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

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

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

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

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

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

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

Statements contained in this Form 10-Q concerning expectations, beliefs, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements which are other than statements of historical fact are "forward-looking statements" within the meaning of the federal securities laws. Although the Registrants believe that the expectations and assumptions reflected in these statements are reasonable, there can be no assurance that these expectations will prove to be correct. Forward-looking statements are subject to many risks and uncertainties, and actual results may differ materially from the results discussed in forward-looking statements. In addition to the specific factors discussed in each Registrant's 2012 Form 10-K and in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Form 10-Q, the following are among the important factors that could cause actual results to differ materially from the forward-looking statements.

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

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

Capitalized terms and abbreviations appearing in the unaudited combined notes to condensed financial statements are defined in the glossary. Dollars are in millions, except per share data, unless otherwise noted. When appropriate, PPL, PPL Energy Supply, PPL Electric, LKE, LG&E and KU are named specifically at each discussion heading or therein for their related activities and disclosures.

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

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

The following accounting policy disclosures represent updates to Note 1 in each Registrant's 2012 Form 10-K and should be read in conjunction with those disclosures.

In accordance with a PUC-approved purchase of accounts receivable program, PPL Electric purchases certain accounts receivable from alternative suppliers (including PPL EnergyPlus) at a discount, which reflects a provision for uncollectible accounts. The alternative suppliers have no continuing involvement or interest in the purchased accounts receivable. The purchased accounts receivable are initially recorded at fair value using a market approach based on the purchase price paid and are classified as Level 2 in the fair value hierarchy. During the three and six months ended ~~March 31,~~June 30, 2013, PPL Electric purchased ~~$259~~$220 million and $479 million of accounts receivable from unaffiliated third parties and ~~$77~~$70 million and $147 million from PPL EnergyPlus. During the three and six months ended ~~March 31,~~June 30, 2012, PPL Electric purchased ~~$238~~$184 million and $422 million of accounts receivable from unaffiliated third parties and ~~$82~~$74 million and $156 million from PPL EnergyPlus.

The KPSC approved new lower depreciation rates for LG&E and KU as part of the rate-case settlement agreement reached in

November 2012. The new rates became effective January 1, 2013 and will result in lower depreciation of approximately $19 million ($9 million for LG&E and $10 million for KU) in 2013, exclusive of net additions to PP~~&E.~~&E since the rate case.

Effective January 1, 2013, the Registrants retrospectively adopted accounting guidance issued to enhance disclosures about derivative instruments that either (1) offset on the balance sheet or (2) are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset on the balance sheet.

The adoption of this guidance resulted in enhanced disclosures but did not have a significant impact on the Registrants. See Note 14 for the new disclosures.

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

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

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

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

See Note 2 in PPL's 2012 Form 10-K for a discussion of reportable segments. "Corporate and Other" primarily ~~represents~~includes financing and certain other costs incurred at the corporate level that have not been allocated or assigned to the segments, as well as certain unallocated assets, which isare presented to reconcile segment information to PPL's consolidated results. For 2012, there were no significant costs or assets in this category.

Beginning in 2013, PPL anticipates more costs to be included in the Corporate and Other category primarily due to an anticipated increase in financing at PPL Capital Funding not directly attributable to a particular segment. PPL's ~~recent~~ growth in rate-regulated businesses provides the organization an enhanced corporate-level financing alternative, through PPL Capital Funding, that further enables PPL to support targeted credit profiles cost effectively across all of PPL's rated companies. As a result, PPL plans to further utilize PPL Capital Funding in addition to continued direct financing by the operating companies, as appropriate. The financing costs associated primarily with PPL Capital Funding's ~~future~~new securities issuances, ~~are~~with certain exceptions including the remarketing of the debt component of the Equity Units, have not ~~expected to be~~been directly ~~assignable~~assigned or ~~allocable~~allocated to any segment and generally ~~will be~~have been reflected in Corporate and Other ~~beginning~~ in 2013.

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

~~In April 2013, PPL settled certain forward sale agreements.~~ See Note 7 for ~~additional information.~~information on the repurchase of shares of PPL common stock that substantially offset the issuances for the three months ended June 30, 2013.

For the periods ended ~~March 31,~~June 30, the following were excluded from the computations of diluted EPS because the effect would have been antidilutive.

Reconciliations of income taxes for the periods ended ~~March 31~~June 30 are:

(PPL Energy Supply)

Three Months
2013 2012
Federal income tax on Income (Loss) Before Income Taxes at statutory tax rate - 35% $ (26) $ 170
Increase (decrease) due to:
State income taxes, net of federal income tax benefit (6) 23
Federal income tax credits (3) (4)
State deferred tax rate change (a) (11)
Other (1)
Total increase (decrease) (9) 7
Total income taxes $ (35) $ 177
In July 2013, the U.K. Finance Act 2013 (the Act) was enacted. The Act 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. As a result of these changes, PPL expects to record a deferred tax benefit in the range of $90 million to $100 million in the third quarter of 2013.

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

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

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

At ~~March 31,~~June 30, the total unrecognized tax benefits and related indirect effects that, if recognized, would decrease the effective income tax rate were as follows.

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

for generation-related expenditures should be disallowed in whole or in part. PPL believes that it has established an adequate ~~reserve~~reserves for this contingency.

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

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

In its December 28, 2012 final rate case proceeding order, the PUC directed PPL Electric to file a proposed Storm Damage Expense Rider (SDER) within 90 days following the order. PPL Electric filed its proposed ~~Storm Damage Expense Rider~~SDER with the PUC on March 28, 2013, including requested recovery of the 2012 qualifying storm costs related to Hurricane Sandy, which ~~were~~the PUC previously approved ~~by the PUC~~ for deferral. PPL Electric proposed that the ~~Storm Damage Expense Rider~~SDER become effective on January 1, 2013 for storm costs incurred in 2013, with those costs and the 2012 Hurricane Sandy costs included in rates effective on January 1, 2014. Several parties ~~have~~ filed comments opposing the ~~Storm Damage Expense Rider.~~SDER. PPL Electric ~~will file~~and several other parties filed reply comments byin May 6, 2013. This matter remains pending before the PUC.

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

Under Act 129, EDCs must file an energy efficiency and conservation plan (EE&C Plan) with the PUC and contract with conservation service providers to implement all or a portion of the EE&C Plan. EDCs are able to recover the costs (capped at 2.0% of the EDC's 2006 revenue) of implementing their EE&C Plans. In October 2009, the PUC approved PPL Electric's Phase 1 EE&C Plan ending May 31, 2013.

Act 129 requires EDCs to reduce overall electricity consumption by 1.0% by May 2011 and, by May 2013, reduce overall electricity consumption by 3.0% and reduce peak demand by 4.5%. Although PPL Electric believes it has met the May 2011 requirement, the PUC is not expected to formally to determine compliance for any EDC before the first quarter of 2014. The peak demand reduction must occur for the 100 hours of highest demand, which is determined by actual demand reduction during the June 2012 through September 2012 period. ~~EDCs are able to recover the costs (capped at 2.0% of the EDC's 2006 revenue) of implementing their EE&C Plans. In October 2009, the PUC approved PPL Electric's EE&C Plan.~~ PPL Electric will determine if it met the May 2013 peak demand reduction ~~target~~ and ~~the May 2013~~ energy reduction ~~target~~targets after it completes the final program evaluation in the fourth quarter of 2013.

Act 129 requires the PUC to evaluate the costs and benefits of the EE&C program by November 30, 2013 and adopt additional reductions if the benefits of the program exceed the costs. In August 2012, after receiving input from stakeholders, the PUC issued a Final Implementation Order establishing a three-year Phase II program, ending May 31, 2016, with individual consumption reduction targets for each EDC. PPL Electric's Phase II reduction target is 2.1% of the total energy consumption forecasted by the PUC for the June 1, 2009 through May 31, 2010 baseline year. The PUC did not establish demand reduction targets for the Phase II program. PPL Electric filed its Phase II EE&C Plan with the PUC on November 15, 2012 and, ~~the PUC issued its decision~~ in March 2013, ~~approving~~the PUC approved PPL Electric's Phase II ~~program~~EE&C Plan with minor ~~modifications~~modifications. PPL Electric filed a Revised Phase II EE&C Plan on May 13, 2013 pursuant to ~~a related tariff provision.~~the PUC's March Order. On July 11, 2013, the PUC issued an Order approving PPL Electric's Revised Phase II EE&C Plan. PPL Electric began its Phase II Plan implementation on June 1, 2013.

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 load unless otherwise approved by the PUC. ~~The~~A DSP ~~will be~~is able to recover the costs associated with aits competitive procurement plan.

The PUC has approved PPL Electric's DSP procurement plan for the period January 1, 2011 through May 31, 2013, and PPL Electric 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. In its January 24, 2013 final order, the PUC 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 ~~has~~ filed revised retail competition initiatives and a revised plan consistent with the PUC's January order. ~~These filings remain pending before~~In an order entered on May 23, 2013, the ~~PUC.~~PUC approved PPL Electric's most recent filing with minor changes and PPL Electric began implementing its revised plan on June 1, 2013. See Note 10 for additional information.

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

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

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

Act 11 authorizes the PUC to approve two specific ratemaking ~~mechanisms -~~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.

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

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

hearings and settlement judge procedures a number of issues raised in the 2010 and 2011 formal challenges. Settlement conferences were held in late 2012 and early 2013. In February 2013, the FERC set for evidentiary hearings and settlement judge procedures a number of issues in the 2012 formal challenge and consolidated that challenge with the 2010 and 2011 challenges. PPL Electric filed a request for rehearing of the February Order which remains pending before the FERC. PPL Electric and the group of municipal customers have exchanged confidential settlement proposals and PPL Electric anticipates that there will be additional settlement conferences held in 2013. ~~Several of the municipal customers have filed Notice of Withdrawal of Intervention.~~ PPL and PPL Electric cannot predict the outcome of the foregoing proceedings, which remain pending before the FERC.

Ofgem is currently consulting on the methodology to be used by all network operators to calculate the final line loss incentive/penalty for the DPCR4. In April 2013, Ofgem stated that their ~~current~~ expectation was to issue a decision in the second half of 2013. ~~PPL cannot predict when~~On July 12, 2013, Ofgem issued a decision paper on the process to follow for closing out the line loss incentive/penalty. Based on one element of the decision paper, WPD has concluded that certain data, which had previously served to reduce the liability calculation, could not be included. Additional information in the decision paper has increased the level of uncertainty regarding the ultimate settlement of this ~~matter will~~liability. WPD currently estimates the potential loss exposure to be ~~resolved.~~in the range of $97 million to $251 million. As a result, during the three and six months ended June 30, 2013, WPD ~~had an $89~~recorded a $24 million increase to the liability ~~recorded~~with a reduction to "Utility" revenue on the Statement of Income, increasing the liability to $97 million at ~~March 31,~~June 30, 2013 compared with $94 million at December 31, ~~2012, related~~2012. Other changes to this line loss liability included reductions of $16 million resulting from the ~~close-out of line losses for the DPCR4, with the change due to~~refund being included in tariffs starting in April 2013 and foreign exchange ~~movements.~~ movement during the six months ended June 30, 2013. PPL cannot predict the outcome of this matter.

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

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 ~~March 31,~~June 30, 2013, PPL Energy Supply 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 2017, but is subject to automatic one-year renewals under certain conditions. There were no secured obligations outstanding under this facility at ~~March 31,~~June 30, 2013.

PPL Energy Supply maintains a commercial paper program for up to $750 million to provide an additional financing source to fund its short-term liquidity needs, if and when necessary. Commercial paper issuances are supported by PPL Energy Supply's Syndicated Credit Facility. At ~~March 31,~~June 30, 2013 and December 31, 2012, PPL Energy Supply had ~~$481~~$575 million and ~~$356~~

$356 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheets, at weighted-average interest rates of ~~0.38%~~0.29% and 0.50%.

PPL Electric maintains a commercial paper program for up to $300 million to provide an additional financing source to fund its short-term liquidity needs, if and when necessary. Commercial paper issuances are supported by PPL Electric's Syndicated Credit Facility. At ~~March 31,~~June 30, 2013, PPL Electric had ~~$125~~$85 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheet, at a weighted-average interest rate of ~~0.39%~~0.34%. PPL Electric had no commercial paper outstanding at December 31, 2012.

In April 2013, LG&E and KU each increased the capacity of their commercial paper programs from $250 million to $350 million to provide an additional financing source to fund their short-term liquidity needs, if and when necessary. Commercial paper issuances are supported by LG&E's and KU's Syndicated Credit Facilities. At ~~March 31,~~June 30, 2013 and December 31, 2012, LG&E had ~~$70~~$80 million and $55 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheets, at weighted-average interest rates of ~~0.36%~~0.32% and 0.42%. At ~~March 31,~~June 30, 2013 and December 31, 2012, KU had ~~$115~~$172 million and $70 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheets, at weighted-average interest rates of ~~0.36%~~0.33% and 0.42%.

See Note 11 for discussion of intercompany borrowings.

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

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

In March 2013, PPL Capital Funding issued $450 million of ~~its~~ 5.90% Junior Subordinated Notes due 2073. PPL Capital Funding received proceeds of $436 million, net of underwriting fees, which ~~will be~~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 June 2013, PPL repurchased 930,000 shares of common stock for $28 million to substantially offset second quarter issuances of common stock under stock-based compensation plans. See Note 4 for further information.

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

See Note 7 in PPL's 2012 Form 10-K for information on the ~~2010~~2011 Equity Units (with respect to which the related ~~$1.150 billion~~$978 million of Notes are expected to be remarketed in the ~~second~~first quarter of ~~2013) and the 2011 Equity Units.~~2014).

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

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

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 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.

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

During the ~~three~~six months ended ~~March 31,~~June 30, 2013, the following distributions and capital contributions occurred:

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 projects, sell, cancel or expand them, execute tolling agreements or pursue other options. Any resulting transactions may impact future financial results.

See Note 10 in PPL's and PPL Energy Supply's 2012 Form 10-K for information on the April 13, 2012 Ironwood Acquisition. See Note 7 for information on the February 2013 exchange of a portion of long-term debt assumed through consolidation as a result of the acquisition.

The NRC continues to review the COLA submitted by a PPL Energy Supply subsidiary, PPL Bell Bend, LLC (PPL Bell Bend) for the proposed Bell Bend nuclear generating unit (Bell Bend) to be built adjacent to ~~the~~PPL's Susquehanna nuclear generating plant. PPL Bell Bend does not expect to complete the COLA review process with the NRC prior to ~~2015.~~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 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 $205 million ~~through 2015~~ on the COLA and other permitting costs necessary for construction, which is expected to be sufficient to fund the project through receipt of the license. At ~~March 31,~~June 30, 2013 and December 31, 2012, ~~$159~~$165 million and $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. See Note 8 in PPL's and PPL Energy Supply's 2012 Form 10-K for additional information.

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

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 Company 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~~U.S. District Court for the District of Columbia by various environmental groups, including the Sierra Club, challenging the ROD and seeking to prohibit its implementation, and on December 6, 2012, the groups filed a petition for injunctive relief seeking to prohibit all construction activities until the court issues a final decision on the complaint. PPL Electric has intervened in the lawsuit. On February 25, 2013, the District Court denied Plaintiffs' Motion for Preliminary Injunction and set a briefing schedule. However, plaintiffs have the right to reinstate the motion if the District Court has not ruled on the lawsuit and construction is imminent. The chosen route had previously been approved by the PUC and the New Jersey Board of Public Utilities.

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

Construction activities have begun on portions of the 101-mile route in Pennsylvania. The line is expected to be completed before the peak summer demand period of 2015. At ~~March 31,~~June 30, 2013, PPL Electric's estimated share of the project cost was $630 million.

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

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 ~~in rate base~~ but denied the ~~request~~incentive for a 100 basis point adder to the return on ~~equity incentive.~~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.

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

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

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

In May 2012, PPL Electric filed a plan with the PUC to purchase its electric supply for default customers for the period June 2013 through May 2015. The PUC approved the plan in January 2013. The approved plan proposes that PPL Electric procure this electricity through competitive solicitations twice each plan year beginning in April 2013. The solicitations will include layered short-term full-requirement products ranging from three months to 12 months for residential and small commercial and industrial PLR customers as well as a recurring 12 month spot market product for large commercial and industrial PLR customers. To date, one of four solicitations has been completed.

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

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

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

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

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

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

In August 2010, PPL Montana filed a petition for a writ of certiorari with the U.S. Supreme Court requesting review of this matter. In June 2011, the U.S. Supreme Court granted PPL Montana's petition, and in February 2012 issued a decision overturning the Montana Supreme Court decision and remanded the case to the Montana Supreme Court for further proceedings consistent with the

U.S. Supreme Court's opinion. In April 2012, the case was returned by the Montana Supreme Court to the Montana First Judicial District Court. Further proceedings have not yet been scheduled by the District Court. PPL Montana has concluded it is not probable, but it remains reasonably possible, that a loss has been incurred. While unable to estimate a range of loss, PPL Montana believes that any such amount would not be material.

In July 2012, PPL Montana received a Notice of Intent to Sue (Notice) for violations of the Clean Air Act at Colstrip Steam Electric Station (Colstrip) from counsel on behalf of the Sierra Club and the Montana Environmental Information Center (MEIC). An Amended Notice was received on September 4, 2012, and a Second Amended Notice was received in October 2012. A Supplemental Notice was received in December 2012. The Notice, Amended Notice, Second Amended Notice and Supplemental Notice (the Notices) were all addressed to the Owner or Managing Agent of Colstrip, and to the other Colstrip co-owners: Avista Corporation, Puget Sound Energy, Portland General Electric Company, Northwestern Energy and PacificCorp. The Notices allege certain violations of the Clean Air Act, including New Source Review, Title V and opacity requirements.

On March 6, 2013, the Sierra Club and MEIC filed a complaint against PPL Montana and the other Colstrip co-owners in the U.S. District Court, District of Montana, Billings Division. PPL Montana operates Colstrip on behalf of the co-owners. The complaint is generally consistent with the prior Notices and lists 39 separate claims for relief. All but three of the claims allege Prevention of Significant Deterioration (PSD) related violations under the federal Clean Air Act for various plant maintenance projects completed since 1992. For each such project or set of projects, there are separate claims for failure to obtain a PSD permit, for failure to obtain a Montana Air Quality Permit to operate after the project(s) were completed and for operating after completion of such project(s) without "Best Available Control Technology". The remaining three claims relate to the alleged failure to update the Title V operating permit for Colstrip to reflect the alleged major modifications described in the other claims, allege that the previous Title V compliance certifications were incomplete because they did not address the major plant modifications, and that numerous opacity violations have occurred at the plant since 2007.

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

See Note 6 for information on regulatory matters related to utility rate regulation. See Note 15 to the Registrants' 2012 Form 10-K for a discussion of Enactment of Financial Reform Legislation.

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

appeals of the FERC's order. PPL, PPL Energy Supply and PPL Electric cannot predict the outcome of this proceeding or the economic impact on their businesses or operations, or the markets in which they transact business.

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

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

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. 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 paid $75 thousand to resolve the City of Tacoma's $23 million claim. The settlement does not resolve the remaining claim outstanding at ~~March 31,~~June 30, 2013, by the City of Seattle, for approximately $50 million. In April 2013, the FERC issued an order on reconsideration allowing the parties to seek refunds for the period January 2000 through December 2000. As a result, the City of Seattle may be able to seek refunds from PPL Montana for such period. Hearings have been scheduled to begin in August 2013.

Although PPL and its subsidiaries believe 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.

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.

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.

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, certain costs of complying with the 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.

In July 2011, the EPA adopted the CSAPR. The CSAPR replaced the EPA's previous CAIR which was invalidated in July 2008 by the U.S. Court of Appeals for the District of Columbia Circuit ~~(the~~(Circuit Court) ~~in July 2008.~~. CAIR subsequently was effectively reinstated by the Circuit Court in December 2008, pending finalization of the ~~Transport Rule.~~CSAPR. Like CAIR, CSAPR ~~only applied to PPL's fossil-fueled generating plants located~~targeted sources in ~~Kentucky and Pennsylvania~~the eastern U.S. and required reductions in sulfur dioxide and nitrogen oxides in two phases (2012 and 2014).

In December 2011, the Circuit Court stayed implementation of the CSAPR and left CAIR in effect pending a final decision on the validity of the rule. In August 2012 the Circuit Court issued a ruling invalidating CSAPR, remanding the rule to the EPA for further action, and leaving CAIR in place during the interim. ~~A further revised rule is not expected from~~On June 24, 2013, the ~~EPA~~U.S. Supreme Court granted the EPA's petition for ~~at least two years.~~review of the Circuit Court's August 2012 decision.

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.

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

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. On ~~February 15,~~July 25, 2013, the EPA ~~proposed to designate~~designated as non-attainment areas part of Yellowstone County in Montana (Billings area), primarily the Corette plant and its immediate vicinity, and part of Jefferson County in ~~Kentucky, as non-attainment. Final~~Kentucky. These designations ~~of non-attainment areas are due~~will become final 60 days after publication in ~~June 2013, and attainment~~the Federal Register. Attainment must be achieved by 2018.

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

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

Energy commodity contracts for electricity, gas, oil and/or emission allowances are generally valued using the income approach, except for exchange-traded derivative gas and oil contracts, which are valued using the market approach and are classified as Level 1. When the lowest level inputs that are significant to the fair value measurement of a contract are observable, the contract is classified as Level 2. Level 2 contracts are valued using inputs which may include quotes obtained from an exchange (where there is insufficient market liquidity to warrant inclusion in Level 1), binding and non-binding broker quotes, prices posted by ISOs or published tariff rates. Furthermore, independent quotes are obtained from the market to validate the forward price curves. Energy commodity contracts include forwards, futures, swaps, options and structured transactions and may be offset with similar positions in exchange-traded markets. To the extent possible, fair value measurements utilize various inputs that include quoted prices for similar contracts or market-corroborated inputs. In certain instances, these contracts may be valued using models, including standard option valuation models and standard industry models. For example, the fair value of a full-requirement sales contract that delivers power to an illiquid delivery point may be measured by valuing the nearest liquid trading point plus the value of the basis between the two points. The basis input may be from market quotes or historical prices.

When unobservable inputs are significant to the fair value measurement, a contract is classified as Level 3. Level 3 contracts are valued using PPL proprietary models which include significant unobservable inputs such as delivery at a location where pricing is unobservable, assumptions for customer migration or delivery dates that are beyond the dates for which independent quotes are available. Forward transactions, including forward transactions classified as Level 3, are analyzed by PPL's Risk Management department, which reports to the Chief Financial Officer (CFO). Accounting personnel, who also report to the CFO, interpret the analysis quarterly to appropriately classify the forward transactions in the fair value hierarchy. Valuation techniques are evaluated periodically. Additionally, Level 2 and Level 3 fair value measurements include adjustments for credit risk based on PPL's own creditworthiness (for net liabilities) and its counterparties' creditworthiness (for net assets). PPL's credit department assesses all reasonably available market information which is used by accounting personnel to calculate the credit valuation adjustment.

In certain instances, energy commodity contracts are transferred between Level 2 and Level 3. The primary reasons for the transfers during 2013 and 2012 were changes in the availability of market information and changes in the significance of the unobservable inputs utilized in the valuation of the contract. As the delivery period of a contract becomes closer, market information may become available. When this occurs, the model's unobservable inputs are replaced with observable market information.

To manage interest rate risk, PPL, LKE, LG&E and KU use interest rate contracts such as forward-starting swaps, floating-to-fixed swaps and fixed-to-floating swaps. To manage foreign currency exchange risk, PPL uses foreign currency contracts such as forwards, options and cross-currency swaps that contain characteristics of both interest rate and foreign currency contracts. An income approach is used to measure the fair value of these contracts, utilizing readily observable inputs, such as forward interest rates (e.g., LIBOR and government security rates) and forward foreign currency exchange rates (e.g., GBP and Euro), as well as inputs that may not be observable, such as credit valuation adjustments. In certain cases, market information cannot practicably be obtained to value credit risk and therefore internal models are relied upon. These models use projected probabilities of default and estimated recovery rates based on historical observances. When the credit valuation adjustment is significant to the overall valuation, the contracts are classified as Level 3. For PPL, the primary reason for the transfers during 2013 and 2012 was the change in the significance of the credit valuation adjustment. Cross-currency swaps classified as Level 3 are valued by PPL's Corporate Finance department, which reports to the CFO. Accounting personnel,

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

The debt securities held in the NDT funds at ~~March 31,~~June 30, 2013 have a weighted-average coupon of ~~4.12%~~3.99% and a weighted-average maturity of ~~8.1~~7.8 years.

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

The fair value of auction rate securities is estimated using an income approach that includes readily observable inputs, such as principal payments and discount curves for bonds with credit ratings and maturities similar to the securities, and unobservable inputs, such as future interest rates that are estimated based on the SIFMA Index, creditworthiness, and liquidity assumptions driven by the impact of auction failures. When the present value of future interest payments is significant to the overall valuation, the auction rate securities are classified as Level 3. The primary reason for the transfers in and out of Level 3 in 2013 and 2012 was the change in discount rates and SIFMA Index.

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

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

The carrying value of short-term debt (including notes between affiliates), when outstanding, ~~represents or~~ approximates fair value due to the variable interest rates associated with the financial instruments and is classified as Level 2.

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

At ~~March 31,~~June 30, 2013, PPL had credit exposure of $1.3 billion from energy trading partners, excluding the effects of netting arrangements, reserves and collateral. As a result of netting arrangements, reserves and collateral, PPL's credit exposure was reduced to ~~$544~~$669 million. The top ten counterparties accounted for ~~$324~~$339 million, or ~~60%~~51%, of this exposure and all had investment grade credit ratings from S&P or Moody's.

At ~~March 31,~~June 30, 2013, PPL Energy Supply had credit exposure of $1.3 billion from energy trading partners, excluding exposure from related parties and the effects of netting arrangements, reserves and collateral. As a result of netting arrangements, reserves and collateral, this credit exposure was reduced to ~~$543~~$667 million. The top ten counterparties accounted for ~~$324~~$339 million, or ~~60%~~51%, of this exposure and all had investment grade credit ratings from S&P or Moody's. See Note 11 for information regarding the related party credit exposure.

PPL Electric is exposed to credit risk under energy supply contracts (including its supply contracts with PPL EnergyPlus); however, its PUC-approved cost recovery mechanism is anticipated to substantially eliminate this exposure.

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

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

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

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

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

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

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

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

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

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

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

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

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

PPL, LKE and LG&E had posted cash collateral under master netting arrangements of ~~$27~~$22 million and $32 million at ~~March 31,~~June 30, 2013 and December 31, 2012.

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

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

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

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

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

Certain derivative contracts have qualified for hedge accounting so that the effective portion of a derivative's gain or loss is deferred in AOCI and reclassified into earnings when the forecasted transaction occurs. Certain cash flow hedge positions were dedesignated during the ~~three~~six months ended ~~March 31, 2013. The fair value of~~June 30, 2013 and 2012 and the ~~hedges at December 31, 2012~~unamortized portion remained in AOCI because the original forecasted transaction is still expected to occur. There were no active cash flow hedges ~~during the three months ended March 31,~~at June 30, 2013. At ~~March 31,~~June 30, 2013, the accumulated net unrecognized after-tax gains (losses) that are expected to be reclassified into earnings during the next 12 months were ~~$99~~$71 million for PPL and PPL Energy Supply. Cash flow hedges are discontinued if it is no longer probable that the original forecasted transaction will occur by the end of the originally specified time periods and any amounts previously recorded in AOCI are reclassified into earnings once it is determined that the hedge transaction is probable of not occurring. For the three and six months ended ~~March 31,~~June 30, 2013 and 2012, such reclassifications were insignificant.

For the three and six months ended ~~March 31,~~June 30, 2013 and 2012, hedge ineffectiveness associated with energy derivatives was insignificant.

Many derivative contracts economically hedge the commodity price risk associated with electricity, natural gas, oil and other commodities but do not receive hedge accounting treatment because they were not eligible for hedge accounting or because

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

Examples of economic activity may include hedges on sales of baseload generation, certain purchase contracts used to supply full-requirement sales contracts, FTRs or basis swaps used to hedge basis risk associated with the sale of competitive generation or supplying full-requirement sales contracts, Spark Spread hedging contracts, retail electric and natural gas activities, and fuel oil swaps used to hedge price escalation clauses in coal transportation and other fuel-related contracts. PPL Energy Supply also uses options, which include the sale of call options and the purchase of put options tied to a particular generating unit. Since the physical generating capacity is owned, price exposure is generally capped at the price at

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

At ~~March 31,~~June 30, 2013, the net volumes of derivative (sales)/purchase contracts used in support of the various strategies discussed above were as follows.

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

Interest rate risks include exposure to adverse interest rate movements for outstanding variable rate debt and for future anticipated financings. Financial interest rate swap contracts that qualify as cash flow hedges may be entered into to hedge

At ~~March 31,~~June 30, 2013, PPL held a notional position in cross-currency interest rate swaps totaling $1.3 billion that range in maturity through 2028 to hedge the interest payments and principal of WPD's U.S. dollar-denominated senior notes.

For the three and six months ended ~~March 31,~~June 30, 2013 and 2012, hedge ineffectiveness associated with interest rate derivatives was insignificant.

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

At ~~March 31,~~June 30, 2013, the accumulated net unrecognized after-tax gains (losses) on qualifying derivatives that are expected to be reclassified into earnings during the next 12 months were ~~$(11)~~$(12) million. Amounts are reclassified as the hedged interest payments are made.

In November 2012 and April 2013, LG&E and KU entered into forward-starting interest rate swaps with PPL that hedge the interest payments on new debt that is expected to be issued in 2013. These hedging instruments have terms identical to forward-starting swaps entered into by PPL with third parties. Realized gains and losses from the swaps are probable of recovery through regulated rates; as such, the fair value of these derivatives were reclassified from AOCI to regulatory assets or liabilities. The gains and losses will be recognized in "Interest Expense" on the Statements of Income over the life of the underlying debt when the hedged transaction occurs. For the three and six months ended ~~March 31,~~June 30, 2013, there was no hedge ineffectiveness associated with the interest rate derivatives. At ~~March 31,~~June 30, 2013, LG&E and KU each held contracts with aggregate notional amounts of ~~$150~~$250 million that range in maturity through 2043.

LG&E enters into interest rate swap contracts that economically hedge interest payments on variable rate debt. Because realized gains and losses from the swaps, including a terminated swap contract, are recoverable through regulated rates, any subsequent changes in fair value of these derivatives are included in regulatory assets or liabilities until they are realized as interest expense. Realized gains and losses are recognized in "Interest Expense" on the Statements of Income when the hedged transaction occurs. At ~~March 31,~~June 30, 2013, LG&E held contracts with a notional amount of $179 million that range in maturity through 2033. ~~The fair values of these contracts were recorded as liabilities of $54 million and $58 million at March 31, 2013 and December 31, 2012 with equal offsetting amounts recorded as regulatory assets.~~

PPL is exposed to foreign currency risk, primarily through investments in U.K. affiliates. PPL has adopted a foreign currency risk management program designed to hedge certain foreign currency exposures, including firm commitments, recognized assets or liabilities, anticipated transactions and net investments. In addition, PPL enters into financial instruments to protect against foreign currency translation risk of expected earnings.

PPL enters into foreign currency contracts on behalf of a subsidiary to protect the value of a portion of its net investment in WPD. The contracts outstanding at ~~March 31,~~June 30, 2013 had a notional amount of ~~£162~~£166 million (approximately ~~$261~~$263 million based on contracted rates). The settlement dates of these contracts range from ~~May~~November 2013 through ~~December 2013. The net fair value of these contracts at March 31, 2013 and December 31, 2012 was an asset (liability) of $15 million and $(2) million.~~June 2014.

Additionally, a PPL Global subsidiary that has a U.S. dollar functional currency entered into a GBP intercompany ~~loan~~loans payable with a PPL WEM ~~subsidiary~~subsidiaries that ~~has a~~have GBP functional currency. The ~~loan qualifies~~loans qualify as a net investment hedge for the PPL Global subsidiary. As such, the foreign currency gains and losses on the intercompany ~~loan~~loans for the PPL Global subsidiary are recorded to the foreign currency translation adjustment component of ~~AOCI.~~OCI. At ~~March 31,~~June 30, 2013, the outstanding ~~balance~~balances of the intercompany ~~loan was £46~~loans were £94 million (approximately ~~$69~~$142 million based on spot rates).

At ~~March 31,~~June 30, 2013, PPL had ~~$25~~$29 million of accumulated net investment hedge gains (losses), after-tax, in the foreign currency translation adjustment component of AOCI, compared to $14 million of gains (losses), after-tax at December 31, 2012.

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

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

See Notes 1 and 19 in each Registrant's 2012 Form 10-K for additional information on accounting policies related to derivative instruments.

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

The after-tax balances of accumulated net gains (losses) (excluding net investment hedges) in AOCI were ~~$114~~$102 million and $132 million at ~~March 31,~~June 30, 2013 and December 31, 2012. The after-tax balances of accumulated net gains (losses) (excluding net investment hedges) in AOCI were ~~$471~~$333 million and $527 million at ~~March 31,~~June 30, 2012 and December 31, 2011.

The following tables present the pre-tax effect of derivative instruments recognized in income, OCI or regulatory assets and regulatory liabilities for the ~~three months~~periods ended ~~March 31.~~June 30, 2013.

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

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

The after-tax balances of accumulated net gains (losses) ~~(excluding net investment hedges)~~ in AOCI were ~~$181~~$144 million and $211 million at ~~March 31,~~June 30, 2013 and December 31, 2012. The after-tax balances of accumulated net gains (losses) ~~(excluding net investment hedges)~~ in AOCI were ~~$522~~$405 million and $605 million at ~~March 31,~~June 30, 2012 and December 31, 2011.

The following tables present the pre-tax effect of derivative instruments recognized in income or OCI for the ~~three months~~periods ended ~~March 31.~~June 30, 2013.

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

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

The following tables present the pre-tax effect of derivative instruments designated as cash flow hedges that are recognized in ~~income or regulatory assets and~~ regulatory liabilities for the ~~three months~~periods ended ~~March 31.~~June 30, 2013.

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

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

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

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

The following tables present the pre-tax effect of derivatives not designated as hedging instruments recognized in income or regulatory assets ~~and regulatory liabilities~~ for the ~~three months~~periods ended ~~March 31.~~June 30, 2013.

~~(KU)~~

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

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

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

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

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

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

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

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

The most significant ARO recorded by PPL and PPL Energy Supply relates to the decommissioning of the Susquehanna nuclear plant. The accrued nuclear decommissioning obligation was ~~$322~~$329 million and $316 million at ~~March 31,~~June 30, 2013 and December 31, 2012.

Assets in the NDT funds are legally restricted for purposes of settling PPL's and PPL Energy Supply's ARO related to the decommissioning of the PPL Susquehanna nuclear plant. The aggregate fair value of these assets was ~~$764~~$771 million and $712 million at ~~March 31,~~June 30, 2013 and December 31, 2012, and is included in "Nuclear plant decommissioning trust funds" on the Balance Sheets. See Notes 13 and 17 for additional information on these assets.

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

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

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

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

The following table shows proceeds from and realized gains and losses on sales of available-for-sale securities for the periods ended ~~March 31.~~ June 30.

The after-tax changes in AOCI by component for the three and six months ended ~~March 31,~~June 30, 2013 were as follows.

The following table presents the gains (losses) and related income taxes for reclassifications from AOCI for the ~~three months~~periods ended ~~March 31,~~June 30, 2013. The defined benefit plan components of AOCI are not reflected in their entirety in the statement of income during the ~~period;~~periods; rather, they are included in the computation of net periodic defined benefit costs (credits). See Note 9 for additional information.

For the three and six months ended ~~March 31,~~June 30, 2013, the changes in AOCI and the effect of reclassifications from AOCI on the statement of income for LKE and KU were insignificant.

Effective January 1, 2014, the Registrants will retrospectively adopt accounting guidance for the recognition, measurement and disclosure of certain obligations resulting from joint and several liability arrangements when the amount of the obligation is fixed at the reporting date. If the obligation is determined to be in the scope of this guidance, it will be measured as the sum of the amount the reporting entity agreed to pay on the basis of its arrangements among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. This guidance also requires additional disclosures for these obligations.

The Registrants are assessing the potential impact of adoption, which ~~could~~is not expected to be material.

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

Effective July 17, 2013, the Registrants adopted accounting guidance that permits the Fed Funds Swap Rate (or Overnight Index Swap Rate) to be used as a U.S. benchmark interest rate for hedge accounting purposes, in addition to interest rates on direct U.S. Treasury obligations and the London Interbank Offer Rate. This guidance also removed the restrictions on using different benchmark interest rates for similar hedges.

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

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

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

The following should be read in conjunction with PPL's Condensed Consolidated Financial Statements and the accompanying Notes and with PPL's 2012 Form 10-K. Capitalized terms and abbreviations are defined in the glossary. Dollars are in millions, except per share data, unless otherwise noted.

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

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

PPL's principal subsidiaries are shown below (* denotes an SEC registrant):

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

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

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

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

Net Income Attributable to PPL Shareowners for the periods ended ~~March 31~~June 30 by segment, and reconciled to PPL's consolidated results, was:

Earnings for the three and six months ended ~~March 31,~~June 30, 2013 ~~decreased 24%~~increased 49% and 1% compared with the same periods in 2012. See "Results of Operations" below for further discussion of PPL's business segments, details of special items and analysis of the consolidated results of operations.

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

The additional environmental requirements discussed above have also resulted in LKE's projected $2.1 billion in capital investment over the next five years and the anticipated retirement by 2015 of five coal-fired units with a combined summer capacity rating of 726 MW. KU retired the 71 MW unit at the Tyrone plant ~~was~~in February 2013. The retirement of the five coal-fired units is not ~~impaired at March 31, 2013, it is reasonably possible~~expected to have a material impact on the financial condition or results of operations of PPL. See Note 8 to the Financial Statements in PPL's 2012 Form 10-K for additional information regarding the anticipated retirement of these units as well as plans to build a combined-cycle natural gas facility in Kentucky.

The KPSC has adopted a series of regulatory mechanisms (ECR, DSM, GLT, fuel adjustment clause, gas supply clause and recovery on certain construction work-in-progress) that ~~an impairment could occur~~provide for recovery of prudently incurred costs. The Kentucky utility businesses are impacted by changes in ~~future periods, as higher priced sales contracts settle, adversely impacting projected cash flows.~~customer usage levels which can be driven by a number of factors including weather conditions and economic factors that impact the load utilized by industrial and commercial customers.

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

In the spring of 2013, PPL ~~Energy Supply will begin making~~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 ~~will be~~were made during the Unit 2 refueling outage and an additional planned outage for Unit 1. Additional modifications will be made during planned outages in 2014 and 2015. Following completion of ~~the~~these modifications, PPL ~~Energy Supply plans to~~Susquehanna will continue monitoring the turbine blades using enhanced diagnostic equipment.

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

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

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

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

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

As previously reported, on July 1, 2013, WPD ~~published a draft of~~filed its ~~2015 - 2023~~ business plan with Ofgem for the RIIO-ED1 period and gave a webcast presentation to highlight the contents of the plan as well as provide potential earnings ranges of the U.K. Regulated segment for the first two years of the RIIO-ED1 period. The ranges provided are subject to certain assumptions including foreign currency exchange rates, interest rates, inflation rates and WPD being "fast-tracked" through the price control review process and therefore earning the fast-track bonus revenue. These assumptions and other future events affecting the potential earnings ranges are subject to significant uncertainties. Although management believes that the business plan submitted by WPD meets the criteria to be fast-tracked, management cannot predict the outcome of the price control review process or the future financial effect on ~~its website in March 2013 in order to solicit feedback from stakeholders on its plan prior to submission to Ofgem in July 2013.~~WPD's businesses of the RIIO-ED1 regulatory framework. See "Item 1. Business - Background - U.K. Regulated Segment - Revenue and Regulation" in the 2012 Form 10-K for additional information. ~~At this time, WPD cannot predict the outcome or the future financial impact of this matter.~~

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.

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.

~~Transmission rates are regulated by the FERC.~~ PPL Electric's transmission revenues are billed in accordance with a FERC-approved PJM open access transmission tariff that utilizes a formula-based rate recovery mechanism. The formula rate is calculated, in part, based on financial results as reported in PPL Electric's annual FERC Form No. 1, filed underElectric must follow FERC's Uniform System of Accounts, ~~(USOA). PPL Electric must follow FERC's USOA,~~ which requires subsidiaries to be presented, for FERC reporting purposes, using the equity method of accounting unless a waiver has been ~~issued.~~granted. The FERC has granted waivers of this requirement to other utilities when ~~such waiver~~alternative accounting would more accurately present the integrated operations of ~~the utilities~~a utility and ~~their~~its subsidiaries. In March 2013, as part of a routine FERC audit of PPL and its subsidiaries, PPL Electric determined that it never obtained a required waiver ~~of the use~~ of the equity method of accounting requirement for its subsidiary, PPL Receivables Corporation (PPL Receivables). PPL Receivables is a wholly owned subsidiary of PPL Electric, formed in 2004 to purchase eligible accounts receivable and unbilled revenue of PPL Electric to collateralize commercial paper issuances to reduce borrowing costs. for FERC Form No. 1 reporting. In March 2013, PPL Electric filed a request for waiver with the FERC that, if approved, would allow it to continue to consolidate the results of PPL Receivables with the results of PPL Electric, as it has done since 2004. ~~While~~If PPL Electric ~~may ultimately be~~is not successful in obtaining ~~a waiver from FERC, FERC may require PPL Electric to re-issue one or more of its prior FERC Form No. 1 filings in either the audit proceeding or~~ the waiver, ~~proceeding. If re-issuance of FERC Form No. 1 filings were required by FERC, PPL Electric's~~its revenue requirement calculated under the formula rate could be negatively impacted. The impact, if any, is not known at this time but could range between $0 and $40 million, pre-tax. PPL Electric cannot predict the outcome of the waiver or audit proceedings, which remain pending before the FERC. See Note 6 to the Financial Statements for additional information.

In ~~connection with an April 2012 registered public offering~~the second quarter of ~~9.9~~2013, PPL settled forward sale agreements for 10.5 million shares of PPL common stock PPL entered into forward sale agreements with two counterparties. In conjunction with that offering, the underwriters exercised an overallotment option and PPL entered into additional forward sale agreements covering 591 thousand shares of PPL common stock.

During 2013, ~~two~~several events ~~will occur~~occurred related to the components of the 2010 Equity Units. On July 1, PPL will receive proceeds of $1.150 billion through the issuance of PPL common stock to settle the 2010 Purchase Contracts, and in the second quarter of 2013, PPL Capital Funding expects to remarket the 4.625% Junior Subordinated Notes due 2018. During the first quarter of 2013, financing plans were finalized to remarket the ~~debt~~Junior Subordinated Notes component of the 2010 Equity ~~Units.~~Units and in the second quarter, PPL Capital Funding completed the remarketing of the Junior Subordinated Notes and the simultaneous exchange into Senior Notes. The transaction resulted in a $10 million loss on extinguishment of the Junior Subordinated Notes. Additionally, in July 2013, PPL issued 40 million shares of common stock at $28.73 per share to settle the 2010 Purchase Contracts. PPL received net cash proceeds of $1.150 billion, which will be used to repay short-term and long-term debt obligations and for other general corporate purposes. See Note 7 to the Financial Statements for additional information.

The If-Converted Method of calculating diluted EPS was applied to the Equity Units beginning in the first quarter of ~~2013 resulting~~2013. This resulted in $15 million and $30 million of interest charges (after-tax) being added back to ~~net~~ income available to PPL common shareowners, and 7273 million shares of PPL common stock being treated as ~~outstanding.~~outstanding for the three and six months ended June 30, 2013. See Note 4 to the Financial Statements for the impact on the calculation of diluted EPS.

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

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

The following discussion provides a review of results by reportable segment and a description of key factors by segment expected to impact future earnings. This section ends with "Statement of Income Analysis," which includes explanations of

Kentucky Gross Margins, Pennsylvania Gross Delivery Margins and Unregulated Gross Energy Margins and significant changes in principal line items on PPL's Statements of Income, comparing the three and six months ended ~~March 31,~~June 30, 2013 with the same periods in 2012.

The results for interim periods can be disproportionately influenced by numerous factors and developments and by seasonal variations. As such, the results of operations for interim periods do not necessarily indicate results or trends for the year or future periods.

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

·

Lower other operation and maintenance primarily due to $14 million of lower costs due to the timing and scope of scheduled coal plant maintenance outages, partially offset by $4 million of adjustments to regulatory assets and liabilities.The capacity (summer rating) of PPL's regulated and competitive electricity generation facilities at June 30, 2013 was:

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

Lease Interest

Primary Fuel

in MW (a)

Regulated

Coal (c)

5,940

Natural Gas/Oil (b)

2,098

·	~~Higher income taxes primarily due to higher pre-tax income.~~Hydro	78

Total Regulated		8,116

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

Total Competitive		10,614

Total		18,730

(a)

The ~~following after-tax gains (losses), which management considers special items, also impacted~~capacity of generation units is based on a number of factors, including the ~~Kentucky Regulated segment's results during~~operating experience and physical conditions of the ~~periods ended March 31.~~

97

Income Statement Three Months
Line Item 2013 2012

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

~~2013 Outlook~~

~~Excluding special items, PPL projects higher segment earnings in 2013 compared with 2012, primarily driven by electric~~units, and ~~gas base rate increases, returns on additional environmental capital investments, and load growth, partially offset by higher operation and maintenance expense.~~

~~Earnings in future periods are subject~~may be revised periodically to ~~various risks and uncertainties.~~reflect changed circumstances. 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"~~2. Properties" in PPL's 2012 Form 10-K for ~~a discussion of the risks, uncertainties and factors that may impact future earnings.~~

~~U.K. Regulated Segment~~

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

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

Three Months
2013 2012 % Change

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

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

		~~Three Months~~

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

~~(a)~~

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

98

~~U.K.~~

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

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

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

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

Income Statement Three Months
Line Item 2013 2012

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

~~(a)~~

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

~~2013 Outlook~~

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

~~Earnings in future periods are subject to various risks and uncertainties.~~

(b)	Includes leasehold interests. See ~~"Forward-Looking Information," the rest of this Item 2, and Notes 5, 6 and 10~~Note 11 to the Financial Statements ~~in this Form 10-Q and "Item 1. Business" and "Item 1A. Risk Factors"~~ in PPL's 2012 Form 10-K for additional information.

(c)

Includes units that are jointly owned or subject to a ~~discussion~~power purchase agreement. Each owner is entitled to its proportionate share of the ~~risks, uncertainties~~unit's total output and ~~factors that may impact future earnings.~~funds its proportionate share of fuel and other operating costs. See Notes 14 and 15 to the Financial Statements in PPL's 2012 Form 10-K for additional information.

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

Business Strategy

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

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

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

Financial and Operational Developments

Net Income Attributable to PPL Shareowners

Net Income Attributable to PPL Shareowners for the periods ended June 30 by segment, and reconciled to PPL's consolidated results, was:

99

	Three Months				Six Months
	2013		2012		2013		2012

Kentucky Regulated	$	49	$	34	$	134	$	76
U.K. Regulated		245		196		558		361
Pennsylvania Regulated		45		29		109		62
Supply		77		12		31		313
Corporate and Other (a)		(11)				(14)
Net Income Attributable to PPL Shareowners	$	405	$	271	$	818	$	812

EPS - basic	$	0.68	$	0.46	$	1.39	$	1.39
EPS - diluted (b)	$	0.63	$	0.46	$	1.28	$	1.39

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

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

Earnings for the three and six months ended June 30, 2013 increased 49% and 1% compared with the same periods in 2012. See "Results of Operations" below for further discussion of PPL's business segments, details of special items and analysis of the consolidated results of operations.

Economic and Market Conditions

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

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

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

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

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

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

100

Susquehanna Turbine Blade Inspection

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

Rate Case Proceedings

Pennsylvania

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

Kentucky

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

Ofgem Review of Line Loss Calculation

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

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

RIIO-ED1

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

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

Distribution System Improvement Charge

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

101

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

FERC Formula Rates

PPL Electric must follow FERC's Uniform System of Accounts, which requires subsidiaries to be presented, for FERC reporting purposes, using the equity method of accounting unless a waiver has been granted. The FERC has granted waivers of this requirement to other utilities when alternative accounting would more accurately present the integrated operations of a utility and its subsidiaries. In March 2013, as part of a routine FERC audit of PPL and its subsidiaries, PPL Electric determined that it never obtained a required waiver of the equity method accounting requirement for its subsidiary, PPL Receivables Corporation (PPL Receivables) for FERC Form No. 1 reporting. In March 2013, PPL Electric filed a request for waiver with the FERC that, if approved, would allow it to continue to consolidate the results of PPL Receivables with the results of PPL Electric, as it has done since 2004. If PPL Electric is not successful in obtaining the waiver, its revenue requirement calculated under the formula rate could be negatively impacted. The impact, if any, is not known at this time but could range between $0 and $40 million, pre-tax. PPL Electric cannot predict the outcome of the waiver or audit proceedings, which remain pending before the FERC. See Note 6 to the Financial Statements for additional information.

Equity Forward Agreements

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

Equity Units

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

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

Tax Litigation

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

U.K. Tax Rate Change

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

Results of Operations

The following discussion provides a review of results by reportable segment and a description of key factors by segment expected to impact future earnings. This section ends with "Statement of Income Analysis," which includes explanations of

102

Kentucky Gross Margins, Pennsylvania Gross Delivery Margins and Unregulated Gross Energy Margins and significant changes in principal line items on PPL's Statements of Income, comparing the three and six months ended June 30, 2013 with the same periods in 2012.

The results for interim periods can be disproportionately influenced by numerous factors and developments and by seasonal variations. As such, the results of operations for interim periods do not necessarily indicate results or trends for the year or future periods.

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

Pennsylvania Regulated Segment

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

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

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

99

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

~~Three Months~~

Supply

Segment

~~Pennsylvania Gross Delivery Margins~~

98

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


		Ownership or
		Lease Interest
Primary Fuel		in MW (a)

Regulated
	Coal (c)	5,940
	Natural Gas/Oil (b)	2,098
	Hydro	78

Total Regulated		8,116

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

Total Competitive		10,614

Total		18,730		$	40
~~Other operation and maintenance~~			7

(a)	The capacity of generation units is based on a number of factors, including the operating experience and physical conditions of the units, and may be revised periodically to reflect changed circumstances. See "Item 2. Properties" in PPL's 2012 Form 10-K for additional information on ownership percentages.
~~Depreciation~~						~~(4)~~

(b)	Includes leasehold interests. See Note 11 to the Financial Statements in PPL's 2012 Form 10-K for additional information.
~~Other~~						~~(3)~~

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

·

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

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

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

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

Financial and Operational Developments

Net Income Attributable to PPL Shareowners

Net Income Attributable to PPL Shareowners for the periods ended June 30 by segment, and reconciled to PPL's consolidated results, was:

99

	Three Months				Six Months
	2013		2012		2013		2012

Kentucky Regulated	$	49	$	34	$	134	$	76
U.K. Regulated		245		196		558		361
Pennsylvania Regulated		45		29		109		62
Supply		77		12		31		313
Corporate and Other (a)		(11)				(14)
Net Income Attributable to PPL Shareowners	$	405	$	271	$	818	$	812

EPS - basic	$	0.68	$	0.46	$	1.39	$	1.39
EPS - diluted (b)	$	0.63	$	0.46	$	1.28	$	1.39

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

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

·

~~Lower other operation and maintenance primarily due to lower corporate service~~Earnings for the three and six months ended June 30, 2013 increased 49% and 1% compared with the same periods in 2012. See "Results of Operations" below for further discussion of PPL's business segments, details of special items and analysis of the consolidated results of operations.

Economic and Market Conditions

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

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

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

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

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

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

100

Susquehanna Turbine Blade Inspection

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

Rate Case Proceedings

Pennsylvania

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

Kentucky

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

Ofgem Review of Line Loss Calculation

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

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

RIIO-ED1

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

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

Distribution System Improvement Charge

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

101

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

FERC Formula Rates

PPL Electric must follow FERC's Uniform System of Accounts, which requires subsidiaries to be presented, for FERC reporting purposes, using the equity method of accounting unless a waiver has been granted. The FERC has granted waivers of this requirement to other utilities when alternative accounting would more accurately present the integrated operations of a utility and its subsidiaries. In March 2013, as part of a routine FERC audit of PPL and its subsidiaries, PPL Electric determined that it never obtained a required waiver of the equity method accounting requirement for its subsidiary, PPL Receivables Corporation (PPL Receivables) for FERC Form No. 1 reporting. In March 2013, PPL Electric filed a request for waiver with the FERC that, if approved, would allow it to continue to consolidate the results of PPL Receivables with the results of PPL Electric, as it has done since 2004. If PPL Electric is not successful in obtaining the waiver, its revenue requirement calculated under the formula rate could be negatively impacted. The impact, if any, is not known at this time but could range between $0 and $40 million, pre-tax. PPL Electric cannot predict the outcome of the waiver or audit proceedings, which remain pending before the FERC. See Note 6 to the Financial Statements for additional information.

Equity Forward Agreements

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

Equity Units

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

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

Tax Litigation

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

U.K. Tax Rate Change

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

Results of Operations

The following discussion provides a review of results by reportable segment and a description of key factors by segment expected to impact future earnings. This section ends with "Statement of Income Analysis," which includes explanations of

102

Kentucky Gross Margins, Pennsylvania Gross Delivery Margins and Unregulated Gross Energy Margins and significant changes in principal line items on PPL's Statements of Income, comparing the three and six months ended June 30, 2013 with the same periods in 2012.

The results for interim periods can be disproportionately influenced by numerous factors and developments and by seasonal variations. As such, the results of operations for interim periods do not necessarily indicate results or trends for the year or future periods.

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

Segment Results

Kentucky Regulated Segment

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

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

		Three Months					Six Months
		2013		2012		% Change	2013		2012		% Change

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

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

	Three Months		Six Months

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

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

·

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

·	Higher depreciation for the three and six-month periods primarily due to ~~PP&E additions.~~environmental costs related to the elimination of the 2005 and 2006 ECR plans now being included in base rates, which added $13 million and $26 million to depreciation

103

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

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

·

Higher interest expense for the three and six-month periods primarily due to the remarketing of the PPL Capital Funding Junior Subordinated Notes component of the 2010 Equity Units and simultaneous exchange into Senior Notes. Interest expense associated with the 2010 Equity Units is allocated to the Kentucky Regulated segment.

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

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

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

		Income Statement	Three Months				Six Months
		Line Item	2013		2012		2013		2012

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

~~2013 Outlook~~

~~Excluding special items, PPL projects higher segment earnings in 2013 compared with~~

(a)	2012 ~~primarily driven by higher distribution revenues from a distribution base rate increase and higher transmission margins, partially offset by higher depreciation.~~includes an adjustment to an indemnification liability.

2013 Outlook

Excluding special items, PPL projects higher segment earnings in 2013 compared with 2012, primarily driven by electric and gas base rate increases, returns on additional environmental capital investments and load growth, partially offset by higher operation and maintenance expense.

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

U.K. Regulated Segment

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

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

		Three Months					Six Months
		2013		2012		% Change	2013		2012		% Change

Utility revenues		$	559	$	543	3	$	1,197	$	1,095	9
Energy-related businesses			13		14	(7)		23		24	(4)
	Total operating revenues		572		557	3		1,220		1,119	9
Other operation and maintenance			112		112			229		225	2
Depreciation			72		70	3		146		137	7
Taxes, other than income			36		36			73		72	1
Energy-related businesses			7		11	(36)		14		16	(13)
	Total operating expenses		227		229	(1)		462		450	3
Other Income (Expense) - net			4		31	(87)		124		11	1,027
Interest Expense			104		105	(1)		211		208	1
Income Taxes					58	(100)		113		111	2
Net Income Attributable to PPL Shareowners		$	245	$	196	25	$	558	$	361	55

104

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

		Three Months		Six Months

U.K.
	Utility revenues	$	68	$	143
	Other operation and maintenance		(4)		(10)
	Depreciation		(6)		(11)
	Interest expense		(3)		(7)
	Other		(2)
	Income taxes		(11)		(21)
U.S.
	Interest expense and other		(1)		1
	Income taxes		9		9
Foreign currency exchange rates, after-tax (a)			(4)		(3)
Special items, after-tax			3		96
Total		$	49	$	197

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

U.K.

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

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

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

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

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

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

·

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

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

U.S.

·

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

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

105

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

		Income Statement	Three Months				Six Months
		Line Item	2013		2012		2013		2012

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

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

(b)

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

(c)

WPD Midlands recorded an adjustment to its line loss accrual in June 2013 based on information provided by Ofgem regarding the calculation of line loss incentive/penalty for all network operators related to DPCR4, a price control period that ended prior to PPL's acquisition of WPD Midlands. See Note 6 to the Financial Statements for additional information.

2013 Outlook

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

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

Pennsylvania Regulated Segment

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

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

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

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

106

	Three Months		Six Months

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

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

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

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

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

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

2013 Outlook

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

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

Supply Segment

The Supply segment primarily consists of PPL Energy Supply's energy marketing and trading activities, as well as its competitive generation operations. In addition, the Supply segment is allocated certain financing costs.

Net Income Attributable to PPL Shareowners for the periods ended March 31 includes the following results:
Net Income Attributable to PPL Shareowners for the periods ended June 30 includes the following results:							Net Income Attributable to PPL Shareowners for the periods ended June 30 includes the following results:

		Three Months						Three Months					Six Months
		2013		2012		% Change		2013		2012		% Change	2013		2012		% Change
Energy revenues	Energy revenues						Energy revenues
	External (a)	$	381	$	2,290	(83)	External (a)	$	1,658	$	816	103	$	2,039	$	3,106	(34)
	Intersegment		14		21	(33)	Intersegment		12		17	(29)		26		38	(32)
Energy-related businesses	Energy-related businesses		113		98	15	Energy-related businesses		122		115	6		235		213	10
	Total operating revenues		508		2,409	(79)	Total operating revenues		1,792		948	89		2,300		3,357	(31)
Fuel (a)	Fuel (a)		298		211	41	Fuel (a)		224		196	14		522		407	28
Energy purchases	Energy purchases						Energy purchases
	External (a)		(200)		1,247	(116)	External (a)		897		191	370		697		1,438	(52)
	Intersegment		1		1		Intersegment		1			n/a		2		1	100
Other operation and maintenance	Other operation and maintenance		235		248	(5)	Other operation and maintenance		270		293	(8)		505		548	(8)
Depreciation	Depreciation		78		72	8	Depreciation		79		70	13		157		135	16
Taxes, other than income	Taxes, other than income		17		18	(6)	Taxes, other than income		16		17	(6)		33		35	(6)
Energy-related businesses	Energy-related businesses		110		97	13	Energy-related businesses		118		113	4		228		210	9
	Total operating expenses		539		1,894	(72)	Total operating expenses		1,605		880	82		2,144		2,774	(23)
Other Income (Expense) - net	Other Income (Expense) - net		4		5	(20)	Other Income (Expense) - net		12		4	200		16		9	78
Other-Than-Temporary Impairments							Other-Than-Temporary Impairments				1	(100)				1	(100)
Interest Expense	Interest Expense		60		48	25	Interest Expense		60		53	13		120		101	19
Income Taxes	Income Taxes		(41)		171	(124)	Income Taxes		62		6	933		21		177	(88)
Net Income (Loss) Attributable to PPL Shareowners		$	(46)	$	301	(115)
Net Income Attributable to PPL Shareowners							Net Income Attributable to PPL Shareowners	$	77	$	12	542	$	31	$	313	(90)

107

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

~~100~~

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

	~~Three Months~~

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

	Three Months		Six Months

Unregulated Gross Energy Margins	$	(88)	$	(195)
Other operation and maintenance		16		29
Depreciation		(9)		(22)
Taxes, other than income		3		4
Other Income (Expense) - net		9		10
Interest expense		(7)		(19)
Other		2		2
Income Taxes		27		60
Special items, after-tax		112		(151)
Total	$	65	$	(282)

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

·

Lower other operation and maintenance for the three-month period primarily due to ~~$15~~$11 million of lower 2013 project and refueling outage costs at ~~eastern fossil~~PPL Susquehanna and ~~hydroelectric plants largely~~$4 million of Brunner Island Unit 3 outage costs in 2012 with no comparable outage in 2013.

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

·	Higher depreciation for the three and six-month periods primarily due to ~~outages in 2012, partially offset by $3~~PP&E additions. The six-month period also includes $6 million ~~of additional costs due~~attributable to the Ironwood Acquisition.

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

·

Higher interest expense ~~primarily~~for the six-month period due to ~~financings associated with~~$7 million from PPL ~~Ironwood, acquired~~Capital Funding's June 2012 $400 million debt issuance, $6 million due to lower capitalized interest in ~~April 2012, which increased interest expense by $4 million,~~2013 and $4 million due to ~~the allocation of interest from a June 2012~~financing associated with PPL Ironwood. Interest expense associated with certain PPL Capital Funding debt ~~issuance.~~issuances is allocated to the Supply segment.

·	Lower income taxes for the three and six-month periods due to lower pre-tax income in 2013, which reduced income taxes by ~~$47~~$30 million and $77 million, partially offset for the six-month period by an $11 million benefit from a state tax rate change recorded in 2012.

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

		Income Statement	Three Months					Income Statement	Three Months				Six Months
		Line Item	2013		2012			Line Item	2013		2012		2013		2012

Adjusted energy-related economic activity, net, net of tax of $79, ($102)		(a)	$	(117)	$	150
Adjusted energy-related economic activity, net, net of tax of ($51), $23, $28, ($79)							Adjusted energy-related economic activity, net, net of tax of ($51), $23, $28, ($79)	(a)	$	76	$	(32)	$	(41)	$	118
Impairments:	Impairments:						Impairments:
	Adjustments - nuclear decommissioning trust investments, net of tax of $0, ($1)	Other Income (Expense)-net				1	Adjustments - nuclear decommissioning trust investments, net of tax of $0, ($1), $0, ($2)	Other Income-net								1
Other:	Other:						Other:
	Counterparty bankruptcy, net of tax of $0, $5 (b)	Other Operation and Maintenance				(6)	Change in tax accounting method related to repairs	Income Taxes		(3)				(3)
	Ash basin leak remediation adjustment, net of tax of $0, ($1)	Other Operation and Maintenance				1		Other Operation
							Counterparty bankruptcy, net of tax of ($1), $0, ($1), $5 (b)	and Maintenance		1				1		(6)
							Wholesale supply cost reimbursement, net of tax of $0, $0, $0, $0	(c)				1				1
								Other Operation
							Ash basin leak remediation adjustment, net of tax of $0, $0, $0, ($1)	and Maintenance								1
							Coal contract modification payments, net of tax of $0, $5, $0, $5 (d)	Fuel				(7)				(7)
Total	Total		$	(117)	$	146	Total		$	74	$	(38)	$	(43)	$	108

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

108

(b)

In October 2011, a wholesale customer, SMGT, filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy code. In 2012, PPL EnergyPlus recorded an additional allowance for unpaid amounts under the long-term power contract. In March 2012, the U.S. Bankruptcy Court for the District of Montana approved the request to terminate the contract, effective April 1, 2012. In June 2013, PPL EnergyPlus received an approval for an administrative claim in the amount of $2 million.

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

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

Reconciliation of Economic Activity

The following table reconciles unrealized pre-tax gains (losses) for the periods ended ~~March 31, from the table within "Commodity Price Risk (Non-trading) - Economic Activity" in Note 14 to the Financial Statements~~June 30, to the special item identified as "Adjusted energy-related economic activity, net."

~~101~~

			Three Months						Three Months				Six Months
			2013		2012				2013		2012		2013		2012
Operating Revenues	Operating Revenues						Operating Revenues
		Unregulated retail electric and gas	$	(8)	$	10		Unregulated retail electric and gas	$	20	$	(12)	$	12	$	(2)
		Wholesale energy marketing		(822)		852		Wholesale energy marketing		590		(458)		(232)		394
Operating Expenses	Operating Expenses						Operating Expenses
		Fuel		(1)		2		Fuel		(4)		(16)		(5)		(14)
		Energy Purchases		634		(591)		Energy Purchases		(479)		442		155		(149)
Energy-related economic activity (a)	Energy-related economic activity (a)			(197)		273	Energy-related economic activity (a)			127		(44)		(70)		229
Option premiums	Option premiums			1			Option premiums					1		1		1
Adjusted energy-related economic activity	Adjusted energy-related economic activity			(196)		273	Adjusted energy-related economic activity			127		(43)		(69)		230
Less: Economic activity realized, associated with the monetization of certain
Less: Economic activity realized, associated with the monetization of							Less: Economic activity realized, associated with the monetization of
	full-requirement sales contracts in 2010					21	certain full-requirement sales contracts in 2010					12				33
Adjusted energy-related economic activity, net, pre-tax	Adjusted energy-related economic activity, net, pre-tax		$	(196)	$	252	Adjusted energy-related economic activity, net, pre-tax		$	127	$	(55)	$	(69)	$	197

Adjusted energy-related economic activity, net, after-tax	Adjusted energy-related economic activity, net, after-tax		$	(117)	$	150	Adjusted energy-related economic activity, net, after-tax		$	76	$	(32)	$	(41)	$	118

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

2013 Outlook

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

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

Statement of Income Analysis --

Margins

Non-GAAP Financial Measures

The following discussion includes financial information prepared in accordance with GAAP, as well as three non-GAAP financial measures: "Kentucky Gross Margins," "Pennsylvania Gross Delivery Margins" and "Unregulated Gross Energy Margins." These measures are not intended to replace "Operating Income," which is determined in accordance with GAAP, as an indicator of overall operating performance. Other companies may use different measures to analyze and to report on the results of their operations. PPL believes that these measures provide additional criteria to make investment decisions. These performance measures are used, in conjunction with other information, internally by senior management and the Board of Directors to manage the Kentucky Regulated, Pennsylvania Regulated and Supply segment operations, analyze each respective segment's actual results compared with budget and, in certain cases, to measure certain corporate financial goals used in determining variable compensation.

PPL's three non-GAAP financial measures include:

109

·

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

·

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

~~102~~

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

·

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

Reconciliation of Non-GAAP Financial Measures

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

2013 Three Months 2012 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 $ 800 $ 512 $ 638 (c) $ 1,950 $ 705 $ 457 $ 552 (c) $ 1,714
PLR intersegment utility
revenue (expense) (d) (14) $ 14 (21) $ 21
Unregulated retail
electric and gas 246 (9) (f) 237 214 9 (f) 223
Wholesale energy marketing
Realized 977 (1) 976 1,204 4 (e) 1,208
Unrealized economic
activity (822) (f) (822) 852 (f) 852
Net energy trading margins (11) (11) 8 8
Energy-related businesses 127 127 107 107
Total Operating Revenues 800 498 1,226 (67) 2,457 705 436 1,447 1,524 4,112

Operating Expenses
Fuel 231 299 (1) (f) 529 213 214 (3) (f) 424
Energy purchases
Realized 86 172 436 (3) 691 74 153 636 20 (e) 883
Unrealized economic
activity (634) (f) (634) 591 (f) 591
Other operation and
maintenance 25 22 5 624 676 22 22 4 658 706
Depreciation 284 284 13 251 264
Taxes, other than income 28 8 60 96 25 8 58 91
Energy-related businesses 122 122 102 102
Intercompany eliminations (1) 1 (1) 1
Total Operating Expenses 342 221 749 452 1,764 322 199 863 1,677 3,061
Total $ 458 $ 277 $ 477 $ (519) $ 693 $ 383 $ 237 $ 584 $ (153) $ 1,051

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

Operating Revenues
	Utility				$	682	$	413				$	560	(c)	$	1,655	$	658	$	403				$	544	(c)	$	1,605
	PLR intersegment utility
		revenue (expense) (d)						(12)		$	12									(17)		$	17
	Unregulated retail
		electric and gas									237		20	(f)		257							192		(13)	(f)		179
	Wholesale energy marketing
			Realized								812		(1)			811							1,075		8	(e)		1,083
			Unrealized economic
				activity									590	(f)		590									(458)	(f)		(458)
	Net energy trading margins																						10					10
	Energy-related businesses												137			137									130			130
			Total Operating Revenues			682		401			1,061		1,306			3,450		658		386			1,294		211			2,549

110

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

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

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

Operating Revenues
	Utility				$	1,482	$	925				$	1,198	(c)	$	3,605	$	1,363	$	860				$	1,096	(c)	$	3,319
	PLR intersegment utility
		revenue (expense) (d)						(26)		$	26									(38)		$	38
	Unregulated retail
		electric and gas									483		11	(f)		494							406		(4)	(f)		402
	Wholesale energy marketing
			Realized								1,789		(2)			1,787							2,279		12	(e)		2,291
			Unrealized economic
				activity									(232)	(f)		(232)									394	(f)		394
	Net energy trading margins										(11)					(11)							18					18
	Energy-related businesses												264			264									237			237
			Total Operating Revenues			1,482		899			2,287		1,239			5,907		1,363		822			2,741		1,735			6,661

Operating Expenses
	Fuel					447					522		1			970		428					385		22	(g)		835
	Energy purchases
			Realized			123		292			855		(7)			1,263		108		273			1,251		38	(e)		1,670
			Unrealized economic
				activity									(155)	(f)		(155)									149	(f)		149
	Other operation and
		maintenance				48		43			8		1,275			1,374		46		49			11		1,339			1,445
	Depreciation					2							568			570		26							509			535
	Taxes, other than income							47			18		117			182				44			16		118			178
	Energy-related businesses												252			252									226			226
	Intercompany eliminations							(2)			2									(2)			1		1
			Total Operating Expenses			620		380			1,405		2,051			4,456		608		364			1,664		2,402			5,038
Total					$	862	$	519		$	882	$	(812)		$	1,451	$	755	$	458		$	1,077	$	(667)		$	1,623

(a)	Represents amounts 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.

~~103~~

(e)

Represents energy-related economic activity as described in "Commodity Price Risk (Non-trading) - Economic Activity" within Note 14 to the Financial Statements. For the three and six months ended ~~March 31,~~June 30, 2012, "Wholesale energy marketing - Realized" and "Energy purchases - Realized" ~~includes a~~include net pre-tax ~~loss~~losses of ~~$21~~$12 million and $33 million related to the monetization of certain full-requirement sales contracts.

(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.

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

Changes in Non-GAAP Financial Measures

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

Three Months
2013 2012 Change

Kentucky Gross Margins $ 458 $ 383 $ 75
PA Gross Delivery Margins by Component
Distribution $ 224 $ 189 $ 35
Transmission 53 48 5
Total $ 277 $ 237 $ 40

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

111

		Three Months						Six Months
		2013		2012		Change		2013		2012		Change

Kentucky Gross Margins		$	404	$	372	$	32	$	862	$	755	$	107
PA Gross Delivery Margins by Component
	Distribution	$	183	$	170	$	13	$	407	$	359	$	48
	Transmission		59		51		8		112		99		13
Total		$	242	$	221	$	21	$	519	$	458	$	61

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

Kentucky Gross Margins

Margins increased for the three months ended ~~March 31,~~June 30, 2013 compared with 2012, primarily due to higher base rates of ~~$31 million, higher volumes of $19~~$25 million, environmental ~~costs~~cost recoveries added to base rates of ~~$18~~$14 million and increased environmental investments of $7$3 million, partially offset by lower volumes of $9 million. The change in volumes was partially attributable to weather, as cooling degree days decreased 14% compared to the same period in 2012.

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

The increase in base rates was the result of new KPSC rates ~~going into effect on~~effective January 1, 2013. The ~~increase in volumes was attributable to colder weather in 2013 compared with 2012. Total heating degree days increased 41%. The~~ environmental ~~costs~~cost recoveries added to base rates ~~was~~were due to the elimination of the 2005 and 2006 ECR plans as a result of the 2012 Kentucky rate ~~case.~~cases. This elimination results in depreciation and other operation and maintenance expenses associated with the 2005 and 2006 ECR plans being excluded from Margins in ~~2013.~~2013, while the recovery of such costs remain in Margins through base rates.

Pennsylvania Gross Delivery Margins

Distribution

Margins increased for the three months ended ~~March 31,~~June 30, 2013 compared with 2012, primarily due to an $11 million favorable effect of price as a result of higher base rates, effective January 1, 2013.

Margins increased for the six months ended June 30, 2013 compared with 2012, primarily due to a $13 million ~~favorable~~adverse effect of mild weather in 2012 and a ~~$19~~$32 million favorable effect of price, largely comprised of higher base rates, effective January 1, 2013, ~~as a result of the 2012 rate case~~ and higher volumes of $3$4 million.

Transmission

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

~~104~~112

Unregulated Gross Energy Margins

	~~Three Months~~

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

Eastern U.S.

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

	Three Months		Six Months

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

Western U.S.

Non-trading margins for the three and six months ended ~~March 31,~~June 30, 2013 compared with the same periods in 2012 were lower due to ~~$43~~$20 million and $59 million of lower wholesale ~~prices,~~prices. The six-month period was partially offset by ~~$12~~$7 million of higher wholesale volumes.

Net Energy Trading Margins

Net energy trading margins for the three months ended ~~March 31,~~June 30, 2013 compared with the same period in 2012 decreased as a result of lower margins of ~~$16~~$5 million on power positions and $3 million on FTRs.

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

~~Utility Revenues~~

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

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

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

Utility Revenues

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

		Three Months		Six Months
Domestic:
	PPL Electric (a)	$	10	$	65
	LKE (b)		24		119
	Total Domestic		34		184

U.K.:
	Price (c)		50		113
	Volume (d)		23		28
	DPCR4 accrual adjustments (e)		(24)		(24)
	Foreign currency exchange rates		(26)		(16)
	Other (f)		(7)		1
	Total U.K.		16		102
Total		$	50	$	286

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

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

(c)	~~Due~~The increase for the three and six-month periods is primarily due to price increases effective April 1, 2013 and April 1, 2012.

(d)	~~This~~The increase for the three and six-month periods is primarily due to $8the favorable effect of weather.

(e)

The decrease for the three and six-month periods is due to a $24 million reduction in revenue based on information provided by Ofgem regarding the calculation of line loss incentive/penalty for all network operators related to DPCR4. See Note 6 to the Financial Statements for additional information.

(f)	The decrease for the three month period is primarily related to a $6 million reduction in third-party engineering ~~work,~~revenue, which is partially offset by ~~expenses~~a reduction in costs in "Other operation and maintenance". on the Statements of Income.

Other Operation and Maintenance

The increase (decrease) in other operation and maintenance for the ~~period~~periods ended ~~March 31,~~June 30, 2013 compared with 2012 was due to:


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

113

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

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

~~105~~

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

(c)

The decrease for the three and six month periods is ~~primarily~~ due to ~~Brunner Island Unit 3 outage~~a reduction in Act 129 energy efficiency and conservation plan costs ~~of $15 million in 2012 compared with no major outage costs in 2013, partially offset by $3 million of additional costs due to the Ironwood Acquisition.~~for Phase 1 programs. Phase 1 ended May 31, 2013.

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

(e)	The increase for the three and six month periods is primarily due to higher ~~tree trimming expense.~~vegetation management costs.

(f)	The decrease for the three and six month periods is primarily due to costs incurred in 2012 related to the WPD Midlands reorganization.

~~Depreciation~~

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

	~~Three Months~~

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

Depreciation

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

	Three Months		Six Months

Additions to PP&E	$	23	$	44
LKE lower depreciation rates effective January 1, 2013		(6)		(11)
Ironwood Acquisition				6
Other		(2)		(4)
Total	$	15	$	35

Other Income (Expense) - net

The ~~$139~~$17 million ~~increase~~decrease in other income (expense) - net for the three months ended ~~March 31,~~June 30, 2013 compared with 2012 was primarily due to ~~$119~~a decrease of $21 million offrom realized and unrealized gains on ~~economic~~ foreign currency ~~contracts~~contracts.

The $122 million increase in other income (expense) - net for the six months ended June 30, 2013 compared with ~~losses in~~ 2012 was primarily due to an increase of ~~$18 million.~~$116 million from realized and unrealized gains on foreign currency contracts.

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

~~Interest Expense~~

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

	~~Three Months~~

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

Interest Expense

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

	Three Months		Six Months

Long-term debt interest expense (a)	$	8	$	22
Loss on extinguishment of debt (b)		10		10
Ironwood Acquisition financing				4
Capitalized interest		3		4
Other		1		3
Total	$	22	$	43

(a)

The increase for the three-month period was primarily due to PPL Capital Funding's debt issuances in March 2013, June 2012 ~~issuance of $400 million, 4.2% Senior Notes due 2022~~ and October ~~2012 issuance of $400 million, 3.5% Senior Notes due 2022. Also, contributing~~2012. See Note 7 to the Financial Statements in this Form 10-Q and in PPL's 2012 Form 10-K for additional information.

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

114

(b)

~~The increase was due~~In May 2013, PPL Capital Funding remarketed and exchanged junior subordinated notes that were originally issued in June 2010 as a component of PPL's 2010 Equity Units. See Note 7 to ~~financings associated with~~ the ~~Ironwood Acquisition.~~ Financial Statements for additional information.

~~Income Taxes~~

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

	~~Three Months~~

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

Income Taxes

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

	Three Months		Six Months

Higher (lower) pre-tax income	$	52	$	(67)
Federal and state tax reserve adjustments (a)		(35)		(35)
U.S. income tax on foreign earnings net of foreign tax credit (b)		(6)		(6)
Foreign tax reserve adjustments (c)		8		5
Foreign tax return adjustments		(4)		(4)
Net operating loss carryforward adjustments (d)		3		9
State deferred tax rate change (e)				11
Other		3
Total	$	21	$	(87)

(a)

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

(b)

During the three and six months ended ~~March 31,~~June 30, 2013, PPL recorded a $14 million increase to income tax expense primarily attributable to a revision in the expected taxable amount of cash repatriation in 2013 and recorded a tax benefit of $19 million associated with a ruling obtained from the IRS impacting the recalculation of 2010 U.K. earnings and profits that will be reflected on an amended 2010 U.S. tax return.

(c)	During the three and six months ended June 30, 2012, PPL recorded a tax benefit following resolution of a U.K. tax issue related to the tax deductibility of interest expense.

(d)	During the three and six months ended June 30, 2012, PPL recorded adjustments to deferred taxes related to net operating loss carryforwards of LKE based on income tax return adjustments.

~~(b)~~(e)

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

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

~~106~~

Financial Condition					Financial Condition

Liquidity and Capital Resources					Liquidity and Capital Resources

PPL had the following at:					PPL had the following at:

	March 31, 2013		December 31, 2012			June 30, 2013		December 31, 2012

Cash and cash equivalents	$	853	$	901		$	711	$	901
Short-term debt	$	1,061	$	652		$	1,206	$	652

At ~~March 31,~~June 30, 2013, ~~$335~~$178 million of cash and cash equivalents were denominated in GBP. If these amounts would be remitted as dividends, PPL may be subject to additional U.S. income taxes, net of allowable foreign income tax credits. Historically, dividends paid by foreign subsidiaries have been distributions of the current year's earnings. See Note 5 to the Financial Statements in PPL's 2012 Form 10-K for additional information on undistributed earnings of WPD.

The ~~$48~~$190 million decrease in PPL's cash and cash equivalents position was primarily the net result of:

·	capital expenditures of ~~$828 million;~~$1.8 billion;

·	the payment of ~~$210~~$426 million of common stock dividends;

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

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

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

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

·	net cash provided by operating activities of ~~$244 million.~~$947 million;

·	net increase in short-term debt of $563 million; and

·	proceeds of $450 million from the issuance of long-term debt.

PPL's cash provided by operating activities ~~decreased by $484 million~~had no net change for the ~~three~~six months ended ~~March 31,~~June 30, 2013 compared with 2012. The ~~decrease~~result was ~~primarily due to:~~the net effect of:

·	a ~~$336~~$219 million increase in net income, when adjusted for non-cash components; and

·	a $25 million decrease in defined benefit plan funding, offset by

·	a $245 million increase in cash used by components of working capital (primarily due to changes in accounts receivable of ~~$219~~$210 million ~~resulting from higher base rates~~ and ~~favorable effects of weather and~~in counterparty collateral of ~~$129 million); and~~

·	~~a $221~~$118 million, ~~increase in defined benefit plans funding;~~ partially offset by

·	a ~~$72~~$95 million ~~increase~~change in ~~net income, when adjusted for non-cash components.~~fuel, materials and supplies).

115

Capital expenditures increased by ~~$146~~$488 million for the ~~three~~six months ended ~~March 31,~~June 30, 2013 compared with 2012, primarily due to ~~the~~PPL Electric's Susquehanna-Roseland transmission project and projects to enhance system reliability, and LKE's environmental projects at Mill Creek and Ghent and construction of Cane Run Unit 7.

Credit Facilities

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

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

PPL Energy Supply Credit Facilities ~~(a)~~	PPL Energy Supply Credit Facilities ~~(a)~~	$	3,200			$	764	$	2,436	PPL Energy Supply Credit Facilities ~~(a)~~	$	3,150			$	785	$	2,365
PPL Electric Credit Facilities ~~(b)~~	PPL Electric Credit Facilities ~~(b)~~		400				126		274	PPL Electric Credit Facilities ~~(b)~~		400				86		314
LG&E Syndicated Credit Facility	LG&E Syndicated Credit Facility		500				70		430	LG&E Syndicated Credit Facility		500				80		420
KU Credit Facilities ~~(c)~~	KU Credit Facilities ~~(c)~~		598				313		285	KU Credit Facilities ~~(c)~~		598				370		228
	Total Domestic Credit Facilities (d)	$	4,698			$	1,273	$	3,425	Total Domestic Credit Facilities (a)	$	4,648			$	1,321	$	3,327

PPL WW Syndicated Credit Facility (e)		£	210	£	109		n/a	£	101
WPD (South West) Syndicated Credit Facility			245				n/a		245
WPD (East Midlands) Syndicated Credit Facility (f)			300		65				235
WPD (West Midlands) Syndicated Credit Facility			300						300
	Total WPD Credit Facilities (g)	£	1,055	£	174			£	881
Total WPD Credit Facilities (b)										Total WPD Credit Facilities (b)	£	1,055	£	193			£	862

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

~~(b)~~

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

~~(c)~~

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

~~(d)~~

The commitments under PPL's domestic credit facilities are provided by a diverse bank group, with no one bank and its affiliates providing an aggregate commitment of more than 9%8% of the total committed capacity.

~~107~~

~~(e)~~

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

~~(f)~~

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

~~(g)~~(b)

At ~~March 31,~~June 30, 2013, the USD equivalent of unused capacity under WPD's committed credit facilities was $1.3 billion. The commitments under WPD's credit facilities are provided by a diverse bank group with no one bank providing more than 13% of the total committed capacity.

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

Commercial Paper

PPL Energy Supply maintains a commercial paper program for up to $750 million to provide an additional financing source to fund its short-term liquidity needs, if and when necessary. Commercial paper issuances are supported by PPL Energy Supply's Syndicated Credit Facility. At ~~March 31,~~June 30, 2013 and December 31, 2012, PPL Energy Supply had ~~$481~~$575 million and $356 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheets, at weighted-average interest rates of ~~0.38%~~0.29% and 0.50%.

PPL Electric maintains a commercial paper program for up to $300 million to provide an additional financing source to fund its short-term liquidity needs, if and when necessary. Commercial paper issuances are supported by PPL Electric's Syndicated Credit Facility. At ~~March 31,~~June 30, 2013, PPL Electric had ~~$125~~$85 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheet, at a weighted-average interest rate of ~~0.39%~~0.34%. PPL Electric had no commercial paper outstanding at December 31, 2012.

In April 2013, LG&E and KU each increased the capacity of their commercial paper programs from $250 million to $350 million to provide an additional financing source to fund their short-term liquidity needs, if and when necessary. Commercial paper issuances are supported by LG&E's and KU's Syndicated Credit Facilities. At ~~March 31,~~June 30, 2013 and December 31, 2012, LG&E had ~~$70~~$80 million and $55 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheets, at weighted-average interest rates of ~~0.36%~~0.32% and 0.42%. At ~~March 31,~~June 30, 2013 and December 31, 2012, KU had ~~$115~~$172 million and $70 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheets, at weighted-average interest rates of ~~0.36%~~0.33% and 0.42%.

Long-term Debt and Equity Securities

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

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

116

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

~~In addition, PPL has reduced~~See Note 7 to the ~~estimate~~Financial Statements for further discussion of ~~its plans to issue new shares of common stock in 2013 by $100 million from the $350 million reported in its 2012 Form 10-K.~~Long-term Debt and Equity Securities.

Common Stock Dividends

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

Rating Agency Actions

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

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

~~108~~

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

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

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

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

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

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

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

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

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

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

Ratings Triggers

PPL and PPL Energy Supply have various contracts, including contracts for the sale and purchase of electricity and fuel, commodity transportation and storage, tolling agreements and interest rate and foreign currency instruments, which contain provisions that require PPL and PPL Energy Supply to post additional collateral or permit the counterparty to terminate the contract, if PPL's or PPL Energy Supply's credit rating were to fall below investment grade. See Note 14 to the Financial

117

Statements for a discussion of "Credit Risk-Related Contingent Features," including a discussion of the potential additional collateral that would have been required for derivative contracts in a net liability position at ~~March 31,~~June 30, 2013.

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

Risk Management

Market Risk

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

The forward-looking information presented below provides estimates of what may occur in the future, assuming certain adverse market conditions and model assumptions. Actual future results may differ materially from those presented. These disclosures are not precise indicators of expected future losses, but only indicators of possible losses under normal market conditions at a given confidence level.

Commodity Price Risk (Non-trading)

PPL segregates its non-trading activities into two categories: hedge activity and economic activity. Transactions that are accounted for as hedge activity qualify for hedge accounting treatment. The economic activity category includes transactions that address a specific risk, but were not eligible for hedge accounting or for which hedge accounting was not elected. This activity includes the changes in fair value of positions used to hedge a portion of the economic value of PPL's competitive generation assets and full-requirement sales and retail contracts. This economic activity is subject to changes in fair value due to market price volatility of the input and output commodities (e.g., fuel and power). Although they do not receive hedge accounting treatment, these transactions are considered non-trading activity. See Note 14 to the Financial Statements for additional information.

To hedge the impact of market price volatility on PPL's energy-related assets, liabilities and other contractual arrangements, PPL both sells and purchases physical energy at the wholesale level under FERC market-based tariffs throughout the U.S. and enters into financial exchange-traded and over-the-counter contracts. PPL's non-trading commodity derivative contracts range in maturity through 2019.

The following table sets forth the changes in the net fair value of non-trading commodity derivative contracts for the periods ended ~~March 31.~~June 30. See Notes 13 and 14 to the Financial Statements for additional information.

~~109~~

	Gains (Losses)				Gains (Losses)
	Three Months				Three Months				Six Months
	2013		2012		2013		2012		2013		2012

Fair value of contracts outstanding at the beginning of the period	$	473	$	1,082	$	229	$	1,215	$	473	$	1,082
Contracts realized or otherwise settled during the period		(137)		(279)		(100)		(261)		(237)		(540)
Fair value of new contracts entered into during the period (a)		9		(1)		37		13		46		12
Other changes in fair value		(116)		413		119		(6)		3		407
Fair value of contracts outstanding at the end of the period	$	229	$	1,215	$	285	$	961	$	285	$	961

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

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

		Net Asset (Liability)											Net Asset (Liability)
		Maturity						Maturity					Maturity						Maturity
		Less Than		Maturity		Maturity		in Excess		Total Fair			Less Than		Maturity		Maturity		in Excess		Total Fair
		1 Year		1-3 Years		4-5 Years		of 5 Years		Value			1 Year		1-3 Years		4-5 Years		of 5 Years		Value
Source of Fair Value	Source of Fair Value											Source of Fair Value
Prices based on significant observable inputs (Level 2)	Prices based on significant observable inputs (Level 2)	$	238	$	(21)	$	(8)	$	6	$	215	Prices based on significant observable inputs (Level 2)	$	226	$	32	$	(10)	$	5	$	253
Prices based on significant unobservable inputs (Level 3)	Prices based on significant unobservable inputs (Level 3)		(1)		12		3				14	Prices based on significant unobservable inputs (Level 3)		10		18		4				32
Fair value of contracts outstanding at the end of the period	Fair value of contracts outstanding at the end of the period	$	237	$	(9)	$	(5)	$	6	$	229	Fair value of contracts outstanding at the end of the period	$	236	$	50	$	(6)	$	5	$	285

118

PPL sells electricity, capacity and related services and buys fuel on a forward basis to hedge the value of energy from its generation assets. If PPL were unable to deliver firm capacity and energy or to accept the delivery of fuel under its agreements, under certain circumstances it could be required to pay liquidating damages. These damages would be based on the difference between the market price and the contract price of the commodity. Depending on price changes in the wholesale energy markets, such damages could be significant. Extreme weather conditions, unplanned power plant outages, transmission disruptions, nonperformance by counterparties (or their counterparties) with which it has energy contracts and other factors could affect PPL's ability to meet its obligations, or cause significant increases in the market price of replacement energy. Although PPL attempts to mitigate these risks, there can be no assurance that it will be able to fully meet its firm obligations, that it will not be required to pay damages for failure to perform, or that it will not experience counterparty nonperformance in the future.

Commodity Price Risk (Trading)

PPL's trading commodity derivative contracts range in maturity through ~~2017.~~2018. The following table sets forth changes in the net fair value of trading commodity derivative contracts for the periods ended ~~March 31.~~June 30. See Notes 13 and 14 to the Financial Statements for additional information.

	Gains (Losses)				Gains (Losses)
	Three Months				Three Months				Six Months
	2013		2012		2013		2012		2013		2012

Fair value of contracts outstanding at the beginning of the period	$	29	$	(4)	$	15	$	2	$	29	$	(4)
Contracts realized or otherwise settled during the period		(2)						(1)		(2)		(1)
Fair value of new contracts entered into during the period (a)		(12)		6		(4)		(1)		(16)		5
Other changes in fair value						7		17		7		17
Fair value of contracts outstanding at the end of the period	$	15	$	2	$	18	$	17	$	18	$	17

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

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

	Net Asset (Liability)								Net Asset (Liability)
	Maturity					Maturity			Maturity					Maturity
	Less Than		Maturity		Maturity	in Excess	Total Fair		Less Than		Maturity		Maturity	in Excess	Total Fair
	1 Year		1-3 Years		4-5 Years	of 5 Years	Value		1 Year		1-3 Years		4-5 Years	of 5 Years	Value
Source of Fair Value
Prices quoted in active markets for identical instruments (Level 1)	$	1					$	1
Prices based on significant observable inputs (Level 2)		5	$	9				14	$	4	$	6			$	10
Prices based on significant unobservable inputs (Level 3)										6		2				8
Fair value of contracts outstanding at the end of the period	$	6	$	9			$	15	$	10	$	8			$	18

~~110~~

VaR Models

A VaR model is utilized to measure commodity price risk in unregulated gross energy margins for the non-trading and trading portfolios. VaR is a statistical model that attempts to estimate the value of potential loss over a given holding period under normal market conditions at a given confidence level. VaR is calculated using a Monte Carlo simulation technique based on a five-day holding period at a 95% confidence level. Given the company's disciplined hedging program, the non-trading VaR exposure is expected to be limited in the short-term. The VaR for portfolios using end-of-month results for the ~~periods~~six months ended June 30, 2013 was as follows.

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

				Non-Trading
		Trading VaR		VaR
95% Confidence Level, Five-Day Holding Period
	Period End	$	2	$	8
	Average for the Period		4		9
	High		6		10
	Low		2		8

The trading portfolio includes all proprietary trading positions, regardless of the delivery period. All positions not considered proprietary trading are considered non-trading. The non-trading portfolio includes the entire portfolio, including generation, with delivery periods through the next 12 months. Both the trading and non-trading VaR computations exclude FTRs due to the absence of reliable spot and forward markets. The fair value of the non-trading and trading FTR positions was insignificant at ~~March 31,~~June 30, 2013.

119

Interest Rate Risk

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

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

PPL is also exposed to changes in the fair value of its domestic and international debt portfolios. PPL estimated that a 10% decrease in interest rates at ~~March 31,~~June 30, 2013 would increase the fair value of its debt portfolio by ~~$563~~$631 million.

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

						Effect of a							Effect of a
				Fair Value,		10% Adverse					Fair Value,		10% Adverse
		Exposure		Net - Asset		Movement			Exposure		Net - Asset		Movement
		Hedged		(Liability) (a)		in Rates (b)			Hedged		(Liability) (a)		in Rates (b)
Cash flow hedges	Cash flow hedges							Cash flow hedges
	Interest rate swaps (c)	$	1,148	$	12	$	(35)	Interest rate swaps (c)	$	1,930	$	129	$	(74)
	Cross-currency swaps (d)		1,262		82		(171)	Cross-currency swaps (d)		1,262		61		(171)
Economic activity	Economic activity							Economic activity
	Interest rate swaps (e)		179		(55)		(3)	Interest rate swaps (e)		179		(44)		(4)

(a)	Includes accrued interest, if applicable.

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

(c)

PPL utilizes various risk management instruments to reduce its exposure to the expected future cash flow variability of its debt instruments. These risks include exposure to adverse interest rate movements for outstanding variable rate debt and for future anticipated financing. While PPL is exposed to changes in the fair value of these instruments, any changes in the fair value of such cash flow hedges are recorded in equity or as regulatory assets or liabilities, if recoverable through ~~regulated~~ rates. The changes in fair value of these instruments are then reclassified into earnings in the same period during which the item being hedged affects earnings. The positions outstanding at ~~March 31,~~June 30, 2013 mature through ~~2043.~~2044.

(d)

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

(e)

PPL utilizes various risk management instruments to reduce its exposure to the expected future cash flow variability of its debt instruments. These risks include exposure to adverse interest rate movements for outstanding variable rate debt and for future anticipated financing. While PPL is exposed to changes in the fair value of these instruments, any realized changes in the fair value of such economic positions are recoverable through regulated rates and any subsequent changes in fair value of these derivatives are included in regulatory assets or liabilities. The positions outstanding at ~~March 31,~~June 30, 2013 mature through 2033.

~~111~~

~~Foreign Currency~~Unregulated Gross Energy Margins

Eastern U.S.

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

	Three Months		Six Months

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

Western U.S.

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

Net Energy Trading Margins

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

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

Utility Revenues

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

		Three Months		Six Months
Domestic:
	PPL Electric (a)	$	10	$	65
	LKE (b)		24		119
	Total Domestic		34		184

U.K.:
	Price (c)		50		113
	Volume (d)		23		28
	DPCR4 accrual adjustments (e)		(24)		(24)
	Foreign currency exchange rates		(26)		(16)
	Other (f)		(7)		1
	Total U.K.		16		102
Total		$	50	$	286

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

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

(c)	The increase for the three and six-month periods is primarily due to price increases effective April 1, 2013 and April 1, 2012.

(d)	The increase for the three and six-month periods is primarily due to the favorable effect of weather.

(e)

The decrease for the three and six-month periods is due to a $24 million reduction in revenue based on information provided by Ofgem regarding the calculation of line loss incentive/penalty for all network operators related to DPCR4. See Note 6 to the Financial Statements for additional information.

(f)	The decrease for the three month period is primarily related to a $6 million reduction in third-party engineering revenue, which is partially offset by a reduction in costs in "Other operation and maintenance" on the Statements of Income.

Other Operation and Maintenance

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

113

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

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

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

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

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

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

(f)	The decrease for the three and six month periods is primarily due to costs incurred in 2012 related to the WPD Midlands reorganization.

Depreciation

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

	Three Months		Six Months

Additions to PP&E	$	23	$	44
LKE lower depreciation rates effective January 1, 2013		(6)		(11)
Ironwood Acquisition				6
Other		(2)		(4)
Total	$	15	$	35

Other Income (Expense) - net

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

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

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

Interest Expense

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

	Three Months		Six Months

Long-term debt interest expense (a)	$	8	$	22
Loss on extinguishment of debt (b)		10		10
Ironwood Acquisition financing				4
Capitalized interest		3		4
Other		1		3
Total	$	22	$	43

(a)	The increase for the three-month period was primarily due to PPL Capital Funding's debt issuances in March 2013, June 2012 and October 2012. See Note 7 to the Financial Statements in this Form 10-Q and in PPL's 2012 Form 10-K for additional information.

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

114

(b)	In May 2013, PPL Capital Funding remarketed and exchanged junior subordinated notes that were originally issued in June 2010 as a component of PPL's 2010 Equity Units. See Note 7 to the Financial Statements for additional information.

Income Taxes

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

	Three Months		Six Months

Higher (lower) pre-tax income	$	52	$	(67)
Federal and state tax reserve adjustments (a)		(35)		(35)
U.S. income tax on foreign earnings net of foreign tax credit (b)		(6)		(6)
Foreign tax reserve adjustments (c)		8		5
Foreign tax return adjustments		(4)		(4)
Net operating loss carryforward adjustments (d)		3		9
State deferred tax rate change (e)				11
Other		3
Total	$	21	$	(87)

(a)

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

(b)

During the three and six months ended June 30, 2013, PPL recorded a $14 million increase to income tax expense primarily attributable to a revision in the expected taxable amount of cash repatriation in 2013 and recorded a tax benefit of $19 million associated with a ruling obtained from the IRS impacting the recalculation of 2010 U.K. earnings and profits that will be reflected on an amended 2010 U.S. tax return.

(c)	During the three and six months ended June 30, 2012, PPL recorded a tax benefit following resolution of a U.K. tax issue related to the tax deductibility of interest expense.

(d)	During the three and six months ended June 30, 2012, PPL recorded adjustments to deferred taxes related to net operating loss carryforwards of LKE based on income tax return adjustments.

(e)	During the six months ended June 30, 2012, PPL recorded adjustments related to state deferred tax liabilities.

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

Financial Condition

Liquidity and Capital Resources

PPL had the following at:

	June 30, 2013		December 31, 2012

Cash and cash equivalents	$	711	$	901
Short-term debt	$	1,206	$	652

At June 30, 2013, $178 million of cash and cash equivalents were denominated in GBP. If these amounts would be remitted as dividends, PPL may be subject to additional U.S. income taxes, net of allowable foreign income tax credits. Historically, dividends paid by foreign subsidiaries have been distributions of the current year's earnings. See Note 5 to the Financial Statements in PPL's 2012 Form 10-K for additional information on undistributed earnings of WPD.

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

·	capital expenditures of $1.8 billion;

·	the payment of $426 million of common stock dividends;

·	net cash provided by operating activities of $947 million;

·	net increase in short-term debt of $563 million; and

·	proceeds of $450 million from the issuance of long-term debt.

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

·	a $219 million increase in net income, when adjusted for non-cash components; and

·	a $25 million decrease in defined benefit plan funding, offset by

·	a $245 million increase in cash used by components of working capital (primarily due to changes in accounts receivable of $210 million and in counterparty collateral of $118 million, partially offset by a $95 million change in fuel, materials and supplies).

115

Capital expenditures increased by $488 million for the six months ended June 30, 2013 compared with 2012, primarily due to PPL Electric's Susquehanna-Roseland transmission project and projects to enhance system reliability, and LKE's environmental projects at Mill Creek and Ghent and construction of Cane Run Unit 7.

Credit Facilities

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

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

PPL Energy Supply Credit Facilities		$	3,150			$	785	$	2,365
PPL Electric Credit Facilities			400				86		314
LG&E Syndicated Credit Facility			500				80		420
KU Credit Facilities			598				370		228
	Total Domestic Credit Facilities (a)	$	4,648			$	1,321	$	3,327

Total WPD Credit Facilities (b)		£	1,055	£	193			£	862

(a)	The commitments under PPL's domestic credit facilities are provided by a diverse bank group, with no one bank and its affiliates providing an aggregate commitment of more than 8% of the total committed capacity.

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

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

Commercial Paper

PPL Energy Supply maintains a commercial paper program for up to $750 million to provide an additional financing source to fund its short-term liquidity needs, if and when necessary. Commercial paper issuances are supported by PPL Energy Supply's Syndicated Credit Facility. At June 30, 2013 and December 31, 2012, PPL Energy Supply had $575 million and $356 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheets, at weighted-average interest rates of 0.29% and 0.50%.

PPL Electric maintains a commercial paper program for up to $300 million to provide an additional financing source to fund its short-term liquidity needs, if and when necessary. Commercial paper issuances are supported by PPL Electric's Syndicated Credit Facility. At June 30, 2013, PPL Electric had $85 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheet, at a weighted-average interest rate of 0.34%. PPL Electric had no commercial paper outstanding at December 31, 2012.

In April 2013, LG&E and KU each increased the capacity of their commercial paper programs from $250 million to $350 million to provide an additional financing source to fund their short-term liquidity needs, if and when necessary. Commercial paper issuances are supported by LG&E's and KU's Syndicated Credit Facilities. At June 30, 2013 and December 31, 2012, LG&E had $80 million and $55 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheets, at weighted-average interest rates of 0.32% and 0.42%. At June 30, 2013 and December 31, 2012, KU had $172 million and $70 million of commercial paper outstanding, included in "Short-term debt" on the Balance Sheets, at weighted-average interest rates of 0.33% and 0.42%.

Long-term Debt and Equity Securities

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

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

116

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

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

Common Stock Dividends

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

Rating Agency Actions

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

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

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

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

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

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

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

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

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

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

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

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

Ratings Triggers

PPL and PPL Energy Supply have various contracts, including contracts for the sale and purchase of electricity and fuel, commodity transportation and storage, tolling agreements and interest rate and foreign currency instruments, which contain provisions that require PPL and PPL Energy Supply to post additional collateral or permit the counterparty to terminate the contract, if PPL's or PPL Energy Supply's credit rating were to fall below investment grade. See Note 14 to the Financial

117

Statements for a discussion of "Credit Risk-Related Contingent Features," including a discussion of the potential additional collateral that would have been required for derivative contracts in a net liability position at June 30, 2013.

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

Risk Management

Market Risk

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

The forward-looking information presented below provides estimates of what may occur in the future, assuming certain adverse market conditions and model assumptions. Actual future results may differ materially from those presented. These disclosures are not precise indicators of expected future losses, but only indicators of possible losses under normal market conditions at a given confidence level.

Commodity Price Risk (Non-trading)

PPL segregates its non-trading activities into two categories: hedge activity and economic activity. Transactions that are accounted for as hedge activity qualify for hedge accounting treatment. The economic activity category includes transactions that address a specific risk, but were not eligible for hedge accounting or for which hedge accounting was not elected. This activity includes the changes in fair value of positions used to hedge a portion of the economic value of PPL's competitive generation assets and full-requirement sales and retail contracts. This economic activity is subject to changes in fair value due to market price volatility of the input and output commodities (e.g., fuel and power). Although they do not receive hedge accounting treatment, these transactions are considered non-trading activity. See Note 14 to the Financial Statements for additional information.

To hedge the impact of market price volatility on PPL's energy-related assets, liabilities and other contractual arrangements, PPL both sells and purchases physical energy at the wholesale level under FERC market-based tariffs throughout the U.S. and enters into financial exchange-traded and over-the-counter contracts. PPL's non-trading commodity derivative contracts range in maturity through 2019.

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

	Gains (Losses)
	Three Months				Six Months
	2013		2012		2013		2012

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

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

The following table segregates the net fair value of non-trading commodity derivative contracts at June 30, 2013, based on the observability of the information used to determine the fair value.

	Net Asset (Liability)
	Maturity						Maturity
	Less Than		Maturity		Maturity		in Excess		Total Fair
	1 Year		1-3 Years		4-5 Years		of 5 Years		Value
Source of Fair Value
Prices based on significant observable inputs (Level 2)	$	226	$	32	$	(10)	$	5	$	253
Prices based on significant unobservable inputs (Level 3)		10		18		4				32
Fair value of contracts outstanding at the end of the period	$	236	$	50	$	(6)	$	5	$	285

118

PPL sells electricity, capacity and related services and buys fuel on a forward basis to hedge the value of energy from its generation assets. If PPL were unable to deliver firm capacity and energy or to accept the delivery of fuel under its agreements, under certain circumstances it could be required to pay liquidating damages. These damages would be based on the difference between the market price and the contract price of the commodity. Depending on price changes in the wholesale energy markets, such damages could be significant. Extreme weather conditions, unplanned power plant outages, transmission disruptions, nonperformance by counterparties (or their counterparties) with which it has energy contracts and other factors could affect PPL's ability to meet its obligations, or cause significant increases in the market price of replacement energy. Although PPL attempts to mitigate these risks, there can be no assurance that it will be able to fully meet its firm obligations, that it will not be required to pay damages for failure to perform, or that it will not experience counterparty nonperformance in the future.

Commodity Price Risk (Trading)

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

	Gains (Losses)
	Three Months				Six Months
	2013		2012		2013		2012

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

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

The following table segregates the net fair value of trading commodity derivative contracts at June 30, 2013, based on the observability of the information used to determine the fair value.

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

VaR Models

A VaR model is utilized to measure commodity price risk in unregulated gross energy margins for the non-trading and trading portfolios. VaR is a statistical model that attempts to estimate the value of potential loss over a given holding period under normal market conditions at a given confidence level. VaR is calculated using a Monte Carlo simulation technique based on a five-day holding period at a 95% confidence level. Given the company's disciplined hedging program, the non-trading VaR exposure is expected to be limited in the short-term. The VaR for portfolios using end-of-month results for the six months ended June 30, 2013 was as follows.

				Non-Trading
		Trading VaR		VaR
95% Confidence Level, Five-Day Holding Period
	Period End	$	2	$	8
	Average for the Period		4		9
	High		6		10
	Low		2		8

The trading portfolio includes all proprietary trading positions, regardless of the delivery period. All positions not considered proprietary trading are considered non-trading. The non-trading portfolio includes the entire portfolio, including generation, with delivery periods through the next 12 months. Both the trading and non-trading VaR computations exclude FTRs due to the absence of reliable spot and forward markets. The fair value of the non-trading and trading FTR positions was insignificant at June 30, 2013.

119

Interest Rate Risk

PPL ~~is exposed~~and its subsidiaries issue debt to ~~foreign currency~~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 ~~primarily through investments~~management program are designed to balance risk exposure to volatility in ~~U.K. affiliates. In addition,~~interest expense and changes in the fair value of PPL's ~~domestic operations may make purchases~~debt portfolio due to changes in the absolute level of ~~equipment~~interest rates.

At June 30, 2013, PPL's potential annual exposure to increased interest expense, based on a 10% increase in ~~currencies other than U.S. dollars.~~interest rates, was not significant.

PPL ~~has adopted~~is also exposed to changes in the fair value of its domestic and international debt portfolios. PPL estimated that 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 risk10% decrease in interest rates at June 30, 2013 would increase the fair value of ~~expected earnings.~~its debt portfolio by $631 million.

At June 30, 2013, PPL had the following ~~foreign currency~~interest rate hedges ~~outstanding March 31, 2013:~~outstanding:

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

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

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

(a)	Includes accrued interest, if applicable.

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

~~(b)~~

~~To protect the value of~~ Sensitivities represent a ~~portion of its net investment~~10% adverse movement in WPD, PPL executes forward contracts to sell GBP. The positions outstanding at March 31, 2013 mature through 2013. Excludes the amount of an intercompany loan classified as a net investment hedge. See Note 14 to the Financial Statementsinterest rates, except for ~~additional information.~~cross-currency swaps which also includes foreign currency exchange rates.

(c)

~~To economically hedge~~PPL utilizes various risk management instruments to reduce its exposure to the ~~translation~~expected future cash flow variability of ~~expected income denominated~~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 ~~GBP to U.S. dollars, PPL enters~~the fair value of these instruments, any changes in the fair value of such cash flow hedges are recorded in equity or as regulatory assets or liabilities, if recoverable through rates. The changes in fair value of these instruments are then reclassified into ~~a combination of average rate forwards and average rate options to sell GBP.~~earnings in the same period during which the item being hedged affects earnings. The ~~forwards and options~~positions outstanding at ~~March 31,~~June 30, 2013 mature through ~~2015.~~

~~NDT Funds - Securities Price Risk~~

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

~~Credit Risk~~

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

~~Foreign Currency Translation~~

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

~~Related Party Transactions~~

PPL is not aware of any material ownership interests or operating responsibility by senior management of PPL, PPL Energy Supply, PPL Electric, LKE, LG&E or KU in outside partnerships, including leasing transactions with variable interest entities or other entities doing business with PPL.

~~112~~

~~Acquisitions, Development and Divestitures~~

PPL from time to time evaluates opportunities for potential acquisitions, divestitures and development projects. Development projects are reexamined based on market conditions and other factors to determine whether to proceed with the projects, sell, cancel or expand them, execute tolling agreements or pursue other options. See Note 8 to the Financial Statements for information on the more significant activities.

~~Environmental Matters~~

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

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

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

~~Coal Combustion Residuals (CCRs)~~

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

~~Effluent Limitation Guidelines~~

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

~~316(b) Cooling Water Intake Structure Rule~~

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

~~113~~

~~GHG Regulations~~

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

~~MATS~~

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

~~CSAPR and CAIR~~

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

~~Regional Haze - Montana~~

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

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

~~New Accounting Guidance~~

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

~~Application of Critical Accounting Policies~~

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

~~114~~

~~PPL ENERGY SUPPLY, LLC AND SUBSIDIARIES~~

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

The following should be read in conjunction with PPL Energy Supply's Condensed Consolidated Financial Statements and the accompanying Notes and with PPL Energy Supply's 2012 Form 10-K. Capitalized terms and abbreviations are defined in the glossary. Dollars are in millions, unless otherwise noted.

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

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

·

"Results of Operations" provides a summary of PPL Energy Supply's earnings and a description of key factors expected to impact future earnings. This section ends with explanations of significant changes in principal line items on PPL Energy Supply's Statements of Income, comparing the three months ended March 31, 2013 with 2012.

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

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

~~Overview~~

~~Introduction~~

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

~~Business Strategy~~

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

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

~~Financial and Operational Developments~~

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

~~Net Income (Loss) Attributable to PPL Energy Supply Member for the three months ended March 31, 2013 was $(38) million compared to $309 million in 2012, representing a 112% decrease.~~

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

~~115~~

~~Economic and Market Conditions~~

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

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

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

~~Susquehanna Turbine Blade Inspection~~

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

~~Results of Operations~~

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

The results for interim periods can be disproportionately influenced by numerous factors and developments and by seasonal variations. As such, the results of operations for interim periods do not necessarily indicate results or trends for the year or future periods.

Earnings

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

Three Months
2013 2012

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

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

	~~Three Months~~

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

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

~~116~~

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

·	~~Higher depreciation primarily due to the Ironwood Acquisition.~~

·	Higher interest expense primarily due to financings associated with PPL Ironwood, acquired in April 2012, which increased interest expense by $4 million and $3 million due to lower capitalized interest.

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

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

Income Statement Three Months
Line Item 2013 2012

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

~~(a)~~

~~See "Reconciliation of Economic Activity" below.~~2044.

~~(b)~~(d)

~~In October 2011, a wholesale customer, SMGT, filed~~PPL utilizes cross-currency swaps to hedge the interest payments and principal of WPD's U.S. dollar-denominated senior notes. While PPL is exposed to changes in the fair value of these instruments, any change in the fair value of these instruments is recorded in equity and reclassified into earnings in the same period during which the item being hedged affects earnings. The positions outstanding at June 30, 2013 mature through 2028.

(e)

PPL utilizes various risk management instruments to reduce its exposure to the expected future cash flow variability of its debt instruments. These risks include exposure to adverse interest rate movements for ~~bankruptcy protection under Chapter 11~~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 ~~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~~fair value of ~~Montana approved the request to terminate the contract, effective April 1, 2012.~~such economic positions are recoverable through regulated rates and any subsequent changes in fair value of these derivatives are included in regulatory assets or liabilities. The positions outstanding at June 30, 2013 mature through 2033.

~~Reconciliation of Economic Activity~~

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

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

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

~~(a)~~

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

~~2013 Outlook~~

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

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

~~117~~

~~Statement of Income Analysis --~~

Unregulated Gross Energy Margins

Eastern U.S.

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

	Three Months		Six Months

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

Western U.S.

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

Net Energy Trading Margins

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

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

Utility Revenues

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

		Three Months		Six Months
Domestic:
	PPL Electric (a)	$	10	$	65
	LKE (b)		24		119
	Total Domestic		34		184

U.K.:
	Price (c)		50		113
	Volume (d)		23		28
	DPCR4 accrual adjustments (e)		(24)		(24)
	Foreign currency exchange rates		(26)		(16)
	Other (f)		(7)		1
	Total U.K.		16		102
Total		$	50	$	286

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

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

(c)	The increase for the three and six-month periods is primarily due to price increases effective April 1, 2013 and April 1, 2012.

(d)	The increase for the three and six-month periods is primarily due to the favorable effect of weather.

(e)

The decrease for the three and six-month periods is due to a $24 million reduction in revenue based on information provided by Ofgem regarding the calculation of line loss incentive/penalty for all network operators related to DPCR4. See Note 6 to the Financial Statements for additional information.

(f)	The decrease for the three month period is primarily related to a $6 million reduction in third-party engineering revenue, which is partially offset by a reduction in costs in "Other operation and maintenance" on the Statements of Income.

Other Operation and Maintenance

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

113

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

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

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

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

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

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

(f)	The decrease for the three and six month periods is primarily due to costs incurred in 2012 related to the WPD Midlands reorganization.

Depreciation

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

	Three Months		Six Months

Additions to PP&E	$	23	$	44
LKE lower depreciation rates effective January 1, 2013		(6)		(11)
Ironwood Acquisition				6
Other		(2)		(4)
Total	$	15	$	35

Other Income (Expense) - net

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

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

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

Interest Expense

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

	Three Months		Six Months

Long-term debt interest expense (a)	$	8	$	22
Loss on extinguishment of debt (b)		10		10
Ironwood Acquisition financing				4
Capitalized interest		3		4
Other		1		3
Total	$	22	$	43

(a)	The increase for the three-month period was primarily due to PPL Capital Funding's debt issuances in March 2013, June 2012 and October 2012. See Note 7 to the Financial Statements in this Form 10-Q and in PPL's 2012 Form 10-K for additional information.

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

114

(b)	In May 2013, PPL Capital Funding remarketed and exchanged junior subordinated notes that were originally issued in June 2010 as a component of PPL's 2010 Equity Units. See Note 7 to the Financial Statements for additional information.

Income Taxes

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

	Three Months		Six Months

Higher (lower) pre-tax income	$	52	$	(67)
Federal and state tax reserve adjustments (a)		(35)		(35)
U.S. income tax on foreign earnings net of foreign tax credit (b)		(6)		(6)
Foreign tax reserve adjustments (c)		8		5
Foreign tax return adjustments		(4)		(4)
Net operating loss carryforward adjustments (d)		3		9
State deferred tax rate change (e)				11
Other		3
Total	$	21	$	(87)

(a)

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

(b)

During the three and six months ended June 30, 2013, PPL recorded a $14 million increase to income tax expense primarily attributable to a revision in the expected taxable amount of cash repatriation in 2013 and recorded a tax benefit of $19 million associated with a ruling obtained from the IRS impacting the recalculation of 2010 U.K. earnings and profits that will be reflected on an amended 2010 U.S. tax return.

(c)	During the three and six months ended June 30, 2012, PPL recorded a tax benefit following resolution of a U.K. tax issue related to the tax deductibility of interest expense.

(d)	During the three and six months ended June 30, 2012, PPL recorded adjustments to deferred taxes related to net operating loss carryforwards of LKE based on income tax return adjustments.

(e)	During the six months ended June 30, 2012, PPL recorded adjustments related to state deferred tax liabilities.

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

Financial Condition

Liquidity and Capital Resources

PPL had the following at:

	June 30, 2013		December 31, 2012

Cash and cash equivalents	$	711	$	901
Short-term debt	$	1,206	$	652

At June 30, 2013, $178 million of cash and cash equivalents were denominated in GBP. If these amounts would be remitted as dividends, PPL may be subject to additional U.S. income taxes, net of allowable foreign income tax credits. Historically, dividends paid by foreign subsidiaries have been distributions of the current year's earnings. See Note 5 to the Financial Statements in PPL's 2012 Form 10-K for additional information on undistributed earnings of WPD.

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

·	capital expenditures of $1.8 billion;

·	the payment of $426 million of common stock dividends;

·	net cash provided by operating activities of $947 million;

·	net increase in short-term debt of $563 million; and

·	proceeds of $450 million from the issuance of long-term debt.

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

·	a $219 million increase in net income, when adjusted for non-cash components; and

·	a $25 million decrease in defined benefit plan funding, offset by

·	a $245 million increase in cash used by components of working capital (primarily due to changes in accounts receivable of $210 million and in counterparty collateral of $118 million, partially offset by a $95 million change in fuel, materials and supplies).

115

Capital expenditures increased by $488 million for the six months ended June 30, 2013 compared with 2012, primarily due to PPL Electric's Susquehanna-Roseland transmission project and projects to enhance system reliability, and LKE's environmental projects at Mill Creek and Ghent and construction of Cane Run Unit 7.

Credit Facilities

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

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

PPL Energy Supply Credit Facilities		$	3,150			$	785	$	2,365
PPL Electric Credit Facilities			400				86		314
LG&E Syndicated Credit Facility			500				80		420
KU Credit Facilities			598				370		228
	Total Domestic Credit Facilities (a)	$	4,648			$	1,321	$	3,327

Total WPD Credit Facilities (b)		£	1,055	£	193			£	862

(a)	The commitments under PPL's domestic credit facilities are provided by a diverse bank group, with no one bank and its affiliates providing an aggregate commitment of more than 8% of the total committed capacity.

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

Includes units that are jointly owned or subject to a power purchase agreement. Each owner is entitled to its proportionate share of the unit's total output and funds its proportionate share of fuel and other operating costs. See Notes 14 and 15 to the Financial Statements in PPL's 2012 Form 10-K for additional information.

~~Income Taxes~~

~~Noncontrolling Interests~~