE and KU cannot predict the outcome of this matter until a final 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 losses above the amounts accrued by KU.Colstrip.

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

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

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

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

Cane Run Environmental Claims(PPL, LKE and LG&E)

On September 6, 2013, PPL, LKE and LG&E received a letter on behalf of two residents adjacent to the Cane Run plant notifying various federal, state, and local agencies of their intent to file a citizen suit for alleged violations of the Clean Air Act and Resource Conservation and Recovery Act. The claimants allege various environmental harms including an imminent and substantial endangerment to health or the environment and state that they will seek civil penalties, injunctive relief and attorneys' fees. PPL, LKE and LG&E cannot predict the outcome of this matter or the potential impact on operations of the Cane Run plant. In the 2011 to 2013 time period, the Louisville Metro Air Pollution Control District issued several notices of violation alleging violations of local air quality rules at the Cane Run plant. The agency is seeking civil penalties and remedial measures which are not expected to result in the incurrence of material costs. LG&E is currently in settlement negotiations with the agency. LG&E has previously announced that it anticipates retiring the coal-fired units at Cane Run before the end of 2015.

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

~~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 to~~applied beginning with 2012 model year vehicles. The EPA ~~has~~ also clarified that this standard, beginning in 2011, ~~also~~ authorized regulation of GHG emissions from stationary sources under the NSR and Title V operating permit provisions of the Clean Air Act. As a result, any new sources or major modifications to existing GHG sources causing a net significant emissions increase ~~requires~~now require adherence to the BACT permit limits for GHGs. ~~These~~The rules were challenged, and in June 2012 the ~~U.S.~~D.C. Circuit Court ~~of Appeals for the District of Columbia Circuit~~ upheld the EPA's regulations. In December 2012, the D.C. Circuit Court denied petitions for rehearing pertaining to its June 2012 opinion. On October 15, 2013, the U.S. Supreme Court granted certiorari for several petitions to decide whether the NSR provisions of the Clean Air Act require the EPA to regulate GHG emissions from stationary sources, such as power plants.

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

The EPA issued its revised proposal (re-proposal) for new sources on September 20, 2013 as directed by the White House. Unlike the EPA's April 2012 ~~the EPA proposed~~Carbon Dioxide (CO2) New Source Performance Standards (NSPS) for ~~carbon dioxide emissions from~~ new ~~coal-fired generating units, combined-cycle natural~~plants, the re-proposal established separate emission standards for coal and gas units based on the application of different technologies. The coal standard is based on the application of partial carbon capture and integrated gasification combined-cycle units. The proposal would require new coal plants to achieve the same stringent limitations on carbon-dioxide emissions as the best performing new gas plants. There presentlysequestration technology, but because there is no commercially viable CO2 reduction technology available ~~technology~~presently to allow new coal plants to ~~achieve these limitations and, as a result,~~meet the ~~EPA's~~proposed standards, this proposal ~~would~~ effectively ~~preclude~~precludes the construction of new ~~coal-fired generation~~coal plants. The EPA proposed the same standard for natural gas combined-cycle power plants as it had proposed in April 2012. A slightly less stringent standard, however, was offered in the ~~future.~~re-proposal for smaller gas plants. Simple cycle natural gas plants are no longer explicitly exempt from the standard under the EPA's re-proposal.

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

Eleven western states and certain Canadian provinces established the Western Climate Initiative (WCI) in 2003. The WCI established a goal of reducing carbon dioxide emissions 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, 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, although the decided cases to date have not sustained claims brought on the basis of these theories of liability, the law remains unsettled on these claims. In September 2009, the U.S. Court of Appeals for the Second Circuit in the case of AEP v. Connecticut reversed a federal district court's decision and ruled that several states and public interest groups, as well as the City of New York, could sue five electric utility companies under federal common law for allegedly causing a public nuisance as a result of their emissions of GHGs. In June 2011, the U.S. Supreme Court overturned the ~~lower court~~Second Circuit and held that such federal common law claims were displaced by the Clean Air Act and regulatory actions of the EPA. In addition, in Comer v. Murphy Oil (Comer case), the U.S. Court of Appeals for the Fifth Circuit (Fifth Circuit) declined to overturn a district court ruling that plaintiffs did not have standing to pursue state common law claims against companies that emit GHGs. The complaint in the Comer case named the previous indirect parent of LKE as a defendant based upon emissions from the Kentucky plants. In January 2011, the Supreme Court denied a petition to reverse the Fifth Circuit's ruling. In May 2011, the plaintiffs in the Comer case filed a substantially similar complaint in federal district court in Mississippi against 87 companies, including KU and three other indirect subsidiaries of LKE, under a Mississippi statute that allows the re-filing of an action in certain circumstances. In March 2012, the Mississippi federal district court granted defendants' motions to dismiss the state common law ~~claims because plaintiffs had previously raised~~claims. Plaintiffs appealed to the ~~same claims, plaintiffs lacked standing, plaintiffs' claims were displaced by the Clean Air Act, and other grounds. In April 2012, plaintiffs filed a notice~~U.S. Court of ~~appeal in~~Appeals for the Fifth ~~Circuit.~~Circuit and in May 2013 the Fifth Circuit affirmed the district court's dismissal of the case. Additional litigation in federal and state courts over ~~these~~such issues is continuing. PPL, LKE and KU cannot predict the outcome of ~~this litigation~~these lawsuits or estimate a range of reasonably possible losses, if any.

Renewable Energy Legislation (All Registrants)~~(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 introduced which would mandate electric utilities~~Federal legislation on renewable energy is not expected 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~~enacted 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. A bill adding new hydropower to Montana's renewable portfolio standard was enacted with an effective date of October 1, 2013. An interim legislative committee in Montana is reviewing the ~~Senate and House amending the existing Alternative Energy Portfolio Standard to accelerate the current solar obligation, but no action was taken before the end of the 2011-2012 legislative session.~~

state's RPS. PPL and PPL Energy Supply cannot predict at this time whether the committee will recommend any changes to existing laws.

The Registrants 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) (All Registrants except PPL ~~PPL Energy Supply, LKE, LG&E and KU)~~Electric)

In June 2010, the EPA proposed two approaches to regulating the disposal and management of CCRs (as either hazardous or non-hazardous) under the Resource Conservation and Recovery Act (RCRA). CCRs include fly ash, bottom ash and sulfur dioxide scrubber wastes. ~~The first approach would regulate~~Regulating CCRs as a hazardous waste under Subtitle C of the ~~RCRA. This approach~~RCRA would materially increase costs and result in early retirements of many coal-fired plants, as it would require plants to retrofit their operations to comply

with full hazardous waste requirements for the generation of CCRs and associated waste waters through generation, transportation and disposal. This would also have a negative impact on the beneficial use of CCRs and could eliminate existing markets for CCRs. The ~~second~~EPA's proposed approach ~~would~~to regulate CCRs as ~~a solid~~non-hazardous waste under Subtitle D of the ~~RCRA. This approach~~RCRA would mainly affect disposal and most significantly affect any wet disposal operations. Under this approach, many of the current markets for beneficial uses would not be affected. Currently, PPL expects that several of its plants in Kentucky and Montana could be significantly impacted by the ~~requirements of Subtitle D of the RCRA,~~EPA's proposed non-hazardous waste regulations, as these plants are using surface impoundments for management and disposal of CCRs.

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

The EPA is continuing to evaluate the unprecedented number of comments it received on its June 2010 proposed regulations. In October 2011, the EPA issued a Notice of Data Availability (NODA) ~~that requests~~requesting comments on selected documents ~~that the EPA~~it received during the comment period for the proposed regulations. On September 20, 2013, in response to the proposed Effluent Limitation Guidelines, PPL submitted comments on the proposed CCR regulations. Also, on September 3, 2013, PPL commented on a second CCR NODA seeking comment on additional information related to the EPA's proposal. In ~~addition,~~July 2013, the U.S. House of Representatives ~~in September 2012 approved a bill that was revised in~~passed House Bill H.R. 2218, the ~~Senate to modify Subtitle D~~Coal Residuals and Reuse Management Act of ~~the RCRA to provide for the proper management and disposal of CCRs and to preclude~~2013, which would preempt the EPA from ~~regulating CCRs~~issuing final CCR regulations and would set non-hazardous CCR standards under ~~Subtitle C of~~RCRA and authorize state permit programs. It remains uncertain whether similar legislation will likely be passed by the ~~RCRA. This revised bill is being considered in the Senate, and the prospect for passage of this legislation is uncertain.~~U.S. Senate.

~~In January 2012, a~~A coalition of environmental groups and two CCR recycling companies have filed ~~a 60-day notice of intent to sue~~lawsuits against the EPA for failure to perform nondiscretionary duties under RCRA, which could require a deadline for the EPA to issue strict CCR regulations. ~~In February 2012,~~The 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~~are asserting that the EPA ~~take~~should regulate CCRs as a ~~Subtitle D approach~~non-hazardous waste that would allow for continued ~~recycling~~recycling.

As a result of ~~CCRs. The coalition filed its lawsuit in April 2012 and~~ litigation ~~is continuing.~~by environmental groups, final rulemaking could be issued as early as the end of 2014.

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

~~Martins Creek Fly Ash Release~~Trimble County Landfill Permit (PPL and ~~PPL Energy Supply)~~Kentucky Registrants)

In ~~2005, approximately 100 million gallons of water containing fly ash was released from~~May 2011, LG&E submitted an application for a ~~disposal basin~~special waste landfill permit to handle coal combustion residuals generated at the ~~Martins Creek plant used in connection with the operation~~Trimble County plant. After extensive review of the ~~plant's two 150 MW coal-fired generating units. This resulted~~permit application in ~~ash being deposited onto adjacent roadways and fields, into a nearby creek and~~May 2013, the ~~Delaware River. PPL determined~~Kentucky Division of Waste Management denied the permit application on the grounds that the ~~release was caused by~~proposed facility would violate the Kentucky Cave Protection Act because it would eliminate an on-site karst feature considered to be a ~~failure~~cave. LG&E and KU are assessing additional options for managing coal combustion residuals including construction of a landfill at an alternate site adjacent to the plant. Submittal of a new permit application for an alternative site may result in additional environmental considerations in the 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 effectscourse of the ~~release on~~permitting process and substantial additional costs. PPL, LKE, LG&E and KU are unable to determine the ~~river's sediment, water quality~~precise impact of this matter until they select an alternate management option and ~~ecosystem.~~

~~The PADEP filed~~complete 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 the Natural Resources Damage Claim has not yet been submitted for public comments, which is the next phase in the process of finalizing the claim.

Through September 30, 2012, 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.detailed engineering design.

Seepages and Groundwater Infiltration - Pennsylvania, Montana and Kentucky

(All Registrants except PPL ~~PPL Energy Supply, LKE, LG&E and KU)~~Electric)

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

7166

(PPL and PPL Energy Supply)

In 2007, six plaintiffs filed a lawsuit in the Montana Sixteenth Judicial District Court against the Colstrip plant owners asserting property damage due to seepage from plant wastewater ponds. A settlement agreement was reached in July 2010 which would have resulted in a payment by PPL Montana, but certain of the plaintiffs later argued the settlement was not final. The Colstrip plant owners filed a motion to enforce the settlement and in October 2011 the court granted the motion and ordered the settlement to be completed in 60 days. The plaintiffs appealed the October 2011 order to the Montana Supreme Court, which affirmed the district court's order enforcing the settlement in December 2012 and denied plaintiff's motion for rehearing in February 2013. Final settlement documents were executed and the ~~court's decision is expected in the second half of 2012. Therefore, the~~ settlement ~~ordered by the district court is not final. PPL and PPL Energy Supply cannot predict the outcome of the appeal, although~~was effective on October 28, 2013. PPL Montana's share of ~~any final~~the settlement ispayment was 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~~referred to above, requests a writ of mandamus directing the MDEQ to enforce the same and seeks recovery of attorneys' fees and costs. ~~PPL~~In May 2013, the court granted MDEQ's and PPL ~~Energy Supply cannot predict~~Montana's motion to dismiss. It is unknown at this time whether the ~~outcome of~~complainants will appeal this ~~matter.~~decision.

(All Registrants except PPL Electric)

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

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

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

In ~~October 2009,~~June 2013, the EPA ~~released its Final Detailed Study~~published proposed regulations to revise discharge limitations for steam electric generation wastewater permits. The proposed limitations are based on the EPA review of available treatment technologies and their capacity for reducing pollutants and include new requirements for fly ash and bottom ash transport water and metal cleaning waste waters, as well as new limits for scrubber wastewater and landfill leachate. The EPA's proposed ELG regulations contain requirements that would affect the ~~Steam Electric Power Generating effluent limitations guidelines~~inspection and ~~standards.~~operation of CCR facilities, if finalized. The EPA ~~is expected to issue~~has indicated that it will coordinate these regulations with the ~~final regulations in 2014.~~regulation of CCRs discussed above. The proposal contains alternative approaches, some of which could significantly impact PPL's coal-fired plants. PPL, PPL Energy Supply, LKE, LG&E and KU ~~expect~~worked with industry groups to comment on the ~~revised guidelines and standards~~proposed regulation on September 20, 2013. The final regulation is expected to be ~~more stringent than~~issued in May 2014. At 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.present time, PPL, PPL Energy Supply, LKE, LG&E and KU

are currently 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,~~ Pending finalization of the ~~EPA significantly decreased to 10 parts per billion (ppb) the drinking water standards related to arsenic. In~~ELGs, states, including Pennsylvania ~~Montana~~ and Kentucky, ~~this arsenic standard has been incorporated into the states' water quality standards and could result in~~are proposing more stringent

technology-based limits in ~~NPDES permits for PPL's Pennsylvania, Montana and Kentucky plants. Subsequently,~~permit renewals. Depending on the ~~EPA developed a draft risk assessment for arsenic that increases~~final limits imposed, 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 itcosts of compliance could be ~~achieved. PPL, PPL Energy Supply, LKE, LG&E~~significant 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.~~imposed ahead of federal timelines.

Other Issues

The EPA is reassessing its polychlorinated biphenyls (PCB) regulations under the ~~Toxics~~Toxic Substance Control Act, which currently allow certain PCB articles to remain in use. In April 2010, the EPA issued an Advanced Notice of Proposed Rulemaking for changes to these regulations. This rulemaking could lead to a phase-out of all 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, 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. In September 2013, the court reversed the Cabinet order upholding the permit and remanded the permit to the agency for further proceedings. In October 2013, LG&E filed a notice of appeal with the Kentucky Court of Appeals. PPL, LKE, LG&E and KU are unable to predict the outcome of this matter or estimate a range of reasonably possible losses, if any.

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

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

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

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

Depending on the outcome of investigations at sites where investigations have not begun or been completed or developments at sites for which PPL Electric, LG&E and KU currently lack information, the costs of remediation and other liabilities could be material. PPL, PPL Electric, LKE, LG&E and KU ~~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)~~All Registrants)

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)~~All Registrants)

The table below details guarantees provided at September 30, ~~2012.~~2013. The total recorded liability at September 30, ~~2012~~2013 and December 31, ~~2011,~~2012, was ~~$24~~$23 million and ~~$14~~$24 million for PPL and $20 million ~~and $11 million~~for both periods for LKE. The probability of expected payment/performance under each of these guarantees is remote except for "WPD guarantee of pension and other obligations of unconsolidated entities" and "Indemnification of lease termination and other divestitures." For reporting purposes, on a consolidated basis, all guarantees of PPL Energy Supply (other than the letters of credit), PPL Electric, LKE, LG&E and KU also apply to PPL, and all guarantees of LG&E and KU also apply to LKE.

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
	September 30, 2013 (a)			Date
PPL
Indemnifications related to the WPD Midlands acquisition			(b)
WPD indemnifications for entities in liquidation and sales of assets	$	11	(c)	2018
WPD guarantee of pension and other obligations of unconsolidated entities		125	(d)	2015

PPL Energy Supply
Letters of credit issued on behalf of affiliates		23	(e)	2013 - 2014
Retrospective premiums under nuclear insurance programs		46	(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		32	(k)	2017

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

~~(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 award. A decision ~~and will present oral arguments~~ in ~~November 2012.~~the appellate matter may occur during late 2013 or early 2014. 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. In the second quarter of 2012, LKE adjusted its estimated liability for certain of these indemnifications by $9 million ($5 million after-tax), which is reflected in "Income (Loss) from Discontinued Operations (net of income taxes)" on the Statement of Income. The adjustment was recorded in the Kentucky Regulated segment for PPL. ~~No additional material loss is anticipated by reason~~LKE cannot predict the ultimate 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 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 Default Service Supply Master Agreement for the solicitation process, PPL Electric requires all suppliers to post collateral once credit exposures exceed defined credit limits. PPL EnergyPlus is required to post collateral with PPL ~~Electric~~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.~~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,~~2013, PPL Energy Supply had a net credit exposure of ~~$39~~$25 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, which PPL management believes are reasonable, including amounts applied to accounts that are further distributed between capital and expense:

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

PPL Energy Supply	$	49	$	44	$	159	$	138	$	52	$	49	$	161	$	159
PPL Electric		35		34		116		108		37		35		109		116
LKE		3		3		11		12		3		3		11		11

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

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

LG&E	$	51	$	51	$	132	$	134	$	53	$	51	$	159	$	132
KU		33		44		114		148		36		33		146		114

~~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~~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 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 significantunion and hourly employees performing work for the ~~three~~other company, charges related to jointly-owned generating units and ~~nine months ended September 30, 2012~~other miscellaneous charges. Tax settlements between LKE 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~~LG&E 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 threeLKE and ~~nine months ended September 30, 2012 and 2011, the interest earned on these revolving facilities was not significant.~~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~~2013 and December 31, ~~2011, there~~2012, $52 million and $25 million were ~~no balances outstanding. Interest expense incurred~~outstanding and were reflected in "Notes payable with affiliates" on the ~~revolving~~Balance Sheet. The interest rate on the outstanding borrowing at September 30, 2013 was 1.68%. Interest on the demand note ~~with the PPL Energy Supply subsidiary~~ was not significant for the three and nine months ended September 30, ~~2012~~2013 and ~~2011.~~

~~LKE holds a~~2012. In October 2013, the capacity of the revolving demand 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.

reduced by $75 million.

7872

~~(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~~Intercompany Derivatives (~~PPL Energy Supply)~~Kentucky Registrants)

APeriodically, LG&E and KU enter into forward-starting interest rate swaps with PPL. These hedging instruments have terms identical to forward-starting swaps entered into by PPL ~~subsidiary owns PPL trademarks and billed certain affiliates~~with third parties. See Note 14 for their use under a licensing agreement. This agreement was terminated in December 2011. PPL Energy Supply was charged $10 million and $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"additional information on ~~the Statement of Income.~~intercompany derivatives.

Intercompany Insurance (PPL Electric)

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

~~Due to damages resulting from several PUC-reportable storms that occurred in 2011,~~Effective January 1, 2013, PPL Electric ~~exceeded its deductible for the 2011 policy year. Probable recoveries on~~no longer has storm insurance ~~claims~~coverage with PPL Power Insurance ~~of $26.5 million were recorded at September 30, 2011, of which $7 million and $16 million were recorded during~~Ltd. See Note 6 for discussion regarding the ~~three and nine months ended September 30, 2011 in "Other operation and maintenance" on the Statement of Income,~~proposed Storm Damage Expense Rider filed with the ~~remainder recorded in PP&E on the Balance Sheet. In September 2012,~~PUC by PPL ~~Electric received $26.5 million from the settlement of its 2011 claims.~~Electric.

Other (~~PPL Energy Supply, PPL Electric, LKE, LG&E and KU)~~All Registrants except PPL)

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)~~All Registrants)

The breakdown of "Other Income (Expense) - net" for the periods ended September 30 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				Nine Months
		2013		2012		2013		2012
PPL
Other Income
	Earnings on securities in NDT funds	$	4	$	5	$	14	$	17
	Interest income		1		1		2		4
	AFUDC - equity component		3		2		8		7
	Earnings (losses) from equity method investments				(1)				(7)
	Miscellaneous - Domestic				3		9		8
	Miscellaneous - U.K.				(1)		1		1
	Total Other Income		8		9		34		30
Other Expense
	Economic foreign currency exchange contracts (Note 14)		117		47		(6)		40
	Charitable contributions		5		1		13		7
	Miscellaneous - Domestic		2		4		7		12
	Miscellaneous - U.K.				1		1		2
	Total Other Expense		124		53		15		61
Other Income (Expense) - net		$	(116)	$	(44)	$	19	$	(31)

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.~~

PPL Energy Supply
Other Income
	Earnings on securities in NDT funds	$	4	$	5	$	14	$	17
	Interest income		1				3		1
	Miscellaneous				2		7		5
	Total Other Income		5		7		24		23
Other Expense
	Charitable contributions		1		1		3		2
	Miscellaneous		2		1		3		5
	Total Other Expense		3		2		6		7
Other Income (Expense) - net		$	2	$	5	$	18	$	16

"Other Income (Expense) - net" for the three and nine months ended September 30, ~~2012~~2013 and ~~2011~~2012 for PPL Electric is primarily the equity component of AFUDC. The components of "Other Income (Expense) - net" for the three and nine months ended September 30, 2013 for LKE, LG&E and KU are not significant. The components of "Other Income (Expense) - net" for the three months ended September 30, 2012 for LKE, LG&E and KU are not significant. "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, 2012 and 2011 and for the nine months ended September 30, 2011 for LKE 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)~~All Registrants)

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

Recurring Fair Value Measurements

The assets and liabilities measured at fair value were:

			September 30, 2012								December 31, 2011											September 30, 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			$	1,291	$	1,291					$	901	$	901
	Restricted cash and cash equivalents (a)			169		169						209		209					Restricted cash and cash equivalents (a)				120		120						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			1,480		7	$	1,421	$	52		2,068		2	$	2,037	$	29
		Interest rate swaps										3				3				Interest rate swaps			86				86				15				15
		Foreign currency contracts										18				18				Foreign currency contracts			1				1
		Cross-currency swaps		24				22		2		24				20		4		Cross-currency swaps			28				28				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				1,595		7		1,536		52		2,097		2		2,065		30
																			NDT funds:
																				Cash and cash equivalents			14		14						11		11
																				Equity securities
																					U.S. large-cap		494		369		125				412		308		104
																					U.S. mid/small-cap		74		30		44				60		25		35
																				Debt securities
																					U.S. Treasury		96		96						95		95
																					U.S. government sponsored agency		6				6				9				9
																					Municipality		75				75				82				82
																					Investment-grade corporate		40				40				40				40
																					Other		3				3				3				3
																				Receivables (payables), net			2				2						(2)		2
																			Total NDT funds				804		509		295				712		437		275
																			Auction rate securities (b)				19						19		19				3		16
Total assets																			Total assets			$	3,829	$	1,927	$	1,831	$	71	$	3,864	$	1,475	$	2,343	$	46

Liabilities																			Liabilities
																			Price risk management liabilities:
																				Energy commodities		$	1,235	$	4	$	1,226	$	5	$	1,566	$	2	$	1,557	$	7
																				Interest rate swaps			58				58				80				80
																				Foreign currency contracts			67				67				44				44
																				Cross-currency swaps			1				1				4				4
																			Total price risk management liabilities			$	1,361	$	4	$	1,352	$	5	$	1,694	$	2	$	1,685	$	7

8074

				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				September 30, 2013								December 31, 2012
																							Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
PPL Energy Supply	PPL Energy Supply																			PPL Energy Supply
Assets	Assets																			Assets
	Cash and cash equivalents			$	432	$	432					$	379	$	379					Cash and cash equivalents			$	551	$	551					$	413	$	413
	Restricted cash and cash equivalents (a)				98		98						145		145					Restricted cash and cash equivalents (a)				54		54						63		63
	Price risk management assets:																			Price risk management assets:
		Energy commodities			2,604		5	$	2,569	$	30		3,423		3	$	3,390	$	30		Energy commodities			1,480		7	$	1,421	$	52		2,068		2	$	2,037	$	29
	Total price risk management assets				2,604		5		2,569		30		3,423		3		3,390		30	Total price risk management assets				1,480		7		1,421		52		2,068		2		2,037		29
	NDT funds:																			NDT funds:
		Cash and cash equivalents			12		12						12		12						Cash and cash equivalents			14		14						11		11
		Equity securities																			Equity securities
			U.S. large-cap		412		307		105				357		267		90					U.S. large-cap		494		369		125				412		308		104
			U.S. mid/small-cap		59		25		34				52		22		30					U.S. mid/small-cap		74		30		44				60		25		35
		Debt securities																			Debt securities
			U.S. Treasury		95		95						86		86							U.S. Treasury		96		96						95		95
			U.S. government sponsored agency		9				9				10				10					U.S. government sponsored agency		6				6				9				9
			Municipality		83				83				83				83					Municipality		75				75				82				82
			Investment-grade corporate		40				40				38				38					Investment-grade corporate		40				40				40				40
			Other		2				2				2				2					Other		3				3				3				3
		Receivables (payables), net			(1)		(3)		2						(3)		3				Receivables (payables), net			2				2						(2)		2
	Total NDT funds				711		436		275				640		384		256			Total NDT funds				804		509		295				712		437		275
	Auction rate securities (b)				16				3		13		19						19	Auction rate securities (b)				16						16		16				3		13
Total assets	Total assets			$	3,861	$	971	$	2,847	$	43	$	4,606	$	911	$	3,646	$	49	Total assets			$	2,905	$	1,121	$	1,716	$	68	$	3,272	$	915	$	2,315	$	42

Liabilities	Liabilities																			Liabilities
	Price risk management liabilities:																			Price risk management liabilities:
		Energy commodities		$	1,947	$	5	$	1,937	$	5	$	2,345	$	1	$	2,327	$	17		Energy commodities		$	1,235	$	4	$	1,226	$	5	$	1,566	$	2	$	1,557	$	7
	Total price risk management liabilities			$	1,947	$	5	$	1,937	$	5	$	2,345	$	1	$	2,327	$	17	Total price risk management liabilities			$	1,235	$	4	$	1,226	$	5	$	1,566	$	2	$	1,557	$	7

PPL Electric	PPL Electric																			PPL Electric
Assets	Assets																			Assets
	Cash and cash equivalents			$	31	$	31					$	320	$	320					Cash and cash equivalents			$	225	$	225					$	140	$	140
	Restricted cash and cash equivalents (c)				13		13						13		13					Restricted cash and cash equivalents (c)				12		12						13		13
Total assets	Total assets			$	44	$	44					$	333	$	333					Total assets			$	237	$	237					$	153	$	153

Higher other operation and ~~the unfavorable effect of weather, and $8 million of lower regulatory recovery due to a 2012 charge to income~~maintenance for the ~~over-recovery of revenues from customers.~~

~~111~~

·	~~Higher other operation and maintenance for the nine-month period~~three- and nine-month periods 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.

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

·	Lower income taxes for the three-month period due to $16 million from U.K. tax rate changes, partially offset by higher pre-tax income, which increased income taxes by $8 million.

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

Higher income taxes for the nine-month period primarily due to higher pre-tax income, which increased income taxes by $38 million, and $13 million from a benefit recorded in 2012 due to the tax deductibility of interest on the acquisition financing for WPD Midlands, partially offset by $27 million from U.K. tax rate changes and $6 million of prior year adjustments.

~~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.~~U.S.

·	Higher income taxes for the three-month period due to an $8 million increase to income tax expense attributable to a revision in the expected taxable amount of cash repatriation in 2013.

Lower income taxes for the nine-month period ~~primarily~~ due to a ~~$13~~$19 million ~~income tax benefit~~2013 adjustment primarily related to ~~the tax deductibility~~an IRS ruling regarding 2010 U.K. earnings and profits calculations and $11 million of ~~interest~~lower income taxes on ~~acquisition financing,~~intercompany loans, partially offset by ~~higher~~a $23 million increase to income ~~taxes~~tax expense attributable to a revision in the expected taxable amount 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.cash repatriation in 2013.

~~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.~~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	2013		2012		2013		2012

		Other Income
Foreign currency-related economic hedges, net of tax of $44, $18, $5, $17 (a)		(Expense)-net	$	(82)	$	(30)	$	(8)	$	(28)
WPD Midlands acquisition-related adjustments:
		Other Operation
	Separation benefits, net of tax of $1, $1, $1, $3	and Maintenance		(2)		(1)		(4)		(9)
		Other Operation
	Other acquisition-related adjustments, net of tax of $0, $0, $0, ($1)	and Maintenance				(2)		(2)		2
Other:
	Windfall Profits Tax litigation (b)	Income Taxes						43
	Change in WPD line loss accrual, net of tax of $5, $0, $10, $0 (c)	Utility		(16)				(35)
	Change in U.K. tax rate (d)	Income Taxes		84		74		84		74
Total			$	(16)	$	41	$	78	$	39

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

~~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~~

(b)

In May 2013, the U.S. Supreme Court reversed the December 2011 ruling, by the U.S. Court of Appeals for the Third Circuit, on the creditability for income tax purposes of ~~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~~Windfall Profits Tax. As a result of the U.S. Supreme Court ruling, PPL recorded an income tax benefit 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.

~~Earnings in 2012 and future periods are subject to various risks and uncertainties.~~nine-month 2013 period. See ~~"Forward-Looking Information," the rest of this Item 2 and Notes 6 and 10~~Note 5 to the Financial Statements for additional information.

109

(c)

WPD Midlands recorded adjustments to its line loss accrual based on information provided by Ofgem regarding the calculation of line loss incentive/penalty for all network operators related to DPCR4, a price control period that ended prior to PPL's acquisition of WPD Midlands. See Note 6 to the Financial Statements for additional information.

(d)

The U.K. Finance Act of 2013, enacted in ~~this Form 10-Q~~July 2013, reduced the U.K.'s statutory income tax rate from 23% to 21%, effective April 1, 2014 and ~~"Item 1. Business"~~from 21% to 20%, effective April 1, 2015. The U.K. Finance Act of 2012, enacted in July 2012, reduced the U.K. statutory income tax rate from 25% to 24% retroactive to April 1, 2012 and ~~"Item 1A. Risk Factors"~~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 ~~PPL's 2011 Form 10-K for a discussion~~the three and nine-month periods of ~~the risks, uncertainties~~2013 and ~~factors that may impact future earnings.~~2012.

Pennsylvania Regulated Segment

Supply

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

PPL's reportable segments' results primarily represent the results of its related Subsidiary Registrant(s), except that the reportable segments are also allocated certain corporate level financing and other costs that are not included in the results of the applicable Subsidiary Registrant. The U.K. Regulated segment does not have a related Subsidiary Registrant.

(PPL Energy Supply)

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

(PPL Electric)

PPL Electric, headquartered in Allentown, Pennsylvania, is an electricity transmission and distribution service provider in eastern and central 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.

(LKE)

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

(LG&E)

LG&E, headquartered in Louisville, Kentucky, is a regulated utility engaged in the generation, transmission, distribution and sale of electricity and distribution and sale of natural gas in Kentucky. LG&E is subject to regulation as a public utility by the KPSC, and certain of its transmission activities are subject to the jurisdiction of FERC under the Federal Power Act. LG&E is a wholly owned subsidiary of LKE.

100

(KU)

KU, headquartered in Lexington, Kentucky, is a regulated utility engaged in the generation, transmission, distribution and sale of electricity in Kentucky, Virginia and Tennessee. KU is subject to regulation as a public utility by the KPSC, the VSCC and the TRA, and certain of its transmission and wholesale power activities are subject to the jurisdiction of FERC under the Federal Power Act. KU is a wholly owned subsidiary of LKE.

(All Registrants except PPL Electric)

The capacity (summer rating) of regulated and competitive electricity generation facilities at September 30, 2013 was:

		Ownership or Lease Interest in MW (a)
			PPL Energy
Primary Fuel		PPL	Supply	LKE	LG&E	KU

Regulated
	Coal (c)	5,940		5,940	2,656	3,284
	Natural Gas/Oil (b)	2,098		2,098	644	1,454
	Hydro	78		78	54	24

Total Regulated		8,116		8,116	3,354	4,762

Competitive
	Coal (b) (c)	4,146	4,146
	Natural Gas/Oil	3,316	3,316
	Nuclear (c)	2,275	2,275
	Hydro (d)	807	807
	Other (e)	70	70

Total Competitive		10,614	10,614

Total		18,730	10,614	8,116	3,354	4,762

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)

(a)

The ~~changes~~capacity of generation units is based on a number of factors, including the operating experience and physical conditions of the units, and may be revised periodically to reflect changed circumstances. See "Item 2. Properties" in the ~~components~~2012 Form 10-K for additional information on ownership percentages.

(b)	Includes leasehold interests. See Note 11 to the Financial Statements in the 2012 Form 10-K for additional information.

(c)

Includes units that are jointly owned or subject to a power purchase agreement. Each owner is entitled to its proportionate share of the ~~Pennsylvania Regulated segment's results between these periods were due~~unit's total output and funds its proportionate share of fuel and other operating costs. See Notes 14 and 15 to the ~~following factors,~~Financial Statements in the 2012 Form 10-K for additional information.

(d)

In September 2013, PPL Montana executed a definitive agreement to sell its 11 hydroelectric facilities, which ~~reflect reclassifications~~have a combined generating capacity of 633 MW, to NorthWestern for ~~items included~~$900 million in ~~gross delivery margins.~~cash, subject to certain adjustments. The sale is not expected to close before the second half of 2014 and is subject to closing conditions, including receipt of regulatory approvals by the FERC and Montana Public Service Commission and certain third party consents. See Note 8 to the Financial Statements for additional information.

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.~~

(e)	Includes facilities owned, controlled or for which PPL Energy Supply has the rights to the output.

Higher 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 stormBusiness Strategy

(PPL and PPL Energy Supply)

The strategy for PPL Energy Supply is to achieve disciplined optimization of energy supply margins while mitigating near-term volatility in both cash flows and earnings. More specifically, the 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. See "Financial and Operational Developments - Economic and Market Conditions" below for additional information.

(All Registrants except PPL Energy Supply)

The strategy for the regulated businesses of WPD, PPL Electric, LKE, LG&E and KU is to achieve stable, long-term growth in earnings and rate base, or RAV, as applicable. Both rate base and RAV are expected to grow as a result of significant capital expenditure programs to maintain existing assets and improving system reliability and, for LKE, LG&E and KU, to comply with federal and state environmental regulations related to electric generation facilities. These regulated businesses

101

focus on timely recovery of costs, efficient, reliable and safe operations, strong customer service and constructive regulatory relationships.

Recovery of capital project costs is attained through various rate-making mechanisms, including periodic base rate case proceedings, FERC formula rate mechanisms, and other regulatory agency-approved recovery mechanisms. In Kentucky, the KPSC has adopted a series of regulatory mechanisms (ECR, DSM, GLT, fuel adjustment clause, gas supply clause and recovery on certain construction work-in-progress) that reduce regulatory lag and provide for timely recovery of prudently incurred costs. In Pennsylvania, the recently approved DSIC mechanism will help PPL Electric reduce regulatory lag and provide for timely recovery of distribution reliability-related capital investment. See "Distribution System Improvement Charge" below for additional information on the implementation of the DSIC mechanism in 2013 and "RIIO-ED1" below for changes to the regulatory framework intended to encourage investment in regulated infrastructure applicable to WPD in 2015.

(All Registrants)

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

Financial and Operational Developments

Earnings (PPL)

Earnings by component of PPL's reportable segments for the periods ended September 30 were as follows.

		Three Months						Nine Months
		2013		2012		% Change		2013		2012		% Change

	U.K. Regulated	$	183	$	202		(9)	$	741	$	563		32
	Kentucky Regulated		93		72		29		227		148		53
	Pennsylvania Regulated		51		33		55		160		95		68
	Supply		91		48		90		122		361		(66)
	Corporate and Other (a)		(8)				n/a		(22)				n/a
Net Income Attributable to
	PPL Shareowners	$	410	$	355		15	$	1,228	$	1,167		5

EPS - basic		$	0.65	$	0.61		7	$	2.03	$	2.00		2
EPS - diluted (b)		$	0.62	$	0.61		2	$	1.90	$	2.00		(5)

(a)	Primarily represents financing and certain other costs incurred at the corporate level that have not been allocated or assigned to the segments, which are presented to reconcile segment information to PPL's consolidated results. For 2012, there were no significant amounts in this category.

(b)	See "Equity Units" below for information on the Equity Units' impact on the calculation of 2013 diluted EPS.

The following after-tax gains (losses), in total, which management considers special items, impacted PPL's reportable segments results during the periods ended September 30. See PPL's "Results of Operations - Segment Earnings" for details of these special items.

	Three Months						Nine Months
	2013		2012		Change		2013		2012		Change

U.K. Regulated	$	(16)	$	41	$	(57)	$	78	$	39	$	39
Kentucky Regulated								2		(1)		3
Supply		(6)		(105)		99		(49)		3		(52)
Total PPL	$	(22)	$	(64)	$	42	$	31	$	41	$	(10)

The changes in PPL's reportable segments results for the three and nine-month periods, excluding the impact of special items, were due to the following factors (on an after-tax basis):

Increase at the U.K. Regulated segment for the three-month period primarily due to higher electricity delivery prices and lower U.K. income taxes, partially offset by an accrual for over-recovery of current-year revenues, lower sales volume due to weather and higher operation and maintenance expense. Increase at the U.K. Regulated segment for the nine-month period primarily due to higher electricity delivery prices, increased sales volume due to weather, and lower U.K.

102

income taxes, partially offset by an accrual for over-recovery of current-year revenues, higher operation and maintenance expense and higher depreciation.

·	Increases at the Kentucky Regulated segment for both periods primarily due to higher base rates that became effective January 1, 2013 and returns from additional environmental capital investments. The three-month period was also partially offset by lower sales volume due to weather.

~~113~~

Increases at the Pennsylvania Regulated segment for both periods primarily due to higher electricity base rates that became effective January 1, 2013 and higher transmission margins from additional capital investments. The increase for the nine-month period was also due to lower operation and maintenance expense, partially offset by higher depreciation.

Decrease at the Supply segment for the three-month period primarily due to lower baseload energy prices, lower baseload generation, higher operation and maintenance expense and higher income taxes. The decline in segment earnings was partially offset by higher capacity prices. Decrease at the Supply segment for the nine-month period primarily due to lower baseload energy prices, higher fuel costs, higher income taxes and higher depreciation. The decline in segment earnings was partially offset by higher capacity prices, higher intermediate and peaking margins and higher baseload generation. The higher income taxes for both periods resulted primarily from a non-cash adjustment of deferred tax assets.

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

2013 Outlook

(PPL)

Excluding special items, higher earnings are expected in 2013 compared with 2012. However, 2013 earnings are expected to decline on a diluted EPS basis due to higher average shares treated as outstanding. The factors underlying these projections by segment and Subsidiary Registrant are reflected below (on an after-tax basis).

(PPL's U.K. Regulated Segment)

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

(PPL's Kentucky Regulated Segment and Kentucky Registrants)

Excluding special items, higher earnings are projected in 2013 compared with 2012, primarily driven by base rate increases and returns on additional environmental capital investments.

(PPL's Pennsylvania Regulated Segment and PPL Electric)

Excluding special items, higher earnings are projected in 2013 compared with 2012, primarily driven by higher distribution revenues from the January 1, 2013 base rate increase and higher transmission margins due to additional capital investment, partially offset by higher depreciation and higher interest expense.

(PPL's Supply Segment and PPL Energy Supply)

Excluding special items, lower earnings are projected in 2013 compared with 2012, primarily driven by lower energy prices, higher fuel costs, higher depreciation, higher taxes and higher financing costs, partially offset by lower operation and maintenance expense, higher capacity prices and higher baseload generation output.

(All Registrants)

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 (as applicable) and "Item 1. Business" and "Item 1A. Risk Factors" in the Registrants' 2012 Form 10-K for a discussion of the risks, uncertainties and factors that may impact future earnings.

103

Other Financial and Operational Developments

Economic and Market Conditions

(PPL and PPL Energy Supply)

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

(All Registrants except PPL Electric)

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

(PPL and PPL Energy Supply)

In 2012, PPL Energy Supply announced its intention, beginning in April 2015, to place its Corette plant in long-term reserve status, suspending the plant's operation due to expected market conditions and the costs to comply with MATS. PPL Energy Supply continues to monitor its Corette plant for potential impairment. The Corette plant asset group's carrying value at September 30, 2013 was $67 million. See "Environmental Matters - Domestic - Air - MATS" in Note 10 to the Financial Statements for additional information.

PPL Energy Supply believes its remaining competitive coal-fired generation assets are well positioned to meet the environmental requirements described above based on prior and planned investments. Management continues to monitor energy and PJM capacity prices. A further decline in energy and/or capacity prices could negatively impact PPL Energy Supply's operations and potentially result in future asset impairment charges for coal-fired plants or goodwill.

(PPL and Kentucky Registrants)

The environmental requirements discussed above have also resulted in LKE's projected $2.2 billion ($1.1 billion each at LG&E and KU) in capital investment over the next five years and the anticipated retirement by 2015 of five coal-fired units (three at LG&E and two at KU) with a combined summer capacity rating of 726 MW (563 MW at LG&E and 163 MW at KU). KU retired the 71 MW unit at the Tyrone plant in February 2013. The retirement of these coal-fired units is not expected to have a material impact on the financial condition or results of operations of PPL, LKE, LG&E and KU. See Note 8 to the Financial Statements in the 2012 Form 10-K for PPL, LKE, LG&E and KU for additional information regarding the anticipated retirement of these units as well as plans to build a combined-cycle natural gas facility in Kentucky.

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

104

(All Registrants)

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

(PPL)

Ofgem Review of Line Loss Calculation

Ofgem is currently consulting on the methodology to be used by all network operators to calculate the final line loss incentive/penalty for the DPCR4. Based on information received from Ofgem in 2013, WPD currently estimates the potential loss exposure for this matter to be in the range of $93 million to $226 million as of September 30, 2013. During the three and nine months ended September 30, 2013, WPD recorded $21 million and $45 million of increases to the liability with reductions to "Utility" revenue on the Statement of Income. PPL cannot predict the outcome of this matter. See Note 6 to the Financial Statements for additional information.

RIIO-ED1

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

As previously reported, on July 1, 2013, WPD filed its business plans with Ofgem for the RIIO-ED1 period and gave a webcast presentation to highlight the contents of the plans as well as provide potential earnings ranges of the U.K. Regulated segment for the first two years of the RIIO-ED1 period. The ranges provided are subject to certain assumptions including foreign currency exchange rates, interest rates, inflation rates and WPD being "fast-tracked" through the price control review process and therefore earning the fast-track bonus revenue. These assumptions and other future events affecting the potential earnings ranges are subject to significant uncertainties. Although management believes that the business plans submitted by WPD meet the criteria to be fast-tracked, management cannot predict the outcome of the price control review process or the future financial effect on WPD's businesses of the RIIO-ED1 regulatory framework. Ofgem has notified WPD that it intends to announce preliminary fast-track determinations on November 22, 2013 with a final determination to be announced in February 2014. See "Item 1. Business - Background - U.K. Regulated Segment - Revenue and Regulation" in the 2012 Form 10-K for additional information.

Equity Forward Agreements

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

Equity Units

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

The If-Converted Method of calculating diluted EPS was applied to the Equity Units prior to settlement beginning in the first quarter of 2013. This resulted in $7 million and $37 million of interest charges (after-tax) being added back to income

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available to PPL common shareowners, and 32 million and 59 million weighted-average incremental shares of PPL common stock being treated as outstanding for purposes of the diluted EPS calculation for the three and nine months ended September 30, 2013. See Note 4 to the Financial Statements for the impact on the calculation of diluted EPS.

Tax Litigation

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

U.K. Tax Rate Change

In July 2013, the U.K. Finance Act 2013 was enacted, which reduces the U.K.'s statutory income tax rate from 23% to 21%, effective April 1, 2014 and from 21% to 20%, effective April 1, 2015. As a result of these changes, PPL reduced its net deferred tax liabilities and recognized a deferred tax benefit of $93 million in the third quarter of 2013.

Pennsylvania Net Operating Loss Valuation Allowance

PPL assesses the realizability of its deferred tax assets for Pennsylvania's net operating loss carryforwards based on, among other things, projections of future taxable income for the net operating loss carryforward periods. In the third quarter of 2013, PPL determined that its projected future taxable income would likely decrease, resulting in an increase to the valuation allowance related to Pennsylvania net operating loss carryforwards. As a result, PPL recorded a $38 million increase in state deferred income tax expense.

FERC Audit Proceedings (All Registrants except PPL Energy Supply)

In November 2011, the FERC commenced an audit of PPL and its subsidiaries, including an audit of the FERC transmission formula rate mechanisms at PPL Electric, LG&E and KU beginning in April 2012. The audit identified several matters related to separate aspects of formula rate mechanics at PPL Electric, LG&E and KU. As previously reported, among the audit matters related to PPL Electric was the determination that PPL Electric had not obtained a waiver of the equity method accounting requirement with respect to its wholly owned subsidiary, PPL Receivables Corporation, which was formed in 2004 to purchase eligible accounts receivable and unbilled revenue from PPL Electric to collateralize commercial paper issuances and reduce borrowing costs. PPL, PPL Electric, LKE, LG&E and KU currently believe that the total amount of refunds, if any, that may be required with respect to the formula rate and all other issues identified during the course of the audit will not be material to any of these Registrants. PPL, PPL Electric, LKE, LG&E and KU, however, cannot predict the ultimate outcome of these matters.

(PPL and PPL Energy Supply)

Montana Transactions

In September 2013, PPL Montana executed a definitive agreement to sell 633MW of hydroelectric facilities to NorthWestern for $900 million in cash, subject to certain adjustments. The sale is not expected to close before the second half of 2014. The sale is subject to closing conditions, including receipt of regulatory approvals by the FERC and Montana Public Service Commission and certain third-party consents. In a related transaction, in September 2013, PPL Montana negotiated and entered into an agreement to pay $271 million to terminate a sale-leaseback arrangement and reacquire its interests in the Colstrip coal-fired facilities. This transaction is anticipated to occur by the end of the first quarter of 2014, subject to approval by the FERC. At lease termination, in addition to recording a charge for the cash payment, a non-cash charge is expected to be recorded related to the existing lease-related assets on PPL's and PPL Energy Supply's Balance Sheets. The book value of these assets was approximately $450 million at September 30, 2013. These lease-related assets will be written-off and the reacquired Colstrip assets will be recorded at fair value as of the acquisition date. The total loss is currently estimated at between $310 million and $430 million, after-tax, which is dependent on the fair value assigned to the reacquired Colstrip assets. See Note 8 to the Financial Statements for additional information.

Susquehanna Turbine Blade Inspection

In the spring of 2013, PPL Susquehanna made modifications to address the causes of turbine blade cracking at the PPL Susquehanna nuclear plant that was first identified in 2011. The modifications were made during the Unit 2 refueling outage and an additional planned outage for Unit 1. In September 2013, data from the extensive vibration monitoring equipment installed on the turbine blades identified cracks in a small number of the blades on both units. Unit 2 completed a blade

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inspection and replacement outage on September 23, 2013. Based upon the evaluation of the conditions on Unit 1 and the latest inspection of previously removed blades, PPL Susquehanna will continue to operate Unit 1 and monitor the blades through the vibration monitoring equipment. The financial impact of the Unit 2 outage is not material. PPL Susquehanna continues to work with the turbine manufacturer to identify and resolve the issues causing the blade cracking.

Colstrip Unit 4 Outage (PPL Energy Supply)

On July 1, 2013, Colstrip Unit 4 automatically shut down as a result of damage that occurred in the unit's generator. The repair to Unit 4 is estimated to cost between $30 million and $40 million and is expected to take at least six months to complete. Property damage insurance for Unit 4 is subject to a $2.5 million self-insured retention. PPL Montana operates Unit 4 pursuant to an agreement with the owners and, pursuant to a separate agreement with NorthWestern, is entitled to receive 15% of Unit 4's electricity output and is responsible for 15% of the capital, operating, maintenance and repair costs associated with Unit 4. PPL Montana's estimated pre-tax loss of earnings attributable to the Unit 4 outage is between $5 million and $10 million.

(PPL and PPL Electric)

Distribution System Improvement Charge

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

Rate Case Proceedings

(PPL and PPL Electric)

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

(PPL and Kentucky Registrants)

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.

(KU)

In September 2013, KU filed an application with the FERC to adjust the formula rate under which KU provides wholesale requirements power sales to 12 municipal customers. Among other changes, the application requests an amended formula whereby KU would recover costs based on forward-looking estimates with a subsequent true-up, replacing the current formula which uses prior-year cost amounts. KU's application proposed an authorized 10.7% return on equity. Subject to regulatory approval, the new formula rate may become effective during mid-2014.

In April 2013, KU filed an application with the VSCC to increase annual Virginia base electricity revenue by approximately $7 million, representing an increase of 9.6%. KU proposed an authorized 10.8% return on equity. In October 2013, KU filed a stipulation reached with VSCC staff proposing a revenue increase of $4.7 million, representing an increase of 6.9%. If approved by the VSCC, new base rates would go into effect on December 1, 2013.

Results of Operations

(PPL)

The discussion for PPL provides a review of results by reportable segment and concludes with a "Statement of Income Analysis," which includes explanations of Kentucky Gross Margins, Pennsylvania Gross Delivery Margins and Unregulated Gross Energy Margins. The "Statement of Income Analysis" also addresses significant changes in principal line items on PPL's Statements of Income, comparing the three and nine months ended September 30, 2013 with the same periods in 2012. "Segment Earnings and Statement of Income Analysis" is presented separately for PPL.

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

(Subsidiary Registrants)

The discussion for each of PPL Energy Supply, PPL Electric, LKE, LG&E and KU provides a summary of earnings and concludes with a "Statement of Income Analysis," which includes a reconciliation of a non-GAAP financial measure to "Operating Income" and significant changes in principal line items on the Statements of Income, comparing the three and nine months ended September 30, 2013 with the same periods in 2012. "Earnings and Statement of Income Analysis" is presented separately for PPL Energy Supply, PPL Electric, LKE, LG&E and KU.

(All Registrants)

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.

PPL: Segment Earnings and Statement of Income Analysis

Segment Earnings

U.K. Regulated Segment

The U.K. Regulated segment consists of PPL Global which primarily includes WPD's regulated electricity distribution operations and certain costs, such as U.S. income taxes, administrative costs and allocated financing costs. The U.K. Regulated segment represents 60% of Net Income Attributable to PPL Shareowners for nine months ended September 30, 2013 and 32% of PPL's assets at September 30, 2013.

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

		Three Months					Nine Months
		2013		2012		% Change	2013		2012		% Change

Utility revenues		$	534	$	518	3	$	1,731	$	1,613	7
Energy-related businesses			9		10	(10)		32		34	(6)
	Total operating revenues		543		528	3		1,763		1,647	7
Other operation and maintenance			111		101	10		340		326	4
Depreciation			73		69	6		219		206	6
Taxes, other than income			36		36			109		108	1
Energy-related businesses			7		8	(13)		21		24	(13)
	Total operating expenses		227		214	6		689		664	4
Other Income (Expense) - net			(117)		(50)	134		7		(39)	(118)
Interest Expense			102		106	(4)		313		314
Income Taxes			(86)		(44)	95		27		67	(60)
Net Income Attributable to PPL Shareowners		$	183	$	202	(9)	$	741	$	563	32

The changes in the components of the U.K. Regulated segment's results between these periods were due to the factors set forth below, which reflect reclassifications for certain items that management considers special. See below for additional detail of these special items.

		Three Months		Nine Months

U.K.
	Utility revenues	$	44	$	187
	Other operation and maintenance		(9)		(19)
	Depreciation		(6)		(17)
	Interest expense		3		(4)
	Other		2		2
	Income taxes		8		(13)
U.S.
	Interest expense and other				1
	Income taxes		(5)		4

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	Three Months		Nine Months

Foreign currency exchange rates, after-tax (a)		1		(2)
Special items, after-tax		(57)		39
Total	$	(19)	$	178

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

U.K.

·	Higher utility revenues for the three-month period primarily due to $74 million from the April 1, 2013 price increase, partially offset by a $22 million accrual for over-recovered revenue and $10 million of lower volume due primarily to weather.

Higher utility revenues for the nine-month period primarily due to $187 million from the April 1, 2013 and 2012 price increases and $18 million of higher volume due primarily to weather, partially offset by a $22 million accrual for over-recovered revenue.

·	Higher other operation and maintenance for the three- and nine-month periods primarily due to higher network maintenance expense.

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

·	Lower income taxes for the three-month period due to $16 million from U.K. tax rate changes, partially offset by higher pre-tax income, which increased income taxes by $8 million.

U.S.

·	Higher income taxes for the three-month period due to an $8 million increase to income tax expense attributable to a revision in the expected taxable amount of cash repatriation in 2013.

Lower income taxes for the nine-month period due to a $19 million 2013 adjustment primarily related to an IRS ruling regarding 2010 U.K. earnings and profits calculations and $11 million of lower income taxes on intercompany loans, partially offset by a $23 million increase to income tax expense attributable to a revision in the expected taxable amount of cash repatriation in 2013.

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	2013		2012		2013		2012

		Other Income
Foreign currency-related economic hedges, net of tax of $44, $18, $5, $17 (a)		(Expense)-net	$	(82)	$	(30)	$	(8)	$	(28)
WPD Midlands acquisition-related adjustments:
		Other Operation
	Separation benefits, net of tax of $1, $1, $1, $3	and Maintenance		(2)		(1)		(4)		(9)
		Other Operation
	Other acquisition-related adjustments, net of tax of $0, $0, $0, ($1)	and Maintenance				(2)		(2)		2
Other:
	Windfall Profits Tax litigation (b)	Income Taxes						43
	Change in WPD line loss accrual, net of tax of $5, $0, $10, $0 (c)	Utility		(16)				(35)
	Change in U.K. tax rate (d)	Income Taxes		84		74		84		74
Total			$	(16)	$	41	$	78	$	39

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

(b)

In May 2013, the U.S. Supreme Court reversed the December 2011 ruling, by the U.S. Court of Appeals for the Third Circuit, on the creditability for income tax purposes of the U.K. Windfall Profits Tax. As a result of the U.S. Supreme Court ruling, PPL recorded an income tax benefit during the nine-month 2013 period. See Note 5 to the Financial Statements for additional information.

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~~Higher~~

(c)

(d)

The U.K. Finance Act of 2013, enacted in July 2013, reduced the U.K.'s statutory income tax rate from 23% to 21%, effective April 1, 2014 and from 21% to 20%, effective April 1, 2015. The U.K. Finance Act of 2012, enacted in July 2012, reduced the U.K. statutory income tax rate from 25% to 24% retroactive to April 1, 2012 and from 24% to 23% effective April 1, 2013. As a result, PPL reduced its net deferred tax liability and recognized a deferred tax benefit in the three and nine-month periods of 2013 and 2012.

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, certain financing costs are allocated to the Kentucky Regulated segment. The Kentucky Regulated segment represents 19% of Net Income Attributable to PPL Shareowners for the nine months ended September 30, 2013 and 25% of PPL's assets at September 30, 2013.

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

		Three Months					Nine Months
		2013		2012		% Change	2013		2012		% Change

Utility revenues		$	744	$	732	2	$	2,226	$	2,095	6
Fuel			237		249	(5)		684		677	1
Energy purchases			23		27	(15)		146		135	8
Other operation and maintenance			188		186	1		582		589	(1)
Depreciation			84		87	(3)		249		259	(4)
Taxes, other than income			12		11	9		36		34	6
	Total operating expenses		544		560	(3)		1,697		1,694
Other Income (Expense) - net			(4)		(4)			(6)		(14)	(57)
Interest Expense			49		54	(9)		165		163	1
Income Taxes			54		42	29		132		70	89
Income (Loss) from Discontinued Operations						n/a		1		(6)	(117)
Net Income Attributable to PPL Shareowners		$	93	$	72	29	$	227	$	148	53

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

	Three Months		Nine Months

Kentucky Gross Margins	$	42	$	151
Other operation and maintenance		(4)		4
Depreciation		(9)		(26)
Taxes, other than income		(1)		(2)
Other Income (Expense) - net				7
Interest Expense		5		(2)
Income Taxes		(12)		(56)
Special items, after-tax				3
Total	$	21	$	79

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

Lower other operation and maintenance for the nine-month period primarily due to ~~$16~~$18 million of lower costs due to the timing and scope of scheduled coal plant maintenance outages. This decrease was partially offset by $8 million of higher ~~payroll-related costs, $10 million of higher vegetation management costs, $7 million of higher corporate service costs~~administrative and general expenses and $4 million of ~~higher contractor~~adjustments to regulatory assets and liabilities.

Higher depreciation for the three and nine-month periods primarily due to environmental costs related to the 2005 and 2006 ECR plans now being included in base rates, which added $13 million and $39 million to depreciation that is excluded from Kentucky Gross Margins. This increase was partially offset by ~~$13~~lower depreciation of $5 and $16 million due to revised rates that were effective January 1, 2013. Both events are the result of ~~lower PUC-reportable storm costs.~~the 2012 rate case proceedings.

·	Higher other income (expense) - net for the nine-month period primarily due to losses from the EEI investment recorded in 2012. The EEI investment was fully impaired in the fourth quarter of 2012.

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.

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·	Higher income taxes for the three and nine-month periods primarily due to the change in pre-tax income at current period tax rates.

~~Lower income taxes~~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	2013	2012	2013		2012

LKE acquisition-related adjustments:
		Income Taxes and Other
	Net operating loss carryforward and other tax-related adjustments	Operation and Maintenance					$	4
Other:
	LKE discontinued operations (a)	Discontinued Operations			$	1		(5)
	EEI adjustments, net of tax of $0, $0, $0, $0 (b)	Other Income (Expense)-net				1
Total					$	2	$	(1)

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

(b)	Impact recorded at KU.

Pennsylvania Regulated Segment

The Pennsylvania Regulated segment includes PPL Electric's regulated electricity transmission and distribution operations. In addition, certain financing costs are allocated to the Pennsylvania Regulated segment. The Pennsylvania Regulated segment represents 13% of Net Income Attributable to PPL Shareowners for the nine months ended September 30, 2013 and 15% of PPL's assets at September 30, 2013.

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

		Three Months					Nine Months
		2013		2012		% Change	2013		2012		% Change
Utility revenues
	External	$	463	$	443	5	$	1,388	$	1,303	7
	Intersegment		1		1			3		3
	Total utility revenues		464		444	5		1,391		1,306	7
Energy purchases
	External		144		137	5		436		410	6
	Intersegment		11		23	(52)		37		61	(39)
Other operation and maintenance			134		148	(9)		391		431	(9)
Depreciation			45		41	10		132		119	11
Taxes, other than income			25		24	4		77		72	7
	Total operating expenses		359		373	(4)		1,073		1,093	(2)
Other Income (Expense) - net			2		3	(33)		5		6	(17)
Interest Expense			30		25	20		80		73	10
Income Taxes			26		16	63		83		47	77
Net Income			51		33	55		160		99	62
Net Income Attributable to Noncontrolling Interests						n/a				4	(100)
Net Income Attributable to PPL Shareowners		$	51	$	33	55	$	160	$	95	68

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

	Three Months		Nine Months

Pennsylvania Gross Delivery Margins	$	31	$	92
Other operation and maintenance		8		28
Depreciation		(4)		(13)
Interest Expense		(5)		(7)
Other		(2)		(3)
Income Taxes		(10)		(36)
Noncontrolling Interests				4
Total	$	18	$	65

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

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·	Lower other operation and maintenance for the three-month period primarily due to lower storm costs of $8 million, lower corporate service costs of $3 million and lower rent expense of $3 million, partially offset by higher vegetation management expense of $6 million.

Lower other operation and maintenance for the nine-month period primarily due to lower storm costs of $9 million, lower corporate service costs of $13 million and lower rent expense of $4 million.

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

·	Higher interest expense for the three and nine-month periods primarily due to the issuance of first mortgage bonds in August 2012 and July 2013.

·	Higher income taxes for the three and nine-month periods 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 segment earnings in 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.

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.

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 operations. In addition, certain financing costs are allocated to the Supply segment. The Supply segment represents 10% of Net Income Attributable to PPL Shareowners for the nine months ended September 30, 2013 and ~~development operations~~27% of ~~PPL Energy Supply.~~PPL's assets at September 30, 2013.

Net Income Attributable to PPL Shareowners for the periods ended September 30 includes the following results:
						��
		Three Months					Nine Months						Three Months					Nine Months
		2012		2011		% Change	2012		2011		% Change		2013		2012		% Change	2013		2012		% Change
Energy revenues	Energy revenues											Energy revenues
	External (a)	$	567	$	1,305	(57)	$	3,673	$	3,437	7	External (a)	$	1,209	$	567	113	$	3,248	$	3,673	(12)
	Intersegment		23		5	360		61		15	307	Intersegment		11		23	(52)		37		61	(39)
Energy-related businesses	Energy-related businesses		133		132	1		346		360	(4)	Energy-related businesses		143		133	8		378		346	9
	Total operating revenues		723		1,442	(50)		4,080		3,812	7	Total operating revenues		1,363		723	89		3,663		4,080	(10)
Fuel (a)	Fuel (a)		321		358	(10)		728		826	(12)	Fuel (a)		258		321	(20)		780		728	7
Energy purchases	Energy purchases											Energy purchases
	External (a)		(150)		335	(145)		1,288		746	73	External (a)		388		(150)	(359)		1,085		1,288	(16)
	Intersegment		1		2	(50)		2		3	(33)	Intersegment		1		1			3		2	50
Other operation and maintenance	Other operation and maintenance		215		191	13		750		707	6	Other operation and maintenance		243		221	10		748		769	(3)
Depreciation	Depreciation		81		66	23		229		194	18	Depreciation		80		75	7		237		210	13
Taxes, other than income	Taxes, other than income		19		18	6		54		49	10	Taxes, other than income		18		19	(5)		51		54	(6)
Energy-related businesses	Energy-related businesses		129		131	(2)		339		356	(5)	Energy-related businesses		138		129	7		366		339	8
	Total operating expenses		616		1,101	(44)		3,390		2,881	18	Total operating expenses		1,126		616	83		3,270		3,390	(4)
Other Income (Expense) - net	Other Income (Expense) - net		6		22	(73)		15		41	(63)	Other Income (Expense) - net		2		6	(67)		18		15	20
Other-Than-Temporary Impairments	Other-Than-Temporary Impairments				5	(100)		1		6	(83)	Other-Than-Temporary Impairments		1			n/a		1		1
Interest Expense	Interest Expense		62		59	5		163		159	3	Interest Expense		54		62	(13)		174		163	7
Income Taxes	Income Taxes		3		99	(97)		180		299	(40)	Income Taxes		92		3	2,967		113		180	(37)
Income (Loss) from Discontinued Operations					1	(100)				3	(100)
Net Income			48		201	(76)		361		511	(29)
Net Income Attributable to Noncontrolling Interests	Net Income Attributable to Noncontrolling Interests				1	(100)				1	(100)	Net Income Attributable to Noncontrolling Interests		1			n/a		1			n/a
Net Income Attributable to PPL Shareowners	Net Income Attributable to PPL Shareowners	$	48	$	200	(76)	$	361	$	510	(29)	Net Income Attributable to PPL Shareowners	$	91	$	48	90	$	122	$	361	(66)

~~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.

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

	Three Months		Nine Months		Three Months		Nine Months

Unregulated gross energy margins	$	(38)	$	(125)
Unregulated Gross Energy Margins					$	(9)	$	(204)
Other operation and maintenance		(23)		(42)		(18)		11
Depreciation		(15)		(35)		(5)		(27)
Taxes, other than income						(1)		3
Other Income (Expense) - net		(18)		(30)		(4)		6
Interest expense						8		(11)
Other		7		1		(4)		(2)
Income Taxes		33		106		(23)		37
Discontinued operations, after-tax		(1)		2
Special items, after-tax		(97)		(26)		99		(52)
Total	$	(152)	$	(149)	$	43	$	(239)

112

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

Higher other operation and maintenance for the three-month period primarily due to ~~$8 million of higher~~Montour outage costs ~~at PPL Susquehanna, $7 million due to a planned~~in 2013 with no comparable outage ~~at PPL Brunner Island~~ in ~~September 2012 and $4 million of higher costs from Ironwood as a result of the acquisition.~~2012.

~~Higher~~Lower other operation and maintenance for the nine-month period primarily due to ~~$27~~$23 million of ~~higher~~outage costs at Brunner Island mainly due to timing and $9 million due to lower project costs at PPL Susquehanna, ~~including refueling outage costs, payroll-related costs and timing of projects and~~partially offset by $13 million of ~~higher~~Montour outage costs ~~from~~in 2013 with no comparable outage in 2012 and $6 million of Ironwood ~~as a result of the acquisition.~~outage costs in 2013 with no comparable outage in 2012.

·	Higher depreciation for the three and nine-month periods primarily due to ~~the impact of~~ PP&E ~~additions, and $7~~additions. The nine-month period also includes $6 million ~~and $11 million due~~attributable to the Ironwood Acquisition.

·	~~Lower other income (expense) - net~~Higher interest expense for the ~~three and~~ nine-month ~~periods~~period primarily due to ~~a $22 million gain on the redemption of debt~~lower capitalized interest in ~~the third quarter of 2011.~~2013.

~~Lower~~Higher income taxes for the three-month period primarily due to $26 million of higher adjustments to valuation allowances in 2013 on Pennsylvania net operating loss carryforwards and a $6 million benefit from a state tax rate change recorded in 2012, partially offset by lower pre-tax ~~income.~~income in 2013, which reduced income taxes by $10 million.

Lower income taxes for the nine-month period primarily due to lower pre-tax income in 2013, which reduced income taxes by ~~$73~~$87 million, ~~$15~~partially offset by $26 million of ~~net deferred tax benefits from state tax~~higher adjustments ~~recorded~~to valuation allowances in ~~2012 and $11 million of~~2013 on Pennsylvania net operating loss ~~valuation allowance adjustments~~carryforwards and a $17 million benefit from a state tax rate change recorded in ~~2011, driven primarily by the impact of bonus depreciation.~~2012.

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

		Income Statement	Three Months				Nine Months					Income Statement	Three Months				Nine Months
		Line Item	2012		2011		2012		2011			Line Item	2013		2012		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 $4, $63, $32, ($16)											Adjusted energy-related economic activity - net, net of tax of $4, $63, $32, ($16)	(a)	$	(6)	$	(95)	$	(47)	$	23
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, $0, $0, ($2)	Other Income-net								1
Other:	Other:										Other:
	Montana hydroelectric litigation, net of tax of $0, $0, $0, $1	Interest Expense				(1)				(2)	Change in tax accounting method related to repairs	Income Taxes						(3)
	Litigation settlement - spent nuclear fuel storage, net of tax of $0, ($2), $0, ($23) (b)	Fuel				4				33		Other Operation
	Counterparty bankruptcy, net of tax of $0, $0, $5, $0 (c)	Other O&M						(6)			Counterparty bankruptcy, net of tax of $0, $0, ($1), $5 (b)	and Maintenance						1		(6)
	Wholesale supply cost reimbursement, net of tax of $0, $0, $0, $0	(d)						1			Wholesale supply cost reimbursement, net of tax of $0, $0, $0, $0	(c)								1
	Ash basin leak remediation adjustment, net of tax of $0, $0, ($1), $0	Other O&M						1				Other Operation
	Coal contract modification payments, net of tax of $7, $0, $12, $0 (e)	Fuel		(10)				(17)			Ash basin leak remediation adjustment, net of tax of $0, $0, $0, ($1)	and Maintenance								1
											Coal contract modification payments, net of tax of $0, $7, $0, $12 (d)	Fuel				(10)				(17)
Total	Total		$	(105)	$	(8)	$	3	$	29	Total		$	(6)	$	(105)	$	(49)	$	3

~~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. In June 2013, PPL EnergyPlus received an approval for an administrative claim in the amount of $2 million.

~~(d)~~(c)

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

~~(e)~~(d)

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

Reconciliation of Economic Activity

The following table reconciles unrealized pre-tax gains (losses) for the periods ended September 30, ~~from the table within "Commodity Price Risk (Non-trading) - Economic Activity" in Note 14 to the Financial Statements~~ to the special item identified as "Adjusted energy-related economic activity - net."

Three Months 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

		Three Months				Nine Months
		2013		2012		2013		2012
Operating Revenues
	Unregulated retail electric and gas	$	(2)	$	(13)	$	10	$	(15)
	Wholesale energy marketing		(49)		(716)		(281)		(322)
Operating Expenses
	Fuel		3		3		(2)		(11)
	Energy Purchases		37		569		192		420
Energy-related economic activity (a)			(11)		(157)		(81)		72

113

		Three Months				Nine Months
		2013		2012		2013		2012
Option premiums			1				2		1
Adjusted energy-related economic activity			(10)		(157)		(79)		73
Less: Economic activity realized, associated with the monetization of
	certain full-requirement sales contracts in 2010				1				34
Adjusted energy-related economic activity - net, pre-tax		$	(10)	$	(158)	$	(79)	$	39

Adjusted energy-related economic activity - net, after-tax		$	(6)	$	(95)	$	(47)	$	23

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

~~(b)~~

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

~~Outlook~~

Excluding special items, PPL projects lower segment earnings in 2012 compared with 2011. The decrease is primarily driven by lower energy margins as a result of lower energy and capacity prices and lower generation volumes, higher other operation and maintenance expense and higher depreciation.

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 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~~Management utilizes 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:~~as indicators of performance for its businesses.

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

"Pennsylvania Gross Delivery Margins" is a single financial performance measure of ~~the Pennsylvania Regulated segment's~~PPL Electric'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 reconciliation table ~~below.~~below (in "Energy purchases from affiliate" in PPL Electric's reconciliation table). As a result, this measure represents the net revenues from ~~the Pennsylvania Regulated segment's~~PPL Electric's electric delivery operations.

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

~~Reconciliation of Non-GAAP Financial Measures~~

114

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. Management 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 PPL's Board of Directors to manage the operations, analyze actual results compared with budget and, in certain cases, to measure certain corporate financial goals used in determining variable compensation.

Reconciliation of Non-GAAP Financial Measures

The following tables ~~reconcile "Operating Income" to PPL's three~~contain the components from the Statement of Income that are included in the non-GAAP financial measures and a reconciliation to PPL's "Operating Income" for the periods ended September 30.

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

Operating Revenues
Utility $ 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

					2013 Three Months												2012 Three Months
									Unregulated												Unregulated
					Kentucky		PA Gross			Gross					Operating		Kentucky		PA Gross			Gross					Operating
					Gross		Delivery			Energy					Income		Gross		Delivery			Energy					Income
					Margins		Margins			Margins		Other (a)			(b)		Margins		Margins			Margins		Other (a)			(b)
Operating Revenues
	Utility				$	744	$	463				$	532	(c)	$	1,739	$	732	$	443				$	518	(c)	$	1,693
	PLR intersegment utility
		revenue (expense) (d)						(11)		$	11									(23)		$	23
	Unregulated retail
		electric and gas									267		(3)	(f)		264							232		(14)	(f)		218
	Wholesale energy marketing
			Realized								981		(1)			980							1,074		2	(e)		1,076
			Unrealized economic
				activity									(49)	(f)		(49)									(716)	(f)		(716)
	Net energy trading margins										12					12							(11)					(11)
	Energy-related businesses												159			159									143			143
			Total Operating Revenues			744		452			1,271		638			3,105		732		420			1,318		(67)			2,403

Operating Expenses
	Fuel					237					256		1			494		249					310		11	(g)		570
	Energy purchases
			Realized			23		144			427		(2)			592		27		137			418		1	(e)		583
			Unrealized economic
				activity									(37)	(f)		(37)									(569)	(f)		(569)
	Other operation and
		maintenance				26		19			5		619			669		28		25			1		596			650
	Depreciation					1							288			289		13							265			278
	Taxes, other than income							23			9		58			90				23			11		56			90
	Energy-related businesses										5		146			151									137			137
	Intercompany eliminations							(1)			1									(1)			1
			Total Operating Expenses			287		185			703		1,073			2,248		317		184			741		497			1,739
Total					$	457	$	267		$	568	$	(435)		$	857	$	415	$	236		$	577	$	(564)		$	664

					2013 Nine Months												2012 Nine Months
									Unregulated												Unregulated
					Kentucky		PA Gross			Gross					Operating		Kentucky		PA Gross			Gross					Operating
					Gross		Delivery			Energy					Income		Gross		Delivery			Energy					Income
					Margins		Margins			Margins		Other (a)			(b)		Margins		Margins			Margins		Other (a)			(b)
Operating Revenues
	Utility				$	2,226	$	1,388				$	1,730	(c)	$	5,344	$	2,095	$	1,303				$	1,614	(c)	$	5,012
	PLR intersegment utility
		revenue (expense) (d)						(37)		$	37									(61)		$	61
	Unregulated retail
		electric and gas									750		8	(f)		758							638		(18)	(f)		620
	Wholesale energy marketing
			Realized								2,770		(3)			2,767							3,353		14	(e)		3,367
			Unrealized economic
				activity									(281)	(f)		(281)									(322)	(f)		(322)
	Net energy trading margins										1					1							7					7
	Energy-related businesses												423			423									380			380
			Total Operating Revenues			2,226		1,351			3,558		1,877			9,012		2,095		1,242			4,059		1,668			9,064

~~117~~115

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
									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				$	2,095	$	1,303				$	1,614	(c)	$	5,012	$	2,139	$	1,444				$	1,112	(c)	$	4,695
	PLR intersegment utility
		revenue (expense) (d)						(61)		$	61									(15)		$	15
	Unregulated retail
		electric and gas									638		(18)	(g)		620							509		8	(g)		517
	Wholesale energy marketing
			Realized								3,353		14	(f)		3,367							2,635		42	(f)		2,677
			Unrealized economic
				activity									(322)	(g)		(322)									229	(g)		229					2013 Nine Months												2012 Nine Months
	Net energy trading margins										7					7							14					14									Unregulated												Unregulated
	Energy-related businesses												380			380									387			387					Kentucky		PA Gross			Gross					Operating		Kentucky		PA Gross			Gross					Operating
			Total Operating Revenues			2,095		1,242			4,059		1,668			9,064		2,139		1,429			3,173		1,778			8,519					Gross		Delivery			Energy					Income		Gross		Delivery			Energy					Income
																																	Margins		Margins			Margins		Other (a)			(b)		Margins		Margins			Margins		Other (a)			(b)
Operating Expenses	Operating Expenses																												Operating Expenses
	Fuel					677					695		33	(e)		1,405		666					872		(46)	(e)		1,492	Fuel					684					778		2			1,464		677					695		33	(g)		1,405
	Energy purchases																												Energy purchases
			Realized			135		410			1,669		39	(f)		2,253		179		591			496		201	(f)		1,467			Realized			146		436			1,282		(9)			1,855		135		410			1,669		39	(e)		2,253
			Unrealized economic																												Unrealized economic
				activity									(420)	(g)		(420)									49	(g)		49				activity									(192)	(f)		(192)									(420)	(f)		(420)
	Other operation and															��													Other operation and
		maintenance				76		74			12		1,933			2,095		67		77			13		1,884			2,041		maintenance				74		62			13		1,894			2,043		76		74			12		1,933			2,095
	Depreciation					39							774			813		37							660			697	Depreciation					3							856			859		39							774			813
	Taxes, other than income							67			27		174			268				77			22		139			238	Taxes, other than income							70			27		175			272				67			27		174			268
	Energy-related businesses												363			363									368			368	Energy-related businesses										5		398			403									363			363
	Intercompany eliminations							(3)			2		1							(9)			3		6				Intercompany eliminations							(3)			3									(3)			2		1
			Total Operating Expenses			927		548			2,405		2,897			6,777		949		736			1,406		3,261			6,352			Total Operating Expenses			907		565			2,108		3,124			6,704		927		548			2,405		2,897			6,777
	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				$	1,319	$	786		$	1,450	$	(1,247)		$	2,308	$	1,168	$	694		$	1,654	$	(1,229)		$	2,287

(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.

~~(f)~~

Represents energy-related economic activity as described in "Commodity Price Risk (Non-trading) - Economic Activity" within Note 14 to the Financial Statements. For the three and nine months ended September 30, 2012, "Wholesale energy marketing - Realized" and "Energy purchases - Realized" include net pre-tax losses of $1 million and $34 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)~~(g)

~~Represents~~Includes economic activity related to fuel as described in "Commodity Price Risk (Non-trading) - Economic Activity" within Note 14 to the ~~net~~Financial Statements. The three and nine months ended September 30, 2012 include a pre-tax loss of ~~certain revenues~~$17 million 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.~~$29 million related to coal contract modification payments.

~~118~~

Changes in Non-GAAP Financial Measures

The following table shows ~~PPL's three~~the non-GAAP financial measures by PPL's reportable segment and by component, as applicable, for the periods ended September 30 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						Nine Months
		2012		2011		Change		2012		2011		Change				2013		2012		Change		2013		2012		Change

Kentucky Regulated														Kentucky Regulated
Kentucky Gross Margins	Kentucky Gross Margins	$	415	$	419	$	(4)	$	1,168	$	1,190	$	(22)	Kentucky Gross Margins
PA Gross Delivery Margins by Component
														LKE		$	457	$	415	$	42	$	1,319	$	1,168	$	151
															LG&E		210		198		12		595		552		43
															KU		247		216		31		724		616		108

Pennsylvania Regulated														Pennsylvania Regulated
PA Gross Delivery Margins														PA Gross Delivery Margins
	Distribution	$	185	$	179	$	6	$	544	$	560	$	(16)		Distribution	$	201	$	185	$	16	$	607	$	544	$	63
	Transmission		51		46		5		150		133		17		Transmission		66		51		15		179		150		29
Total	Total	$	236	$	225	$	11	$	694	$	693	$	1	Total		$	267	$	236	$	31	$	786	$	694	$	92

Unregulated Gross Energy Margins by Region
Supply														Supply
Unregulated Gross Energy Margins														Unregulated Gross Energy Margins
Non-trading	Non-trading													Non-trading
	Eastern U.S.	$	521	$	530	$	(9)	$	1,417	$	1,502	$	(85)		Eastern U.S.	$	504	$	521	$	(17)	$	1,283	$	1,417	$	(134)
	Western U.S.		67		92		(25)		230		263		(33)		Western U.S.		52		67		(15)		166		230		(64)
Net energy trading	Net energy trading		(11)		(7)		(4)		7		14		(7)	Net energy trading			12		(11)		23		1		7		(6)
Total	Total	$	577	$	615	$	(38)	$	1,654	$	1,779	$	(125)	Total		$	568	$	577	$	(9)	$	1,450	$	1,654	$	(204)

Kentucky Gross Margins

Kentucky Gross Margins increased $42 million for the three months ended September 30, 2013 compared with 2012, primarily due to higher base rates of $23 million ($10 million at LG&E and $13 million at KU), environmental cost recoveries added to base rates of $13 million (at KU), returns from additional environmental capital investments of $8 million ($3 million at LG&E and $5 million at KU) and higher fuel recoveries of $6 million ($3 million at LG&E and $3 million at KU), partially offset by lower volumes of $13 million ($7 million at LG&E and $6 million at KU). The change in volumes was primarily attributable to weather, as cooling degree days decreased 16% compared to the same period in 2012.

116

Kentucky Gross Margins increased $151 million for the nine months ended September 30, ~~2012~~2013 compared with ~~the same period in 2011,~~2012, primarily due to ~~$16~~higher base rates of $72 million ($31 million at LG&E and $41 million at KU), environmental cost recoveries added to base rates of ~~lower retail margins, as volumes~~$45 million ($3 million at LG&E and $42 million at KU), returns from additional environmental capital investments of $18 million ($9 million at LG&E and $9 million at KU) and higher fuel recoveries of $11 million ($3 million at LG&E and $8 million at KU).

The increase in base rates was the result of new KPSC rates effective January 1, 2013 at LG&E and KU. The environmental cost recoveries added to base rates were impacted by unseasonably mild weather during the first four months of 2012, and $6 million of lower wholesale margins, as volumes were impacted by lower market prices. Total heating degree days decreased 24% compareddue to the ~~same period~~transfer of the 2005 and 2006 ECR plans into base rates as a result of the 2012 Kentucky rate cases for LG&E and KU. This transfer results in ~~2011.~~depreciation and other operation and maintenance expenses associated with the 2005 and 2006 ECR plans being excluded from Kentucky Gross Margins in 2013, while the recovery of such costs remain in Kentucky Gross Margins through base rates.

Pennsylvania Gross Delivery Margins

Distribution

~~Margins decreased~~Distribution margins increased for the three months ended September 30, 2013 compared with 2012, primarily due to an $18 million favorable effect of price as a result of higher base rates, effective January 1, 2013, partially offset by unfavorable weather of $4 million.

Distribution margins increased for the nine months ended September 30, ~~2012~~2013 compared with ~~the same period in 2011, primarily~~2012 due to ~~an $18~~a $50 million ~~unfavorable~~favorable effect of ~~mild~~price, largely comprised of higher base rates, effective January 1, 2013, a favorable weather ~~early in 2012. The three~~effect of $9 million and ~~nine-month periods were impacted by a $7 million charge recorded in 2011 to reduce a portion~~higher volumes of ~~the transmission service charge regulatory asset associated with a 2005 undercollection that was not included in any subsequent rate reconciliations filed with the PUC.~~$4 million.

Transmission

~~Margins~~Transmission margins increased for the three and ~~nine-month periods~~nine months ended September 30, ~~2012,~~2013 compared with ~~the same periods in 2011,~~2012, primarily due to increased ~~investment in plant~~capital investments 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)~~

~~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.

~~119~~

~~Western U.S.~~

Non-trading margins for the three and nine months ended September 30, 2012 compared with the same periods in 2011 were lower due to $14 million and $31 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 million of higher fuel costs.

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

~~(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 price increase 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 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 is primarily due to lower charges recorded as a result of the acquisition, including $85 million for severance compensation, early retirement deficiency costs 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.~~

~~Taxes, Other Than Income~~

~~The increase in taxes, other than income for the nine months ended September 30, 2012 compared with 2011 was due to:~~

	~~Nine Months~~

~~Pennsylvania gross receipts tax (a)~~	$	~~(14)~~
~~Domestic property tax~~		7
~~WPD Midlands (b)~~		31
~~Other~~		6
~~Total~~	$	30

~~(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

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)~~

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

~~Interest Expense~~

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

~~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 to the issuance in April 2011 to support the WPD Midlands acquisition.~~

~~(b)~~

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.

~~(c)~~

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

~~(d)~~

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

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, 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)~~

~~During the three and nine months ended September 30, 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~~

~~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

At September 30, 2012, $360 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 Form 10-K for additional information on undistributed earnings of WPD.

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

~~capital expenditures of $2.1 billion;~~

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

~~the redemption of preference stock of a subsidiary of $250 million;~~

~~the retirement of long-term debt of $105 million;~~

~~the Ironwood Acquisition for $84 million, net of cash acquired;~~

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

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

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

~~an increase of $185 million in net income, when adjusted for non-cash components; and~~

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

~~Credit Facilities~~

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

~~123~~

~~(a)~~

~~In April 2012, PPL Electric increased the capacity of its syndicated credit facility from $200 million to $300 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 credit facility agreement was amended and restated to allow for certain payments under the letter of credit facility to be converted to loans rather than requiring immediate payment.

~~(c)~~

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.

~~(e)~~

~~The amount outstanding at September 30, 2012 was a USD-denominated borrowing of $171 million, which equated to £107 million at the time of borrowing and bore interest at 0.8818%.~~

~~(f)~~

In January 2012, WPD (South West) entered into a £245 million 5-year syndicated credit facility to replace its previous £210 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 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.

~~(g)~~

At September 30, 2012, the U.S. dollar equivalent of unused capacity under WPD's committed credit facilities was $1.4 billion. The commitments under WPD's credit facilities are provided by a diverse bank group with no one bank providing more than 16% 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~~

In April 2012, PPL made a registered underwritten public offering of 9.9 million shares of its common stock. In conjunction with that offering, the underwriters exercised an option to purchase 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.

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, PPL Capital Funding issued $400 million of 4.20% Senior Notes due 2022. The notes may be redeemed at PPL Capital Funding's option any time prior to maturity at make-whole redemption prices. PPL Capital Funding received proceeds of $396 million, net of a discount and underwriting fees, which were used for general corporate purposes.

~~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 and for other general corporate purposes.

In October 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.

~~Common Stock Dividends~~

In August 2012, PPL declared its quarterly common stock dividend, payable October 1, 2012, at 36.0 cents per share (equivalent to $1.44 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. 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 of the respective rating agencies' websites, which ratings together with all other information contained on such rating agency websites is, hereby, explicitly not incorporated by reference in this report.

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

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

~~In February 2012, Fitch assigned ratings to 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.~~

~~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 and outlook to PPL Capital Funding's $400 million of 4.20% Senior 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, Fitch affirmed the long-term issuer default rating and senior unsecured rating of PPL WW, WPD (South Wales) and WPD (South West).~~

~~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 of 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 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 generation assets, full-requirement sales contracts and retail contracts. This economic activity is subject to changes in fair value due to market price volatility of the input and output commodities (e.g., fuel and power). Although they do not receive hedge accounting treatment, these transactions are considered non-trading activity. The fair value of economic positions at 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. 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

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

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

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 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. 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 $ 17 $ 15 $ (4) $ 4
Contracts realized or otherwise settled during the period 17 (10) 16 (7)
Fair value of new contracts entered into during the period (a) 13 (2) 18 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

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

Net Asset (Liability)
Maturity Maturity
Less Than Maturity Maturity in Excess Total Fair
1 Year 1-3 Years 4-5 Years of 5 Years Value
Source of Fair Value
Prices based on significant observable inputs (Level 2) $ 18 $ 11 $ 1 $ 30
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

~~128~~

~~VaR Models~~

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

Trading VaR Non-Trading VaR
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

The trading portfolio includes all speculative positions, regardless of the delivery period. All positions not considered speculative are considered non-trading. The non-trading portfolio includes the entire portfolio, including generation, with delivery periods through the next 12 months. Both the trading and non-trading VaR computations exclude FTRs due to the absence of reliable spot and forward markets. The fair value of the non-trading and trading FTR positions was insignificant at September 30, 2012.

~~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, 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 would increase the fair value of its debt portfolio by $609 million.

~~At September 30, 2012, 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) $ 618 $ (21) $ (14)
Cross-currency swaps (d) 1,262 20 (180)
Economic hedges
Interest rate swaps (e) 179 (62) (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.~~

~~(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. 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 mature through 2024.

~~(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 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 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 mature through 2033.

~~129~~

~~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:~~

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

Net investment hedges (b) £ 163 $ (1) $ (26)
Economic hedges (c) 1,199 (35) (185)

~~(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 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 outstanding at September 30, 2012 mature through 2014.

~~NDT Funds - Securities Price Risk~~

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

~~Credit Risk~~

~~See Notes 13 and 14 to the Financial Statements in this Form 10-Q and "Risk Management - Energy Marketing & Trading and Other - Credit Risk" in PPL's 2011 Form 10-K for additional information.~~

~~Foreign Currency Translation~~

The value of the British pound sterling fluctuates in relation to the U.S. dollar. Changes in these exchange rates resulted in a foreign currency translation gain of $53 million for the nine months ended September 30, 2012, which primarily reflected a $93 million increase to PP&E 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 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~~

~~Acquisitions, Development and Divestitures~~

~~See Note 8 to the Financial Statements for information on the April 2012 Ironwood Acquisition and LG&E's and KU's June 2012 termination of the asset purchase agreement for the Bluegrass CTs.~~

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

~~Environmental Matters~~

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

~~New Accounting Guidance~~

~~See Notes 2 and 18 to the Financial Statements for a discussion of new accounting guidance adopted and pending adoption.~~

~~Application of Critical Accounting Policies~~

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

~~131~~

~~PPL ENERGY SUPPLY, LLC AND SUBSIDIARIES~~

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

The following should be read in conjunction with PPL Energy Supply's Condensed Consolidated Financial Statements and the accompanying Notes and with PPL Energy Supply's 2011 Form 10-K. Capitalized terms and abbreviations are defined in the glossary. Dollars are in millions, unless otherwise noted.

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

·	"Overview" provides a description of PPL Energy Supply and its business strategy, a summary of Net Income Attributable to PPL Energy Supply 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 factors expected to impact future earnings. This section ends with explanations of significant changes in principal items on PPL Energy Supply's Statements of Income, comparing the three and nine months ended September 30, 2012 with the same periods in 2011.

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

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

~~Overview~~

~~Introduction~~

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

~~Business Strategy~~

PPL Energy Supply's overall strategy is to achieve disciplined optimization of energy supply margins while mitigating volatility in both cash flows and earnings. More specifically, PPL Energy Supply's strategy is to optimize the value from its competitive generation and marketing 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, counterparty credit risk and operational risk.

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

~~Financial and Operational Developments~~

~~Net Income Attributable to PPL Energy Supply Member~~

Net Income Attributable to PPL Energy Supply Member for the three and nine months ended September 30, 2012 was $54 million and $382 million compared to $169 million and $472 million for the same periods in 2011, representing decreases of 68% and 19% from the same periods in 2011.

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

~~132~~

~~Economic and Market Conditions~~

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

Average Utilization Factors (a)
2009 - 2011 YTD 2012
Pennsylvania coal plants 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) 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, to place its Corette plant in long-term reserve status, suspending the plant's operation due to expected market conditions and the costs to comply with the Mercury and Air Toxics Standards. The Corette plant's carrying value at September 30, 2012 was approximately $67 million. Although the Corette plant was not determined to be impaired at September 30, 2012, it is reasonably possible that an impairment charge could be recorded in the fourth quarter of 2012 or 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~~

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 to the finalization of a plan to resolve the issue of turbine blade cracking that was first identified in 2011. Unit 1 is expected to resume operations by November 8, 2012. 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 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.

~~Results of Operations~~

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

~~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

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

Three Months 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)

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

Higher other operation and maintenance for the three-month period primarily due to $8 million of higher costs at PPL Susquehanna, $7 million due to a planned outage at PPL Brunner Island in September 2012 and $4 million of higher costs from Ironwood as a result of the acquisition, partially offset by $9 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 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 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 primarily due to lower pre-tax income.~~

Lower income taxes for the nine-month period due to lower pre-tax income, which reduced income taxes by $67 million, $15 million of net deferred tax benefits from state tax adjustments 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.

~~135~~

~~The following after-tax gains (losses), which management considers special items, also impacted the 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 $63, $8, ($16), ($2) (a) $ (95) $ (10) $ 23 $ 4
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)
Other:
Montana hydroelectric litigation, net of tax of $0, $0, $0, $1 Interest Expense (1) (2)
Litigation settlement - spent nuclear fuel storage, net of tax of $0, ($2), $0, ($23) (b) Fuel 4 33
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 $ (105) $ (8) $ 3 $ 29

~~(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~~

The following table reconciles unrealized pre-tax gains (losses) for the periods ended September 30, from the table within "Commodity Price Risk (Non-trading) - Economic Activity" in Note 14 to the Financial Statements to the special item identified as "Adjusted energy-related economic activity, net."

~~(a)~~

~~See Note 14 to the Financial Statements for additional information.~~

~~(b)~~

~~Outlook~~

Excluding special items, PPL Energy Supply projects lower earnings in 2012 compared with 2011. The decrease is primarily driven by lower energy margins as a result of lower energy and capacity prices and lower generation volumes, higher other operation and maintenance expense and higher depreciation.

~~136~~

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

~~Statement of Income Analysis --~~

~~Unregulated~~Pennsylvania Gross ~~Energy~~Delivery Margins

~~Non-GAAP Financial Measure~~Distribution

The following discussion includes financial information prepared in accordance with GAAP, as well as a non-GAAP financial measure, "Unregulated Gross Energy Margins." "Unregulated Gross Energy Margins" is a single financial performance measure of PPL Energy Supply's competitive energy non-trading and trading activities. In calculating this measure, PPL Energy Supply's energy revenues, which include operating revenues associated with certain PPL Energy Supply businesses that are classified as discontinued operations, are offset by the cost of fuel, energy purchases, certain other operation and maintenance expenses, primarily ancillary charges, gross receipts tax, which is recorded in "Taxes, other than income," and operating expenses associated with certain PPL Energy Supply businesses that are classified as discontinued operations. This performance measure is relevant to PPL Energy Supply due to the volatility in the individual revenue and expense lines on the Statements of Income that comprise "Unregulated Gross Energy Margins." This volatility stems from a number of factors, including the required netting of certain transactions with ISOs and significant swings in unrealized gains and losses. Such factors could result in gains or losses being recorded in either "Wholesale energy marketing" or "Energy purchases" on the Statements of Income. This performance measure includes PLR revenues from energy sales to PPL Electric by PPL EnergyPlus, which are recorded in "Wholesale energy marketing to affiliate" revenue. PPL Energy Supply excludes from "Unregulated Gross Energy Margins" 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 ineffective portion of qualifying cash flow hedges, the monetization of certain full-requirement sales contracts and premium amortization associated with options. This economic activity is deferred, with the exception of the full-requirement sales contracts that were monetized, and included in "Unregulated Gross Energy Margins" over the delivery period that was hedged or upon realization. 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 "Unregulated Gross Energy Margins" as defined by PPL Energy Supply~~Distribution margins increased for the ~~periods ended September 30.~~

2012 Three Months 2011 Three Months
Unregulated Unregulated
Gross Energy Operating Gross Energy Operating
Margins Other (a) Income (b) Margins Other (a) Income (b)

Operating Revenues
Wholesale energy marketing
Realized $ 1,074 $ 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

~~137~~

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)~~

~~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, 2012, "Wholesale energy marketing - Realized" and "Energy purchases - Realized" include net pre-tax losses of $1 million and $34 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.

~~(d)~~

~~(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)~~

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

~~Changes in Non-GAAP Financial Measures~~

Unregulated Gross Energy Margins are generated through PPL Energy Supply's competitive non-trading and trading activities. PPL Energy Supply's non-trading energy business is managed on a geographic basis that is aligned with its generation fleet. The following table shows PPL Energy Supply's non-GAAP financial measure, Unregulated Gross Energy Margins, for the periods ended September 30, 2013 compared with 2012, primarily due to an $18 million favorable effect of price as ~~well as the change between periods. The factors that gave rise to the changes are described below the table.~~

~~138~~

a result of higher base rates, effective January 1, 2013, partially offset by unfavorable weather of $4 million.

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)
Distribution margins increased for the nine months ended September 30, 2013 compared with 2012 due to a $50 million favorable effect of price, largely comprised of higher base rates, effective January 1, 2013, a favorable weather effect of $9 million and higher volumes of $4 million.

~~(a)~~

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

~~(b)~~

~~Western U.S.~~Transmission

~~Non-trading~~Transmission margins increased for the three and nine months ended September 30, ~~2012~~2013 compared with the same periods in 2011 were lower due to $14 million and $31 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 million of higher fuel costs.

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

~~(a)~~

~~Primarily due to refueling outage costs, payroll-related costs and timing of projects.~~

~~(b)~~

~~(c)~~

~~There are no comparable amounts 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)~~

~~(b)~~

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

~~(c)~~

~~The three and nine-month periods include the impact of accelerating the amortization of deferred financing fees of $7 million in 2011, due to the July 2011 redemption.~~

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)

~~(a)~~

In February 2011, the Pennsylvania Department of Revenue issued interpretive guidance on the treatment of bonus depreciation for Pennsylvania income tax purposes. In accordance with Corporation Tax Bulletin 2011-01, Pennsylvania allows 100% bonus depreciation for qualifying assets in the same year bonus depreciation is allowed for federal tax purposes. Due to the decrease in projected taxable income related to bonus depreciation, PPL Energy Supply recorded $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.

~~(b)~~

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

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

Financial Condition

Liquidity and Capital Resources

PPL Energy Supply had the following at:

September 30, 2012 December 31, 2011

Cash and cash equivalents $ 432 $ 379
Short-term debt $ 355 $ 400

~~140~~

~~The $53 million increase 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 of $733 million;~~

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

·	~~the Ironwood Acquisition for $84 million, net of cash acquired.~~

~~PPL Energy Supply's cash provided by operating activities increased by $234 million for the nine months ended September 30, 2012, compared with 2011. This was~~ primarily due to ~~a $177 million increase in cash from components of working~~increased capital ~~(primarily due to changes in counterparty collateral, partially offset by changes in unbilled revenues and accrued taxes) and a $66 million decrease in defined benefit plan funding.~~

~~Credit Facilities~~

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

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

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

~~(a)~~

~~In November 2012, PPL Energy Supply amended its syndicated credit facility to extend the expiration date to November 2017.~~

~~(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~~

~~Long-term Debt Securities~~

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

~~Rating Agency Actions~~

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

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

~~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 of the respective rating agencies' websites, which ratings together with all other information contained on such rating agency websites is, hereby, explicitly not incorporated by reference in this report.

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

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

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

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

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

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

·	~~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.

For additional information on PPL Energy Supply's liquidity and capital resources, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," in PPL Energy Supply's 2011 Form 10-K.

~~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, 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.

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

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

~~(a)~~

~~Represents the fair value of contracts at the end of the quarter of their inception.~~

PPL Energy Supply sells electricity, capacity and related services and buys fuel on a forward basis to hedge the value of energy from its generation assets. If PPL Energy Supply were unable to deliver firm capacity and energy or to accept the delivery of fuel under its agreements, under certain circumstances it could be required to pay liquidating damages. These damages could be based on the difference between the market price and the contract price of the commodity. Depending on price changes in the wholesale energy markets, such damages could be significant. Extreme weather conditions, unplanned power plant outages, transmission disruptions, nonperformance by counterparties (or their own counterparties) with which it has energy contracts and other factors could affect PPL Energy Supply's ability to meet its obligations, or cause significant increases in the market price of replacement energy. Although PPL Energy Supply attempts to mitigate these risks, there can be no assurance that it will be able to fully meet its firm obligations, that it will not be required to pay damages for failure to perform, or that it will not experience counterparty nonperformance in the future. In connection with its bankruptcy proceedings, a significant counterparty, SMGT, had been purchasing lower volumes of electricity than prescribed in the contract and effective April 1, 2012 the contract was terminated. PPL Energy Supply cannot predict the prices or other terms on which it will be able to market to third parties the power that SMGT will not purchase from PPL EnergyPlus due to the termination of this contract. See Note 10 to the Financial Statements for additional information.

~~Commodity Price Risk (Trading)~~

PPL Energy Supply's trading commodity derivative contracts range in maturity through 2017. The following table sets forth changes in the net fair value of PPL Energy Supply's trading commodity derivative contracts for the periods ended September 30. See Notes 13 and 14 to the Financial Statements for additional information.

~~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)
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) $ 18 $ 11 $ 1 $ 30
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

~~VaR Models~~

~~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.

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

PPL Energy Supply is also exposed to changes in the fair value of its debt portfolio. PPL Energy Supply estimated that a 10% decrease in interest rates at September 30, 2012 would increase the fair value of its debt portfolio by $56 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 Form 10-K for additional information.

~~Related Party Transactions~~

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

~~Acquisitions, Development and Divestitures~~

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

~~Environmental Matters~~

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

~~New Accounting Guidance~~

~~See Notes 2 and 18 to the Financial Statements for a discussion of new accounting guidance adopted and pending adoption.~~

~~Application of Critical Accounting Policies~~

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

~~145~~

~~PPL ELECTRIC UTILITIES CORPORATION AND SUBSIDIARIES~~

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

The following should be read in conjunction with PPL Electric's Condensed Consolidated Financial Statements and the accompanying Notes and with PPL Electric's 2011 Form 10-K. Capitalized terms and abbreviations are defined in the glossary. Dollars are in millions, unless otherwise noted.

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

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

"Results of Operations" provides a summary of PPL Electric's earnings and a description of factors expected to impact future earnings. This section ends with explanations of significant changes in principal items on PPL Electric's Statements of Income, comparing the three and nine months ended September 30, 2012 with the same periods in 2011.

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

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

~~Overview~~

~~Introduction~~

PPL Electric is an electricity 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 its electricity delivery business at the most efficient cost while maintaining high quality customer service and reliability. PPL Electric anticipates that it will have significant capital expenditure requirements for at least the next five years. In order to manage financing costs and access to credit markets, a key objective for PPL Electric's business strategy is to maintain a strong credit profile. PPL Electric continually focuses on maintaining an appropriate capital structure and liquidity position.

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

Transmission costs are recovered through a FERC Formula Rate mechanism, which is updated annually for costs incurred and assets placed in service. Accordingly, increased costs including those related to the replacement of aging transmission assets and the PJM-approved Regional Transmission Line Expansion Plan are recovered on a timely basis.

~~146~~

~~Financial and Operational Developments~~

~~Net Income Available to PPL~~

Net Income Available to PPL for the three and nine months ended September 30, 2012 was $33 million and $95 million compared to $28 million and $116 million for the same periods in 2011, representing an 18% increase over and an 18% decrease from the same periods in 2011.

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

~~Redemption of Preference Stock~~

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

~~Hurricane Sandy~~

~~Regional Transmission Line Expansion Plan~~formula-based rates.

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~~

~~147~~

In September 2012, PPL Electric filed its Long Term Infrastructure Improvement Plan (LTIIP) describing projects eligible for inclusion in the DSIC. In October 2012, several parties filed comments to the LTIIP but none of the comments requested evidentiary hearings on the LTIIP. A decision on 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 in April 2013.

~~FERC Formula Rates~~

~~Results of Operations~~

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

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

~~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 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
Distributions on preference stock 4 8
Total $ 5 $ (21)

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

·	Higher other operation and maintenance 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.

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, 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 pre-tax income.~~

~~148~~

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

~~Outlook~~

PPL Electric projects lower earnings in 2012 compared with 2011, primarily driven by higher 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.

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 Electric's 2011 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~~Distribution

Distribution margins increased for the three months ended September 30, 2013 compared with 2012, primarily due to an $18 million favorable effect of price as a result of higher base rates, effective January 1, 2013, partially offset by unfavorable weather of $4 million.

Distribution margins increased for the nine months ended September 30, 2013 compared with 2012 due to a $50 million favorable effect of price, largely comprised of higher base rates, effective January 1, 2013, a favorable weather effect of $9 million and higher volumes of $4 million.

Transmission

Transmission margins increased for the three and nine months ended September 30, 2013 compared with 2012, primarily due to increased capital investments and the recovery of additional costs through the FERC formula-based rates.

Unregulated Gross Energy Margins

The increase (decrease) in unregulated gross energy margins for the periods ended September 30, 2013 compared with 2012 was due to:
		Three Months		Nine Months
Eastern U.S.
	Baseload energy prices	$	(64)	$	(310)
	Coal prices		(5)		(14)
	Nuclear fuel prices		(4)		(14)
	Retail electric		(10)		(10)
	Nuclear generation volume		(12)		(3)
	Full-requirement sales contracts		(6)		4
	Gas optimization and storage		5		16
	Ironwood acquisition which eliminated tolling expense				17
	Intermediate and peaking Spark Spreads and availability		11		18
	Net economic availability of coal and hydroelectric plants		(10)		29
	Capacity prices		77		124
	Other		1		9
	Total	$	(17)	$	(134)

Western U.S.
	Wholesale energy prices	$	(10)	$	(67)
	Net economic availability of coal and hydroelectric plants		(8)		(1)
	Other		3		4
	Total	$	(15)	$	(64)

Net Energy Trading Margins
	Gas positions	$	(3)	$	(17)
	Power positions		15		5
	FTRs		9		7
	Other		2		(1)
	Total	$	23	$	(6)

117

Utility Revenues

The increase (decrease) in utility revenues for the periods ended September 30, 2013 compared with 2012 was due to:

		Three Months		Nine Months
Domestic:
	PPL Electric (a)	$	20	$	85
	LKE (b)		12		131
	Total Domestic		32		216

U.K.:
	Price (c)		74		187
	Volume (d)		(10)		18
	DPCR4 accrual adjustments (e)		(21)		(45)
	Recovery of allowed revenues (f)		(22)		(22)
	Foreign currency exchange rates		(9)		(25)
	Other		2		3
	Total U.K.		14		116
Total		$	46	$	332

(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 price increase effective April 1, 2013. The nine-month period was also impacted by a price increase effective April 1, 2012.

(d)	The increase for the nine-month period was primarily due to the favorable effect of weather.

(e)	The decrease for the three and nine-month periods was due to a reduction in revenue based on information provided by Ofgem regarding the calculation of line loss incentive/penalty for all network operators related to DPCR4. See Note 6 to the Financial Statements for additional information.

(f)

The decrease for the three and nine-month period was due to an accrual for over-recovered revenues as a result of price and weather related volume effects that is not expected to reverse within the regulatory year ending March 31, 2014. Therefore, a liability was recorded and utility revenue was reduced for the amount of the over-recovery in September 2013. These amounts are expected to be refunded within the regulatory year beginning April 1, 2014.

Other Operation and Maintenance

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


		Three Months		Nine Months
Domestic:
	Brunner Island outage timing	$	(4)	$	(23)
	Uncollectible accounts (a)				(23)
	LKE coal plant outages (b)		(1)		(18)
	Montour outage in 2013		15		13
	Act 129 costs (c)		(7)		(13)
	PUC-reportable storm costs, net of insurance recovery		(8)		(9)
	PPL Susquehanna projects				(9)
	PPL Susquehanna outages		1		(6)
	Ironwood outage in 2013		3		6
	LKE adjustments to regulatory assets and liabilities				4
	Other generation plants		4		4
	Other		8		9
U.K.:
	Third-party engineering (d)		3		5
	Network maintenance (e)		10		23
	Insurance claim provision release				6
	Severance compensation (f)				(8)
	Employee related expenses		(1)		(6)
	Foreign currency exchange rates		(2)		(4)
	Other		(2)		(3)
Total		$	19	$	(52)

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

(b)	The decrease for the three and nine month periods is due to the timing and scope of scheduled outages.

(c)	The decrease for the three and nine month periods is due to a reduction in Act 129 energy efficiency and conservation plan costs for Phase 1 programs. Phase 1 ended May 31, 2013.

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

(e)	The increase for the three and nine month periods is primarily due to higher vegetation management costs.

(f)	The decrease for the nine month period is primarily due to costs incurred in 2012 related to the WPD Midlands reorganization.

118

Depreciation

The increase (decrease) in depreciation for the periods ended September 30, 2013 compared with 2012 was due to:

	Three Months		Nine Months

Additions to PP&E	$	20	$	64
LKE lower depreciation rates effective January 1, 2013		(5)		(16)
Ironwood Acquisition				6
Other		(4)		(8)
Total	$	11	$	46

Other Income (Expense) - net

The ~~following discussion includes financial~~$72 million decrease in other income (expense) - net for the three months ended September 30, 2013 compared with 2012 was primarily due to a decrease of $70 million from realized and unrealized gains on foreign currency contracts to economically hedge GBP denominated earnings from WPD.

The $50 million increase in other income (expense) - net for the nine months ended September 30, 2013 compared with 2012 was primarily due to an increase of $46 million from realized and unrealized gains on foreign currency contracts to economically hedge GBP denominated earnings from WPD.

See Note 12 to the Financial Statements for additional information ~~prepared in accordance with GAAP,~~on other income (expense) - net.

Interest Expense

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

	��	Three Months		Nine Months

Long-term debt interest expense (a)		$	5	$	32
Loss on extinguishment of debt (b)					10
Net amortization of debt discounts, premiums and issuance costs			(4)		(4)
Other			(3)		3
Total		$	(2)	$	41

(a)	The increase for the three and nine-month periods was due to debt issuances by PPL Capital Funding in March 2013 and October 2012, and by PPL Electric in July 2013 and August 2012, partially offset by the impact of lower interest rates resulting from the remarketing of the 2010 Equity Units.

The nine-month period also increased due to debt issuances by PPL Capital Funding in June 2012 and by WPD (East Midlands) in April 2012, as well as higher accretion expense on WPD index linked notes and three additional months of interest on debt assumed as part of the Ironwood Acquisition. Partially offsetting these increases was PPL Energy Supply's debt maturity in July 2013.

(b)	In May 2013, PPL Capital Funding remarketed and exchanged junior subordinate notes that were originally issued in June 2010 as a component of PPL's 2010 Equity Units.

See Note 7 to the Financial Statements in this Form 10-Q for information on 2013 long-term debt activity and PPL's 2012 Form 10-K for information on 2012 activity.

Income Taxes

The increase (decrease) in income taxes for the periods ended September 30, 2013 compared with 2012 was due to:

	Three Months		Nine Months

Change in pre-tax income at current period tax rates	$	36	$	(31)
State valuation allowance adjustments (a)		36		36
Federal and state tax reserve adjustments (b)		1		(34)
Federal and state tax return adjustments		(4)		(4)
U.S. income tax on foreign earnings net of foreign tax credit (c)		9		3
U.K. Finance Act adjustments (d)		(19)		(19)
Foreign tax reserve adjustments		(2)		3
Net operating loss carryforward adjustments (e)				9
Intercompany Interest on WPD Financing Entities		2		2
State deferred tax rate change (f)		6		17
Other		2		(2)
Total	$	67	$	(20)

119

(a)

During the three and nine months ended September 30, 2013, PPL recorded a $38 million increase in state deferred income tax expense related to a deferred tax valuation allowance primarily due to a decrease in projected future taxable income over the remaining carryforward period of Pennsylvania net operating losses.

(b)

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

(c)	During the three and nine months ended September 30, 2013, PPL recorded a $10 million and $24 million increase to income tax expense primarily attributable to a revision in the expected taxable amount of cash repatriation in 2013.

During the nine months ended September 30, 2013, PPL recorded a tax benefit of $19 million associated with a ruling obtained from the IRS impacting the recalculation of 2010 U.K. earnings and profits that will be reflected on an amended 2010 U.S. tax return.

(d)

The U.K.'s Finance Act 2013, enacted in July 2013, reduced the U.K. statutory income tax rate from 23% to 21%, effective April 1, 2014 and from 21% to 20% effective April 1, 2015. As a result, PPL reduced its net deferred tax liabilities and recognized a $93 million deferred tax benefit in the third quarter of 2013 related to both rate decreases.

The U.K.'s Finance Act 2012, enacted in July 2012, reduced the U.K. statutory income tax rate from 25% to 24% retroactive to April 1, 2012 and from 24% to 23% effective April 1, 2013. As a result, PPL reduced its net deferred tax liabilities and recognized a $74 million deferred tax benefit in the third quarter of 2012 related to both rate decreases.

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

(f)	During the three and nine months ended September 30, 2012, PPL recorded adjustments related to state deferred tax liabilities.

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

PPL Energy Supply: Earnings and Statement of Income Analysis

Earnings
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012

Net Income Attributable to PPL Energy Supply Member	$	124	$	54	$	172	$	382
Special items, after-tax		(6)		(105)		(49)		3

Excluding special items, the decrease in earnings for the three-month period was primarily due to lower baseload energy prices, lower baseload generation and higher operation and maintenance expense, partially offset by higher capacity prices. The decrease for the nine-month period was primarily due to lower baseload energy prices, higher fuel costs and higher depreciation, partially offset by higher capacity prices, higher intermediate and peaking margins, higher baseload generation and lower income taxes.

The table below quantifies the changes in the components of Net Income Attributable to PPL Energy Supply Member between these periods, which reflect reclassifications for items included in Unregulated Gross Energy Margins and certain items that management considers special. See PPL's "Results of Operations - Segment Earnings - Supply Segment" for the details of special items.

	Three Months		Nine Months

Unregulated Gross Energy Margins	$	(9)	$	(204)
Other operation and maintenance		(19)		11
Depreciation		(7)		(31)
Taxes, other than income		(2)		2
Other Income (Expense) - net		(3)		5
Interest Expense		4		(8)
Other		(1)		1
Income Taxes		8		66
Special items, after-tax		99		(52)
Total	$	70	$	(210)

Statement of Income Analysis --

Unregulated Gross Energy Margins

"Unregulated Gross Energy Margins" is 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,that management utilizes as an indicator of ~~overall operating performance. Other companies may use different measures to analyze and to report~~the performance of its business. See PPL's "Results of Operations - Income Statement Analysis - Margins" for information on ~~the results of their operations. PPL Electric~~why management believes ~~that "Pennsylvania Gross Delivery Margins" provides another criterion to make investment decisions. This performance~~this measure is ~~used, in conjunction with other information, internally by senior management to manage PPL Electric's operations~~useful and ~~analyze actual results to budget.~~for explanations of the underlying drivers of the changes between periods.

~~Reconciliation of Non-GAAP Financial Measures~~

120

The following tables ~~reconcile~~contain the components from the Statements of Income that are included in this non-GAAP financial measure and a reconciliation to "Operating Income" ~~to "Pennsylvania Gross Delivery Margins" as defined by PPL Electric~~ for the periods ended September 30.

2012 Three Months 2011 Three Months
PA Gross PA Gross
Delivery Operating Delivery Operating
Margins Other (a) Income (b) Margins Other (a) Income (b)

Operating Revenues
Retail electric $ 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
																			Unregulated							Unregulated
																			Gross Energy					Operating		Gross Energy					Operating
																			Margins		Other (a)			Income (b)		Margins		Other (a)			Income (b)
Operating Revenues															Operating Revenues
															Wholesale energy marketing
																		Realized	$	981	$	(1)		$	980	$	1,074	$	2	(c)	$	1,076
																		Unrealized economic activity				(49)	(d)		(49)				(716)	(d)		(716)
															Wholesale energy marketing
																to affiliate				11					11		23					23
															Unregulated retail electric and gas					267		(1)	(d)		266		232		(13)	(d)		219
			2012 Three Months						2011 Three Months						Net energy trading margins					12					12		(11)					(11)
			PA Gross						PA Gross						Energy-related businesses							143			143				128			128
			Delivery				Operating		Delivery				Operating				Total Operating Revenues			1,271		92			1,363		1,318		(599)			719
			Margins		Other (a)		Income (b)		Margins		Other (a)		Income (b)
Operating Expenses	Operating Expenses														Operating Expenses
	Energy purchases			137				137		171				171	Fuel					256		2			258		310		11	(e)		321
	Energy purchases from affiliate			23				23		5				5	Energy purchases
	Other operation and maintenance			25	$	123		148		30	$	116		146				Realized		427		(2)			425		418		3	(c)		421
	Depreciation					41		41				38		38				Unrealized economic activity				(37)	(d)		(37)				(569)	(d)		(569)
	Taxes, other than income			23		1		24		24		2		26	Energy purchases from affiliate					1					1		1					1
		Total Operating Expenses		208		165		373		230		156		386	Other operation and maintenance					5		238			243		1		219			220
															Depreciation							80			80				73			73
															Taxes, other than income					9		9			18		11		7			18
															Energy-related businesses					5		133			138				125			125
																	Total Operating Expenses			703		423			1,126		741		(131)			610
Total	Total		$	236	$	(165)	$	71	$	225	$	(156)	$	69	Total				$	568	$	(331)		$	237	$	577	$	(468)		$	109

																			2013 Nine Months							2012 Nine Months
																			Unregulated							Unregulated
																			Gross Energy					Operating		Gross Energy					Operating
																			Margins		Other (a)			Income (b)		Margins		Other (a)			Income (b)
Operating Revenues															Operating Revenues
			2012 Nine Months						2011 Nine Months						Wholesale energy marketing
			PA Gross						PA Gross									Realized	$	2,770	$	(3)		$	2,767	$	3,353	$	14	(c)	$	3,367
			Delivery				Operating		Delivery				Operating					Unrealized economic activity				(281)	(d)		(281)				(322)	(d)		(322)
			Margins		Other (a)		Income (b)		Margins		Other (a)		Income (b)		Wholesale energy marketing
																to affiliate				37					37		61					61
Operating Revenues
															Unregulated retail electric and gas					750		11	(d)		761		638		(15)	(d)		623
	Retail electric		$	1,303			$	1,303	$	1,444			$	1,444	Net energy trading margins					1					1		7					7
	Electric revenue from affiliate			3				3		9				9	Energy-related businesses							378			378				336			336
		Total Operating Revenues		1,306				1,306		1,453				1,453			Total Operating Revenues			3,558		105			3,663		4,059		13			4,072

Operating Expenses	Operating Expenses														Operating Expenses
	Energy purchases			410				410		591				591	Fuel					778		2			780		695		33	(e)		728
	Energy purchases from affiliate			61				61		15				15	Energy purchases
	Other operation and maintenance			74	$	357		431		77	$	325		402				Realized		1,282		(5)			1,277		1,669		46	(c)		1,715
	Depreciation					119		119				108		108				Unrealized economic activity				(192)	(d)		(192)				(420)	(d)		(420)
	Taxes, other than income			67		5		72		77		6		83	Energy purchases from affiliate					3					3		2					2
		Total Operating Expenses		612		481		1,093		760		439		1,199	Other operation and maintenance					13		735			748		12		757			769
															Depreciation							237			237				206			206
															Taxes, other than income					27		24			51		27		26			53
															Energy-related businesses					5		361			366				326			326
																	Total Operating Expenses			2,108		1,162			3,270		2,405		974			3,379
Total	Total		$	694	$	(481)	$	213	$	693	$	(439)	$	254	Total				$	1,450	$	(1,057)		$	393	$	1,654	$	(961)		$	693

(a)	Represents amounts excluded from Margins.

(b)	As reported on the Statements of Income.

(c)

~~Changes in Non-GAAP Financial Measures~~

(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)

121

Other Operation and Maintenance

The increase (decrease) in other operation and maintenance for the periods ended September 30, 2013 compared with 2012 was due to:
	Three Months		Nine Months

Brunner Island outage timing	$	(4)	$	(23)
Uncollectible accounts (a)				(15)
PPL Susquehanna projects				(9)
PPL Susquehanna outages		1		(6)
Ironwood outage in 2013		3		6
Montour outage in 2013		15		13
Other generation plants		4		4
Other		4		9
Total	$	23	$	(21)

~~The following table shows PPL Electric's non-GAAP financial measure, "Pennsylvania Gross Delivery Margins"~~

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

Depreciation

Depreciation increased by $7 million and $31 million for the ~~periods~~three and nine months ended September 30, ~~as well as the change between periods. The factors that gave rise~~2013 compared with 2012, primarily due to $8 million and $28 million related to PP&E additions, and $6 million attributable to the ~~change are described below~~Ironwood Acquisition for 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
nine-month period.

~~Distribution~~Interest Expense

~~Margins decreased for~~For the nine months ended September 30, ~~2012~~2013 compared with ~~the same period in 2011,~~2012, interest expense increased by $8 million, primarily due to ~~an $18~~$6 million ~~unfavorable effect~~ of ~~mild weather early in 2012. The three and nine-month periods were impacted by a $7 million charge recorded in 2011~~lower capitalized interest related to ~~reduce a portion of~~ the ~~transmission service charge regulatory asset associated with a 2005 undercollection that was not included in any subsequent rate reconciliations filed with the PUC.~~Rainbow hydroelectric redevelopment project.

~~Transmission~~

Income Taxes

The increase (decrease) in income taxes for the periods ended September 30, 2013 compared with 2012 was due to:

	Three Months		Nine Months

Change in pre-tax income at current period tax rates	$	50	$	(122)
State valuation allowance adjustments		2		2
Federal and state tax reserve adjustments (a)				6
Federal and state tax return adjustments		(1)		(1)
State deferred tax rate change (b)		6		17
Other		1		2
Total	$	58	$	(96)

~~Margins increased~~

(a)

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

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

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

PPL Electric: Earnings and ~~nine-month~~Statement of Income Analysis

Earnings
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012

Net Income Available to PPL	$	51	$	33	$	160	$	95

The increase in earnings for both periods ~~ended September 30, 2012, compared with the same periods in 2011,~~was primarily due to ~~increased investment in plant~~higher electricity base rates that became effective January 1, 2013 and higher transmission margins from additional capital investments, partially offset by higher income taxes. The increase for the ~~recovery of additional costs through the FERC formula-based rates.~~

nine-month period was also due to lower operation and maintenance expense, partially offset by higher depreciation.

~~150~~122

The table below quantifies the changes in the components of Net Income Available to PPL between these periods, which reflect reclassifications for items included in Pennsylvania Gross Delivery Margins.

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

		Three Months		Nine Months

Pennsylvania Gross Delivery Margins	��	$	31	$	92
Other operation and maintenance			8		28
Depreciation			(4)		(13)
Interest Expense			(5)		(7)
Other			(2)		(3)
Income Taxes			(10)		(36)
Distributions on preference stock					4
Total		$	18	$	65

Statement of Income Analysis --

Pennsylvania Gross Delivery Margins

"Pennsylvania Gross Delivery Margins" is a non-GAAP financial performance measure that management utilizes as an indicator of the performance of its business. See PPL's "Results of Operations - Income Statement Analysis - Margins" for information on why management believes this measure is useful and for explanations of the underlying drivers of the changes between periods.

The following tables contain the components from the Statements of Income that are included in this non-GAAP financial measure and a reconciliation to "Operating Income" for the periods ended September 30.

			2013 Three Months						2012 Three Months
			PA Gross						PA Gross
			Delivery				Operating		Delivery				Operating
			Margins		Other (a)		Income (b)		Margins		Other (a)		Income (b)
Operating Revenues
	Retail electric		$	463			$	463	$	443			$	443
	Electric revenue from affiliate			1				1		1				1
		Total Operating Revenues		464				464		444				444

Operating Expenses
	Energy purchases			144				144		137				137
	Energy purchases from affiliate			11				11		23				23
	Other operation and maintenance			19	$	115		134		25	$	123		148
	Depreciation					45		45				41		41
	Taxes, other than income			23		2		25		23		1		24
		Total Operating Expenses		197		162		359		208		165		373
Total			$	267	$	(162)	$	105	$	236	$	(165)	$	71

			2013 Nine Months						2012 Nine Months
			PA Gross						PA Gross
			Delivery				Operating		Delivery				Operating
			Margins		Other (a)		Income (b)		Margins		Other (a)		Income (b)
Operating Revenues
	Retail electric		$	1,388			$	1,388	$	1,303			$	1,303
	Electric revenue from affiliate			3				3		3				3
		Total Operating Revenues		1,391				1,391		1,306				1,306

Operating Expenses
	Energy purchases			436				436		410				410
	Energy purchases from affiliate			37				37		61				61
	Other operation and maintenance			62	$	329		391		74	$	357		431
	Depreciation					132		132				119		119
	Taxes, other than income			70		7		77		67		5		72
		Total Operating Expenses		605		468		1,073		612		481		1,093
Total			$	786	$	(468)	$	318	$	694	$	(481)	$	213

(a)	Represents amounts excluded from Margins.

(b)	As reported on the Statements of Income.

123

Other Operation and Maintenance

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

	Three Months		Nine Months


Vegetation management	$	6	$	3
PUC-reportable storm costs, net of insurance recovery		(8)		(9)
Act 129 costs (a)		(7)		(13)
Uncollectible accounts				(3)
Corporate service (b)		(2)		(13)
Rent		(3)		(4)
Other				(1)
Total	$	(14)	$	(40)

(a)	The decrease was due to a reduction in Act 129 energy efficiency and conservation plan costs for Phase 1 programs. Phase 1 ended May 31, 2013.

(b)	The decrease was partially due to storm insurance policy premiums for coverage that was in place in 2012 but was not renewed in 2013.

Depreciation

Depreciation ~~expense~~ increased by ~~$11~~$4 million and $13 million for the three and nine months ended September 30, ~~2012~~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~~$5 million for the nine months ended September 30, ~~2012~~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:
The increase (decrease) in financing costs for the periods ended September 30, 2013 compared with 2012 was due to:					The increase (decrease) in financing costs for the periods ended September 30, 2013 compared with 2012 was due to:

	Three Months		Nine Months			Three Months		Nine Months

Long-term debt interest expense(a)	$	1	$	(1)		$	5	$	8
Distributions on preference stock (a)		(4)		(8)
Amortization of debt issuance costs		(2)		1
Distributions on Preference Stock (b)									(4)
Other				(1)					(1)
Total	$	(5)	$	(9)		$	5	$	3

(a)	~~Decreases for both periods are~~The increase was due to debt issuances in August 2012 and July 2013.

(b)	The decrease was due to the June 2012 redemption of all 2.5 million shares of preference stock.

Income Taxes

The increase (decrease) in income taxes 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)

Income Taxes

The increase (decrease) in income taxes for the periods ended September 30, 2013 compared with 2012 was due to:

	Three Months		Nine Months

Change in pre-tax income at current period tax rates	$	12	$	39
Other		(2)		(3)
Total	$	10	$	36

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

LKE: Earnings and Statement of Income Analysis

Earnings
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012

Net Income	$	100	$	83	$	260	$	180
Special items, after-tax						2		(1)

124

Excluding special items, the increases in earnings for both periods were primarily due to higher electricity and gas base rates that went into effect January 1, 2013, returns from additional environmental capital investments and higher fuel recovery, partially offset by higher depreciation (due to environmental costs related to the 2005 and 2006 ECR plans now being included in base rates and excluded from Margins) and higher income taxes. The increase for the three-month period was partially offset by lower sales volumes.

The table below quantifies the components of Net Income between these periods, which reflect reclassifications for items included in Margins and certain items that management considers special. See PPL's "Results of Operations - Segment Earnings - Kentucky Regulated Segment" for details of special items.

	Three Months		Nine Months

Margins	$	42	$	151
Other operation and maintenance		(4)		4
Depreciation		(9)		(26)
Taxes, other than income		(1)		(2)
Other Income (Expense) - net				7
Interest Expense				1
Income Taxes		(11)		(58)
Special items, after-tax				3
Total	$	17	$	80

Statement of Income Analysis --

Margins

"Margins" is a non-GAAP financial performance measure that management utilizes as an indicator of the performance of its business. See PPL's "Results of Operations - Income Statement Analysis - Margins" for information on why management believes this measure is useful and explanations of the underlying drivers of the changes between periods. Within PPL's discussion, LKE's Margins are referred to as "Kentucky Gross Margins."

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

Operating Revenues			$	744			$	744	$	732			$	732
Operating Expenses
	Fuel			237				237		249				249
	Energy purchases			23				23		27				27
	Other operation and maintenance			26	$	162		188		28	$	158		186
	Depreciation			1		83		84		13		74		87
	Taxes, other than income					12		12				11		11
		Total Operating Expenses		287		257		544		317		243		560
Total			$	457	$	(257)	$	200	$	415	$	(243)	$	172

			2013 Nine Months						2012 Nine Months
							Operating						Operating
			Margins		Other (a)		Income (b)		Margins		Other (a)		Income (b)

Operating Revenues			$	2,226			$	2,226	$	2,095			$	2,095
Operating Expenses
	Fuel			684				684		677				677
	Energy purchases			146				146		135				135
	Other operation and maintenance			74	$	508		582		76	$	513		589
	Depreciation			3		246		249		39		220		259
	Taxes, other than income			��		36		36				34		34
		Total Operating Expenses		907		790		1,697		927		767		1,694
Total			$	1,319	$	(790)	$	529	$	1,168	$	(767)	$	401

(a)	~~In February 2011, the Pennsylvania Department of Revenue issued interpretive guidance~~Represents amounts excluded from Margins.

(b)	As reported on the ~~treatment~~Statements 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~~Income.

125

Other Operation and Maintenance

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

	Three Months		Nine Months

Coal plant outages (a)	$	(1)	$	(18)
Administrative and general (b)		3		8
Adjustments to regulatory assets and liabilities				4
Coal plant operations				3
Other				(4)
Total	$	2	$	(7)

(a)	Decrease is due to 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~~timing and scope of scheduled outages.

(b)	Increase for the ~~flow-through impact~~nine-month period is primarily due to an increase in outside services of ~~Pennsylvania regulated state tax depreciation. The federal provision for 100% bonus depreciation generally applies to property placed in service before January 1, 2012.~~$8 million.

Depreciation

The increase (decrease) in depreciation for the periods ended September 30, 2013 compared with 2012 was due to:

	Three Months		Nine Months

Lower depreciation rates effective January 1, 2013	$	(5)	$	(16)
Additions to PP&E		2		6
Total	$	(3)	$	(10)

Other Income (Expense) - net

Other income (expense) - net increased by $8 million for the nine months ended September 30, 2013 compared with 2012 primarily due to losses from the EEI investment recorded in 2012. The EEI investment was fully impaired in the fourth quarter of 2012.

Income Taxes

Income taxes increased by $11 million and $64 million for the three and nine months ended September 30, 2013 compared with 2012 primarily due to the change in pre-tax income at current period tax rates.

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

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

Income (loss) from discontinued operations increased by $7 million for the nine months ended September 30, 2013 compared with 2012. The increase was primarily related to an adjustment to the estimated liability for indemnifications related to the 2009 termination of the WKE lease recorded in 2012.

LG&E: Earnings and Statement of Income Analysis

Earnings
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012

Net Income	$	49	$	43	$	122	$	94

The increases in earnings for both periods were primarily due to higher electricity and gas base rates that went into effect January 1, 2013, returns from additional environmental capital investments and higher fuel recovery. The increase for the three-month period was partially offset by lower sales volumes. The increase for the nine-month period was partially offset by higher income taxes.

The table below quantifies the changes in the components of Net Income between these periods, which reflect reclassifications for items included in Margins.

126

	Three Months		Nine Months

Margins	$	12	$	43
Other operation and maintenance		(6)		(3)
Depreciation				3
Taxes, other than income				(1)
Other Income (Expense) - net		2
Interest Expense				1
Income Taxes		(2)		(15)
Total	$	6	$	28

Statement of Income Analysis --

Margins

"Margins" is a non-GAAP financial performance measure that management utilizes as an indicator of the performance of its business. See PPL's "Results of Operations - Income Statement Analysis - Margins" for information on why management believes this measure is useful and explanations of the underlying drivers of the changes between periods. Within PPL's discussion, LG&E's Margins are included in "Kentucky Gross Margins."

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

Operating Revenues			$	343			$	343	$	333			$	333
Operating Expenses
	Fuel			100				100		100				100
	Energy purchases			20				20		21				21
	Other operation and maintenance			13	$	80		93		13	$	74		87
	Depreciation					37		37		1		37		38
	Taxes, other than income					6		6				6		6
		Total Operating Expenses		133		123		256		135		117		252
Total			$	210	$	(123)	$	87	$	198	$	(117)	$	81

			2013 Nine Months						2012 Nine Months
							Operating						Operating
			Margins		Other (a)		Income (b)		Margins		Other (a)		Income (b)

Operating Revenues			$	1,049			$	1,049	$	990			$	990
Operating Expenses
	Fuel			284				284		281				281
	Energy purchases			135				135		119				119
	Other operation and maintenance			34	$	244		278		36	$	241		277
	Depreciation			1		109		110		2		112		114
	Taxes, other than income					18		18				17		17
		Total Operating Expenses		454		371		825		438		370		808
Total			$	595	$	(371)	$	224	$	552	$	(370)	$	182

(a)	Represents amounts excluded from Margins.

(b)	As reported on the Statements of Income.

Other Operation and Maintenance

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

	Three Months		Nine Months

Coal plant outages (a)	$	1	$	(6)
Administrative and general (b)		1		6
Distribution maintenance		2		2
Other		2		(1)
Total	$	6	$	1

(a)	Increase (decrease) is due to the timing and scope of scheduled outages.

~~151~~127

(b)	Increase for the nine-month period is primarily due to an increase in outside services of $5 million.

Depreciation

The increase (decrease) in depreciation for the periods ended September 30, 2013 compared with 2012 was due to:

	Three Months		Nine Months

Lower depreciation rates effective January 1, 2013	$	(2)	$	(6)
Additions to PP&E		1		2
Total	$	(1)	$	(4)

Income Taxes

Income taxes increased by $15 million for the nine months ended September 30, 2013 compared with 2012 primarily due to the change in pre-tax income at current period tax rates.

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

KU: Earnings and Statement of Income Analysis

Earnings
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012

Net Income	$	63	$	50	$	171	$	118

Excluding special items, the increases in earnings for both periods were primarily due to higher electricity base rates that went into effect January 1, 2013, returns from additional environmental capital investments and higher fuel recovery, partially offset by higher depreciation (due to environmental costs related to the 2005 and 2006 ECR plans now being included in base rates and excluded from Margins) and higher income taxes. The increase for the three-month period was partially offset by lower sales volumes.

The table below quantifies the changes in the components of Net Income between these periods, which reflect reclassifications for items included in Margins and an item that management considers special.

	Three Months		Nine Months

Margins	$	31	$	108
Other operation and maintenance		(1)		(1)
Depreciation		(8)		(27)
Taxes, other than income		(1)		(1)
Other Income (Expense) - net		(3)		3
Interest Expense		1		1
Income Taxes		(6)		(31)
Special item - EEI adjustments, after-tax				1
Total	$	13	$	53

Statement of Income Analysis --

Margins

"Margins" is a non-GAAP financial performance measure that management utilizes as an indicator of the performance of its business. See PPL's "Results of Operations - Income Statement Analysis - Margins" for information on why management believes this measure is useful and explanations of the underlying drivers of the changes between periods. Within PPL's discussion, KU's Margins are included in "Kentucky Gross Margins."

128

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

Operating Revenues			$	414			$	414	$	411			$	411
Operating Expenses
	Fuel			137				137		149				149
	Energy purchases			16				16		18				18
	Other operation and maintenance			13	$	78		91		16	$	77		93
	Depreciation			1		45		46		12		37		49
	Taxes, other than income					6		6				5		5
		Total Operating Expenses		167		129		296		195		119		314
Total			$	247	$	(129)	$	118	$	216	$	(119)	$	97

			2013 Nine Months						2012 Nine Months
							Operating						Operating
			Margins		Other (a)		Income (b)		Margins		Other (a)		Income (b)

Operating Revenues			$	1,229			$	1,229	$	1,165			$	1,165
Operating Expenses
	Fuel			400				400		396				396
	Energy purchases			63				63		76				76
	Other operation and maintenance			40	$	246		286		41	$	245		286
	Depreciation			2		136		138		36		109		145
	Taxes, other than income					18		18				17		17
		Total Operating Expenses		505		400		905		549		371		920
Total			$	724	$	(400)	$	324	$	616	$	(371)	$	245

(a)	Represents amounts excluded from Margins.

(b)	As reported on the Statements of Income.

Other Operation and Maintenance

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

	Three Months		Nine Months

Coal plant outages (a)	$	(2)	$	(12)
Administrative and general (b)		2		6
Coal plant operations				4
Adjustments to regulatory assets and liabilities				4
Other		(2)		(2)
Total	$	(2)	$

(a)	Decrease is due to the timing and scope of scheduled outages.

(b)	Increase for the nine-month period is primarily due to an increase in outside services of $5 million.

Depreciation

The increase (decrease) in depreciation for the periods ended September 30, 2013 compared with 2012 was due to:

	Three Months		Nine Months

Lower depreciation rates effective January 1, 2013	$	(4)	$	(10)
Additions to PP&E		1		4
Other				(1)
Total	$	(3)	$	(7)

Other Income (Expense) - net

Other income (expense) - net increased by $4 million for the nine months ended September 30, 2013 compared with 2012 primarily due to losses from the EEI investment recorded in 2012. The EEI investment was fully impaired in the fourth quarter of 2012.

129

Financial Condition

Liquidity and Capital Resources

PPL Electric had the following at:

September 30, 2012 December 31, 2011

Cash and cash equivalents $ 31 $ 320
Income Taxes

~~The $289~~Income taxes increased by $6 million ~~decrease~~and $31 million for the three and nine months ended September 30, 2013 compared with 2012 primarily due to the change in ~~PPL Electric's~~pre-tax income at current period tax rates.

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

Financial Condition

Financial Condition and the remainder of this Item 2 are presented on a combined basis, providing information, as
applicable, for all Registrants.

Liquidity and Capital Resources

(All Registrants)

The Registrants had the following at:
			PPL
	PPL		Energy Supply		PPL Electric		LKE		LG&E		KU
September 30, 2013
Cash and cash equivalents	$	1,291	$	551	$	225	$	21	$	12	$	9
Short-term debt		499						212		72		140
Notes payable with affiliates								52

December 31, 2012
Cash and cash equivalents	$	901	$	413	$	140	$	43	$	22	$	21
Short-term debt		652		356				125		55		70
Notes payable with affiliates								25

At September 30, 2013, PPL's cash and cash equivalents ~~position~~included $231 million denominated in GBP. If these amounts would be remitted as dividends, PPL may be subject to additional U.S. income taxes, net of allowable foreign income tax credits. Historically, dividends paid by foreign subsidiaries have been distributions of the current year's earnings. See Note 5 to the Financial Statements in PPL's 2012 Form 10-K for additional information on undistributed earnings of WPD.

Net cash provided by (used in) operating, investing and financing activities for the nine-month periods ended September 30, and the changes between periods were as follows.

			PPL Energy
	PPL		Supply		PPL Electric		LKE		LG&E		KU
2013
Operating activities	$	2,223	$	583	$	327	$	713	$	352	$	419
Investing activities		(2,788)		(351)		(697)		(879)		(366)		(510)
Financing activities		966		(94)		455		144		4		79

2012
Operating activities	$	2,094	$	674	$	261	$	646	$	267	$	410
Investing activities		(2,116)		(308)		(614)		(519)		(196)		(331)
Financing activities		(240)		(313)		64		(96)		(48)		(68)

Change - Cash Provided (Used)
Operating activities	$	129	$	(91)	$	66	$	67	$	85	$	9
Investing activities		(672)		(43)		(83)		(360)		(170)		(179)
Financing activities		1,206		219		391		240		52		147

Operating Activities

The components of the change in cash provided by (used in) operating activities for the nine months ended September 30, 2013 compared with 2012 were as follows.

130

						PPL Energy
				PPL		Supply		PPL Electric		LKE		LG&E		KU

Change - Cash Provided (Used)
		Net income		$	58	$	(210)	$	61	$	80	$	28	$	53
		Non-cash components			244		169		42		15		(1)		(9)
		Net income, adjusted for non-cash
			components		302		(41)		103		95		27		44
		Working capital			(284)		42		(45)		(21)		24		(26)
		Defined benefit funding			21		(37)		(34)		(93)		(19)		(42)
		Other operating activities			90		(55)		42		86		53		33
	Total			$	129	$	(91)	$	66	$	67	$	85	$	9

For PPL, non-cash components of net income primarily consisted of $105 million related to non-cash hedging activities, $46 million related to increased depreciation and $45 million related to 2013 charges to adjust WPD's line loss accrual. The decrease in cash from changes in components of working capital was primarily due to increases in accounts receivable (primarily due to extended payment terms at LG&E and KU and base rate increases effective in 2013 at PPL Electric, LG&E and KU), returns of counterparty collateral and changes to certain tax-related accounts. The increase in cash from other operating activities was primarily due to $98 million in proceeds from the ~~net result of:~~settlement of forward-starting interest rate swaps.

·	~~capital expenditures of $407 million;~~

For PPL Energy Supply, non-cash components of net income primarily consisted of $135 million related to non-cash hedging activities and $31 million related to increased depreciation. The increase in cash from changes in components of working capital was primarily due to decreases in accounts receivable (primarily affiliate receivables), and lower unbilled revenue (primarily due to decreases in power swap sales), partially offset by returns of counterparty collateral. The decrease in cash from other operating activities was partially due to changes to certain tax-related accounts.

·	~~redemption of preference stock of $250 million;~~

·	~~a net increase in notes receivable from affiliate of $210 million;~~

For PPL Electric, non-cash components of net income primarily consisted of $31 million related to an increase in deferred tax expense and $13 million related to increased depreciation. The decrease in cash from changes in components of working capital was primarily due to increases in accounts receivable (primarily due to the base rate increase effective January 1, 2013, partially offset by a decrease in affiliate receivables). The increase in cash from other operating activities was partially due to changes to certain tax-related accounts.

·	~~the payment of $75 million of common stock dividends to parent;~~

·	~~net cash provided by operating activities of $261 million;~~

LKE's decrease in working capital was driven primarily by increases in accounts receivable and unbilled revenues due to extended payment terms and higher rates, offset by an increase in accounts payable due to timing of fuel purchase commitments and payments. The increase in cash from LKE's other operating activities was driven primarily by $98 million in proceeds from the settlement of interest rate swaps.

·	~~long-term debt issuance of $249 million; and~~

·	~~contributions from parent of $150 million.~~

LG&E's increase in working capital was driven primarily by lower fuel inventory purchases in 2013 and an increase in accounts payable due to timing of fuel purchase commitments and payments, offset by increases in accounts receivable and unbilled revenues due to extended payment terms and higher rates. The increase in cash from LG&E's other operating activities was driven primarily by $49 million in proceeds from the settlement of interest rate swaps.

KU's decrease in working capital was driven primarily by higher fuel inventory purchases in 2013 and increases in accounts receivable and unbilled revenues due to extended payment terms and higher rates, offset by an increase in accounts payable due to timing of fuel purchase commitments and payments. The increase in cash from KU's other operating activities was driven primarily by $49 million in proceeds from the settlement of interest rate swaps.

Investing Activities

The primary use of cash within investing activities is expenditures for PP&E. The change in these expenditures for the nine months ended September 30, 2013 compared with 2012 was as follows.

			PPL Energy
	PPL		Supply		PPL Electric		LKE		LG&E		KU

(Increase) Decrease	$	(690)	$	119	$	(281)	$	(366)	$	(183)	$	(181)

The increase in expenditures for PP&E was primarily due to projects to enhance system reliability at WPD and PPL Electric, the Susquehanna-Roseland transmission project at PPL Electric, environmental projects at LG&E's Mill Creek and KU's Ghent plants and construction of Cane Run Unit 7 for LG&E and KU.

131

Expenditures for PP&E decreased at PPL Energy Supply primarily related to the Rainbow hydroelectric redevelopment and Holtwood expansion projects and timing of nuclear fuel purchases.

For PPL Energy Supply and PPL Electric, the change in cash provided by (used in) investing activities was also impacted primarily by the change in notes receivable from affiliates of ($198) million and $210 million.

Financing Activities

The components of the change in cash provided by (used in) financing activities for the nine months ended September 30, 2013 compared with 2012 was as follows.

				PPL Energy
		PPL		Supply		PPL Electric		LKE		LG&E		KU

Change - Cash Provided (Used)
	Debt issuances/retirements, net	$	(166)	$	(303)	$	99
	Stock issuances/redemptions, net		1,531				250
	Dividends		(22)				(19)			$	(20)	$	(15)
	Capital contributions/distributions, net				833		55	$	125		54		92
	Change in short-term debt, net		(97)		(311)				87		17		70
	Other financing activities		(40)				6		28		1
	Total	$	1,206	$	219	$	391	$	240	$	52	$	147

See Note 7 to the Financial Statements in this Form 10-Q for information on 2013 short and long-term debt activity, equity transactions and dividends. See the Registrant's 2012 Form 10-K for information on 2012 activity.

Credit Facilities

~~PPL Electric maintains~~The Registrants maintain credit facilities to provide liquidity and to backstop commercial paper issuances. ~~At September 30, 2012, PPL Electric's~~The total committed borrowing capacity ~~under its credit facilities~~ and the use of ~~this borrowing capacity were:~~the borrowings under these facilities at September 30, 2013 was as follows.

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

Syndicated Credit Facility (a) (b) $ 300 $ 1 $ 299
Asset-backed Credit Facility (c) 100 n/a 100
Total PPL Electric Credit Facilities $ 400 $ 1 $ 399
External (All Registrants)

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

PPL Energy Supply Credit Facilities (a)		$	3,150			$	170	$	2,980
PPL Electric Credit Facilities (a)			300				1		299

LG&E Syndicated Credit Facility (a)			500				72		428
KU Credit Facilities (a)			598				338		260
Total LKE (a) (b)			1,098				410		688
	Total PPL Domestic Credit Facilities (a)	$	4,548			$	581	$	3,967

Total WPD Credit Facilities (c)		£	1,055	£	184			£	871

(a)

The commitments under ~~this~~ credit ~~facility~~facilities are provided by a diverse bank group with no one bank and its affiliates providing an aggregate commitment of more than 7%the following percentages of the total committed capacity: 8% for PPL's domestic credit facilities, 9% for PPL Energy Supply, 5% for PPL Electric, 13% for LKE, 6% for LG&E and 22% for KU.

(b)	In October 2013, LKE entered into a $75 million syndicated credit facility that expires in October 2018.

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

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

132

Intercompany (All Registrants except PPL)

	Committed				Unused
	Capacity		Borrowed		Capacity

PPL Energy Supply Credit Facility	$	200			$	200
PPL Electric Credit Facility		100				100
LKE Credit Facility (a)		300	$	52		248
LG&E Money Pool (b)		500				500
KU Money Pool (b)		500				500

~~(b)~~(a)

In ~~November 2012, PPL Electric amended its syndicated~~October 2013, LKE reduced the size of the intercompany credit facility ~~to extend the expiration date to October 2017.~~by $75 million.

~~(c)~~(b)

~~PPL Electric obtains financing by selling~~LG&E and ~~contributing its eligible accounts receivable and unbilled revenue to a special purpose, wholly owned subsidiary on~~KU participate in an ~~ongoing basis. The subsidiary pledges these assets to secure loans of~~intercompany money pool agreement whereby LKE, LG&E and/or KU make available funds up to $500 million at an ~~aggregate~~interest rate based on a market index of ~~$100 million from a~~ commercial paper ~~conduit sponsored by a financial institution. At September 30, 2012, based on accounts receivable~~issues.

See Note 11 to the Financial Statements for further discussion of intercompany credit facilities.

Commercial Paper(All Registrants)

PPL Energy Supply, PPL Electric, LG&E and KU maintain commercial paper programs to provide an additional financing source to fund their short-term liquidity needs, if and when necessary. Commercial paper issuances are supported by the respective Registrant's Syndicated Credit Facility.

When outstanding, the amounts are reflected in "Short-term debt" on the Balance Sheets. The following amounts were outstanding at:

		September 30, 2013							December 31, 2012
					Commercial				Commercial
					Paper		Unused		Paper
			Capacity		Issuances		Capacity		Issuances

PPL Energy Supply			$	750			$	750	$	356
PPL Electric				300				300

LG&E (a)				350	$	72		278		55
KU (a)				350		140		210		70
Total LKE				700		212		488		125
	Total PPL		$	1,750	$	212	$	1,538	$	481

(a)	In April 2013, the capacity was increased from $250 million.

Long-term Debt and Equity Securities

(PPL and Kentucky Registrants)

During 2012, LG&E and KU received KPSC and other state approvals to issue up to $350 million for LG&E and $300 million for KU of first mortgage bond indebtedness in 2013. The proceeds will be used to fund capital expenditures and for other general corporate purposes.

(PPL, PPL Energy Supply and PPL Electric)

The long-term debt and equity securities activity through September 30, 2013 was:

		Debt				Net Stock
		Issuances (a)		Retirements		Issuances (b)
Cash Flow Impact:
	PPL	$	862	$	(309)	$	1,335
	PPL Energy Supply				(309)
	PPL Electric		348

Non-cash Transactions:
	PPL (c)	$	1,317

(a)	Issuances are net of pricing discounts, where applicable and ~~unbilled revenue pledged,~~exclude the ~~amount available~~impact of debt issuance costs.

(b)

Net stock issuances include activity related to various stock and incentive compensation plans and other equity transactions. See Overview - "Financial and Operational Developments" for ~~borrowing under the facility was $100 million. In July 2012, PPL Electric~~information regarding equity forward agreements and the ~~subsidiary extended this agreement~~2010 Equity Units. PPL has no plans to ~~September 2012~~issue new shares of common stock for the remainder of 2013. The activity is net of the 2013 repurchase of PPL common stock.

133

(c)

The debt issuances primarily include $1.150 billion relating to the remarketing of Junior Subordinated Notes that were issued as a component of PPL's 2010 Equity Units and ~~reduced the capacity from $150 million. In September 2012, the agreement was extended to September 2013.~~simultaneously exchanged into Senior Notes.

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

~~Commercial Paper~~

Long-term Debt and Equity ~~Securities~~Securities.

~~In June 2012, PPL Electric redeemed all 2.5 million shares of its 6.25% Series Preference~~Common 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.Dividends(PPL)

In August ~~2012,~~2013, PPL ~~Electric issued $250 million~~declared its quarterly common stock dividend, payable October 1, 2013, at 36.75 cents per share (equivalent to $1.47 per annum). Future dividends, declared at the discretion of ~~2.50% First Mortgage Bonds due 2022. The notes may~~the Board of Directors, will 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~~dependent upon future earnings, cash flows, financial 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~~legal requirements and ~~for~~ other ~~general corporate purposes.~~

~~152~~

factors.

Rating Agency Actions

(All Registrants)

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

A credit rating reflects an assessment by the rating agency of the creditworthiness associated with an issuer and particular securities that it issues. The credit ratings of ~~PPL Electric~~the Registrants and their subsidiaries are based on information provided by ~~PPL Electric~~the Registrants and other sources. The ratings of Fitch, Moody's and S&P ~~and Fitch~~ are not a recommendation to buy, sell or hold any securities of ~~PPL Electric. Such ratings may be subject to revisions~~the Registrants 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 credit rating disclosure to a description 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 each of the respective rating agencies' websites, which ratings together with all other information contained on such rating agency websites is, hereby, explicitly not incorporated by reference in this report.

~~The rating agencies took the following actions related to PPL 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.~~

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 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, PPL Electric had no potential annual exposure to increased interest expense based on its current debt portfolio.

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 would increase the fair value of its debt portfolio by $97 million.

~~See Notes 13 and 14 to the Financial Statements in this Form 10-Q and "Risk Management" in PPL Electric's 2011 Form 10-K for additional information on market and credit risk.~~

~~Related Party Transactions~~

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

~~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 Form 10-K for a discussion of environmental matters.~~

~~153~~

~~New Accounting Guidance~~

~~See Notes 2 and 18 to the Financial Statements for a discussion of new accounting guidance adopted and pending adoption.~~

~~Application of Critical Accounting Policies~~

Financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies. The following accounting policies are particularly important to the financial condition or results of operations, and require estimates or other judgments of matters inherently uncertain: 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 Form 10-K for a discussion of each critical accounting policy.

~~154~~

~~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 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 factors expected to impact future earnings. This section ends with explanations of significant changes in principal items on LKE's Statements of Income, comparing the three and nine months ended September 30, 2012 with the same periods in 2011.

~~"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 utility operations through its subsidiaries, LG&E and KU. LG&E and KU, which constitute substantially all of LKE's operations, are regulated utilities engaged in the generation, transmission, distribution and sale of electricity, in Kentucky, Virginia and Tennessee. LG&E also engages in the distribution and sale of natural gas in Kentucky.

~~Business Strategy~~

~~LKE's overall strategy is to provide reliable, safe and competitively priced energy to its customers.~~

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 was $83 million and $180 million compared to $89 million and $217 million for the same periods in 2011 representing decreases of 7% and 17% from the same periods in 2011.

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

~~Terminated Bluegrass CTs Acquisition~~

~~155~~

~~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.

~~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 factors that management expects may impact future earnings. This section ends with "Statement of Income Analysis," which includes explanations of significant changes in principal items on LKE's Statements of Income, comparing the three and nine months ended September 30, 2012 with the same periods in 2011.

Earnings

Net Income for the periods ended September 30 was:

Three Months Nine Months
2012 2011 2012 2011

Net Income $ 83 $ 89 $ 180 $ 217

~~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 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)

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

·	~~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.~~

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

·	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.

·	~~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.~~

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)

~~(a)~~

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

~~Outlook~~

Excluding special items, LKE projects lower earnings in 2012 compared with 2011 as a result of 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.

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 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. In calculating this measure, 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 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 to budget.

~~Reconciliation of Non-GAAP Financial Measures~~

~~The following tables reconcile "Operating Income" to "Margins" as defined by LKE for the periods ended September 30.~~

2012 Three Months 2011 Three Months
Operating Operating
Margins Other (a) Income (b) Margins Other (a) Income (b)

Operating Revenues $ 732 $ 732 $ 734 $ 2 $ 736
Operating Expenses
Fuel 249 249 245 245
Energy purchases 27 27 32 32
Other operation and maintenance 28 $ 158 186 26 161 187
Depreciation 13 74 87 12 72 84
Taxes, other than income 11 11 10 10
Total Operating Expenses 317 243 560 315 243 558
Total $ 415 $ (243) $ 172 $ 419 $ (241) $ 178

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 by $22 million for the nine months ended September 30, 2012 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, and $6 million of lower wholesale margins, as volumes were impacted by lower market prices. Total heating degree days decreased 24% compared to the same period in 2011.

~~158~~

~~Other Operation and Maintenance~~

~~Other operation and maintenance increased by $23 million for the nine months ended September 30, 2012 compared with 2011, primarily due to:~~

·	~~a $13 million increase in coal plant maintenance costs, including certain amounts included in margins, primarily resulting from an increased scope of scheduled outages;~~

·	~~a $6 million credit to establish a regulatory asset was recorded in the first quarter of 2011 related to 2009 storm costs; and~~

·	~~a $3 million increase in restricted stock awards.~~

~~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 by $36 million for the nine months ended September 30, 2012, compared with 2011, primarily due to a $68 million decrease in pre-tax income and $9 million of adjustments to deferred taxes related to net operating loss carryforwards based on income tax return adjustments.

~~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 $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

~~The $31 million increase in LKE's cash and cash equivalents position was primarily the net result of:~~

·	~~cash provided by operating activities of $646 million;~~

·	~~capital expenditures of $525 million; and~~

·	~~distributions to member of $95 million.~~

~~LKE's cash provided by operating activities decreased by $37 million for the nine months ended September 30, 2012, compared with 2011, primarily due to:~~

~~159~~

a decrease 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 of $103 million (deferred income taxes and investment tax credits of $114 million and defined benefit plans - expense of $8 million, partially offset by depreciation of $10 million and other noncash items of $9 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 increased by $383 million for the nine months ended September 30, 2012, compared with 2011, primarily due to proceeds from the sale of other investments of $163 million in 2011 and an increase in capital 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.

~~Credit Facilities~~

~~At September 30, 2012, LKE's total committed borrowing capacity under its credit facilities and the use of this borrowing capacity were:~~

Committed Letters of Unused
Capacity Borrowed Credit Issued Capacity

LKE Credit Facility with a subsidiary of PPL Energy Supply $ 300 $ 300
LG&E Credit Facility (a) 400 400
KU Credit Facilities (a) (b) 598 $ 198 400
Total Credit Facilities (c) $ 1,298 $ 198 $ 1,100

~~(a)~~

~~In November 2012, LG&E and KU amended the syndicated credit facility to extend the expiration dates to November 2017. In addition, LG&E increased the credit facility capacity to $500 million.~~

~~(b)~~

~~(c)~~

The commitments under LKE'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% of the total committed capacity; however, the PPL affiliate provides a commitment of approximately 23% of the total facilities listed above.

~~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.

~~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~~the Registrants' or ~~its~~their subsidiaries' credit ratings could result in higher borrowing costs and reduced access to capital markets.

~~As a result of the passage of the Dodd-Frank Act~~ The Registrants 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 itstheir subsidiaries have no 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 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 and their 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 actions related to ~~LKE~~the Registrants and ~~its subsidiaries:~~their subsidiaries during 2013:

(PPL)

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

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

In September 2013, Fitch affirmed the BBB-, issuer default rating, BBB, senior unsecured rating and stable outlook at PPL WW.

In September 2013, Fitch affirmed the BBB+, issuer default rating, A-, senior unsecured rating, F2 short-term issuer default rating and stable outlook at WPD (South Wales) WPD (South West).

In September 2013, Moody's and S&P assigned ratings of Baa1 and BBB to WPD (East Midlands') £65 million 1.676% Index-Linked Senior Notes due 2052.

In October 2013, Moody's and S&P assigned ratings of Baa1 and BBB to WPD (West Midlands') £400 million 3.875% Senior Notes due 2024.

(PPL and PPL Energy Supply)

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

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

134

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

In August 2013, 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.~~

Baa3 rating and revised the outlook from stable to negative for PPL Montana's pass through trust certificates due 2020.

~~Also in March 2012,~~In September 2013, S&P affirmed the BB+ rating and revised the outlook from negative to stable for PPL Montana's pass through trust certificates due 2020.

(PPL and PPL Electric)

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

(PPL, LKE and KU)

In ~~March and May 2012, Moody's,~~July 2013, S&P ~~and Fitch affirmed~~confirmed the ~~long-term~~AA+ ratings for ~~LG&E's 2003~~KU's 2000 Series A Solid Waste Disposal Facility Revenue Bonds and ~~2007~~KU's 2004 Series A, 2006 Series B ~~pollution control bonds.~~and 2008 Series A Environmental Facilities Revenue Bonds. S&P also confirmed the A-1+ short term rating on these Bonds.

Ratings Triggers

~~LKE and its subsidiaries have various~~(All Registrants except PPL Electric)

Various derivative and non-derivative contracts, including contracts for the sale and purchase of electricity and fuel, commodity transportation and storage, tolling agreements (for PPL and PPL Energy Supply) and interest rate and foreign currency (for PPL) instruments, ~~which~~ contain provisions ~~requiring LKE and its subsidiaries to post~~that require the posting of additional collateral or ~~permitting~~permit the counterparty to terminate the contract, if PPL's, PPL Energy Supply's, LKE's, LG&E's or ~~its~~KU's or their subsidiaries' credit ~~ratings~~rating, as applicable, 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.2013.

(All Registrants)

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

Risk Management

Market Risk

(All Registrants)

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

~~The forward-looking information presented below provides estimates of what may occur in~~ the future, assuming certain adverse market conditions and model assumptions. Actual future results may differ materially from those presented. These disclosures are not precise indicators of expected future losses, but only indicators of possible losses under normal market conditions at a given confidence level.

~~161~~

~~Commodity Price Risk~~

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 to maximize the value of the physical assets at times when the assets are not required to serve LG&E's and 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, 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, would increase the fair value of its debt portfolio by $117 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)

~~(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 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 mature through 2033.

~~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 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.

~~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 air emissions, water discharges and the management of hazardous and solid waste, among other areas, and the costs of compliance or alleged non-compliance cannot be predicted with certainty but could be material. In addition, 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 or operating and maintenance 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, industrial power users, etc. and may impact the costs for their products or their demand for LKE's services. See "Item 1. Business - Environmental Matters" in LKE's 2011 Form 10-K and Note 10 to the Financial Statements for a discussion of environmental matters.

~~162~~

~~New Accounting Guidance~~

~~See Notes 2 and 18 to the Financial Statements for a discussion of new accounting guidance adopted and pending adoption.~~

~~Application of Critical Accounting Policies~~

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

~~163~~

~~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 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 factors expected to impact future earnings. This section ends with explanations of significant changes in principal items on LG&E's Statements of Income, comparing the three and nine months ended September 30, 2012 with the same periods in 2011.

~~"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 and the distribution and sale of natural gas in Kentucky.

~~Business Strategy~~

~~LG&E's overall strategy is to provide reliable, safe and competitively priced energy to its customers.~~

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 was $43 million and $94 million compared to $43 million and $102 million for the same periods in 2011 representing an 8% decrease from the nine-month period in 2011.

~~See "Results of Operations" for a discussion and analysis of LG&E's earnings.~~

~~Terminated Bluegrass CTs Acquisition~~

~~164~~

~~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 factors that management expects may impact future earnings. This section ends with "Statement of Income Analysis," which includes explanations of significant changes in principal items on LG&E's Statements of Income, comparing the three and nine months ended September 30, 2012 with the same periods in 2011.

Earnings

Net Income for the periods ended September 30 was:

Three Months Nine Months
2012 2011 2012 2011

Net Income $ 43 $ 43 $ 94 $ 102

~~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.~~

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~~

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

Lower other operation and maintenance for the three-month period, due to less storm restoration and tree trimming costs, less gas operation and maintenance costs, lower bad debt expenses as a result of milder weather and improving economy and lower pension expenses.

~~Outlook~~

~~LG&E projects lower earnings in 2012 compared with 2011 as a result of 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.

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

~~Statement of Income Analysis --~~

~~Margins~~

~~Non-GAAP Financial Measure~~

The following discussion includes financial information prepared in accordance with GAAP, as well as a non-GAAP financial measure, "Margins." Margins is not intended to replace "Operating Income," which is determined in accordance with GAAP as an indicator of overall operating performance. Other companies may use different measures to analyze and to report on the results of their operations. Margins is a single financial performance measure of LG&E's operations. In calculating this measure, 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 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 to budget.

~~Reconciliation of Non-GAAP Financial Measures~~

~~The following tables reconcile "Operating Income" to "Margins" as defined by LG&E for the periods ended September 30.~~

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
Margins Other (a) Income (b) Margins Other (a) Income (b)

Operating Revenues $ 990 $ 990 $ 1,034 $ 1 $ 1,035
Operating Expenses
Fuel 281 281 265 265
Energy purchases 119 119 180 180
Other operation and maintenance 36 $ 241 277 30 242 272
Depreciation 2 112 114 2 108 110
Taxes, other than income 17 17 14 14
Total Operating Expenses 438 370 808 477 364 841
Total $ 552 $ (370) $ 182 $ 557 $ (363) $ 194

~~(a)~~

~~Represents amounts excluded from Margins.~~

~~(b)~~

~~As reported on the Statements of Income.~~

~~Changes in Non-GAAP Financial Measures~~

Margins decreased by $5 million during the nine months ended September 30, 2012 compared with the same period in 2011, primarily due to $4 million of lower wholesale margins, as volumes were impacted by lower market prices. Retail margins were consistent 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 to the same period in 2011.

~~Other Operation and Maintenance~~

Other operation and maintenance increased by $5 million for the nine months ended September 30, 2012 compared with 2011, 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.

Financial Condition

Liquidity and Capital Resources

LG&E had the following at:

September 30, 2012 December 31, 2011

Cash and cash equivalents $ 48 $ 25

~~The $23 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, partially offset by~~

·	~~capital expenditures of $193 million; and~~

·	~~common stock dividends of $47 million.~~

~~LG&E's cash provided by operating activities decreased by $12 million for the nine months ended September 30, 2012, compared with 2011, primarily due to:~~

·	a decrease in cash inflows from accounts receivable of $26 million which is primarily the result of a decrease 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; and

a decrease in coal consumption resulting primarily from lower coal-fired generation due to the mild winter weather and an increase in combustion turbine generation that led to an increase of $34 million in coal inventory, partially offset by a $7 million greater decline in gas storage in comparison to 2011; partially offset by

·	~~a decrease in cash outflows of $42 million due to a reduction in discretionary defined benefit plan contributions.~~

LG&E's cash used in investing activities increased by $221 million for the nine months ended September 30, 2012, compared with 2011, primarily due to proceeds from the sale of other investments of $163 million in 2011 and an increase in capital 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.

~~Credit Facilities~~

~~At September 30, 2012, 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

~~(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 syndicated credit facility to extend the expiration date to November 2017. In addition, LG&E increased the credit facility capacity to $500 million.~~

~~See Note 7 to the Financial Statements for further discussion of LG&E's credit facilities.~~

~~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 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, LG&E is limiting 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.

~~The rating agencies took the following actions related to LG&E:~~

~~In February 2012, Fitch assigned ratings to LG&E's newly established commercial paper program.~~

~~In March 2012, Moody's affirmed 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.

~~Risk Management~~

~~Market Risk~~

~~See Notes 13 and 14 to the Financial Statements for information about LG&E's~~Registrants' risk management objectives, valuation techniques and accounting designations.

Commodity Price Risk (Non-trading)

(PPL and PPL Energy Supply)

PPL Energy Supply segregates its non-trading activities into two categories: hedge activity and economic activity. Transactions that are accounted for as hedge activity qualify for hedge accounting treatment. The economic activity category includes transactions that address a specific risk, but were not eligible for hedge accounting or for which hedge accounting was not elected. 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).

135

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				Nine Months
	2013		2012		2013		2012

Fair value of contracts outstanding at the beginning of the period	$	285	$	961	$	473	$	1,082
Contracts realized or otherwise settled during the period		(95)		(224)		(332)		(764)
Fair value of new contracts entered into during the period (a)		2		(11)		48		1
Other changes in fair value		25		(101)		28		306
Fair value of contracts outstanding at the end of the period	$	217	$	625	$	217	$	625

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

	Net Asset (Liability)
	Maturity						Maturity
	Less Than		Maturity		Maturity		in Excess		Total Fair
	1 Year		1-3 Years		4-5 Years		of 5 Years		Value
Source of Fair Value
Prices based on significant observable inputs (Level 2)	$	166	$	11	$	(2)	$	5	$	180
Prices based on significant unobservable inputs (Level 3)		12		21		4				37
Fair value of contracts outstanding at the end of the period	$	178	$	32	$	2	$	5	$	217

PPL Energy Supply sells electricity, capacity and related services and buys fuel on a forward basis to hedge the value of energy from its generation assets. If PPL Energy Supply were unable to deliver firm capacity and energy or to accept the delivery of fuel under its agreements, under certain circumstances it could be required to pay liquidating damages. These damages would be based on the difference between the market price and the contract price of the commodity. Depending on price changes in the wholesale energy markets, such damages could be significant. Extreme weather conditions, unplanned power plant outages, transmission disruptions, nonperformance by counterparties (or their counterparties) with which it has energy contracts and other factors could affect PPL Energy Supply's ability to meet its obligations, or cause significant increases in the market price of replacement energy. Although PPL Energy Supply attempts to mitigate these risks, there can be no assurance that it will be able to fully meet its firm obligations, that it will not be required to pay damages for failure to perform, or that it will not experience counterparty nonperformance in the future.

(PPL and Kentucky Registrants)

LG&E's and KU's rates are set by a regulatory ~~commission~~commissions and the fuel costs incurred are directly recoverable from customers. As a result, LG&E isand KU are subject to commodity price risk for only a small portion of on-going business operations. LG&E ~~conducts energy trading~~ and ~~risk management activities~~KU sell excess economic generation to maximize the value of the physical assets at times when the assets are not required to serve LG&E's or KU's customers. See Note 14 to the Financial Statements for additional disclosures.

(PPL and PPL Energy Supply)

Commodity Price Risk (Trading)

PPL Energy Supply's trading commodity derivative contracts range in maturity through 2020. The following table sets forth changes in the net fair value of trading commodity derivative contracts for the periods ended September 30. See Notes 13 and 14 to the Financial Statements for additional information.

136

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

Fair value of contracts outstanding at the beginning of the period	$	18	$	17	$	29	$	(4)
Contracts realized or otherwise settled during the period		(3)		17		(5)		16
Fair value of new contracts entered into during the period (a)		12		13		(4)		18
Other changes in fair value		1		(15)		8		2
Fair value of contracts outstanding at the end of the period	$	28	$	32	$	��28	$	32

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

	Net Asset (Liability)
	Maturity						Maturity
	Less Than		Maturity		Maturity		in Excess		Total Fair
	1 Year		1-3 Years		4-5 Years		of 5 Years		Value
Source of Fair Value
Prices quoted in active markets for identical instruments (Level 1)	$	3							$	3
Prices based on significant observable inputs (Level 2)		5	$	8	$	2				15
Prices based on significant unobservable inputs (Level 3)		2		4		1	$	3		10
Fair value of contracts outstanding at the end of the period	$	10	$	12	$	3	$	3	$	28

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 nine months ended September 30, 2013 was as follows.

				Non-Trading
		Trading VaR		VaR
95% Confidence Level, Five-Day Holding Period
	Period End	$	6	$	6
	Average for the Period		4		8
	High		7		10
	Low		2		5

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 September 30, 2013.

Interest Rate Risk (All Registrants)

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

~~At September 30, 2012, LG&E's potential annual exposure to increased interest expense, based on a 10% increase in interest rates, was not significant.~~

The following interest rate hedges were outstanding at September 30, 2013.

137

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, 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)

						Effect of a
				Fair Value,		10% Adverse		Maturities
		Exposure		Net - Asset		Movement		Ranging
		Hedged		(Liability) (a)		in Rates (b)		Through
PPL
Cash flow hedges
	Interest rate swaps (c)	$	2,264	$	68	$	(92)	2044
	Cross-currency swaps (d)		1,262		26		(171)	2028
Economic activity
	Interest rate swaps (e)		179		(41)		(3)	2033
LKE
Cash flow hedges
	Interest rate swaps (c)		500		(14)		(36)	2043
Economic activity
	Interest rate swaps (e)		179		(41)		(3)	2033
LG&E
Cash flow hedges
	Interest rate swaps (c)		250		(7)		(18)	2043
Economic activity
	Interest rate swaps (e)		179		(41)		(3)	2033
KU
Cash flow hedges
	Interest rate swaps (c)		250		(7)		(18)	2043

(a)	Includes accrued ~~interest.~~interest, if applicable.

(b)

~~LG&E utilizes various risk management instruments to reduce its exposure to~~Effects of adverse movements decrease assets or increase liabilities, as applicable, which could result in an asset becoming a liability. Sensitivities represent a 10% adverse movement in interest rates, except for cross-currency swaps which also includes foreign currency exchange rates.

(c)

Changes in the ~~expected future~~fair value of such cash flow ~~variability~~hedges are recorded in equity or as regulatory assets or liabilities, if recoverable through rates. The changes in fair value of ~~its debt instruments. These risks include exposure~~these instruments are then reclassified into earnings in the same period during which the item being hedged affects earnings.

(d)

Cross-currency swaps are utilized to ~~adverse~~hedge the interest ~~rate movements for outstanding variable rate debt~~payments and ~~for future anticipated financing. While LG&E is exposed to changes~~principal of WPD's U.S. dollar-denominated senior notes. Changes in the fair value of these instruments ~~any realized~~are recorded in equity and reclassified into earnings in the same period during which the item being hedged affects earnings.

(e)

Realized changes in the fair value of such economic hedges are recoverable through regulated rates and any subsequent changes in 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 mature through 2033.~~

The Registrants are exposed to a potential increase in interest expense and to changes in the fair value of their debt portfolios. The estimated impact of a 10% adverse movement in interest rates at September 30, 2013 is shown below.

PPL Energy

PPL

Supply

Electric

LKE

LG&E

Increase to interest expense of 10%

Not

increase in interest rates

Significant

Increase in fair value of 10% decrease

in interest rates

682

120

111

Foreign Currency Risk (PPL)

The following foreign currency hedges were outstanding at September 30, 2013.

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

Net investment hedges (b)	£	320	$	(11)	$	(51)	2015
Economic activity (c)		1,350		(55)		(208)	2015

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

~~169~~138

(b)	To protect the value of a portion of its net investment in WPD, PPL executes forward contracts to sell GBP. The positions outstanding exclude the amount of intercompany loans classified as net investment hedges. See Note 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.

NDT Funds - Securities Price Risk (PPL and PPL Energy Supply)

In connection with certain NRC requirements, PPL Susquehanna maintains trust funds to fund certain costs of decommissioning the PPL Susquehanna nuclear plant (Susquehanna). At September 30, 2013, these funds were invested primarily in domestic equity securities and fixed-rate, fixed-income securities and are reflected at fair value on the Balance Sheet. The mix of securities is designed to provide returns sufficient to fund Susquehanna's decommissioning and to compensate for inflationary increases in decommissioning costs. However, the equity securities included in the trusts are exposed to price fluctuation in equity markets, and the values of fixed-rate, fixed-income securities are primarily exposed to changes in interest rates. PPL actively monitors the investment performance and periodically reviews asset allocation in accordance with its nuclear decommissioning trust policy statement. At September 30, 2013, a hypothetical 10% increase in interest rates and a 10% decrease in equity prices would have resulted in an estimated $60 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(All Registrants)

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, PPL Energy Supply's, LKE's, LG&E's ~~2011~~and KU's 2012 Form 10-K and "Risk Management" in PPL Electric's 2012 Form 10-K for additional information.

Foreign Currency Translation (PPL)

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 $159 million for the nine months ended September 30, 2013, which primarily reflected a $454 million reduction to PP&E and goodwill offset by a reduction of $295 million to net liabilities. Changes in this exchange rate resulted in a foreign currency translation gain of $53 million for the nine months ended September 30, 2012, which primarily reflected a $123 million increase to PP&E and goodwill offset by an increase of $70 million to net liabilities. The impact of foreign currency translation is recorded in AOCI.

Related Party Transactions(All Registrants)

~~LG&E is~~The Registrants are not aware of any material ownership ~~interest~~interests or operating responsibility by senior management of ~~LG&E~~the Registrants in outside partnerships, including leasing transactions with variable interest entities or other entities doing business with ~~LG&E.~~ the Registrants.

See Note 11 to the Financial Statements for additional information on related party ~~transactions.~~transactions for PPL Energy Supply, PPL Electric, LKE, LG&E and KU.

~~Environmental Matters~~Acquisitions, Development and Divestitures(All Registrants)

~~Protection of~~The Registrants from time to time evaluate opportunities for potential acquisitions, divestitures and development projects. Development projects are reexamined based on market conditions and other factors to determine whether to proceed with the ~~environment is a major priority~~projects, sell, cancel or expand them, execute tolling agreements or pursue other options. See Note 8 to the Financial Statements for ~~LG&E and a~~information on the more significant ~~element of its business~~ activities.

Environmental Matters

(All Registrants)

Extensive federal, state and local environmental laws and regulations are applicable to PPL's, PPL Energy Supply's, LKE's, LG&E's and KU's air emissions, water discharges and the management of hazardous and solid waste, ~~among~~as well as other ~~areas, and~~aspects of the ~~costs~~Registrants' businesses. The cost of compliance or alleged non-compliance cannot be predicted with certainty but could be material. In addition, costs may increase significantly if the requirements or scope of environmental laws or regulations, or similar rules, are expanded or changed ~~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 for their products or their demand for ~~LG&E's~~the Registrants' services.

139

The following is a discussion of the more significant environmental matters. See Note 10 to the Financial Statements in this Form 10-Q and "Item 1. Business - Environmental Matters" in ~~LG&E's 2011~~the Registrants' 2012 Form 10-K ~~and Note 10 to the Financial Statements~~ for ~~a discussion of~~additional information on environmental matters.

GHG Regulations

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

The EPA's re-proposal for new power plants was released on September 20, 2013. The EPA's dependence on carbon capture and sequestration, a technology which is not presently commercially viable, effectively precludes the construction of new coal plants. The proposal is further problematic as the proposed standards for new gas plants may not be achievable at all times. PPL will comment on the rule to this effect. Regulation of existing plants could have a significant industry-wide impact depending on the structure and stringency of the final rule and state implementation plans.

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

Climate Change

Physical effects associated with possible climate change could include the impact of changes in weather patterns, such as storm frequency and intensity, and the resultant potential damage, as applicable, to the Registrants' generation assets, electricity transmission and distribution systems, as well as impacts on the Registrants' customers. In addition, changed weather patterns could potentially reduce annual rainfall in areas where PPL, PPL Energy Supply, LKE, LG&E and KU have hydroelectric generating facilities or where river water is used to cool their fossil and nuclear (as applicable) powered generators. The Registrants cannot currently predict whether their businesses will experience these potential climate change-related risks or estimate the potential cost of their related consequences.

(All Registrants except PPL Electric)

Coal Combustion Residuals (CCRs)

In June 2010, the EPA proposed two approaches to regulating the disposal and management of CCRs (as either hazardous or non-hazardous waste) under existing solid waste regulations. A final rulemaking is currently expected by the end of 2014, as a result of litigation by environmental groups. Regulations could impact handling, disposal and/or beneficial use of CCRs. The financial and operational impact is expected to be material if CCRs are regulated as hazardous waste, and significant if regulated as non-hazardous, in accordance with the proposed rule.

In July 2013, the U.S. House of Representatives passed House Bill H.R. 2218, the Coal Residuals and Reuse Management Act of 2013, which would preempt the EPA from issuing final CCR regulations and would set non-hazardous CCR standards under RCRA and authorize state permit programs. It remains uncertain whether similar legislation will likely be passed by the U.S. Senate.

Effluent Limitation Guidelines (ELGs)

In June 2013, the EPA published proposed regulations to revise discharge limitations for steam electric generation wastewater permits. The proposed limitations are based on the EPA review of available treatment technologies and their capacity for reducing pollutants and include new requirements for fly ash and bottom ash transport water and metal cleaning waste waters, as well as new limits for scrubber wastewater and landfill leachate. The EPA's proposed ELG regulations also contain some requirements that would affect the inspection and operation of CCR facilities, if finalized. The proposal contains several alternative approaches, some of which could significantly impact PPL's, PPL Energy Supply's, LKE's, LG&E's and KU's coal-fired plants. PPL, PPL Energy Supply, LKE, LG&E and KU worked with industry groups to comment on the proposed regulation on September 20, 2013. The final regulation is expected in May 2014. At the present time, PPL, PPL Energy Supply, LKE, LG&E and KU are unable to predict the outcome of this matter or estimate a range of reasonably possible costs, but the costs could be significant.

140

316(b) Cooling Water Intake Structure Rule

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

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, PPL Energy Supply, LKE, LG&E and KU are generally well-positioned to comply with MATS, primarily due to recent investments in environmental controls at PPL Energy Supply and approved ECR plans to install additional controls at some of LG&E's and KU's Kentucky plants. Additionally, PPL Energy Supply is evaluating chemical additive systems for mercury control at Brunner Island, and modifications to existing controls at Colstrip for improved particulate matter reductions. In September 2012, PPL Energy Supply announced its intention to place its Corette plant in long-term reserve status beginning in April 2015 due to expected market conditions and costs to comply with MATS. Also, PPL has received approval for two compliance extensions in Kentucky, and has requested an extension for one of its plants in Pennsylvania. Other extension requests are under consideration.

In connection with a unanimous settlement agreement filed with the KPSC in November 2011, KU agreed to defer the requested approval for certain environmental upgrades to Units 1 and 2 at its E.W. Brown generating plant which represented approximately $200 million in capital costs. LG&E and KU are evaluating, among other measures, chemical additive systems for mercury control at Trimble County and Brown plants. These measures, combined with the completion of recent feasibility studies conducted based on current market conditions, provide alternative compliance options for KU on Units 1 and 2 at the E.W. Brown station.

The anticipated retirements of certain coal-fired electricity generating units are in response to this and other environmental regulations.

CSAPR and CAIR

In 2011, the EPA finalized its CSAPR regulating emissions of nitrogen oxide and sulfur dioxide through new allowance trading programs which were to be implemented in two phases (2012 and 2014). Like its predecessor, the CAIR, CSAPR targeted sources in the eastern U.S. In December 2011, the U.S. Court of Appeals for the District of Columbia Circuit (D.C. Circuit Court) stayed implementation of CSAPR, leaving CAIR in place. Subsequently, in August 2012, the D.C. Circuit Court vacated and remanded CSAPR back to the EPA for further rulemaking, again leaving CAIR in place in the interim, and in June 2013 the U.S. Supreme Court granted the EPA's petition for review of the D.C. Circuit Court's decision. Oral argument before the U.S. Supreme Court has been scheduled for December 2013. Prior to a revised rule from the EPA, coal-fired generating plants could face tighter nitrous oxide emission limitations through state action.

The PPL, PPL Energy Supply, LKE, LG&E and KU plants in Pennsylvania and Kentucky will continue to comply with CAIR through optimization of existing controls, balanced with emission allowance purchases. The D.C. Circuit Court's August 2012 decision leaves plants in CSAPR-affected states potentially exposed to more stringent emission reductions 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

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

141

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

National Ambient Air Quality Standards(Kentucky Registrants)

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.

New Accounting Guidance (All Registrants)

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(All Registrants)

Financial condition and results of operations are impacted by the methods, assumptions and estimates used in the application of critical accounting policies. The following table summarizes the accounting policies by Registrant that are particularly important to the financial condition or results of operations, and require estimates or other judgments of matters inherently ~~uncertain: revenue recognition - unbilled revenue, price risk management, defined benefits, asset impairment, loss accruals, AROs, income taxes, and regulatory assets and liabilities.~~uncertain. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in ~~LG&E's 2011~~each Registrant's 2012 Form 10-K for a discussion of each critical accounting policy.

~~170~~

~~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 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.~~

PPL

"Results of Operations" provides a summary of KU's earnings and a description of factors expected to impact future earnings. This section ends with explanations of significant changes in principal items on KU's Statements of Income, comparing the three and nine months ended September 30, 2012 with the same periods in 2011.

PPL

Energy Supply

Electric

LKE

LG&E

~~"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~~

Defined Benefits

Loss Accruals

Income Taxes

Asset Impairments (Excluding Investments)

AROs

Price Risk Management

Regulatory Assets and Liabilities

Revenue Recognition - ~~Risk Management" provides an explanation of KU's risk management programs relating to market and credit risk.~~unbilled revenue

~~Overview~~

~~Introduction~~

~~KU, headquartered in Lexington, Kentucky, is a regulated utility engaged in the generation, transmission, distribution and sale of electricity, in Kentucky, Virginia and Tennessee.~~

~~Business Strategy~~

~~KU's overall strategy is to provide reliable, safe and competitively priced energy to its customers.~~

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 was $50 million and $118 million compared to $56 million and $144 million for the same periods in 2011 representing decreases of 11% and 18% from the same periods in 2011.

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

~~Terminated Bluegrass CTs Acquisition~~

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 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, 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. 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 of 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 factors that management expects may impact future earnings. This section ends with "Statement of Income Analysis," which includes explanations of significant changes in principal items on KU's Statements of Income, comparing the three and nine months ended September 30, 2012 with the same periods in 2011.

Earnings

Net Income for the periods ended September 30 was:

Three Months Nine Months
2012 2011 2012 2011

Net Income $ 50 $ 56 $ 118 $ 144

~~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)

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

~~Higher other operation and maintenance for the nine-month period primarily due to a $6 million credit recorded in 2011 to establish a regulatory asset related to 2009 storm costs.~~

~~Higher depreciation for the three and nine-month periods 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 pre-tax income.~~

~~Outlook~~

KU projects lower earnings in 2012 compared with 2011 as a result of 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.

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 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 operations. In calculating this measure, 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 to budget.

~~173~~

~~Reconciliation of Non-GAAP Financial Measures~~

~~The following tables reconcile "Operating Income" to "Margins" as defined by KU for the periods ended September 30.~~

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
Operating Operating
Margins Other (a) Income (b) Margins Other (a) Income (b)

Operating Revenues $ 1,165 $ 1,165 $ 1,191 $ 1,191
Operating Expenses
Fuel 396 396 401 401
Energy purchases 76 76 85 85
Other operation and maintenance 41 $ 245 286 37 $ 237 274
Depreciation 36 109 145 35 104 139
Taxes, other than income 17 17 14 14
Total Operating Expenses 549 371 920 558 355 913
Total $ 616 $ (371) $ 245 $ 633 $ (355) $ 278

~~(a)~~

~~Represents amounts excluded from Margins.~~

~~(b)~~

~~As reported on the Statements of Income.~~

~~Changes in Non-GAAP Financial Measures~~

~~Margins decreased by $5 million for the three months ended September 30, 2012 compared with the same period in 2011, primarily due to $4 million of lower retail margins.~~

Margins decreased by $17 million for the nine months ended September 30, 2012 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 to the same period in 2011.

~~Other Operation and Maintenance~~

Other operation and maintenance increased by $12 million for the nine months ended September 30, 2012 compared with 2011, primarily due to a $6 million credit to establish a regulatory asset was recorded 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~~

~~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 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.~~

~~Income Taxes~~

~~Income taxes decreased by $12 million for the nine months ended September 30, 2012, compared with 2011, primarily due to a $38 million decrease in 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

Cash and cash equivalents $ 42 $ 31

~~The $11 million increase in KU's cash and cash equivalents position was the net result of:~~

·	~~cash provided by operating activities of $410 million; partially offset by~~

·	~~capital expenditures of $331 million; and~~

·	~~common stock dividends of $68 million.~~

~~KU's cash provided by operating activities increased by $51 million for the nine months ended September 30, 2012, compared with 2011, primarily due to:~~

·	a decrease in cash outflows for accounts payable to affiliates of $17 million primarily as a result of payables to LG&E for TC2 coal inventory and other shared costs, partially offset by a decrease in income tax settlements with LKE in 2011;

·	~~a decrease in cash outflows of $26 million due to a reduction in discretionary defined benefit plan contributions; and~~

·	~~a decrease in cash outflows related to accrued taxes of $31 million primarily due to the timing of property 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 and the timing of cash receipts and payments, and an increase in accounts receivable from affiliates balance for income tax settlements with LKE in 2012.

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 by $32 million for the nine months ended September 30, 2012, compared with 2011, primarily due to lower common stock dividends paid to LKE of $20 million in 2012.

~~Credit Facilities~~

~~At September 30, 2012, KU's committed borrowing capacity under its credit facilities and the use of this borrowing capacity were:~~

Committed Letters of Unused
Capacity Borrowed Credit Issued Capacity

Syndicated Credit Facility (a) $ 400 $ 400
Letter of Credit Facility (b) 198 $ 198
Total Credit Facilities (c) $ 598 $ 198 $ 400

~~(a)~~

~~In November 2012, KU amended the syndicated credit facility to extend the expiration date to November 2017.~~

~~(b)~~

~~(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 7 and 11 to the Financial Statements for further discussion of KU's credit facilities.~~

~~175~~

~~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 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, KU is limiting its credit rating disclosure to a description of the actions taken by the rating agencies with respect to KU's ratings, but without stating what ratings have been assigned to KU's securities. The ratings assigned by the rating agencies to KU and its securities may be found, without charge, on each of the respective rating agencies' websites, which ratings together with all other information contained on such rating agency websites is, hereby, explicitly not incorporated by reference in this report.

~~The rating agencies took the following actions related to KU:~~

~~In February 2012, Fitch assigned ratings to KU'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 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.~~

~~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.

~~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~~

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 to maximize the value of the physical assets at times when the assets are not required to serve KU's or LG&E'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. At September 30, 2012, 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, would increase the fair value of its debt portfolio by $70 million.

~~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 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 other areas, and the costs 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 or operating and maintenance 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, industrial power users, etc. and may impact the costs for their products or their demand for KU's services. See "Item 1. Business - Environmental Matters" in KU's 2011 Form 10-K and Note 10 to the Financial Statements for a discussion of environmental matters.

~~New Accounting Guidance~~

~~See Notes 2 and 18 to the Financial Statements for a discussion of new accounting guidance adopted and pending adoption.~~

~~Application of Critical Accounting Policies~~

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

~~177~~142

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'~~Registrants' principal executive officers and principal financial officers, based on their evaluation of the ~~registrants'~~Registrants' disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934) have concluded that, as of September 30, ~~2012,~~2013, the ~~registrants'~~Registrants' disclosure controls and procedures are effective to ensure that material information relating to the ~~registrants~~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

As reported in the June 30, 2013 Form 10-Q, the principal executive officers and principal financial officers of the Registrants concluded that the implementation of a financial consolidation and reporting system for PPL and its primary U.S. subsidiaries resulted in a material change to the Registrants' internal control over financial reporting. The ~~registrants'~~new system enhances the consolidation of subsidiary accounts, provides reporting tools for analysis and automates certain aspects of financial statement preparation for each of the Registrants. Processes and controls over the consolidation and reporting processes that were previously considered to be effective were replaced with new or modified controls that were also determined to be effective.

The new consolidation and reporting system was subject to extensive testing and data reconciliation during implementation. Post-implementation reviews have been and will continue to be conducted to enable us to determine the effectiveness of the internal controls relating to the system implementation processes and to key business processes.

The Registrants' principal executive officers and principal financial officers have concluded that there were no other changes in the ~~registrants'~~Registrants' internal control over financial reporting during the ~~registrants'~~Registrants' third fiscal quarter that have materially affected, or are reasonably likely to materially affect, the ~~registrants'~~Registrants' internal control over financial reporting.

PPL Corporation

As reported in the June 30, 2013 Form 10-Q, PPL's principal executive officer and principal financial officer concluded that the implementation of a new general ledger system and a financial reporting system at WPD resulted in a material change to its internal control over financial reporting. The general ledger system that was implemented at WPD replaced the existing mainframe system and resulted in more automation and enhanced controls over

~~178~~143

~~PART II. OTHER INFORMATION~~general ledger processing and consolidation. The reporting system that was implemented at WPD improves and automates controls over data transfer included in PPL's consolidation process and improves controls over GAAP and foreign currency adjustments. In each of the WPD system implementations, controls that were previously determined to be effective were replaced with new or modified controls that were also determined to be effective.

The general ledger and reporting systems were subject to extensive testing and data reconciliation during their implementation. Post-implementation reviews have been and will continue to be conducted to enable us to determine the effectiveness of the internal controls relating to the system implementation processes and to key business processes remain effective. Risks related to the system implementations at WPD were also partially mitigated by PPL's existing policy of consolidating foreign subsidiaries on a one-month lag, which provided management additional time for review and analysis of WPD results and their incorporation into PPL's consolidated financial statements.

The Registrant's principal executive officer and principal financial officer have concluded that there were no other changes in the Registrant's internal control over financial reporting during the Registrant's third fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Registrant's internal control over financial reporting.

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~~Registrants' risk factors from those disclosed in "Item 1A. Risk Factors" of the ~~2011~~2012 Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchase of Equity Securities during the Third Quarter of 2013:

(a)

(b)

(c)

(d)

Maximum Number (or

Approximate Dollar

Total Number of

Value) of Shares

Shares (or Units)

(or Units) that May

Total Number of

Average Price

Purchased as Part of

Yet Be Purchased

Shares (or Units)

Paid per Share

Publicly Announced

Under the Plans

Period

Purchased (1)

(or Unit)

Plans of Programs

or Programs

July 1 to July 31, 2013

August 1 to August 31, 2013

750,000

$30.81

September 1 to September 30, 2013

750,000

$31.00

Total

1,500,000

$30.91

(1)

Represents shares of common stock repurchased in the open market to offset a portion of shares issued under stock based compensation plans.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

PPL Electric Utilities Corporation

Effective October 31, 2013, PPL Electric amended and restated its Articles of Incorporation and Bylaws, copies of which are filed as exhibits 3(a) and 3(b), respectively, to this report.

~~179~~144

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)~~ 1(a)	-	~~Supplemental Indenture No. 14, dated as~~ Final Terms 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~~WPD West Midlands £400 million 3.875% Senior Unsecured Notes due October 17, 2024 (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 15, 2012, 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)), as Trustee (Exhibit 4(b)1.1 to PPL Corporation Form 8-K Report (File No. 1-11459) dated October ~~15, 2012)~~18, 2013)
*10(a)1(b)	-	~~Amendment~~ Final Terms of WPD East Midlands £40 million 1.676% Notes due 2052 (Exhibit 1.2 to PPL Corporation Form 8-K Report (File No. 61-11459) dated October 18, 2013)
1(c)	-	Final Terms of WPD East Midlands £25 million 1.676% Notes due 2052 (Exhibit 1.3 to ~~Credit~~PPL Corporation Form 8-K Report (File No. 1-11459) dated October 18, 2013)
2(a)	-	Purchase and ~~Security~~Sale Agreement by and between PPL Montana, LLC and NorthWestern Corporation, dated as of ~~July 24, 2012,~~September 26, 2013 (Exhibit 2.1 to PPL Corporation Form 8-K Report (File No. 1-11459) dated September 27, 2013)
2(b)	-	Lease Termination Agreement by and ~~among~~between PPL ~~Receivables~~Montana, LLC, Montana OL3 LLC and Montana OP3 LLC, dated as of September 26, 2013 (Exhibit 2.2 to PPL Corporation Form 8-K Report (File No. 1-11459) dated September 27, 2013)
2(c)	-	Lease Termination Agreement by and between PPL Montana, LLC, Montana OL4 LLC and Montana OP4 LLC, dated as ~~Borrower,~~of September 26, 2013 (Exhibit 2.3 to PPL Corporation Form 8-K Report (File No. 1-11459) dated September 27, 2013)
2(d)	-	Lease Termination Agreement by and between PPL Montana, LLC, Montana OL1 LLC and Montana OP1 LLC, dated as of September 26, 2013 (Exhibit 2.4 to PPL Corporation Form 8-K Report (File No. 1-11459) dated September 27, 2013)
2(e)	-	Lease Termination Agreement by and between PPL Montana, LLC, Montana OL1 LLC and Montana OP1 LLC, dated as of September 26, 2013 (Exhibit 2.5 to PPL Corporation Form 8-K Report (File No. 1-11459) dated September 27, 2013)
*3(a)	-	Amended and Restated Articles of Incorporation of PPL Electric Utilities Corporation, effective 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~~October 31, 2013
*~~10(b)~~3(b)	-	~~Amendment No. 7 to Credit~~ Amended and ~~Security Agreement, dated as~~Restated Bylaws of ~~September 24, 2012, by and among PPL Receivables Corporation, as Borrower,~~ PPL Electric Utilities Corporation, effective 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~~October 31, 2013
*~~10(c)~~4(a)	-	Amendment No. 10 to Employee Stock Ownership Plan, dated September 16, 2013
4(b)	-	Amended and ~~Restatement Agreement,~~Restated Trust Deed, dated September 10, 2013, by and among Western Power Distribution (East Midlands) plc, Western Power Distribution (West Midlands) plc, Western Power Distribution (South West) plc and Western Power Distribution (South Wales) plc as ~~of August 16, 2012,~~Issuers, and HSBC Corporate Trustee Company (UK) Limited as Note Trustee (Exhibit 4.1 to ~~Letter of Credit Agreement,~~PPL Corporation Form 8-K Report (File No. 1-11459) dated as of April 29, 2011, as amended, among Kentucky Utilities Company, the Borrower; the Lenders from time to time party thereto, the Lenders; Banco Bilbao Vizcaya Argentaria, S.A., New York Branch, the Agent and Sumitomo Mitsui Banking Corporation, New York Branch, the Issuing Lender and LenderOctober 18, 2013)
*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,~~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

145

*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

Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, for the quarterly period ended September 30, ~~2012,~~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~~146

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~~1, 2013	/s/ Vincent Sorgi
	Vincent Sorgi
	Vice President and Controller
	(Principal Accounting Officer)



	PPL Electric Utilities Corporation
	(Registrant)



Date: November ~~8, 2012~~1, 2013	/s/ ~~Vincent Sorgi~~Dennis A. Urban, Jr.
	~~Vincent Sorgi~~Dennis A. Urban, Jr.
	~~Vice President and~~
	~~Chief Accounting Officer~~Controller
	(Principal Financial Officer and Principal Accounting Officer)

	LG&E and KU Energy LLC
	(Registrant)

	Louisville Gas and Electric Company
	(Registrant)

	Kentucky Utilities Company
	(Registrant)



Date: November ~~8, 2012~~1, 2013	/s/ Kent W. Blake
	Kent W. Blake Chief Financial Officer
	(Principal Financial Officer and Principal Accounting Officer)

147

~~182~~

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~~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

					Page

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~~630,249,634 shares outstanding at October ~~31, 2012.~~25, 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.~~25, 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.~~25, 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.~~25, 2013.

Louisville Gas and Electric Company
	Condensed Statements of Income	28
	Condensed Statements of Cash Flows	29
	Condensed Balance Sheets	30
	Condensed Statements of Equity	32

CONDENSED CONSOLIDATED BALANCE SHEETS													PPL Corporation and Subsidiaries	(Unaudited)	(Millions of Dollars, shares in thousands)
			September 30,		December 31,				September 30,		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		$	499	$	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			1,079		1,252
	Taxes			95		65	Taxes			170		90
	Interest			335		287	Interest			325		325
	Dividends			210		207	Dividends			232		210
	Price risk management liabilities			1,184		1,570	Price risk management liabilities			823		1,065
	Regulatory liabilities			65		73	Regulatory liabilities			68		61
	Other current liabilities			1,088		1,261	Other current liabilities			1,001		1,219
	Total Current Liabilities			4,887		5,255	Total Current Liabilities			4,948		5,625

Long-term Debt	Long-term Debt			18,711		17,993	Long-term Debt			19,092		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			3,777		3,387
	Investment tax credits			315		285	Investment tax credits			345		328
	Price risk management liabilities			884		840	Price risk management liabilities			538		629
	Accrued pension obligations			1,086		1,313	Accrued pension obligations			1,529		2,076
	Asset retirement obligations			500		484	Asset retirement obligations			678		536
	Regulatory liabilities			999		1,010	Regulatory liabilities			1,054		1,010
	Other deferred credits and noncurrent liabilities			921		1,046	Other deferred credits and noncurrent liabilities			665		820
	Total Deferred Credits and Other Noncurrent Liabilities			8,410		8,304	Total Deferred Credits and Other Noncurrent Liabilities			8,586		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		8,305		6,936
		Earnings reinvested		5,335		4,797		Earnings reinvested		6,040		5,478
		Accumulated other comprehensive loss		(1,039)		(788)		Accumulated other comprehensive loss		(2,007)		(1,940)
		Total PPL Shareowners' Common Equity		11,214		10,828		Total PPL Shareowners' Common Equity		12,344		10,480
	Noncontrolling Interests			18		268	Noncontrolling Interests			18		18
	Total Equity			11,232		11,096	Total Equity			12,362		10,498

Total Liabilities and Equity	Total Liabilities and Equity		$	43,240	$	42,648	Total Liabilities and Equity		$	44,988	$	43,634

(Shares in thousands)	(Shares in thousands)	Three Months		Nine Months		(Shares in thousands)	Three Months				Nine Months
							2013		2012		2013		2012

Stock-based compensation plans (a)	Stock-based compensation plans (a)		159		512	Stock-based compensation plans (a)		85		159		1,469		512
ESOP	ESOP				280	ESOP						275		280
DRIP	DRIP		598		1,773	DRIP				598		549		1,773

		Increase		Decrease			Increase		Decrease

PPL	PPL	$	21	$	105	PPL	$	16	$	30
PPL Energy Supply	PPL Energy Supply		1		31	PPL Energy Supply				15
PPL Electric	PPL Electric		22		38	PPL Electric		16		8

Current Regulatory Liabilities:
	Generation supply charge	$	21	$	27	$	21	$	27
	ECR				4
	Gas supply clause		2		4
	Transmission service charge		9		6		9		6
	Transmission formula rate		9				9
	Universal service rider		11		17		11		17
	Gas line tracker		6
	Other		10		3		1		2
Total current regulatory liabilities		$	68	$	61	$	51	$	52

Noncurrent Regulatory Liabilities:
	Accumulated cost of removal of utility plant	$	690	$	679
	Coal contracts (a)		108		141
	Power purchase agreement - OVEC (a)		102		108
	Net deferred tax assets		32		34
	Act 129 compliance rider		14		8	$	14	$	8
	Defined benefit plans		18		17
	Interest rate swaps		84		14
	Other		6		9
Total noncurrent regulatory liabilities		$	1,054	$	1,010	$	14	$	8

	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 periods ended September 30, 2013 is as follows:																					A reconciliation of net assets and liabilities classified as Level 3 for the periods ended September 30, 2013 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												Three Months								Nine Months
					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	period				$	40	$	19	$	3	$	62	$	22	$	16	$	1	$	39
		Total realized/unrealized																				Total realized/unrealized
			gains (losses)																				gains (losses)
				Included in earnings		(17)						(17)		(1)				(1)		(2)				Included in earnings		18						18		23						23
				Included in OCI (a)				1		(8)		(7)		1				2		3				Included in OCI (a)						(2)		(2)						1		1
		Sales														(5)				(5)		Sales												(2)						(2)
		Settlements				2						2		(9)						(9)		Settlements				(2)						(2)		1						1
		Transfers into Level 3				(2)						(2)		12						12		Transfers into Level 3				(7)						(7)		1		3		3		7
		Transfers out of Level 3				8						8		9		(3)		(3)		3		Transfers out of Level 3				(2)				(1)		(3)		2				(5)		(3)
Balance at end of period	Balance at end of period				$	25	$	16	$	2	$	43	$	25	$	16	$	2	$	43	Balance at end of period				$	47	$	19	$		$	66	$	47	$	19	$		$	66

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				$	40	$	16			$	56	$	22	$	13			$	35
		Total realized/unrealized																				Total realized/unrealized
			gains (losses)																				gains (losses)
				Included in earnings		(17)						(17)		(1)						(1)				Included in earnings		18						18		23						23
				Included in OCI (a)				1				1		1						1		Sales												(2)						(2)
		Sales														(3)				(3)		Settlements				(2)						(2)		1						1
		Settlements				2						2		(9)						(9)		Transfers into Level 3				(7)						(7)		1		3				4
		Transfers into Level 3				(2)						(2)		12						12		Transfers out of Level 3				(2)						(2)		2						2
		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				$	47	$	16			$	63	$	47	$	16			$	63

		Three Months																			Three Months
																		Cross-Currency
		Energy Commodities, net																Swaps			Energy Commodities, net

		Unregulated Retail				Wholesale Energy				Net Energy				Energy							Unregulated				Wholesale
		Electric and Gas				Marketing				Trading Margins				Purchases				Interest Expense			Retail				Energy				Net Energy							Energy
		2012		2011		2012		2011		2012		2011		2012		2011		2012	2011		Electric and Gas				Marketing				Trading Margins				Fuel			Purchases
PPL
																					2013		2012		2013		2012		2013		2012		2013		2012	2013		2012
PPL and PPL Energy Supply																				PPL and PPL Energy Supply

Total gains (losses) included in earnings	Total gains (losses) included in earnings	$	(3)	$	6	$	(4)	$	(1)	$	(8)	$	1	$	(2)					Total gains (losses) included in earnings	$	3	$	(3)	$	(8)	$	(4)	$	11	$	(8)	$	3		$	9	$	(2)
Change in unrealized gains (losses) relating	Change in unrealized gains (losses) relating																			Change in unrealized gains (losses) relating
	to positions still held at the reporting date		(2)		3		(1)				2		1			$	1			to positions still held at the reporting date		3		(2)				(1)		17		2

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

		September 30, 2012				December 31, 2011
		Carrying				Carrying
		Amount		Fair Value		Amount		Fair Value
PPL
	Contract adjustment payments (a)	$	128	$	116	$	198	$	198
	Long-term debt (b)		19,024		21,091		17,993		19,392
PPL Energy Supply
	Long-term debt (b)		3,275		3,691		3,024		3,397
PPL Electric
	Long-term debt		1,967		2,252		1,718		2,012
LKE
	Long-term debt		4,074		4,385		4,073		4,306
LG&E
	Long-term debt		1,112		1,172		1,112		1,164
KU
	Long-term debt		1,842		2,021		1,842		2,000

		Volume (a)
Commodity	Unit of Measure	2013 (b)	2014	2015	Thereafter

Power	MWh	(9,950,950)	(28,280,182)	(4,110,530)	10,991,752
Capacity	MW-Month	(5,114)	(14,418)	(309)	1,990
Gas	MMBtu	12,653,279	18,794,545	(3,852,725)	5,320,453
Coal	Tons		(30,000)
FTRs	MW-Month	5,056	8,724	1,465
Oil	Barrels	(15,335)	300,000	384,334	371,466

	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

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	Three Months		Nine Months

Foreign currency contracts	Other income (expense) - net	$	(47)	$	(40)	Other income (expense) - net	$	(117)	$	6
Interest rate swaps	Interest expense		(2)		(4)	Interest expense		(2)		(6)
Commodity contracts	Unregulated retail electric and gas		(3)		20	Unregulated retail electric and gas		3		18
	Wholesale energy marketing		(476)		900	Wholesale energy marketing		104		144
	Net energy trading margins (a)		(10)		12	Net energy trading margins (a)		14		8
	Fuel		6			Fuel		4		2
	Energy purchases		364		(717)	Energy purchases		(86)		(99)
	Total	$	(168)	$	171	Total	$	(80)	$	73

Derivatives Not Designated as	Location of Gain (Loss) Recognized as
Hedging Instruments:	Regulatory Liabilities/Assets	Three Months		Nine Months

Interest rate swaps	Regulatory assets - noncurrent	$	(9)	$	(3)

Derivatives Designated as	Location of Gain (Loss) Recognized as
Hedging Instruments	Regulatory Liabilities/Assets	Three Months		Nine Months

Interest rate swaps	Regulatory liabilities - noncurrent	$	12	$	70

Derivative Instruments	Location of Gain (Loss)	Three Months		Nine Months

Interest rate swaps	Regulatory liabilities - noncurrent	$	12	$	70

	Location of Gain (Loss) Recognized in
Derivative Instruments	Regulatory Assets	Three Months		Nine Months

Interest rate swaps	Regulatory assets - noncurrent (a)	$	2	$	18

		Assets								Liabilities
				Eligible for Offset								Eligible for Offset
						Cash								Cash
				Derivative		Collateral						Derivative		Collateral
		Gross		Instruments		Received		Net		Gross		Instruments		Pledged		Net
September 30, 2013
PPL
	Energy Commodities	$	1,480	$	1,122	$	14	$	344	$	1,235	$	1,122			$	113
	Treasury Derivatives		115		47				68		126		47	$	22		57
Total		$	1,595	$	1,169	$	14	$	412	$	1,361	$	1,169	$	22	$	170

PPL Energy Supply
	Energy Commodities	$	1,480	$	1,122	$	14	$	344	$	1,235	$	1,122			$	113

16. Asset Retirement Obligations

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

The changes in the carrying amounts of AROs were as follows.

				PPL
		PPL		Energy Supply		LKE		LG&E		KU

Balance at December 31, 2011		$	497	$	359	$	118	$	57	$	61
	Accretion expense		27		21		5		2		3
	Obligations incurred		3		3
	Changes in estimated cash flow or settlement date		(7)		(7)
	Obligations settled		(7)		(5)		(2)		(2)
Balance at September 30, 2012		$	513	$	371	$	121	$	57	$	64

	Foreign		Unrealized gains (losses)						Defined benefit plans
	currency		Available-				Equity		Prior		Actuarial		Transition
	translation		for-sale		Qualifying		investees'		service		gain		asset
	adjustments		securities		derivatives		AOCI		costs		(loss)		(obligation)		Total
PPL
June 30, 2013	$	(401)	$	135	$	102	$	1	$	(11)	$	(1,955)	$	1	$	(2,128)
Amounts arising during the period		87		15		(9)										93
Reclassifications from AOCI						(6)		(1)		2		33				28
Net OCI during the period		87		15		(15)		(1)		2		33				121
September 30, 2013	$	(314)	$	150	$	87	$		$	(9)	$	(1,922)	$	1	$	(2,007)

December 31, 2012	$	(149)	$	112	$	132	$	1	$	(14)	$	(2,023)	$	1	$	(1,940)
Amounts arising during the period		(165)		40		77										(48)
Reclassifications from AOCI				(2)		(122)		(1)		5		101				(19)
Net OCI during the period		(165)		38		(45)		(1)		5		101				(67)
September 30, 2013	$	(314)	$	150	$	87	$		$	(9)	$	(1,922)	$	1	$	(2,007)

		Three Months
		Affected Line Item on the Statements of Income
								Other
		Wholesale						Income
		energy		Energy				(Expense),		Interest		Total		Income		Total
Details about AOCI		marketing		purchases		Depreciation		net		Expense		Pre-tax		Taxes		After-tax
PPL
Available-for-sale securities								$	1			$	1	$	(1)
Qualifying derivatives
	Interest rate swaps									$	(5)		(5)		2	$	(3)
	Cross-currency swaps								(25)		(1)		(26)		7		(19)
	Energy commodities	$	58	$	(11)	$	1						48		(20)		28
	Total	$	58	$	(11)	$	1	$	(25)	$	(6)		17		(11)		6
Equity investees' AOCI								$	1				1				1
Defined benefit plans
	Prior service costs												(3)		1		(2)
	Net actuarial loss												(45)		12		(33)
	Total											$	(48)	$	13		(35)

Total reclassifications
	during the period															$	(28)

PPL Energy Supply
Available-for-sale securities								$	1			$	1	$	(1)
Qualifying derivatives
	Energy commodities	$	58	$	(11)	$	1						48		(19)	$	29
Defined benefit plans
	Prior service costs												(2)		1		(1)
	Net actuarial loss												(5)		2		(3)
	Total											$	(7)	$	3		(4)

Total reclassifications
	during the period															$	25

		Nine Months
		Affected Line Item on the Statements of Income
								Other
		Wholesale						Income
		energy		Energy				(Expense),		Interest		Total		Income		Total
Details about AOCI		marketing		purchases		Depreciation		net		Expense		Pre-tax		Taxes		After-tax
PPL
Available-for-sale securities								$	4			$	4	$	(2)	$	2
Qualifying derivatives
	Interest rate swaps									$	(14)		(14)		6		(8)
	Cross-currency swaps								45				45		(10)		35
	Energy commodities	$	198	$	(41)	$	2						159		(64)		95
	Total	$	198	$	(41)	$	2	$	45	$	(14)		190		(68)		122
Equity investees' AOCI								$	1				1				1
Defined benefit plans
	Prior service costs												(8)		3		(5)
	Net actuarial loss												(138)		37		(101)
	Total											$	(146)	$	40		(106)

Total reclassifications
	during the period															$	19

PPL Energy Supply
Available-for-sale securities								$	4			$	4	$	(2)	$	2
Qualifying derivatives
	Energy commodities	$	198	$	(41)	$	2						159		(63)		96
Defined benefit plans
	Prior service costs												(5)		2		(3)
	Net actuarial loss												(18)		7		(11)
	Total											$	(23)	$	9		(14)

Total reclassifications
	during the period															$	84

	Average Utilization Factors (a)
	2009 - 2011	2012
Pennsylvania coal plants	89%	70%
Montana coal plants	87%	59%
Combined-cycle gas plants	70%	96%

Three Months

Nine Months

Accrued severance at the beginning of period

Severance compensation

Severance paid

Accrued severance at the end of period